A. The Current Landscape

1. Ecuador is subject to natural disasters and climate-related risks. Natural disasters may be climate (e.g. flooding) and/or non-climate related (e.g. earthquakes or volcanic activity). Both may result in significant economic and social losses, as well as in increasing fiscal pressures. Data from the EM-DAT database, compiled and maintained by the Centre for Research on the Epidemiology of Disasters, shows that Ecuador experienced 42 natural disaster episodes between 2000 and 2020 (Table 1). Most of them are related to flooding (19 events) and volcanic activity (10 events). Landslides (6 events) and earthquakes (5 events)² are also common in the country. The frequency of these events is high, as there have been on average 2 events recorded per year. A similar pattern is present throughout the recent history of Ecuador (Figure 1). The 2021 INFORM Global Risk Index rates the disaster risk of Ecuador as “medium” and ranks the country 76 out of 191 in terms of riskiness. However, the index shows very high risk of an earthquake (9.8 out of 10 in terms of riskiness), a tsunami (9.2 out of 10) and high risk of a flood (6.7 out of 10).

^{Table 1.}

Ecuador: Natural Disasters Since 2000 and their Frequency

Source: EM-DAT Database.

^{Table 1.}

Ecuador: Natural Disasters Since 2000 and their Frequency

	Number of Episodes Since 2000
Earthquake	5
Flood	19
Landslide	6
Volcanic Activity	10
Drought	2
Total	42

Source: EM-DAT Database.

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^{Table 1.}

Ecuador: Natural Disasters Since 2000 and their Frequency

	Number of Episodes Since 2000
Earthquake	5
Flood	19
Landslide	6
Volcanic Activity	10
Drought	2
Total	42

Source: EM-DAT Database.

2. The economic, social, and environmental costs associated with climate-related events are significant (Box 1). Extreme weather-related events affect key economic sectors such as fisheries, which produces shrimps – one of the key exports, and agriculture. Moreover, part of the exposure to climate change reflects the geography of the country, which has extensive and populated coastal lines that host the main trading hub, the port of Guayaquil.

Ecuador: Natural Disasters in Ecuador

(number of episodes)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source EM-DAT database.

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Ecuador: Natural Disasters in Ecuador

(number of episodes)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source EM-DAT database.

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Ecuador: Natural Disasters in Ecuador

(number of episodes)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source EM-DAT database.

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3. Ecuador’s emissions per capita of greenhouse gases are lower than most Latin American countries. In per capita terms, according to the World Resources Institute, Ecuador produced 5.4 metric tons equivalent of gases in 2017, placing the country as the 95th emitter among the 193 countries in the database. Emission levels are particularly high in the Energy sectors and in the land use change and forestry. Other sectors, such as agriculture, waste and industry do not produce significantly high levels of greenhouse gas emissions. The level of emissions increased only marginally since 2000. Among countries in the region, Ecuador produces a relative low amount of emissions (Table 2).

^{Table 2.}

Ecuador: Greenhouse Gas Emissions-Per Capita

Source: World Resource Institute.

^1/The sample includes Brazil, Mexico, Argentina, Venezuela, Colombia, Peru, Bolivia, Chile, and Uruguay.

^{Table 2.}

Ecuador: Greenhouse Gas Emissions-Per Capita

		Emissions (in tCO2e per capita)	World Ranking	Average Emissions of Top 5 Countries (in tCO2e per capita)	Average Emissions of Top 10 Countries (in tCO2e per capita)	Average Emissions of Selected LatAm Countries (in tCO2e) 1/
Total		5.4	95	41.7	33.5	7.4
	Agriculture	0.8	77	7.6	5.8	2.3
	Energy	2.2	109	28.1	22.6	3.2
	Industrial Processes	0.2	112	3.3	2.5	0.3
	Land-Use Change and Forestry	1.6	29	27.8	17.3	1.3
	Waste	0.2	115	7.6	4.5	0.4

Source: World Resource Institute.

^1/The sample includes Brazil, Mexico, Argentina, Venezuela, Colombia, Peru, Bolivia, Chile, and Uruguay.

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^{Table 2.}

Ecuador: Greenhouse Gas Emissions-Per Capita

		Emissions (in tCO2e per capita)	World Ranking	Average Emissions of Top 5 Countries (in tCO2e per capita)	Average Emissions of Top 10 Countries (in tCO2e per capita)	Average Emissions of Selected LatAm Countries (in tCO2e) 1/
Total		5.4	95	41.7	33.5	7.4
	Agriculture	0.8	77	7.6	5.8	2.3
	Energy	2.2	109	28.1	22.6	3.2
	Industrial Processes	0.2	112	3.3	2.5	0.3
	Land-Use Change and Forestry	1.6	29	27.8	17.3	1.3
	Waste	0.2	115	7.6	4.5	0.4

Source: World Resource Institute.

^1/The sample includes Brazil, Mexico, Argentina, Venezuela, Colombia, Peru, Bolivia, Chile, and Uruguay.

4. Ecuador is an oil producer, heavily dependent on oil revenues and faces transition risks from moving away from fossil fuels. At the end of 2019, the oil sector accounted for about 6 percent of total GDP and about 26 percent of total exports. At about US$7.8 billion in net terms, oil revenues represented about 21.7 percent of total revenues. Current oil reserves amount to 8.3 billion barrels. Assuming constant production at 2020 levels, oil production is assured for at most the next 45 years, implying a transition risk in the next few decades. In addition, the oil sector suffers from a low domestic refining capacity, which limits oil revenues, and an old pipeline infrastructure, which limits export’s capacity.

5. While most of the production of electricity comes from renewable sources, the consumption of energy from renewables is lagging. Renewable energy consumption accounts for about 26 percent of the total. The country does not consume energy from coal or nuclear energy. Most electricity production comes from renewables, especially from hydroelectricity. However, hydroelectricity production is subject to rainfall and climate events (e.g. el Niño). Other renewable production sources (e.g. wind, solar) are not well developed and there are no long-term plans to invest in the sector.

Ecuador: Primary Energy Consumption by Fuel

(in percent)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source: U.S. Energy Information Administration

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Ecuador: Primary Energy Consumption by Fuel

(in percent)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source: U.S. Energy Information Administration

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Ecuador: Primary Energy Consumption by Fuel

(in percent)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source: U.S. Energy Information Administration

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Ecuador: Electricity Generation

(in percent)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source: U.S. Energy Information Administration

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Ecuador: Electricity Generation

(in percent)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source: U.S. Energy Information Administration

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Ecuador: Electricity Generation

(in percent)

Citation: IMF Staff Country Reports 2021, 229; 10.5089/9781513599274.002.A005

Source: U.S. Energy Information Administration

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B. Institutional Setup and Current Policies

6. Ecuador was the first country in the world to include ecosystem rights in the constitution. The “rights of nature” are recognized in Article 10 and Article 71–74, which: (i) protect the ecosystem rights to exist and flourish; (ii) give people the authority to petition on the behalf of nature; and (iii) require the government to remedy violations of these rights. They also prohibit the extraction of non-renewable resources in protected areas and state that the production of monocultures should be avoided. In addition, Article 389 establishes that the State will protect people, communities, and nature in the face of the negative effects of disasters through risk prevention and disaster mitigation. According to Article 414, the State must adopt adequate and transversal measures for the mitigation of climate change, by limiting the emissions of greenhouse gases, deforestation, and air pollution.

7. In addition, Ecuador has taken further legislative actions to facilitate climate change adaptation and mitigation. With decree n. 1815 (2009), climate change adaptation and mitigation were recognized as state policies. In addition, the decree sets the definitions and the guidelines of climate change adaptation and mitigation, and mandates the implementations of three further plans: (i) the National Plan for the Creation and Strengthening of Institutional Conditions; (ii) the climate Change Mitigation Plan; (iii) The Climate Change Adaptation Plan. The Decree also resulted in the adoption of the National Strategy on Climate Change strategy in 2012, which establishes the strategic and institutional pillars for future climate change plans.

8. Ecuador signed the Paris agreement in 2016, ratified it in 2017, and set the Nationally Determined Contributions (NDC) targets in 2019. The NDC was the result of a multi-stakeholders, participatory process. It focuses on five sectors for mitigation (energy, waste, industrial processes, agriculture, and land use) and six for adaptation (agriculture, health, human settlements, food safety, water, and natural heritage), with each led by the responsible line ministry. Ecuador set an unconditional GHG reduction target of 9 percent from business-as-usual (BAU) by 2025 and a conditional reduction target of 20.9 percent from BAU by 2025 in the energy sector. The conditional target is subject to availability of resources and support by the international community.

9. The recently enacted subsidies reform represents a crucial step towards reducing greenhouse gases. In May 2020, the authorities introduced a significant reform aimed at reducing gasoline and diesel subsidies. The reform introduced a formula-based pricing mechanism for diesel and gasoline that links domestic retail prices to supply costs, where monthly changes are capped to prevent large swings in retail prices. Besides generating long lasting fiscal savings, this mechanism will encourage a more efficient energy use, reduce the depletion of natural resources, and help preserve the environment.

C. The Road Ahead and Recommended Policy Actions

10. Climate-related disasters are expected to intensify in the coming years with the raising of temperatures and generate significant cross-sectional losses. In a no-change in policies scenario at global level, the World Bank (2009) estimates that temperatures in Ecuador will increase by about 2ºC by the end of the century, implying a higher frequency and severity of climate-related disaster events. Key sectors such as agriculture, fishery, forestry, and livestock are expected to be the ones more exposed to these changes. In addition, agriculture would suffer from the high rates of deforestation, while the energy sector is also expected to have threats from changes in precipitation patterns.

11. Despite the recent efforts, Ecuador is not well placed to respond timely to natural disasters and to the effects of climate change. The strategy “financing of climate”, published in 2021, outlines the steps for green financing and represents a significant step towards defining a comprehensive financing strategy. However, relatively low reserves, together with high borrowing costs for external loans, hinder the timely response to natural events. In addition, climate change calls for significant investments, which are needed in the medium- and long-term to build efficient infrastructure and to protect key sectors from the adverse impact of climate shocks.

12. The oil sector may not generate the same level of revenues in the medium- and long-term. Oil reserves have a finite lifespan, currently estimated in about 45 years. In addition, changes in global demand stemming from increasing production of electric vehicles can lower demand of oil products. This would eventually shorten the lifecycle of oil fields. Furthermore, oil prices could settle at unsustainable levels. According to the International Energy Agency, oil prices could drop to around USD 35/barrel by 2030 and then drift down slowly towards USD 25/barrel by 2050 in a zero net emissions scenario. The combined effect would be a negative oil balance, implying that the oil sector could become a liability.

13. Given the increase in risks posed by natural disasters, climate change, and the perspective changes in the oil sector, Ecuador should scale-up its policy efforts. The following policy steps should be considered:

• Implement the policies in the national climate change strategy. The strategy considers mitigation and adaptation policies and clearly sets objectives and guidelines to meet them. The objectives are outlined at the sectoral level with a precise timeline (end-2025). However, implementation is lagging and there is no further report on the progress towards meeting those objectives. A roadmap for meeting those objectives should be published as early as possible, together with a strategy for the longer-term.

• Maintain the commitments in the Nationally Determined Contributions (NDC) targets and implement policies to promote them. The NDC strategy is an important step towards a greener economy. Given the current levels of emission, Ecuador is on track to meet its 2025 target. The strategy to reduce GHG emissions envisions policies at the sectoral level, which should be implemented as early as possible to allow for a gradual transition.

• Maintain the decree on fuel subsidies. The recently introduced mechanism encourages a more efficient energy use. As it expected to lower greenhouse gases emission, it is akin to a carbon tax, and it is an important structural reform for greener economic developments in Ecuador. In addition, it increases revenues for the budget, which could be used for additional green investments.

• Identify “crown jewels” and promote investment to preserve them. These are key sectors for growth and exports (e.g. production of shrimps and agricultural products), which should be particularly ringfenced from natural disasters and climate change. The investment should preserve these sectors from potential losses and maintain employment.

• Save additional oil revenues with a clear governance structure on investment and use, together with implementing policies, to increase non-oil revenues. The increase in non-oil revenues would allow for a higher non-oil primary balance and a significant increase in deposits and reserves. These savings could then be used in the medium- and long- term to finance the investment needs, have buffers to protect the country from adverse natural disaster and lower the reliance on expensive financing.