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Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No. 42569 - MX INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized PROGRAM DOCUMENT FOR A PROPOSED CLIMATE CHANGE DEVELOPMENT POLICY LOAN IN THE AMOUNT OF US$501.25 MILLION TO THE UNITED MEXICAN STATES Public Disclosure Authorized March 7,2008 Sustainable Development Department Colombia and Mexico Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official Public Disclosure Authorized duties. Its contents may not otherwise be disclosed without World Bank authorization. United Mexican States - GOVERNMENTFISCAL YEAR January 1 - December 3 1 CURRENCY EQUIVALENTS (Exchange Rate Effective as of March 7,2008) Currency Unit = Mexican Peso (MXN) 10.70 MXN - US$I.oo US$O.O9 - MXN1 Weights and Measures Metric System ABBREVIATIONS AND ACRONYMS CDM Clean Development Mechanism CER Certified Emission Reduction CFC Chlorofluorocarbon CHP Combined Heat and Power CICC Intersecretarial Commission on Climate Change (Comisidn Intersecretarial de Cambio Climcitico) CIDA Canadian International Development Agency C02e Carbon Dioxide Equivalent CONAE National Commission for Energy Conservation (Comisidn Nacionalpara el Ahorro de Energia) CONAFOR National Forestry Commission (Comisidn Nacional Forestal) CONAGUA National Water Commission (Comisidn Nacional del Agua) CONAVI National Housing Commission (Comisidn Nacional de Vivienda) CPF Carbon Partnership Facility CPS Country Partnership Strategy DPL Development Policy Loan EMBI+ Emerging Markets Bond Index Plus FCPF Forest Carbon Partnership Facility FIDE National Trust Fund for Energy Efficiency (Fideicomiso para el Ahorro de Energia Ele'ctrica) FIRCO Mexico Renewable Energy Program (Fideicomiso de Riesgo Compartido) FOMECAR Mexican Carbon Fund (Fondo Me'xicano de Carbono) FSL Fixed-Spread Loan GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse Gas GoM Government of Mexico IADB Inter-American Development Bank IBRD International Bank for Reconstruction and Development IDA International Development Association IMF International Monetary Fund INE National Institute of Ecology (Instituto Nacional de Ecologia) INEGI National Statistics Institute (Instituto Nacional de Estadistica Geografa e Informcit ica) IPCC Intergovernmental Panel on Climate Change ISAN Tax on new automobiles (Impuesto sobre automobiles nuevos) JAXA Japanese Aerospace Exploration Agency LDP Letter ofDevelopment Policy FOR OFFICIAL USE ONLY LULUCF Land Use, Land-Use Change and Forestry MEDEC Low-Carbon Country Case Study for Mexico MIC Middle-Income Country Mt Megaton (million metric tons) NAFIN Nacional Financiera NAFTA North American Free Trade Agreement NCCS National Climate Change Strategy NDP National Development Plan (2007-20 12) OECD Organisation for Economic Co-operation and Development PEMEX Petrdleos Me'xicanos PER Public Expenditure Review PoA CDM Program of Activities PPm Parts per million PROCAMPO Direct Support to Agriculture (Programa de Apoyos Directos a1 Campo) PROGAN Program for Support for Cattle Production (Programa de Estimulos a la Productividad Ganadera) PSBR Public Sector Borrowing Requirements REDD Reducing Emissions from Deforestation and Forest Degradation SAGARPA Minister of Agriculture, Livestock Production, Rural Development, Fisheries and Food (Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y Alimentacidn) SCCP Special Climate Change Program (Programa Especial de Cambio Climdtico) SCT Ministery of Communication and Transport (Secretaria de Comunicacidny Transportes) SE Ministry of Economy (Secretaria de Economia) SEDESOL Ministry of Social Development (Secretaria de Desarrollo Social) SEMARNAT Ministry of Environment and Natural Resources (Secretaria de Medio Ambiente y Recursos Naturales) SENER Ministry of Energy (Secretaria de Energia) SHCP Ministry of Finance and Public Credit (Secretaria de Hacienda y Cre'dito Ptiblico) SINAP National Protected Areas System (Sistema Nacional de Areas Naturales Protegidas) SRE Ministry of Foreign Affairs (Secretaria de Relaciones Exteriores) UNAM National University of Mexico (Universidad Nacional de Me'xico) UNDP United Nations Development Programme UNFCCC United Nations Framework Convention on Climate Change Vice President: Pamela Cox Country Director: Axel van Trotsenburg Sector Director: Laura Tuck Sector Manager: Laura Tlaiye Task Team Leader: Benoit Bosquet This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. MEXICO CLIMATE CHANGEDEVELOPMENT POLICY LOAN CONTENTS LOAN AND PROGRAM SUMMARY .............................................................................................................. iii I. INTRODUCTION .................................................................................................................................. 1 I1. COUNTRY CONTEXT ......................................................................................................................... 4 A . RECENT ECONOMIC DEVELOPMENTS IN MEXICO ................................................. 4 B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ............................... 5 I11. THE GOVERNMENT’S PROGRAM ................................................................................................. 8 A . MEXICO AND CLIMATE CHANGE ................................................................................ 8 B . GOVERNMENT RESPONSE ........................................................................................... 10 IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY ........................................................ 19 A . LINK TO COUNTRY PARTNERSHIP STRATEGY ...................................................... 19 B. COLLABORATION WITH THE IMF AND OTHER DONORS ..................................... 19 C . RELATIONSHIP TO OTHER BANK OPERATIONS..................................................... 19 D. LESSONS LEARNED ....................................................................................................... 20 E . ANALYTICAL UNDERPINNINGS ................................................................................. 22 V . THE PROPOSED CLIMATE CHANGE DEVELOPMENT POLICY LOAN ............................. 23 A . OPERATION DESCRIPTION.......................................................................................... 23 B. POLICY AREAS ............................................................................................................... 25 VI. OPERATION IMPLEMENTATION................................................................................................. 27 A . POVERTY AND SOCIAL IMPACTS .............................................................................. 27 B. IMPLEMENTATION. MONITORING AND EVALUATION ........................................ 27 C. FIDUCIARY ASPECTS .................................................................................................... 29 D. DISBURSEMENT AND AUDITING ............................................................................... 29 E . ENVIRONMENTAL ASPECTS ....................................................................................... 30 F. RISKS AND RISK MITIGATION .................................................................................... 30 ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY ................................................................................... 32 ANNEX 2: GOVERNMENT POLICY/OVERALL GOVERNMENT DEVELOPMENT PROGRAM.... 50 ANNEX 3: OPERATION POLICY MATRIX ................................................................................................ 66 ANNEX 4: FUND RELATIONS NOTE ........................................................................................................... 67 ANNEX 5: ESTIMATED EMISSION REDUCTION POTENTIAL ............................................................ 71 ANNEX 6: MONITORING INDICATORS AND OUTCOMES ................................................................... 73 ANNEX 7: COUNTRY AT A GLANCE .......................................................................................................... 76 ANNEX 8: MAP (IBRD 33447) ......................................................................................................................... 79 The Climate Change Development Policy Loan was prepared by an IBRD team consisting of Benoit Bosquet (Task Team Leader). Angela Armstrong. Dinesh Aryal. Juan Carlos Belausteguigoitia. Rita Cestti. Alejandro Deeb. Seraphine Marie Haeussling. Ricardo Hernandez. Adriana Moreira. and Walter Vergara (LCSEN); Gustavo Saltiel (LCSSD); Todd Crawford (LCSDE); Jozef Draaisma (LCSPE); Todd Johnson (LCSEG); Roberto Aiello (ENVCF); William Reuben (LCSSO); Juan Carlos Alvarez (LEGLA); Victor Ordonez (LCSFM); and Habiba Gitay (WBISD). This operation was undertaken under the general guidance of Axel van Trotsenburg (Country Director. LCClC). Laura Tuck (Sector Director. LCSSD). and Laura Tlaiye (Sector Manager. LCSEN) . Peer reviewers were Jocelyne Albert (LCSEN). and Eduardo Dopazo (ENVCF) . LOAN AND PROGRAM SUMMARY MEXICO CLIMATE CHANGE DEVELOPMENT POLICY LOAN 3orrower THE UNITED MEXICAN STATES Ymplementing Agency Secretaria de Medio Ambiente y Recursos Naturales (SEMARNAT) 4mount US$501.25 million rerms Fixed-Spread Loan (FSL),