A. Country Vulnerability to Climate Change Including Human, Social and Economic Costs

1. Paraguay, an upper-middle-income country, has an economy that is heavily reliant on natural resources, making it susceptible to climate shocks. According to the World Bank (2021) Changing Wealth of Nations data, natural capital wealth constitutes 16 percent of Paraguay’s total per capita wealth, twice the average upper middle-income country. Paraguay possesses abundant rainfall, fertile soil, and forests, giving it a comparative advantage in agriculture and livestock. Despite being landlocked, the country has two major rivers that enable waterway transport and hydroelectric power generation. The binational dams, Itaipú and Yacyretá, produce more clean electricity than Paraguay currently consumes. The economy is dependent on natural resources: the primary sector, agroprocessing¹, electricity, and hydropower directly contribute at least a third of GDP and 80 percent of direct exports. As a result, the Paraguayan economy and people are vulnerable to weather-related shocks, including from climate change.

2. Climate change could exacerbate the impact of extreme weather events that have already been affecting the Paraguayan economy. While Paraguay has regularly experienced extreme weather events such as floods and droughts over the past few decades, these events are expected to become more frequent and intense due to climate change, particularly along the Paraguay River (one of the two major waterways) and key watersheds in the Chaco region. Climate change is also projected to result in more unpredictable rainfall, which would affect agriculture and hydropower production, and in higher temperature increases than the global average. According to estimates from the World Bank’s forthcoming Country Climate and Development Report (CCDR) for Paraguay, climate change could reduce GDP by 0.5 to 3.1 percent from the baseline projection by2050 in a high global emissions scenario (RCP 8.5), and by 0.1 to 1.1 percent in a low emissions scenario. These estimates could be higher as they exclude the impact of climate change on livestock,² but they could be lower if Paraguay accelerates economic diversification away from commodity exports and invests more in adaptation.

3. Climate change could slow the rate of poverty reduction and affect all Paraguayans’ health. The World Bank CCDR estimates that the national poverty rate could be 0.05–1.19 percentage points³ higher than the baseline projection by 2050 due to the impacts of climate change, depending on the climate scenario and the modelling approach. This would primarily occur through crop yield losses from droughts, and through labor productivity losses from heat stress. Already, natural hazards disproportionately impact at-risk populations in the north, southwestern and central departments, and the Chaco. The poor are less equipped to cope with the consequences of climate change as they have relatively few and undiversified assets, less savings, and are more likely to live in flood-prone areas. Moreover, climate change could worsen health outcomes for all Paraguayans by aggravating epidemics, increasing air pollution (from forest fires) and deaths from extreme temperatures.

B. Government Policies and Commitments in Terms of Climate Change Adaptation and Priority Areas to Strengthen Resilience

4. The government of Paraguay has become increasingly cognizant of the need to increase resilience to climate change. Since ratifying the Paris Agreement in 2016, the government has developed policies to tackle climate change, emphasizing adaptation. In 2017, Paraguay approved its Framework Law on Climate Change, or Ley Nacional de Cambio Climático (5875/2017), paving the way for the creation of an interinstitutional coordination body called the National Climate Change Commission. In July 2021, Paraguay updated its nationally determined contributions (NDC) and submitted them to the United Nations Framework Convention on Climate Change. The NDC includes 25 objectives for adaptation across seven prioritized sectors—(i) resilient communities and cities; (ii) health and epidemiology; (iii) ecosystems and biodiversity; (iv) energy; (v) agriculture, livestock, forestry, and food security; (vi) water resources; and (vii) transport—and six cross-cutting areas: (i) risk management, (ii) normative aspects, (iii) gender vulnerability, (iv) indigenous peoples, (v) actions to empower climate action, and (vi) technology and development. To operationalize these plans, the government published a Plan Nacional de Adaptación al Cambio Climático or National Climate Change Adaptation Plan (2022–2030) and a Hoja de Ruta de Adaptación al Cambio Climático or 2030 Adaptation Roadmap. The Roadmap identifies strategic actions, a reference schedule for each action and primary implementation needs for each sector.

5. Implementing the adaptation measures listed in Paraguay’s NDCs requires investments of US$ 6.5 billion until 2030.⁴ These investments, which are mostly concentrated in energy, transport, and agriculture, would require increases in public and especially private financing. As discussed in World Bank’s forthcoming CCDR, increasing resilience in these sectors by promoting the adoption of climate-smart agricultural technologies, investing in forest restoration and other types of nature-based solutions to protect water resources, adapting waterways to climatic shocks, and increasing the reliability of energy sources are key to improve Paraguay’s resilience to climate change. Measures to strengthen social protection, prepare the education and health systems for climate extremes, and promote the diversification of the country’s economy could reduce the effects of climate change on Paraguayans.

C. Government Policies and Commitments in Terms of Climate Change Mitigation and Priority Areas to Reduce Greenhouse Gas Emissions

6. In 2019 (latest government data available), Paraguay’s net emissions were 62.7 million tons of carbon dioxide equivalent (MtCO2e). Most of this comes from agriculture (40 percent) and land use, land use change and forestry (LULUCF; 41.2 percent), followed by energy (13.3 percent), waste (3.4 percent), and industrial processes (2.1 percent). Carbon dioxide (CO2) represented 54.6 percent of 2019 net emissions, while methane accounted for 38 percent. Emissions have been falling since 2010, reflecting decreases in LULUCF emissions, but emissions from agriculture, energy, waste, and industrial processes have increased over the same period. Although Paraguay’s electricity generation is fully renewable due to hydropower production, energy emissions have increased almost 60 percent between 2010 and 2019, reflecting the transport sector’s reliance on fossil fuels (responsible for 89 percent of total energy emissions).

7. Paraguay has committed to reducing emissions relative to a business-as-usual scenario by 10 percent by 2030 (20 percent conditional on international financing). To attain this objective, the country has formulated Climate Change Mitigation Plans across five sectors: Agriculture, Land Use, Land Use Change and Forestry, Use of Products and Industrial Processes, Waste, and Energy. These plans, outlined in the 2021 Updated NDC, propose 45 specific measures for national climate action, focusing on mitigation efforts.

8. Forest conservation and restoration are essential for the country to decarbonize its economy. To promote investments in these areas, Paraguay recently approved legislation on Carbon Credits (Law 7190) that establishes the basis for the creation of a national carbon credit registry. Coupled with improvements in forest governance, this legislation could induce much-needed private investments in forest conservation and restoration. Other priority areas for mitigation are the promotion of plantation forestry for industrial use, the increase of biomass availability for energy, and electromobility.

D. Other Challenges and Opportunities

9. Paraguay has many opportunities to both decarbonize the economy and accelerate economic growth. In the near term, Paraguay could use its surplus clean energy to decarbonize transport and industry, but also to explore opportunities in green hydrogen and ammonia, which could reduce its reliance on imported fertilizer. More widespread adoption of sustainable and climate-smart agricultural practices—such as promoting agroforestry systems and reducing deforestation associated with cattle ranching—can unlock access to export markets that pay a premium for sustainable products. In the longer term, accelerating the transition from raw agriculture and energy commodity exports to more sophisticated manufacturing and services exports would help Paraguay build resilience to climate change, as such shocks would have a smaller impact on a more diversified production structure. This would require boosting the productivity of non-agriculture sectors by reducing barriers to firms’ entry, growth, and exit, and by investing more in human capital and infrastructure.

10. Transitioning to this low-carbon, climate-resilient future would require additional investments. The forthcoming World Bank CCDR estimates that annual increases in investments of about 2.1 percent of GDP from now until 2050 are needed to meet Paraguay’s sustainable development and climate goals. These volumes are much larger than the total amount of climate finance Paraguay received between 2019 and 2021, estimated at $181 million or 0.4 percent of GDP by the Ministry of Environment and Sustainable Development (MADES). However, the total projected increase in climate-related investments is small compared to the annual investments required to achieve the infrastructure-related SDG targets by 2030 (Brichetti et al. 2021). While roughly 55 percent of these investments (mostly in public transport) are assumed to be privately financed before 2030, this share increases to 75 percent after 2030, as most are concentrated in land use change and additional renewable energy.

11. Whole-of-economy reforms play an important role in leveraging finance for climate action and in improving resilience to climate shocks. Fiscal and financial sector policies have an important role to play in reducing Paraguay’s exposure to shocks and mitigating their impact on households and firms. While public finances alone are insufficient to meet Paraguay’s sustainable development and climate goals, Paraguay has the potential to eventually raise more domestic public revenues for climate action through property and environmental taxes, and feebates. To smooth fluctuations in consumption and revenues when climate-related shocks occur, Paraguay could further strengthen the countercyclicality of fiscal policies—for example, by increasing social transfers to poor households during economic downturns. It would also be important to ensure that the fiscal rule helps to sustain higher public investment spending, while maintaining macroeconomic stability. Moreover, given the need for more private climate finance, efforts to deepen and green the financial sector are essential. Although Paraguay’s banking sector is sound and highly profitable, credit markets are still shallow, with a lower (51.3 percent in 2022) credit-to-GDP ratio than the median of regional peers and upper middle-income countries.⁵ Capital markets are also small, in part because tapping institutional investments (pension funds) is currently not possible. Firms thus have limited access to long-term finance, which is critical for the development of sectors such as forestry. Accelerating pension reforms, improving access to finance – particularly for micro, small and medium-sized enterprises – and improving the verification and certification of green investments could unlock more private finance for climate action. Improving the rule of law, protection of property rights, and governance on environmental standards would also increase foreign direct investment in new sectors of the economy. In this context, it is encouraging that the government has recently taken concrete steps to improve the national forest monitoring system and to reform the pension system.

E. World Bank Engagement in the Area of Climate Change

12. Many of the reform measures envisaged under the proposed RSF program have been identified in close coordination with World Bank staff. They build on and complement the extensive World Bank engagement on the climate agenda in Paraguay, which in recent years has focused on:

• Identifying green growth opportunities. The forthcoming CCDR not only examines the threats that climate change poses to the country’s development goals, but also discusses how Paraguay can benefit from decarbonization. These opportunities include leveraging its surplus hydropower energy to green domestic industries and the transport sector, as well as making waterways and infrastructure more resilient. Building on this analysis, the World Bank is providing technical assistance and advice on how Paraguay can promote more efficient use of energy, climate-smart agriculture, and sustainable urban mobility. An assessment of bioeconomy value chains that could result new export opportunities for Paraguay is ongoing, and a commercial forestry lending project is in the pipeline.

• Building resilience across the economy and in key sectors. The US$240 million Paraguay Green and Resilient Development Policy Loan (P178285), approved in July 2022, supported reforms aimed at mainstreaming climate risks in fiscal management, improving the management of wildfires and mobilizing climate finance. The US$105 million “Franja Costera” project, approved in November 2023, aims to make the Asunción coastline more resilient to floods, among other objectives. Recent analytical work provides recommendations on how to boost resilience. Examples include: (i) a chapter of the forthcoming World Bank Country Economic Memorandum, which provides recommendations on boosting agriculture competitiveness and resilience, and (ii) a study on agriculture risk financing mechanisms for family farmers to support the government’s National Development Plan for Disaster Risk Management and Adaptation to Climate Change in Paraguay’s Agricultural Sector (2016–2022). A follow-up, ongoing study will identify and analyze options to accelerate the adoption of Climate Smart Agriculture and risk management practices/technologies by family farmers.

• Mainstreaming climate considerations in public and private finances. In 2022–2023, at the request of the previous Ministry of Economy and Finance (MEF), the World Bank prepared a climate policy roadmap to help the ministry think strategically about the roles and functions it should take on and the policy levers it can use to promote climate action in Paraguay. As part of this preliminary work, t also estimated the effective carbon price in Paraguay and worked with MADES on a costing exercise of Paraguay’s adaptation measures in the NDC. In addition, the World Bank has also worked closely with MEF on integrating climate change budget tagging and analysis of environmental considerations in public investment projects. Work with the Central Bank to quantify the impact of climate change on the financial sector is also ongoing.

13. The World Bank is also finalizing the publication of the Country Climate and Development Report for Paraguay. The report identifies the most impactful actions that Paraguay can take to boost climate change adaptation and maintain low emissions, while delivering on broader development goals.