57036 FAST TRACKBRIEF August 27, 2008 The IEG report "Climate Change and the World Bank Group ­ Phase I: An Evaluation of World Bank Win- Win Energy Policy Reforms", was discussed by CODE on August 27, 2008 Climate Change and the World Bank Group - Phase I: An Evaluation of World Bank Win-Win Energy Policy Reforms The first of a series on climate change, this evaluation assesses IBRD/IDA experience with key win-win policies in the energy sector. It focuses on energy price reform and policies for energy efficiency ­ both of which offer potentially large gains at the country level together with significant reductions in greenhouse gas emissions. The next phase will look at the project experience of the Bank (including the carbon funds) and the IFC in promoting technologies for renewable energy and energy efficiency. Transport and forestry issues will also be evaluated. Energy subsidies are large, expensive and climate-damaging, and disproportionately benefit the well-off. Price reform encourages energy efficiency, increases the attractiveness of renewable energy and of coal- to-gas switching, and allows more resources to flow to poor people and to investments in cleaner power. Though subsidy reduction is seldom easy, the Bank has a record of supporting country reform in this area. Improvements in the design and implementation of social safety nets can facilitate price reform that protects poor people. Energy efficiency offers countries savings in fuel and infrastructure costs. IEA and others project that a substantial portion of incremental energy needs for the next two decades can be met through efficiency measures, particularly on the demand side. Policy interventions ­ in addition to price reform ­ can overcome the market failures that block these measures. While it has done some innovative work in this area, overall the Bank's support for non-price policy measures has been modest. The record levels of energy prices in 2008, although they have been relaxed, provide an impetus for clients to seek more sustainable and price-resilient growth paths. The Bank can proactively help interested clients to assess the domestic benefits of price reform and efficiency policies, explore design options, and finance their implementation. This will require a reorientation of the Bank's internal incentives, and adoption of a systems approach to energy and climate. These efforts would complement the crucial steps developed countries must take to reduce their own greenhouse gas emissions and to provide financial and technical help for mitigation by developing countries, consistent with UNFCCC commitments and the Bali Action Plan. Goals and Scope Findings This evaluation is the first of a series that seeks lessons Development spurs emissions. A 1 percent increase in from the World Bank Group's experience on how to per capita income induces--on average and with pursue a sustainable growth path. The WBG has never exceptions--a 1 percent increase in GHG emissions. had an explicit corporate strategy on climate change Hence, to the extent that the World Bank is successful in against which evaluative assessments could be made. supporting broad-based growth, it will put pressure on However, a premise of this evaluation series is that many climate change. climate-oriented policies and investments under But there is no significant trade-off between climate discussion for the future have close analogs in the past change mitigation and energy access for the poorest. and thus can be assessed, whether or not they were Basic electricity services for the world's unconnected explicitly oriented to climate change mitigation. households, under the most unfavorable assumptions, This report, which introduces the series, focuses on the would add only a third of a percent to global GHG World Bank (IBRD and IDA) and not on the IFC or emissions, and much less if renewable energy and efficient MIGA. It assesses its experience with key win-win policies light bulbs can be deployed. The welfare benefits of in the energy sector: removal of energy subsidies and electricity access are on the order of $0.50 to $1 per promotion of end-user energy efficiency. The next phase kilowatt-hour, while a stringent valuation of the looks at the expanding project-level experience of the Bank corresponding carbon damages, in a worst-case scenario, and the IFC in promoting technologies for renewable is a few cents per kilowatt-hour. energy and energy efficiency, addressing also the role of Country policies can shape a low-carbon growth carbon finance. A parallel study examines the role of path. Although there is a strong link between per capita forests in climate mitigation. The climate evaluation's income and energy-related GHG emissions, there is final phase will look at adaptation to climate change. sevenfold variation between the most and least emissions- intensive countries at a given income level. Reliance on Motivation hydropower is part of the story behind these differences, Operationally, the World Bank has pursued three broad but fuel pricing is another. High subsidizers--those whose lines of action in promoting the mitigation of greenhouse diesel prices are less than half the world market rate--emit gas (GHG) emissions, the main contributor to climate about twice as much per capita as other countries with change. First, it has mobilized concessional finance from similar income levels. And countries with long-standing the Global Environment Facility (GEF) and carbon fuel taxes, such as the United Kingdom, have evolved finance from the Clean Development Mechanism (CDM) more energy-efficient transport and land use. to promote renewable energy and other GHG-reducing activities. Second, and to a much more limited extent, it Energy subsidies are large, burdensome, regressive, has used GEF funds to stimulate the development of and climate damaging. The International Energy noncommercial technologies. Third, and the subject of Agency's 2005 estimate of a quarter trillion dollars per this evaluation, it has supported win-win policies and year outside the OECD may understate the current projects--sometimes with an explicit climate motivation, situation. While poor people receive some of these often without. These not only provide global benefits in benefits, overall the benefits are skewed to wealthier reducing GHGs but also pay for themselves in purely groups and often dwarf more progressive public domestic side benefits such as reduced fuel expenditure or expenditure. Fuel subsidies alone are 2 to 7.5 times as improved air quality. The win-win designation obscures large as public spending on health in Bangladesh, the fact that these policies may impose costs on particular Ecuador, Arab Republic of Egypt, India, Indonesia, groups even while benefiting a nation as a whole, Morocco, Pakistan, Turkmenistan, República Bolivariana presenting challenges for design and implementation. de Venezuela, and Republic of Yemen. At the same time, subsidies encourage inefficient, carbon-intensive use of Two sets of win-win policies are perennial topics of energy and build constituencies for this inefficiency. discussion in the energy sector: reduction in subsidies and energy efficiency policies -- particularly those relating to The Bank has supported more than 250 operations in end-user efficiency. This report looks at these, and at support of energy pricing reform. Success has been another apparently win-win topic: gas flaring. Flaring is achieved in the transition countries, for instance in Romania interesting because of its magnitude, the links to pricing and Ukraine, where energy prices were adjusted toward policy and to carbon finance, and the existence of a World market levels, and carbon dioxide emissions intensity has Bank-led initiative for flaring reduction. dropped substantially. Subsidy removal can threaten the poor, however. Recent efforts to assess poverty and welfare impacts systematically appear to have informed the design and implementation of price reform efforts, though not 2 necessarily with direct Bank involvement. Examples include flaring activity to date. Associated gas (a byproduct of Ghana and Indonesia, where compensatory measures were oil production) is often wastefully vented or flared, adding deployed in connection with fuel price rises. more than 400 million tons of carbon dioxide equivalent to the atmosphere annually, about 1 percent of global The Bank has rarely coordinated efficiency emissions. A modestly funded public-private partnership, improvements with subsidy reductions to reduce the the GGFR has succeeded in highlighting the issue, immediate adjustment burden on energy users. An promoting dialogue, securing agreement on a voluntary exception is the China Heat Reform and Building standard for flaring reduction, and sponsoring useful Efficiency project, which links improved insulation with diagnostic studies. But only four member countries have heat pricing. A growing number of projects sponsor adopted the standard. The GGFR has emphasized carbon nationwide distribution of compact fluorescent light finance as a remedy for flaring, but the use of project-level bulbs, but this has been done in response to power carbon finance is a mere bandage for policy ailments that shortages (Uganda, Rwanda) or with the effect of require a more fundamental cure. stanching utility losses (Argentina, Vietnam), rather than to facilitate subsidy reduction. Recommendations Despite emphasis on energy efficiency in Bank In mid-2008, real energy prices are at a record high. While statements and in CASes, the volume and policy this is burdensome for energy users, it opens an orientation of IBRD/IDA efficiency lending has been opportunity for the Bank to support clients to make a modest. Although the IFC has recently increased its transition to a long-term sustainable growth path that is investments in energy efficiency projects, World Bank resilient to energy price volatility, entails less local commitments for efficiency have been about 5 percent by environmental damage, and is a nationally appropriate value of energy finance over the period 1991-2007. This contribution to global mitigation efforts. includes investments in demand-side efficiency, district heating and may also include some supply-side efficiency Clearly the World Bank needs to focus its efforts investments. By this definition, about one in ten projects strategically on areas of its comparative advantage. This by number involve energy efficiency. Including a broader would include supporting the provision of public goods, range of projects identified by management as supporting and promoting policy and institutional reform at the supply-side energy efficiency would boost the proportion country level. Furthermore, the Bank can achieve the above 20 percent by number over the period 1998-2007. greatest leverage by promoting policies that catalyze Globally only 34 projects undertaken over the period private sector investments in renewable energy and energy 1996-2007 had components oriented to demand-side efficiency, including those supported by IFC and MIGA. energy efficiency policy. Among these, many attempts to The analysis in this report supports the following promote efficiency have had limited success because the recommendations: Bank has engaged with utilities, which have limited incentives to restrict electricity sales. Systematically promote the removal of energy subsidies, easing political economy and social There are several reasons why end-user energy concerns by providing technical assistance and policy efficiency projects, and especially policy-oriented advice to help reforming client countries find projects, appear to be under-emphasized in the effective solutions, and analytical work Bank's portfolio. The Bank has carried out some demonstrating the cost and distributional impact of successful and innovative efficiency projects. But internal removal of such subsidies and of building effective, Bank incentives work against these projects because they broad-based safety nets. Energy price reform can are often small in scale, demanding of staff time and endanger poor people and arouse the opposition of preparation funds, and may require persistent client groups used to low prices, thereby posing political risks. engagement over a period of years. There is a general But failure to reform can be worse, diverting public funds tendency to prefer investments in power generation, from investments that fight poverty, and fostering an which are visible and easily understood, to investments in inefficient economy increasingly exposed to energy efficiency, which are less visible, involve human behavior shocks. And reform need not be undertaken overnight. rather than electrical engineering, and whose efficacy is The Bank can provide assistance in charting and financing harder to measure. A general neglect of rigorous adjustment paths that are politically, socially, and monitoring and evaluation reinforces the negative view of environmentally sustainable. Factoring political economy efficiency. into the design of reforms, and supporting better-targeted, The Bank-hosted Global Gas Flaring Reduction more effective social protection systems will be elements Partnership (GGFR) has fostered dialogue on gas of this approach. flaring, but it is difficult to assess its impact on 3 Emphasize policies that induce improvement in management, urban management, and social safety nets energy efficiency as a way of reducing the burden of are other areas where cross-sectoral collaboration is transition to market-based energy prices. Historically, essential to promoting win-win policies and programs. energy efficiency has received rhetorical support but Invest more in improving metrics and monitoring for garnered only a small share of financial support or policy motivation and learning ­ at the global, country and attention. This is beginning to change, for instance, with project levels. Good information can motivate and guide China's commitment to reduce drastically its energy action. First, building on the Bank's current collaboration intensity and with India's Energy Conservation Act. But the with the International Energy Agency on energy efficiency Bank can do much more to help clients pursue this agenda. indicators, the Bank could set up an Energy Scoreboard If a real reorientation to energy efficiency and renewable that will regularly compile up-to-date standardized energy is to occur, the Bank's internal incentive system information on energy prices, collection rates, subsidies, needs to be reshaped. Instead of targeting dollar growth in policies, and performance data at the national, lending for energy efficiency (which may distort effort away subnational, and project level. Borrowers could use from the high-leverage, low-cost interventions), it needs to indicators for benchmarking, in the design and find indicators that more directly reflect energy savings and implementation of country strategies including sectoral harness them to country strategies and project decisions. It and cross-sectoral policies, and in assessing Bank needs also to patiently support longer, more-staff-intensive performance. analysis and technical assistance activities. Increased funding for preparation, policy dialogue, analysis, and Second, more rigorous economic and environmental technical assistance is required. assessment is needed for energy investments and those that release or prevent carbon emissions. These Promote a systems approach by providing incentives assessments should draw on energy prices collected for to address climate change issues through cross- the Scoreboard, account for externalities, including the net sectoral approaches and teams at the country level, impact on GHG emissions, and account for price and structured interaction between the energy and volatility. Investment projects should also be assessed, environment sector boards. To tackle problems of qualitatively, on a diffusion index, which would indicate climate change mitigation and adaptation, the Bank and its the expected catalytic effect of the investment on clients need to think, organize, and act beyond the facility subsequent similar projects. It is desirable to complement level, and outside of subsectoral and sectoral confines. project-based analysis with assessment of indirect and One avenue for this is through greater attention to policy-related impacts, which could be much larger. systemwide energy planning. Integrated resource planning, once in vogue, has been largely abandoned in the wake of Third, monitoring and evaluation of energy interventions power sector privatization and unbundling. Yet current continue to need more attention. Large-scale distribution planning methods are inadequate in integrating of compact fluorescent light bulbs is one example of an considerations of end-use efficiency and in balancing the intervention that is well suited to impact analysis and risks of volatile fuel prices and weather-sensitive electricity where a timely analysis could be important in informing output from wind and hydro power plants. Water possibly massive scale-up activities. 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