LATIN AMERICA AND CARIBBEAN ECUADOR World Bank Group COUNTRY CLIMATE AND DEVELOPMENT REPORT September 2024 © 2024 The World Bank Group 1818 H Street NW, Washington, DC 20433 Telephone: 202‑473‑1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank Group with external contributions. "The World Bank Group" refers to the legally separate organizations of the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA). The World Bank Group does not guarantee the accuracy, reliability or completeness of the content included in this work, or the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon. 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Table of Contents Abbreviations...................................................................................................................................................iii Acknowledgments............................................................................................................................................v Executive Summary........................................................................................................................................vi 1. The Impact of Climate Change on Ecuador's Developmental Priorities................................................. 1 1.1.. Despite competitive advantages, Ecuador is struggling to reach its full potential and achieve stable, long‑term growth...................................................................................................... 1 1.2.. Climate change and natural hazards are expected to have large impacts on Ecuador’s economy and population, especially through the agriculture and transport sectors.................................................................................................................................3 1.2.1.. Climate change is expected to exacerbate the hazards threatening Ecuador’s transport network, causing significant disruptions in access and economic activity............................................................................................................................ 6 1.2.2.. Agricultural losses concentrated in certain crops and areas will have heterogeneous impacts on production and poverty.........................................................................7 1.3.. Absent adaptation measures, hydropower production could be significantly reduced due to hydrological variability, threatening Ecuador’s energy security..............................9 1.4.. Global decarbonization efforts threaten Ecuador’s oil and agriculture exports while opening a potential opportunity for the mining sector.............................................................. 10 1.5.. Reducing Ecuador’s GHG emissions will require a determined focus on limiting deforestation and decarbonizing transport and energy...................................................11 1.5.1.. The transport sector, because of the increased use of fossil fuels and inefficient subsidies, has had the most rapid increase in emissions.................................... 12 1.5.2.. The energy sector has succeeded in slowing emissions from electricity generation, particularly through hydropower, although it remains a substantial emitter, and oil and gas production continues to produce high fugitive emissions.................................14 1.5.3..LULUCF is one of the largest emitters because of significant and increasing deforestation, caused especially by inefficient agricultural expansion.......................................14 2. Country Climate Commitments, Policies, and Capacity........................................................................ 16 2.1.. Ecuador’s development objectives are well aligned with climate action, and the country has made institutional progress................................................................................ 16 2.2.. Ecuador’s climate action strategy and commitments face several institutional and financial shortcomings..................................................................................................................... 17 2.3.. Green private finance is needed to achieve climate objectives, yet private sector investments continue to face significant barriers............................................................................... 19 3. Climate Policies, Development Implications, and Economic Impacts................................................. 21 3.1.. A more resilient and low‑carbon development is needed................................................................... 21 3.2.. Adaptation policies need to complement Ecuador’s development priorities................................. 23 3.2.1.. Modernizing Ecuador’s agricultural sector will facilitate its resilience against climate shocks, prioritizing crop and producer‑specific climate‑smart agriculture and productive interventions............................................................................................................. 23 3.2.2..Improving the resilience of Ecuador’s roads is a cost‑effective way to avoid disruptions to economic activity........................................................................................................ 27 3.2.3..Infrastructure adaptations can improve hydropower resilience but should be complemented with enhanced planning, considering climate risks and the urgency for diversification with other types of non‑hydro renewable energy............. 29 i Country Climate and Development Report: Ecuador 3.2.4..The combined effect of multiple adaptation investments could offset most of the impacts of climate change and protect the economy and the most vulnerable...................................................................................................................... 30 3.3.. Managing oil resources in the face of transition risks and planning for alternatives, such as mining, could present an opportunity for the country if social and environmental concerns are solved............................................................................................... 32 3.4.. Transitioning to low‑carbon development requires an integrated multisectoral approach that takes into account the energy, transport, and land use sectors............................. 34 3.4.1.. Low‑carbon development will require the expansion of policies that protect and restore forests by combining strategies from conservation, forestry, and agriculture...................................................................................................................................... 35 3.4.2..Significant decarbonization of the energy and transport sectors is possible without negative macroeconomic consequences in the long term and with potential resilience benefits............................................................................................... 39 3.5.. Improving the capacity of the state and the private sector to deploy the required investments and implement the needed changes.............................................................................. 49 4. Selected Development and Climate Priorities....................................................................................... 52 References...................................................................................................................................................... 61 5. Appendix.................................................................................................................................................... 66 5.1.. Summary of biophysical modeling and climate impact channels..................................................... 66 5.2.. Computable general equilibrium and microsimulation modeling of Ecuador’s CCDR...................................................................................................................................67 Inclusion of the sectoral roadmaps into the model.................................................................................. 69 The microsimulation model to estimate poverty impacts....................................................................... 69 5.3.. Coastal impacts and policies..................................................................................................................72 5.3.1.. As the region with the most economic activity, densest population, and unique natural hazards, the coast of Ecuador experiences uniquely high impacts.......................................................................................................................... 72 5.3.2..Addressing governance issues is important for the resilience of blue economy sectors, particularly fishing...................................................................................74 5.4.. Summary of the long‑term NDC and net‑zero pathways using the ELENA model...........................75 5.5.. Annexed background notes....................................................................................................................76 ii Country Climate and Development Report: Ecuador Abbreviations ARCERNNR Agencia de Regulación y Control de Energía y Recursos Naturales no Renovables ASOBANCA Asociación de Bancos del Ecuador AUSCM Agreements of Sustainable Use and Custody of Mangroves’ Ecosystem BAU Business‑as‑Usual BECCS Bioenergy with Carbon Capture and Storage CBAMs Carbon Border Adjustment Mechanisms CCDR Country and Climate Development Report CCIA Climate Change Institutional Assessment CECMI Special Committee for the Control of Illegal Mining CGE Computable General Equilibrium CH4 Methane CCIC Inter‑Institutional Committee on Climate Change CCS Carbon Capture and Storage COAM Environmental Organic Code COP United Nations Climate Change Conference CO2 Carbon Dioxide CSA Climate‑Smart Agriculture DFP Deforestation‑Free Mechanism DRF Disaster Risk Financing DRM Disaster risk management DTM Digital Terrain Models EE Energy Efficiency EITI Extractive Industries Transparency Initiative ELENA Ecuador Land Use and Energy Network Analysis ENSO La Niña and El Niño Southern Oscillation ESPAC Continuous Survey of Agriculture Surface and Production EU European Union EV Electric Vehicles FDI Foreign Direct Investment FNIEE National Energy Efficiency Investment Fund GCM General Circulation Models GDP Gross Domestic Product GGFR Global Gas Flaring Reduction Partnership GHG Greenhouse Gas GoE Government of Ecuador GW Gigawatts IFI International Financial Institution INEC National Institute of Statistics and Censuses IPs Indigenous Populations IPCC Intergovernmental Panel on Climate Change IRA Inflation Reduction Act LAC Latin America and Caribbean region LOCE Orgánica de Competitividad Energética LPG Liquefied petroleum gas LUCF Land use change and Forestry LULUCF Land use, Land‑use Change, and Forestry MAATE Ministry of Environment, Water, and Ecological Transition MAG Ministry of Agriculture and Livestock MANAGE The Mitigation, Adaptation and New Technologies Applied General Equilibrium Model MDB Multilateral Development Banks MEF Ministry of Economy and Finance MEM Ministry of Energy and Mining MMbbl Million Barrels iii Country Climate and Development Report: Ecuador MRV Measurement, Reporting, and Verification processes MSME Micro, Small, and Medium Enterprises NDCs Nationally Determined Contributions NMTS National Multimodal Transportation System NPV Net Present Value NZ Net Zero Carbon Emissions OGMP Oil and Gas Methane Partnership OPEC Organization of the Petroleum Exporting Countries O&G Oil and Gas PLANEE National Energy Efficiency Plan PME Electricity Sector Master Plan PNA National Adaptation Plan PNR National Program of Restoration PPP Public–Private Partnership PV Photovoltaic RCP Representative Concentration Pathways REDD+ Reducing Emissions of Deforestation and Forest Degradation SBFN Sustainable Banking and Finance Network SIPP Public‑Private Investment Secretariat SNDGR National Decentralized Risk Management System SNAP National System of Protected Areas SP Social Protection SSP Shared Socioeconomic Pathway TFP Total factor productivity TW Terawatts UN United Nations UNCTAD United Nations Conference on Trade and Development UNEP FI United Nations Environment Programme Finance Initiative US United States iv Country Climate and Development Report: Ecuador Acknowledgments The Ecuador Country Climate and Development Report (CCDR) was a collaborative effort of the World Bank, IFC, and MIGA under the leadership and guidance of Anna Wellenstein and Benoit Bosquet (Regional Directors Sustainable Development, World Bank), Oscar Calvo‑Gonzalez (Regional Directors Equitable Growth, Finance and Institutions, World Bank), Maria Marcela Silva (Regional Director for Infrastructure, World Bank), Manuel Reyes-Retama (Regional Directors, IFC), Moritz Nebe (Director, MIGA), Marianne Fay and Isaam Abousleiman (Country Directors, World Bank), Genevieve Connors (Practice Manager, World Bank), Erwin De Nys (Practice Manager, World Bank), Doerte Doemeland (Practice Manager, World Bank), and Boris Weber (Resident Representative, Ecuador). The CCDR team was led by Juan José Miranda (Senior Environmental Economist), Christian Gonzalez Amador (Senior Economist), and Alejandro Hoyos Guerrero (Senior Transport Specialist). The core team included Daniel Navia (Senior Economist), Laura Berman (Senior Energy Specialist), Pablo Salas (Senior Economist), Gustavo Canavire (Senior Economist), Johannes Pius (Senior Agricultural Economist), Martin Aaroee Christensen (Senior Economist), Penelope Mealy (Senior Economist), Jia Li (Senior Economist), Esther G. Naikal (Economist), Julio Velasco (Senior Economist), Carlo Alberto Amadei (Water Supply and Sanitation Specialist), Oliver Masetti (Senior Financial Sector Specialist), Federico Diaz Kalan (Financial Sector Specialist), Gabriela Encalada (Senior Environmental Specialist), Gonzalo Pons (consultant), Elena Resk (consultant), Ana Rivadeneira (consultant), Ana Palacios (consultant), and José Rehbein (consultant). The CCDR team is thankful for the deep engagement of the following team members who contributed to this report: Steven Pennings (Senior Economist), Gabriel Englander (Economist), Daniel Reinoso (Social Development Specialist), Diana Rubiano (Senior Disaster Risk Management Specialist), Sergio Olivieri (Senior Economist), Carolina Luisa Vaira (Senior Governance Specialist), Gabriel Arrisueño (Senior Urban Specialist), Janina Franco (Senior Energy Specialist), Kennan W. Rapp (Senior Social Development Specialist), Mariana T. Felicio (Senior Social Development Specialist), Susan Vasquez Plasencia (Risk Management Officer), Nelson Gutierrez (Senior Social Protection Specialist), Jaime Fernandez (Data Scientist), Arthur Galego Mendes (consultant), Aitor Franco Arana (consultant), Homero Paltan (consultant), Ximena Velandia (consultant), Alexis Ortiz (consultant), and Cesar Ruiz (consultant). Rafael Soria, Daniel Villamar, Pedro Rochedo, Hector Paredes, Mauricio Espinoza, Jose Moran, Célian Colon, César Viteri, and Industrial Economics conducted key background analysis as well as that provided important inputs to the CCDR. The team benefited immensely from the guidance of three peer reviewers—Lauren Claire Culver (Senior Energy Specialist), Kevin Carey (Program Manager), and Klas Sander (Senior Environmental Economist). The team would also like to thank Nancy Lozano (Lead Economist), Stephane Hallegatte (Senior Climate Change Advisor), Bjorn Phillip (Program Leader), and Tanja Goodwin (Program Leader) for their continuous support throughout the development of this report, Cristina Medina for the communication strategy, and Maria Caridad Gutierrez for her superb administrative support. v Country Climate and Development Report: Ecuador Executive Summary A climate change policy agenda can provide opportunities for Ecuador, enabling the country to accelerate growth and poverty reduction. Ecuador is a middle-income country with abundant agricultural, oil, mineral, and hydropower resources and a challenging fiscal situation. Agriculture contributes nearly 10 percent to GDP and 32 percent to employment, while hydropower contributes 77 percent to energy. The coast of Ecuador supports a sizable share of the economy and its ocean and coastline feeds some of the most important fisheries in the Pacific. Ecuador is Latin America’s fifth-largest oil producer, and the sector represents 10 percent of total GDP and 31 percent of total fiscal revenues. The decision to move out of oil exacerbated an already challenging situation. Poverty remains high at 27 percent and has not been declining. Growth has been elusive in recent years, averaging only 0.5 percent between 2014 and 2019 and 0.2 percent between 2014 and 2022, and remains excessively dependent on the public sector and global commodity cycles. Without more vigorous, private sector-led, non-oil-dependent growth, Ecuador may struggle to maintain its per capita income levels and to sustain its poverty reduction rates. Ecuador is already facing severe consequences from climate-induced hazards like droughts, floods, and rising sea levels, and these impacts are projected to escalate due to climate change. Ecuador's vulnerability to natural and climate-induced hazards is high, with an existing high risk of floods, earthquakes, landslides, extreme heat, tsunamis, and volcanic activity. For example, an estimated 20 percent of Ecuador’s population is exposed to 15 centimeters or more of flood inundation risk. Heavy precipitation and floods also make landslides more prevalent. Ecuador is particularly susceptible to the El Niño and La Niña phenomena, which increase flood and drought risk. The 1997 and 1998 El Niño phenomenon, for instance, caused estimated losses of US$2.869 billion, or 15 percent of 1997 Gross Domestic Product (GDP). Ecuador’s development, heavily reliant on the state and fueled by oil exports, is fiscally dependent on this commodity, and the global shift toward decarbonization could significantly reduce the demand for Ecuador’s oil and agricultural commodities. Ecuador's oil is currently extracted at costs comparable to the global average, which is far above the cost of the more competitive OPEC countries. If global prices were to decline as a result of the energy transition, Ecuador's oil exports could become uncompetitive, leading to stranded fossil fuel assets. Global trends linked with decarbonization could also pose a threat to Ecuador's agricultural exports. The country’s high deforestation rate could limit its ability to export agricultural commodities to jurisdictions that have adopted deforestation-free regulations or to participate in global value chains controlled by large multinational corporations that have strong sustainability commitments. Climate mitigation and adaptation actions combined with critical institutional and structural reforms would unlock Ecuador’s productivity and strengthen resilience to shocks, putting the country on a path of higher, more stable growth. Although Ecuador has relatively low per capita emissions, mitigation actions can provide an opportunity to advance key reforms to unlock non-oil growth. High-emissions sectors in Ecuador include energy, transportation, land use, land use change and forestry (LULUCF), and agriculture. LULUCF is one of the largest emitters because of significant and increasing deforestation, caused especially by inefficient agricultural expansion. Transport sector emissions have increased dramatically in the last decade and remain one of the leading sources of fossil fuel emissions in Ecuador. The transport sector, because of the increased use of fossil fuels and inefficient subsidies, has had the most rapid increase in emissions. Ecuador’s economic growth and oil- related fiscal revenues are thus vulnerable to international oil market risks in terms of price volatility and international demand. vi Country Climate and Development Report: Ecuador Rationalizing fossil fuel consumption through subsidy reform reduces emissions and supports growth. Eliminating fuel subsidies would generate significant fiscal resources while supporting climate goals. Ecuador's fuel subsidies rank among the highest in Latin America, leading to some of the lowest gasoline and diesel prices in the region. These subsidies not only undermine decarbonization efforts by encouraging excessive consumption but also impose a heavy fiscal burden on the country. Over the past decade, subsidies for gasoline, diesel, electricity, and LPG have averaged US$2.3 billion annually. In 2022, this figure soared to US$4.5 billion (4% of GDP), partly due to rising oil prices, and in 2023, it was US$3.3 billion (3% of GDP). Although the removal of diesel subsidies might have an negative impact on lower-income groups, targeted compensation strategies could alleviate the impact on the most vulnerable sectors of the population. Eliminating fuel subsidies will further disincentivize the use of carbon-intensive fuels and technologies and help shift incentives toward green development while generating significant savings. The country, however, has substantial reserves of certain minerals needed for a decarbonized economy and that, if well managed, could help finance the transition to a low-carbon development path. Formal mining is projected to have strong potential, and investment in the sector has been increasing. However, it is still far from realizing its full potential and overcoming social and environmental concerns. Ecuador’s nascent mining sector could be favored by the anticipated increase in international metal demand, primarily copper. This could boost fiscal revenues and foreign exchange inflows, contributing to higher growth, faster poverty reduction, reduced greenhouse gas emissions, and a more resilient development. Combining strategies from conservation, forestry, and agriculture can reduce land use emissions while boosting the value of forests and agricultural productivity. Reducing Ecuador’s high deforestation rates will not only lower emissions but also protect ecosystem services. This leads to biodiversity loss and exacerbates natural hazard-induced disasters like landslides and floods. Furthermore, because of Ecuador's high deforestation rates, which are driven in large part by the expansion of the agriculture frontier (especially for livestock), the country’s agricultural exports could face stricter international restrictions as countries step up action against commodities that are associated with high deforestation. By adopting CSA technologies in the agriculture sector, expanding forest protection through programs like the National Program of Protected Areas or SocioBosque, and improving property rights allocation. Increasing ambition in restoration targets would also be a cost-effective measure to reach a low- carbon development. Enhancing forest conservation could be the most feasible and beneficial option for reducing emissions and achieving net-zero goals. Therefore, more ambitious forest conservation and restoration targets than those outlined in current government policies are needed. Such policies should also be extended to protect and revitalize natural assets crucial for the Blue Economy, like mangroves and fisheries, thereby supporting vulnerable coastal communities. This will require specific improvements in the governance of coastal and marine areas. Compliance with Ecuador’s climate goals will require comprehensive action in the transportation and energy sectors which, with the right policies, could be achieved at moderate costs. Decarbonizing the energy and transport sector will require well-crafted policies and substantial investments. Economy-wide energy efficiency measures and modal shifts in the use of transport are also required for successful decarbonization. Given the country’s abundance of hydro and renewable energy from non-hydropower sources (for example, solar and wind), the gradual electrification of industry and transport would have a strong base. Additionally, expediting the implementation of existing plans for economy-wide energy efficiency and gas flaring reduction would be a low-hanging fruit toward energy savings and decarbonization. Regulation changes to allow for a greater role of markets in the supply and use of energy and create conditions for private investment in these sectors. Many sectors of the economy, such as industry, would need to be further electrified to achieve low-carbon development, and implement measures to promote energy efficiency. Furthermore, the transport sector would require major electromobility efforts and a modal shift toward mass transportation. vii Country Climate and Development Report: Ecuador A modeling exercise carried out for this CCDR suggests the need for annual investments in adaptation and mitigation measures averaging US$3.7 billion per year, or 3.5 percent of GDP,between 2025 and 2050, but these figures ought to be considered only as illustrative and subject to large uncertainties. A computable general equilibrium model simulating these investments finds that the long-term implications of the investments would be limited. Over the short and medium term, the implications of large increases in investments will most likely depend on the extent to which these can be achieved jointly with broader reforms to create a private investment push in Ecuador's economy. Climate change is likely to worsen the already large negative impacts of climate-induced hazards on Ecuador's economy and population, and recent climate events underscore the urgency to address long-lasting growth constraints. Climate change crisis adds to the urgency for Ecuador to confront the constraints hindering its long- term growth and efforts to alleviate poverty. The country is highly vulnerable to natural disasters, which are expected to worsen with climate change, exacerbating hazards, and prolonged water shortages that affect hydroelectric power, particularly impacting the poor in the Amazon and coastal regions. The country is already feeling the impact of prolonged water shortages that have compromised hydroelectric power generation, as evidenced by the energy crisis in 2023 and April 2024. Climate-smart agricultural technologies can improve productivity, increase resilience against climate change impacts, and allow a reduction in agricultural emissions. Scaling up climate-smart agriculture (CSA) practices and improved water management can improve resilience against weather-related events and raise agricultural productivity and growth, particularly benefiting the poor. Integrated water management and CSA technologies (such as pressurized irrigation, agroforestry, intercropping, improved livestock production systems, and enhanced post-harvest community infrastructure, among others) have the potential to reduce the negative effects of climate change, increase sustainability, protect the poor, and potentially boost production. Particular focus is needed on CSA for livestock to ensure lower levels of deforestation and emissions. Integrated water management in the form of irrigation and protecting water sources are crucial measures that will increase resilience and take care of critical resources in a drier future. Strengthening the resilience of the transportation system to climate-related impacts is a cost- beneficial investment to reduce significant disruptions to economic activity. Making the roads and bridge infrastructure more resilient would have net benefits, given today’s disasters and the impact of future climate change. Ecuador already suffers from large impacts of natural disasters on its transportation infrastructure, which create large costs for economic activity. These are expected to exacerbate in future climate scenarios. The report models the importance of engineering improvements, including upgrading unpaved to paved, upgrading asphalt binder, enhancing road base layer, and improving bridge design and changes in the prioritization of works in roads and bridges. Investment in renewable energy can help reduce the climate vulnerability of the energy sector while boosting private investment Investment in renewable energy from non-hydropower sources could help diversify the hydropower- based electricity matrix without increasing GHG emissions while decreasing costs in the long term. For these opportunities to be realized, the country needs to build an enabling environment for private investment. The constraints that hamper the building of such an environment include widespread price distortions, high policy risk, trade and investment restrictions, labor market rigidities, and a weak competition framework (World Bank 2021b). Fostering a stable macroeconomic environment will be crucial to attracting foreign and domestic private investment and reducing the costs of financing, which could fuel long-term sustainable economic growth. viii Country Climate and Development Report: Ecuador Ecuador needs to develop its local capital markets and address structural barriers currently hindering private investment on climate. The market for green finance in Ecuador is presently small, and access to investors is limited because of the country’s underdeveloped capital markets and the perceived macroeconomic and political risks. The approval of a new public–private partnership (PPP) framework is a step in the right direction, as it can help to attract private investment into critical infrastructure for mitigation and adaptation. The development of a green taxonomy and the adoption of a framework for issuing thematic bonds could further help the country to boost interest for private investment on climate, especially for renewable energy. Investing in institutional capacity and coordination is essential to adopting a “whole-of-government” approach for mitigating risks, seizing new opportunities, and creating a favorable environment for private investment. Ecuador needs to enhance its institutional and public frameworks for climate action. Currently, the deficiencies include insufficient integration and coordination between the multiple regulations, policies, systems, and responsible agencies, ineffective involvement of local populations and subnational governments, and slow implementation of instruments that would help manage financial issues. Thus, institutional enhancement needs to focus on improving coordination among the multiple agencies and levels of government that have climate action responsibilities, especially in the areas of adaptation and resilience. An integrated climate change law could provide a unifying framework and enable a comprehensive approach to mitigating risks and seizing new opportunities. Ecuador also needs to create a conducive environment for the private sector to diversify its economy and seize climate-related business opportunities. Currently, private sector investment and access to international markets are highly constrained in Ecuador, limiting the sector’s potential to contribute to the country’s development, including facing climate change. The low-carbon transition presents significant business opportunities for Ecuador. For instance, investment in climate-resilient agriculture, transport, and logistic infrastructure could help farmers exploit their competitive advantage in international trade. Similarly, investment in renewable energy from non-hydropower sources could help diversify the hydropower-based electricity matrix without increasing GHG emissions while decreasing costs in the long term. For these opportunities to be realized, the country needs to build an enabling environment for private investment. A climate change policy agenda can offer opportunities for Ecuador, helping the country accelerate growth and poverty reduction. Climate mitigation and adaptation actions, driven by a combination of private sector dynamism and well-targeted public investments, could contribute to the modernization of Ecuador's economy, putting the country on a path of higher, more stable growth. Key reforms in Ecuador's economy could unlock productivity, strengthen resilience to shocks, improve macroeconomic stability, and free up resources for higher added-value activities, all while contributing to the country’s climate goals. Successfully addressing climate challenges can be achieved by combining institutional, macro- fiscal, and sectoral policies that integrate climate and development priorities and exploit their complementarities under a “whole-of-the-economy” approach. Ecuador can achieve resilient and low- carbon development through these efforts, but urgent action is required. ix Country Climate and Development Report: Ecuador 1. The Impact of Climate Change on Ecuador's Developmental Priorities Main messages • Climate change and natural hazards are expected to have severe impacts on the Ecuadorian economy and people, potentially reducing GDP per capita in 2050 by nearly 4 percentage points and increasing poverty by 1 point. The largest impacts will rise from the damage to transport infrastructure and the subsequent disruption of economic activity resulting from such damage, as well as substantial losses in agricultural production that will affect some producers more and will serve as the main channel through which poverty increases. • Absent adaptations, climate change impacts on hydropower production, which is Ecuador’s main source of electricity, will raise the risk of energy crises in the country. • Global decarbonization efforts expose Ecuador’s economy to significant transition risks, such as a reduction in the country’s all‑important oil sector revenue and in high‑carbon agriculture exports. If Ecuador invests early in environmental and social sustainability, however, then the decarbonization trend could also open up an opportunity for the mining sector and high‑quality, deforestation‑free agriculture products. • Although emissions per capita are low compared to other countries, certain strategically important sectors of the economy need to make a concerted effort to reduce emissions and increase their climate resilience. Reducing Ecuador’s GHG emissions will require a dogged focus on limiting deforestation, transforming agriculture, and decarbonizing transport and energy. 1.1.  Despite competitive advantages, Ecuador is struggling to reach its full potential and achieve stable, long‑term growth There is a pressing need for Ecuador to tackle long‑lasting constraints that have thwarted the development of new sources of growth, to resume poverty reduction, and to resolve the challenges of climate change. Ecuador’s abundant natural resources and diverse ecosystems grant comparative advantages to its agriculture, forestry, and extractive sectors. But Ecuador’s growth has been and remains excessively dependent on a public‑sector‑led growth model that is, in turn, highly dependent on global commodity cycles. In the past, Ecuador has been one of Latin America’s fastest‑growing countries, averaging 4.6 percent growth between 2002 and 2014. But growth has been elusive in recent years, averaging only 0.5 percent between 2014 and 2019 and 0.2 percent between 2014 and 2022. Without more vigorous, private sector‑led, non‑oil‑dependent growth, Ecuador may struggle to maintain its per capita income levels and to sustain its poverty reduction rates. The imperative to tackle the constraints to long‑term growth, including by developing new growth sources, is all the more urgent due to climate change because climate‑related shifts pose substantial risks to Ecuador’s economic development strategy, particularly given its reliance on oil and agriculture. Additionally, there are potential synergies between the country’s modernization plans and climate agendas that could be harnessed. Ecuador’s development, heavily reliant on the state and fueled by oil exports, is fiscally dependent on this commodity.1 Ecuador is Latin America’s fifth‑largest oil producer. According to the Central Bank and Finance Ministry data2, in the last decade the oil sector has represented 10 percent of total GDP, 31 percent of total 1 According to BP Statistical Review of World Energy, Ecuador had substantial oil reserves in 2021 and ranked 38th in the world. Its 1.3 billion barrels of proven reserves represent 0.1 percent of global reserves. That year, the country produced 473,000 barrels perday—0.5 percent of global production. Ecuador’s reserve‑to‑production ratio was 7.4 in 2021, which indicates the number of years its remaining reserves would last if production were constant. 2 GPD, fiscal income, and export data, respectively, were obtained from the following links: https://contenido.bce.fin.ec/documentos/ informacioneconomica/cuentasnacionales/ix_cuentasnacionalesanuales.html#, https://www.finanzas.gob.ec/estadistica-nueva- metodologia-2013-2022/, https://www.bce.fin.ec/informacioneconomica/sector-externo, https://www.bce.fin.ec/index.php/ informacioneconomica/sector-fiscal. 1 Country Climate and Development Report: Ecuador fiscal revenues, and 41 percent of total exports. Ecuador’s economic growth and oil‑related fiscal revenues are thus vulnerable to international oil market risks in terms of price volatility and international demand. Its excessive dependency on oil exports makes the country vulnerable to the risk of a decarbonization‑driven decline in global oil demand. Mining is projected to have strong potential, and investment in the sector has been increasing, but it is still far from realizing its full potential and overcoming social and environmental concerns. Agriculture is a primary driver of Ecuador’s income, employment, and exports, although the sector has yet to achieve its potential. Agriculture accounts for one‑third of employment, the highest rate among regional peers after Bolivia. A majority of those employed are small holders, many from low‑income households. Between 2010 and 2022, the agriculture sector maintained a higher growth rate than the economy overall, with the value of agricultural exports reaching 42 percent of overall exports. Ecuador is the top exporter of bananas globally, the second‑largest exporter of shrimp, and the third‑argest exporter of cocoa beans and cut flowers. The agro‑industry sector is also an important segment of Ecuador’s manufacturing sector. But agriculture is increasingly vulnerable to external, climate, and phytosanitary shocks in part because of its reliance on a limited range of products and geographic regions. Meanwhile, low and declining labor productivity, especially among small farmers, inefficient public expenditure, and inadequate private investment have impeded the sector's ability to reach its export potential. Climate shocks already have large consequences for the country, and a hotter world would have negative impacts on Ecuador’s agricultural yields. Ecuador’s large extensions of forests, especially in the Amazon rainforest region, offer several benefits to the population. Considered a megadiverse country, Ecuador holds more than 6 percent of the planet’s reported species, and has diverse landscapes and large extension of forests, particularly in the Amazon rainforest. According to the Ministry of Environment, Water, and Ecological Transition (called MAATE after its acronym in Spanish), in 2020 Ecuador’s natural forests covered approximately 12.3 million hectares, or close to half of its territory. Forests provide many timber and non‑timber ecosystem services to Ecuador’s population, especially the rural population—ranging from commercial timber, firewood, and tourism and recreation, to hunting, fishing, and habitat provision, to climate regulation, water retention and filtration, and carbon sequestration. To realize these benefits, however, the country needs to reduce deforestation, which drove the loss of over 2.4 million hectares (18 percent) between 1990 and 2022 (MAATE n.d.). The main cause of this deforestation is the expansion of the agriculture frontier, particularly of livestock. As countries take a more active stance against high deforestation crops, Ecuador’s high deforestation rates could subject its agricultural exports to increasingly strict restrictions and would be incompatible with its own emission‑reduction goals. Despite these comparative advantages, Ecuador has struggled to unlock its full growth potential. Procyclical fiscal policy and a lack of reforms have resulted in a vicious cycle of booms and busts driven by fluctuations in international oil prices. After unsustainable spending during the 2004–2014 oil price boom, the country was compelled to embark on a difficult fiscal consolidation (World Bank 2023) that dampened economic growth. Because of the challenging business climate, private sector investments remain low, at only 15 percent of GDP (World Bank, 2021b). The financial sector is underdeveloped, limiting access to domestic finance. Ecuador is therefore also reliant on external financing to cover its growing expenses, which makes it all the more vulnerable to higher international rates. Poverty rates have stagnated in recent years and remain high, at 25.2 percent in 2022. Climate changes makes it even more urgent for Ecuador to address long‑lasting constraints on growth and poverty reduction. The country is highly vulnerable to climate change and a broader strategy for diversification is needed that forthrightly acknowledges the importance of sectors with higher growth potential and lower climate risks, while scaling up public and private investments in resilient transport infrastructure, diversifying power generation beyond hydropower, and strengthening the resilience of existing assets against climate risks. The country, however, has substantial reserves of certain minerals needed for a decarbonized economy (for example, copper) and that, if well managed, could help finance the transition to a low‑carbon model. To achieve higher growth, faster poverty reduction, reduced GHG emissions, and a more resilient economy, Ecuador needs to develop a comprehensive reform agenda. The country needs to address structural barriers that are currently limiting both private sector growth 2 Country Climate and Development Report: Ecuador and access to domestic and international finance (World Bank, 2021b). The reform agenda can combine sound macro‑fiscal policies with climate‑friendly fiscal policies promoting a better business environment, and targeted sectoral policies that support more resilient infrastructure, the energy transition, and the modernization of agricultural practices. 1.2.  Climate change and natural hazards are expected to have large impacts on Ecuador’s economy and population, especially through the agriculture and transport sectors Ecuador is highly vulnerable to natural hazards, including climate‑induced hazards. The country is at high risk for floods, earthquakes, landslides, extreme heat, wildfires, tsunamis, and volcanoes (ThinkHazard 2022). For example, an estimated 20 percent of Ecuador’s population is exposed to 15 centimeters or more of flood inundation risk. Ecuador is also highly vulnerable to the La Niña and El Niño Southern Oscillation (ENSO) phenomena, which increase flooding and drought risks and impact major economic sectors such as agriculture, fishing, and forestry. Past events such as the 1997 and 1998 El Niño phenomena caused estimated losses of USD 2.869 billion, or 15 percent of 1997 GDP (World Bank 2021a). Climate change is expected to increase temperatures and the frequency and magnitude of floods and landslides, threatening income, infrastructure, and livelihoods. Projections under the Representative Concentration Pathways (RCPs) 4.5 and 8.5 suggest that mean temperatures in Ecuador are expected to continue increasing (figure 1.1A).3 Between 2020 and 2039, especially during the rainy months of March and April, those temperature rises are expected to trigger more extreme weather events, for example, an increase in the number of days with intense precipitation (figure 1.1B). This could cause more floods and landslides. FIGURE 1.1 Rising temperatures are likely to increase climate volatility A. Projected Mean Temperature B. Projected Climatology of Days with Precipitation over 20mm, 2020–2039 10 28 27 8 26 25 6 24 4 23 22 2 21 20 0 2000 2020 2040 2060 2080 2100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Hist. Ref. Per., 1986–2005 RCP 2.6 RCP 4.5 RCP 6.0 RCP 8.5 Hist. Ref. Per., 1986–2005 RCP 2.6 RCP 4.5 RCP 6.0 RCP 8.5 Source: Climate Change Knowledge Portal, World Bank (2022b). Note: Reference period is Ecuador between 1986 and 2005—multi‑model ensemble. The solid‑color lines represent the average result from multiple climate models for each RCP, while the shaded areas represent the variety of results. Mm = millimeters; RCP = Representative Concentration Pathway. Assuming the structure of Ecuador’s economy remains largely unchanged, climate change could substantially hit the economy and undermine poverty alleviation efforts. The modeling undertaken for this report combined biophysical modeling and a computable general equilibrium macroeconomic model called MANAGE (see appendices 6.1 and 6.2). The model assessed the impacts of (i) crop production shocks due to changes in water availability and heat levels; (ii) crop production shocks from changes in 3 RCP, or Representative Concentration Pathways, refers to the four global climate change projections presented in the Fifth Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC)—RCP2.6, RCP4.5, RCP6.0, and RCP8.5. They were selected and defined by their total radiative forcing pathway (cumulative measure of GHG emissions from all sources) and level by 2100. According to Pachauri and Meyer (IPCC, 2014), the global mean surface temperature by the end of the 21st century, relative to 1986–2005, is likely to increase by 0.3–1.7 °C under RCP2.6, 1.1–2.6 °C under RCP4.5, 1.4–3.1 °C under RCP6.0, and 2.6–4.8 °C under RCP8.5. 3 Country Climate and Development Report: Ecuador soil erosion; (iii) livestock production shocks caused by changes in heat levels and feed‑source availability; (iv) hydropower production shocks from changes in water availability; (v) shocks to roads and bridges as a result of changes in precipitation, flood, and temperature; (vi) capital damage due to changes in inland flooding; and (vii) capital damage caused by sea‑level rise and changes in coastal flooding. In a potential climate scenario in which future conditions are wetter and warmer,4these channels could reduce 2050 real GDP by 1.8 percent (equivalent to 1.6 percent of the business‑as‑usual [BAU] GDP net present value compared to 2022 GDP). By contrast, a future scenario with drier and hotter conditions could reduce 2050 real GDP by about 3.7 percent (equivalent to 1.7 percent of the BAU GDP net present value compared to the 2022 GDP) (figure 1.2, higher panel). The overall effect of the two scenarios on GDP in net present value is similar because the higher delays caused by transport infrastructure disruptions (the channel with the higher impact) in the dry‑hot scenario increase over time and are relatively more important toward the end of the considered period (figure 1.2 lower panel). These estimates do not account for the current impacts of natural hazards, which likely would make the overall impact on GDP larger. FIGURE 1.2 Climate change impacts in GDP by channel (as a percent of BAU GDP) A. Decomposition of climate change impact on real GDP by chanel Percent of business as usual (BAU) scenario 0 -2 -4 Wet-warm Dry-hot Wet-warm Dry-hot Percent of BAU's GDP in 2050 Percent of BAU's GDP net present value Erosion impacts on crop production Water availability and heat impacts on irrigated crops production Water availability and heat impacts on rainfed crops production Heat and food availability impacts on livestock production Water availability impacts on hydropower production Inland flooding impacts on capital Flood, temperature and precipitation impacts on road/bridges capital Flood, temperature and precipitation impacts on road/bridges delays SLR and storm surge impacts on coastal capital Total B. GDP Impact by channels and year Percent of business as usual (BAU) scenario Wet-warm scenario Dry-hot scenario 2044 2044 2040 2040 2034 2048 2034 2048 2050 2050 2024 2042 2024 2042 2030 2030 2046 2046 2038 2038 2023 2028 2032 2023 2028 2032 2036 2036 2026 2026 1% 1% 0% 0% -1% -1% -2% -2% -3% -3% -4% -4% Water availability impacts on hydropower production Flood, temperature and precipitation impacts on road/bridges capital Water availability and heat impacts on rainfed crops production Flood, temperature and precipitation impacts on road/bridges delays Water availability and heat impacts on irrigated crops production Inland flooding impacts on capital SLR and storm surge impacts on coastal capital Heat and food availability impacts on livestock production Erosion impacts on crop production Source: World Bank staff calculations. Note: See footnote 4 for reference to dry/hot versus wet/warm climate scenarios. Y-axis in all graphs is the percent of GDP in the BAU scenario. See appendix 5.2 for more details on the computable general equilibrium model MANAGE. 4 To address climate uncertainty in the analysis and try to capture a broad range of possible climate impacts, different general circulation models (GCMs) were used. Two combinations of the Shared Socioeconomic Pathway (SSP) and RCP emissions scenarios were selected: a pessimistic SSP3-70 scenario and an optimistic SSP1-1.9. To capture an even broader range of impacts for the five channels for which data were available, specific GCMs within these SSP‑RCP combinations were selected to construct a dry and hot scenario and another wet and warm scenario. See appendix 6.2 and annexed background note 5 for more details. 4 Country Climate and Development Report: Ecuador Climate change would lead to a slower rate of poverty reduction in future decades, particularly in a drier and hotter future scenario. Ecuador’s poor are highly vulnerable to natural hazards, particularly floods in the Amazon and coastal regions (Canavire and Serio 2023) as result of high informal employment, scarce income diversification (mainly only in agriculture), and low quality of dwelling material. Some groups, such as indigenous peoples, are particularly exposed and vulnerable.5 Climate change would have an impact on poverty. By 2050, in a pessimistic future scenario with drier and hotter conditions, the poverty rate would have reached 22.3 percent, compared to 21.5 percent under the USD 6.85 poverty line in a hypothetical business‑as‑usual (BAU) scenario without climate change impacts. This translates to an additional 180,000 people falling into poverty. Impacts would be higher in rural poverty (1.13 points increase versus BAU) than in urban. Poverty impacts in a moderate scenario with warmer and wetter conditions are negligible. Also the impact on income inequality, as measured by the Gini index would be limited. In fact, the Gini index would decline by 0.13 points to 47.57 in 2050 in a wet‑warm scenario. This is due to the opposite effects of the two most significant channels. Irrigated crop impacts are more significant for the bottom 40 of the income distribution. In contrast, delays from the transport network impact the entire distribution but are higher on average for the top 20 percent. FIGURE 1.3 Impacts of climate change on income poverty: Headcount (left) and deviations from BAU in percentage points by channel (right) 30% 27.9% 0.5 25% 21.5% 21.7% 22.3% 0.4 20% 0.3 15% 0.48 0.2 10% 0.31 0.1 5% 0.02 0% 0.0 2019 Business Wet/Warm Dry/Hot DH_crp_irrigated as usual DH_crp_rainfed 2050 DH_Flood_delay Source: World Bank staff Calculations. Although climate impacts are expected in all regions, the coastal region is at especially high risk of different types of flooding and could sustain the most economic damage. The coast is Ecuador’s most populated region and hosts important economic activities, including agriculture, fishing, tourism, and extractives, that contributed to almost half of the national GDP in 2020.6 But the coastal region faces especially high and unique climate risks, such as coastal erosion, sea‑level rise, storm surge, and swells. Most disasters caused by heavy rain floods in Ecuador (as recorded in EM‑DAT data since 1992) impacted at least one coastal province. Guayaquil, the country’s second‑largest city, is one of the most vulnerable coastal cities in the world (Hallegatte et al. 2013). The poverty and social impacts of climate change and natural hazards are also more pronounced in the coastal region. In the dry/hot scenario, poverty rises by about 1.01 percentage points by 2050 due to climate change, compared to 0.63 of a percentage point in the Amazon and Highlands. Climate out‑migration hotspots by 2050 are also mainly identified in the coastal region, particularly around Guayaquil (data from Rigaud et al. 2018). The oceanic impacts of climate change and overexploitation also affect fisheries and the livelihoods of vulnerable fishers. Appendix 5.3 explores in greater detail the multiple risks of, and opportunities for, the coastal region, including the promotion of a Blue Economy. The breakdown of future impacts on economic activity presented in figure 1.2 suggests that disruptions to Ecuador’s transport infrastructure and the climate effects on agricultural yields will be the most significant channels. Accordingly, they are explored in greater detail in the next two subsections. 5 World Bank (Forthcoming). Ecuador Poverty Assessment. 6 World Bank staff calculations based on Cuentas Nacionales Cantonales 2020 (Banco Central de Ecuador 2021). 5 Country Climate and Development Report: Ecuador 1.2.1.  Climate change is expected to exacerbate the hazards threatening Ecuador’s transport network, causing significant disruptions in access and economic activity The National Multimodal Transportation System (NMTS) has gradually deteriorated since 2014 owing to poor maintenance and a lack of investment. Heavy rains, recently aggravated by the El Niño phenomenon, and an earthquake in 2023, have pushed the vulnerability and conditions of the NMTS to critical levels. In 2014, 74.2 percent of the road network was in good condition, 21.0 percent in average condition, and 4.9 percent in poor condition. By comparison, in 2023, 46.8 percent of the national road network was below good condition—almost double the 2014 level. This deterioration closely correlates with low levels of investment in the NMTS infrastructure and the limited budget dedicated to maintenance. Floods are expected to disrupt Ecuador’s road network infrastructure, affecting access to markets and hospitals and disrupting economic activity. Flooding, the most common cause of road disruptions that affect connectivity and accessibility, is likely to impact access to canton markets and critical services such as hospitals,7 throughout the country, with the area north of Guayaquil bearing the brunt. The risk is especially high in Los Rios, a province that suffers from constant floodings, and where flood events can typically increase travel time to hospitals by 2–2.5 extra hours. Also, critical roads around Guayaquil are likely to be severely affected at high economic cost: A one‑week disruption of these road segments could result in losses of about USD 35 million for households. For Ecuadorian exporters, the route linking Ambato to the port of Guayaquil is by far the most critical.8 A one‑week access disruption along this route could cost exporters USD 150 million if they can neither delay the transaction nor substitute local Ecuadorian products (see annexed background note 1 for more on this analysis). FIGURE 1.4 Criticality maps showing impacts on households (left) and exporters (right) Indirect losses to domestic households Indirect losses to Ecuadorian exporters Largest indirect loss for most Largest indirect loss for most critical road segment: 35m USD (12% of daily GDP) critical road segment: 150m USD Source: World Bank staff analysis. Further details are in annexed background note 1. Note: The figure identifies segments of the transport system where disruptions are likely to cause the highest indirect economic losses. Impacts are calculated as the increased production and delivery costs for exported products due to transport disruptions. The width of a road is proportional to the simulated losses from a week‑long disruption. Climate change is expected to increase damage costs to roads and bridges, besides affecting productivity by adding to delays. In a biophysical analysis, we estimated the economic losses associated with infrastructure damage from future changes in temperature, precipitation, and flooding, as well as the indirect impacts of delayed hours. Damage in the decade of the 2050s is estimated at USD 100 million to USD 115 million in additional damage annually. In the same decade, delays caused by disruptions within this infrastructure are estimated at approximately USD 200 million to USD 750 million additional delayed hours annually. The macro model described in section 1.2 estimates that these are the main channels through which climate change generates economic losses in Ecuador, especially the lost labor productivity caused by delays, independently reducing 2050 real GDP by 1.3 percent in a wet‑warm scenario (1.3 percent of the BAU GDP net present value between 2022 and 2055 as well), and by about 2.1 percent in a dry‑hot scenario 7 This analysis (explained in background note 1) examined the increase in time to access hospitals as a result of natural hazards. Medical care, especially in emergency or life‑threatening situations, can be extremely sensitive to increases in access time. 8 When road segments are disrupted, the model also captures the cost of finding alternative routes. 6 Country Climate and Development Report: Ecuador (1.0 percent of the BAU GDP net present value). The biophysical climate models indicate that episodes of concentrated or extreme rainfall, which drive the infrastructure impacts, are more likely under dry‑hot than wet‑warm conditions, even if the wet‑warm scenario has more precipitation in general. These impacts would also cause a 0.31-point increase in poverty. 1.2.2.  Agricultural losses concentrated in certain crops and areas will have heterogeneous impacts on production and poverty Ecuador’s agriculture sector needs to improve its productivity and modernize its systems. Ecuador’s large producers, and most of its agricultural land, are concentrated in the coastal region. This part of the agriculture sector, particularly around the upper basin of the Guayas River (Guayas province), is characterized by high production potential, high efficiency, and technology use. The problem is that fully three‑quarters of Ecuador’s agriculture units are small farmers, generally subsistence farmers up in the highlands. These small‑hold producers face many constraints, resulting in poor agricultural practices and low productivity (particularly labor productivity), low profitability, and low sustainability. They are affected by inequality in access to land, poor access to financial services (particularly credit), low levels of access to technology and irrigation, and degraded soils and ecosystems. Nationally, irrigated land—such as along the coast—accounts for just 15 percent of the total cultivated area, yet it contributes 70 percent of the country’s agricultural production. Total factor productivity (TFP) estimates at the national level suggest that irrigation increased production by 27 percent in Ecuador between 2014 and 2021 —the most important production factor of output growth. Temperature and precipitation shocks, which have grown more frequent, have already significantly affected agriculture productivity in the last decade. A stochastic frontier analysis suggests that climate shocks between 2014 and 2021 have had a significant impact on TFP and, ultimately, on agricultural output and productivity.9 The largest shares of cultivated land affected by climatic shocks included both export‑oriented crops (mostly traditional, such as coffee or cocoa, but to a lower extent also emergent crops like blackberries) and domestic‑oriented crops (for example, maize, rice, and potatoes). Rainfall shocks over this period10 substantially reduced agricultural output in the highlands (nearly 1 percent), affecting crops such as broad beans, soft corn, and potatoes. But some coastal and Amazon crops such as coffee, cocoa, and rice also experienced adverse consequences. In contrast, temperature shocks adversely affected the production of coastal farmers, reducing agricultural output by 18.3 percent, with the production of coastal and Amazon crops such as cocoa, plantain, and palm significantly affected. Similarly, an increase of one degree Celsius in average temperature during the rainy season in the analyzed period reduced output by 4 percent in the highlands, 19 percent in the Amazon, and 15 percent nationally (see annexed background note 7). Droughts are also significantly affecting agricultural productivity, especially given the country’s limited irrigation. Less than 19 percent of agricultural land receives irrigation, compared to nearly 30 percent in Peru, which compromises productivity. A stochastic frontier approach showed that irrigation is the most important factor of output growth. The relatively low percentage of irrigated land amplifies the impact of droughts, one of Ecuador’s most frequent climate disasters, particularly affecting small producers who use inefficient crop‑watering techniques (World Bank 2017). Biophysical analysis shows that, by 2050, changes in climatic conditions may result in an even wider range of impacts. Rain‑fed crop production could vary from +8  percent to -16  percent, compared to production under the baseline period. When considering irrigated crops, the dispersion of the results is even more pronounced, with yield changes ranging from +12 percent to -26 percent by 2050. Not surprisingly, the most negative outcomes are associated with a potential future scenario with dry‑hot conditions. Figure 1.5 shows that crops that would suffer the most from these effects are vegetables, rice, bananas, sugarcane, and tropical fruits. Of these, the effects of climate change on bananas are particularly concerning, given their importance in terms of revenues and production. Rice and sugarcane are also important in terms of revenue and production and are expected to have large production shocks of -22 and -18 percent, respectively, in the 9 The analysis used the national agricultural survey (ESPAC) and a panel dataset of agricultural units observed from 2014 to 2021. 10 Rainfall shocks are defined as deviations from average rainfall, that is, extreme droughts or extreme floods. 7 Country Climate and Development Report: Ecuador dry‑hot scenario by 2050. Effects on the production of cocoa are expected to be around -6 percent under the dry‑hot scenario, while effects on corn (produced mostly in the highlands) would be around -16 percent. Horticulture (vegetable and “other fruit”) crops are expected to experience the most negative production shocks across the average dry‑hot and average wet‑warm scenarios by 2050—up to -32 percent shock for vegetables. However, the amount of revenue and production that these crops represent are smaller. The total factor productivity analysis in terms of rainfall shocks also highlighted some of the same crops as vulnerable. FIGURE 1.5 Main crops and climate change production shocks from heat and water availability by 2050 A. Share of crops by area, production, and revenue (2016–2020) 100% 5% 6% 4% 5% 80% 12% 5% 15% 5% 7% 10% 60% 8% 38% 10% 22% 40% 5% 5% 14% 44% 20% 8% 27% 9% 0% Area (ha) Production (ton) Revenue (USD) Tobacco Groundnut Potato Tropical fruits Coffee Citrues Other fruits Vegetables Plantain Oil palm fruit Sugarcane Banana Maize Cocoa bean Rice NA B. Production shocks, by crop (2041-2050), relative to baseline 10% 9% 8% 7% 7% 5% 4% 3% 3% 2% 2% 0% 1% 0% 0% -5% -4% -10% -7% -6% -6% -8% -11% -13% -16% -20% -18% -18% -20% -22% -22% -30% -32% -40% na s an e t ze it its n to ce ne its es nu tru ffe ai fru ta ai bl Ri fru fru ca na be t nd an Co Ci M Po ta m r Ba a ga ou er al ge Pl al co ic h lp Su Gr Ve Ot Co op Oi Tr Dry/hot mean Wet/warm mean GCM range Source: Simulations prepared by Industrial Economics for this report (see Appendix 5). Note: GCM = general circulation model. Similarly, changes in heat stress and the availability of feed sources would also have an impact on milk and meat production from livestock. A -1.5 percent impact on total livestock productivity by 2050 is estimated in a wetter, warmer scenario and -6.5 percent in a hotter, drier scenario. The livestock products expected to be impacted the most are goat meat, lamb, beef, and cattle milk, in that order, although beef and milk represent much higher revenues than the other two. 8 Country Climate and Development Report: Ecuador Simulations suggest that the macroeconomic impact of future climate conditions through their repercussions within the agricultural sector could be significant. While the impact of the wet‑warm scenario through the four channels related to agriculture (land erosion, irrigated and rainfed crops, and livestock) is insignificant—it reduces the 2050 real GDP by only 0.1 percent11—the dry‑hot scenario reduces 2050 real GDP by about 1.2 percent (-0.5 percent of the BAU GDP net present value) (figure 1.6).12 The higher negative impact of the dry‑hot scenario on GDP is related to damage caused by higher temperature and water availability shocks to irrigated crops (0.3 percent of BAU GDP net present value); this climate impact channel does not have any impact on GDP in the wet‑warm scenario. FIGURE 1.6 Main crops and climate change production shocks from heat and water availability by 2050 Decomposition of climate cange impact on real GDP by climate impact channel Percent of business as usual (BAU) scenario 0.3 0.1 -0.1 -0.3 -0.5 -0.7 -0.9 -1.1 -1.3 -1.5 Wet/warm Dry/hot Wet/warm Dry/hot Percent of BAU's GDP in 2050 Percent of BAU's GDP net present value Water availability and heat impacts on rainfed crops production Heat and food availability on livestock production Total Water availability and heat impacts on irrigated crops production Erosion impacts on crop production Source: World Bank staff calculations. Impacts on irrigated crops will be the main channel through which climate change increases poverty rates, particularly in rural areas. Irrigated crop impacts would be responsible for a 0.48‑point increase in the poverty rate in a dry/hot scenario, about 60 percent of the impact of all channels together. This is more significant for rural poverty. The increase in rural poverty comes mostly from the unmet demand for irrigation water, which affects agriculture the most and would bring a 0.75‑point increase in poverty compared to BAU. By 2050, nearly 75 percent of rural workers will be employed in agricultural activities. The impact of climate change on irrigated crops would also increase urban poverty by 0.44 points compared to BAU. 1.3.  Absent adaptation measures, hydropower production could be significantly reduced due to hydrological variability, threatening Ecuador’s energy security Ecuador’s hydropower system, the country’s main electricity source, has shown vulnerability to hydrological variability, which, absent adaptation measures, could threaten its energy security and low‑carbon development. In 2020, hydropower represented 77 percent of Ecuador’s electricity generation (MEM 2020). Electricity supply in Ecuador is impacted by hydrological variability due to recurring climate phenomena such as El Niño. In 2023, electricity supply was severely affected by water scarcity caused by a combination of the most severe drought in 50 years, a spike in power demand, and delays in commissioning non‑hydro generation. In October 2023, the Ministry of Energy and Mining (MEM) declared an electricity sector emergency and started rationing electricity for 2–4 hours a day until mid‑December to safeguard the power system and avoid system failure. Ecuador had to resort to importing high‑cost electricity from Colombia to help cover the supply deficit. Still, given the similar drought conditions in Colombia, the imports were insufficient to fully cover Ecuador’s electricity needs. Ecuador passed a law in January 2024 11 We used a 6 percent discount rate for all exercises. 12 These impacts could be worse for some areas. As shown in other analyses, economic impacts of natural hazards are high in coastal provinces because of their larger share of population and economic activity, and additional hazards that unique to the coast. Also, the economic impacts of flooding are large in the Amazon region and the Pacific side of the Andes, for example, the highly vulnerable and important roads in Guayas. 9 Country Climate and Development Report: Ecuador intended to address some of these issues. However, in April 2024, the government had to take emergency measures again, ordering business and government offices to shut down for two days. Climate change, through reduced rainfall and higher air temperature, could exacerbate these vulnerabilities and precipitate future energy crises (World Bank 2021a). Switching to fossil fuels to bridge any generation deficit could add to expenses and pollution and will be less efficient. During the wet season, heavier rainfall could cause greater sedimentation and erosion of the hydrographic basin, potentially damaging the electromechanical elements of hydropower plants,13 exposing them to structural issues, jeopardizing infrastructure, and elevating production costs in the medium term. By 2050, climate change may result in hydropower production shocks ranging from -20 percent to +8 percent, threatening energy security. Biophysical modeling shows a small increase in hydropower production (from +0.3 percent to +1.6 percent) under the wet and warm scenario in the 2040s, whereas the potential impacts under the dry and hot scenario are always negative (ranging from -7.0 percent to -9.3 percent) (figure 1.7A). Under a dry‑hot mean scenario, electricity production from the Mazar, Paute, Sopladora, and Coca‑Codo hydropower facilities (responsible for 75 percent of Ecuador’s total hydropower generation) is expected to decrease by 14.3, 11.9, 1, and 11.4 percent, respectively (figure 1.7B). Even if these impacts are not high in GDP terms, they could threaten the country’s low‑carbon development and energy security goals, as seen in previously mentioned energy crisis. FIGURE 1.7 Climate change impacts to hydropower A. Hydropower generation shock (3-yr moving average) B. Hydropower production change in the 2040s by basin distribution 5% Dry/hot Wet/Warm 1° N 1° N 0% 0° 0° -5% 1° S 1° S 2° S 2° S -10% 3° S 3° S 0 8 -15% 6 Wet−Warm −3 Dry−Hot 4° S 4° S 4 −6 Mean Mean 2020 2025 2030 2035 2040 2045 2050 −9 2 5° S 5° S 0 Individual GCMs Dry/hot mean Wet/warm mean 81° W 79° W 77° W 75° W 81° W 79° W 77° W 75° W Source: Simulations prepared by Industrial Economics for this report (see Appendix 5). Besides climate change, the El Niño phenomenon also adds to uncertainty about the future. The El Niño Southern Oscillation could affect the frequency, intensity, and duration of both wet and drought periods in Ecuador, adding to the uncertainty of hydropower production. In 2023, El Niño started in June and, during 2024, it is already causing changes in climate and heavy rains. 1.4.  Global decarbonization efforts threaten Ecuador’s oil and agriculture exports while opening a potential opportunity for the mining sector Global decarbonization efforts could reduce demand for Ecuador’s oil and increase demand for metals like copper. As discussed in section 1.1, under a scenario of declining oil prices in the medium to long term in response to waning demand, Ecuador’s oil exports could become uncompetitive, stranding its fossil fuel assets. A reduction in oil revenues would dramatically affect the government’s fiscal balance and constrain public investment. On the other hand, Ecuador’s nascent mining sector could be favored by the anticipated increase in international metal demand, primarily copper; this could increase fiscal revenues and forex inflows. Although no clear analysis of Ecuador’s mining potential yet exists, the sector holds tremendous prospects geologically, given that it is situated in the “copper belt,” which extends across several Andean countries, and that a copper mine became operational in 2020. Mining exports increased Strong erosion caused by heavy rains deposits sediment and suspended materials in substantial quantities, clogging dams, and 13 potentially hindering turbine movement. 10 Country Climate and Development Report: Ecuador by over 7x in the last four years, becoming the country’s fourth‑largest export sector, and are well placed to take advantage of this increase in demand. (For more information about the mining sector, see the recent Country Economic Memorandum, Gonzalez Amador, Velasco, and Miranda (2024)). Ecuador’s extractive sectors are currently facing local opposition because of social and environmental concerns, which is intensifying the need to explore alternative sources of revenues and exports. There is also the risk that the development of these sectors could be affected by environmental and social concerns around oil and mining operations, mainly around the use of water and possible environmental degradation near or in important natural areas, indigenous lands, or populated areas. In August 2023, a national referendum was passed restricting oil activity in the Ishpingo‑Tambococha‑Tiputini (ITT) block in Ecuador’s Yasuni National Park. The state‑owned enterprise PetroEcuador must now close its operations in this location, which accounts for 11–12 percent of the country’s oil production. Another vote in the same referendum for Quito restricted metal mining activity in El Choco Andino, where some operations were in the exploration phase and overlapped with environmentally important areas. Similar referendums restricting extractive activities have been introduced on other occasions and in other provinces, with similar results. Ecuador’s exports could also be challenged by new export standards and mechanisms for carbon‑intensive products, especially agricultural products, although they could bring opportunities if early investments are made to adapt to them. Ecuador could face more severe export challenges for carbon‑intensive products if new standards or carbon border adjustment mechanisms (CBAMs) and bans on imports of deforestation‑linked products become the norm. According to Conte, Schulz‑Antipa, and Rozenberg (2023), Ecuador’s external trade position currently faces only minor risks (less than 1 percent) due to the European Union’s (EU) CBAM and the EU deforestation‑free mechanism (DFP). Besides the aggregate impact, it is important to consider what it means individually for each subsector. For coffee and cocoa, the DFP would pose risks to approximately 30 percent of that sector’s exports. These analyses are still preliminary because there is still uncertainty about how these mechanisms will be implemented, which could alter the risks not only in aggregate but also in the distribution of their impacts. But even with these risks, there could also be opportunities for decarbonized value chains. Ecuador’s products could be more competitive if they had lower emissions intensity than those of EU producers or competing exporters to Europe. Ecuador’s losses will depend on its producers’ preparedness to demonstrate that they do not cause or contribute to deforestation, which will represent additional costs. 1.5.  Reducing Ecuador’s GHG emissions will require a determined focus on limiting deforestation and decarbonizing transport and energy Although Ecuador is not considered a major emitter, it can achieve a low‑carbon, sustainable economy if the challenges in certain sectors are addressed. According to Climate Watch (2022), in 2019, Ecuador accounted for only 0.2 percent of global greenhouse gas (GHG) emissions, and its emissions per capita were below the global and regional averages. Both Climate Watch and Ecuador’s official emissions data find that the country’s total GHG emissions have remained largely the same since 2000, although official data reports a 10 percent decrease in emissions in 2018 relative to 2016 (figure 1.8A). But looking at both sources, there is no clear trend of decoupling of GDP and GHG emission growth rates. To achieve low‑carbon development, Ecuador could focus on critical high‑emissions sectors such as energy, transportation,14 land use, land use change and forestry (LULUCF),15 and agriculture (figure 1.8B). In 2018, official accounts reported that CO2 (that is, carbon) represented 74.5 percent of all GHG emissions in Ecuador, released primarily by the transportation and LULUCF sectors, whereas methane (CH4) represented 18 percent of emissions, released primarily from agriculture, followed by waste and then fugitive emissions16 (an energy subsector). 14 Emission reporting typically includes transport as an energy subsector, but in this report, transport is often reported separately in light of the subsector’s predominance. 15 Note that, compared to official emission accounts, Climate Watch data refer to the land use change and forestry (LUCF), not LULUCF. Compared to official accounts, Climate Watch shows a larger amount of CH4 emissions coming from fugitive emissions, reporting CH4 as 16 constituting 28 percent of Ecuador’s emissions. 11 Country Climate and Development Report: Ecuador FIGURE 1.8 Ecuador's GHG emissions in 2019 (official accounts) A. National GHG in Ecuador 2018 150 95 9 80.5 87.4 80.5 81.4 84.6 80.1 75.3 100 Gg CO2 e 50 0 1994 2000 2006 2010 2012 2014 2016 2018 Energy Industrial Processess Agriculture LULUCF Waste Total B. Sectors in 2018 Emissions (%) C. Subsectors from 2018 energy sector (excluding transportation) (%) Waste LULUCF 3% Other sectors 22% (Residential, Energy commercial, Energy (excluding public industries transportation) services, etc.) 37% 24% 40% Agriculture 21% Fugitive Manufacturing Industrial emission from industries and Transportation processess oil and gas construction 27% 3% 10% 13% Source: MAATE. (2022b). 1.5.1.  The transport sector, because of the increased use of fossil fuels and inefficient subsidies, has had the most rapid increase in emissions Transport sector emissions have increased dramatically in the last decade and remain one of the leading sources of fossil fuel emissions in Ecuador. In 2018, transport accounted for 27 percent of the country’s total emissions (figure 1.8B), mostly CO2. Although official numbers are not provided for transport by year, Climate Watch reports that, between 2008 and 2018, the transport sector’s emissions almost doubled, and they have increased by 35 percent since 2012, faster than any other subsector. Demand for all energy sources (fossil fuels and electricity), grew in the past decade, resulting in higher national GHG emissions. Fossil fuels—gasoline, diesel, liquefied petroleum gas—have accounted for on average 80 percent of Ecuador’s total energy consumption from 2011–2021 in Ecuador, and with most vehicles using gasoline and diesel (MEM 2021), the transport sector was responsible for half of Ecuador’s emissions from fossil fuel consumption in 2021. Together with the proliferation of private vehicles for personal use, large fuel subsidies, because they encourage inefficient consumption, have contributed to the transport sector’s rapidly growing emissions, but changes are now being made. In the last decade, the government has spent on average 7% of its budget—USD 2.3 billion per year—to subsidize gasoline, diesel, electricity and liquefied petroleum gas (LPG). This has aggravated mobility issues in the main cities, increasing air pollution, accident rates, and road damage caused by over‑utilization (Vogt‑Schilb and Soria 2019). Ecuador could simultaneously achieve greater decarbonization and economic productivity by reducing fossil fuel subsidies while adequately protecting the poor from the economic impacts of withdrawing the subsidies. Although it would be somewhat more complex, the government could also revise transport policies to optimize the use of different transport modes and facilitate the transition to low‑carbon road transport as new technologies emerge. 12 Country Climate and Development Report: Ecuador Box 1. Fuel subsidy reform in Ecuador Ecuador’s fuel subsidies are among the highest in Latin America; its gasoline and diesel prices rank among the lowest. The subsidies not only pose a significant fiscal strain on the country but run counter to decarbonization initiatives by promoting overconsumption. Socially regressive, they also provide fertile ground for corruption and smuggling. Over the past decade, subsidies for gasoline, diesel, electricity, and LPG have averaged USD 2.3 billion annually. In 2022, this figure soared to USD 4.5 billion (4% of GDP), partly due to rising oil prices, and in 2023 it reached USD 3.3 billion (3% of GDP). There have been several attempts for decades to reduce fuel subsidies. For instance, more recently, faced with a large fiscal deficit and financing needs, in 2019 the government implemented abrupt and steep price increases for diesel and gasoline, with mitigation measures for the lower‑income population coming in only considerably later. Violent protests and social unrest forced the authorities to reverse the price increases. Another fuel subsidy reform started in 2020, but this time it allowed domestic prices to adjust gradually toward international prices. Taking advantage of the COVID‑19 pandemic‑led oil price collapse, the market‑based, upper‑and‑lower‑limit band the government set allowed gasoline and diesel prices to gradually increase from June 2020 onward. Between June 2020 and October 2021, owing to an 80% increase in international oil prices, gasoline and diesel prices rose by 80% and 47%, respectively. This resulted in fiscal savings of about USD 500 million with respect to the counterfactual without the price‑band adjustments. Nonetheless, the higher fuel prices raised inflationary pressures, impacting transport and food prices. In the context of ongoing political instability, it triggered widespread protests and social discontent, prompting the suspension of the 2020 reform in October 2021, following a one‑time price adjustment. In June 2022, with annual inflation peaking at 4.2 percent, the government—again in response to social protests—lowered diesel and gasoline prices at the pump by USD 0.15 per gallon. The government then opted for reducing subsidies for targeted sectors; an Executive Decree in December 2022 eliminated the diesel subsidy to large shrimp farms, which by itself accounted for some 80% of the diesel subsidy the shrimp industry receives. It resulted in annual average savings of about USD 160 million. The suspension of the 2020 subsidy formula was scheduled to end by December 2023, but the subsidy did not resume in 2024. On June 26, 2024, the government issued Executive Decree (Decreto Ejecutivo) No. 308 that aligns the gasoline prices for extra and ecopais (extra with ethanol) fuels to international prices and establishes a price smoothing formula to protect consumers from excessive price volatility. This new pricing approach would increase gasoline prices to reach cost-reflective levels and will allow prices to fluctuate by a maximum of 5 percent upwards or 10 percent downward to prevent transmission of price shocks greater than that and engender greater social buy-in for these reforms As per Executive Decree No. 306, the only remaining gasoline subsidies are provided as cash transfer to owners of taxis, lightweight transport/freight vehicles and motorized tricycles. Each month, these transport providers receive a fixed amount per type of vehicle and a monthly base price informed by the MEM. The aim is to temporarily help prevent price increases for the poorest transport users. The government will review and adjust this mechanism every 6 months. The government also plans to extend the cash transfer programs to 100,000 eligible families by the end of 2025. No additional compensation measures for firms or other stakeholders are planned, but all end users will benefit from the price band that lessens the impacts of price volatility. Source: WBG based on information from MEM and MEF 13 Country Climate and Development Report: Ecuador 1.5.2.  The energy sector has succeeded in slowing emissions from electricity generation, particularly through hydropower, although it remains a substantial emitter, and oil and gas production continues to produce high fugitive emissions Generating energy for buildings and industries is one of the leading sources of emissions in Ecuador. Both Climate Watch and official accounts show that, in 2018, even when transportation was excluded, other energy production sectors represented nearly a quarter of the country’s emissions (figure 1.8C). Many industries in Ecuador, such as tuna, still rely largely on fossil fuels since they are not fully connected to the electricity grid. The tuna industry, along with various informal illicit economic activities, have benefited from fossil fuel subsidies that incentivize higher consumption, although the government is starting to reduce these and some companies are beginning to take steps to use renewable sources. Ecuador is committed to increasing its share of renewable energy in its power generation mix, and the country already has a large share of renewable-source electricity, mostly hydropower. In 2020, hydropower was the main source of electricity in Ecuador, responsible for 77 percent of the electricity generated nationally, which advances emissions mitigation (MEM 2021). Other types of renewable energy (wind, solar) accounted for less than 2 percent of electricity generation. Ecuador releases relatively high fugitive emissions. GHG emissions from Ecuador’s sizable oil and gas (O&G) sector, due mainly to the country’s inadequate gas capture infrastructure, come from combustion, flaring, and venting, primarily in the form of fugitive emissions. According to Climate Watch, the country’s per capita fugitive emissions, lower only than that of Venezuela, Surinam, and Argentina in the region, exceed the regional average. Official accounts show lower CH4 (methane) emissions than shown by Climate Watch, but that notwithstanding, the data show that these emissions have increased every year they have been recorded. According to the 2023 Global Flaring Tracker Report, in 2022, Ecuador ranked 20th globally in terms of volume of flares, with gas flaring volumes increasing 61 percent between 2012 and 2022 (World Bank 2023).17 1.5.3.  LULUCF is one of the largest emitters because of significant and increasing deforestation, caused especially by inefficient agricultural expansion High deforestation rates make LULUCF one of the sectors with the highest emissions, which threatens economic activity and ecosystem services. According to the Ministry of Environment, Water, and Ecological Transition (MAATE), in 2022 Ecuador’s natural forests covered close to half of its territory. Forests provide many timber and non‑timber ecosystem services to the population, especially the rural population. To fully realize these benefits, however, the country needs to reduce deforestation. Between 1990 and 2022, Ecuador lost more than 2.4 million hectares of forested land, equivalent to 18 percent of its forest cover in 1990 (MAATE 2017, n.d.). The CO2 emissions resulting from that deforestation make LULUCF one of the largest emitting sectors, accounting for 22 percent of Ecuador’s total emissions (figure 1.8B). According to official records, after decades of steady progress in reducing annual deforestation rates, the most recent data show a significant and unsettling rebound. Figure 1.9 shows an overall decreasing trend in gross deforestation (represented by the black‑outlined bars) in continental Ecuador from 1990 until 2018. However, the trend reverses in 2018–2020, with rates rising by 11 percent, and continues to grow to 95,600 hectares annually by 2020–2022. Natural and anthropic forest regeneration18 (depicted in green) partially offsets gross deforestation and aids in the recovery of degraded ecosystems. Nonetheless, forest regeneration has decreased at an alarming rate in recent years, with an 83 percent reduction from 2016–2018 to 2018–2020, and it continued to decline to 2,500 hectares annually by 2020–2022. As a result of these two trends, net deforestation (light orange) has also significantly increased since 2018, suggesting new LULUCF emissions figures will likely be significantly higher than those reported in the most recent official accounts from 2018. The highest net deforestation is concentrated in provinces of the coastal region, such as Manabí, Guayas, and Esmeraldas, and of the Amazon region, such as Morona Santiago and Orellana. 17 From the Global Flaring Tracker Report 2023, which is based on satellite data for estimating flare gas volumes. 18 However, regenerated (secondary) forests support only a small fraction of the ecosystem services that mature forests can support (Naime et al. 2020). 14 Country Climate and Development Report: Ecuador FIGURE 1.9 Official national average annual deforestation 150 129.9 hectares annually (thousand) 108.7 37.2 97.9 94.4 91.7 95.6 100 30.9 82.5 33.2 4.2 2.5 50.4 24.1 50 92.7 87.5 93.0 77.7 47.5 61.1 58.4 0 1990–2000 2000–2008 2008–2014 2014–2016 2016–2018 2018–2020 2020–2022 Net deforestation Regeneration offset Gross deforestation Source: World Bank staff’s calculations based on data from MAATE’s interactive map and data provided by officials. Note: Net deforestation is gross deforestation minus regeneration. Deforestation is driven by numerous economic factors, of which agricultural expansion, especially of livestock, is the gravest and the biggest contributor. According to Global Forest Watch, approximately 97–98 percent of deforestation is driven by shifting agriculture. Though more research is needed to analyze the reasons behind the recent deforestation spike over the 2018–2022 period, a detailed analysis by Sierra, Calva, and Guevara (2021) using official data until 2018 also concluded that most forest loss was livestock‑related (that is, pasture), followed by permanent crops such as coffee, bananas, and palm oil. Aside from deforestation, GHG emissions from the agriculture sector also increased, attributed to the growth in cattle numbers in recent years and their methane (CH4) emissions. The conversion of forest land to pastures for extensive beef production is attractive because of its low investment costs and high beef prices. While extractive activities, roads, settlements, and infrastructure directly account for less total deforestation than agriculture, they should still strive to implement sustainable practices, given the potential for other social and ecological impacts. For example, oil and mining activities are typically located in remote areas often near indigenous territories, and the resulting pollution and constructed roads have been linked to ecological degradation and forest fragmentation. Several communities have been increasingly concerned about the potential impacts of these activities on water availability and pollution. Infrastructure such as roads also opens new areas of primary forests to deforestation from economic activities.19 Also, some of these drivers could well be growing in importance over time. For instance, Sierra, Calva, and Guevara (2021) showed that the total area deforested for infrastructure (for example, for urbanization) increased by 320 percent over the 1990–2018 period. Within forests, specific ecosystems such as paramos or mangroves support particularly critical services and are especially threatened by deforestation. Paramos help capture and store water from rain, glacier runoff, and fog, which is then slowly released to downstream communities. This makes paramos a predictable storage system for approximately 85 percent of the water used in Ecuador. Yet paramos have been especially impacted by agricultural expansion (in particular, livestock grazing), the introduction of non‑native trees, and slash‑and‑burn practices (Correa et al. 2020; Chuncho Morocho and Chuncho 2019). Mangroves support a variety of ecosystem services, including substantial carbon capture, livelihood support for fisheries, coastal protection from erosion and other natural hazards, and recreation opportunities for locals and tourists. Over the past six decades, researchers have reported the loss of one‑third of the cover (Hamilton 2020). Much of this reduction was due to shrimp farming (usually accounted as agriculture) and urban expansion (López‑Rodríguez 2021). 19 This deforestation may be accounted as driven by the economic activity, not the road infrastructure. 15 Country Climate and Development Report: Ecuador 2. Country Climate Commitments, Policies, and Capacity Main messages • Ecuador’s constitution and development plans are well aligned with climate action, and so the country has made progress in its institutional framework, developing commitments, plans, and strategies. • However, institutional and financial capacity shortcomings make those plans and commitments difficult to implement. The deficiencies include insufficient integration and coordination between the multiple regulations, policies, systems, and responsible agencies, ineffective involvement of local populations and subnational governments, and slow implementation of instruments that would help manage financial and macro‑fiscal issues. • Green private finance is needed to achieve climate objectives, but private sector investments continue to face significant barriers. 2.1.  Ecuador’s development objectives are well aligned with climate action, and the country has made institutional progress Ecuador’s 2008 Constitution recognizes the government’s role in implementing mitigation and adaptation measures, conserving forests and vegetation, and protecting at‑risk populations. The Constitution recognizes Ecuadorians’ rights to water, access to quality food, and living in a healthy and balanced ecosystem. It declares sustainability, conservation, and restoration of nature as a public interest and recognizes the promotion of clean and sustainable energy and technologies (MAATE 2012). This Constitution was also one of the first in the world to recognize nature’s rights. Given Ecuador’s clear national interest in addressing anticipated climate change impacts, it has been working on its institutional framework and formulating mitigation and adaptation strategies. MAATE is the national authority that leads the effort to formulate and implement climate change policies, including the 2012–2025 National Climate Change Strategy. The GoE also submitted its first NDC in 2019, indicating a commitment to mitigation targets in LULUCF, energy, industrial processes, waste, and agriculture, and measures to support the adaptation of human settlements, water heritage, natural heritage, food security, agriculture, livestock, aquaculture and fishing, and productive and strategic sectors like energy. It also subscribed to the 1.5 °C objective adopted at the United Nations Climate Change Conference in 2019 (COP25), besides submitting a National Strategy for Climate Finance (2021–30). In 2017, the government also promoted the Environmental Organic Code (COAM), subsequently regulated in 2019. COAM set the framework for addressing climate change. Finally, in 2021, the sustainable development of Ecuador was declared a national priority in Executive Decree No. 59. To operationalize its commitments and strategies, the GoE published the Implementation Plan for the NDC in 2021 and its National Adaptation Plan (PNA) in February 2023, and is now developing a decarbonization plan. The NDC Implementation Plan discussed more concrete numbers, programs, and challenges for the established targets and initiatives. But details of the programs are still missing. The PNA signals progress in adaptation by making climate data and analysis available to decision‑makers and general users (although more effort should also be made to make the data easily usable by local governments) and employs participatory methods, biophysical models, and risk analysis for each priority sector. Meanwhile, in August 2022, the GoE began working on a long‑term national plan—the National Plan of the Transition to Decarbonization (MAATE 2022). 16 Country Climate and Development Report: Ecuador 2.2.  Ecuador’s climate action strategy and commitments face several institutional and financial shortcomings Despite these well‑designed targets and plans, Ecuador faces institutional challenges in implementing its climate change policies and regulations. A Climate Change Institutional Assessment (CCIA) (World Bank 2021c) shows that although Ecuador has a robust legal framework to address climate change and the GoE has made sustainable development a clear priority, the legal framework, currently made of several different environmental regulations, needs to be strengthened further by establishing a climate change law that would achieve greater integration, efficiency, and effectiveness of regulations. Additional institutional challenges highlighted by this analysis are the need for (i) better integration of climate change considerations into public finance management—making it possible to track public spending on climate change and its impacts;20 (ii) greater involvement of subnational governments in climate change policy formulation; and (iii) better articulation of adaptation and mitigation measures to be implemented locally and subnationally to meet national initiatives and targets. Other analyses have also found insufficient coordination among the many Ecuadorian institutions that share often overlapping responsibilities in addressing climate change and reducing natural hazard threats, which hinders their effectiveness. This includes the many institutions and levels of government in the National Decentralized Risk Management System (SNDGR), MAATE secretariats, and the Inter‑Institutional Committee on Climate Change (CICC). The frequent turnover of staff in the CICC, as well as resource limitations, have also been identified as challenges (World Bank 2021c). Additionally, although institutional responsibilities for disaster risk management (DRM) and climate change have been assigned, the definition of responsibilities requires refinement, especially in terms of response activities and the generation of risk knowledge. Finally, as with any decentralized system, the localized nature of natural hazards and risk management brings with it a set of coordination and integration challenges. A unified climate change law could help address these issues. Ecuador’s subnational governments have an important role in mitigation and adaptation, given the responsibilities assigned to them, but they have limited capacity. Many sectors relevant to climate policy fall under the responsibility of provincial and local governments. Even though the GoE has implemented capacity‑building initiatives for subnational governments, their capacity remains constrained, limiting appropriate planning and implementation of climate action. Moreover, climate investment at the subnational level is highly inadequate because of challenges in designing climate adaptation projects and identifying funding sources. In 2020, provincial governments allocated only USD 1.9 million to climate investment (INEC 2022). There have been important initial measures on adaptation capacity, but much work is still needed, especially regarding coverage and integration of systems and macro‑fiscal and financial management. Many policies, laws, and regulations have been put forward in the country to increase adaptation and resilience capacity, but further work is needed to establish and consolidate this capacity.21 For example, the country has many climate‑related systems in place, such as the National Early Warning System, and has produced useful data on climate risks. But the systems require better coverage and integration, and both the systems and data need to ensure that local governments and the public know about them and can use them. Ecuador’s recent PNA signals progress in addressing many of these issues, yet adequate funding, clear ministerial responsibilities, and sufficient technical capacity (particularly at the local level) will be required to ensure adaptation capacity in the coming years. One area in which particular attention is needed is managing financial and macro‑fiscal issues. Given Ecuador’s reliance on oil, it must anticipate and plan better to tackle long‑term macroeconomic impacts due to climate change, including potentially a 20 Building on initial efforts for tagging climate‑relevant public expenditures, the Ministry of Economy and Finance is revising the existing budget classifier for environmental‑policy‑related expenditures (Clasificador Orientador del Gasto en Políticas de Ambiente, COGPA) to incorporate the Catalog of Climate Change Activities introduced in Ecuador’s National Strategy of Climate Finance. All budget‑related entities will have to use the revised budget classifier for the 2023 budget and onward. This will guide the identification and tagging of amounts specifically allocated to climate change. This will be the first step toward a phased approach to implementing a comprehensive “climate change budget tagging” methodology for generating information to monitor spending, steer policy decisions, and identify financing gaps in the country. 21 A review of 164 indicator using the Hallegatte et al. (2020) method to assess the adaptation capacity of the country shows an average rating of “emerging”. 17 Country Climate and Development Report: Ecuador fall in tax revenue, a deterioration of its current account balance, and repercussions for the financial sector. Also, in 2020, the GoE developed a DRF strategy under which several instruments were assessed, but they have not all been implemented. When the ability of the social protection (SP) system to adapt in response to shocks is examined, there is substantial progress in the area of coverage, registry, and shock‑responsiveness, but significant work is needed to ensure financial sustainability, improve coordination, and provide insurance. The almost 50 programs of Ecuador’s social protection system offer good coverage, but there is a high degree of fragmentation, although clear steps are being taken to achieve a unified social registry with full coverage. These programs include a proactive mechanism, “Cobertura de Contingencia por Calamidades” (Calamity Contingency Coverage), which was introduced in 2019 for cash transfers and interventions under emergencies, meaningfully improving its shock‑responsiveness. The system also shows reliable and time‑responsive digital payments, although it could be improved by increasing the number of beneficiaries with bank accounts. Nevertheless, as with other areas of adaptation and resilience policy, the absence of DRF instruments puts the social protection system’s financial liquidity at risk. Clearer roadmaps are needed to ensure smooth coordination and implementation of disaster risk management plans, including formal agreements with non‑state actors. Efforts are also needed to develop insurance systems for the poorest households, particularly in the agriculture sector. That sector once had a state‑funded system but it was shut down because of low coverage and financial unsustainability. Social protection instruments also have an important role to play to ensure that climate policies, both domestic and international, do not negatively affect more vulnerable households. For such groups, compensation mechanisms that rely on social protection instruments can offset the potential negative impacts of sweeping reforms such as the elimination of fossil fuel subsidies, and/or protect them from the consequences of deforestation‑free regulations, which tend to disproportionately impact small farmers. In terms of mitigation, current progress suggests that strengthening implementation capacity, and increasing the pace of investments, are needed to achieve even the unconditional targets under the NDC. Since the government is currently updating its NDCs toward 2030, it will need to ensure that government capacity and the pace of investments are adequate for achieving its climate commitments. Ecuador needs to ensure that the environmental and climate policy‑making process is more widely seen as legitimate22 by improving how it involves its population. The importance of this has been especially evident in recent years. In October 2019 and June 2022, mass protests paralyzed large parts of the country and compelled the government to reverse certain policies, many of them impacting climate targets, such as the cancellation of fuel subsidies.23 Civil society has also restricted government actions in the environmental space through legal action and referendums, restricting oil and mining activities in 2019 and 2023. These examples show how civil society in Ecuador can restrict government plans in the climate and environmental space. This adds further complexity to the policy‑making process when it is not perceived as legitimate or does not involve adequate consultation. Ecuador's legal framework provides guiding principles for citizen engagement and consultation mechanisms for involving indigenous populations (IPs) and vulnerable groups,24 but evidence suggests that these processes could be improved. Discussions with government officials25 have revealed that government institutions often lack not only clarity about the requirements for engagement with IPs, but 22 The World Bank’s Social Sustainability Database (World Bank 2022d) shows that Ecuador is below the Latin American and Caribbean median on the Process Legitimacy index—an indicator that shows how much people in a society accept as legitimate the authority of officials and the existing policy‑making process (Barron et al. 2023). 23 A new proposal for fossil fuels subsidies has been proposed since then. 24 These guiding principles include the Organic Law for Citizen Participation and Social Control; articles 9 and 13 of the Organic Code of Planning and Public Finance; the International Labor Organization Convention No. 169; the UN Declaration on the Rights of Indigenous Peoples; Access to Information, Public Participation and Access to Justice in Environmental Matters (Escazú Agreement), ratified on May 2020; the Organic Code of Territorial Planning, Autonomies and Decentralization (Provincial, Municipal and Parish Systems for Citizen Participation and Social Control); the Organic Law on Transparency and Access to Public Information (replaced by law published in February 2023); the Organic Code of the Environment (COAM) and its By‑Law (RCOAM), the latter recently reformed by Executive Decree No. 754 (May 2023); and the Open Government Partnership. 25 The effectiveness of the application of the “Environmental and Social Standard (ESS) 7: Indigenous Peoples/Sub‑Saharan African Historically Underserved Traditional Local Communities” was assessed through a participatory workshop in June 2022 in Ecuador that brought together several government and implementing agencies, and included the participation of indigenous populations. 18 Country Climate and Development Report: Ecuador also the capacity and knowledge to engage more effectively and in a culturally sensitive manner. As a result, they often focus on unilateral information‑sharing rather than a meaningful bilateral consultation processes. Assessments also identified deficiencies in the design of the participatory protocols in the NDCs, such as a lack of institutional arrangements for sharing information with relevant organizations, difficulty identifying and engaging all the relevant actors, and frequent turnover of focal points (European Commission, 2019). But the process was still seen as beneficial overall. These efforts are a positive sign that should be sustained when formulating and implementing policies, laws, and regulations to support a just transition. 2.3.  Green private finance is needed to achieve climate objectives, yet private sector investments continue to face significant barriers Ecuador will need to significantly ramp up private financing to achieve its climate and environmental objectives. Estimates of only Ecuador’s NDC targets put financing needs until 2025 at USD 2.7 billion (4.8 percent of 2022 GDP), with more ambitious estimates putting it as high as USD 3.6 billion (6.4 percent of 2022 GDP). Further, the Ministry of Energy and Mining estimates that new hydro and renewable energy projects to meet rising electricity demand until 2032 will cost USD 6.495 billion (11.5 percent of 2022 GDP). It will be difficult for the GoE to cover all these costs just with public financing. The market for green finance in Ecuador is presently small, and access to international investors is limited because of the country’s perceived macroeconomic and political risks. Despite Ecuador’s rich natural wealth, foreign direct investment inflows, averaging 1.1 percent of GDP between 2000 and 2022, have been significantly below that of regional peers such as Peru (3.7%) and Colombia (3.7%), and below the LAC’s 2.9% average (even excluding high‑income countries) over the same period (UNCTAD 2021; World Bank 2021). No sovereign green bonds have been issued, and prospects for issuances in the short term are low because the country’s challenging macro‑economic circumstances have all but closed market access for international sovereign debt issuance. According to the banking association ASOBANCA, green loans from private banks and cooperatives—USD 525 million in 2022—was only 1.3 percent of total loans. Moreover, this funding has been provided mainly by international financial institutions (IFIs), not the private market.26 Besides IFIs, the demand for thematic bonds is very small owing to the lack of a domestic institutional investor base and limited international market access. Furthermore, despite the implementation of certain reforms aimed at boosting foreign investment, these changes are widely regarded as inadequate; legal stability, the security situation in the country, and other important attributes of the business environment profoundly impact the investment decisions of the international community, including green investments. Several barriers constrain the supply and demand of green financial instruments, and addressing them will require more effective policy coordination. Ecuador has a small financial sector with an underdeveloped capital market and significant regulatory constraints. For instance, banks are required to maintain minimum investments in government securities at non‑market prices. This requirement negatively affects the option to invest in corporate securities, including green bonds, and to offer green loans at scale. Banks also face regulatory ceilings on lending rates, which were intended to protect riskier borrowers. Unfortunately, interest rate ceiling regulations limit the ability of financial institutions to adequately price risk, further hampering the access of low‑income households and MSMEs (Micro, Small and Medium‑sized Enterprises) to finance, who then turn to informal channels (such as loan sharks who charge usury interest rates) to meet their financing needs. Additional factors that hinder the growth of green finance in Ecuador include regulatory and tax barriers for non‑resident investors, the lack of a legal framework, and the failure to standardize thematic bonds and loans. Although the 2021 National Climate Finance Strategy was an important starting point to improve the green investment climate, no initiatives set out in the strategy have actually commenced since the strategy was launched, and coordination among authorities remains 26 The first green bond was issued by Banco Pichincha in 2019 (USD 150 million). Other institutions subsequently issued two more green bonds (USD 80 million and USD 15 million), one blue bond (USD 79 million), and another sustainable bond (USD 50 million). International finance institutions bought these bonds, with almost no private investor participation. 19 Country Climate and Development Report: Ecuador low. Because the strategy was developed with limited input from the superintendencies and private financial institutions, ownership and buy‑in are a problem. In short, few initiatives other than those that are industry‑led have been pursued and followed through to promote green finance.27 Authorities and market players are implementing a series of actions aimed at improving the regulatory landscape for green finance. First, regulators are developing a green taxonomy to address the lack of clarity in defining what constitutes a green loan or bond. This should improve transparency and accountability in the sector to the benefit of potential investors. Second, in 2016 ASOBANCA joined the Sustainable Banking and Finance Network (SBFN) and issued the Sustainable Banking Protocol for Ecuador the same year, which was ratified in 2023. Additionally, in 2019 nine commercial banks further committed to the UN Principles for Responsible Banking. Third, the superintendence has created a legal framework for issuing thematic corporate bonds that is pending approval; and the stock exchanges in Quito and Guayaquil are developing enabling conditions, such as clear green bond standards for issuers to enter the market, in preparation for the approval of the new legal framework. Fourth, the Ministry of Economy and Finance is finalizing a framework for sovereign‑issued thematic bonds. Ecuador also recently announced a debt exchange transaction, termed “debt‑for‑nature‑swap,” in which a new bond is issued with a guarantee from IFIs, and the proceeds are used to buy back more expensive outstanding debt, with the cashflow savings allocated to marine conservancy in the Galapagos reserve. But this transaction is seen as a one‑off deal and is not expected to serve as a benchmark for other thematic sovereign issuances. For Ecuador to take advantage of the sovereign‑issued thematic bond framework and the lessons learned through the debt‑for‑nature swap, it first needs to recover access to international markets. Bringing macroeconomic security, and political stability is paramount for attracting international investment. Finally, in 2023, Ecuador approved a new regulation for public–private partnerships (PPPs).28 The country has traditionally struggled to structure tenders and bankable, transparent, competitive PPPs. The new regulation brings clarity to the conditions, processes, and requirements for investors to participate in PPPs, describes the roles and institutional responsibilities, and provides guidelines to guarantee transparency across the projects’ life cycle. Another constraint on financing is Ecuador’s constitutional framework, which currently prevents carbon market development, potentially missing out on this stream of funding, even though the GoE is developing alternative frameworks for carbon offsets and leveraging other mechanisms. Ecuador’s constitution restricts the creation of markets related to environmental services.29 This has limited Ecuador’s participation in some market‑based funding mechanisms for carbon emissions reduction and removals. Nevertheless, the GoE is developing new frameworks for carbon offset projects and leveraging other mechanisms to finance climate action outside markets. For example, it successfully sourced international funding for its Reducing Emissions of Deforestation and Forest Degradation (REDD+) Program, which has been used to support reforestation and forest restoration. More recently, the GoE announced the Ecuador 0 Carbon Program, which will offer a mechanism for registering, monitoring, and planning net‑zero emission activities in the private and public sectors. In 2016, ASOBANCA joined the Sustainable Banking and Finance Network (SBFN) and signed the Sustainable Banking Protocol for 27 Ecuador. Since then, ASOBANCA has published 34 sectoral guides for banks to identify and mitigate environmental and social risks across all productive sectors. The Central Bank formally joined the SBFN in 2021. In 2019, nine Ecuadorian banks signed the Principles for Responsible Banking of the United Nations Environment Programme Finance Initiative (UNEP FI). The same year, the Quito Stock Exchange issued a Guide for Green and Social Bonds for Ecuador, advancing the development of sustainable finance in the capital markets. 28 The organic law on economic efficiency and employment generation, approved in December 2023, includes the creation of a regime for attracting investment through private–public partnerships. 29 Article 74 of the Constitution of Ecuador states that “the environmental services are not susceptible to appropriation; their production, offering, use and exploitation will be regulated by the Estate.” This text is widely interpreted as a prohibition on the monetization of environmental services in Ecuador. 20 Country Climate and Development Report: Ecuador 3. Climate Policies, Development Implications, and Economic Impacts Main messages • Multiple adaptation investments, with an emphasis on resilience‑improving investments in roads and bridges, and climate‑smart agriculture technologies, particularly irrigation, could almost completely offset the impacts of climate change on GDP and poverty. Increasing the resilience of the power sector through well‑designed hydropower infrastructure, climate‑informed planning, and diversification will also be critical for energy security and emissions reduction. • The country needs to carefully manage its oil resources by investing in diversification and resilience in the face of transition risks and by starting to plan for alternatives like green mining, which has high potential if its social and environmental concerns are solved. • A multi‑sectoral approach that involves the LULUCF, energy, and transport sectors could achieve significant decarbonization. There is space to aggressively expand already successful policies to protect and restore forests, combining strategies from conservation forestry and agriculture. Ambitious decarbonization investments in energy and transport are also feasible without (or with just minor) negative long‑term macroeconomic consequences. A combination of the expansion and diversification of renewable energy, electrification expansion (including electromobility), transport modal shift, a reduction in gas flaring, and energy efficiency measures will be needed. • A mix of private and public initiatives will be critical to transforming Ecuador’s economy. To raise the public sector’s capacity to conduct these policies, Ecuador needs to clarify responsibilities, improve coordination and integration, facilitate and encourage the involvement of subnational governments, and improve financial sustainability by making clear plans and enabling green finance. 3.1.  A more resilient and low‑carbon development is needed If poverty reduction is to be resumed, and the challenges of climate change are to be managed, Ecuador urgently needs to tackle long‑lasting constraints on developing new sources of growth. As described in section 1.1., Ecuador is blessed with natural resources, including arable land, extensive forests, fish resources, diverse ecosystems, and significant hydropower, as well as oil, gold, and copper. Its agriculture, tourism, and extractive sectors have significant potential. But despite its status as one of the region’s fastest‑growing countries in the past, growth has remained elusive since 2014. Without accelerated growth, Ecuador will struggle to maintain its income per capita or significantly reduce poverty. The consequences of climate change discussed in chapter 1 increase the urgency of tackling its challenges, most of which are already impacting the economy. Past growth relied on an unsustainable expansion of public spending, fueled by windfall gains from the 2004–2014 oil price boom, and a costly erosion of fiscal buffers. Between 2004 and 2014, the oil price boom and revenue‑enhancing policy measures enabled Ecuador to increase expenditure, contributing to high growth, poverty reduction, and shared prosperity. Despite strong growth and high oil prices, Ecuador dismantled its sovereign oil funds, accumulated new debt, and defaulted on old debt to pay for a large public investment program. This policy stance prevented Ecuador from building fiscal buffers and increased public debt, vitiating the country’s capacity to deal with lower oil prices and the pandemic. After the oil price boom, with no national currency—Ecuador is a dollarized economy—and limited macroeconomic buffers, the country had to engage in a fiscal consolidation to reduce its debt‑to‑GDP ratio from 2022 (World Bank 2023). But this consolidation has dampened economic growth because the recovery of private investment in the wake of the COVID‑19 pandemic has not been sufficient to offset the fiscal consolidation. 21 Country Climate and Development Report: Ecuador Although Ecuador has stabilized its public debt in recent years, its public finances still depend heavily on the oil sector, and external financing remains highly constrained. Despite the recent fiscal consolidation, fiscal sustainability is still vulnerable to major downward short- to medium‑term risks, including lower oil prices, higher international interest rates, and emerging expenditure pressures. Positive fiscal outcomes in Ecuador are still highly dependent on oil revenues, exposing the country to short‑term volatility, higher uncertainty (as evidenced by the recent referendum mandate to stop oil production in the Yasuni National Park), and the potential risk of long‑term oil price reductions resulting from global decarbonization efforts. Additionally, with limited mobilized domestic financing, the public sector is heavily reliant on external financing to close its still high financing needs, including the servicing of debt acquired during the consolidation process. Although Ecuador’s short- to medium‑term access to the international market is constrained by its long‑lasting default record and by political instability, its long‑term access will depend on its capacity to replace oil revenues with new growth and fiscal revenues. Moreover, in the medium to long term, fiscal sustainability will require addressing rising pension and health expenditures resulting from Ecuador’s aging population. Structural policies to boost growth can be found in Ecuador’s Systematic Country Diagnostic (World Bank 2018c) and in Gonzalez Amador, Velasco, and Miranda (2024); this report focuses on issues directly related to climate change and decarbonization. Ecuador needs to address the structural factors that limit long‑term private investment, which is critical to enabling the economy to adapt to medium- to long‑term challenges. Private investment showed a modest recovery after the 2003-2014 commodity boom as fiscal consolidation reduced macroeconomic risk. But private investment remains low and has struggled to recover from the pandemic. Through reforms such as the 2018 Productive Development Law and the 2022 Entrepreneurship and Innovation Law, and by advancing trade agreements, the GoE is creating a more investment‑friendly business environment. But significant constraints that disincentivize private investment still need to be addressed. Crosscutting limitations include (i) trade and investment restrictions, (ii) labor market rigidities, (iii) weaknesses in the country’s competition framework, (iv) a shallow, over‑regulated financial sector, and (v) cumbersome regulations and procedures for firms trying to do business (World Bank 2021b). Additionally, in recent years, the country has been affected by increasing insecurity related to narcotraffic, together with domestic political instability and social unrest. Addressing these constraints would enable more active private sector participation, including foreign participation, in large‑scale transformational or innovation‑intensive projects. A recent Country Private Sector Diagnostic (CPSD, World Bank 2021b) reviews in greater detail how to address these structural challenges. Some of the main recommendations highlighted in the CPSD that are particularly relevant for the climate and development agenda of Ecuador are the following: (i) foster international trade by rationalizing tariff and non‑tariff barriers, and develop a framework of export promotion; (ii) facilitate private investment by strengthening the PPP framework and remove international investment barriers (such as foreign currency exit tax); (iii) enhance competition, lift barriers to entry in network industries and review rationale for State participation in activities that could be provided by the private sector; (iv) strengthen the financial sector by reducing distortionary policies, increase competition and foster the development of digital services; and (v) promote the digitalization of several sectors of the economy. Against this background, climate change is making it more urgent that Ecuador tackle its development challenges. The decarbonization of Ecuador’s economy and its adaptation to the physical consequences of climate (both current and future) can, under the appropriate policies and conditions, help catalyze the overall modernization and evolution of its economic structure. A well‑designed package of policy reforms to remove the barriers to private investment in key sectors, combined with adequately prioritized government investments, could improve Ecuador’s resilience against climatic shocks, achieve reductions in emissions, and contribute to increasing the country’s long‑term macroeconomic performance. This chapter explores climate policies consistent with resilient, low‑carbon development that address the multiple threats discussed in chapters 1 and 2. Modernization of the agriculture sector is needed to manage, first, increases in global temperatures that could have large negative consequences on crop yields, and second, transition risks to agricultural exports from deforestation policies in importing markets. Investments in infrastructure and rehabilitation can address the vulnerability of road infrastructure to flooding and landslides, which already have significant economic costs and would be amplified in future climatic conditions. Hydroelectric power availability, which is already experiencing sizeable fluctuations that are affecting businesses and households, could worsen in future climate scenarios, requiring investments 22 Country Climate and Development Report: Ecuador in resilient infrastructure and diversification with NCRE. As mentioned above, over the medium term, oil dependency exposes the Ecuadorian economy to the possibility that global decarbonization efforts will reduce oil exports, requiring active planning and searching for alternative sources of revenue, such as energy transition minerals. The country can reap substantial benefits from sustainably using its forests and tackling its deforestation emissions, such as through the above‑mentioned agriculture export products. The technological transformations for the decarbonization of the power and transport sector, while complex and uncertain, can be part of broader reforms to unleash private investment. Action in these sectors would support a broader diversification push in the economy. Finally, to tackle all these challenges, the capacity of the public and private sectors will require significant across‑the‑board strengthening. 3.2.  Adaptation policies need to complement Ecuador’s development priorities 3.2.1.  Modernizing Ecuador’s agricultural sector will facilitate its resilience against climate shocks, prioritizing crop and producer‑specific climate‑smart agriculture and productive interventions Regional differences in land productivity and resilience against climate shocks demand diverse policy priorities for inclusive and sustainable agriculture. Higher labor productivity identified on the coastal region suggests that policy interventions can benefit from targeting these areas based on land productivity differences. In high land productivity areas, agricultural innovation, logistics, and quality standards (namely, certifications) oriented to foster higher competitiveness could be promoted as a priority. In lower‑productivity areas, agri‑productive investments should be prioritized and oriented to close efficiency gaps. In the highlands region, with their lower labor productivity, the focus should be on inclusive agriculture programs, combining agri‑productive support for small‑scale producers with transfers that offer small‑hold producers at least the minimum level of assets that they require for integration into dynamic markets, both domestic and export. If farmers in the highlands can manage to supply these markets with high‑value crops such as fruits and vegetables, this would also simultaneously create an opportunity to improve the nutritional status of their own households. In Ecuador, vulnerability to climatic shocks typically varies from region to region and from crop to crop, a distribution pattern that requires careful targeting of resilience interventions. This distribution of climate shocks emphasizes the need to evaluate policy alternatives that consider crop‑specific levels of regional exposure to shocks, intrinsic vulnerabilities, and farmer‑specific adaptation capacities. For instance, in the Guayas River basin, adaptation practices should be prioritized to build resilience against water scarcity, while in the Amazon regions, emissions mitigation practices should be prioritized. Further, with their efficient water consumption, modern irrigation systems such as sprinklers and drip systems can help tackle the threat of growing poverty in rural areas in view of the likely climate‑change‑induced increases in drought frequency and severity, which will adversely impact irrigation water availability. Irrigation can enhance resilience and boost agricultural productivity in Ecuador. It has been shown that access to a reliable water source for irrigation has a positive impact on productivity, especially for small and medium‑sized farmers in the coastal and highland regions. To maximize the benefits, it is recommended that irrigation investments be targeted toward dynamic, small‑scale farm commercialization, focusing on local markets in the Sierra and Costa regions. In this regard, Ministry of Agriculture and Livestock (MAG) programs that aim to increase the diversification and commercialization of small‑scale agriculture should be expanded. These programs should align investments in irrigation and assistance measures to support the supply of key crops to urban markets (Reardon 2022). Strategies to promote irrigation and water predictability for agriculture would also have to conserve paramos, which are the source of 85–90 percent of the drinking water in Ecuador and an important water source for farming, and yet are being threatened by glacier retreat and deforestation. Investments, policies, and regulations in this area should closely assess and adhere to water rights. Likewise, a strategy that promotes targeted CSA technologies could present a win‑win opportunity to improve productivity while caring for natural resources such as forests. There is a diversity of CSA options that can be explored depending on the hazard faced, the productive barriers, and even the crop type. Table 3.1 includes a few proven CSA options by different objectives, and the annexed background note 7 goes into more 23 Country Climate and Development Report: Ecuador detail, even suggesting crop‑specific alternatives. The specificity and range of these technologies require a detailed strategy that considers the differences among the situations of producers, leveraging existing programs that are already promoting some of these technologies. CSA will be critical not only for improved resilience and productivity but also to reduce the carbon intensity of agriculture exports and retain access to markets that are expected to adopt new low‑carbon or deforestation‑free requirements. For the same reason, it will also be important to include support for small farmers to access services that certify their practices and promote formalization. This would require a concerted strategy with a territorial approach. A territorial and participatory approach would also provide the opportunity for local populations to play a more important role in devising strategies based on their knowledge of local techniques and context. TABLE 3.1 Examples of CSA alternatives by objective Contribution Example of alternatives Resilience In other international experiences—Costa Rica, Peru, Colombia, El Salvador—scaling up and efficient CSA‑related practices such as pressured irrigation (drip, sprinklers, and so on), agroforestry, water and intercropping, improved livestock production systems (including grass‑legume combinations, soil use silvopastoral systems, crop‑livestock integration, or even integrated crop‑livestock‑forest systems), and postharvest community infrastructure has been shown to improve drought resilience and to lead to more efficient water and soil use. Pest- and disease‑resistant variables, improved shade systems, diversification, and crop‑switching alternatives can be used in areas affected by rising temperatures. Prevent soil Practices that can improve land use and prevent soil erosion and deforestation include agroforestry erosion and for microclimate improvement, efficient nitrogen fertilizer application to mitigate methane deforestation emissions, stone contour bounds to maintain carbon dioxide (CO2) deposits in the soil and improve soil conservation, and crop rotation for improved soil quality. Given that cattle ranching is the main driver of deforestation, adopting improved livestock production systems, in combination with forest governance, is especially important (see section 3.4.1 for more information). Further, low‑carbon agriculture production techniques30 can help decrease deforestation, increase productivity, and generate direct and indirect jobs. In a pessimistic scenario, ambitious scale up of CSA technologies such as irrigation could cut potential negative production shocks by about a third. Those same technologies, in an optimistic wet‑warm scenario, could double the potential positive shocks. For water and heat impacts on rainfed and irrigated crops, our biophysical analysis (see annex 5.2) explored the protective effect of combining (i) construction of new irrigation infrastructure for rainfed crops covering up to 50 percent of the estimated irrigation potential in the country, (ii) a reduction in unmet irrigation demand for irrigated crops, (iii) crop switching to double the share of climate‑resilient crops, and (iv) an increase in the share of heat‑tolerant crop varieties to 50 percent among all crops. For the period 2041–2050, the combination of these four adaptation measures is expected to reduce by a third the negative impact on production that would occur under the dry‑hot scenario, and double the potential positive impact under the wet‑warm scenario, with the greatest impacts coming from the reduction in unmet irrigation demand. As shown in figure 3.1, the protective effects of these adaptation measures differ significantly from crop to crop. Nevertheless, important crops such as bananas, vegetables, rice, sugarcane, maize, potatoes, and “other fruits” show high potential protection from these adaptation measures, leading to production gains of more than 10 percentage points. Undertaking adaptation measures in response to the soil erosion impacts on crops, and to the heat and feed impacts on livestock, also have protective effects, albeit smaller. For the soil erosion and livestock channels, the modeling included improving soil conservation practices such as reduced tillage, leaving crop residue on fields post‑harvest with an adoption rate of 10 percent by 2050, and compensating for 50 percent of pasture losses by providing supplemental feed to livestock. Improving soil conservation has less than a 1 percent production gain (although the cost was minimal), while the impacts are halved for livestock production (except for cattle milk, for which the strategy has almost no protective effect). 30 Further examples of such techniques include the following: zero tillage, where soil is turned only along the sowing line and organic material and straw from previous crops is used to fertilize and provide nutrients for the soil; increasing soil biodiversity and water conservation; biological nitrogen fixation, which involves inoculating seeds with bacteria capable of fixing atmospheric nitrogen in the soil; and the production of planted forests of native and exotic species, which helps capture atmospheric CO2. 24 Country Climate and Development Report: Ecuador FIGURE 3.1 Crop production shock after implementation of all adaptation interventions, 2041–2050 A. No adaptation B. All interventions 20% 16% 12% 11% 13%13% 9% 8% 9% 8% 9% 7% 7% 3% 5% 3% 4% 4% 5% 5% 2% 2% 1% 1% 1% 3% 0% 0% 0% -5% -4% -4% -4% -5% -4% -4% -5% -7%-6%-8%-6% -9% -5% -6% -11% -11% -10% -13% -14% -11% -20% -16% -18% -20% -18% -22% -22% -21% -32% -40% na ca s Co n ou e Oi M t al ze rf t Pl its Po n to Tr gar e al e ge its es na ca s Co n ou e Oi M t al ze rf t Pl its Po n to ce al ne ge its es nu he frui nu he frui Co tru Co itru G r f fe c n G r f fe a i a i ta ta ta ta l p ai l p ai bl bl Su Ri Su Ri ru Ve fru ru Ve fru op ca op ca na be na be nd nd an an Ci ta ta C m m Tr ar Ba Ba g ic ic Ot Ot Dry/hot mean Wet/warm mean GCM range Source: Simulations prepared by Industrial Economics for this report (see Appendix 5). Note: See footnote 4 for reference to dry‑hot versus wet‑warm climate scenarios. The simulations also lend support to the notion that modernizing agricultural practices in Ecuador would reduce negative economic impacts. Table 3.2 summarizes each channel’s measures and their cost. In the dry‑hot scenario, these investments would result in the cumulative avoidance of future losses in economic activity by 2050 of 0.6 percent of GDP (figure 3.2), compared to an expected loss without adaptation measures of 1.2 percent. Furthermore, the net present value of these investments would be zero over this time horizon, indicating that the cumulative value of the GDP losses due to climate change damage avoided with these investments would compensate for their initial upfront costs. The economic benefits resulting from these measures are higher when their indirect effects through improvements in productivity are considered. A climate‑smart approach to agriculture—climate‑resilient crop varieties, conservation techniques, water, and livestock management—could enhance resilience against droughts and other climate‑related shocks while simultaneously boosting productivity by increasing the quantity and quality of produce and reducing emissions. TABLE 3.2 Adaptation measures and cost by channel Investment cost (cumulative Investment cost Channel Measures by 2050, US$ million) (NPV, US$ million) Crops Irrigation 759 286 Soil erosion Tillage and residues Cost‑neutral Livestock Feed imports Higher operation cost Source: World Bank staff calculations. FIGURE 3.2 Impacts on GDP of modeled adaptation measures for agriculture channels Decomposition of impact on GDP growth Percent of BAU scenario 0.0 -0.3 -0.6 -0.9 -1.2 -1.5 Dry/hot Adaptation Dry/hot Adaptation Percent of BAU's GDP in 2050 Percent of BAU's GDP net present value Water availability and heat impacts on rainfed crops production Heat and food availability on livestock production Water availability and heat impacts on irrigated crops production Erosion impacts on crop production Source: World Bank staff calculations. Note: See footnote 4 for reference to dry/hot versus wet/warm climate scenarios. Y‑axis in all graphs is the percent of GDP in the BAU scenario. See appendix 5.2. for more details on the computable general equilibrium model MANAGE. 25 Country Climate and Development Report: Ecuador An area yields, index‑based, agriculture insurance program could also be useful to offset the effect of climate change on agriculture. Many governments promote agriculture insurance for smallholders to mitigate production and climate risk and stimulate diversification. Between 2010 and 2017, Ecuador ran AgroSeguro, a state‑subsidized agriculture insurance system for small and medium‑sized farmers, with a premium subsidy of up to 60 percent. But the system turned out to be inefficient, mainly due to asymmetric information problems that resulted in payouts larger than the premium earnings, making the system unsustainable. It was canceled in 2018. Learning from this failed experience with individual insurance systems, Ecuadorian authorities could evaluate the option to implement an area yield, index‑based insurance program that is more efficient, and insures more areas and producers at the same subsidy cost. Beyond the specific resilience interventions explored, there are a series of sectoral and economy‑wide policies that could reduce structural barriers to the sector and support its resilience. Many individual options have been explored in this report. However, reducing sectoral barriers to productivity—explored in detail in Gonzalez Amador, Velasco, and Miranda, (2024)—could also support resilience. It is vitally important to improve small farmers’ productivity and resilience by reallocating public funds and mobilizing private investment to address structural challenges. More efficient allocation of land, labor, and capital in agriculture would likely require removing distortions caused by policies like minimum prices. A productive alliance approach could complement this effort by providing associated small farms with technical and financial support and linking them to buyers to better take advantage of emerging opportunities in both foreign and domestic markets. Authorities also need to adopt an economy‑wide approach to reduce Ecuador’s exposure to climate shocks from agriculture. The incomes of most vulnerable households—particularly those in rural areas and minority groups such as the indigenous populations and Montubios—come exclusively from agriculture. In view of the oversized risks climate change poses to agriculture, policies that support the diversification of Ecuador’s economy will also reduce its aggregate exposure to climate change and diversify the sources of income of vulnerable households. Box 2. Opportunities for the private sector to build climate resilience in the agriculture sector Investment in a climate‑resilient transport and logistic infrastructure is part of Ecuador’s competitive strategy. Ecuador exports significantly more fish products (USD 8.4 billion in 2022) than its much larger neighbors, Colombia and Peru, and was the top exporter globally of bananas (USD 3.5 billion) and shrimp (USD 7.9 billion) in 2022. Fisheries and fruit exports could take advantage of high‑demand windows in developed countries by selling when the supply is low and prices are high. Such a strategy would require optimized transportation modes to deliver during short windows of time, access to agglomeration centers, and full continuity of the cold chain to reduce spoilage. Thus, investment in resilient transport and logistic infrastructure could help the country gain trade competitiveness while adapting to climate change. Ecuador already has experience attracting foreign and domestic private investment for transport and logistic projects through PPPs. However, because of the lack of a robust regulatory framework, the country has not been able to create a pipeline at scale. Following the approval of the new regime for attracting investment through PPPs, the Public‑Private Investment Secretariat (SIPP) has identified roads, ports, and airports that could become part of strategic projects for the transport and logistics sectors. CSA is another area where the private sector has significant opportunities for making profitable and climate‑resilient investments. Some examples include agroforestry, irrigation, and water management systems, alongside post‑harvest infrastructure, to reduce food losses and improve energy efficiency (see table 3.1 above). 26 Country Climate and Development Report: Ecuador The right financing mechanism for CSA projects depends on several factors, including the project size, the underlying crop cycle, the potential need for long grace periods, and the existence of additional incentives for sustainable land use, among others. Thus, to incentivize investment, it is essential to adjust the current portfolio of credit and risk management instruments to meet the specific needs. Commercial and public banks should work with IFIs and combine grants, guarantees, and concessional and commercial finance to tailor their portfolio and optimize affordability. Source: World Bank (2021b) 3.2.2.  Improving the resilience of Ecuador’s roads is a cost‑effective way to avoid disruptions to economic activity Although the construction and maintenance of roads is typically thought of as a long‑term objective, the importance of the road network, and its current condition, make it especially urgent to improve the resilience of the network. As mentioned in chapter 1, a significant portion of the NMTS is in below optimal condition because of poor maintenance, lack of investment, and continual recurring natural hazards. Ecuador has faced a similar situation in the past, to which it responded swiftly: Triggered by the poor condition of the network, the Plan Relámpago of 2007 injected substantial and prompt investments into the NMTS that helped enhance its condition and boost economic development. Building up the resilience of the current network should be treated with similar urgency. Investments should be prioritized based on the exposure and importance of each road. As shown in section 1.2.1, some roads are particularly important for economic activities and access to basic services, and the roads are all impacted differentially depending on the level of climate risk in the area. This spatial analysis and different types of impacts should be considered when setting investment needs. For example, the roads in Los Rios province, close to the important port city of Guayaquil, have high economic and connectivity value and are constantly impacted by floods. Multiple infrastructure investments are possible to improve the resilience of roads and bridges and reduce the need for maintenance. Section 1.2.1 explored the impacts of high daily temperatures, precipitation, and flooding stressors on paved, gravel, and unpaved roads, as well as bridges. Table 3.3 summarizes the effects of climate stressors on each type of road, the additional repair and maintenance costs incurred due to climate damage, and the different adaptation measures considered in the analysis. Overall, the adaptation strategy assumes that new road infrastructure is constructed to resist high levels of temperature and precipitation, and also takes into account the magnitude of a future 50‑year flooding event. TABLE 3.3 Modeled effects, costs, and adaptation alternatives based on stressor and type of road Repair and Maintenance Climate Effect Costs Incurred Possible Adaptation Measures Stressor Due to Climate Damage Paved roads Temperature Increased Use additional sealing more Construct dense seals (for example, temperature frequently, such as on a five‑year sand seal, otta seal, or cape seal). accelerates the aging instead of a seven‑year schedule, Typically, cape seals are used on of a binder. because of faster degradation of heavily trafficked roads. road quality. Increased Use additional patching each Adopt base bitumen binders with temperature leads to year to fill cracks resulting from higher softening points (including the rutting of asphalt pavement weakening. polymer modification) for surface and bleeding and seals and asphalt. flushing of seals. 27 Country Climate and Development Report: Ecuador Repair and Maintenance Climate Effect Costs Incurred Possible Adaptation Measures Stressor Due to Climate Damage Precipitation Increased Increase the focus on annual Add wider paved shoulders to improve precipitation leads patching to minimize exposed surface drainage. to higher average cracking resulting from seasonal moisture content surface failure. in subgrade layers and reduced load- Fill sub‑base where erosion has Increase base strength (thickness carrying capacity. occurred due to water infiltration. and/or quality) from the typical 150 Follow with additional patching. mm to 225-300 mm, depending on precipitation levels, to increase protection of subgrade layers. Flooding Wash‑aways and Repair localized washouts, Lengthen‑flood design return period (in excess of overtopping of road. including cleaning or replacing by increasing the size of culverts to design flood) culverts, replacing subbase, and accommodate new 1-in-50-year flood replacing asphalt surface. level (in most cases, it will require raising the road to allow a larger culvert to fit). Gravel roads Temperature Not applicable Precipitation Higher precipitation Regrade roads localized to Increase gravel‑wearing course leads to increased precipitation, fill sub‑base, and thickness to increase cover and to average moisture reapply gravel top layer. protect the subgrade layers. content in subgrade layers and reduces load- carrying capacity. Flooding Wash‑aways and Same as for paved roads except Lengthen flood design return period (exceeding overtopping of road. for the application of a gravel top by increasing the size of culverts (in design flood) layer rather than an asphalt layer. most cases, it will require raising the road to allow larger culverts to fit). Unpaved roads Temperature Not applicable Precipitation Higher precipitation Regrade the road localized to Upgrade to gravel road and increase leads to increased precipitation, fill the sub‑base, the thickness of the gravel‑wearing average moisture and reapply the earth’s top layer. course to increase cover and protect content in subgrade subgrade layers. layers and reduces load‑carrying capacity. Flooding Washaways and Same as for gravel except for the Lengthen flood design return period (in excess of overtopping of road. application of a top layer of earth by increasing the size of culverts to design flood) rather than gravel. accommodate new 1-in-50-year flood level (in most cases, it will require raising the road to allow larger culvert to fit). These adaptation investments for roads and bridges would be enough to offset these impacts in a cost‑effective way. We modelled the impact of engineering improvements, including upgrading unpaved to paved roads, upgrading asphalt binders, enhancing the road base layer, and improving bridge design for a total cumulative cost of USD 1.4 billion up until 2050 (USD 737 billion in NPV terms). Such adaptation investments would offset the impact of the dry‑hot scenario by 2050 (figure 3.3). The NPV of the avoided GDP losses more than compensates for the investment costs required so that the net present value of these investments would be positive over this time horizon. In addition to cushioning climate change impacts, these measures would bring significant co‑benefits. In a context of fiscal constraints, private sector participation, proper project prioritization and asset management capabilities are key to improve the resilience of transport infrastructure. To attract private investors for the new Public-Private Partnership regulations, the government must work towards building a credible pipeline of projects and improving fare policies. Private participation can partially contribute to bridging the current liquidity gap. Additionally, on the public investment side, appropriate project prioritization and asset management systems based on potential socioeconomic benefits, vulnerabilities and environmental and social risks will help the country maximize the limited funding capacity and minimize maintenance costs. 28 Country Climate and Development Report: Ecuador FIGURE 3.3 Impacts on GDP of modeled adaptation measures for road and bridge channels Decomposition of impact on GDP growth Percent of BAU scenario 1 -1 -3 Dry/hot Adaptation Dry/hot Adaptation Percentage of BAU's GDP in 2050 Percentage of BAU's GDP, net present value Flood, temperature and precipitation impacts on road/bridges delays Flood, temperature and precipitation impacts on road/bridges capital Source: World Bank staff calculations. Note: See footnote 4 for reference to dry‑hot versus wet‑warm climate scenarios. Y‑axis in all graphs is the percent of GDP in the BAU scenario. See appendix 5.2 for further details on the computable general equilibrium model, MANAGE. 3.2.3.  Infrastructure adaptations can improve hydropower resilience but should be complemented with enhanced planning, considering climate risks and the urgency for diversification with other types of non‑hydro renewable energy There are a variety of resilience measures that could be considered to help address hydropower’s vulnerabilities to hydrological events and fluctuations. Adaptation measures to consider include improved water resource and basin management, prevention and management of sediment accumulation, measures for planning flood protection, power plant rehabilitation and repowering, periodic monitoring and control of the discharge infrastructure, and the adoption of more climate‑resilient designs for future dams and infrastructure (OLADE, 2021). There may also be the opportunity to convert some existing hydropower plants into pumped storage facilities, or the plants’ reservoir capacity could be increased. For new planned hydropower facilities, the government could explore the feasibility and cost‑effectiveness of hydropower with storage capacity. All these adaptation measures would need to closely consider existing water rights. Investments in enhanced reservoir and turbine capacity could also offer some protection against climate impacts, as it could reduce by more than half the expected negative impacts of climate change under a dry and hot scenario while still producing positive results in a more optimistic scenario. The biophysical modeling described in appendix 6.1 includes a number of adaptation options for the hydropower channel. The analysis considered the impact of a 10 percent increase in reservoir volume capacity and maximum turbine capacity. In a pessimistic, dry, and hot future, the cumulative negative impacts of climate change over 2041–2050 would range from an 8 percent reduction in hydropower production without adaptation to a 3 percent reduction with adaptation measures included. Under an optimistic wet and warm mean scenario, these adaptation measures would also be beneficial by boosting production, resulting in an estimated 7 percent increase in hydropower production compared to the noninvestment in the adaptation measures scenario. Since climate change impacts on hydropower generation remain uncertain, Ecuador could already start considering potential climate risks in future planning for better preparedness. As discussed in 1.3, future hydropower generation is likely to be affected by year‑to‑year climate variability, climate change’s potential longer‑term impacts on runoff availability, and the El Niño Southern Oscillation (ENSO) phenomenon. Given this, it is essential that Ecuador’s future planning accounts for increased year‑to‑year and longer‑term variability in water resources. Greater renewable energy from non‑hydropower sources also needs to be developed to increase energy security and ensure a more climate‑resilient power system. Ecuador could enhance resilience of its power sector through greater diversification of its electricity sources by integrating more renewable energy resources like wind, solar, and biomass to diversify beyond hydropower, expanding 29 Country Climate and Development Report: Ecuador regional transmission interconnections with Peru and Colombia, and investing in new technologies such as battery energy storage and green hydrogen in the longer term, which could make the power generation system more flexible. Ecuador’s significant untapped renewable energy resources—including an estimated 660 megawatts (MW) of solar, 884 MW of wind, and 10,678 MW of biomass usable potential—could be developed for electricity generation to support the energy transition (MEM 2022c). Under its 2018–2028 Electricity Master Plan, Ecuador is aiming to significantly increase generation capacity, including through the addition of 550 MW of wind, solar, and biomass capacity and 2,956 MW of hydropower under the base case scenario of the Electricity Master Plan (equivalent to 63 percent of installed capacity) (MEM 2023).31 In this regard, the government has taken steps that include involving the private sector in public bidding processes for renewable energy generation, boosting the renewable energy generation capacity awarded through competitive public procurement processes, and passing regulations to facilitate investment in distributed renewable energy generation. To accelerate renewable energy investments, the government may have to strengthen its institutional capacity to procure private renewable energy generation, further develop mechanisms that can provide greater payment certainty for private generators—including considering future tariff adjustments so that investment costs can be recuperated—implement additional regulatory measures to enable distributed renewable generation, and deploy innovative low‑carbon technologies. 3.2.4.  The combined effect of multiple adaptation investments could offset most of the impacts of climate change and protect the economy and the most vulnerable Simulations suggest that adaptation investments in agriculture, infrastructure and hydropower could significantly reduce the cost of climate change. In addition to adaptation measures to reduce the impact through agriculture, roads and bridges, and hydropower channels, the simulation also includes building infrastructure above the sea level projected by 2050 to reduce the impact from the sea level rise and storm surge channel (with a cumulative cost of USD 246 million (USD 127 in NPV). If all these adaptation investments are made, the impact of climate change on 2050 GDP in the dry‑hot scenario, estimated at 3.7 percent, could be reduced to only 0.8 percent (Figure 3.4). Additionally, the net present value of this investment would be positive over this time horizon, indicating that the cumulative value of the GDP losses avoided would exceed the initial upfront costs—a net gain. Investing in adaptation measures can help to reduce poverty rates compared to the worst damage scenario, where no action is taken. By 2050, in the combined dry‑hot scenario, the rate of people living on USD 6.35 a day could be 21.7 percent with adaptation measures, compared to 22.3 percent without them. In the combined wet‑warm scenario, the poverty rate reduces slightly, from 21.7 to 21.3, when adaptation measures are taken. Thus, the overall impact of climate change is relatively small once adaptation measures are considered. Between 81,400 and 134,900 people would avoid falling into poverty because of adaptation policies in the wet‑warm and dry‑hot scenarios, respectively. Adaptation investments aimed at protecting irrigated crop production from climate change have the greatest impact. With adaptation, poverty rates are estimated to increase only by 0.26 points compared to the BAU scenario, which is nearly half the increase in the poverty rate for this channel without adaptation. Additionally, adaptation measures that focus on reducing the impacts of road and bridge disruptions and on rainfed crop production would leave the poverty rate practically unchanged from BAU, containing all impacts of climate change on households’ income (see Figure 3.5). Since the climate change impacts of all the channels together had little impact on inequality to start, the adaptations also have little impact on it. Compared to a BAU scenario, the combined adaptation measures have the largest positive impact in the wet‑warm scenario, reducing the Gini index by -0.09 while leaving it practically unchanged in the dry‑hot scenario by midcentury. 31 Refers to percentage of 2022 effective installed capacity (MW). 30 Country Climate and Development Report: Ecuador FIGURE 3.4 Compared impacts of climate change on GDP with and without all modelled adaptation measures A. Decomposition of impact on GDP growth B. Impact of damages in the dry-hot scenario Percent of BAU scenario with and without adaptation measures Percent of BAU scenario 2 1% 0 0% -2 -1% -2% -4 -3% Dry/hot Adaptation Dry/hot Adaptation -4% Percent of BAU's GDP in 2050 Percent of BAU's GDP net present value 23 25 27 29 20 1 33 35 37 39 20 1 43 45 47 49 3 4 20 20 20 20 20 20 20 20 20 20 20 20 Water availability on hydropower production No adaptation (damages only) Flood, temperature and precipitation impacts on road/bridges capital With adaptation Heat and food availability impacts on livestock production Flood, temperature and precipitation impacts on road/bridges delays Water availability and heat impacts on irrigated crops production SLR and storm surge impacts on coastal capital Inland flooding impacts on capital Erosion impacts on crop production Water availability and heat impacts on rainfed crops production Total Source: World Bank staff calculations. Note: See footnote 4 for reference to dry/hot versus wet/warm climate scenarios. Y‑axis in all graphs is the percent of GDP in the BAU scenario. See appendix 5.2. for more details on the Computable General Equilibrium model, MANAGE. FIGURE 3.5 Aggregate impacts of adaptation measures on income poverty (at USD 6.85 a day): Headcount rate (left) and deviations from BAU in pp (right) 30% 27.9% 0.50 0.48 0.45 25% 0.40 21.7% 22.3% 21.7% 0.35 0.31 21.5% 21.3% 0.30 0.26 20% 0.25 0.20 0.15 15% 0.10 Wet/Warm Wet/Warm Dry/Hot Dry/Hot BAU 2019 0.05 0.02 0.01 0.00 0.00 W/O With W/O With W/O With 2050 Without adaptation With adaptation Adapt. Adapt. Adapt. Adapt. Adapt. Adapt. 2050 2050 crp_irrigated crp_rainfed flood_delay Source: World Bank staff estimates. Notes: “BAU” is a hypothetical scenario where the economy is not hit by climate change; “Without (W/O) adaptation” includes the effects of climate change, but without any adaptation interventions; “With adaptation” includes the effects of climate change and also includes the adaptation interventions. Adaptation measures have a greater impact on poverty rates in the rural areas than in the urban areas, with the potential to reduce the poverty rates even compared to BAU in an optimistic wet and warm scenario. In the combined scenarios (considering all impact channels), adaptation measures contain the rural poverty impacts of climate change by 80 percent in the dry‑hot scenario and could even reduce rural poverty relative to BAU by half a point in the wet‑warm scenario. In the urban areas, aggregate adaptation measures could reduce impacts on poverty by more than 72 percent in the dry‑hot scenario and more than 41 percent in the wet‑warm scenario. Measures aimed at reducing the impacts of flooding on mobility delays have the greatest impact on poverty rates in both rural and urban areas, which could leave urban and rural poverty rates the same as the business‑as‑usual scenario. In rural areas, proactive adaptation measures to reduce the impacts of climate change on irrigated crops are expected to have equally important positive impacts on poverty rates. In this case, rural poverty relative to BAU would rise by 0.35 points versus 0.75 points in the no‑adaptation case by 2050. Among the three natural regions of continental Ecuador, the coastal region would have the largest aggregate adaptation effects, perhaps not surprising considering that it also had the largest impacts. 31 Country Climate and Development Report: Ecuador Managing Ecuador’s exposure to climate change will require a multipronged approach to adaptation comprising sound macro‑fiscal management, structural reforms that boost private sector activities and sector‑specific investment, like those discussed for agriculture, transport, and hydropower. The complexity and uncertainty surrounding future climate impacts call for a comprehensive strategy based on a risk management approach. Specific investments in infrastructure protection are an important part of this but are not sufficient on their own. Successful adaptation and resilience building requires a broader set of interventions, including comprehensive information about the risks involved, adequate conditions for private sector adaptation (including incentives and finance), and insurance products for residual risks. Most importantly, ensuring that development is rapid and inclusive and provides buffers against shocks would reduce vulnerability to climate shocks (Hallegate, Rentschler and Rozenberg 2020). Diversification of economic activities is also an important adaptation action because changes in the structure of Ecuador’s economy could increase the share of less exposed activities in the national GDP. 3.3.  Managing oil resources in the face of transition risks and planning for alternatives, such as mining, could present an opportunity for the country if social and environmental concerns are solved As discussed earlier, Ecuador’s economy is particularly dependent on the evolution of oil exports, mostly through the influence they exert on fiscal revenues. In 2022, 11% of Ecuador’s GDP, and 61% of its exports, came from the oil sector. Thus, Ecuador’s fiscal revenues are particularly vulnerable to international oil markets in terms of price volatility as well as international demand. In addition, between 2012 and 2022, Ecuador’s non‑financial public sector revenues associated with the oil industry averaged almost 12 percent of GDP, ranging from 7.3 percent (2016) to 17.1 percent (2012) and reaching 14.7 percent of GDP in 2022. According to data from the Ministry of Economy and Finance (2022), hydrocarbon‑related income represented 8.3 percent of Ecuador’s budget in 2021, and the latest available partial figure (first semester) for 2022 reached 6.2 percent. The main source of revenue for the oil sector is exports (two‑thirds is exported). Still, a significant fraction of the income is also linked to the domestic sale of oil derivatives (mainly diesel and petrol). Ecuador’s oil sector is facing short‑term risks from production constraints and medium‑to‑long‑term risks driven by the impact of global decarbonization efforts on oil demand. After reaching 556,000 barrels a day in 2014, Ecuador’s oil production has been declining, reaching 480,000 barrels in 2022, reflecting social conflicts and lower productivity. Without additional investment in exploration and new extractive capacity, and addressing the social and environmental concerns (see section 1.4), Ecuador’s oil production could decrease significantly in the coming decades.32 But production risks cannot be solved simply by investing more in extractive infrastructure because Ecuador is also facing the risk of declining medium- to long‑term demand for oil. As the global economy decarbonizes, the risk of a downward shift in oil demand increases, together with potentially and persistently lower prices. Although the international oil price would slightly decrease in a stated policies scenario (from USD 97 per barrel in 2022 to USD 95 in 2050), it would decrease substantially in announced pledges (USD 60) or a net zero (USD 24) scenario (IEA 2022).33 Sanctioning long‑cycle (conventional) projects based on bullish short‑term price signals carries the risk of significant over‑investment in the medium to long term, especially if other oil‑producing countries follow the same strategy (CT 2022). Ecuador will have to compete with other fossil fuel exporters for a dwindling oil market. As shown by figure 3.6, Ecuador’s resources can be extracted at costs that are competitive when compared with the global average but not competitive enough to out‑price the more competitive OPEC countries. The median breakeven price for Ecuador’s oil resources is 32 USD/barrel, while for the selected OPEC countries is 12 USD/barrel. In a scenario of declining oil prices driven by waning demand in the medium to long term, Ecuador’s oil export could therefore become uncompetitive and lead to stranded fossil fuel assets.34 According to projections by Espinoza et al. (2019), Ecuador’s oil extractive capacity could go below 100 million barrels (MMbbl) 32 before 2040, from 173 MMbbl in 2021, and possibly earlier than 2030, depending on the assumptions made on recoverable resources. 33 The stated policies scenario shows the trajectory with today’s policy settings. The announced pledges scenario assumes that all aspirational targets announced by governments are met on time and in full, including their long‑term net zero and energy access goals. The net‑zero scenario maps out a way to achieve a 1.5 °C stabilization in the rise in average global temperatures, and universal access to modern energy by 2030. 34 The median breakeven price for Ecuador’s oil resources is estimated using cost distributions (as shown in figure 3.6). The median breakeven price corresponds to the midpoint of the distribution, the price at which 50 percent of the reserves are profitable. In the case of Ecuador, this value corresponds to 32 USD/barrel. In the case of the selected OPEC countries, half of the reserves are below 12 USD/barrel, significantly more profitable. The global median breakeven price was estimated at approximately 50 USD/barrel. For a detailed analysis of the incentives fossil fuel exporter countries may face under rigorous decarbonization scenarios and the risk of stranded assets, please refer to Mercure et al. (2021). 32 Country Climate and Development Report: Ecuador FIGURE 3.6 Cost distribution of oil reserves in Ecuador, in a selection of OPEC countries, and the world A. Distribution of Oil Reserves B. Distribution of Oil Reserves 600 200 Global Selection OPEC countries Median Breakeven Price Median Breakeven Price 500 150 [MMbb per USD/bbl] [MMbb per USD/bbl] 400 300 100 200 50 100 0 20 40 60 80 100 120 0 20 40 60 80 100 120 Breakeven Price [USD/bbl] Breakeven Price [USD/bbl] C. Distribution of Oil Reserves, Ecuador D. Normalized Distributions 0.7 35 Ecuador Global [percent of reerves per USD/bbl] 0.6 Median Breakeven Price 30 Selection OPEC Countries Ecuador Median Breakeven Price global [MMbb per USD/bbl] 0.5 25 Median Breakeven Price Sel OPEC Median Breakeven Price Ecuador 0.4 20 0.3 15 0.2 10 0.1 5 0 20 40 60 80 100 120 0 20 40 60 80 100 120 Breakeven Price [USD/bbl] Breakeven Price [USD/bbl] Source: IFC staff using data from Mercure et al. (2021). Notes: Distribution of oil reserves at the global level (blue, top-left), in a selection of OPEC countries (Iran, Iraq, Kuwait, UAE, and Saudi Arabia, in orange, top-right), and in Ecuador (yellow, bottom-left). The reserves (vertical axis) are distributed along their break-even price (horizontal axis), that is, prices at which the resources are profitable to extract. By comparing the allocation of reserves along the cost axis, it is possible to compare their relative competitiveness. To facilitate the comparison, the bottom-right chart shows the three distributions normalized (the area under each distribution is equal to 100 percent). Fiscal revenues from the oil sector will remain a primary source of financing for climate‑resilient investments over the next decade, calling for careful management of Ecuador’s remaining oil wealth. Even if efforts to diversify the economy are successful and despite a gradual decline in oil production, Ecuador’s fortunes will remain tied to oil for at least the next decade. The country needs to reduce its fiscal procyclicality, and oil revenues need to be managed and deployed to achieve the highest impact to realize Ecuador’s resilient development vision. This could be achieved by creating fiscal buffers to reduce procyclicality and improve market access and by supporting transformative policy packages with public investments aimed at diversification and improvement of private productivity. Section 3.4.2 also discusses alternatives to reduce emissions from gas flaring and fuel subsidies. The same global decarbonization efforts that threaten the future of oil could be an opportunity for Ecuador’s mining sector, and represent an alternative to oil revenues. Driven by increasing demand for low‑carbon energy and transport, the copper market could see an annual deficit of 1.5 million to 9.9 million megatons by 2035, depending on the supply scenario (S&P Global Market Intelligence 2022). Another study finds that copper prices could increase by 60 percent over the next decade (Boer Pescatori, and Stuermer 2021). In this context, the mining sector could help boost the Ecuadorian economy while reducing external and internal balances and the country’s dependency on oil exports. Ecuador’s rank in the Fraser Institute’s Investment Attractiveness Index improved from 56th among 83 nations in 2018 to 27th among 62 nations in 2022, making the country the second most appealing destination for mining investment in the LAC region. Ecuador’s natural endowment aside, this perception also resulted from reforms the government initiated in the early 2010s that triggered a number of medium- to large‑scale investment projects. But the optimism is supported primarily by Ecuador’s geologic potential, with world‑class deposits of high‑grade ores and low‑strip ratios, with less than 10 percent of the territory explored, and with recent improvements in transport and power infrastructure. 33 Country Climate and Development Report: Ecuador There has been a sizable increase in mining exports, along with plans for expansion. Mining exports have multiplied by over seven times in the last four years, from USD 282 million in 2018 to USD 2.2 billion in 2022, becoming the fourth‑largest export sector after oil, bananas, and shrimp. This surge is due mainly to the production of two large‑scale mines. Mining generated 37,000 jobs in 2021 (Ministerio del Trabajo 2022) and paid out approximately USD 600 million in salaries. Ecuador has a pipeline of medium- and large‑scale mining projects expected to begin this decade, including two operations and nine projects classified as strategic and second‑generation projects. The government estimates that, between 2022 and 2025, investment in mining will total USD 4.3 billion, with exports reaching USD 13 billion in the same period. Fiscal revenues from mining projects are expected to increase from USD 350 million in 2021 to USD 1.3 billion in 2025. Moreover, as the Ministry of Energy and Mines has envisaged, Ecuador could take advantage of the opportunities derived from Free Trade Agreements with China, signed in May 2023, and with the United States (under negotiation). The latter agreement could open additional opportunities because of the tax incentives provided by the Inflation Reduction Act (IRA), which could include cooper as critical minerals in the short term (Gonzalez Amador, Velasco, and Miranda 2024). Ecuador is grappling with the dual challenge of social and political resistance to formal mining and the rise of illegal mining with its negative consequences. Formal mining faces hurdles from public opposition, as seen in the recent Quito referendum, which restricted metal mining in El Choco Andino. Meanwhile, illegal mining is flourishing, causing environmental and social harm, contributing minimally to public finances and local development, and creating unstable jobs (Gonzalez Amador, Velasco, and Miranda 2024). This illegal activity is also exacerbating insecurity because it is linked to organized crime, especially the trafficking of gold, mercury, explosives, and firearms. Formal mining is further hindered by institutional weaknesses such as dysfunctional revenue‑sharing mechanisms with local governments, poorly regulated participatory mechanisms for environmental consultations, unresolved ancestral territory mapping, an overly rigid environmental licensing process, and an underdeveloped system for mining oversight. Regulatory voids on water protection areas and recharge zone status delay the water permitting process. Besides this, the institutional setup to control mining operations is still underdeveloped. There is no integrated, functional, comprehensive information system for mining. These issues are compounded by conflicting visions on mining among the various branches of government, reductions in staff, and the Internal Revenue Service’s (SRI) difficulties in managing and auditing mining operations. To sustain mining growth and address these social, institutional, administrative, and environmental conflicts, Ecuador must implement short‑term measures and long‑term policy reforms. In the short term, broad citizen participation in legislative processes, an enhanced Special Committee for the Control of Illegal Mining (CECMI), and regulatory reforms to improve tax collection and local government investment are essential. Strengthening the technical, financial, and human capacities of key institutions such as ARCERNNR (Agency for regulation and control of energy and non‑renewable natural resources) and MAATE, and improving transparency through initiatives like the Extractive Industries Transparency Initiative (EITI), are also crucial. Long‑term strategies include developing a comprehensive national mining policy, integrating consultation processes, reopening the mining cadaster, and formalizing artisanal mining with a progressive tax system and rigorous environmental and social requirements. Implemented well, these reforms should boost confidence, investment, and sustainability in the mining sector, ultimately leading to more efficient and competitive operations. 3.4.  Transitioning to low‑carbon development requires an integrated multisectoral approach that takes into account the energy, transport, and land use sectors Based on modeling results, achieving net zero emissions would require advancing mitigation measures planned for the energy and transport sectors, as well as more ambitious forest conservation targets. An integrated assessment model—the Ecuador Land Use and Energy Network Analysis (ELENA) model, which optimizes results based on costs—was used to assess potential, long‑term decarbonization pathways until 2050 (see appendix 6.4 and the annexed background note 4). The model shows that, with a multisectoral approach, reaching net zero carbon emissions35 (NZ) is feasible. But it would require significantly more The ELENA model was optimized to achieve net‑zero carbon, not on all gases. Also, net‑zero carbon is achieved across sectors, not 35 within each sector. 34 Country Climate and Development Report: Ecuador ambitious action than the current BAU mitigation policies, and even more than the NDC unconditional commitments, particularly in the long term. The analysis of sub‑sectoral emissions indicates the importance of actions in transport and other energy‑use activities (figure 3.7). These measures will have to be combined with the introduction of forestry policies consistent with NDC commitments to reach more ambitious NZ targets. Reaching full carbon neutrality (0 tCO2) will require mitigation measures in energy as well as transport. FIGURE 3.7 Energy, transport, agriculture, and land use emissions (MtCO2) by sector and scenario 80.0 70.0 CO2 emissions [MtCO2] 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 Base Base NDCu NDCc NZ 2020 2050 Transport Residencial Comercial Industry Agriculture Power Biofuels Fuels Land Source: World Bank staff analysis using the ELENA model. Note: NDC = Nationally Determined Contribution; NDCc = Conditional NDC; NDCu = Unconditional NDC; NZ = Net Zero carbon emissions. 3.4.1.  Low‑carbon development will require the expansion of policies that protect and restore forests by combining strategies from conservation, forestry, and agriculture Forest conservation efforts need to involve the agriculture sector, which will benefit from low deforestation in the face of new export barriers To reduce deforestation, special attention should be given to agricultural production, especially livestock. Given that extensive cattle production on traditional, mostly degraded pastures has proven to be the predominant cause of deforestation, especially in the Amazon36—adopting improved livestock production systems, as described in section 3.2.1, is crucial for moving toward low‑carbon cattle production and relieving pressure on forest lands. Intensive cattle production systems involving improved pastures, often mixed with nitrogen‑fixing legumes and/or trees (agroforestry systems), have higher stocking rates and are more sustainable, with lower greenhouse gas emissions per kilogram of beef produced, along with less land degradation. But their adoption in frontier economies remains limited because of the lack of incentives as long as deforestation is allowed to continue. It would also be important to adopt other CSA strategies for crops to produce more sustainable systems. Sierra, Calva, and Guevara (2021), analyzing deforestation trends, also suggest promoting the intensification and efficient use of agricultural land by providing access to technical assistance, improved inputs and seeds, and credit. Section 3.2.1 discusses this. Given that the Amazon and coastal regions face different challenges with respect to agriculture production, the policy instruments to prevent deforestation will also have to vary accordingly. But complementary conservation initiatives would be needed to prevent higher agriculture productivity and market linkages from increasing deforestation and emissions. Whether higher agriculture productivity will contribute to forest conservation will depend on the degree to which the Borlaug effect and the Jevons effect are at play.37 This risk implies that any effort to increase productivity should be accompanied by complementary forest governance measures to limit agriculture expansion into new areas. Some of those measures are discussed in the following subsections. It also makes clear the need for active coordination between MAG and MAATE to ensure their efforts are aligned to prevent further deforestation. Cattle ranching is the simplest and most inexpensive method for occupying an area for speculation in the region. Its simplicity and low 36 cost encourage the associated land grabbing, which causes more deforestation and contributes to greenhouse gas emissions. 37 The basic notion of the Borlaug effect is that agricultural intensification can save natural habitats from agriculture expansion. Yet the Jevons effect maintains that intensifying and increasing productivity may lead to further expansion of agricultural lands (and implicitly points to the need for legal enforcement of conservation laws to save forests). 35 Country Climate and Development Report: Ecuador As discussed before, reducing deforestation caused by agriculture would not only support emission targets but also help agriculture products access markets with “deforestation‑free” restrictions. The EU deforestation‑free mechanism requires producers to provide evidence that their goods did not cause deforestation. Thus, whether export opportunities open up for Ecuador will depend on how readily producers adopt sustainable practices and can show it. Proving deforestation‑free status will incur costs, but if producers cannot provide proof, their only alternative would be to try to find some other export destination. Ecuador has opportunities to increase agricultural output and, simultaneously, maintain or expand carbon storage at a national level. Integrated economic and ecosystem models (Damania et al. 2023) indicate highly inefficient land use patterns in Ecuador in economic terms (crops, beef, dairy products, timber, and so on), and about average efficiency in the provision of environmental goods and services (carbon storage, biodiversity, watershed protection, and so on). This creates the possibility to maintain or increase carbon storage while improving economic production (Hawthorne et al. 2023). But doing so would require carefully assessing and managing the spatial implications of land use change in the country. This would imply boosting productivity by increasing intensified cropland. It would also need careful spatial redistribution of some land usages, conserving and restoring forests where they have the most environmental potential, such as in the Amazon and the northern coast, and promoting agriculture output in areas such as the southern coast, which hold the highest intensification potential, without environmental degradation. Many policies, along with capacity building, would be needed to achieve this—for example, establishing cadasters and property rights, improving land tenure security through monitoring and enforcement, improving territorial planning, and enhancing labor market regulations and local government capacity to attract investments. Additionally, tools to better target conservation programs such as SocioBosque (explained below) based on agriculture and environmental potential can support this, as well as coordination between MAG and MAATE. Successful conservation instruments like SNAP and SocioBosque could be further expanded, better enforced, and better targeted to reduce deforestation even further The National System of Protected Areas (SNAP, after its acronym in Spanish) is an emblematic tool to conserve forests and other critical ecosystems. Outside the Galapagos, SNAP covered 26 percent of native forests in Ecuador by 2016 (MAATE 2017). According to official sources, deforestation is significantly lower in forests under SNAP. Between 2014 and 2016, the net annual deforestation rate for these forests was 0.05 percent, compared to 0.63 percent for forests outside the SNAP system,38 and studies suggest the deforestation pressure in the immediate borders of these areas is even higher (Kleemann et al. 2022). Another successful policy to curb deforestation has been SocioBosque, the national payment for ecosystem services program. SocioBosque, created in 2008, is a voluntary forest conservation scheme that provides semestral monetary incentives in exchange for a commitment to ecosystem conservation. In 2009 and 2014, analogous programs were included in protecting paramos (high‑altitude wetlands) and mangrove ecosystems—named Socio Paramo and Socio Manglar, respectively—which provide higher payments per hectare. Several studies have found that SocioBosque, in general, is effective in reducing deforestation, although this effect might be small in certain areas (Cuenca et al. 2018; Mohebelian and Aguilar 2016; Pantoja et al. 2022; Zurita‑Arthos and Cotachachi 2019; Hayes, Murtinho, and Wolff 2017). Given their positive results on forest conservation, SNAP and SocioBosque could be expanded. If Ecuador aspires to have at least 30 percent of its forests under SNAP by 2030, which is in line with global objectives, it will need to include approximately 420,000 additional forest hectares, implying a faster pace than the last decade. SocioBosque has also been expanding since its inception in 2008, although the rate of added contracts has fallen in recent years. Nevertheless, conversations with government officials suggest that the GoE plans to incorporate millions of hectares into SocioBosque, much higher than suggested in NDC commitments. Important ecosystems, such as paramos and mangroves, should also be prioritized. For example, currently, only 78 percent of paramos are in conservation programs. This should be extended, given how critical these are. 38 Calculation based on MAATE (2017). 36 Country Climate and Development Report: Ecuador Maintaining and increasing the impact of SocioBosque could be achieved by better targeting high‑deforestation‑risk areas and ensuring long‑term financial sustainability. Missirian (2023) suggests that enrollment of areas to SocioBosque was spatially biased toward land that was poorly suited for agriculture and other activities (low opportunity cost) and hence was less likely to be deforested absent the program. The program will have a stronger nationwide impact if it is better targeted and prioritized to include high‑deforestation‑risk areas in future contracts, prioritizing production and environmental objectives. Additionally, the financial sustainability of the program is critical. Etchart et al. (2020) show that during SocioBosque’s unplanned payment suspension period in October 2015,39 many enrolled properties did not maintain their conservation outcomes where deforestation pressures were high. Substantial investments in monitoring and enforcement will also be needed to ensure these and other land use policies are implemented as planned. Enforcement, in the way of curbing illegal deforestation and enforcing conservation agreements and property rights, is also vital. Illegal deforestation has been reported in areas under SNAP, SocioBosque, and indigenous territories, but authorities may not be able to respond quickly enough to multiplying threats. Deforestation in these areas could, nevertheless, be taken as close as possible to zero through investment in monitoring, integrated information systems, timber extraction certificates, and traceability, and building the capacity to react to illegal deforestation quickly and dissuade it firmly. The implementation of these measures, however, would require substantial capacity and resources. Promoting sustainable livelihoods for local populations around critical ecosystems could further conserve forests while supporting people Conservation programs need to work with local populations and communities to ensure they can find sustainable livelihoods, increasing social sustainability. Given that local communities rely on forests for their livelihoods and are often the only people available to monitor forests, their involvement is necessary for the sustainability of these strategies. Research summarized by FAO and FILAC (2021) shows that approximately 30 percent of forests in Ecuador are in indigenous territories and face lower deforestation on average.40 Conservation programs can also create economic benefits through private businesses, such as agroforestry or eco‑tourism, which can also help with sustainable financing of the programs through fees and taxes. An analysis for the Country Economic Memorandum (CEM - Gonzalez Amador, Velasco, and Miranda 2024) shows that ecological destinations such as the Galapagos Islands or lodges in the Amazon tend to attract high‑spending tourists. But significantly fewer arrive in Ecuador than in regional comparators, indicating untapped potential. Environmental considerations will be important to achieve green tourism (More analyses on the development opportunities for Ecuador’s tourism sector can be found in Gonzalez Amador, Velasco, and Miranda 2024). National, provincial, and local conservation plans would benefit from an inclusive approach that maximizes these types of livelihood opportunities and a just transition.41 Mangrove Sustainable Use and Custody Agreements (AUSCMs, for its Spanish acronym) are a successful government program that leverages this approach. AUSCMs provide local organizations with management rights to perform sustainable livelihoods while slowing down deforestation. AUSCMs were created in 1999 as a tool to hand over management rights to local organizations to protect and make sustainable use of the hydrobiological resources of mangroves without cutting them down. By 2020, approximately 43  percent of mangroves were under 59 AUSCMs (López‑Rodríguez 2021). In 2014, SocioManglar was created as a subprogram to provide AUSCMs with payments for conserving mangroves, 39 That year, Ecuador plunged into a deep economic recession, and its National Environment Fund (FAN)—the nonprofit institution responsible for investing and managing its conservation funds from international donors—closed and underwent restructuring. These events undermined the SocioBosque’s ability to pay participants. For some SocioBosque participants, the May 2015 payment arrived a few months late. By October 2015, SocioBosque officially suspended payments to all program participants and closed new enrollments (Etchart et al. 2020). 40 FAO and FILAC (2021) state that mechanisms for this lower deforestation include cultural factors and local knowledge in managing forests, the use of non‑wood products, which supports forests’ health, collective property, and overlap with other mechanisms already discussed (for example, incentives to indigenous groups, protected areas, low profitability and accessibility to markets, and a lack of resources, although research confirms that these are not the only reasons. For example, the provincial government of Pastaza, together with international NGOs and indigenous and local communities, created a 41 development plan to reduce deforestation and forest degradation. It received funding from the REDD+ Governor’s Climate and Forests Task Force. 37 Country Climate and Development Report: Ecuador which is in line with SocioBosque. Yet to date, many AUSCMs have not been absorbed by SocioManglar because of insufficient funds. Nevertheless, AUSCM on its own has proven effective in slowing deforestation. Tanner and Ratzke (2022) found that, between 2000 and 2012, the policy significantly prevented the deforestation of mangroves, even more than state‑led protected areas. They estimate that the equivalent of 1.5 million tCO2 emissions were prevented during the 12‑year period. This effectiveness is consistent with qualitative accounts by other researchers (for example, López‑Rodríguez 2021) and spatial data that, across time, show lower deforestation rates within AUSCMs than in the 100 meters immediately outside these areas. This evidence also highlights the importance of local management rights for sustainability. But AUSCMs face many of the challenges previously discussed, such as the renewed expansion of shrimp activity; low government capacity for surveillance and for quickly responding to complaints; weak community organization, which jeopardizes compliance with agreements; financial unsustainability (López‑Rodríguez 2021; Casos 2020; Ortega‑Pacheco et al. 2019; Coello et al. 2008); and reports of illegal trafficking in the mangroves. Instruments to protect natural capital and biodiversity, such as mangroves or marine species, are also important for Ecuador's fishing and Blue Economy sectors, as discussed in Box 3 and Appendix 5.3. Box 3: Artisanal Fishing and Blue Economy in Ecuador Blue Economy sectors hold great opportunity for Ecuador’s sustainable development, but these are threatened by climate change and natural degradation. The coastal and marine regions of Ecuador hold great opportunities from sectors such as tourism, fishing, blue carbon, among others. However, climate change and environmental degradation put these sectors at risk. For example, regarding fishing, recent studies suggest that climate change may impact marine species that are important for both industrial and artisanal fishing in Ecuador (MAATE 2022b). Overfishing and degradation of mangroves and other ecosystems that act as nurseries for marine species can also cause fisheries to reach unhealthy numbers. These changes could reduce catches for artisanal fishers, lowering their income, and putting their livelihood in an even more precarious situation. Marine species could be safeguarded from the impacts of climate change and overexploitation by implementing measures for fish population and ecosystem conservation, and fishers should be supported to adapt to these policies. However, governance issues need to be overcome for these to be successful. For example, modelling discussed in Appendix 5.3. shows that individual transferable quotas (ITQs) and value‑enhancing investments in artisanal fishing could help stabilize biomass and increase fishers’ profits beyond the damage caused by climate change. Nevertheless, poor governance and a precarious sectoral context are challenges for implementing even the existing sustainable management plans and policies in the fishing sector. Such challenges include informality, inadequate generation and dissemination of data and research, and decision‑making schemes for fisheries management that, in practice, limit the participation of relevant stakeholders. Addressing these issues require an integrated and blue economy approach. Coastal and marine regions would benefit from integrated planning and a blue economy approach, which considers the sustainable and integrated development of all coast- and ocean‑related economic sectors along with oceanic health. Moreover, the challenges, opportunities, and priorities in each area of the country will depend on its context (for example, tourism is a priority in Galapagos, while coastal fisheries are more prominent in the northern coastline), highlighting the need for participatory, territorial, and adaptive planning that involves local communities and the private sector. Source: Appendix 5.3. Coastal impacts and policies 38 Country Climate and Development Report: Ecuador Given the importance of forest regeneration in achieving forest cover goals, it is essential that Ecuador return to more ambitious restoration targets MAATE aids forest regeneration through the National Program of Restoration (PNR), which has experienced significant fluctuations in activity over time. Although it is vital to prevent forest degradation in the first place, it is also important to allow, or actively assist, degraded forests to regenerate.42 But as discussed in section 1.5.3, this regeneration has been minimal in recent times. The PNR was established in 2014 with an initial objective of restoring 100,000 hectares every year for five years until 2017 and more than 1.6 million hectares by 2030 (MAATE 2014). But with funding impacted by the 2016 earthquake in Manabí and Esmeraldas, updates suggest that less than one percent of these targets was achieved (MAATE 2018). Subsequent new plans include a much more modest target of restoring 10,000 hectares annually, and unconditional NDC commitments refer to an even more modest target of 24,000 hectares between 2020 and 2025 (4,000 hectares annually) (MAATE 2021a). Setting more ambitious restoration targets, even if difficult to achieve, is essential for achieving low‑carbon targets. While past targets of restoring 100,000 hectares annually may have been overoptimistic, the existing targets of restoring 4,000 or 10,000 hectares may be too modest to make an impact. Back‑of‑the‑envelope calculations show that the current target of 10,000 hectares annually would fall short of the 500,000 hectares the government pledged during the 2011 Bonn Challenge that it would achieve by 2030. Likewise, to achieve a lower‑carbon future, increasing the restoration targets may be the most feasible and cost‑effective option compared to more costly reforms in other sectors such as energy or transport. The country needs a financial strategy that pulls funds through multiple mechanisms, earmarking sources such as taxes or financial investments using payments for ecosystem services. It should also explore the idea of setting up a trust so the funds are not diverted. While simple reforestation may be less desirable than restoration in terms of environmental benefits, commercial reforestation of local species (avoiding monocropping) and agroforestry by the private sector could also play a complementary role. The Ministry of Agriculture’s Incentive Program for Commercial Reforestation could continue supporting private organizations in commercial reforestation to capture carbon and reduce pressure on native forests. 3.4.2.  Significant decarbonization of the energy and transport sectors is possible without negative macroeconomic consequences in the long term and with potential resilience benefits The scale of the effort and investment needed to mitigate energy and transport emissions is inversely related to how ambitious a country’s LULUCF policies are A prime result from the ELENA model is that the scale of the effort and investment to mitigate energy and transport emissions varies inversely as the ambition level of forest conservation targets, which promotes CO2 absorption and negative emissions. Less effort in the forest sector could require the GoE to deploy, among others, carbon capture and storage (CCS), bioenergy with CCS (BECCS), more advanced biofuels from biorefineries, and more battery electric vehicles (Evs) for heavy freight transportation. To illustrate this point, the NZ scenario presented with the ELENA model already used more ambitious forest conservation and restoration targets than the one indicated under current government policies. But to reach net‑zero emissions under the NZ scenario, significant technological and policy efforts were still needed in energy and transport, as explained below. Hydropower is expected to remain the backbone of Ecuador’s power sector, but NCRE would need to play a bigger role to enhance climate resilience Electricity generation in Ecuador is expected to nearly double by 2050, with hydropower predominantly supporting this expansion. In 2020, the national installed capacity (nominal power), including isolated systems, was 8.4 gigawatts (GW), which generated 37.4 terawatt‑hours (TWh)/year, 70 percent of it from 42 In an ideal situation, and after maturation, these regenerated forests may restore a proportion of the ecosystem services and a balance of the original forest. 39 Country Climate and Development Report: Ecuador hydropower. Hydropower is expected to be critical in Ecuador’s energy policy if it is to achieve its climate objectives. According to the country’s current PME, 2.96 GW of additional hydropower capacity, 0.55 GW of other renewables (solar, wind, and biomass), and 0.59 GW of thermal capacity will be added between 2018 and 2027. The two largest hydropower investments planned43 will both include storage capacity, and various hydropower investments will be located in the Amazon basin, which is less affected by droughts. Although the PME is prepared based on least‑cost expansion plan criteria, it also takes into consideration government energy policy direction. There have been delays in implementing PME investments, given public sector fiscal constraints and the difficulty of attracting private investment. Under a BAU scenario in the ELENA model, population and GDP growth would nearly double the final energy demand by 2050, requiring total installed capacity to increase to 17.7 GW by 2050, with increasing emissions. Assuming that the planned PME investment and the additional investments needed to meet the demand simulated in the ELENA model were to materialize, Ecuador would have a 99 percent renewables‑based power generation system by 2050. Hydropower would be responsible for most capacity expansion (7.1 GW), accounting for 73 percent of installed capacity by 2050. Over the 2020–2050 period that was modeled, smaller additions of capacity can be expected from natural gas (0.6 GW) and 2.88 GW from wind, solar, geothermal, and biomass. These estimates do not account for a possible reduction in future hydropower production caused by climate change, since the PME planning approach for the current plan does not account for climate and drought risks, as detailed in sections 1.3 and 3.2.3. More resilient planning would be beneficial in the future to better account for these risks. More ambitious decarbonization scenarios will require further expanding electricity generation and installed capacity, and other renewables (wind, solar, biomass) will need to have a bigger role, but with hydropower still predominant in the expansion. To reach net zero across all sectors by 2050, the power sector’s installed capacity is expected to increase even further, with electricity generation rising to 112.9 TWh/year and installed capacity rising to 30.3 GW—more than triple the installed capacity in 2020. The higher electricity generation under NZ partly supports the greater industrial and transport electrification. Hydropower capacity and other renewables (wind, solar, biomass) are expected to continue expanding. Efforts will also be needed to increase energy efficiency for energy end users, including industries, optimize energy use in the oil and gas (O&G) sector (for example, the use of gas for power generation and liquefied petroleum gas processing), mitigate power sector losses, and expand clean cooking. Fossil fuel sources would be expected to generate negligible or no electricity by 2050, replaced by hydropower, solar, geothermal, biomass, and wind. Under the NZ scenario, solar energy would need to play a more prominent role by 2050 than current NDC efforts suggest (12.8 percent of generation vs. 8 percent under NDC conditional). Achieving carbon neutrality in 2050 would also require carbon capture by agriculture, forestry, and land use. The energy and transport sectors are expected to continue contributing 2.6 MtCO2e in 2050 under the NZ scenario. But CO2 removal from forests (through reduced deforestation) and the use of some BECCS technology in biorefineries would help achieve carbon neutrality at the national level that year. The real potential of CO2 storage in deep saline aquifers and closed oil wells in Ecuador requires further analysis. A low‑carbon future will require addressing transport, the main fossil fuel emissions source, reducing subsidies to fuel use, facilitating modal shifts, and developing electromobility The transport sector is the leading fossil fuel emissions source, but there are opportunities to reduce its emissions and increase co‑benefits through modal shift and greater EV penetration over the longer term. The transport sector, with its vast fleet of gasoline- and diesel‑engine vehicles, was responsible for half of Ecuador’s emissions from fossil fuel consumption (50.1 percent) in 2021 (MEM 2022b). The most significant measures taken by the model are modal shift and EV penetration, both in passenger and freight transport. This not only would achieve lower emissions but could have major economic, health (for example, related to air quality), and resilience benefits. 43 These are the Cardenillo 600 MW and the Santiago 2,400 MW hydropower projects. 40 Country Climate and Development Report: Ecuador A modal shift that reduces the proportion of individual passenger cars and small freight transportation in favor of buses and heavy freight will be one of the most significant changes, in line with NDC commitments (figure 3.8). To reach NZ across all sectors, the share of passengers traveling by bus would need to significantly increase by 2050, to 63 percent, reversing an assumed trend under a BAU scenario in which the share of bus passengers is expected to decrease between 2020 and 2050 in favor of more trips in private cars. The increase in bus transport would be consistent with commitments under the NDCc. For freight transportation, NZ would require going further than what is proposed in the NDCc (which would basically not change much compared to BAU), dramatically increasing the use of heavy freight by more than 30 percentage points of cargo. The GoE has many tools and has indicated an interest in investments for this modal shift, especially in urban transportation such as the Metro de Quito. But this will require policy changes to align incentives. A first step could be changing the formula of the National Sustainable Urban Mobility Policy to distribute resources for urban mobility since the current formula incentivizes the use of private cars instead of rewarding the higher use of public transport and active mobility, promoting the modal switch. FIGURE 3.8 Modal shift and EV penetration for passenger and freight transportation by scenario in 2050 A. Passenger B. Freight 100% 100% 8% 9% 9% 9% 5% share of passengers-km 80% 80% 34% share of tons-km 59% 51% 47% 54% 35% 60% 61% 63% 60% 13% 40% 40% 7% 32% 28% 26% 20% 43% 9% 20% 39% 33% 21% 15% 16% 15% 12% 0% 0% 2020 BAU 2050 BAU 2050 NDCc 2050 NZ 2020 BAU 2050 BAU 2050 NDCc 2050 NZ Cars ICE Cars EV Bikes ICE Bikes BEV Heavy ICE Heavy EV Medium ICE Medium EV Buses ICE Buses EV Rail Air Light ICE Light EV Rail Source: World Bank staff analysis using the ELENA model. Note: BAU = business as usual; EV = electric vehicle; ICE = internal combustion engine; NDC = Nationally Determined Contribution; NDCc = Conditional NDC; NZ = Net Zero; km = kilometer. Over the longer term, decarbonization of the transport system would require the electrification of vehicle fleets, underscoring the need to start taking the first enabling steps. Under a BAU that follows current trends, up to 3 percent of cars and 13 percent of buses would have been converted to run on electricity by 2050. By contrast, an NZ scenario would require almost full electrification of passenger transport, more than with NDCc electrification plans. In freight, from virtually no electrification, net zero carbon emissions would demand almost full electrification of light freight, and 26 and 16 percent of medium and heavy freight, respectively, over the longer term. Under NDCc commitments, only about 5–10 percent would be EV by 2050. The government is interested in increasing transport electrification, but several actions will be needed to overcome affordability gaps, access to charging, and other barriers to reach the levels contemplated under the NDC scenarios and NZ. The goals set out in Ecuador’s National Electromobility Strategy aim at 10,000 EVs by 2025 and up to 750,000 EVs by 2040 (IADB 2021). For greater EV penetration, the GoE has established EV‑charging tariffs and is planning to implement other regulatory measures to facilitate EV integration. But the efforts have not quite been sufficient for the industry to take off. In 2019, the legislature enacted a law mandating that, in line with the fleet replacement regulation, all buses newly added to the fleet beyond 2025, such as metros or trams, must be fully electric or equipped with zero‑emission systems for mass transportation. A noteworthy example is the recently inaugurated Quito Metro Line 1. Given current electricity supply challenges, a measured approach will initially be required, where additional electricity generation is first installed to close the deficit, before the increased electricity demand from EVs can be met. 41 Country Climate and Development Report: Ecuador Currently, the bus and truck fleet in Ecuador is aging, with 41 percent of buses having a useful life exceeding 12 years, and 36 percent of trucks exceeding 15 years. However, the legal lifespan limits set by Resolution 053-Dir-2020-ANT double the technically optimal lifespan, and this extension aimed to mitigate the financial impacts of the pandemic. In Ecuador, vehicles experience a 60 percent increase in fuel consumption after the fifth year, and more than double after 20 years. Diesel subsidies disincentivize fleet renewal, as they offset the negative impact of keeping older vehicles. Figure 3.9 shows that adhering to Resolution 053-Dir-2020-ANT guidelines results in a 27 percent reduction in CO2 emissions (orange line). However, maintaining technically optimal fleet ages would lead to a much larger 51 percent reduction (blue line). Furthermore, complying with the Energy Efficiency Law, which mandates the purchase of electric urban buses in Ecuadorian cities from 2025 onwards, can achieve a 43 percent reduction in CO2 emissions (green line). Establishing financial mechanisms, such as guarantees or scrapping bonds in fleet renewal programs would incentivize this transition. FIGURE 3.9 Estimation of CO2 buses emissions reduction 18,000,000 16,000,000 14,000,000 12,000,000 CO2 Emissions 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2022 2023 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 2052 Without removing old buses + growth of the fleet (Baseline) 100% electric urban buses from 2025 Legal fleet renewal 25 years Optimal fleet renewal 12 years Source: World Bank analysis using data from Transport National Authority and surveys with transport operators. The GoE has been developing mechanisms to better target fossil fuel subsidies toward certain industries and transport users, and establish cost‑reflective pricing methodologies. With some of the highest fuel subsidies in Latin America, Ecuador’s gasoline and diesel prices are among the lowest in the region. Such overly indulgent fuel subsidies, besides countering decarbonization goals by promoting the profligate use of fuel, exact a significant fiscal cost from the government. The cost is higher still if air pollution, waste, and the opportunity cost of firms’ productivity are factored in.44 Subsidies to gasoline, diesel, electricity, and LPG have averaged USD 2.3 billion per year over the past decade. They reached USD 4.5 billion in 2022 (4 percent of GDP), partly reflecting the surge in oil prices, and USD 3.3 billion in 2023 (3 percent of GDP). Measures to remove these subsidies could be implemented gradually to help reduce consumption of fossil fuels, which would incentivize modal shift and EV penetration, reduce fiscal expenditures to enable greater social expenditures, and support wider decarbonization and adaptation efforts. But eliminating the subsidy would likely have some regressive effects (Castillo, Fernández, and Olivieri 2021) by impacting low‑income households more. To mitigate the impact on the most vulnerable population and gather political and public support for the measure, certain compensation mechanisms could be implemented, for example, for the indigenous and vulnerable population, as agreed in the Peace Accord with Civil Society and Indigenous Groups. One other consideration is that political economy barriers may slow down the implementation of the planned reforms. Progress may therefore require the government and relevant stakeholders to agree on a gradual implementation pathway, combined with compensation measures where needed, along with vigorous communication and social outreach efforts. 44 According to Black et al. (2023), The IMF Fossil Fuel Subsidies Data estimated that the implicit costs incurred in Ecuador—primarily attributable to environmental expenses and foregone consumption taxes—are multiplied by a factor of 5 for gasoline and by a factor of 2 for diesel. The implicit subsidy estimate there includes air pollution, accidents, traffic congestion, and traffic accidents. 42 Country Climate and Development Report: Ecuador Mitigating the economy’s carbon intensity will require expanding electrification, along with measures to promote energy efficiency Greater industrial electrification would require policy changes and greater public and private investment to expand the electricity network and replace aging equipment. Existing financial mechanisms funded by development finance institutions are expected to provide USD 283 million in funding to facilitate the electrification of 55,000 hectares of shrimp farms (out of Ecuador’s 220,000 hectares). Likewise, Ecuador’s largest shrimp producer recently initiated an electrification project at an estimated cost of USD 45 million. Results from the ELENA model suggest that under NDCc, the share of the energy demand met by electricity in the food and beverage industries could increase from 30 percent to 36 percent, and from 40 percent to 51 percent for other industries. But meeting these electrification levels will be challenging since it would require these industries to replace or retrofit a significant portion of their fossil fuel‑consuming equipment and make corresponding investments in electrical interconnections and the distribution network, as well as require additional generation capacity to meet the higher demand and avoid electricity supply constraints. Future studies will need to explore in more depth the total electrification potential of Ecuador’s industries, as well as the efficiency and competitiveness gains they represent. Although Ecuador has implemented major energy efficiency policies and regulatory measures in recent years, a more comprehensive energy efficiency approach is needed to see greater uptake. Energy efficiency measures are often the lowest-cost and most rapid solutions for advancing climate mitigation goals. The GoE has taken various actions to promote energy efficiency, including passing the Organic Law of Energy Efficiency in 2019, creating a National Energy Efficiency Committee, and preparing the National Energy Efficiency Plan 2016–2035 (PLANEE). The government also passed the Ley Orgánica de Competitividad Energética (LOCE) in 2024, which provides the legal framework to implement various measures contemplated in the PLANEE, and there is an urgent need to develop the corresponding regulations to facilitate the implementation of priority energy efficiency (EE) measures to unlock these investments further. EE measures are also included in Ecuador’s NDCs for both conditional and unconditional scenarios, but electricity demand has continued to grow by 4.3 percent per year over the past decade. It has grown at an even higher rate in 2021, with demand coming mainly from the industrial (42 percent), residential (29 percent), and commercial sectors (26  percent) (MEM 2022b). Electricity demand may increase further as more industries and consumers are electrified and connected to the grid. Energy efficiency measures are a no‑regret option that can be pursued in the short term to reduce energy consumption, manage supply constraints, and generate cost savings and competitiveness. Ecuador’s PLANEE (MEM 2017) and NDC have proposed a series of measures in the residential, commercial, and public sectors. The World Bank (2022d) also assessed potential energy efficiency measures for public buildings, showing that, even under a conservative scenario, investing in the energy efficiency of Ecuador’s 3,650 public buildings that are connected to the medium‑voltage network could generate USD 3.3 million to USD 16.4 million in annual savings. These investments could contribute to the creation of an estimated 488 green jobs and a reduction of 11,457 tCO2 per year. Opportunities to invest in energy efficiency are prevalent among all sectors of Ecuador’s economy, although actions to overcome key barriers, such as limited financing, will be needed to speed up investments. Energy efficiency measures in the public, residential, and commercial sectors have the lowest costs and could be implemented in the least time. EE investments in the industrial, power, and O&G sectors will be more expensive but could have a sizable impact on energy consumption. Given funding constraints in Ecuador, unlocking these investments may require creating financing mechanisms to facilitate public and private involvement. An example of such a mechanism is the National Energy Efficiency Fund (Fondo Nacional para Inversión en Eficiencia Energética), which the government is working to establish in the short term. Furthermore, a robust communications campaign to overcome information gaps pertaining to the a of EE measures and energy conservation can facilitate behavior change to exploit the potential advantages. 43 Country Climate and Development Report: Ecuador Meaningful emissions reductions could be achieved by dealing with gas flaring as the country explores alternatives to its oil dependence Ecuador continues to rely on O&G production and exports to support economic growth and supply domestic O&G consumption, but there are opportunities to reduce gas flaring and emissions from this sector’s operations. Given the importance of O&G to the national economy, it is important to move forward with the GoE’s O&G plans to reduce operational emissions, especially those from gas flaring. Ecuador’s NDC includes the reduction of gas flaring and venting from O&G production as key emissions mitigation actions through, for example, using gas to power the facilities of the state‑owned O&G company PetroEcuador, and connecting production fields in the Amazon region to the National Interconnected System. This will allow the operations to consume clean grid‑supplied hydroelectricity. Since 2008, Ecuador has taken steps to reduce gas flaring, but significantly more work will be needed if the country is to meet its climate goals. Ecuador became a part of the Global Gas Flaring Reduction Partnership (GGFR)45 and in 2015endorsed the UN–World Bank Zero Routine Flaring by 2030 initiative. Further, during the 2021 United Nations Climate Change Conference (COP26) in February 2023, the GoE signed the Global Methane Pledge46 to reduce methane emissions, and PetroEcuador joined the Oil and Gas Methane Partnership (OGMP).47 Despite these actions, Ecuador’s gas flaring intensity rose from 4.4 percent to 7 percent over this period, suggesting that flaring has increased relative to oil production. To reduce gas flaring and emissions, PetroEcuador has established a committee and is finalizing the preparation of a plan that includes 43 projects to be implemented by 2043, with the majority to be completed by 2030. The projects include several electricity interconnections as well as associated gas capture, cogeneration, and energy efficiency projects. Most are yet to commence, and the plan would require substantial funding. These investments in the energy and transport sectors can be achieved without long‑term negative macroeconomic consequences Like other countries, Ecuador faces significant uncertainties about how best to decarbonize its economy, including the necessary technologies, the most effective policies, and their timing and sequencing. The ELENA model helps to at least navigate—if not always reduce—these uncertainties, suggesting pathways to reach net zero and providing valuable insights by exploring different mitigation scenarios. ’But it is crucial to note that such models are not predictors but rather tools that suggest efficient combinations of technology under certain cost and macroeconomic conditions. Among the critical techno‑economic assumptions used in these modelling exercises are the costs of renewable electricity generation technologies, of storage technologies, and of electric vehicles, what changes in modes of transport are achievable, future trends in fossil fuel prices, and the availability and costs of biomass fuels. The values of these parameters need to be projected out to 2050, as the ELENA model optimizes the full path toward an emission target to find the combination of technologies that would lead to the minimum cost delivery of the required energy services. The challenges of forecasting technology evolution are well documented. For some technologies, such as solar photovoltaic (PV) panels, historical forecasts have tended to underestimate the pace of cost reductions, but the maturity of other technologies makes it difficult to ascertain if the other green technologies’ evolution might replicate this trend. The investment costs of decarbonization, and the most efficient combination of technologies to achieve it, are sensitive to the techno‑economic parameters assumed. Moreover, the model is not a representation of actual markets or the economic behavior of actual agents. Its results inform of the “least cost path” to mitigation but do not presume that policies, institutions, and markets would in fact lead to this outcome. In view of this, the results of the model are better interpreted as illustrative pathways subject to large technological and institutional uncertainties, rather than forecasts or policy targets. 45 In 2009, Petroamazonas (now PetroEcuador) launched an energy efficiency program called “Optimización, Generación Eléctrica y Eficiencia Energética,” which generated gross savings (as of May 2020) of more than USD 1.7 million and approximately 1.7 MtCO2e of emissions reductions. In 2015, Ecuador endorsed the “Zero Routine Flaring by 2030” initiative. 46 https://www.globalmethanepledge.org/. 47 The Oil and Gas Methane Partnership requires companies to report methane reduction efforts and support them, demonstrate progress toward methane reduction targets, and commit to the objectives of the Paris Agreement and the Global Methane Pledge. 44 Country Climate and Development Report: Ecuador Integrating insights from techno‑economic models like ELENA with macroeconomic and microeconomic models can identify actionable steps that align decarbonization with national development goals, which is essential for achieving positive outcomes and social sustainability. The computable generable equilibrium model MANAGE builds on the ELENA model’s findings for energy and transport (described above), indicating that decarbonization will demand significant investment.48 According to the ELENA model, these investments are projected to average 5% of annual GDP from 2025 to 2050 (approximately USD 4 billon per year). Table 3.4 presents the detailed breakdown of the additional investments in the decarbonization scenario relative to the baseline scenario. The largest share of these additional investments would be directed toward the electricity generation and transport sector, broadly in line with the situation in other countries’ decarbonization paths. A significant reduction in the required investments in fossil fuel supply would, however, offset part of the aggregate investment need, highlighting the essence of the transformation required: a simultaneous increase in Ecuador’s investments and a shift towards low‑carbon activities. The model projections suggest that approximately three‑quarters of the investment effort would need to be accomplished in the earlier part of the projection period, given the assumed path for Ecuador's emissions reductions. TABLE 3.4 Additional investments in the decarbonization scenario Average annual investments (US$ Billion) 2024-2050 2024-2034 2035-2050 Electricity Generation 3 5 1 Transport 2 3 1 Biofuels and Industry 1 2 0 Oil and Gas including refinery -2 -3 -1 Total 4 7 2 % of cumulative discounted GDP 2024-2050 2024-2034 2035-2050 Electricity Generation 4% 5% 1% Transport 3% 3% 2% Biofuels and Industry 1% 2% 0% Oil and Gas including refinery -2% -3% -1% Total 5% 7% 2% Source: World Bank staff calculations Notes: Figures are given in constant US$ 2022. Investments are cumulated using a 6% discount rate. Figures reflect the difference in investments between the decarbonization scenario and the baseline scenario, both modeled with the ELENA model. 48 The model requires factoring in the costs of these investments and their effects on Ecuador’s production structure, as well as the improvements in the productivity of various activities associated with them. The planned changes in transportation aim to enhance efficiency and productivity, with electric vehicles playing a major role because of their lower maintenance expenses over time, despite their higher initial costs. These changes, along with the adoption of EVs, are projected to reduce fuel consumption per passenger/ ton‑kilometer over time. Investments in renewable electricity generation within the decarbonization pathway substitute investments in the petroleum and refining sectors. This will help to meet energy demands and eliminate the need for fuel combustion in power generation in the medium term. These shifts will gradually improve Ecuador's economic structure and productivity over the decades, with initial investments concentrated in the early years. The model anticipates a decrease in the costs of decarbonization technologies, such as solar panels, wind turbines and EVs, which are expected to become cheaper owing to efficiency gains from learning and economies of scale at global level. The investment timeline and resulting benefits, typical for countries committed to decarbonization, significantly influence macroeconomic simulation outcomes and the design of transition policies. However, it is important to note that not all costs associated with decarbonization technologies lead to increased production capacity. Some investments serve primarily to reduce GHG emissions without directly contributing to GDP or employment growth. The challenge lies in calibrating these "non‑productive" costs within macroeconomic models. The simulations assume that 50% of the transport sector's transformation costs do not add production capacity, while all investments in the electricity sector do. Another critical simulation parameter is the investment distribution between the public and private sectors. With appropriate market and regulatory frameworks, private entities could fund many necessary investments, such as deploying new renewable electricity plants. But Ecuador's current regulatory environment lacks the dynamics to stimulate private investment, with unclear price signals and restricted market entry for competitors. Despite the country's challenges in boosting private investment, the simulations optimistically assume that 75% of decarbonization investments will come from the private sector. 45 Country Climate and Development Report: Ecuador Investments in these sectors would not cause large changes in GDP, consumption, or debt, yet would significantly cut emissions. The MANAGE model simulations indicate that, by 2050, the decarbonization scenario is expected to cut emissions by 75 percent (excluding LULUCF), while Ecuador’s GDP could be 0.7 percent higher than in a BAU scenario, with private consumption marginally higher, by 0.1 percent. The public debt ratio is projected to be around 39 percent in both scenarios.These results suggest that a decarbonization strategy for energy and transport is feasible without compromising the country’s long‑term growth. TABLE 3.5 Percent change in macroeconomic variables: Deviation net zero scenario from BAU, 2050 Variable % change GDP 0.7% Household Consumption 0.1% General Government Debt 0.2% Source: World Bank staff calculations. Results from the MANAGE model also point to the short‑term challenges of increasing and shifting investments in the next decade. The additional investments in the decarbonization scenario would add to the capital stock of Ecuador´s economy and provide additional productive capacity. However, some of, the benefits of these investments in terms of emission reductions and improvements in air quality, congestion times, and so on, are not computed as part of GDP and the productivity effects that the model captures— for example, an improvement in the energy efficiency of transportation—occur over several years. In these conditions, investments associated with decarbonization technologies, given the delay in passing on the positive effects of productivity, would tend to reduce GDP in the initial years in which they are made, compared to the scenario with no decarbonization. This explains the result obtained in the MANAGE model (figure 3.10). In the short to medium term, the decarbonization scenario results in slightly lower GDP, but as structural transformations and productivity improvements become more important when the situation is reversed. Structural models like MANAGE, which have a rich representation of intersectoral linkages and enforce a consistent treatment of macroeconomic constraints (such as restricting the divergence of aggregate investment and aggregate saving) help quantify the challenge implicit in the scaling up Ecuador’s investment flows and simultaneously shifting them towards low carbon technologies. FIGURE 3.10 Net zero scenario: GDP as % of BAU (2020 to 2050) 1.00% 0.50% GDP percent deviation from baseline 0.00% -0.50% -1.00% -1.50% -2.00% 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 Year Source: World Bank staff calculations. However, scenarios where the energy transition can have positive cyclical effects in the short and medium term are also possible if climate policies help unlock investment in Ecuador. The modeling results in Figure 3.10 assume the continuation of the main macroeconomic trends that have characterized Ecuador’s economy in the past, including its lack of investment, low productivity, etc., which, in turn, make the challenge of increasing climate investment more difficult. However, good policies can unlock a different path. For example, if the appropriate reforms in the field of climate change together with other cross‑cutting reforms mentioned in this section, boosted private investment, favored the formalization of employment and so on, the energy transition could result in significant gains in activity even in the short term. This 46 Country Climate and Development Report: Ecuador highlights the importance of framing climate action in Ecuador within the broader effort to restore and build more vigorous and dynamic economic growth. Fossil fuel reform, in particular, has the potential to provide important benefits in terms of releasing resources that the government could leverage towards creating conditions more favorable to development -including by improving the security situation in the country-, while providing adequate incentives for investment to shift towards more efficient and environmentally sustainable alternatives. In this regard, the modeling exercises carried out for Figure 3.9 do not include the effects of fuel subsidy reform on fiscal aggregates or other macroeconomic variables. Mitigation investments have limited impacts on poverty and equity Mitigation policies could raise poverty rates by 2050 compared to BAU, although the impacts are modest. Considering that reducing emissions requires actions that could negatively impact growth and employment in brown industries, and that the transition to more energy‑efficient technologies and job reallocation to greener sectors take time, it can be expected that mitigation actions will, to some degree, negatively impact poverty rates and inequality. For instance, by 2050, mitigation policies could raise poverty rates by 0.08 percentage points relative to BAU, to reach 21.6 percent.49 That said, it is important to note that reducing emissions could bring other direct and indirect benefits not accounted for in this analysis, which can positively affect other dimensions of poverty beyond sheer income. For example, evidence from countries such as Bolivia, Colombia, and Peru shows that a reduction in deforestation is correlated with poverty reduction (Ferraro et al. 2013; Miranda et al. 2016, Canavire and Hanauer 2018). 6.85 a day): Headcount (left) FIGURE 3.11 Aggregate impacts of mitigation actions on income poverty (at USD  and deviations from BAU in pp (right) 30% 27.9% miti12 25% 22.3% 21.5% 21.7% 21.6% 0.10 0.08 20% 0.08 0.06 15% 0.04 0.02 10% 0.00 −0.02 5% −0.04 0% −0.06 2019 BAU Wet/Warm Dry/Hot Miti12 −0.08 −0.07 2050 With −0.10 −0.09 W/O mitig. & adapt. mitigation −0.12 2050 2050 2030 2040 2050 Source: World Bank staff calculations. At the subnational level, mitigation actions could alleviate poverty in the rural areas and the Amazon provinces by 2050, but all other regions have mixed results. In urban areas, the USD 3.65-a‑day poverty rate would rise by 0.13 percentage points relative to BAU. On the other hand, rural poverty decreases by -0.05 points relative to BAU. A similar situation can be observed in the Amazon regions, where mitigation actions reduce the poverty rate by 0.05 points. But in the highlands, coast, and Galapagos regions, poverty by 2050 is, at best, unchanged from that of the BAU scenario. The coastal provinces could experience a 0.09-point increase in income poverty, and the Sierra, a 0.08-point variation. The current poverty impact analysis results in small effects because it only considers impacts through GDP on households’ incomes and 49 does not consider the effects of food prices nor does it assess the impacts on consumption or other measures of poverty. 47 Country Climate and Development Report: Ecuador 6.85 a day) at the subnational level with mitigation actions FIGURE 3.12 Changes in income poverty (at USD  in 2050 – Deviations from BAU (in pp) miti12 0.15 0.13 0.10 0.10 0.09 0.08 0.05 0.00 0.00 0.00 -0.05 -0.05 -0.05 -0.10 -0.10 2050 2050 2050 2050 2050 2050 Rural Urban Sierra Costa Amazon Galapagos Source: World Bank staff calculations. Mitigation policy actions could increase income inequality relative to BAU. By 2050, the Gini index would increase by 0.18. Average income grows by 0.23 percent relative to the BAU, but households at the top of the income scale benefit the most, thus widening inequality. The average income of the bottom 40 percent of households would remain practically unchanged relative to BAU, while in the top 20 percent, it would grow by 0.7 percent, and in the top 10 percent, by 0.9 percent. FIGURE 3.13 Distributional impacts of mitigation policies: Gini Index (left) and change in average household income (right) — Deviations from BAU 2050 0.20 0.18 1.5 0.15 1.0 miti12 Fitted values (%) 0.10 1.0 0.05 0 0.00 2050 -0.5 miti12 0 20 40 60 80 100 Percentile Source: World Bank staff calculations. Considering that mitigation actions to reduce emissions have differentiated impacts, and that the more vulnerable could face disproportionately greater losses, compensation measures and other social protection and labor market policies are imperative, especially in the short to medium term. For instance, success has eluded fossil fuel subsidy reform in Ecuador mostly because of the lack of clear, well‑implemented compensation mechanisms that protect the most disadvantaged consumers from the immediate impacts of eliminating the subsidies. the top 20 percent of households account for over half of the country’s total fuel consumption, especially of diesel and gasoline. Correspondingly, they receive more than 51 and 41 percent of low‑octane gasoline and diesel subsidies, respectively, while the bottom 20 percent get only 3.7 and 6.5 percent, respectively. But, in relative terms, fuel subsidies account for over 2 percent of the household income of the bottom decile, compared to 0.5 percent of the top decile’s household income. Which implies that fuel subsidy removal would have a larger relative impact on the poor. 48 Country Climate and Development Report: Ecuador FIGURE 3.14 Gasoline and diesel subsidies in 2023, by income decile: Distribution of total subsidies (left) and relative incidence of subsidies (percentage of household market income) (right) 3% 26.3% 2.0% 33.0% 2% 14.7% 18.3% 2% 1% 0.4% 1% 0.2% 0.1% 1.3% 2.5% 0% Low-octane gasoline Diesel Low-octane gasoline Diesel Decile 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Source: World Bank staff Estimates using the CEQ methodology tool in Castillo, Fernández, and Olivieri (2021). Removing fossil fuel subsidies is one of the most urgently needed mitigation policies, both environmentally and economically sound. Yet its immediate impacts are negative, and not only that but disproportionately larger for the most vulnerable, which is why immediate compensation is necessary to protect their welfare in the short run. Such trade‑offs between mitigation actions to limit global warming and the short‑term reduction of poverty and inequality have been identified in the literature (IPCC 2014; Roy et al. 2018 Markkanen and Anger‑Kraavi 2019). This is especially true in countries that depend heavily on fossil fuel production for revenue or employment generation, and in contexts of high poverty and socioeconomic inequality. This is why, along with other researchers, we recommend that the potential negative impacts on poverty and inequality be considered at all stages of policymaking and clear action be taken to minimize them (Markkanen and Anger‑Kraavi 2019). 3.5.  Improving the capacity of the state and the private sector to deploy the required investments and implement the needed changes Integrated legislation is needed to refine and assign responsibilities for climate action and to ensure the smooth coordination of policy implementation steps. Across the institutional assessment, two common challenges found were poor coordination between institutions that are in charge of climate policy, and related to that, a lack of clarity around who is responsible for what. This has been observed in both horizontal (between agencies) and vertical (between national and subnational levels of government) institutional relationships. To address this, the government is currently in the process of enacting the law on Integrated Disaster Risk Management, which is expected to delineate the executive, leadership, and administrative responsibilities of each actor in the National Decentralized Risk Management System, at both the sectoral and different levels of government, including the responsibilities of technical‑scientific institutes. In the case of the social protection (SP) and disaster risk management (DRM) systems, there is a clear need to transition away from ad hoc, reactive, post‑disaster, SP–DRM linkages, and move toward the establishment of institutionalized linkages that facilitate smooth coordination during times of shock, especially needed coordination with non‑state actors. Further, while Ecuador’s climate legal framework is considered quite robust, a unifying Climate Change Law is missing that could help bring the several regulatory pieces together in an integrated and efficient way. This would support not only DRM but also long‑term adaptation and mitigation. Additionally, a more formalized framework that is focused on increasing the capacity, financing, and involvement of local and subnational governments could ensure they have the tools they need to execute their assigned responsibilities related to climate action. Although Ecuador’s subnational and local governments already have many responsibilities assigned to them, this does not mean that decision‑making, capacity, and funding have been properly transferred. A program at the national level that integrates the needed components required for adequate participation of local governments and 49 Country Climate and Development Report: Ecuador populations could help close this gap. To institutionalize this approach, the GoE could draw lessons, models, and best practices from similar programs in other countries50 that have found workable ways to support their local governments with needed regulation, on‑demand capacity building, identifying and accessing climate finance sources, technological and information transfer, and measurement, reporting, and verification processes (MRV). Additionally, appropriate mechanisms are required to ensure effective public participation in validating investments and contributing to decision‑making, including presenting data on climate risks in a clear, easy‑to‑understand format, and helping them incorporate the information into their decision‑making. Finally, it is important to ensure that different institutions and levels of government can easily use climate data and plans. Ecuador has made initial progress in assessing disaster risks and making the information available. But more granular information on climate change risk assessments needs to be generated to increase the ease of data availability and community awareness. For instance, the government has made commendable progress in developing the data and maps necessary for assessing climate and disaster risks—for example, high‑resolution digital terrain models (DTM) and local‑scale hazard maps—and in including high‑resolution information on future climate projections in its PNA. But improvements are needed across the board to ensure that local‑scale climate information can be visualized, downloaded, and publicly accessed. The need to fund multiple competing climate policies and to adapt to future climate requires a concerted strategy to ensure financial sustainability. Like other countries in the LAC region, Ecuador will have to make simultaneous progress in reducing its vulnerability to the physical consequences of future climate scenarios while fulfilling its commitments to lowering GHG emissions and, importantly, decreasing its vulnerability to the consequences of technological developments and global climate change policies. To bring the financing for these different components together, the GoE needs to continue the work it has done on the 2021 National Climate Finance Strategy by implementing its mechanisms. Implementing the initiatives and coordination mechanisms set out in the strategy could help deliver more tangible outcomes. The GoE has also recently developed a climate tagging methodology that should be implemented in the following budget cycle to visualize climate finance in the country and correct any remaining issues in the following cycles. At the same time, Ecuador should finalize and implement instruments from its Disaster Risk Financing (DRF) strategy to ensure financial sustainability during shocks of natural hazards. Considering the country’s exposure to a wide range of shocks, it is essential to transition from relying solely on budgetary reallocations and contingencies to introducing sustainable DRF instruments that can fund shock responses promptly. Although the DRF strategy was developed in 2020, and financial planning has begun accounting for contingent liabilities caused by natural hazards, many of these instruments still need to be implemented and refined. It is essential for the Ministry of Economics and Finance (MEF) to resume its pre‑pandemic effort to introduce DRF instruments in Ecuador. For the social protection system, a similar mechanism could be operationalized through the framework of the Cobertura de Contingencias por Calamidades program. It is also important to consider passing a law for the financing of shock‑responsive productive social programs that can favor economic reactivation in the aftermath of a shock. Insurance schemes are needed to ensure that Ecuador’s households and firms can cope with the shocks of natural hazards, and more technical information is needed to support an efficient system. The recent, publicly available PNA focuses on increasing agriculture insurance coverage (discussed in section 3.2.1). But special attention should be paid to inefficiencies and asymmetric information to avoid financially unsustainable programs. Regarding public assets, Ecuador’s legal framework mandates that all institutions managing state assets must insure those assets. However, as the ministries of health and education have indicated in interviews, it is not possible to optimally ensure these assets because the technical elements to define their protection conditions, and the insured sums based on the risks to which these assets are exposed, are lacking, and the ministry has a limited budget. Technical assistance is needed to ensure sustainable insurance schemes. 50 For example, Kenya’s Financing Locally‑Led Climate Action Program, supported by the World Bank. 50 Country Climate and Development Report: Ecuador De‑risking instruments can further incentivize private investment in climate‑resilient infrastructure. On top of the technical and regulatory considerations, it is essential to put in place financial safeguards that can minimize risks and attract investment. Key aspects to consider are the liquidity and creditworthiness of the investee, adequate insurance/guarantee coverage (not only for assets, but also for contractor risks, business interruptions and the potential loss of income), and the existence of long‑term contracts (such as public purchasing agreements or PPAs for the power sector). PPAs can be particularly effective in providing the right conditions for private investment, as they can de‑risk projects by combining support from the state and IFIs (through guarantees, grants, and concessional finance) with long‑term contracts. Similarly, public–private partnerships with well‑designed key performance indicators can help the private sector bring in their financing and technical expertise for developing low‑carbon projects in different sectors, while ensuring the long‑term performance of the new infrastructure being built. Ecuador needs structural changes to unlock private sector investment to support green financing, and the new public–private partnerships (PPPs) framework is a step in the right direction, but it needs to be complemented with additional measures. Ecuador approved in 2023 the creation of a regime to attract investment through PPPs. The regime provides an updated regulatory and institutional framework for PPPs that addresses some of the shortcomings of the previous PPP framework.51 The new regime includes a clearer governance structure and definition of institutional responsibilities based on 12 guiding principles, including transparency, appropriate risk sharing, sustainable development, fiscal sustainability, and citizen participation. Although the updated framework is welcome, its success will strongly depend on the design and enforcement of specific regulations and policies that can ensure value for money. The new framework needs to be complemented with the availability of financial instruments that can facilitate and incentivize private sector participation to make PPPs more bankable. These instruments may include partial risk and partial credit guarantees, as well as non‑commercial guarantees, that can be implemented with the support of Multilateral Development Banks (MDBs) to attract foreign investment. Ecuador also needs a credible fiscal path that can lead to a reduction of sovereign spreads, particularly at longer tenures, otherwise financing costs may offset the efficiency gains of PPPs. Finally, access to complementary funding sources, such as carbon markets, could increase the bankability of some projects with high climate change mitigation potential. Beyond specific policies aimed at developing opportunities in climate adaptation and mitigation, broader reforms that foster private sector dynamism (World Bank 2021b) would facilitate the expansion of its role in climate investments. The previous PPP framework includes several decrees and the Organic Law for PPPs and Foreign Investment Incentives, approved on 51 December 15, 2015. Some of the shortcomings of the old PPP framework are described in the Country Private Sector Diagnostic (World Bank 2021b). 51 Country Climate and Development Report: Ecuador 4. Selected Development and Climate Priorities Main messages This report recommends the following policy priorities to ensure that Ecuador’s climate policy is closely aligned with development objectives: • Strengthen the institutional framework to implement climate action, such as with a unifying legal framework and streamlining coordination, particularly in adaptation and resilience. • Implement reforms to strengthen macroeconomic and fiscal management, fiscal, competitiveness, and jobs. • Promote climate‑smart agriculture techniques and improved water management as win‑win investments for development and climate outcomes. • Raise the ambition level of the already effective LULUCF policies to further reduce deforestation and to increase forest restoration to needed levels. • Energy and transport policies should promote clean energy but also prioritize resilience to reduce the impacts on the economy. The analyses in this report suggest that the need to address climate change and the global decarbonization agenda become even more relevant because they threaten Ecuador’s development priorities, and, at the same time, achieving development will strengthen the country’s situation to deal with them. Successfully dealing with climate challenges can be accomplished by combining institutional, macro‑fiscal, and sectoral policies that integrate climate and development priorities and exploit their complementarities under a “whole of the economy” approach. This chapter proposes five priorities that the government could pursue, highlighting those with high adaptation, mitigation, and development synergies. Though many issues and policies have been discussed throughout this CCDR, five priorities stand out. Each has specific policy recommendations within it. Together, these five priorities would maximize the synergy between Ecuador’s development, adaptation, and mitigation objectives. Table 4.1 discusses each of them, together with their associated recommended policies. Also included in table 4.1 are indicators of the likely benefits and challenges, based on the qualitative assessments of World Bank experts,52 which could help with further prioritization and sequencing. The benefits column shows the degree to which each policy would contribute to adaptation, mitigation, and development objectives (defined as human and social development, economic growth and jobs, and natural capital and conservation). In contrast, the challenges column displays the degree to which each priority could face institutional, political, or financial challenges. Based on their respective benefits and challenges, their urgency, and their expected implementation time, the table also suggests whether policies should be categorized as short‑term priorities (the next five years) or longer term. The five priority areas—a combination of private and public initiatives—will be critical to transforming Ecuador’s economy to align with resilient, low‑carbon development. First, the institutional framework needs to be better integrated horizontally and vertically to ensure it can implement the required policies. Second, to ensure the country makes the best use of its financial resources, it needs to redesign 52 The assessment rated each benefit and challenge using three points. For benefits, green represents high benefits and red negligible or null benefits. For challenges, green represents a beneficial outlook (for example, low financial resources needed, clear institutional framework in place, and so on) and red a challenging outlook. Yellow represents a middle rating usually due to a mixed assessment (that is, it could be beneficial or challenging in some dimensions but not all). 52 Country Climate and Development Report: Ecuador incentives, deploy macro‑fiscal instruments that account for climate consequences, boost financial strategies, diversify the economy and fiscal resources away from oil (potentially mining of energy transition minerals), and create appropriate conditions for the private sector to develop business opportunities linked with climate. Third, the agriculture sector’s resilience and carbon intensity are key to protecting the economy and vulnerable populations. CSA strategies, integrated water management for irrigation and hydropower, and the protection of existing water sources are important policies for this. Fourth, together with agriculture policies (especially concerning livestock), increasing the ambition level of forest governance, conservation, and restoration objectives will help the country achieve its emissions targets, conserve ecosystem services and biodiversity, and increase the export prospects of its agriculture products. Fifth, the technological transformations for the decarbonization of the energy and transport sectors, though complex and uncertain, could drive broader reforms that should help unleash private investment, increase efficiency, and align public incentives with low carbon objectives. At the same time, the energy and transport sectors will have to prioritize resilient infrastructure and the diversification of electricity sources to avoid the potentially large economic costs of climate impacts and future energy crises. It will be important to ensure that private sector agents have the appropriate incentives to engage in these low‑carbon opportunities. In addition to these climate priorities, Ecuador needs to tackle broad structural challenges as an underlying condition to enable both development and climate outcomes. Tackling other more general barriers to private sector development will also be required. Private sector investment and access to international markets are highly constrained in Ecuador, limiting the sector’s potential to contribute to the country’s development, including facing climate change. More generally, macroeconomic stability will be critical to creating an environment where private investments can flourish, and to reducing financial costs and the risk premiums required by private sector agents. The country needs to pursue a sustainable macroeconomic and fiscal path by addressing fiscal imbalances, consolidating public debt, improving the efficiency of spending through the reallocation of public expenditures, increasing tax revenue, re‑building international reserves and buffers, and seeking national dialogue around difficult but critical economic issues, among other things. In light of Ecuador’s political economy and institutional contexts, the GoE is urged to adopt a flexible approach in shaping and executing its climate and development strategies. Climate policies should be based not only on their technical and financial feasibility but also on the ability to actively build political support, increase capacity, and reduce the costs of future climate action (Hallegate et al. 2023). While appropriate policy design is critical, aspects of governance, sequencing, and process are as important to ensure their effectiveness (Hallegate et al. 2023). For instance, removing fossil fuel subsidies is one of Ecuador's most pressing mitigation policies, given its dual environmental and economic benefits. But this action may disproportionately affect vulnerable groups. Implementing revenue redistribution and compensation measures therefore emerges as a prudent response to mitigate the potential adverse impacts. Schaffitzel et al. (2020) find that removing all energy subsidies and repurposing a share of this revenue to strengthen the government’s cash transfer program, Bono de Desarrollo Humano, would increase the poorest quintile’s real income by 10 percent and leave more than USD 1.3 billion for the public budget. However, recognizing the broad effects this reform would have in the population, early measures to enhance public engagement and communication would also be needed to ensure that relevant groups are being involved and other potential social disparities are being addressed. Such initiatives would not only address socio‑economic disparities but also garner public support and legitimacy, thereby enhancing the sustainability and effectiveness of Ecuador's climate agenda. To reiterate, a combination of private and public initiatives will be critical to transforming Ecuador’s economy. Creating appropriate conditions for the private sector to develop business opportunities linked with climate will be essential. The country can also reap the benefits of rationalizing the use of its forests and tackling its deforestation emissions. Similarly, the mining of energy transition minerals could become a relevant source of wealth. It will be important to ensure that private sector agents have appropriate incentives to engage in these opportunities and gradually transition toward low‑carbon alternatives. Diversifying the economy and fiscal resources away from oil would help reduce the country’s vulnerability to climate‑related transition risks. 53 Country Climate and Development Report: Ecuador Similarly, fostering economic growth based on high-value manufacturing and other activities not directly linked with agriculture could reduce Ecuador’s exposure to both climate-related physical risks and global trade policies linked with deforestation. In this regard, Ecuador needs to reevaluate sectoral regulations and financial incentives that may be favoring emissions-intensive businesses and activities that are highly vulnerable to climate change. Additionally, the country needs to tackle general barriers to private sector development, including trade and investment restrictions, labor market rigidities, and a weak competition framework (World Bank 2021b). Improvements in the financial system, such as building a robust local investor base and adopting a sustainable finance framework (including a green taxonomy), are also relevant to this goal. Promoting Government initiatives will be critical to achieving the country’s climate goals. That contribution must involve a wide range of government tools, including taxation and public expenditure. Tax instruments (and the reduction of existing subsidies) have an important role in ensuring adequate incentives for the private sector while providing resources. On the other hand, the integration of climate considerations in Ecuador´s investment and expenditure policies will be a very important lever for climate action in the coming years. The fiscal constraints the country faces make it all the urgent to prioritize investments in areas where climate goals coincide with more general development objectives. Finally, factoring the potential consequences of climate change into Ecuador’s fiscal situation will also help manage fiscal risks more comprehensively. 54 Country Climate and Development Report: Ecuador TABLE 4.1 Proposed priorities, policies, timeframe, and prioritization criteria Benefits Challenges Short or Priority area and policy recommendations Urgency and enabling conditions long term Sections where this topic is discussed Adaptation Mitigation Development Institutional Political Financial 1. Improve the institutional and public framework towards climate action, streamlining coordination, particularly in adaptation and resilience. 1.1. Develop a climate change framework that integrates the 2.2, 3.5 This is urgently needed as a building block for climate short‑term multiple regulations and clarifies responsibilities on climate policies. Most of these laws and regulations have (next five action. already been formulated but require refinement, years) integration, and implementation. Financial investment is low. The hardest challenge could be synthesizing together the multiple views of various relevant authorities 1.2. Develop a national program that ensures that subnational 2.2, 3.5 This would greatly increase the effectiveness and long‑term 55 and local governments receive the needed finance and capacity sustainability of spending and should therefore be (more than to fulfill their climate responsibilities. This program should pursued as soon as possible, but it could take longer five years) incorporate participatory processes, so local governments and to implement. The decentralized structure of the communities can help make climate investments more effective country may be a benefit here, but it will require a process of negotiation to allow for the transfer of funds and decision‑making Country Climate and Development Report: Ecuador 2. Macroeconomic management, fiscal, competitiveness, and jobs 2.1 Reforms to diversify the sources of growth and tackle the 1.1., Ecuador’s economic reliance on oil and agriculture long‑term binding constraints to private sector development. 53 2.3., subjects it to the adverse effects of climate change, (more than 3.1., jeopardizing these vital sectors and the fight against five years) 3.3., poverty. Economic diversification could enhance 3.5. growth and resilience. To tap into climate‑related business opportunities, Ecuador must cultivate a private sector‑friendly environment. This effort is currently hindered by extensive price distortions, high policy uncertainty, trade and investment barriers, labor market inflexibility, and a weak competition framework. 53 See Gonzalez, Velasco, and Miranda 2024. Benefits Challenges Short or Priority area and policy recommendations Urgency and enabling conditions long term Sections where this topic is discussed Adaptation Mitigation Development Institutional Political Financial 2.2. Enhance fiscal and macroeconomic management 1.1., Reforms in support of non‑oil growth, lowering the short‑term to expedite the achievement of climate and 2.2., fiscal dependence on oil and managing its revenues (next five development objectives. 3.1., more stably, are needed to stabilize Ecuador years) 3.3., economy and to minimize transition risks from global 3.5. decarbonization. More generally, restoring fiscal sustainability is critical to ensure the country has sufficient fiscal space and lower risk premiums to face the investment needs associated with climate change. 2.3. Phase‑out fuel subsidies, continuing the Government 1.5.1., Elimination of fossil fuel subsidies correctly timed and short‑term current reform, helping reduce fuel consumption, and saving 3.4.2. with adequate social protections would help improve (next much‑needed funds to implement climate policy. the country’s fiscal position while aligning incentives for five years) private investment in climate mitigation. 2.4. Design DRM Disaster Risk Financing (DRF) instruments to 2.2., Integrating disaster risk explicitly in the financing short‑term 56 ensure the country is prepared to face natural hazards occurring 3.5. strategy of Ecuador can provide hedge against the (next in the short‑term. negative consequences of these events, providing net five years) positive value to society. 2.5. Formulate a climate financing plan that makes explicit 2.3., High priority as a building block so that the climate short‑term the sources of funding for the necessary climate investments 3.5. agenda can be financed and implemented. The National (next and the actions that will be taken to develop or access these, Climate Finance Strategy is an important first step, five years) ensuring the involvement of the private sector and the but it should better involve all relevant actors (e.g., Country Climate and Development Report: Ecuador deployment of fiscal instruments. private sector), and the initiatives and coordination mechanisms should start without further delay. 2.6 Enhance the environment for private investment in 2.3,, High priority as a building block so that the climate short‑term climate‑related initiatives. Develop a strong domestic investor 3.1., 3.5. agenda can be financed and implemented. The National (next community to back sustained investment in green infrastructure, Climate Finance Strategy is an important first step, five years) facilitate improved access to global capital markets, and draw in but it should better involve all relevant actors (e.g., higher‑quality foreign direct investment (FDI). private sector), and the initiatives and coordination mechanisms should start without further delay. Benefits Challenges Short or Priority area and policy recommendations Urgency and enabling conditions long term Sections where this topic is discussed Adaptation Mitigation Development Institutional Political Financial 3. Promote climate‑smart agriculture techniques and improved water management as win‑win investments for development and climate outcomes 3.1. Develop a national program to further develop and scale 3.2.1., Although the implementation of the program is a short‑term up climate‑smart agriculture technologies, together with 3.4.1. long‑term goal, adapting existing and developing new (next detailed regional assessments, in light of the need for tailored CSA technologies should be treated with high urgency five years) and territorial approaches with close involvement of local and priority. This will allow the implementation to communities. Place particular focus on climate‑smart agriculture start without delay and receive highly complementary (CSA) for livestock to ensure lower levels of deforestation and synergistic benefits. Local participation in the and emissions formulation is a necessary component, although this would likely make the process more time‑intensive but then also more effective 3.2. Recognizing the central role of paramos in predictable water 1.5.3, Securing the funds to support this expansion and short‑term 57 storage and provision, prioritize the expansion of conservation 3.2.1, identifying strategies to support local communities (next programs to fully protect these ecosystems 3.4.1 making use of these paramos will be the most five years) important challenges. But the need for water security and a stable supply for agriculture makes this an important objective. Successful implementation experience exists 3.3. Pursue integrated water management plans to build 1.2.1, This would require significant investments in finance, long‑term Country Climate and Development Report: Ecuador infrastructure and storage that can simultaneously increase the 1.3, time, and coordination, but it would bring large (more than adaptation capacity of the agriculture and electricity sectors, 3.2.1, synergistic benefits, especially in adaptation and five years) and even capitalize on production gains if optimistic future 3.2.3 development. Further independent assessment would scenarios become the reality. Where synergy between the help find the most efficient integration. Water rights electricity sector and the agriculture sector is not possible, the should also be closely considered when pursuing expansion of irrigated areas is still worthwhile as an investment these investments. that simultaneously improves drought resilience and increases farmer income 4. Raise the ambition level of the already effective LULUCF policies to further reduce deforestation and increase forest restoration to needed levels Benefits Challenges Short or Priority area and policy recommendations Urgency and enabling conditions long term Sections where this topic is discussed Adaptation Mitigation Development Institutional Political Financial 4.1. To improve the conservation impacts of SocioBosque, 3.4.1 The GoE has the technical capacity to create such an short‑term using available data, develop an index of deforestation risk index and come up with a prioritization scheme. The (next five (including the opportunity cost of agricultural productivity) more challenging part might be designing contracts years) and environmental potential to help prioritize its targeting and that incorporate this targeting into the expansion expansion. This could also help target agriculture policies. Use agenda, given the voluntary nature of contracts. participatory techniques to validate the results of this index, Technical assistance and the use of participatory and design proper contracts to implement it, minimizing the methods will be needed socioeconomic impact on poor and marginalized households while ensuring conservation results 4.2. Continue expanding SNAP, SocioBosque, and 1.5.3, Although the GoE has the technical capacity to long‑term Agreements of Sustainable Use and Custody of Mangroves’ 3.4.1 implement such an expansion, significant efforts (more than Ecosystem (AUSCM) type‑agreements into critical will be required to secure the financial resources. five years) ecosystems (such as paramos and mangroves) to provide Leveraging international funds as part of a long‑term 58 local communities with the opportunity to make use of strategy will be necessary. Nevertheless, expansion resources sustainably should start in the midterm and grow periodically 4.3. Invest in forest governance and increased monitoring 3.4.1 This faces significant operational challenges, but it long‑term and enforcement capacity to ensure that illegal deforestation is urgently needed to strengthen the effectiveness (more than and degradation remain as low as possible, particularly in of any forest conservation policy. Monitoring five years) protected areas. improvements can be implemented sooner with the support of technology. Enforcement will require Country Climate and Development Report: Ecuador the involvement of multiple sectors, including law enforcement 4.4. Increase restoration targets to levels closer to previous, 1.5.3, Recent data on the low levels of forest regeneration long‑term more ambitious plans, and identify mechanisms to ensure their 3.4.1 underscore the urgency of increasing targets in (more than financial sustainability a long‑term strategy. But securing the financial five years) resources to do so has proven to be an especially formidable challenge Benefits Challenges Short or Priority area and policy recommendations Urgency and enabling conditions long term Sections where this topic is discussed Adaptation Mitigation Development Institutional Political Financial 5. Energy and transport policies should promote clean energy but also prioritize resilience to reduce impacts on the economy 5.1. As cost‑effective, low‑hanging fruit, expedite the 1.5.2, Furthering the implementation of the National short‑term implementation of existing plans for energy efficiency and 3.4.2 Energy Efficiency Plan (PLANEE), the gas‑flaring (next five reduced gas flaring and develop plans for energy efficiency in reduction plan and the Electricity Sector Master years) sectors that still do not have one. Plan (PME) is urgent to avoid the recurrence of an electricity crisis/supply deficit and lock into more expensive and polluting power generation options. Studies, strategies, and partnerships have already been set out. Ecuador should therefore move forward with these plans as low‑hanging fruit. There is also a need to move ahead in the short term with additional regulatory measures and the 59 establishment of the National Energy Efficiency Investment Fund (FNIEE) to unlock greater EE investments in Ecuador 5.2. Catalyze investments in renewable energy, emphasizing 1.3, Catalyzing investments in NCRE and enhancing short‑term the need for more resilient hydropower infrastructure and 3.2.3, the resilience of hydropower capacity is urgently (next five greater diversification with NCRE to reduce climate risks 3.4.2 needed to diversify the generation matrix and years) expand capacity to avoid the recurrence of an Country Climate and Development Report: Ecuador electricity crisis/supply deficit and locking into more expensive and polluting generation options. The GoE has already developed a long‑term plan to respond to increasing energy needs. These might need to be updated to include resilience considerations. Ecuador holds the technical capacity to implement this, but financing challenges remain that will have to be overcome Benefits Challenges Short or Priority area and policy recommendations Urgency and enabling conditions long term Sections where this topic is discussed Adaptation Mitigation Development Institutional Political Financial 5.3. Develop a regulatory framework and business 2.3, The electrification of industry, buildings, and short‑term environment that promotes private sector involvement in 3.4.2 transport will require the heavy involvement of the (next five electrification (including the electrification of transport) and private sector. Although electrification is a long‑term years) avoids locking in inefficient, high‑carbon paths objective and a stable electricity supply needs to be ensured first, developing a regulatory and business environment that incentivizes these investments is urgently needed in the short‑term to avoid locking into high‑carbon alternatives. Implementation challenges would be high, and additional renewable electricity generation will be needed in parallel to supply this increased demand in a sustainable manner, but the returns achieved would also be significant 60 5.4. Given the size of the potential impacts on the economy, 1.2.1, Although repairing and building transport long‑term invest in rehabilitating and providing adequate maintenance 3.2.2, infrastructure with higher resilience consideration (more than to the national transport infrastructure, prioritizing routes by 3.5 is a long‑term objective, it should be treated with five years) their relevance for economic activity and access, and ensuring urgency to avoid the potentially high impacts on the rapid‑response capacity to disasters economy. Investments will be high, but the country has the technical capacity to implement them, and they will prove to be cost‑effective in the long term Country Climate and Development Report: Ecuador 5.5. Operationalize the National Sustainable Urban Mobility 1.5.1, Reforming the formula to distribute resources long‑term Policy by (i) reforming the formula to distribute resources for 3.2.2 is a potentially high impact action that could be (more than urban mobility in a way that incentivizes modal shift, and then (ii) implemented in less than a year, since the current five years) articulating new resources to support strategic interventions in formula incentivizes the use of private cars. A revised selected cities formula would reward those cities with higher use of public transport and active mobility, promoting the modal switch. Operationalization of the policy would require a unit in the Ministry of Transport to design the policy and generate a portfolio of participating cities, which is a longer‑term goal Note: The assessment rated each benefit and challenge using three points. For benefits, green = high benefits, and red = negligible or null benefits. 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Ecuador Poverty Assessment. Zurita‑Arthos, L., and Cotacachi, D. 2019. Análisis Cartográfico y Georreferenciado del Programa Socio Bosque. Nota Técnica IDB‑TN-01673. 65 Country Climate and Development Report: Ecuador 5. Appendix 5.1.  Summary of biophysical modeling and climate impact channels This report54 relied on biophysical analyses to estimate the impacts of climate change along seven general channels that affect agriculture, natural resources, and infrastructure. These channels simulated (i) crop production shocks due to changes in water availability and heat levels; (ii) crop production shocks due to changes in soil erosion; (iii) livestock production shocks from changes in heat levels and feed source availability, (iv) hydropower production shocks caused by changes in water availability; (v) shocks to roads and bridges produced by changes in precipitation, flood, and temperature; (vi) capital damage due to changes in inland flooding; and (vii) capital damage caused by sea‑level rise and changes in coastal flooding. For each of these, different degrees of adaptations were considered to estimate the potential reduction of the impacts. These impacts and adaptations are presented throughout the report. Within this study’s analytical framework, developing impact channels involves four stages:(i) obtaining gridded historical and projected climate data for a set of climate scenarios; (ii) selecting, tailoring, and/or developing biophysical models that convert changes in climate data into biophysical shocks for each impact channel evaluated; (iii) aggregating the grid‑level biophysical shocks to national and/or sectoral scales using high‑resolution geospatial data; and (iv) producing shocks to be fed into the country’s macroeconomic model. The results are aggregated to national scale inputs (for example, capital and labor) or economic sectors (for example, agriculture) to match the macroeconomic model’s resolution. A water evaluation and planning (WEAP) systems model was also produced to evaluate changes in water availability that served as an input for different channels. Each impact channel relies on stylized biophysical models that can process climate information and projections and simulate changes in biophysical variables (for example, streamflow or infrastructure conditions) and/or socioeconomic variables (for example, labor supply) under these altered climatic conditions. To address climate uncertainty in the analysis and to try to capture a broad range of possible climate impacts, different general circulation models (GCMs) were used. Two combinations of the Shared Socioeconomic Pathway (SSP) and Representative Concentration Pathway (RCP) emissions scenarios were selected: a pessimistic SSP3-70 scenario and an optimistic SSP1-1.9. To capture an even broader range of impacts for the five channels for which data were available, specific GCMs within these SSP– RCP combinations were selected to construct a dry and hot scenario and a wet and warm scenario. To estimate the impacts of climate change, future changes between 2021 and 2050 under these scenarios were compared to the baseline period, 1995–2020. Channel of Impact Description of how climate change translates to damage Agriculture and natural resources 1 Crop production crp_irrigated; Shock to water‑dependent sector's productivity. Uses a water– crp_rainfed agriculture nexus model to evaluate unmet demands and replacement costs of water supply. 2 Erosion crp_erosion Shock to crops from topsoil erosion and flooding due to vegetation conditions. Impacts on erosivity from changes in rainfall are based on the Revised Universal Soil Loss Equation model. 3 Livestock live_heat Shock to livestock revenues through changes in productivity by animal and product type. Considers extreme heat and feed availability effects through animal‑specific impact curves. 4 Hydropower HydPower Shock to energy generation resulting from changes in river runoff. Utilizes a water systems model. 54 Source: Estimating the Economic Damage of Climate Change in Ecuador (see Appendix 5). 66 Country Climate and Development Report: Ecuador Channel of Impact Description of how climate change translates to damage Infrastructure and services 5 Inland flooding inland Shock to capital from changes in the recurrence of peak precipitation events that result in fluvial (riverine) flooding. Models streamflows and floodplains, with damage estimated using depth‑damage curves. 6 Sea‑level rise and slr Shock to coastal capital from changes in mean sea level and storm storm surge surge, using a bathtub approach. 7 Roads and bridges Flood_delay; Shock to capital from damage to, and increased maintenance of, roads Flood_capital and bridges, as modeled using the Infrastructure Planning Support System model. Also considers the effects of road disruptions on labor supply. 5.2.  Computable general equilibrium and microsimulation modeling of Ecuador’s CCDR The CGE model used in Ecuador's CCDR is based on the MANAGE model, which was developed by the World Bank. MANAGE is a single open‑country CGE model that relies on a neoclassical structural modeling approach. Most of the model assumptions follow the standard CGE literature. An extended documentation and user guide for an earlier version of the model can be found in van der Mensbrugghe (2020). In what follows, we will briefly explain the main features of the MANAGE model. Production activities in the MANAGE model are profit maximizers under constant returns‑to‑scale technologies. They use labor, capital, land, and intermediate inputs to produce goods and services (which we will refer to as goods from here on) for domestic and international markets. The production function is nested with a constant elasticity of substitution (CES) production function in value‑added nests, and a Leontief technology at the intermediate input nest. The CES production function allows for the substitution of factors in a specific nest, while Leontief technology assumes a fixed ratio between them. Thus, using a nested production structure allows different substitution elasticities among factors to be used. In the top nest, value‑added and an aggregate, non‑energy, intermediate input are combined, following a Leontief production technology. This creates a link between sectors because the output of one sector can be an input for others. At the second nest, the composite intermediate input is obtained by combining all non‑energy intermediate inputs with a Leontief technology. The value‑added composite aggregates the capital composite factor and other factors of production (labor and land). The last nest combines energy and capital with a CES production function, making them substitutable. Demand for factors and intermediate inputs, as well as the output level, are determined according to the production nest. One of the novelties of the MANAGE model is the ability of production activities to determine the energy intensity of production endogenously, based on energy prices. This distinction is important when analyzing carbon pricing policies. Introducing carbon pricing is likely to raise the cost of energy, which in this framework would incentivize substituting capital with energy. The intuition behind this mechanism is that firms are likely to invest in energy‑efficient technologies so as to use less energy and, hence, substitute capital with energy. The MANAGE model also has a vintage capital structure where old and new capital are treated differently in terms of substitutability with energy. New capital is substitutable with energy, while old capital is a near complement. That is, the vintage capital structure captures the semi‑putty/putty relations across inputs with more elastic, long‑run behavior than the short‑run. Energy production in this version of the MANAGE model distinguishes five types of electricity generation activities: Gas, oil, hydro, wind, and solar. The electricity generation mix is endogenously determined based on the relative cost of each generation activity. Alternatively, the model allows targeting a specific energy generation mix by adjusting the investment in each type of generation (for example, increasing investment in renewables to follow a renewable energy target). All markets in the model are perfectly competitive, implying that prices are equal to marginal costs in the equilibrium. Thus, firms compete with others in the factor markets to hire labor and capital. There are six types of labor—skilled, unskilled, semi‑skilled, each in turn divided into formal and informal—one 67 Country Climate and Development Report: Ecuador type of capital, one type of land, and natural resources in the model. Labor and land supply are determined by a supply function that is sensitive to average wage and land price, respectively. Labor supply is also segmented across sector groups. Hence, the movement of labor across those sector groups is limited. This is achieved by introducing a constant elasticity of transformation (CET) function, which drives the supply of labor to the sector groups based on relative wages across sector groups and elasticity of substitution. Hence, workers cannot move freely across sectors. This allows the model to mimic the real‑world rigidities of the labor market. Capital supply is determined as a result of the capital accumulation process, where shrinking activities release capital, which is added to "new" capital stock. New capital is fully mobile across sectors. This mimic some rigidities in the capital market because the movement of capital from a declining sector to an expanding sector is limited. The rate of return on capital is the same in expanding sectors, while declining sectors have a lower rate of return. The model consists of five representative household types according to income deciles. Households are the owners of factors of production. They supply labor depending on real wages: higher wages induce more labor supply. That means we ignore the wealth effect on labor supply, which would require reducing the labor supply to meet very high levels of the real wage rate. Income sources other than factor income for households are income and transfers from the government and the rest of the world. Households spend their income on consumption, savings, and direct taxes. The distribution of consumption across commodities is determined by a two‑level utility function. At the first level, a constant difference in elasticities (CDE) utility function determines the consumption of aggregated commodities. The use of CDE allows a better representation of income effects on household demand by allowing consumption shares to change as income and prices change (Hertel 2001), unlike other functional forms like Linear Expenditure System (LES) or Constant Elasticity of Substitution (CES) demand functions, which assume that expenditure shares are independent of household income and are constant. The aggregate groups are food, manufacturing, energy, services, and transport. The first‑level utility function therefore distributes household consumption spending across those broader categories. A second‑level CES nest then distributes the spending on each aggregate consumption among commodities in that group. The government does not have a behavioral assumption and is completely neutral. It collects taxes, receives transfers from the rest of the world and domestic agents, and then spends them on savings, government consumption, and investment, and transfers to the rest of the world. The government can borrow from domestic institutions or the rest of the world but must pay interest on debt in the subsequent periods. All tax rates are fixed at base‑year levels. The volumes of government current spending and investment spending are also fixed. This implies that government savings (primary balance) is endogenous and adjusts to clear the government balance. The gap between government investment demand and public saving is satisfied through foreign and domestic borrowing. Alternative government closures can be considered for the simulations of fiscal reforms. For example, there can be a target for the government budget balance, and a 'swing' fiscal instrument, such as personal income taxes, adjusts to achieve the target. The rest of the world (ROW) exports from, and imports to, Ecuador according to Constant Elasticity of Transformation and Armington specification, respectively. Both specifications assume that domestic commodities are not perfect substitutes for traded commodities. Thus, imports and exports are determined based on the difference between domestic prices and world prices, which are assumed to be fixed in line with the small open economy assumption. ROW also makes transfers to domestic agents and receives transfers from them. These transfers are assumed to be a constant share of GDP. Last, the ROW account invests in Ecuador, which corresponds to F/X flows for investment purposes (for example, FDI, short‑term capital movements, and so on). The model follows a savings‑driven closure where aggregate investment is flexible and equal to the available volume of savings. Foreign savings are exogenous and fixed as a share of GDP, while government and household savings are endogenous. In effect, the rate of return on capital adjusts to equalize investment to the saving. Hence, the model has a crowding‑out effect where government investment displaces private investment. 68 Country Climate and Development Report: Ecuador The model’s dynamics follow the neo‑classical growth framework (Solow‑Swan growth model), implying that the long‑run growth rate of the economy is determined by three main factors: capital accumulation, labor supply growth, and increases in productivity. The stock of capital is endogenous, while the latter two are exogenously determined. The capital stock in each period is the sum of depreciated capital from the previous period plus new investments. For each type of labor, the maximum stock of labor available in each period grows exogenously based on population projections by age cohort and cohort‑specific participation rates. The technical progress specific to sector and production factors is calibrated to replicate the GDP growth in the baseline from the long‑term growth model, and equals that calibrated level in simulations. The model is calibrated to replicate the 2019 Social Accounting Matrix (SAM) for Ecuador, which is constructed for this study. It comprises 73 sectors, 70 commodities, nine factors of production (skilled, semi‑skilled, and unskilled labor, each divided into formal and informal, plus capital, land, and natural resources), and five household types by income deciles. The matrix also distinguishes between public and private investment demand. The SAM includes five power activities that produce a homogenous electricity commodity: gas, oil, hydroelectricity, wind, and solar. The single power sector in the original input‑output table is split based on the Global Trade Analysis Project (GTAP) power database, with ad hoc adjustments for the Ecuador power balance tables. Inclusion of the sectoral roadmaps into the model Energy: The CGE power mix in the baseline is calibrated to the results of the ELENA model, a least‑cost power system modeling approach. We allow the productivities of different power generation activities to adjust to reproduce the sectoral model pathway. We introduce the investment requirements in the model as an exogenous shock. The additional investments are paid by increased public and private savings, which reduces total consumption in the economy. The microsimulation model to estimate poverty impacts A top‑down approach was used to forecast the long‑term impacts of climate change on poverty and inequality in Ecuador, where the outputs of the CGE model (MANAGE) were used as inputs. A dynamic microsimulation model was applied using the ClimSim tool by the World Bank Equity Policy Lab,55 which uses a full reweighting approach to align the initial microdata to the exogenous population projections and the projected sectoral structure of workers from the macro modeling for target years. FIGURE A1 The Full Reweighting Microsimulation Approach Population Projection Education Projection by Age Groups (Semi-Exogenous) (Exogenous) CGE New Population Shares Sectoral or Sampling Weights Reallocation by Age and Education CGE Updated Wages Household Survey (Simulated Distribution) Source: World Bank Equity Policy Lab (2022), based on Bourguignon and Bussolo (2013). 55 Based on World Bank Equity Policy Lab (2022). 69 Country Climate and Development Report: Ecuador The full reweighting approach could be summarized in four mandatory steps and a fifth optional one:  Reweighting to account for changes in the population structure: age–sex, education, urbanization, and (i)  changes in the employment structure; (ii) rescaling and macro‑alignment to account for changes in the wage structure by sector and type of worker between the baseline and the target years; (iii) rescaling non‑labor income; (iv) reconstructing per capita household income, rescaling, and macro‑aligning aggregate household income/ consumption to CGE outputs; and (v) when possible, adjusting welfare for relative consumption price changes. The baseline survey is the 2019 Annual Enemdu Survey from the National Institute of Statistics and Census (INEC), the official household survey that measures labor market indicators and income poverty in Ecuador. The annual survey combines the monthly data and is representative of the national, the urban, the rural, and the important city (5) levels and the province (24) level. By using the annual survey, with its over 480,000 observations, the main disadvantages of applying a reweighting approach are controlled. Incomes, labor market variables, and other characteristics of individuals and households were computed to match the SEDLAC definitions, except for years of schooling, where the official national definition was used for its greater clarity. The macro team definitions were used to group economic activities into three industries: agriculture, manufacturing, and services. The baseline welfare variable is the per capita household income (SEDLAC definition). The target years were 2025, 2030, 2035, 2040, 2045 and 2050. For the sake of brevity, only 2050 results are presented in the report. For the first step—reweighting to get the future population structure—the 2022 UN World Population Prospects for Ecuador was used, specifically, the female and male population projection (medium variant) by five‑year age groups (0–4, 5–9, 10–14, ..., 95–99, 100+) as of January 1st. To forecast education, the population in the baseline survey was divided into three skill levels according to years of schooling: 0–7, 8–12, and 12+ years. The targets of sector shares of employment by skill level were obtained from the CGE outputs. The "ms_reweight" command in Stata generated a new set of weights to match the given population targets by age, gender, education, and industry shares, for each target year. For the second step, the CGE outputs were again used to assign labor income growth rates by skill, formal/informal sector, and quintile to estimate labor income in each target year. The third step, rescaling non‑labor income, used the growth rates of households' total non‑labor income from the CGE outputs by quintile for the respective target year. Finally, the simulated per capita household income was estimated by aggregating labor income at the household level, dividing by household size, and adding back the simulated per capita non‑labor income. This simulated welfare measure, with its respective set of weights in the target year, allowed us to analyze the distributional impacts of climate change damage, as well as adaptation and mitigation measures. FIGURE A2 Algorithm of Macro to Microsimulation by Reweighting Micro data: Income Demographic distribution at baseline statistic = f(w,y) Age-gender - Un wsim Project education reweighting Young and old cohorts Employment Macro Skill-sector level inputs Wages by sector Labor income Non-labor income Aggregate income Micro data: Simulated statisticsim = f(wsim,ysim) income distribution Source: World Bank Equity Policy Lab (2022) Separate impacts are estimated for the channels of climate change damage scenarios, for the adaptation, and for the mitigation scenarios. 70 Country Climate and Development Report: Ecuador Box A1. How are modeling exercises included in MANAGE The MANAGE model received input on climate change damage and adaptations from the biophysical analysis described in sections 1.2 and 3.1, and from the mitigation policies from the ELENA model described in section 3.2. The following figures describe how these feed into economic variables. FIGURE B.A1.1 Shocks/outputs from biophysical modeling simulated into MANAGE Global Change (temperature, rainfall) Water Landscape Extreme events Sea-level rise (runoff, supply) (land use, erosion) (floods) (lands) Hydropower Agriculture Capital/land Human capital (generation, (crops, (urban, (labor, water supply) livestock) roads) population) Economy Source: Industrial Economics report. FIGURE B.A1.2 Outputs of ELENA net‑zero pathway simulated into MANAGE Inputs Models Outputs Base year: energy and technologies available ELENA Ecuadorland use and Useful energy demands for each modelled period energy network Analysis Industry: Commercial and agriculture & others Steam Direct heat Steam Direct heat Spatial structure: Emissions Drive Others Drive Others 5 regions Transport demands: Residential: -Ecuador -Amazon pkm Cooking Lightning -Andes -Galápagos tkm Refrigereation Cooling -Coast Water heating Others Energy: Time structure: Production Food demand: 18 main products Time horizon 2015–2050 MAtrix shares 5 year periods Installed capacity Land use (LU) 12 months Consumption Solution Relative production cost for each LU 5 intra day timeslice: simmulated in Night the economy Resources, including reneqable energy seasonality Morning PV peak Restrictions by scenario: Day GHG emissions Peak Transport: Technolog shares Fleet shares Capacity: increase or total Sectors: Fuel shares Transportation Technologies portfolio Residential Technology parameters: Commercial Investment cost Industry (inc. 9 subsectors) Fixed operational costs Agriculture and others Land covers Variable operational cost Plant life Plant factor Efficiency Source: Adapted from Villamar et al. (2021) 71 Country Climate and Development Report: Ecuador 5.3.  Coastal impacts and policies 5.3.1.  As the region with the most economic activity, densest population, and unique natural hazards, the coast of Ecuador experiences uniquely high impacts Although climate impacts occur in all regions, the coastal region is at especially high risk of different types of flooding and could sustain the greatest economic impacts. The coast is Ecuador’s most populous region. It is home to the country’s second‑largest city, Guayaquil, and to approximately 7.2 million people as of the most recent census (2010). It hosts important economic activities, including agriculture, fishing, tourism, and extractives. In 2020, the seven coastal provinces, along with Galapagos, contributed almost half of the national GDP.56 But the coastal region faces especially high and unique climate risks, including coastal erosion, sea‑level rise, storm surge, and swells. Inland flooding caused by intense precipitation also impacts the coastal region more frequently. Twenty of 24 disasters caused by heavy rain floods in Ecuador (as recorded in EM‑DAT data since 1992) impacted at least one coastal province. Guayaquil, one of the world’s most vulnerable coastal cities, suffers an average annual loss of 0.95 percent of local GDP. This lost production is equivalent to the estimated share of the city’s economic output that would have paid for future flood losses (Hallegatte et al. 2013). Estimates show significant economic losses to residents from shoreline erosion, swells, and fluvial (river) and pluvial (rainfall) flooding on the coast. An analysis based on 1984–2016 Shoreline Monitor data (Luijendijk 2019) estimated that shoreline erosion has, on average, caused an economic loss of USD 10 million over the past 30 years, with the highest average erosion levels occurring in El Oro and Esmeraldas (-1.6 meters) and Guayas (-1.4 meters) (figure 1.7).57 Total economic losses were highest in Guayas (USD 3.3 million) and Galapagos (USD 3.0 million).58 Fluvial and pluvial flooding also cause substantial economic losses in the coastal region. Analyses using FATHOM Global Flood Hazard Maps estimate that, in a typical year, pluvial flooding costs Ecuador an estimated USD 33.4 million, over half of which occurs in the coastal provinces (not including Galapagos) and almost a third in Manabi alone. Nationwide, fluvial flooding costs USD 4.8 million annually, with almost two‑thirds in coastal provinces and 42 percent in Guayas alone. These natural hazards likely contribute to higher poverty. For instance, Canavire and Serio (2023) reveal that, on average, an additional swell event is associated with a 2.9 percentage point increase in the probability of households located in the coastal provinces or districts falling into poverty. FIGURE A3 Magnitude of shoreline erosion in Ecuador, 1984–2016 Meters/year lost due to erosion < -5 extreme erosion -5 – -3 severe erosion -3 – -1 intense erosion -1 – -0.3 erosion -0.5 – 0.5 stable Provinces with shoreline Source: Map generated by World Bank staff using Shoreline Monitor data (Luijendijk 2019) 56 World Bank staff calculations based on Cuentas Nacionales Cantonales 2020 (Banco Central de Ecuador 2021). 57 An average economic loss of USD 10 million, with a minimum estimate of USD 3.1 million and a maximum estimate of USD 16.9 million. When the US dollar value per meter lost is taken into consideration, the highest economic values of land lost were in Santa Elena (mainly 58 because of its beaches and buildings), El Oro (because of its buildings and forests), and Guayas (because of its buildings and beaches). 72 Country Climate and Development Report: Ecuador Climate change is expected to increase this damage along the coast through amplified inland flooding, sea level rise, and storm surge flooding, although with modest effects in the medium term. Biophysical modeling performed for this report (box 1.1) shows a modestly amplified impact of inland flooding on infrastructure, with climate change causing 0.25 percent and 0.175 percent additional capital losses by 2050 under the worst- and best‑case scenarios, respectively. These additional losses will occur especially in areas surrounding Quito and near the coast.59 The results suggest that the primary cause of these additional impacts will be an increase in the magnitude of lower‑intensity but higher‑frequency events (currently occurring once every 10 or 20 years) rather than lower‑frequency but higher‑intensity events (25- or 100‑year events). A similar biophysical analysis was conducted to assess the impacts of sea level rise and temporary increases in storm surge flooding on infrastructure and land assets. Although the projected sea level change by 2050 is relatively small (0.2‑meter increase relative to baseline), it is expected to increase by a magnitude of 3 by the end of the century. Meanwhile, impacts are seen early on when accounting for changes in storm surges. Overall, storm surge events exert consistently worsening, albeit modest, impacts on capital through the midcentury relative to baseline conditions, resulting in a -0.45 percent capital shock by 2050. The impacts are larger in the second half of the century. Regarding social consequences, these climate change impacts are likely to cause internal migration. Increasing coastal vulnerability to climate threats in the projected future may drive people to migrate away from the coast. Data generated by a World Bank study (Rigaud et al. 2018)—which projected future internal climate migration caused by changes in water availability, crop and pasture productivity, and sea‑level rise—suggest that most hotspots of climate‑induced internal out‑migration will be in the coastal region (see figure 1.8), particularly in the areas of Guayaquil (Guayas), Machala (El Oro), Esmeralda, and Manta (Manabí). The data suggest that climate change will lead to the out‑migration of city dwellers as well as those who depend on the surrounding agricultural land. Most in‑migration hotspots would be in the Sierra region. FIGURE A4 Hotspots projected to have high levels of climate‑related in‑migration and out‑migration, 2050 In-Migration High certainty in high levels of climate in-migration Moderate certainty in high levels of climate in-migration Out-Migration High certainty in high levels of climate out-migration Moderate certainty in high levels of climate in-migration National capital Source: Rigaud et al. (2018) Climate change and overexploitation will also affect the marine biodiversity of the ocean and the livelihoods of vulnerable fishers. Recent studies show that climate change could affect small pelagic species that are important for the breeding ecosystem of species harvested by both industrial and artisanal fishing in continental Ecuador (MAATE 2022). Fisheries in Galapagos, where research is more developed, are also expected to be adversely affected by climate change. Notably, by 2100, biomass for Galapagos cod could be reduced by 15.6 percent. On the other hand, the displacement of tuna to the tropics would increase the biomass available in the Galapagos Marine Reserve. Still, the highest‑value tuna is expected 59 Although these could be considered small, it should be noted that these increases do not account for the already high current impacts of inland flooding. 73 Country Climate and Development Report: Ecuador to move to depths inaccessible to artisanal fishers (MAATE 2022). Overexploitation can also cause fisheries to reach unhealthy numbers. Ecuador currently has 61 fish species that are designated as threatened (World Bank 2018a). These changes could reduce catches for artisanal fishers, lowering their income. The profession’s social aspects could also deteriorate. For instance, fishers could face increasingly insecure circumstances at sea because of the potential displacement of fisheries to areas that may be prone to extreme weather or piracy (Cornejo 2020). Artisanal fishers often face precarious economic and social conditions, such as overly concentrated markets, informality, poverty, limited access to credit and insurance, job insecurity, seasonality, and unpredictable production, violence, and drug trafficking. 5.3.2.  Addressing governance issues is important for the resilience of blue economy sectors, particularly fishing Ecuador has long recognized the need to better manage marine and coastal economic sectors by having a pipeline of programs that represent an opportunity to implement an integrated blue economy approach. The GoE initially took action for more integrated planning through the 1985 Coastal Resources Management Program and, more recently, through the Marine and Coastal Space Ordering Plan 2017– 2030. Recent initiatives represent important opportunities to use the best tools and experiences for integrated, participatory, territorial, and adaptive planning. Coastal and marine regions would benefit from integrated planning and a blue economy approach, which considers the sustainable and integrated development of all coast- and ocean‑related economic sectors along with oceanic health (World Bank 2022e). Moreover, the challenges, opportunities, and priorities in each area of the country will depend on its context (for example, tourism is a priority in Galapagos, while coastal fisheries are more prominent in the northern coastline), highlighting the need for participatory, territorial, and adaptive planning. Climate change should also be considered in government‑formulated management action plans, which could impact the health of essential fisheries and fishers’ socioeconomic situation, as well as increase the impacts of natural hazards on some of the most populated areas of the country. Marine species could be safeguarded from the impacts of climate change and overexploitation by implementing measures for fish population and ecosystem conservation, and fishers should be supported to adapt to these policies. Strategies to manage the health of fish populations could include a prohibition on gear that causes higher bycatch that damages seabed ecosystems, closed seasons for the recovery of endangered species, or the establishment of protected and non‑extraction areas. Meanwhile, complementing these measures with further research and alternatives for fishers will minimize the economic impact on the sector. Provided Ecuador can improve its data gathering and monitoring capacity, it could also implement individual transferable quotas (ITQs), which aid in long‑term sustainability through permits that grant specific quotas based on measurements of optimal fishing quantities. The international literature also highlights value‑enhancing investments that may improve incomes without increasing extraction. These could include providing marketing and infrastructure such as cooling facilities, roads, and fish‑processing facilities; setting up contractual arrangements with fish product buyers; and supporting groups to attain health and halal certification for their products (Cavatassi et al. 2019). A simplified model that includes ITQs and value‑enhancing investments in artisanal fishing of Dorado fishery suggests that these policies could help stabilize biomass and increase fishers’ profits beyond the damage caused by climate change. A modelling exercise undertaken for this report compares these strategies’ potential biomass and profit outcomes under five scenarios: business as usual (BAU) with no climate change impacts, BAU with climate change impacts, ITQs, value‑enhancing investments, and a combination of ITQs and value. In the case of the Dorado fishery (figure A5, left column), implementing ITQs would increase biomass up to 83 percent over BAU (possibly less, depending on the behavior of the Peruvian and international fishing sectors) for a fishery that almost exclusively has artisanal fishers doing the extraction and has no regulated mortality target. Interestingly, this sustainability in biomass from ITQs would improve artisanal fishers’ profits in 25 years beyond BAU (USD 23.60 versus USD 9.13 million), and would improve even with value‑enhancing alone (USD 15.56 million). But the combination of the two is even more impactful (USD 34.58 million). ITQ offsets the effects of climate change on biomass (assumed to be 9.9 percent), and any of the policies offset them in terms of profits (USD 2.04 million). 74 Country Climate and Development Report: Ecuador FIGURE A5 Results from the modeling of fisheries management scenarios 20,000 35,000,000 Scenario Value + ITQ Artisanal profit (2020 USS) 30,000,000 Value 17,500 Scenario ITQ Bioma ss (tons) 25,000,000 ITQ or Value + ITQ BAU, no CC BAU, no CC BAU 15,000 20,000,000 BAU or Value 15,000,000 12,500 10,000,000 0 5 10 15 20 25 0 5 10 15 20 25 Year Year Source: World Bank staff analysis. Details can be found in annexed background note 2. Poor governance and a precarious sectoral context are challenges for implementing existing sustainable management plans and policies for the fishing sector, as well as those described above. Although the decline in fish populations is widely recognized, and the GoE has decided to act in this respect, management decisions and their implementation are hindered by the sector’s governance challenges. Such challenges include informality, inadequate generation and dissemination of data and research, and decision‑making schemes for fisheries management that, in practice, limit the participation of relevant stakeholders. More readily available information and data are needed to assess the population status of the main fish species and effectively implement the type of policies described above. For example, although the current production levels of the Dorado fishery in the Eastern Tropical Pacific appear to be below maximum sustainable yield, the limited information available hinders precise estimation of the effects of fishing mortality (Aires‑Da‑Silva et al. 2016). Similar concerns arise for species such as sharks, turtles, seabirds, and yellowtail tuna, which are under the constant pressure of bycatch or incidental catch, but there is not enough information to assess the health of their populations to know if corrective actions are needed (Hearn et al. 2022; Menéndez 2022; Minte‑Vera et al. 2019). 5.4.  Summary of the long‑term NDC and net‑zero pathways using the ELENA model Building on previous research in Ecuador, this report applies a MESSAGE platform model called ELENA (Ecuador Land Use and Energy Network Analysis model),an integrated assessment model (IAM) designed specifically for Ecuador (Villamar et al., 2021; Bataille et al. 2020). MESSAGE is a mixed‑integer, linear‑programming model with optimization. It is designed to evaluate different strategies to increase supply to meet a given demand in a competitive market. It makes it possible to develop IAMs that combine techno‑economic and environmental variables to generate cost‑optimal solutions.60 ELENA models the transformation chains of Ecuador’s energy‑land system. Taking the base year (2020) as the starting year, it simulates evolutions up to 2050 under each scenario, subject to macroeconomic and political considerations (top‑down vision) and technological‑sectoral considerations (bottom‑up vision). It allows evaluation of the expansion of the energy system, possible land use changes (subject to deforestation and reforestation exogenous scenarios), and the evolution of sectoral and national GHG emissions until 2050. It is an integrated optimization model that considers the complete energy conversion chain—from primary energy to useful energy—in each energy consumption sector. The total cost of system expansion until the end of the study horizon is minimized (perfect foresight), subject to scenario‑specific constraints. ELENA also models the evolution of the land use system. It calculates land use changes from meeting food demand, subject to deforestation/reforestation scenarios, until 2050. Useful energy and food demands, as well as deforestation and reforestation scenarios, are calculated exogenously. More details on ELENA and the assumptions can be found in the annexed background note 4- Application of the ELENA model for the 60 World Bank’s Ecuador CCDR. 75 Country Climate and Development Report: Ecuador ELENA employs four scenarios to reproduce different development pathways for the main drivers of energy, transport, and land use transition in Ecuador. These scenarios include (1) business as usual—a reference scenario in which the sectoral structure of recent historical years is kept constant, which follows Ecuador’s Electricity Master Plan (PME) until 2030, and which is subsequently optimized by ELENA by total minimum cost to 2050; (2) Nationally Determined Contribution Unconditional (NDCu) and (3) NDC Conditional (NDCc)—for which existing NDC assumptions until 2025 are used, and which are subsequently optimized to achieve similar ambition levels for mitigation until 2050; and (4) Net‑Zero (NZ)—where emissions follow the unconditional NDC trajectory until 2025, after which carbon dioxide (CO2) emissions fall to net zero (emissions minus absorptions) by 2050. To achieve net zero, a linear CO2 reduction path is exogenously calculated and implemented as a constraint to optimize system expansion. To achieve the defined decreasing CO2 trajectory, ELENA increases renewable energy deployment and energy efficiency for different energy end uses and also selects other low‑carbon investments. More ambitious forest trajectories are also included exogenously as constraints in the optimization model. 5.5.  Annexed background notes Background notes include: 1. Transport criticality and access analyses 2. Fisheries Management Reform Scenario 3. Adaptation Principles analyses 4. Application of the ELENA model for the World Bank's Ecuador CCDR. 5. Industrial Economics report: Climate impact channels and attachment "Estimating the Economic Damages of Climate Change in Ecuador." (biophysical analysis) 6. Adaptive Social Protection System Stress test 7. Ecuador's Agriculture Total Factor Productivity (TFP), climate change effects, and climate smart agriculture (CSA) 76 Country Climate and Development Report: Ecuador