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IBP1151_12 GREENHOUSE GASES MITIGATION POTENTIAL AND COSTS FOR BRAZIL’S ENERGY SYSTEM FROM 2010 TO 2030 Bruno

S.M.C. Borba1, André F.P. de Lucena2, Régis Rathmann1, Isabella V.L. da Costa3, Larissa P.P. Nogueira3, Pedro R.R. Rochedo3, Maurício F.H. Júnior1, Alexandre Szklo2, Roberto Schaeffer2
Copyright 2012, Instituto Brasileiro de Petróleo, Gás e Biocombustíveis - IBP Este Trabalho Técnico foi preparado para apresentação na Rio Oil & Gas Expo and Conference 2012, realizado no período de 17 a 20 de setembro de 2012, no Rio de Janeiro. Este Trabalho Técnico foi selecionado para apresentação pelo Comitê Técnico do evento, seguindo as informações contidas no trabalho completo submetido pelo(s) autor(es). Os organizadores não irão traduzir ou corrigir os textos recebidos. O material conforme, apresentado, não necessariamente reflete as opiniões do Instituto Brasileiro de Petróleo, Gás e Biocombustíveis, Sócios e Representantes. É de conhecimento e aprovação do(s) autor(es) que este Trabalho Técnico seja publicado nos Anais da Rio Oil & Gas Expo and Conference 2012.

Abstract
This paper analyses the potential for energy-related greenhouse gas (GHG) emission reductions and their abatement costs in the energy system of Brazil. The analysis of mitigation options and their costs focuses on the following sectors: industry, transportation and energy supply (electricity generation and oil refining), given their large contribution to the Brazil's GHGs emissions. For the industrial and oil refining sectors, the paper estimated abatement costs based on the investments along with the energy and operational costs of the measures considered. Two discount rates were used: 15% a year (private discount rate) and 8% a year (social discount rate). Compared to a business-as-usual reference scenario, results show a potential to reduce future energy-related GHG emissions by 27% in 2030. This study shows, however, that in relation to a reference year (2007), the examined abatement measures, along with the socioeconomic dynamics of an emerging country such as Brazil, would not be enough to attain absolute reductions in GHG emissions by 2030. This result is valid both each sector individually and for the sum of the emissions from all the sectors analyzed.

1. Introduction
Faced with the challenge of global climate change, many research teams have developed computer-based economic models and have calculated abatement costs of greenhouse gas (GHG) emissions that are consistent with longterm climate policy targets in terms of maximum GHG concentrations or temperature increases (Den Elzen et. al., 2005; Cai et. al., 2007; Enkvist et. al., 2007; Holmgren and Sternhufvud, 2008; Ribbenhed et. al., 2008; Henriques Jr. et. al., 2010; McKinsey, 2009; Castelo Branco et. al., 2010; De Gouvello, 2010; Hasanbeigi et. al., 2010; Ko et. al., 2010; Castelo Branco et. al., 2011). It is possible to interpret the abatement costs as the carbon prices that would enable, from an economic standpoint, implementing the emission reduction measures considered. Although Brazil is not currently listed as an Annex I country under the Kyoto Protocol, pressure is mounting for it to assume binding commitments to reduce its GHG emissions in a possible post-Kyoto agreement. Although an agreed outcome was not reached at COP 15 in Copenhagen, the Government of Brazil indicated voluntary mitigation actions leading to an expected reduction of 36% to 39% regarding projected GHG emissions of Brazil by 2020, an objective that was further stressed at COP 16 in Cancun, and then more recently again at COP 17 in Durban. This paper estimates the potential for energy-related GHG emission reductions and their average abatement costs in Brazil and proposes some policy measures to reduce those emissions.

2. Methodology
2.1. Abatement Cost In this paper, several carbon emission mitigation measures are formulated and estimated, along with their respective costs and potentials for abatement. The measures presented here expand, update and summarize previous estimates produced by the authors in other studies, such as Gomes et. al. (2009), Castelo Branco et al. (2010), Schaeffer et. al. (2009) and Henriques Jr. et. al. (2010).

______________________________ 1 Doutores em Planejamento Energético – PPE/COPPE/UFRJ. 2 Professores do Programa de Planejamento Energético – PPE/COPPE/UFRJ. 3 Doutorandos do Programa de Planejamento Energético – PPE/COPPE/UFRJ.

Rio Oil & Gas Expo and Conference 2012 Therefore, the three sectors analyzed here are industry (including some key segments), transports and energy supply, focusing on the petroleum sector. Actually, this latter sector will account for a significant share of the expected additional GHG emissions from Brazil, given the prospects of increased petroleum production and refining, which were not considered in previous studies. Corporate scenarios signal that the oil industry in Brazil will grow substantially in the next decades. These scenarios indicate that the Brazilian petroleum production will increase due to new discoveries in the Pre-Salt area, from 0.6 billion boe in 2011 to 1.4 billion boe in 2020 (Petrobras, 2011). Moreover, the country’s oil refining sector is expected to be expanded significantly, from 319,000 m³/day in 2011 to 561,000m³/day in 2020 (Bonfá, 2011). In the transport sector, due to the heterogeneity of the specific data available, we collected the abatement costs based on the literature and only forecast the potential abatements by employing the methodology developed by Borba (2008) and Schaeffer et. al. (2008), along with the premises presented by Schaeffer et. al. (2009). For the power sector, since most of Brazil’s electricity comes from renewable sources (mainly hydropower), which already have a low carbon footprint, we discuss the peculiarities of the sector and possible impacts from climate change. The average abatement costs consider the investments and operating costs (including energy costs) of each abatement measure (Halsnaes et. al., 1998). The cost for each mitigation option is determined from the incremental cost of implementing the measure, compared to a reference scenario, divided by the avoided annual GHG emissions (Equation 1).

NACtlowcarbon  NACtreference AAC Option   AEtreference  AEtlowcarbon t

(1)

where AAC is the average abatement cost of avoiding one tCO2e from each mitigation option in year t; NAC represents the net annual cost of implementing the option; and AE is the annual GHG emission in each scenario. The net annual cost (NAC) (Equation 2) represents the difference in the annualized investment cost and the annual financial result of implementing the option. This financial result is given by the total revenue less operating and maintenance expenses.

INV .r. NAC 

(1  r )T  OM  FUEL  REV (1  r )T  1 (1  r ) n2010

(2)

where REV is revenue; OM is operating and maintenance costs; FUEL is fuel costs; INV is the investment cost; r is the discount rate; T is the useful life of the project; and n is the year of analysis. 2.2. Reference Scenario In this work we used Scenario B1 from PNE2030 (EPE, 2007) as a baseline/reference scenario. However, we updated it to better reflect the growth of the petroleum sector activities in Brazil, as mentioned before. Crude oil prices from PNE2030 were also altered to reflect the oil price threshold scenario adopted by Petrobras, the Brazilian oil company. As explained in Castelo Branco et al. (2010), the crude oil price threshold is a reference price used by oil companies to analyze the feasibility of each of their projects individually. It is the minimum price to guarantee a positive NPV for a project. Petrobras has set this at approximately US$ 55.00/barrel. Moreover, for the industrial sector we updated costs based on the more recent “low-oil prices” scenario of Annual Energy Outlook 2011 (EIA, 2012).

3. Abatement Costs Related to Brazil´s Energy Sector
3.1. Petroleum Industry For the upstream segment of the Brazilian petroleum industry, we elaborated a long-term scenario for petroleum production, which was based on Petrobras’ forecasts to 2020 (Petrobras, 2011) and on the Hubbert model developed by Szklo et. al. (2007). According to our estimates, Brazil’s petroleum production will grow from 0.6 billion boe in 2011 to 1.6 billion boe in 2030. This will result in emissions of 37.8 MtCO2e in 2030. For the downstream sector – oil refining and petrochemicals production – the current refineries are being optimized and adapted to process acid and heavy crude oils and to produce highly specified fuels. Also, the country’s oil refining sector needs to be expanded to meet the projected future demand for fuels. This would also increase the sector’s GHG emissions. Finally, the Brazilian petroleum industry is going through a vertical integration movement between refineries and petrochemicals complexes, both in terms of industrial facilities and assets property (Gomes, 2011), by raising the investment in greenfield projects for steam crackers (Gomes et. al., 2009). Indeed, Petrochemical complexes 2

Rio Oil & Gas Expo and Conference 2012 are usually integrated with oil refining units, and in Brazil this vertical integration will increase after the construction of the Petrochemical Complex of Rio de Janeiro – Comperj (Moreira et. al., 2007; Castelo Branco et. al., 2011). This paper has formulated several mitigation measures to minimize the estimated petroleum industry emissions for the next years, summarized in Table 1. Table 1. Mitigation alternatives for the oil industry sector. Average Abatement Cost (US$/tCO2e) Discount Rate (%) 8% 15% Gross emission reduction potential (2012-2030) (MtCO2e)

Upstream Install Vapor Recovery Units 4.0 4.8 12.6 DI&M Program 10.7 12.7 5.4 Rod Packing 33.0 40.0 3.6 Reducing gas flaring (GTL)1 -3.0 82.0 102.4 Oil Refining Energy Integration 33.9 34.8 30.1 Fouling Mitigation 60.3 62.6 6.0 Advanced Control 92.3 94.3 12.6 Low-NOx Burners -39.4 13.6 5.1 Oxygen Control -21.4 -19.1 9.2 Air pre-heating -10.5 -5.5 0.5 Pumps (Monitoring, Oversized, ASD) -2.8 -0.7 3.6 Compressors (Monitoring, ASD) -2.4 -0.3 0.8 Air-Coolers (Monitoring, ASD) -1.1 1.3 0.6 Basic Petrochemicals Low-NOx Burners2 -120.5 -14.8 1.0 Boiler Efficiency Improvement3 -39.6 59.3 1.4 Process Innovation4 825.3 1.629.2 9.6 1 Discount rate considered for GTL is 25% due to the great risk that this technology represents to its investors.
2 3 4

Based on DOE (2003). Based on Neelis et. al. (2008) and DOE (2003). Substitution of steam cracking process for catalytic pyrolysis, based on Ren et. al. (2006) and Ren (2009).

For the upstream sector, the first three mitigation options depend on the optimization of platforms’ design and also on the enhancement of operational safety on offshore platforms. For the mitigation option to reduce gas flaring (GTL), the abatement costs shown in the table 3 were updated from Castelo Branco et. al. (2010). These results required new estimates for the number of platforms that should be implemented in the next decades considering the increase in oil and gas production in the pre-salt area. . The most promising alternative for oil refineries is directly related to process heaters. Notably, the investment in new Low-NOx burners has a considerably negative abatement cost from a social perspective, which is not perceived from a private perspective. To a certain extent this difference between the values at annual discount rates of 8% and 15% indicates a need for public policies to reduce carbon emissions in Brazilian refineries. Although all mitigations options related to the reduction of power consumption by mechanical equipments proved to be appealing at both perspectives, the three options with higher mitigation potentials have presented higher abatement costs. From a private investor’s perspective, a cost above 25 US$/tCO2e is still considerably high, in the sense that these options would not be implemented without an incentive mechanism. Actually, the carbon price in the EU-ETS and even under a CDM mechanism has never overcame this limit. When it comes to basic petrochemicals production, results show that improvements in furnaces’ burners and in steam generation in boilers can mitigate almost 2% of overall CO2e emissions in the 2012-2030 period, at an abatement cost of -73.2 US$/tCO2e from a social perspective, or 28.5 US$/tCO2e from a private agent perspective. The adoption of Low-NOx burners is the cheapest option among these two, but it has the lower abatement potential. The most uncertain option due to its technological maturity (catalytic pyrolysis) was, naturally, the most expensive option, with an abatement cost significantly above 100 US$/tCO2e. 3

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3.2. Transport Sector The Brazilian transport sector emitted 136 MtCO2e in 2005, which accounted for 38% of total energy related GHG emissions in the country (IEA, 2006b; MCT, 2009). There are few studies of the potential to reduce emissions in the cargo transport sector in Brazil as a whole. Therefore, to quantify the possibility of reducing CO 2e emissions, we used the state of Minas Gerais as a proxy, based on the study by Schaeffer et al. (2008). This state is very important for the country’s transport system, since it serves as a corridor for cargo transport between the Midwest (producer of grains and meat) and the ports in the Southeast region. According to this study, the transport system in Minas Gerais is representative of the country’s, with a predominance of roadway mode and an average old truck fleet. The study examines an alternative scenario with increased vehicle inspection (to remove older vehicles from circulation) and the adoption of policies to encourage integration of trucks and trains to reduce fuel consumption. Table 2 shows the mitigation options considered in this study for passenger transport based on data from IEA (2008), IPCC (2007) and Vattenfall (2007). Table 2. Mitigation options for the transport sector. Average abatement cost (US$/tCO2e) -120.0 -105.0 0.0 35.0 66.0 Gross emission reduction potential (2010-2030) (MtCO2e) 20.2 29.7 51.6 47.0 7.5

Mitigation measure Engine efficiency gains Other efficiency gains Smart transport systems Optimization of bus systems Infrastructure improvements

Electric-hybrid vehicles 360.0 19.4 Source: Calculate based on data from IEA (2008), IPCC (2007) and Vattenfall (2007). 3.3. Industrial Sector Within the industrial sector, the iron and steel industry account for great part of emissions (42%). This is due to the large energy requirements of this industry, which is supplied by both fossil fuels and charcoal from deforestation. The chemical industry is the second largest emitter (11%), mostly because of its high consumption of natural gas (MCT, 2009). The proposed mitigation measures for the industrial sector can be generalized into six categories: energy efficiency, recycling, fuel substitution, higher use of renewable energy, achieving full renewability in charcoal and wood and cogeneration. Table 3 presents the mitigation alternatives for the industrial sector. Table 3. Mitigation alternatives in the industrial sector. Average abatement cost (US$/tCO2e) 8% -194.6 -402.0 -382.6 -142.6 -187.6 -96.3 -118.2 -147.5 -67.2 -61.4 -11.4 -49.3 15% -186.1 -388.6 -365.2 -119.8 0.6 -87.0 -115.6 -124.2 -6.3 -35.5 -0.9 185.9 Gross emission reduction potential (2010-2030) (MtCO2e) 105.2 19.0 37.3 283.0 135.4 18.3 74.8 25.8 43.8 69.2 567.0 93.8 4

Mitigation measure Discount Rate (%) Energy Efficiency Measures Improved combustion Heat recovery Steam recovery Heat recovery from furnaces/kilns New processes Other efficiency improvement measures Recycling Higher use of renewable energy (solar) Fuel substitution (with natural gas) Fuel substitution (with biomass) Eliminating non-renewable biomass Cogeneration

Rio Oil & Gas Expo and Conference 2012 Over the entire period (2010 to 2030), the avoided emissions would amount to 1.473 billion tCO2e, a significant figure that corresponds to twelve times the current emissions from the industrial sector in 2007. Among all abatement measures, energy efficiency would account for the main share of mitigation in the industrial sector: 598 million tCO2e (40.6%). These measures can be applied across all industrial segments, including improving combustion in boilers and furnaces/kilns in general, implementation of heat recovery systems using varied processes and incorporation of new production routes and technologies. Individually the various efficiency measures can result in energy savings ranging from 2 to 35%, depending on the industrial segment and type of measure. A large share abatement comes from heat recovery from furnaces/kilns and implementation of new processes, which together would account for 50% of energy efficiency measures. New processes, for example, can enable substantial energy savings but also require heavier investments. Eliminating the use of non-renewable biomass (charcoal from deforestation) represents the second largest potential for abating CO2e emissions, equal to 567 million tCO2e (38.5% of the total). To entirely replace this biomass with biomass from planted forests would require an area of some 3.8 million hectares, 62% of which to produce renewable charcoal for the iron and steel industry and the rest to produce firewood mainly for use in ceramics (bricks/tiles), pulp and paper and food segments. Cogeneration can reduce emissions by 94 million tCO2e (6.4%) in the 2010-2030 period. In the particular case of Brazil, cogeneration reduces GHG emissions through two basic configurations: burning of residual biomass, especially sugarcane bagasse in the alcohol/sugar industry and black liquor from turning wood into pulp for paper making; recovering gases and heat in segments like steel and petrochemicals. The use of renewable sources (biomass) to replace fossil fuels has an outstanding potential to reduce emissions in the iron and steel, food and beverage and pulp and paper segments: 69.2 million tCO2e (4.7%). In the iron and steel segment, for example, the use of charcoal (from planted forests) to make pig iron can rise from the current 34% (where only half of the charcoal used is renewable) to 45% in 2030 (100% renewable). To achieve the emissions abatement from fossil fuel substitution, the amount of planted area would be 940 thousand hectares (88% to meet demand from iron and steel makers). Another measure considered is to switch from high-carbon content fossil fuels to natural gas. The quantity of CO2e avoided could reach 43 million tonnes (3.0%), with an additional consumption of 19.4 million m 3 of natural gas per day. Finally, solar energy could also be implemented in some low-temperature processes, particularly in the food processing and lumber industries. The emissions avoided could amount to 25.6 million tCO 2e (1.7%).

4. Results
We estimate that, in the reference scenario, Brazilian emissions from energy consumption in 2030 should amount to slightly over 827 million tCO2e, with small changes in the relative shares of sources and sectors. The transports and industrial sectors that year should remain as the main emitters of GHGs (75%). Emissions from oil refining and other sectors (agriculture, commerce and residential) should grow, without a significant effect on total emissions though. In relation to this business-as-usual scenario, it would be possible to reduce future emissions in relative terms by adopting the mitigation measures summarized in this paper. The abatement in this ‘low carbon scenario’ is projected to reach 226.1 million tCO2e, which leads to energy-related emissions 27% lower, when compared to the reference scenario in 2030 (see Table 4 and Figure 1).

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Rio Oil & Gas Expo and Conference 2012 Table 4. CO2e emissions abatement from energy supply and use by segment in 2030 and in the period from 2010 to 2030, and respective percentage contributions. In 2030 (MtCO2e) 124.3 12.2 7.6 3.6 1.0 6.7 74.4 8.5 226.1 601.4 Share in 2030 % 55.0 5.4 3.4 1.6 0.4 3.0 32.9 3.8 100.0 100.0 Accumulated 2010 - 2030 (MtCO2e) 1,472.7 204.5 124.0 68.5 12.0 97.4 609.9 93.8 2,478.3 9,848.8 Accumulated share % 59.4 8.3 5.0 2.8 0.5 3.9 24.6 3.8 100.0 100.0

Emissions abated Industry Petroleum Upstream Oil Refining Basic Petrochemicals Others Transports Generation and use of electricity TOTAL Resulting Emissions

1,000

800

106 tCO2e

600

400

200

0 2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Low carbon scenario Others

Industry Transportation

Petroleum sector Eletricity generation

Figure 1. Evolution of CO2e emissions in the low-carbon scenario (blue) and the portions that will be abated in each energy consuming segment. Considering only the mitigation options presented in three of the sectors of this study (industry, petroleum and light-duty vehicles), the emission reduction potential would reach 1.85 billion tCO 2e in the 2010-2030 period, as shown in Table 5.

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Rio Oil & Gas Expo and Conference 2012 Table 5. Total abatement cost (social discount rate of 8%) for measures considered – 2010 to 2030. Average abatement cost (US$/tCO2e) Industrial Sector Energy Efficiency Measures Improved combustion Heat recovery Steam recovery Heat recovery from furnaces/kilns New processes Other efficiency improvement measures Recycling Higher use of renewable energy (solar) Fuel substitution (with natural gas) Fuel substitution (with biomass) Eliminating non-renewable biomass Cogeneration Engine efficiency gains Other efficiency gains Smart transport systems Optimization of bus systems Infrastructure improvements Electric-hybrid vehicles Upstream Install Vapor Recovery Units DI&M Program Rod Packing Reducing gas flaring (GTL) Oil Refining Energy Integration Fouling Mitigation Advanced Control Low-NOx Burners Oxygen Control Air pre-heating Pumps (Monitoring, Oversized, ASD) Compressors (Monitoring, ASD) Air-Coolers (Monitoring, ASD) Basic Petrochemicals Low-NOx Burners Boiler Efficiency Improvement Process Innovation TOTAL -194.6 -402.0 -382.6 -142.6 -187.6 -96.3 -118.2 -147.5 -67.2 -61.4 -11.4 -49.3 Transport Sector -120.0 -105.0 0.0 35.0 66.0 360.0 Petroleum Sector 4.0 10.7 33.0 -3.0 33.9 60.3 92.3 -39.4 -21.4 -10.5 -2.8 -2.4 -1.1 -120.5 -39.6 825.3 12.6 5.4 3.6 102.4 30.1 6.0 12.6 5.1 9.2 0.5 3.6 0.8 0.6 1.0 1.4 9.6 1,852.5 50.4 57.8 118.8 -307.2 1,020.4 361.8 1,163.0 -200.9 -196.9 -5.3 -10.1 -1.9 -0.7 -120.5 -55.4 7,922.9 -127,450.0 105.2 19.0 37.3 283.0 135.4 18.3 74.8 25.8 43.8 69.2 567.0 93.8 20.2 29.7 51.6 47.0 7.5 19.4 -20,471.9 -7,638.0 -14,271.0 -40,355.8 -25,401.0 -1,762.3 -8,841.4 -3,805.6 -2,943.4 -4,248.9 -6,463.8 -4,624.3 -2,424.0 -3,118.5 0.0 1,645.0 495.0 6,984.0 Gross emission reduction potential (20102030) (MtCO2e) Total cost of abatement (Million US$)

Measure by sector [number]

Much of the abatement alternatives analyzed could be obtained with negative costs (see Tables 4 and 6) under a social perspective. However, decarbonization investment decisions are not made under a social perspective. The private sector will make decisions within the context of its own cost calculations, based on higher implicit discount rates (or on its opportunity cost). At a private-sector rate, some no-regret measures at the social discount rate become less attractive. In this case, 25% of the measures have costs above 25$/tCO2e – or would not be feasible even if Brazil adopt marketoriented mechanisms to curb its energy-related GHG emissions. Actually, on rare occasions have carbon prices under the European cap and trade system overcome 25$/tCO2e. 7

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Table 6. Abatement potential under different cost ranges and discount rates Discount rate 8% 1,647.1 69.6 80.7 55.1 1,852.5 15% 1,258.5 159.1 33.7 225.8 1,677.1

Abatement Potential Abatement cost less than US$ 0 Abatement cost between US$ 0 and US$ 25 Abatement cost between US$ 26 and US$ 50 Abatement cost over US$ 50 Total

5. Conclusions
Although Brazil has what can be considered as a “clean” energy matrix, based heavily on hydropower and biofuels, there are still good opportunities for the abatement of GHG emissions related to energy use in different economic sectors. The main result of this study is identification that it is possible to reduce emissions from energy use in relative terms – i.e., in a low-carbon scenario in comparison with the reference scenario. The accumulated emissions by 2030 are 27% lower than the business-as-usual emissions, without adopting any of the mitigation measures analyzed here. This study shows, however, that in relation to a reference year (2007), the examined abatement measures, along with the socioeconomic dynamics of an emerging country such as Brazil, would not be enough to attain absolute reductions in GHG emissions by 2030. This result is valid both each sector individually and for the sum of the emissions from all the sectors analyzed. Even if we had included other energy consuming sectors in the analysis (the residential and commercial sectors, for instance), the conclusions would not change substantially, given the small participation of these other sectors in overall GHG emissions from energy use in Brazil. In closing, we should mention that this study was restricted to the direct emissions from the supply and use of energy. In Brazil the question of land use is extremely important and can be partly involved with indirect emissions associated with the production of biofuels. However, this was outside the scope of this study. For more details, see De Gouvello (2010).

6. Acknowledgments
We wish to thank the World Bank, FBDS, CNPq, FAPERJ and CAPES for providing funding for this study.

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