59460 PHASE II: THE CHALLENGE OF LOW-CARBON DEVELOPMENT Climate Change and the World Bank Group IEG Study Series Cover 2 ­ IEG Study Series Books THE WORLD BANK GROUP T he World Bank Group consists of five institutions--the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the International Development Association (IDA), the Multilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of Investment Disputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their environment by providing resources, sharing knowledge, building capacity, and forging partnerships in the public and private sectors. The Independent Evaluation Group IMPROVING DEVELOPMENT RESULTS THROUGH EXCELLENCE IN EVALUATION T he Independent Evaluation Group (IEG) is an independent, three-part unit within the World Bank Group. IEG-World Bank is charged with evaluating the activities of the IBRD (the World Bank) and IDA, IEG-IFC focuses on assessment of IFC's work toward private sector development, and IEG-MIGA evaluates the contributions of MIGA guarantee projects and services. IEG reports directly to the Bank's Board of Directors through the Director-General, Evaluation. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank Group's work, and to provide accountability in the achievement of its objectives. It also improves Bank Group work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. CLIMATE CHANGE AND THE WORLD BANK GROUP Phase II: The Challenge of Low-Carbon Development 2010 The World Bank Washington, D.C. Copyright © 2010 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume, except the "Management Response" and "Chairman's Summary," is a product of the staff of the Independent Evalua- tion Group of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. This volume does not support any general inferences beyond the scope of the evaluation, including any inferences about the World Bank Group's past, current, or prospective overall performance. The World Bank Group does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Cover: Photo by Martin Wright/Ashden Awards for Sustainable Energy. Used with permission. http://www.ashdenawards.org. ISBN-13:978-0-8213-8653-8 e-ISBN-13:978-0-8213-8654-5 DOI:1596/978-0-8213-8653-8 Library of Congress Cataloging-in-Publication Data have been applied for. World Bank InfoShop Independent Evaluation Group E-mail: pic@worldbank.org Communication, Strategy, and Learning Telephone: 202-458-5454 E-mail: eline@worldbank.org Facsimile: 202-522-1500 Telephone: 202-458-4497 Printed on Recycled Paper Facsimile: 202-522-3125 Printed on Recycled Paper Table of Contents Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Management Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xvi Chairman's Summary: Committee on Development Effectiveness (CODE) . . .xxiii Statement of the External High-Level Review Panel . . . . . . . . . . . . . . . . . . . . . . . .xxiv Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxxi 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Climate Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Global Mitigation Context and the WBG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Evaluation Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Evaluation Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Evaluation Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Low-Carbon Energy Projects and Their Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Overcoming Barriers to On-Grid Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 On-Grid Renewable Energy: Hydropower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Energy Access and Low-Carbon Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Off-Grid Renewable Energy: Solar Photovoltaics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The Way Forward for Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 3. Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Energy Efficiency in the First Phase Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Using Financial Intermediaries to Overcome Barriers to Energy Efficiency Investments . . . . . . . . . . . . . . . . . . . 34 Direct Investments in Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Transmission and Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Efficient Light Bulbs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 The Way Forward for Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 4. Beyond Energy: Low-Carbon Paths in Cities and Forests . . . . . . . . . . . . . . . . . 47 Urban Transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Forests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 XYZ | iii 5. Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Efficiency in Coal-Fired Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Technology Promotion and Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Carbon Finance at the WBG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 6. Conclusions and Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 The Congruence of Mitigation and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 A Systems View Is Essential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Appendixes A. Renewable Energy Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 B. World Bank Experience with Renewable Energy Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 C. Energy Efficiency: Supplementary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 D. Lessons from Completed Transmission and Distribution Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 E. Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 F. Transport Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 G. Energy Project Portfolio Databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 H. Pilot and Demonstration Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 I. Carbon and Economic Returns of Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 J. Recent WBG Developments in Emission Mitigation Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 K. Evaluation Summary from Climate Change and the World Bank Group--Phase I. . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Photographs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 Boxes 1.1 The Strategic Framework on Development and Climate Change . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 The Economics of Grid-Connected Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.2 Monitoring and Evaluation Provides Rapid Feedback on the Performance of Landfill Gas Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.3 Mitigating Political Risks in Renewables: a MIGA Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.4 Gender and Low-Carbon Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.5 On-Grid and Off-Grid Renewable Energy in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 3.1 Energy Service Companies and Energy Performance Contracting . . . . . . . . . . . . . . . . . . . . . . 36 4.1 The TransMilenio BRTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 4.2 The Silvopastoral Project: A Successful Demonstration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.1 Technology Learning (or Experience) Curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.2 Carbon Offsets, a Peculiar Commodity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 iv | Climate Change and the World Bank Group Figures 1.1 GHG Emissions by Sector and Country Group, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.2 Low-Cost GHG Abatement Potential, Non-OECD Countries, in 2030 . . . . . . . . . . . . . . . . . . . . . 4 1.3 WBG Investments in Renewable Energy 2003­08: Evaluation Coverage . . . . . . . . . . . . . . . . 10 1.4 WBG Investments in Low Carbon Energy Efficiency 2003­08: Evaluation Coverage . . . . . 10 1.5 WBG Investments in Urban Transport 2003­08: Evaluation Coverage . . . . . . . . . . . . . . . . . . . 10 2.1 Location of 2003­08 Low-Carbon Portfolio, by Groups of Renewable Energy-Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.2 Breakdown of 2003­08 Low-Carbon Portfolio by Country Income Group and Type . . . . . 15 2.3 Growth in Low-Carbon Portfolio by Project Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2.4 Growth in Low-Carbon Portfolio by Country Income Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.5 Breakdown of Non-Low Carbon WBG Energy Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.6 WBG-Supported Grid-Connected Generation Capacity by Technology, 2003­08 . . . . . . . . 16 2.7 Distribution of Capacity Factors of Hydropower CDM Projects . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.8 Impact of Carbon Payments on Return on Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.9 The Fall and Rise of WBG Hydropower Commitments, 1990-2008 . . . . . . . . . . . . . . . . . . . . . . . 24 4.1 Average Annual Forest Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5.1 Spectrum of Technology Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 5.2 World Bank Share of CDM Projects and Tons Registered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 6.1 Economic and Carbon Returns to InvestmentsTables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Tables 1.1 Map of the Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1 International Energy Agency Projections of Power Production, 2007­30 . . . . . . . . . . . . . . . . 12 2.2 Evaluated World Bank Renewable Energy and Energy Efficiency Projects by Rating, Projects Initiated 1990­2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2.3 WBG Low-Carbon Energy Commitments ($ millions) by Product Line and Investment Category, 2003­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.4 Commitments to Grid-Connected Renewable Energy by Technology and Funding, 2003­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.5 Off-Grid Investment Projects, 2003­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.6 Hydropower Investments by Size, Storage, and Funding, 2003­08 . . . . . . . . . . . . . . . . . . . . . . 25 2.7 Outcome Ratings of World Bank Hydropower Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.8 Rated Outcomes of Completed Projects with Large SHS Components . . . . . . . . . . . . . . . . . . 28 3.1 Energy Efficiency Interventions by Type in the Low-Carbon Investment Portfolio, 2003­08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.2 IFC and World Bank Approaches to Energy Efficiency Financial Intermediation in China and Eastern Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 4.1 Impact of Protected Areas in Tropical Forests on Forest Fire Incidence . . . . . . . . . . . . . . . . . . 57 5.1 Carbon Funds at the World Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 5.2 Comparative Success at Registration of CDM Projects, WBG versus Other Sponsors and Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 5.3 Carbon Projects with Signed Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 6.1 Summary of Sectoral Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Table of Contents | v Abbreviations ASTAE Asia Sustainable and Alternative Energy Program BRT Bus Rapid Transit BRTS Bus Rapid Transit System CDM Clean Development Mechanism CEIF Clean Energy Investment Framework CER Certified emission reduction CFL Compact fluorescent light bulb CFU Carbon Finance Unit of the World Bank CHUEE China Utility-Based Energy Efficiency project CO2 Carbon dioxide CO2e Carbon dioxide equivalent CPF Carbon Partnership Facility CSP Concentrated solar power ELI Efficient lighting initiative EMC Energy management company ERR Economic rate of return ESCO Energy service company ESMAP Energy Sector Management Assistance Program GEF Global Environment Facility GHG Greenhouse gas IBRD International Bank for Reconstruction and Development ICR Implementation and Completion Results Report IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IPP Independent power producer IPR intellectual property rights IRR Internal rate of return MIGA Multilateral Investment Guarantee Agency OECD Organisation for Economic Co-operation and Development PCF Prototype Carbon Fund PES Payment for environmental services REDD Reduced Emissions from Deforestation and Degradation REDP Renewable energy development project ROE Return on equity SFDCC Strategic Framework on Development and Climate Change SHS Solar photovoltaic home system SME Small and medium enterprise T&D Transmission and distribution TWh Terawatt hour UNFCCC United Nations Framework Convention on Climate Change WBG World Bank Group Wp Peak watts vi | Climate Change and the World Bank Group Acknowledgments The report was prepared by a team led by Kenneth Chomitz, frontier), Zmarak Shalizi with the assistance of Cheikh the principal author. Dinara Akhmetova and Stephen M'Backe Fall (urban transport), James Wolf (concentrated Hutton provided overall research, analytic, and production solar power projects), Fan Zhang (solar home systems, en- support and contributed to the energy chapters. The Inter- ergy efficiency and renewable energy in China), and Fuqiu national Finance Corporation (IFC) effort was led by Jouni Zhou (Chinese efficient boiler project). Valuable advice Eerikainen, with the assistance of Unurjargal Demberel was provided by peer reviewers Gunnar Eskeland, Michael and Maria Elena Pinglo. Zmarak Shalizi provided general Toman, David Victor, and Claudio Volonte. Tireless admin- guidance. The team was supervised by Cheryl Gray, Marvin istrative support was provided by Nischint Bhatnagar and Taylor-Dormond, Christine Wallich, and Stoyan Tenev, Viktoriya Yevsyeyeva. William Hurlbut provided editorial under the overall direction of Vinod Thomas, Director- assistance and Heather Dittbrenner edited the final report. General of Evaluation. Yvette Jarencio-Lukban assisted with manuscript prepara- tion. Nik Andre Harvey prepared the Web site. Substantial inputs were provided by Ananth Chikkatur (coal power), Lauren Kelly and Diana Salvemini (forestry), Financial support from the Swiss Agency for Development Andres Liebenthal (Chinese renewable energy), Jacquelin and Cooperation, and the Evaluation Department of the Ligot (energy efficiency financial intermediation in Eastern Norwegian Agency for Development Cooperation is grate- Europe), Clive Mason (industrial energy efficiency), Craig fully acknowledged, as is InWEnt's cosponsorship of an ini- Meisner (small power purchase agreements), Andrew Nel- tiating workshop. son and Kenneth Chomitz (protected area effectiveness), The team is grateful for the cooperation of the many people Aygul Ozen (Turkey), Fabio Rossi (economics of renewable inside and outside the World Bank Group who were inter- energy), Robert Schenck (energy in Sri Lanka, Uganda, viewed. and Vietnam), Robert Schneider (agribusiness at the forest Director-General, Evaluation: Vinod Thomas Director, Independent Evaluation Group-World Bank: Cheryl W. Gray Director, Independent Evaluation Group-IFC: Marvin Taylor-Dormond Director, Independent Evaluation Group-MIGA: Christine Wallich Overall Evaluation Leader: Kenneth M. Chomitz Head, Macro-Evaluation, IEG-IFC: Stoyan Tenev Task Team Leader, IEG-IFC: Jouni Eerikainen Acknowledgments | vii Foreword Climate change is one of the biggest long-term risks to proliferation of innovative efforts in energy, forestry, trans- global development. That threat has originated largely ow- port, and other fields. This evaluation, which focuses most- ing to the greenhouse gas emissions of developed countries, ly on the pre-Framework period, begins the work of sorting which continue to emit far more per capita than developing out the results of those efforts. countries and which are obliged by the Climate Convention Because the WBG is a small player in the climate arena, in to take the lead in fighting climate change. But developing a world of immense needs, it must be as efficient as possible economies also add to pressure on the limited remaining in catalyzing development and greenhouse gas mitigation. space for atmospheric carbon dioxide, and their actions, It must first be cognizant of where the "no regrets" options too, matter importantly. lie. If hoped-for climate finance materializes on a large scale, No comprehensive global agreement yet spells out how clients and funders will want hard, reliable information on the Climate Convention's goal of stabilizing atmospheric the most effective ways to fund low-carbon development. greenhouse gas levels will be accomplished and financed. They will also want to understand the trade-offs and com- Clearly, developed countries will need to throttle back plementarities among social, economic, and climate goals. their emissions. The challenge for developing countries So a sound, evidence-based results framework--focused on is to create a cleaner path to rapid growth than has pre- measures of economic and carbon outcomes--is critical. vailed in earlier growth episodes, avoiding needless local The WBG has the potential to make a difference greater environmental damage and taking advantage of emerging than its size suggests. It can provide support for policies that technologies and financing opportunities. In the absence enable low-carbon growth. It can contribute to transferring of a global agreement, the World Bank Group (WBG) has and adapting innovations in technology, finance, and insti- to chart its course, focused on today's urgent development tutions, developing a portfolio of high-return options that needs yet mindful of long-term risks. can be scaled up and widely deployed. And it can finance The Strategic Framework on Development and Climate and deploy the innovations it has incubated. To do so, it Change walks this tightrope. While putting development will need to tap the immense value of its experience with first, it urges the WBG to seek "no regrets" actions that countries and partners across the World Bank, the Inter- advance development with cobenefits in climate change national Finance Corporation, and the Multilateral Invest- mitigation, while mobilizing funds to defray the added costs ment Guarantee Agency, learning rapidly from its successes of low-carbon growth. The Framework has accelerated a and failures and constantly improving its efforts. Vinod Thomas Director-General, Evaluation viii | Climate Change and the World Bank Group Executive Summary Unabated, climate change could derail development, with a Third, the WBG can refocus on high-impact sectors and one in four chance of a six-degree Celsius hike in temperature instruments. Energy efficiency stands out among areas for this century. Although industrialized countries are historical- intervention. Early results suggest, for instance, that distri- ly responsible for the build-up of heat-trapping greenhouse bution of compact fluorescent lightbulbs offers economic gases (GHGs), the United Nations' goal of stabilizing atmo- returns that dwarf those of most WBG investments while spheric GHG levels requires urgent and concerted world- providing significant cobenefits in carbon dioxide (CO2) wide efforts. Choices and investments made in the next two reduction, exemplifying the Strategic Framework's call for decades--in buildings, power plants, transport systems, and "no-regrets" investments. To meet power demands, the forest use--will irreversibly shape the global climate's future. WBG's scarce human and financial resources will be best spent helping clients find domestically preferable alterna- This evaluation seeks lessons for development and climate tives to coal power, such as through increased energy effi- change mitigation from the World Bank Group's (WBG) ciency. Coal support should be a last resort used only when far-reaching portfolio in energy, forestry, and transport. lower cost and concessionally financed alternatives have The assessment is not exhaustive but covers subsectors that been exhausted and when there is a compelling case that represent the great bulk of evaluable WBG activity with WBG support would reduce poverty or emissions. potential GHG cobenefits. Over the period 2003­08 the WBG scaled up annual investments in renewable energy Among forest interventions, indigenous and protected areas and energy efficiency from $200 million to $2 billion and that permit sustainable use have reduced tropical deforesta- helped mobilize more than $5 billion in concessional funds tion by up to two percentage points a year (compared with for GHG reduction. In 2008 it adopted the Strategic Frame- unprotected areas), thus promoting social, environmen- work on Development and Climate Change (SFDCC), tal, and climate goals. Among instruments, carbon finance which triggered a spate of investment and analytic activ- needs to be redirected away from hydropower, where it ity, too new to assess. Yet the WBG's resources are small has minimal impact on project bankability, to applications compared with the multitrillion dollar investments needed where it can have more leverage. Long-duration loans are for low-carbon growth. How can the Bank have the greatest critical for support of renewable energy. Guarantees have impact, both for development and for GHG mitigation? not transformed the market for energy efficiency lending One important way the WBG can achieve leverage is but could be increasingly important for renewable energy through advice and support for favorable policies: removal as investors seek reassurance that favorable policies will be of energy subsidies and of other biases against renewable maintained over the long run. energy and energy efficiency. This topic was covered in To pursue this agenda, the WBG should orient itself strongly Phase I of this evaluation series (IEG 2009). toward results and closely monitor performance. In this fast- A second way is to act more like a venture capitalist--in changing area, being able to understand what is working, the public sphere as well as for private investments--by sup- what's not, and why is a source of value for the institution, porting the transfer and adaptation to local conditions of for its clients, and for the world. existing technologies, policies, and financial practices. By taking modest risks in pilot projects, the WBG can identify Evaluation Framework a high-return portfolio of development solutions that can be deployed on a large scale, as climate finance expands. This evaluation reviews a broad range of WBG activity in The WBG has been successful in this kind of technol- the adoption and diffusion of emissions-reducing technol- ogy transfer--but only when demonstration and diffusion ogies and practices. It addresses three main concerns: mechanisms were well thought out. Global Environment · What actions will deliver the greatest overlap between Facility (GEF) support has been crucial in mitigating cli- GHG mitigation and local development? ents' perceived risk, and expanded concessional funds will be needed for larger-scale demonstrations. Support for · Where and how does the WBG have the highest lever- age in promoting those actions? more advanced technologies has usually been unsuccessful, though there could be niches such as land use where the · How can the WBG best use feedback from ongoing ex- WBG has a role. perience to improve performance? Executive Summary | ix Because the range of activities is great, because most have not Findings yet been subject to a final evaluation, and because most do WBG-supported interventions vary widely in nature and not generate consistent and accessible data on impacts, the effectiveness. This evaluation first looks at sectoral findings evaluation is selective, though it covers the bulk of evaluable and then at cross-cutting lessons and recommendations. WBG experience. Within each of the main GHG-emitting sectors--energy, transport, and forestry--it examines spe- Congruence of mitigation and development cific issues that capture a large part of the relevant WBG There is ample scope for projects that promote local devel- portfolio (such as support for energy efficiency via financial opment goals while also mitigating GHGs. (See figure 6.1, intermediaries), illuminate sectorwide issues (such as the which illustrates economic and carbon returns for a range of role of finance for grid-connected renewables), or pioneer energy projects.) Energy efficiency, more than other invest- novel approaches (such as payment for ecosystem services). ments, offers a combination of high economic returns and It also addresses three special issues: technology transfer, the GHG benefits. Other projects may individually have high WBG's carbon funds, and the role of the WBG in coal power. carbon returns (forestry) or economic returns (solar home The evaluation looks at how the WBG has diagnosed barri- photovoltaic systems). To optimize carbon and economic ers to technology adoption, the effectiveness of prescribed gains, it may often be necessary to construct portfolios of interventions, and likely economic and mitigation impacts. projects, rather than pursue multiple goals with a single in- The first volume of this climate change evaluation (IEG strument. 2009) looked at WBG support for key areas of policy re- form. This second volume focuses on two other areas of Renewable energy intervention: (i) development, transfer, and demonstration Grid-connected renewable energy reduces CO2 emissions, of technical and financial innovations and (ii) finance and offers the additional domestic advantages of local air pol- implementation. lution reduction and energy security, and could potentially stimulate industrial development. But investors may not take account of the national or global benefits. Lenders may shy away from capital-intensive investments in less-proven technologies. Utilities may not know how to deal with in- termittent energy sources. Technical assistance can help overcome these barriers. The World Bank helped Sri Lanka institute standardized small power purchase agreements that facilitated access to the power grid. Analytic work, capacity building, and demon- stration have contributed to Mexican and Chinese adoption of favorable renewable energy payment schemes, which in turn have stimulated more than 20 gigawatts of installed wind capacity in China and hundreds of megawatts under construction in Mexico. Provision of long-duration loans (as in lending by the In- ternational Finance Corporation [IFC] and World Bank on-lending projects) has a much bigger impact on project bankability than the purchase of carbon credits, at cur- rent carbon prices. As countries increasingly rely on pay- ing price premiums for renewable energy, World Bank and Multilateral Investment Guarantee Agency (MIGA) guar- antees against breach of contract and other political risks could be catalytic. The WBG's direct lending for renewable energy is domi- nated by hydropower, the only grid technology for which there is a substantial evaluable record at the WBG. Among evaluated hydropower plants, 76 percent had outcomes rated as moderately satisfactory or better, with better rat- ings in recently initiated projects. Unsuccessful projects are often those for which preparation or implementation of x | Climate Change and the World Bank Group resettlement plans has been ineffective. About two-thirds of much communication between them. Yet, contrary to ex- hydropower investment volume now goes to run-of-river pectations, loan guarantees have turned out not to be a hydropower (that is, without substantial reservoirs), which temporary, market-transforming measure that could be has less potential for local social and environmental dam- discontinued once the banks gained familiarity with energy age but is more vulnerable to climate change. efficiency lending. Inadequate lending for energy efficiency often reflects wider credit market failures, including oner- Direct WBG investments in wind power have been mod- ous requirements for collateral. est. On average, wind power offers significantly lower eco- nomic and carbon returns than hydropower because of Guarantees have triggered energy efficiency lending to high capital costs and often low capacity utilization. Manu- credit-strapped small and medium enterprises. Because facturing cost reductions at the global level, together with borrowers achieved high rates of return, guarantee pro- better siting and maintenance, are crucial to increasing the grams could achieve higher impact through tighter target- competitiveness of wind and other new renewable energy ing on less creditworthy companies. technologies. World Bank-supported projects have been successful in The largest single area of off-grid renewable energy invest- introducing energy service companies (ESCOs) to China, ment has been in solar photovoltaics, mostly for home use. with high returns, significant GHG impacts, and sponta- Since 1992, the WBG has contributed $790 million to solar neous replication. However, further replication and scale- home system (SHS) components in 34 countries, almost up must address the ESCOs' own credit problems and all using GEF-funded subsidies. World Bank efforts, us- recognize that energy performance contracting, the stan- ing quality-contingent producer subsidies and relying on dard paradigm for ESCOs, may require major adaptations microfinance for consumers, have been more successful in many developing countries. than those of IFC. These projects can have economic rates IFC also lends directly to industry for energy efficiency. of return of 30­90 percent but have little impact on GHG IFC's program of screening its clients for energy efficiency reductions because off-grid households use so little energy. opportunities supports mostly small loans with low GHG At current prices, SHSs have been successful in a narrow impacts. niche market: the off-grid household that is either relatively well-off by rural standards or can access good microfinance Three areas of existing activity stand out as having high services. impact and high potential for scale-up: first, proactive IFC support for energy efficiency in the atypical but important Energy efficiency cases of large, carbon-intensive factories that face credit or Phase I of this evaluation (IEG 2009) assessed the most im- information barriers; second, increased support for trans- portant barrier-removing policies: energy price reform and mission and distribution loss reduction, which offers eco- promotion of energy efficiency policies such as building and nomic rates of return of 16­60+ percent and lifetime carbon appliance standards. It noted that the Bank had pursued returns of 7­15 kilograms per dollar. Third, substitution of price reforms in energy but had relatively few--and mod- compact fluorescent lamps (CFLs) for incandescent lamps estly funded--projects dealing with energy efficiency. Since offers estimated direct economic returns (in saved energy) then, there has been increased attention to policy-efficiency of 50­700 percent, together with deferred construction of linkages, including Bank-IFC support for a recently adopt- power plants and emissions reductions of 27­134 kilograms ed energy efficiency law in the Russian Federation, support of CO2 per dollar. These returns would be further magnified for a G20 study of energy subsidies, and a recently approved if initial projects catalyzed spontaneous diffusion of CFLs. Vietnam power sector development policy operation. However, rigorous evaluation of CFLs is lacking. Owners of factories and buildings often fail to borrow for Forestry apparently highly profitable energy efficiency opportuni- Forest loss, especially in the tropics, generates a quarter of de- ties. The WBG's diagnosis: Borrowers lack information, and veloping countries' emissions. The local and global values of lenders lack experience and comfort with energy efficiency standing forests often greatly exceed the gains from destroy- project finance. The largest WBG response has been to ing those forests. Tapping this value could therefore offer support financial intermediaries--banks, special-purpose large economic and GHG gains. The Forest Carbon Partner- funds, and energy service companies--with guarantees and ship Facility is a pilot that explores options to monetize the technical assistance. These programs have appropriately value of standing forests. However, the mechanisms to use been directed to China and Eastern Europe, where energy the funds to conserve forests are still being planned. World inefficiency has been high. Bank experience provides some models for scaling up. Parallel programs have been implemented by the World Payment for Environmental Services programs also seek Bank and IFC, both supported by the GEF, and without to reward property owners who maintain forests. World Executive Summary | xi Bank-supported programs in Costa Rica and Mexico IEG found that none of the investment cases would have have demonstrated the logistics of paying for services and met the SFDCC criteria, either because they were not have helped to globally popularize this approach. Howev- least-cost for generation after accounting for local air pol- er, a substantial proportion of payments has gone to areas lution burdens or because they did not fully explore effi- that are not at high risk for deforestation, diluting carbon ciency alternatives. The complexity of the issues, however, and environmental benefits and prompting attention to is illustrated by IFC's support for a supercritical coal plant targeting. in India. On one hand, it will be one of the largest point sources of CO2 on the planet, adding to the atmosphere's The most prominent line of action associated with forest pre-existing burden as GHG concentrations climb toward conservation is support for protected areas. These now dangerous levels. On the other hand, it may nevertheless cover more than a quarter of the tropical forest estate, an have reduced emissions by about 10 percent compared with area equivalent to Argentina and Bolivia combined, much a scenario without IFC involvement, and indirectly accel- of it with World Bank support. A global analysis shows erated the diffusion of this higher-efficiency technology in that these areas are on average effective in reducing defor- a country that will continue to rely on coal for decades to estation. Areas that allow sustainable use are more effec- meet urgent power needs. More than a quarter of India's tive than strictly protected areas, and indigenous areas are power is lost in transmission and distribution. Nationwide, most effective of all. They also offer precious biodiversity reduction in distribution losses and other efficiency mea- benefits. These findings support the feasibility of the Re- sures can offer higher returns in power availability, local duced Emissions from Deforestation and Degradation ini- environmental improvement, and GHG reductions than tiative (REDD) in combining sustainable development and new construction. forest conservation. The WBG's highest leverage for promoting low-carbon Urban transit growth is at the level of the power system. The World Bank's Growing transport demand clogs limited roadway space technical assistance to Kosovo points to a way of resolving in the developing world, resulting in severe congestion, air the tensions surrounding coal. A study (World Bank 2005) pollution, and GHG emissions. The single largest WBG re- assessed options for power system expansion using a sys- sponse has been to support the deployment of bus rapid temwide power model that accounted for local health costs transit systems, which cost much less than tramways or from pollution. It showed if CO2 abatement was valued at subways. Key barriers have been the lack of intermunici- 10 per ton, it would be optimal to retire small, inefficient pality coordination, and opposition by displaced minibus coal plants but also to construct a large, efficient one. (The drivers. However, systems have been successfully initiated impact of higher carbon prices was not explored.) Models in Bogota and Mexico City and are being expanded there like this, if extended to include energy efficiency as an al- and replicated elsewhere. ternative to expanded generation, can serve as a basis of The immediate economic benefits in Mexico City provide discussion for identifying technical and financial options an estimated 81 percent economic return and a GHG re- for pursuing low-carbon growth at a national level. turn of 10 kilograms per dollar. Larger, sustainable long- run gains will require demand-side management of traffic Carbon finance and rational land use planning. As an institutional innovation, the World Bank's Carbon Finance Unit (CFU) has played an important demonstration Coal power role in helping open an entirely new field of environmental Coal is a cheap source of power for a power-hungry world, finance, popularizing the idea of carbon markets, and con- but coal is a major source of GHG emissions. How does the tributing to the institutional infrastructure of the market. WBG maximize development returns for clients with no GHG reduction obligations, while protecting other clients The Bank's carbon business exit strategy called for the CFU threatened by GHG emissions regardless of their source? to relinquish its role as carbon offset buyer as the private SFDCC criteria restrict WBG support to instances where market began to flourish. But although the Bank indeed coal has the lowest cost after environmental externalities moved into higher-risk, pilot areas of the carbon market have been considered, there is optimal use of energy effi- (the Forest Carbon Partnership Facility and the Carbon ciency, and no concessional funds are available to finance Partnership Facility), it continued to build up its lower- the incremental cost of low-carbon alternatives. risk Kyoto-oriented business after that market was already thriving. It also failed to mainstream carbon finance within The Independent Evaluation Group (IEG) examined five the Bank. pre-SFDCC coal power projects to determine whether WBG involvement contributed to greater efficiency and As a vehicle for catalytic finance and technology transfer, the whether lower-carbon alternatives had been considered. CFU's record is mixed. It has contributed to the diffusion xii | Climate Change and the World Bank Group of some technologies, such as landfill gas, and supported first-of-kind technology investments in some countries. The BioCarbon Fund and the Community Development Carbon Fund have supported small-scale, rural, and for- estry projects--and learned in the process that this is dif- ficult to do. In contrast, much of the CFU's support for energy technologies has gone to projects where its financial leverage--and hence its catalytic impact--was relatively small. In addition, two-thirds of carbon fund purchase commitments have been for projects that destroy HFC-23, a highly potent, industrially generated GHG. The projects tapped a Chinese low-cost GHG abatement opportunity and gave participating companies high profits, 65 percent of which were then taxed for development purposes. Al- though this was an allowable use of the carbon market, an alternative would have been to use international funding to pay only for the low marginal costs of destroying the gas, deploying carbon funds with higher leverage elsewhere. Photo by Kenneth M. Chomitz. Used with permission. Technology transfer Technology transfer is one of the pillars of the Bali Action Plan (under the United Nations Framework Convention on Climate) and of the SFDCC. The WBG has contributed to the transfer of existing clean technologies through projects that pilot, debug, demonstrate, and diffuse innovations in engineering and finance. These have been successful when the logic of demonstration and diffusion has been well thought out. The Renewable Energy Development Project (China), for instance, used a combination of quality-contingent subsidies, research and development grants, and techni- cal assistance to foster the growth of a competitive solar photovoltaic industry. The Energy Conservation Project scaled.) Projects incorrectly assumed that private benefi- supported China's first ESCOs, with strong emphasis on ciaries of technology (such as recipients of technology li- knowledge sharing and diffusion. The Regional Silvopas- censes in the China Efficient Boilers Project) would share toral Project in Latin America piloted different approaches proprietary technology with competitors. Several IFC in- to integrating trees with pasture, rigorously documenting vestments, pursuing multiple but conflicting objectives, that some techniques were highly profitable even without tackled an insurmountable combination of inexperienced reckoning carbon and biodiversity benefits, and was able entrepreneurs, unfamiliar technology, and an uninter- to convince the Colombian government to scale up the ested target market. Finally, both the concentrated solar project. In all these cases, GEF support was essential to power and efficient boiler projects underestimated the dif- mitigate up-front risk and to pay for global benefits of ficulty of procurement when technology suppliers are few knowledge created. and costs are poorly known--an inherent feature of newer technologies. Conversely, technology transfer has floundered in the absence of a solid logical framework that links interven- Learning and incentives tions to technological diffusion, especially in the case of Rapid feedback and learning is essential for adapting tech- advanced technologies. Early efforts to support concen- nology to new sites, for deciding which technologies to trated solar power, for instance, incorrectly assumed that scale up, and for ensuring that they are working as planned. a few scattered projects would spur cost reductions at the Technology demonstration projects work best when it global level. (A new concentrated solar power initiative is clear what is being demonstrated, how, and to whom. under the Clean Technology Fund is more appropriately Although recent demonstration projects have good plans Executive Summary | xiii for monitoring their direct results, they do not yet track counts for clients, the WBG, and the world, however, is the how effectively these results are reaching their intended return on the portfolio in development, poverty reduction, audience. and GHG mitigation. As other IEG reports have noted, cost-benefit analysis has A first challenge is to mitigate risks. This means using GEF fallen out of fashion, impeding the WBG's ability to identify or other concessional funds (grants or low-interest loans) high-return investments. The estimates quoted here remain to support the earliest and riskiest ventures, so that failures an unvalidated and possibly overoptimistic guide. The lack are less costly to borrowers. Because of the potential for of good impact evaluations of forest projects, for instance, high returns, this could be a much higher-leverage use of has deprived the REDD agenda of urgently needed guid- climate finance than the purchase of carbon offsets from ance on how best to combine forest protection with eco- marginally profitable renewable energy projects. Risk is nomic development. further mitigated by staging successively larger pilots and demonstrations, from test site to province to nation. With Publicly disclosed monitoring of carbon projects shows the increasing experience and comfort, scale expands and risk gains from feedback. Landfill gas projects proliferated with declines. Changes are necessary, too, in internal WBG in- the advent of the carbon market, but monitoring reports centives to reward staff and managers for conducting in- soon showed that these projects were systematically un- formative pilots and for producing results at the portfolio derperforming, relative to their design expectations. This rather than the project level. feedback revealed that the appraisal models were based on US experience, which is inapplicable to the waste streams A second challenge is to design projects effectively for learn- of developing countries. The WBG helped to publicize this ing and diffusion. Pilot or demonstration projects must discovery. have a clear, logical framework showing how they will pro- mote diffusion the knowledge gained through experience. Newer projects have incorporated design and operational Pilot, demonstration, and technology transfer projects re- lessons. This kind of systematic feedback is missing from quire additional support for preparation and supervision in most projects, though IFC's monitoring system is begin- funding and on-call expertise. ning to cover it. Feedback is especially needed for renew- able energy projects, where economic and carbon impacts Though there is a clear case and large scope for WBG in- are proportional to capacity utilization. Many hydropower volvement in technology transfer at the national level, the and wind projects are underperforming for reasons that are case is less clear for WBG involvement in new technology not clear. development at the global level. Candidate technologies would be those where WBG support could make an ap- At the organizational level, the WBG has framed SFDCC preciable difference to the global market, helping to push goals in terms of dollars committed, rather than outcomes costs down. Of special interest are technologies that ben- or impacts. This sets up poor incentives. For instance, en- efit poor people and are difficult to protect from copying ergy efficiency projects are expensive in staff time and lead (and therefore attract little private R&D)--for instance, in to relatively modest volumes of lending, yet can benefit cli- agriculture and land use. The proposed new WBG effort ents more than cheaper-to-prepare, larger-volume genera- to support concentrated solar power is a plausible area of tion projects. support because a large proportion of the suitable resource is located in client countries, the technology is suitable for Recommendations manufacture in client countries, and the proposed effort is sufficiently large to globally push the industry down the The WBG should maximize its leverage in promoting low- cost curve. carbon development. This will require a strategic approach to portfolio choice, instruments deployed, and technology The World Bank and IFC should-- policy. And it means scaling up what works and redesign- · Create incentives and mobilize resources to sup- ing what does not, using learning to unlock value for clients port effective pilot, demonstration, and technology and for the world. Key aspects are as follows. transfer projects that have a clear logic of demon- stration and diffusion. This will include mobilizing Act like a venture capitalist GEF and other concessional funds to mitigate World In both the public and private spheres, the WBG can sup- Bank borrower risk, reshaping incentives for staff and port the transfer, adaptation, piloting, and demonstra- managers, providing adequate resources for the de- tion of innovative technologies, policies, and financial sign and supervision of complex projects, and making practices--as it has, for instance, with ESCOs, bus rapid available specialized expertise in technology transfer transit, solar home systems, and agroforestry. These dem- and procurement through a real or virtual technology onstrations carry risks but can offer high returns. What unit. xiv | Climate Change and the World Bank Group Scale up high-impact investments and existing portfolio of climate-friendly guarantee Energy efficiency offers high economic and carbon returns. projects. The WBG should-- · The World Bank should enhance the delivery of its · Place greater emphasis on large-scale energy effi- guarantee products by taking actions to improve poli- ciency scale-up, as measured by savings in energy cies and procedures, eliminate disincentives, increase and reduced need for new power plants. This in- flexibility, and strengthen skills for the deployment of cludes support for efficient lighting and for exploring the products. It should assess the potential for greater the scope for accelerating the global phase-out of in- use of partial risk guarantees to mobilize long-term fi- candescent light bulbs. It also includes continued and nancing for renewable energy projects, particularly in expanded support for reductions in transmission and the context of feed-in tariffs or other premiums to sup- distribution losses. And it includes a proactive search port investment in renewable energy. by IFC for large-scale, catalytic investments in energy · The Carbon Partnership Facility and other post- efficiency. There is scope to coordinate World Bank Kyoto carbon finance efforts should focus on demon- support for demand-side energy efficiency policies strating effective technical and financial approaches with IFC support for more efficient manufacturing and to boosting low-carbon investments. Funds and facili- more efficient products. ties should have clear exit strategies. The WBG should, wherever possible, help clients find cleaner, domestically preferable alternatives to coal power. Reorient incentives toward learning and impact Moreover, the WBG faces strategic choices in staffing and There is an urgent need to better understand the economic, programming between building up expertise in "sunrise" social, and GHG impacts of a wide variety of scalable in- sectors of broad applicability and limited private sector terventions. How can REDD programs incorporate the les- competition (energy efficiency, land use management for sons of protected areas, environmental services payments, carbon, energy systems planning) versus "sunset" sectors and community forestry? What is the best way to encour- such as coal power. The WBG should-- age energy efficiency in the building sector? · Help countries find alternatives to coal power while Traditional evaluation cycles are too slow when tens of retaining a rarely used option to support it, strictly billions of dollars may be deployed annually for climate following existing guidelines (including optimal use of finance and where there is a danger of lock-in to high- energy efficiency opportunities) and being restricted carbon growth. At the same time, information costs are to cases where there is a compelling argument for pov- plummeting, remote sensing resources are multiplying, and erty or emissions reductions impacts that would not be cell phone access is nearly universal. By wiring up projects achieved without WBG support for coal power. to return early information on impacts, global innovation The WBG cannot tackle this issue alone. Complementary can be accelerated and the WBG can optimize project su- financing for renewable energy and investments in technol- pervision and new project design. ogy R&D are needed from the developed world to provide The WBG's extensive project portfolio and support for better options for the WBG's clients. country strategies makes it a natural nexus for this global Protected areas--especially those permitting sustainable public good. The WBG should-- use--reduce tropical deforestation, providing local envi- · Measure projects' economic and environmental im- ronmental benefits as well as carbon emissions reductions. pact both during execution and after closure and ag- The WBG should-- gregate this information for analysis. For instance, · Continue to explore, in the REDD context, ways to renewable energy projects should monitor capacity finance and promote forest conservation and sus- utilization, and energy efficiency projects should moni- tainable use, including support for indigenous forest tor energy savings. This may require the use of conces- areas and maintenance of existing protected areas. sional funds to defray additional costs of monitoring by staff, clients, and project proponents. In terms of its instruments-- · Link these measures to a results framework that shifts · MIGA's upcoming FY 2012­15 Strategy should out- the SFDCC toward a focus on outputs such as pow- line the role and scope for MIGA to provide politi- er produced, power access, forest cover, and transit cal risk insurance to catalyze long-term financing for share of urban trips, rather than on money spent. renewable energy projects, building on its expertise Executive Summary | xv Management Response I. Introduction account of efforts the WBG has made or is making. It then discusses areas in which Management believes that IEG Management welcomes the second phase evaluation by the has drawn conclusions from an analysis based on limited Independent Evaluation Group (IEG) of lessons-learned coverage, without fully taking into account the significant for development and climate change mitigation from the ongoing changes that have been facilitated by the adoption World Bank Group's (WBG) portfolio in energy, forestry, of the SFDCC. and transport. As noted in the first phase evaluation (IEG 2009), IEG's evaluation covering the expanding project- A. Areas of agreement level experience of the Bank and the International Finance Low-Carbon Studies. Appendix J, referring to the low- Corporation (IFC) in promoting renewable energy, energy carbon pilot program, provides a useful summary of the efficiency, and carbon finance enables a comprehensive as- available work. It also includes the comment that access to sessment of the focus and success of the WBG's efforts on energy is generally not considered. Management would like low carbon development. Management appreciates the fact to emphasize that this statement should not be generalized that this report covers activities across the entire WBG, about all work on low-carbon studies, since the observation including IFC and the Multilateral Investment Guarantee is based only on work presently in the public domain (for Agency (MIGA). example, Brazil and Mexico and the review of renewable The report addresses a very important topic and summa- energy targets and power dispatch efficiency for China). rizes a major exercise to review how the WBG portfolio The low-carbon study for India has paid attention to the has been contributing to low-carbon growth objectives. It access issue. approaches this exercise from an appropriate and construc- In addition, the appendix does not address the issue of long- tive angle: not to be the "judge" of the past WBG perfor- term planning (20 years+) and demand for capacity build- mance in promoting low-carbon growth, since, until very ing in this area, which has been integral to the low-carbon recently, it was not a stated WBG objective, but rather to work along with the need to engage and build consensus use available experiences and lessons to inform future ac- across broad stakeholder groups. These are the emerging tions. It correctly recognizes that projects can contribute to key lessons, and as such should be incorporated in the low- low-carbon growth even if they do not necessarily include carbon work to be pursued in the future. it in development objectives, and thus assesses a wide pool Development cobenefits. With respect to the issue of of projects with and without explicitly stated mitigation energy access, IEG correctly notes that monitoring and related objectives. While the report does not look at every evaluation data are rarely available to quantify cobenefits sector and subsector where significant mitigation coben- of low-carbon interventions in terms of poverty reduction, efits can be obtained, its selection of sectors is reasonable. energy/transport access, and gender equity. In this regard, Management appreciates the many useful observations and management believes that it is worth noting the priority be- suggestions provided in the report and concurs with aspects ing given to developing results frameworks for the SFDCC of IEG's main findings. Many of these comments reinforce and the Climate Investment Funds (CIF). This ongoing the messages expressed in the WBG Strategic Framework work aims to identify indicators which would allow for a on Development and Climate Change (SFDCC) and are better tracking of distributional and gender dimensions, complemented by emerging lessons from analytical stud- with a view to assessing the extent to which development ies, sector strategies, and relevant project level experiences cobenefits actually result from low-carbon interventions. across the WBG. At the same time, management differs A new set of International Development Association (IDA) with some of IEG's findings and recommendations. core indicators has also been prepared to better capture the development impacts of energy projects. Also, the forth- II. Key Issues of Agreement and Divergence coming report on transport and climate underscores the impact of development cobenefits in moving toward a low- Overview of response carbon transport sector. This Management Response first outlines the areas in which management broadly agrees with the analysis in the review, Finally, since the issue of development cobenefits is of noting, however, areas where IEG could have given a fuller central importance to the WBG, management feels that it xvi | Climate Change and the World Bank Group should have been strengthened in the report. This would distribution (T&D) loss reduction would avert the needed have helped identify a set of concrete suggestions on how capacity addition from the Tata Mundra project in India is best to capture and measure the potential development oversimplified. This conclusion does not account for differ- dividend of low-carbon growth. ences in power supply-demand balances or the level of T&D losses within India's regional networks (the 27 percent T&D B. Areas of divergence losses cited in the report is an average across five regional Strategic direction. Management is of the view that sev- networks). An investment decision on capacity additions eral major policy decisions made by the WBG on climate is always linked to a prospective service market, not to the change needed to be better reflected in the IEG report. Spe- entire country. The analogy of using the same system wide cifically, the report tends to imply that the SFDCC requires approach as for the Kosovo electricity system analysis is an "optimizing" both local and global benefits and outcomes. inappropriate extrapolation, since the total system capacity However, this premise is not the message of the Strategic is only about 1,000 MW linked through a single national Framework; the SFDCC very clearly states that the WBG is transmission network. For Kosovo, any investment in T&D to help clients "maximize" national and local development loss reduction will result in capacity availability in any region outcomes, taking advantage of low-carbon growth oppor- of the country; whereas in India, the power market is much tunities to achieve these outcomes whenever possible. It larger, and the supply-demand situation varies locally. would have been better if the IEG report had correctly pre- Energy efficiency. Management is of the view that the sented current WBG policies as articulated in the SFDCC. report's evaluation of energy efficiency is somewhat While the IEG report makes selective references to specific oversimplified in that it does not include a discussion of recent initiatives that draw on lessons from experiences operationally-relevant nuances vis-à-vis energy efficiency over the study period, it does not recognize the signifi- barriers. By limiting the discussion to specific financing cance of ongoing changes that have been facilitated by the tools such as credit lines, the analysis does not fully ap- adoption of the SFDCC. These changes cut across project preciate the broader challenges in dealing with energy ef- design and implementation, corporate targets, and new fi- ficiency implementation through key delivery mechanisms nancial instruments and are also reflected in organizational (for example, incentive systems, market-based approaches, restructuring as well as addition of new staff with special- and regulatory policies to implement energy efficiency sub- ized expertise. While it is too soon to evaluate their impact, projects) which are required to overcome energy efficiency these actions are indicative of greater corporate commit- sector constraints and address transaction risks. Further- ment to addressing climate change. For example, climate more, by focusing on only a few types of interventions, the change work has become a major focus of IFC's business. discussion does not mention some of the barriers addressed The IEG report should also have emphasized more strongly through other operations (technical assistance, policy work, that the "debate" has moved beyond "low-carbon" develop- and so forth), which are meant to create additional drivers ment to "climate smart" development as noted in the World for energy efficiency (mostly through incentives or through Development Report 2010, taking into account syner- new policy drivers). As a result, the evaluation depicts an gies that exist between climate resilience and low-carbon incomplete picture of World Bank programs in some coun- growth. tries, most notably in China. Cleaner production. An area of difference in views con- Management also believes that barriers to investment in cerns IFC's Cleaner Production (CP) program, which IEG energy efficiency, particularly within many large energy-in- summarizes as dedicating "significant resources ... to small tensive industries, remain significant and justify continued loans" and largely dependent for impact on concessional targeted efforts to work with banks and commercial lend- lending. In contrast, management perceives cleaner pro- ers. This conclusion is underscored by recent announce- duction more broadly as part of a systematic approach to ments of setbacks in achieving Chinese targets for energy helping clients identify opportunities for resource and en- efficiency improvements in key industrial sectors. IEG's ergy efficiency which can be implemented at low cost and methodology, which relies primarily on self-reporting by with continuing benefits. Management would like to stress industrial enterprises already under government mandate, that the CP program is one initiative among others that aim needs to be reassessed, with more attention given to com- to improve resource-use efficiency in IFC operations. mercial realities and constraints on clean energy lending. Coal power. Management would like to emphasize that the Outstanding data issues. Management finds that the data application of the system analysis suggested for evaluating file provided in the report is difficult to reconcile with the investment decisions for coal power projects should take energy database, and as such, does not allow for verification into account differences across power markets. The IEG of IEG's numbers. Further efforts to ensure consistency of report's conclusion that investment in transmission and data would be desirable. Management Response | xvii Technology. As a general observation, in recent years the carbon finance to potential projects inside and outside the WBG has been becoming much more involved in the pro- Bank. Finally, the report argues that "carbon finance needs motion of efforts to develop and transfer new energy tech- to be redirected away from hydropower, where it has mini- nologies. These efforts build on donor-funded programs, mal impact on project bankability." Here, management be- particularly the Global Environmental Facility (GEF) and lieves the report should have discussed alternative financ- more recently the Clean Technology Fund (CTF), but also ing avenues, in particular for Africa, where hydro remains a include significant on balance sheet investments by IFC's vast and largely untapped reservoir of clean energy. clean tech unit and funds department. The combined re- Management would have liked to see a stronger emphasis sources of the WBG, GEF and CTF, if leveraged, can help in the report on the potential role the Bank may play in pro- scale up advanced technologies including concentrating moting carbon finance reform, so as to facilitate transition solar power (CSP) and carbon capture and storage (CCS) toward programmatic and ecosystem based approaches, in developing countries. IEG should have recognized the and speedier and simplified administrative processes. WBG's efforts in this regard, including the establishment of the CCS Capacity Building Trust Fund in 2009. The WBG's Agriculture. IEG's review made the decision to exclude the proactive approach to CSP and CCS is helping to consider- agriculture sector, while acknowledging its contribution to ably change the Bank's role in supporting advanced tech- greenhouse gas (GHG) emissions. Management believes, nology transfer. however, that given this sector's importance (together with Forestry it accounts for 30 percent of GHG emissions and Carbon finance. There are significant differences between more in many developing countries), the report should the views of management and the IEG report with regard have recommended that management pay more attention to the exit strategy, knowledge transfer, and technical assis- to the role of agriculture, including livestock and land and tance provided through the Bank's involvement in carbon water management, in low-carbon growth in the future. finance. The report does not differentiate between carbon markets (e.g., the market for allowances in Europe and the In this regard, the report and its recommendations would Clean Development Mechanism market), and fails to un- have benefited from using a broader perspective. The evi- derstand that withdrawal by the Bank in 2005 from the car- dence is that many of the "causes of deforestation" lie out- bon markets where its Carbon Finance Unit operates would side the forestry sector (for example, forest fires related to have been catastrophic to the long-term stability of these land clearing for agricultural intensification), and in the markets. Management also believes that the report should use of biomass energy (for example, wood and charcoal) have acknowledged that a major goal of carbon markets for cooking and heating. was to bring in private capital as per United Nations nego- tiations, and that the unpredictable nature of carbon flows poses a fundamental problem in using carbon financing in III. IEG Recommendations the Bank and elsewhere. Management feels that the report Management welcomes and in general agrees with the IEG misses the knowledge transfer and technical assistance recommendations. These recommendations largely fit with provided through instruments such as the Prototype Car- what the WBG is doing at present, and are relevant to the bon Fund Plus, Community Development Carbon Fund Energy and the Environment Strategies currently under (CDCF) Plus, or Forest Carbon Partnership Facility (FCPF) preparation. Management's specific responses to IEG rec- Readiness Fund, and by the World Bank Institute's CF As- ommendations are outlined in the attached draft Manage- sist program, all of which help increase the availability of ment Action Record. xviii | Climate Change and the World Bank Group Management Action Record Major monitorable IEG Management response recommendations requiring a response The World Bank and IFC should-- Ongoing/Agree Create incentives and mobilize resources to This recommendation is consistent with the SFDCC. Key ongoing work consistent support effective pilot, demonstration, and with the recommendation includes-- technology transfer projects that have a clear · WBG expects to expand its partnership with GEF, which is well positioned to take logic of demonstration and diffusion. This will on early research and development risks, through the recently established Technol- include mobilizing Global Environment Fund and ogy Transfer Program and GEF/IFC Earth Fund. other concessional funds to mitigate World Bank · Through the Clean Technology Fund (CTF), Scaling-up Renewable Energy Partner- borrower risk; reshaping incentives for staff and ship (SREP) and Forest Investment Partnership (FIP), WBG is supporting technology managers; providing adequate resources for the scale-up with the help of innovative financing. design and supervision of complex projects; and · A climate technology program, launched in September 2009, is exploring the making available specialized expertise in technol- feasibility of climate technology innovation centers in developing countries as ogy transfer and procurement through a real or a way to stimulate locally relevant climate technologies and harness economic virtual technology unit. opportunities at the small and medium enterprise (SME) level (first centers already under development in Brazil, India, and Kenya). · A new MDTF has been established for supporting the introduction of CCS technologies and providing technical assistance to clients. · IFC's clean-tech investment practice will be housed in the newly-created Climate Business Group. CLEANTECHNET is a practice group that meets virtually and in person to share knowledge and issues in the technology space. · The potential for additional initiatives to support these objectives will also be explored in the Energy Strategy. The WBG should-- Partially Agree Place greater emphasis on large-scale energy WBG agrees with the general emphasis proposed, but does not agree with the efficiency scale-up, as measured by energy saved specific action areas proposed. WBG does focus on large-scale or bundled energy and generating capacity avoided. This includes efficiency projects to avoid high transaction costs associated with small-scale invest- support for efficient lighting and exploring the ments. Estimates of energy saved are computed as part of the appraisal of projects scope for accelerating the global phase-out of in- with energy efficiency components. candescent light bulbs. It includes continued and However, World Bank finds the recommendations on efficient lighting and T&D to be expanded support for reductions in transmission rather prescriptive and limited in terms of scope and impacts. They do not account and distribution losses. And it includes proactive for a variety of untapped energy efficiency scale up opportunities and available long- search by IFC for large-scale, catalytic invest- term EE potential in other sectors, on both the supply and demand sides, which could ments in energy efficiency. There is scope to have much larger impacts, such as in district heating, industry, and municipalities. coordinate World Bank support for demand-side IFC intends to increase its climate-related lending from 10 percent of annual energy efficiency policies with IFC support for commitments in fiscal 2009 to 20­25 percent in fiscal 2013, and will undertake more efficient manufacturing and more efficient a proactive search for suitable investments. Energy efficiency is expected to be products. a significant contributor to meeting this target. IFC will define an approach to estimating avoided emissions associated with its climate-related activity. IFC agrees with the potential for investments in manufacturing of more efficient products and is actively seeking such opportunities, having made several such investments in fiscal 2010. (continued) Management Response | xix Management Action Record (continued) Major monitorable IEG Management response recommendations requiring a response The WBG should-- Ongoing/Agree Help countries find alternatives to coal power The policy proposed is consistent with SFDCC criteria for coal investments. while retaining a rarely used option to support SFDCC criteria for coal investments have been clarified in the "Operational Guidance coal power, strictly following existing guidelines for the World Bank Group Staff : Criteria for Screening Coal Projects Framework for (including optimal use of energy efficiency op- Development and Climate Change," which took effect on April 15, 2010. The specific portunities) and being restricted to cases where stress on "optimal use of energy efficiency opportunities" presented in the IEG recom- there is a compelling argument for poverty or mendation seems unnecessary, as there are no priority criteria either in SFDCC or emissions reductions impacts that would not be the Operational Guidance and all required criteria must be adequately addressed. achieved without WBG support for coal power. The Operational Guidance makes clear that coal investments should focus on cases where there is a compelling argument for poverty reduction and a clear need for WBG support. The WBG should-- Ongoing/Agree Continue to explore, in the REDD context, ways By definition, REDD+ includes reducing emissions from deforestation and forest deg- to finance and promote forest conservation and radation and addressing the role of conservation, sustainable management of forests sustainable use, including support for indig- and enhancement of forest carbon stocks. The World Bank is assisting countries to enous forest areas and maintenance of existing engage in REDD+ activities through two programs: FCPF and FIP. Both of these will protected areas. contribute to financing and promoting forest conservation and sustainable use, including support for indigenous forest areas and forest conservation. FCPF involves 37 countries, and has mobilized $160 million for capacity building and performance- based payments to pilot projects which aim to open financial flows for sustainable management of forests and land. FIP, funded at approximately $600 million, will pilot programmatic investments to reduce deforestation and forest degradation, promote sustainable forest management, and conserve forests in Brazil, Burkina Faso, the Democratic Republic of Congo, Ghana, Indonesia, Lao PDR, Mexico, and Peru. MIGA's upcoming FY 2012­15 Strategy should Partially Agree outline the role and scope for MIGA to provide MIGA intends to address these issues in its annual business plan/budgeting process, political risk insurance to catalyze long-term but will not do so in the upcoming FY 2012­15 Strategy. financing for renewable energy projects, building MIGA will consider a set of actions aimed at supporting eligible renewable energy on its expertise and existing portfolio of climate- and energy efficiency projects. These actions are subject to the willingness of private friendly guarantee projects. sponsors to invest in renewable energy and energy efficiency projects and the need for political risk insurance as a risk mitigation tool and/or a facilitation mechanism for funding and operations of those projects. MIGA understands that decisions to invest by project sponsors are subject to the uncertainties of future carbon market structures and prices. These markets have been actively pursued by sponsors as a complementary source of funds for renewable energy and energy efficiency projects. MIGA's current portfolio and expertise can serve as an initial step in supporting renewable energy and energy efficiency projects, however MIGA's actions will need to evolve and adapt to changing conditions in the carbon markets. As MIGA's upcoming FY 2012­15 Strategy will primarily be focused on MIGA's risk- return dynamics, including the agency's overall appetite for risk, it may not focus on specific subsectors such as renewable energy and therefore may not be the ap- propriate vehicle to address this issue. This subsector focus will therefore need to be addressed through a more appropriate mechanism such as MIGA's annual business plan/budgeting process. xx | Climate Change and the World Bank Group Management Action Record (continued) Major monitorable IEG Management response recommendations requiring a response The World Bank should take the necessary steps Partially Agree to enhance the delivery of its guarantee products In response to IEG's evaluation of WBG guarantees, Management has been engaged by taking actions to improve policies and proce- in ongoing discussions on opportunities to optimize the delivery of WBG guarantee dures, eliminate disincentives, increase flexibility, instruments and has taken action to introduce greater flexibility in the use of Bank and strengthen skills for the deployment of guarantee instruments in response to dynamic country and client needs and market the products. It should assess the potential for developments. A Memorandum of Understanding was recently signed between greater use of partial risk guarantees to mobilize the World Bank and MIGA to provide incentives to staff to collaborate and a similar long-term financing for renewable energy proj- agreement is being worked on with IFC. The Bank is working to increase potential for ects, particularly in the context of feed-in tariffs greater use of partial risk guarantees for renewable energy projects and is allocating or other premiums to support investment in more staff and resources accordingly. The World Bank feels that the delivery of renew- renewable energy. able energy guarantee products should not single out the feed-in-tariff instrument, as the effectiveness and efficiency of its application varies across market structures and varies across countries depending on their energy access levels, with the potential to result in high energy costs that will need to be borne by consumers. The Carbon Partnership Facility and other post- Ongoing/Agree Kyoto carbon finance efforts should focus on CPF and FCPF were clearly established for the purposes described. Beyond these demonstrating effective technical and financial facilities, the World Bank is invited to explore how to facilitate developing countries' approaches to boosting low-carbon invest- further access to the carbon market and expand the reach of market mechanisms in ments. Funds and facilities should have clear exit land use, including in agriculture. Work is under way to develop successor facilities to strategies. CDCF and the BioCarbon Fund. Each fund and facility has its own clear exit strategy corresponding to when its capital has been fully committed. Regarding CPF, each tranche is to be established based on an assessment of the needs for further methodology development and piloting of new approaches to scale up the use of market mechanisms. The WBG should-- Disagree Measure projects' economic and environmental While WBG assesses projects' environmental impacts before, during, and after imple- impact during execution and after closure and mentation, there are methodological difficulties in aggregating these. aggregate this information for analysis. For in- There is not a clear source of concessional funding to defray the additional cost of stance, renewable energy projects should moni- monitoring by staff and project proponents, apart from climate-related trust funds, tor capacity utilization, and energy efficiency such as the CIF. Under the CIF, results frameworks are currently under develop- projects should monitor energy savings. This may ment. Each multilateral development bank partner and client will be responsible for require the use of concessional funds to defray monitoring results in accordance with the frameworks. Under the CTF and the SREP, additional costs of monitoring by staff, clients, indicators for renewable energy and energy efficiency investments will be tested in and project proponents. CIF-funded operations. Measurement is being strengthened with respect to climate change mitigation. As outlined in SFDCC, a methodology for "carbon tagging" has been developed and prototyped. Once this methodology is adopted, this will help aggregate the project commitments coded as GHG mitigation (CO2 emission reduction). In addition, a new set of core indicators for IDA investment lending operations was approved by the En- ergy and Mining Sector Board in 2009, to better capture impacts of the implementa- tion of renewable energy projects. For energy efficiency projects in the IDA portfolio, a similar set of indicators, including project energy savings, is currently under review. The formulation of new core indicators for energy projects is also proposed for IBRD- financed operations. IFC feels that collecting information on project performance may be complex and unrealistic for some financial intermediation-based lending instruments (for example, small loan programs for SMEs). Nevertheless, more efforts could be made in terms of monitoring, if additional resources were available to cover the extra costs of staff, clients, and project proponents. (continued) Management Response | xxi Management Action Record (continued) Major monitorable IEG Management response recommendations requiring a response The WBG should-- Ongoing/Agree Link these measures to a results framework that A long-term results framework for SFDCC is under development, as stated in the shifts the SFDCC toward a focus on outputs such Interim Progress Report for SFDCC, May 2010. as power produced, power access, forest cover, The SFDCC results framework will be outcome-oriented and is currently being transit share of urban trips, rather than money developed in a consultative manner as envisioned in SFDCC. In addition to tracking spent. WBG actions at the input level, the new results framework is being designed to track outputs, outcomes, and impacts related to WBG actions. Potential indicators at all of these levels (including the suggested output indicators: power produced, power access, forest cover, transit share of urban trips) are currently being assessed for their feasibility, simplicity, and suitability in communicating results at different levels and scales. Separate results frameworks are under development for the CIF with an emphasis on impact, outcome and output indicators. Results chains link projects to the CIF final outcomes through pilot country outputs and outcomes, program replication outcomes, and transformative impact. The multilateral development banks are currently in a process to identify reliable indicators to measure results and achieve- ments at each level. xxii | Climate Change and the World Bank Group Chairman's Summary: Committee on Development Effectiveness (CODE) On September 15, 2010, the Committee on Develop- and diffusion of technologies and practices that reduce ment Effectiveness (CODE) considered the report Climate GHG emissions. Members noted that since the Strategic Change and the World Bank Group--Phase II: The Challenge Framework for Development and Climate Change (SFDCC) of Low-Carbon Development, prepared by the Indepen- was launched in 2008, it would be premature to evaluate the dent Evaluation Group (IEG), and the draft management experience with the SFDCC. IEG clarified that the report is response. not an evaluation of the SFDCC but rather an assessment of earlier activities to inform the implementation of the Summary SFDCC. In addition, members agreed with management that addressing climate change as a development issue raises The Committee welcomed the timely discussion of the IEG the questions of how to address the access agenda while report which, as noted by management, highlighted impor- taking into account low-carbon development. IEG clarified tant areas that are currently considered in the updates of that Phase I of the report considered this important aspect. the World Bank Group (WBG) Energy and Environment Sector Strategies. In this regard, members cautioned that, Some members felt that the IEG evaluation should have given the ongoing consultations, the IEG findings and rec- addressed the World Bank commitments at the country ommendations should not be perceived as preempting the level rather than project-by-project, suggested guidance to new strategies but inform the ongoing process. They wel- emerging countries on how to support low-carbon growth, comed the report's emphasis on energy efficiency and its and looked at geothermal, biofuel, and biomass energy. perspective on a "venture capital" approach and endorsed There were also comments on global vis-à-vis national the call for a greater focus on results to complement the efforts; trade-offs of having a climate change agenda, energy focus on mobilization and transfer of resources. There was access, and social development; the role of carbon funds; appreciation for the report's findings that many types of re- and shortcomings of current staff incentives and resource newable energy require concessional finance. constraints. Different views were expressed on the WBG's involvement in coal plant projects. The IEG evaluation sought to draw lessons from recent WBG experience (2003­08) with promoting the adoption Chairman's Summary: Committee on Development Effectiveness (CODE) | xxiii Statement of the External High-Level Review Panel The High-Level Review Panel (Panel) has been asked to WBG, as other institutions that grew up before the chal- comment on the Phase II report of the Independent Evalu- lenges of climate resilient development were apparent, ation Group's (IEG) evaluation Climate Change and the must alter its practices of investment and capacity building World Bank Group. The Phase I evaluation was devoted to to adapt to the different politics and technologies that now assessing the role of policy actions in support of low-carbon are present. We hope our comment will be read in the same growth and stressed the importance of energy price ratio- spirit as the IEG report, reinforcing and extending the work nalization. Like the Phase I report, this report places special we are charged to review. stress on the need for systems thinking in key sectors such as energy, transport, and forestry. The Panel appreciates both the extensive amount of work and the scope of the as- The Challenge of Climate Change and sessment assembled by the two reports together and sepa- Low-Carbon (Green) Growth rately. Summarizing World Bank Group (WBG) activities A number of features set the management of climate risks and giving a comprehensive review of the changing role of apart from most developmental and environmental prob- the Bank and future options is difficult because of the size lems. It spans centuries, forcing us to rethink intergen- and diversity of the Bank. The challenge of preparing such a erational equity issues between and within countries. If report is compounded by the decline in the use of cost ben- unchecked, climate change might threaten the development efit analysis over recent decades that has been documented aspirations of the poor. If approached creatively, it opens in another recent IEG report (IEG 2010a). development opportunities. Rapid economic growth in We find the current report to be written with exemplary the last decades has substantially reduced poverty in some clarity. As far as we have been able to ascertain, it gives both countries, but now the very sustainability of this growth is an even-handed overview of the changing WBG practice seriously threatened by climate change unless we change in this area and a level-headed analysis of the options and our growth strategies. Some implications of the long-run alternatives ahead. low-carbon strategy are clear, such as the virtual phase-out in this century of fossil fuel use. This will require a high The report is at once supportive and critical of the various price on carbon emissions or other aggressive policy mea- dimensions of the WBG activities and represents an element sures and incentives, with inclusive participation across of an ongoing evolution of the thinking about the work al- the world. Others aspects of these alternative development ready under way, or in need of further implementation, strategies in the areas of forestry and innovation suggest in the multiple activities of the WBG. The Panel also both quite immediate interventions to preserve depletable assets supports and criticizes the reviewed practices of the WBG or lay the foundations for the commercialization and diffu- and equally recommends a continuing evolution of WBG sion of newer technologies that cannot be deferred. perspectives in its adaptation to the pressing needs for cli- Although the short-run capital, operational, and transition mate finance. In this comment, we want to reinforce the key costs of managing climate change risks are sizable, they are messages in the report: that the WBG can and should play a still dwarfed both by the benefits of and by the resources central role in the multilateral and national responses to the available from a century of growth. Green growth and win- worldwide development/climate problems before us. win opportunities are increasingly recognized by national We believe that the tensions between development and leaders as real options, but coal is often the cheapest cur- climate are a chimera: the damages from climate change rent investment and the (shadow) carbon prices currently will counteract the development aspirations of low-income discussed are, as shown by the IEG report, inconsequential. countries. To mitigate climate damages is a vital develop- In the multilateral climate negotiations, the distribution of ment goal. Again, in agreement with the report, we believe these costs is deeply contentious and it will take some time that the newer and integrated strategies for low-carbon to resolve. Eventually we will live in a world where all pro- growth can, if well and consistently pursued, minimize or ductive resources, including the climate regulating functions overcome these tensions. Finally, we emphasize that the of the atmosphere have a price--just like land does today in xxiv | Climate Change and the World Bank Group most places. Before we get there, we are in an interregnum to development and poverty alleviation, and there is a when policy making is quite complex. What the situation growing (although not yet sufficiently large) willingness to needs are credible agents that provide the vision to bridge the pay for global mitigation services. Yet there are not inclu- gap, leadership in this crucial task, and the capacity to mobi- sive sanctions imposed on greenhouse gas emissions that lize and channel resources responsibly. As suggested in this would signal to all nations that resource use must change report, the WBG can and must contribute to this leadership. or provide the funds for climate-specific transfers to put a significant positive incentive behind cleaner technologies in less developed countries. In the absence of such agreed The WBG Role international policy guidance to markets, it is especially The report finds that there are multiple and overlapping important that established global coordinating agents use reasons for WBG involvement and action. First, it is evi- financial markets to internalize the shadow costs of carbon dent that when environmental externalities are taken into and the prospective returns of green investment into their account, unregulated markets will not optimize social investment portfolios. We believe that the WBG--with its well-being. Second, given past regulatory practices and the access to world capital markets, the ears of policy makers rising costs of sustainable energy services associated with in all countries, and a credible engagement in both devel- climate change and with other environmental and resource opment and environmental issues--is a strong candidate problems, there is good reason to believe that greener for this position. There are many other important agents, growth built on less extensive exploitation of this resource including governments, industry, and the United Nations. base can increase productivity and development. Third, the However, in the current situation, there is a particular historically low resource prices associated with prior indus- need for the WBG to consider its exceptional position to trial growth have failed to motivate innovation of systems articulate and promote the long-run investment horizon, that use resources in smarter ways. Looking systematically the production of global public goods and services, and the at these opportunities through integrated planning is the systemic planning perspective that few other financial bod- responsibility of agencies such as the WBG, which make ies are able to define and pursue. investment capital available, especially in poorer countries Although the report does not make the overall portfolio of with less institutional capacity to perform this analysis. WBG energy investments a principal subject of criticism, The IEG report highlights that the problem of responsible we urge that this question of WBG perspective receive leadership in this field is compounded by the inability of more direct attention. The bottom line is that virtually the multilateral system over the past years to agree on a all forms of energy supply entail some serious issues, and regime for giving meaningful price signals and comple- hence optimization of demand through effective manage- mentary incentives for managing carbon risks. It has been ment, overview of tariff structures, reduction of grid losses, recognized in principle that climate change is a true threat and other methods of increasing energy productivity should © Corbis Statement of the External High-Level Review Panel | xxv be WBG priorities. The WBG has made significant gains in The IEG report directs attention to energy efficiency, which recent years through its Clean Energy Investment Frame- offers low-cost or negative-cost opportunities to reduce work, and it reports that it achieved a 40 percent share of its carbon emissions. It finds that many people, inside and total energy commitments for renewable energy and energy outside the WBG, do not appear to take energy efficiency efficiency for fiscal 2009. This total commitment figure can seriously. However, especially noting that hoped-for large- include funds for energy efficiency in fossil energy, hydro- scale climate funding may not appear soon and that many power facilities, new renewable energy technologies, and countries simply do not have good immediate alternatives both specific donor funds and structural lending. These to fossil power, many kinds of energy efficiency offer both alternative types of climate finance should be clearly and high economic returns to the borrowing country and high separately reported to facilitate transparent understanding abatement returns to the world. Some types of energy ef- of the changing composition of WBG activities. The Panel ficiency investments can be undertaken immediately, with also makes specific remarks about continuing WBG lend- concurrent huge economic benefits and significant climate ing to coal fired power below. However, given the strong benefits. At the same time, aggressive pursuit of energy findings of the IEG report on the economic viability of in- efficiency today can defer the locking in of new carbon- creasing numbers of renewable energy or clean transport intensive power construction like diesel or coal plants for investment and the social value of the WBG acting to low- a few years, allowing time both for technical progress to er capital and operational costs of newer technologies and reduce the cost of renewable alternatives and for the inter- systems, the Panel urges the WBG to move more quickly national political process to muster more climate finance. in its structural energy lending to assume the coordinating Although the Panel insists that it is necessary to reinforce role of a strategic renewable energy investor. the effects of such investments by anticipating with com- plementary policies--such as tariff and tax reform--the As does the IEG report, the Panel realizes that a change in rebound effects of falling energy prices, it emphasizes the WBG investing stance is not a simple or politically easy task. conclusion of the IEG report that the WBG should give Our position, like that of the evaluation, is more forceful than very high priority to energy efficiency. the WBG Strategic Framework on Development and Climate. We recognize that various WBG stakeholders contest its abil- The Panel also underscores the evaluation's finding that the ity to lead on climate finance, that the WBG operates in a WBG can emulate a role played by venture funding in the partial policy vacuum, and that it has neither a clear mandate private sector. With current carbon prices, the power of nor control over many of the necessary international policies concessional finance is often limited in mitigating the risk to complement its investments. In spite of these factors, the of high-risk projects. At $10/ton for CO2, carbon finance Panel would go beyond even the IEG evaluations and reiter- simply doesn't constitute a make-or-break factor in low- ate by consensus that the Bank Group is uniquely positioned carbon investments. Yet there is a whole class of projects to take on roles that would as an investor and trustee be in- that offer high economic returns (to the adopting coun- ternally innovative and politically opportune in showing the try) together with carbon benefits, but that present some a way toward a comprehensive multilateral system in which priori risks. Bus rapid transit and silvopastoral systems are the financing of low-carbon growth is the essential reform. examples given in the text. Although risk-averse borrowing countries will shy away from these until they are proven, General Findings concessional funds can mitigate this risk. WBG clean tech- nology funds or other WBG climate finance could be used It certainly is true in the short run that low-carbon growth to support a number of individual "start-up" projects, scal- costs more (ignoring externalities) than business as usual ing up the ones that work, and produce an overall portfolio growth (the evaluation emphasizes that renewable energy, with very attractive rates of return. The difference between aside from medium to large hydropower, does have higher this and private venture capital is that the benefits accrue costs or lower returns than other kinds of power genera- to the Bank's client countries rather than the Bank itself-- tion); but the Panel, like the report, puts great stress on the hence the need for concessional capital. potential for a congruence of mitigation and development. The report shows there is ample scope for projects that Although the IEG report demonstrates a record of con- promote local development goals while also mitigating siderable success in many WBG projects in the energy greenhouse gases (see figure 6.1 of the report). In addition efficiency and off-grid photovoltaics (renewable energy), to energy efficiency investments, other projects may indi- the WBG's record in renewable energy more generally has vidually have high carbon returns (forestry) or economic been more mixed and modest. Many hydropower and wind returns (solar home photovoltaic systems). To optimize projects have underperformed relative to expectations. Still carbon and economic gains, it may often be necessary to greater caution about the value of WBG programs should construct portfolios of projects, rather than pursue mul- be attached to the Group's extensive efforts in piloting tiple goals with a single instrument. international carbon markets between Annex I and xxvi | Climate Change and the World Bank Group non-Annex I countries. The World Bank's Carbon Finance programs have been valuable in exposing that inadequate Unit (CFU) has led, through its extensive activities in Clean lending for energy efficiency often reflects wider credit mar- Development Mechanism markets, to expanding the role ket failures, including onerous requirements for collateral. of, and the infrastructure for, carbon trading between de- However, it is important to note that, contrary to expecta- veloped and developing nations. However, there has been tions, although market transformation programs were often criticism of the environmental quality of many projects that conceived as temporary, WBG experience indicates that the WBG has supported, including industrial gases, hydro- these actions proved difficult to discontinue even as banks power, and fossil (gas and coal) power plants, which may or firms gained familiarity with energy efficiency lending. well have been either profitable in themselves or were pur- The Panel finds that the WBG could focus even more exten- sued primarily for the purpose of national energy diversifi- sively on these less usual categories of transition financing, cation and security policies. In addition, although the CFU but needs to pay careful attention to the incentives that will was promoted as a market maker that could act as a carbon help convert such demonstrations of market potential into offset buyer until the private market flourished, the WBG commercial local finance as rapidly as possible. continued to build up its trading after that private market The Panel also applauds the report's attention to the im- was fully established. Finally, as a vehicle for catalytic fi- portance of technology development or promotion and nance and technology transfer, the IEG finds the CFU's re- its transfer or diffusion. Technological innovation requires cord is at best mixed. The Panel suggests that the WBG has special conditions to be successful. The report argues that a public responsibility to ensure that its behavior advances innovations are more apt for WBG support when the Photo by Dana Smillie, courtesy of the World Bank Photo Library. the quality of international institutions that regulate carbon Bank can help defray risks that are peculiar to a certain finance markets, rather than acting principally as a pure environment or when the supported innovations are par- market player profiting from expanding market scale. ticularly adapted to conditions, inputs, or skills found in developing countries. The barriers to technology diffu- Both the report and the Panel underline the importance sion are very often related to institutional factors such as of market transforming measures. The Panel confirms the the character of competition and industrial structure. De- view in the report that loan guarantees, innovative forms of pending on market structure, competitors may resist the insurance for joint ventures and other types of commercial diffusion of technology and the WBG must have a realistic organizations that encourage the international transfer of strategy and realistic goals that take this into account. The technologies, can be valuable. Likewise, investment in new report argues that in numerous cases international support service providers such as energy service companies (ESCOs) was essential to mitigate up-front risk and to pay for global or transmission and distribution loss reduction programs benefits of knowledge created. are especially valuable in climate-related activities. WBG Statement of the External High-Level Review Panel | xxvii Yet WBG experience shows that the returns from invest- car transport. As many nations currently lack the capacity ment in technology development may often be lost with- to implement more systemic and forward-looking develop- out associated programs to encourage and facilitate wide ment planning, there can be a particularly high return to technological diffusion. Some projects have incorrectly as- WBG support in building and institutionalizing intellectual sumed that private beneficiaries of technology would share and political capacity in climate science, climate econom- proprietary technology with competitors. As discussed in ics, and technology strategy. the IEG report, other lessons on fomenting technology in- novation and diffusion can be garnered from projects that Specific Findings fail because of multiple, conflicting objectives, inexperi- In addition to the main points raised above, the Panel agrees enced entrepreneurs, unfamiliar technology, an uninter- with many of the recommendations of the IEG report. We ested target market, and the difficulty of procurement when cannot comment on all sectors or recommendations, but technology suppliers are few and costs are poorly known. we would particularly like to emphasize a number of spe- The Panel suggests that the WBG devote particular atten- cific additional issues. tion to the analysis and selection criteria for programs to compensate private actors for technology and diffusion Energy efficiency risks in its future climate finance portfolio. Analytical clar- Although the emphasis on large-scale energy efficiency ity by the Bank may also help dispel confusion about these scale-up goes in the right direction, further study is needed issues, often found in the multilateral climate negotiations. on the relative importance of efficient lighting and reduc- We believe that the role of capacity building, though men- ing power losses in transmission, for WBG intervention. tioned in the report, could be given even more emphasis Incandescent bulbs and power loss are problems for both as an integrated part of WBG programs and as a separate developed and developing countries. The potential scope standalone activity. for WBG intervention in developing countries, particularly The WBG needs to demonstrate a comprehensive low- in household and building sectors or other areas where op- carbon development pathway for developing countries. portunities for decentralized actions are needed but sub- In promoting low-carbon development, it should apply stantial, needs to be systematically analyzed. In addition, a strategic approach, rather than simply supporting proj- many ESCOs are already playing a role in implementing ects based on sector-specific priorities. The IEG correctly profitable efficiency opportunities, such as phasing out in- highlights how difficult this is, in the absence of a global candescent bulbs. The WBG needs to explore how better to deal that requires governments to account for the external complement and leverage the role of ESCOs by providing costs of climate risk. Naturally, one can focus on combat- them concessional funds. Likewise, the potential for WBG ing perverse subsidies and on pursuing currently available intervention to reduce power loss in developing countries win-win options, but these will not be enough. The climate- needs to be measured, and the carbon saved per dollar by development dilemma is that many green options are not reducing power loss needs to be compared with that of other economically profitable, especially in the short term, or projects. Large-scale gains are also available in the industry they threaten governments with substantial transitional or and transport sectors. These gains are often more simple to political costs. organize because the scale of savings offers reduced trans- action costs, and so they may deserve top priority in many However, the report also suggests that a portfolio of lower developing countries. carbon actions across many sectors--including energy, in- Finally, the Panel emphasizes its particular appreciation dustry, transport and forestry--can mitigate overall devel- that the IEG report consistently highlights and analyzes opment costs and bring ancillary benefits from improved the separate roles of renewable and energy efficiency. We local environmental services and energy security. And over agree both with the importance of the scale-up of energy the long term, technical progress will reduce the costs of efficiency programs and with the practice of measuring and currently noncommercial technologies, yielding systematic evaluating results by energy saved and generating capacity productivity gains. Prospective economic gains from in- avoided rather than by funds dispersed, which can easily novation imply that it is most important to avoid land use lead to inefficient effort. patterns and technology investments that have almost irre- versible lock in. Cases illustrated in the report include op- Transportation and urban design tions to use energy efficiency savings to increase electricity Another major field covered is urban architecture. The fo- supply and forestall the need for more current investment cus when it comes to urban issues is rightly and well placed in power plants with 50 years useful life, and to avoid urban on transit, although rising demands for local indoor clima- architectures (buildings, roads, and so forth) that "require" tization (cooling and heating as well as other demands for (or at least promote strongly) heating, cooling, or passenger urban energy) could perhaps have been given some more xxviii | Climate Change and the World Bank Group attention. In a couple of decades, countries that spent large guidelines that include optimal use of energy efficiency sums on urban infrastructure--such as big roads, sparsely opportunities as well as restricting coal projects to cases populated cities, and homes with high heating or cooling re- where there is a compelling argument for poverty or emis- quirements--will feel that they wasted resources--just like sions reductions impacts that would not be achieved with- those who spent their money on copper telephone lines. The out WBG support. WBG should help tilt the building of long-run infrastruc- However, the report stops short of fully banning engagement ture in a carbon-lean direction: shipping rather than air in the sector for fear that the Bank would lose influence over freight, rail rather than road, virtual communication rather and contact with the sector where such investments will go than physical, and so forth. Thus, urban planning, building ahead without even the advantage of the WBG guidelines. design, modern and climate-adapted systems for transport, The report gives an example of a country that urgently needs forestry, energy portfolio, and infrastructure could be the base load power and where a new efficient coal-fired plant re- critical structural factors in pursuing low-carbon develop- places a number of older and highly inefficient plants--also ment pathways by developing countries. The WBG should within a context of overall system optimization. Although aim to incorporate a low-carbon paradigm shift in those it appreciates the latter argument, this panel would want to structural areas. emphasize the signaling value that the WBG has both when Though reliable data are not readily available, economic it chooses to finance and when it chooses not to. It is hard loss caused by traffic congestion in most developing coun- to envisage situations where the arguments in favor of WBG tries would range from three percent to six percent of GDP, support to coal power outweigh the arguments against. This particularly in urban areas. Thus, investment in mass transit applies particularly if sufficient concessional carbon funding could not only save carbon but could also reduce economic can be leveraged. The argument against a complete ban may, losses in developing countries. The WBG should aim to in- however, have some validity. corporate a low-carbon paradigm shift in these structural It is necessary to make sure that coal is used in a most pru- areas. dent manner, but it is better to focus on improving the en- In almost all developing countries, the transport sector, in ergy portfolio as a whole rather than focusing only on coal particular mass urban transit, chronically suffers from un- at the project level. The WBG should be able to advise and derinvestment. The historical trend of developed countries offer a strategy of diversifying and scaling up renewable en- clearly shows that it is the transport sector that will be the ergy sources in order to shift toward a low-carbon energy most difficult in which to curb the soaring increase of car- portfolio. bon emissions. The bulk of future emissions from devel- oping countries will come from the transport sector. This Forestry, land, and other resource use must be forestalled by massive investment in infrastruc- In addition to access to carbon finance in energy-related in- ture, rapidly and through a paradigm shift toward com- vestment, one of the potential advantages of the WBG is its fortable and accessible low-carbon mass transit, which will superior overview of such issues as global externalities and be a critical component of low-carbon development. The the related politics of negotiations. In the shorter run, the WBG, in particular the International Finance Corporation, rapid depletion of forests and other land-based carbon stor- should engage in mapping out an ambitious strategy of age systems (for example, peat lands and agricultural soils) promoting low-carbon mass transport systems in develop- represents a stock of assets that can rapidly be exhausted. Im- ing countries. This is consistent with the large-scale energy mediate opportunities to prevent the continuation of long- efficiency scale-up recommendation. As with other energy standing resource exploitation practices in these sectors are sectors, it is crucial to complement these investments with abundant. Substituting degraded lands, themselves the con- a sound price and tariff policy. In this case we recommend sequences of inefficient resource use, for the further loss of tax reform, shifting more of the burden of taxation away primary stocks can allow national development of timber, from goods used by the poor and onto environmentally pulp and paper, oil palm, agroforestry, agropastoral, and unsustainable goods such as fossil fuels. Without high fuel fishery economies that are currently promoted in an unsus- prices, grand schemes for urban transit cannot compete tainable manner by exploitation of natural areas. Food secu- and will merely fall into disrepute. rity concerns in many developing countries are equally open to better management through productivity increases using Coal-fired power intensive techniques instead of simply extending tradition- We appreciate the care that the IEG report has taken in al production by plowing under more forests or throwing discussing the thorny issue of support to coal-fired power out more nets. Because these newer techniques are usually plants. The report recommends assistance to countries more capital and knowledge intensive than what has been to find alternatives to coal power and raises fairly formi- done under business as usual, the WBG is in a particularly dable barriers to coal projects by requiring adherence to strong position to support national agricultural and forestry Statement of the External High-Level Review Panel | xxix services with increased loan capital and concessional funds We close by reiterating only four key points that have been to cover the added costs of transition to new practices. emphasized both in the IEG report and our statement: Because forestry, agriculture, and fishing are often critical · Climate damage is a serious threat to development, areas for many poorer developing countries in pursuing especially for the poor. low-carbon development, the WBG should not only "ex- · It is essential that the WBG as a development institution plore" these mitigation opportunities, but should be able lead in building capacity, understanding, and practical to prioritize immediate support. This support may demand standards to support governments' implemention of the use of public funding to supplement the privately avail- low-carbon growth strategies. able income flows that firms, families, or communities can · The WBG can and should expand its structural lending reap from less-sustainable resource uses and the delivery and grant programs for energy efficiency, renewable en- of these public funds through innovative measures like ergy, and market transformation programs that create easements or contracts for ecosystem services. Moreover, correct incentives consistent with these strategies. as the WBG expands its activities in these sectors, it needs to carefully synchronize its approaches with the Reduced · Finally, the WBG is well placed to take on a mission Emission from Deforestation and Degradation negotia- to encourage and leverage financing for low carbon tions and other elements of the United Nations process in growth. To do so, it must continue to reform its orga- nizational goals, operational practices, internal incen- order to complement and encourage political progress in tives, and performance management criteria to value this priority negotiation field. and reward results at the systemic, rather than at the project level. Recommendations The panel agrees with most of the excellent IEG report. Our own statement is short enough to not require any summary. Han Seung-soo Chairman, Global Green Growth Institute Former Prime Minister, Republic of Korea Thomas C. Heller Executive Director, Climate Policy Initiative Lewis Talbot and Nadine Hearn Shelton Professor of International Legal Studies, Emeritus, Stanford University Thomas Sterner Professor of Environmental Economics, Gothenburg University Past President, European Association of Environmental Economists xxx | Climate Change and the World Bank Group Glossary Additionality To generate carbon offsets recognized under the Clean Development Mechanism or Joint Implementation, projects must show that their emis- sion reductions would be in addition to those that would occur in the absence of carbon finance. Bankability The ability of a project to attract sufficient financing to be viable. A proj- ect might not be bankable if its profits are not high enough in early years to cover the needed debt payments. Base load The amount of power required to supply minimum customer demands (as power demand fluctuates throughout the day, or seasonally). Bus rapid transit (BRT) An efficient urban transit form using priority or dedicated bus lanes. Bus rapid transit system (BRTS) An integrated system of multiple bus rapid transit lines. Carbon dioxide equivalent Number of tons of carbon dioxide considered to have the same impact on (CO2e) global warming as a ton of a specified gas. For instance, one ton of meth- ane is considered equivalent in warming to 25 tons of CO2. Carbon finance unit (CFU) The World Bank unit that manages carbon funds and purchases carbon offsets. Carbon fund A trust fund established to purchase carbon offsets. Carbon offset (or credit) A commodity representing a reduction in greenhouse gas emissions (in- cluding gases other than carbon dioxide), used by purchasers to meet regulatory or voluntary limits on emissions. Certified emission reduc- tions are one type of carbon offset. Carbon return The effectiveness of a project in reducing carbon dioxide emissions (as opposed to the economic return, or other environmental benefits). Mea- sured in lifetime kilograms of CO2e emissions reduced per dollar of in- vestment cost. Certified emission reduction A carbon credit (measured in tons CO2e) for an emissions reduction as- sociated with a Clean Development Mechanism project. Clean Development A mechanism under the Kyoto Protocol by which developed countries Mechanism (CDM) can finance greenhouse gas emission reductions or removal projects in developing countries. In turn, the developed countries receive credits for doing this, which they may apply toward meeting mandatory limits on their own emissions. Combined-cycle turbine A relatively efficient technology for power generation from combustion, usually of natural gas. Combined heat and power (or The production of both electricity and economically valuable heat (for cogeneration) industrial processes or space heating), for example, from a steam boiler. Glossary | xxxi Compact Fluorescent Lamp An efficient light bulb that uses only 20%­30% as much power as a stan- (CFL) dard incandescent bulb. Concentrated solar power A solar power technology that uses focused sunlight to drive a steam tur- bine or heat engine in order to produce electricity. Concessional funds Donor-provided grants and subsidized loans. Debt service coverage ratio The ratio of net operating income to debt repayment obligations (interest and principal). Demand-side management Actions or incentives, often directed by energy utilities to their custom- (DSM) ers, to reduce the level of energy demands (typically through efficiency measures) or change the timing of those demands. Can also apply to mea- sures to reduce demand for transport, such as road or parking pricing. Development Policy Loan A World Bank lending instrument used to support structural reforms in (DPL) an economic sector or in an economy as a whole. District heating Centralized system for the provision of steam heat to an urban neighbor- hood or district. Economic Rate of Return (ERR) The annual percentage rate of return on a project, considering all costs and benefits to society. In this evaluation, ERRs are computed using only domestic costs and benefits; carbon benefits are reckoned separately. End user energy efficiency Energy efficiency improvements carried out by power consumers, such as (or demand-side energy through appliances or industrial equipment that consumes less energy. efficiency) Energy services company A company that provides clients with some combination of assessment, (ESCO) financing and implementation of options for increased efficiency of use and reduced expenditure on energy. Financial intermediaries Financial institutions such as banks that borrow money and then lend it on to other institutions. Global Environment Facility An independent, international financial organization that provides grants to (GEF) developing and countries with economies in transition for projects that sup- port environmental objectives, including those related to climate change. Greenhouse gas (GHG) Gases whose atmospheric buildup contributes to global warming and cli- mate change. Greenhouse gases regulated under the Kyoto Protocol are CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulphur hexafluoride. HFC-23 A potent greenhouse gas (with a global warming impact 11,700 times that of CO2) generated as a byproduct of the manufacture of the refriger- ant HCFC-22. Hydropower with storage Hydropower plants that have substantial reservoirs (as opposed to run- of-river hydropower). Incandescent Lamp The "standard" lightbulb technology, in use since the 19th century. Incremental cost The additional cost of substituting a low-carbon for a high-carbon investment. xxxii | Climate Change and the World Bank Group Joint Implementation A mechanism under the Kyoto Protocol through which a developed coun- try can receive "emissions reduction units" when it helps finance projects that reduce net greenhouse gas emissions in another developed country. Low-carbon Term applied to activities that provide outputs while producing less CO2 (or other greenhouse gases) than alternative "standard" methods. Mitigation Abatement of greenhouse gas (or other pollutant) emissions. No regrets/win-win actions An action that provides net benefits both to the nation that adopts it and to the world at large. Individuals or groups may suffer losses under win- win policies, though in principle they could be compensated from the benefits. Also, actions that would be valuable even without considering climate change mitigation benefits. Nontechnical losses In a power system, power that is consumed but is not billed to customers, because of power theft, meter failure or utility employee collusion. Also called commercial losses. Off-grid Power generation not connected to the main power grid, such as solar home systems, mini-grids, or small portable diesel generators. On-grid Power generation connected to the main power transmission grid. Parts per million (ppm) A measure of concentrations of greenhouse gases in the atmosphere. Payment for Environmental A mechanism for rewarding landholders for providing environmental Services (PES) services (for example, watershed protection or carbon storage), such as by growing or conserving forests. Peak load (or peak demand) The amount of power needed to supply consumers when demand is at its greatest. Peak demand typically occurs in early evening hours, when electric lights and household appliances are turned on. Protected area A clearly defined geographical area, recognized, dedicated, and man- aged--through legal or other effective means--to achieve long-term con- servation with associated ecosystem services and cultural values. Renewable energy Energy produced sustainably without net carbon emissions and without consumption of fossil or nuclear fuels. Includes hydropower, wind power, solar power, geothermal power and biomass power. Return on equity The rate of return realized by shareholders in a project. Run-of-river hydropower Hydropower plants without significant storage capacity. These usually still have a small dam but do not create a large reservoir. Silvopastoral systems The practice of combining agroforestry and pastoral animal grazing. Solar home systems (SHS) A small solar photovoltaic powered system (with battery storage) for use by off-grid households. Strategic Framework on A strategic framework adopted by the World Bank in 2008. Development and Climate Change (SFDCC) Supercritical coal A technology that burns coal at high temperature and pressure (as op- posed to subcritical coal.) Glossary | xxxiii Supply-side energy efficiency Energy efficiency improvements carried out by energy suppliers, such as reducing the amount of fuel needed to be consumed to generate a given amount of power from a power plant. Technical losses The difference between electric power that is generated and power that is consumed. As power passes through transmission/distribution lines and transformers, some energy is converted to heat and lost. Technology transfer Transfer of technical hardware or know-how, or financial and institution- al innovations, between countries. Tenor The total length of time for a loan to be repaid, including grace periods. Traditional financing The principal financial instruments used by the World Bank Group (IDA credits and grants, IBRD loans, IFC loans and equity financing, MIGA guarantees), as opposed to new financing sources with environmental aims such as carbon finance and GEF grants. xxxiv | Climate Change and the World Bank Group Chapter 1 EVALUATION HIGHLIGHTS · The World Bank Group's Strategic Framework on Development and Climate Change pro- motes national sustainable development and global action. · Prior to the Strategic Framework, the World Bank Group had limited objectives specifically related to climate change, but many of its activities have potential mitigation benefits. · The evaluation draws lessons from that experi- ence, seeking ways for the World Bank Group to maximize its impact on development and climate change mitigation. · Within the areas of energy, forestry, and transport, this evaluation looks at specific subsectors that illustrate the challenges to overcoming barriers to the adoption of low-carbon technologies and practices. Photo by Kenneth M. Chomitz. Used with permission. Introduction In 2008, the World Bank Group (WBG) adopted a Strategic Framework on Development and Climate Change (SFDCC). This framework addresses the challenges of promoting development in a changing climate. The Independent Evaluation Group's (IEG) climate evaluation series does not directly assess the performance of this new framework. Rather, it recognizes that the WBG has for some years been deeply involved in renew- able energy, energy efficiency, forest conservation, and other activities at the cusp of development and climate change. An early assessment of that experience can help inform the implementation of the SFDCC. The first volume of IEG's series (IEG 2009) examined How can the WBG increase its impact World Bank experience with the promotion of the most important win-win (no regrets) energy policies--policies on development and climate change that combine domestic gains with global greenhouse gas mitigation? (GHG) reductions. These included energy pricing reform and policies to promote energy efficiency (see appendix K, recent experience with promoting the adoption and dif- Executive Summary of Phase I). fusion of technologies and practices that reduce GHG emissions while advancing other development goals. It This second phase covers the entire WBG, including the encompasses a diverse range of activities, including re- International Finance Corporation (IFC) and the Multi- newable energy, energy efficiency, urban transport, and lateral Investment Guarantee Agency (MIGA). It assesses forest management. And it encompasses a broad repertory BOX 1.1 The Strategic Framework on Development and Climate Change OBJECTIVES · To enable the WBG to effectively support sustainable development and poverty reduction at the national, regional, and local levels, as additional climate risks and climate-related economic opportunities arise. · To use the WBG's potential to facilitate global action and interactions by all countries. ACTION AREAS · Support climate action in country-led development processes. · Mobilize additional concessional and innovative finance. · Facilitate the development of market-based financing mechanisms. · Leverage private sector resources. · Support accelerated development and deployment of new technologies. · Step up policy research, knowledge, and capacity building. Source: World Bank 2008. 2 | Climate Change and the World Bank Group of interventions, from technical assistance to financing to Managing climate risk requires urgent, globally regulatory reform. This project-eye view of activities per- cooperative action tains to all the action areas of the SFDCC (see box 1.1). To mitigate these risks, the United Nations Framework Con- The third phase will look at the challenge of adaptation to vention on Climate Change (UNFCCC), to which virtually climate change. all countries subscribe, sets a goal of stabilizing the quantity of heat-trapping GHG in the atmosphere. Although pre- The WBG's resources--human and financial--are small cise limits have not been agreed on, the 2009 Copenhagen compared to the task at hand. The International Energy Accord called for limiting the global increase in temperature Agency estimates that developing and transition coun- (relative to preindustrial times) to 2 degrees Celsius, often tries need $16 trillion of energy sector investments over equated with an atmospheric GHG concentration limit of 2008­30 under "business as usual" operations--plus an 450 CO2-equivalent (CO2e) parts per million.2 additional $5 trillion to shift to an ambitiously low-carbon path (IEA 2009). Much more is needed for sustainable It will be difficult or impossible to achieve this goal without land and forest management and for urban transport. So a immediate mitigation actions in all major emitting nations, prime focus of this evaluation is how the WBG can get the according to 14 climate modeling exercises undertaken by most leverage--the widest positive impact on both devel- 10 independent research groups (Clarke and others 2009). opment and climate change mitigation--from its limited (Mitigation refers to where action takes place rather than who resources. funds it.) Although developed countries have contributed most of the atmospheric stock of GHGs and emit far more Climate Context per capita, developing countries account for about half the Climate change is a threat to development current flow (see figure 1.1), and these emissions are grow- Climate change threatens development (Parry and others ing rapidly. Even for less-ambitious stabilization targets, 2007; World Bank 2010). Most of this burden falls on devel- participation of middle-income countries is key to keeping oping countries. Coastal areas will be exposed to inunda- tion, flooding, and brackish water supplies. Snowmelt-fed FIGURE 1.1 GHG Emissions by Sector and watersheds will face winter floods and summer droughts. Country Group, 2005 Crop yields will fall in many areas. Infrastructure, designed 14,000 CH4, N2O, PFCs, HFCs, SF6), MtCO2e GHG emissions (including CO2, to cope with an increasingly unpredictable climate, will 12,000 become more expensive. 10,000 Most of the climate change burden falls on 8,000 developing countries. 6,000 4,000 Uncertainty about the magnitude of these impacts 2,000 strengthens rather than weakens the case for urgent action. To quantify this uncertainty, researchers (Sokolov and oth- 0 er Tr ions gy Ag try ge d ers 2009) ran a climate change model under hundreds of n te an tio w r re an iss ne Po ta as e fo ch different assumptions about economic growth, techni- w ltur em l e or d e d ria s sp u an -us ric cal change, and climate response. The range of outcomes an st an nd du La In represents, in their view, the gamble that the world takes from inaction. They found that, absent climate mitigation, Sector there is a 24 percent chance that average global tempera- Non-Annex I Annex I tures will rise this century by more than 6 degrees Celsius Source: WRI CAIT (version 7.0). (13 degrees Fahrenheit).1 A change of this magnitude, Note: Annex I countries are the industrialized countries assigned during the lifetime of many alive today, would be broadly emissions limits under the Kyoto Protocol. GHG = greenhouse gas. catastrophic. Introduction | 3 FIGURE 1.2 Low-Cost GHG Abatement Potential, Costs and benefits of mitigation differ by sector and are the Non-OECD Countries, 2030 subject of intense investigation. The consensus estimate of the Intergovernmental Panel on Climate Change is sum- Forestry Waste 11% 5% Energy supply marized in figure 1.2, which shows low-cost abatement 11% opportunities. Like many other analyses, this one points Agriculture Transport 14% 13% to increased energy efficiency (in buildings and industry) as the largest and most economically attractive option for mitigation over the next few decades. Industry An emphasis on energy efficiency in the next few decades 8% Buildings buys time for solar and wind power to become more cost 38% competitive with fossil fuels and to develop and deploy ad- Source: Metz and others 2007. vanced low-carbon energy technologies (such as carbon Note: Cost< $20/ton of CO2. Estimated economic potentials for GHG mitigation at a sectoral level in 2030 for different cost categories capture and storage and nuclear fusion) in the second half using the SRES B2 and International Energy Agency World Energy of the century. Energy efficiency helps preclude construc- Outlook (2004) baselines. Total abatement potential is 9.2 Gt CO2e. tion of coal power plants that might otherwise stay in ser- GHG = greenhouse gas; OECD = Organisation for Economic Co-Operation and Development. vice for 40 years or more. Because mitigation is a global public good, it makes eco- nomic sense to compensate countries, firms, farms, and global mitigation costs affordable. (There is, however, no other actors for their contribution to mitigation. The quest agreement yet on how those costs might be apportioned.) to use global demand for climate stability as a means of The long-run goal of stabilizing the level financing climate-friendly development has shaped both United Nations and WBG approaches to climate change. of atmospheric GHGs cannot be achieved without mitigating actions in all major Global Mitigation Context and the WBG emitting nations. The WBG's approach to climate change has coevolved The need for action is urgent. If installed today, inefficient with the international climate regime. One line of coevo- coal-fired power plants, poorly insulated buildings, and lution was with the Global Environment Facility (GEF), poorly targeted energy subsidies will be needlessly pump- which was established in 1991 as a pilot program within ing GHGs into the atmosphere through mid-century. Those the Bank. The GEF mobilized donor funds to address GHGs will linger in the atmosphere for many decades lon- climate change, biodiversity loss, and other global envi- ger, intensifying warming and increasing the chance that the ronmental problems. Recognizing that climate and bio- climate will pass a critical threshold--leading to accelerated diversity are global public goods, the GEF's approach was warming, dieback of the Amazon forest, or other climatic to pay countries for the incremental costs of supplying disruptions. these goods. There are many routes to mitigation The GEF rapidly realized that its funds were too limited to How might mitigation take place? GHG emissions arise in plug the funding gap (project by project) and shifted to ac- many ways, in many sectors. To motivate the sectors cov- tivities aimed at catalyzing replicable win-win actions. The ered in this evaluation, consider first the current patterns GEF became an independent agency in 1994, but the Bank of emissions. remained its trustee and largest implementing agency. This has been an important avenue for fostering attention to cli- In the developing world, 83 percent of emissions come, in mate change inside the Bank and to developing a cadre of roughly equal proportions, from power generation; industrial staff and managers with climate expertise. processes (including steel manufacture, cement production, oil refining); deforestation; and agriculture (largely methane The WBG's approach to climate change has from rice paddies and livestock). Transportation accounts for another 7 percent. However, energy and transport emis- coevolved with the international climate sions are expected to grow rapidly as economies expand. regime and carbon market development. Emphasis on energy efficiency now buys time Another line of coevolution was with the carbon mar- for renewable energy costs to fall and for de- ket. The UNFCCC, which became effective in 1994, did not specify how its mitigation goals would be accom- velopment of advanced energy technologies. plished. Attention turned to an economic approach that 4 | Climate Change and the World Bank Group would allow industrialized countries to seek cost-effective from deforestation and forest degradation (REDD), a major opportunities for GHG reduction in developed or transi- source of emissions not addressed in the Kyoto Protocol. tion countries. This was in line with the UNFCCC's prin- And it called for setting a long-term global goal for emis- ciple of "common but differentiated responsibilities and sions reductions. The Bali Action Plan was widely expected respective capacities." It would take advantage of low-cost to culminate in a new international agreement at the 2009 options to retrofit aging infrastructure in transition coun- Copenhagen climate meetings. tries and to install cleaner greenfield equipment in rapidly Development and Climate Change: A Strategic Framework growing developing countries. for the World Bank Group was adopted in 2008. Although This approach was piloted in the Activities Implemented the SFDCC recognizes the primacy of the UNFCCC in the Jointly Program, in which the World Bank participated. climate area, its goals are to support sustainable develop- It evolved into the Kyoto Protocol, which was adopted in ment, including "climate-related economic opportunities," 1997 (but did not enter into force until 2005). and to "facilitate global action." The Kyoto Protocol assigned GHG emissions allowances The SFDCC emphasizes six action areas (box 1.1), aligned to industrialized countries. To exceed its emissions limit, with the Bali Action Plan. Four of these areas are concerned a country was obliged either to purchase allowances from with mobilizing finance, from traditional and novel sources, another industrialized country or to purchase a carbon and with supporting technology investments. The frame- offset from a developing or transition country (see box work commits the WBG to increase the share of energy 5.2). The World Bank's Prototype Carbon Fund (PCF; lending devoted to low-carbon projects (including large whose staff had been involved in GEF and the Activities hydro) from 40 percent in 2009 to 50 percent in 2011, by Implemented Jointly Program), put in place after Kyoto increasing financing of energy efficiency and new renewable and launched in 1999, was intended to pilot the concept of energy by 30 percent per year. It coincides with the mobili- carbon offsets and help catalyze this avenue for investment zation of the $6.2 billion Climate Investment Funds, a new in GHG mitigation. source of financing for pilot projects aimed at initiating transformational changes. The core of the Climate Invest- The 2001 WBG Environment Strategy ment Funds is the $5.1 billion Clean Technology Fund, pro- included win-win approaches and viding financing for demonstration, large-scale deployment, and transfer of low-carbon technologies. These funds were mobilization of concessional funds. seen as transitional devices, pending mobilization of much larger-scale financing as part of a new climate agreement. The dual-track approach--win-win opportunities comple- mented by mobilization of concessional funds--was in- The 2008 strategic framework emphasizes cluded in the 2001 WBG Environment Strategy and has been pursued since. An independent review (Nakhooda six action areas, four of which concern 2008) assessed 54 Country Assistance Strategies issued finance and investment. over 2004­07 and found that 32 discussed GHG mitiga- tion in a sectoral context. At the 2004 Bonn International However, the 2009 meeting in Copenhagen did not result Conference on Renewable Energies, the WBG committed in a comprehensive, binding climate agreement. This leaves to expand its lending for renewable energy (excluding large the WBG to operate in a partial vacuum. hydropower) and energy efficiency by 20 percent per year If there were an agreed, funded operationalization of the over 2005­09 from a baseline of $209 million. The Bank UNFCCC goal of GHG stabilization that spelled out roles, surpassed its commitment by a large margin (see chap- responsibilities, and funding sources, the WBG and its ter 2). In 2007, the Bank endorsed an Investment Frame- clients would be better able to make development choices work for Clean Energy and Development. The framework consistent with a low-carbon growth path. Absent such had a broader scope than its name suggests, emphasizing an agreement, each development choice is fraught with electricity access and including climate adaptation as well ambiguity, as in the controversy over coal-fired power gen- as mitigation. The mitigation component focused on mo- eration (see chapter 4). And it is not clear when, if ever, bilization of concessional funds for investments in clean anticipated multibillion dollar per year climate financing technologies and promotion of carbon trading. sources may come into being. Meanwhile, the UNFCCC process began to focus on the era after 2012, when the Kyoto provisions expire. The 2007 Bali Evaluation Questions Action Plan emphasized mitigation, adaptation, and finan- Before the SFDCC, the WBG had limited objectives explic- cial and technological support for developing countries. itly related to climate change. Where such objectives exist, It opened the negotiations to include reducing emissions IEG can assess performance against them. Activities with Introduction | 5 relevant goals include GEF projects with goals to reduce Though it addresses related issues, this GHGs, the Bonn Commitment to scale up renewable energy and energy efficiency, and the carbon funds. evaluation does not assess the WBG's overall impact on GHG emissions. But because development and climate change are so closely linked, many development activities look like mitiga- Because of its focus on mitigation activities, the evalua- tion projects, even if they were not so labeled. These offer tion does not address the WBG's overall impact on GHG a wealth of lessons for a more climate-conscious future. emissions. It does, however, examine in detail the impact In particular, they may hold lessons for the implementation of WBG support for coal-fired power plants, which is em- and follow-up of the SFDCC and for the use of hoped-for blematic of the wider issue. additional climate financing. The WBG has had limited objectives spe- Evaluation Framework cifically related to climate change, but many Barriers block adoption of low-carbon paths of its activities look like mitigation projects. Why don't people choose lower-carbon paths: wind power instead of gas, agroforestry instead of pasture, fluorescent The SFDCC addresses national goals of sustainable de- light bulbs instead of incandescents? Standard explanations velopment and global goals of climate mitigation. It puts cite barriers such as: particular emphasis on the pursuit of no-regrets (win-win) · Cost-competitiveness: The low-carbon alternative is actions that promote both goals and on the use of con- worthwhile from a social viewpoint that takes climate cessional funds (additional to development finance) that and other benefits into account, but it is not competi- promote GHG reduction in a development context. The tive with high-carbon alternatives from the household, SFDCC is an evolving, adaptive framework that stresses firm, or country viewpoint. learning. To increase its effectiveness, it is important to · Credit bottlenecks: Renewable energy and energy effi- understand how development options compare along ciency have a big up-front capital component, so lenders different dimensions of impact. To what extent are there and investors need confidence that they will be repaid. untapped no-regrets options? If concessional finance is limited, which are the most attractive "climate-related eco- · Lack of information or attention: People don't perceive nomic opportunities"? the opportunities, don't know what to do about them, or overestimate the risks of action. The principal evaluation questions can be organized under · Unfavorable policies: Laws or regulations (for in- three themes. First, to what extent do GHG mitigation goals stance, fossil fuel subsidies) favor the higher-carbon overlap with other development goals? alternative. Second, how and in what areas does the WBG have the larg- est impact in promoting low-carbon development? The WBG seeks to overcome barriers through analytic and lending support for · What instruments, in what contexts, have been most effective in promoting the development, adoption, and policy reform, technology transfer, and diffusion of clean(er) technologies (looking across en- project finance and implementation. ergy, transport, forestry, and carbon finance)? · What, in turn, is the impact of technology adoption on Interventions can overcome barriers to technology GHG emission and development outcomes? adoption · The WBG can deploy interventions that address these · What internal and external factors affect project out- barriers at the site or sectoral level, unlocking carbon comes and project mix? and economic benefits. · To what extent and with what impact has the Bank's · These interventions include analytic or lending support Carbon Finance Unit (CFU) catalyzed the development for policy reform; transfer, adaptation, and dissemina- of the carbon market and its institutions? tion of technical and financial innovations (technology A third emerging theme is the role of learning, feedback, and transfer); and project finance and implementation. incentives: Adopted technologies yield economic, social, and · To what extent, and with what rapidity, is the WBG able carbon returns to monitor the outcomes of its climate-related activities? Low-carbon investments can promote development along · To what extent is feedback used to improve the design, many dimensions, in addition to mitigating GHGs. Ideally, mix, and targeting of interventions? one would want to assess each intervention's impact on 6 | Climate Change and the World Bank Group growth, poverty reduction (including access to energy and For instance, an innovation that substantially and cost- transport), gender equity, and GHG emissions. Unfortu- effectively increased the efficiency of coal-fired power nately, monitoring and evaluation data rarely exist for most generation would reduce plant-level CO2 emissions. But it of these dimensions. This evaluation tries where possible to could result in greater global emissions if it triggered substi- characterize an investment's economic rate of return (ERR) tution of coal for hydropower or gas power. Improvements as a summary measure of development impact. In addition, in agricultural productivity could increase the incentives it tries to quantify as cobenefits the investments' carbon for deforestation, rather than lessening pressure on the for- rate of return: the net reduction in carbon dioxide (CO2) est. These system-level issues pervade climate mitigation. emissions per dollar of investment. Summary Evaluation findings are illustrated in figure 6.1. (Estimates In looking across a diverse variety of sectors, the evaluation are based mostly on appraisal and should be taken with asks-- caution.) In this figure, any project with emissions savings and a high ERR (say, higher than 15 percent) is likely to · What are the barriers to technology adoption and dif- be a clear no-regrets investment. Projects with somewhat fusion? lower ERRs may still be no-regrets from a local viewpoint, · How appropriate were the WBG's diagnosis of the barri- because they confer large but hard-to-monetize benefits ers and prescription of interventions? such as energy security. Some projects, including some for- · What was the impact of the interventions on technology est conservation projects, may have low measured ERRs adoption and diffusion? but nonetheless contribute to local development objectives again in difficult-to-quantify ways. These would be strong · What are the economic and carbon returns to adoption? candidates for global financial support. · Looking at the chain from intervention to impacts, what is the WBG's leverage in this area? Leverage and catalytic impacts · How well measured are these impacts? This figure points to several avenues by which the WBG can increase its impact. Working at "retail" level, it can assemble portfolios of projects with high returns. It can also aspire to Evaluation Scope catalytic, widespread impacts (GEF 2008). One way to do This evaluation faces two big challenges. First is the trade-off this is through financial leverage, attracting capital from between depth and breadth. The range of relevant activities lower to higher return activities, along both dimensions. is dazzling, from geothermal power to community forestry A second way is to increase the returns to equity, for in- to biogas digesters to school insulation. Any attempt to deal stance, by removing regulatory barriers that discourage in- with the idiosyncratic features of each of these endeavors vestment. A third avenue is to boost the returns to an entire is doomed to be shallow. So this evaluation chooses to un- class of activities, such as by supporting technical progress dertake detailed analyses of specific subsectors that are im- that reduces investment costs. portant in themselves but that also hold general lessons for An important way of boosting returns (public and private) omitted subsectors. This is done against a comprehensive is through provision of information, especially through pilot description of the overall portfolio. and demonstration projects. These projects can work out technical and regulatory problems and hence reduce cost and risk for all similar projects that follow. This evaluation pays close attention to piloting and demonstration projects. The relevant evaluation questions are: What, exactly, is be- ing demonstrated? How is it being demonstrated, and to whom? How will the results of the demonstration change the behavior of the target audience? The provision of information through pilot © Frans Lanting/Corbis. and demonstration projects is an important way to boost returns to relevant WBG activities. As a result of these catalytic interventions, prices may change, with far-reaching effects that could vitiate leverage. Introduction | 7 The second challenge is the need to be current. IEG's evalu- Pragmatically, these low-carbon sectors are renewable ations often build heavily on completion reviews of closed energy, energy efficiency, urban transit, and forest projects projects. That is not feasible in this case. On one hand, the related to afforestation or reduced deforestation. The choice number of projects has increased dramatically over the past of, and emphasis on, these broad sectors (energy efficiency, decade, technology and financial engineering are changing renewable energy, forestry, and transport) was informed rapidly, and the national and international policy context by consideration of current overall emissions levels is in flux. On the other hand, IFC projects are typically not (figure 1.1), prospects for emission reductions (figure 1.2), evaluated until five years after approval, and Bank projects emphasis in the Climate Investment Funds, and the scale of are not evaluated until closure, often eight years or more WBG commitments. after approval. Consequently, of the renewable energy and An important but unavoidable omission was a detailed energy efficiency projects initiated since 1990, IEG has eval- treatment of agriculture. Agriculture is a large source of uated only about 100; and though more than 450 projects emissions from developing countries. Rice paddies and were initiated between 2003 and 2008, IEG has evaluated cattle, in particular, emit large quantities of methane. How- only 3 of them. ever, understanding of agricultural abatement options and These considerations lead to the following definitions of their impacts is far less advanced than for energy, transport, scope. and forestry. The evaluative base is small. So although this is a crucial area for research and piloting, this evaluation Temporal scope limits discussion to an agroforestry project that illustrates For background, the evaluation relies on a detailed and the potential for climate cobenefits from agricultural comprehensive review of the low-carbon energy and urban development. transportation portfolios from 2003 to 2008 and a compre- hensive but less-detailed review of the forest portfolio for The core of the evaluation is an in-depth discussion of 2002­08. The post-2008 increase in climate-related activi- specific subsectors that are important areas in their own ties could not be covered in detail, but is briefly described right but that also illustrate the challenges affecting the in appendix J. For subsectoral analyses, however (such as broader sectors to which they belong. For instance, the solar photovoltaics or hydropower), the evaluation ranges challenge of promoting low-emissions urban transporta- back as far as 1990 to take advantage of information from tion is illustrated through a detailed examination of bus closed and evaluated projects. It may also report on current rapid transit, which is the single largest line of WBG ac- activities. tion in urban transit and ties together the issues of modal shift, fuel shift, and land use that are central to a city's This evaluation looks at attempts to transport footprint. overcome the barriers that inhibit adoption Table 1.1 presents a topical map of the evaluation. and diffusion of favorable technologies and The choice of subsectors was informed by considerations of practices. evaluability (track record and data), current overall emis- sion levels (figure 1.1), potential for generalizable lessons, and scale of 2003­08 WBG commitments. Topical scope The evaluation is concerned with evidence of attempts to Within renewable energy there are in-depth discussions surmount the barriers that inhibit the adoption and dif- of hydropower and solar home photovoltaic systems, the fusion of low-carbon technologies and practices. Hence largest and most longstanding areas of on-grid and off- it excludes most attention to the WBG's "high-carbon" grid investment, respectively. There is also a discussion activities, such as oil exploration, road construction, and of the economics of on-grid renewable power that ap- thermal power. Indeed, as pointed out in the Phase I evalu- plies to all technologies. A significant omission is biomass ation (IEG 2009), anything the WBG does to promote technology, itself a very heterogeneous category. Figure economic growth will tend to put upward pressure on GHG 1.3 compares renewable energy coverage to the 2003­08 emissions. portfolio. Instead, the evaluation focuses on projects that potentially Within energy efficiency there is extensive discussion of promote development and reduce GHG emissions, regard- investments via financial intermediaries and of projects less of whether they had a GHG goal. Where such a goal that reduce transmission and distribution losses. To- exists, it is appropriate to evaluate the WBG's success in gether these comprise about half the 2003­08 portfolio achieving it. Even where there was no explicit goal, it is (figure 1.4). Also discussed at length are projects involving useful to try to understand the determinants of success or compact fluorescent light bulbs (CFLs), a tiny part of the failure. portfolio, but, it is argued, one worthy of scaling up. The 8 | Climate Change and the World Bank Group TABLE 1.1 Map of the Evaluation Sector Subsector Specific technologies and practices On-grid renewable energy Hydropower Wind Landfill gas Geothermal Biomass, biogas Off-grid renewable energy Solar photovoltaic Off-grid hydropower Biomass Energy efficiency Energy efficiency via financial intermediaries Direct investment in industrial energy efficiency Efficient lighting Transmission and distribution loss reduction Increased efficiency in coal-fired power generation District heating (discussed in Phase I) Demand side management (discussed in Phase I) Building and appliance codes (discussed in Phase I) Efficient cookstoves Transport Bus rapid transit Demand management Commuter rail Intercity rail Aircraft and truck fuel efficiency Land use and land use change Protected areas Payments for environmental services Community forestry Plantation forestry Agricultural carbon Technology transfer Advanced technologies Intellectual property rights Carbon finance Carbon finance Thermal power Coal power Natural gas (discussed in Phase I) Source: IEG. Note: Areas discussed are in bold type; areas not discussed are in regular type. For Phase I, see IEG 2009. discussions of the Afsin-Elbistan coal power rehabilitation increasing activity (though with important growth and and of IFC's direct energy efficiency investments cover poverty-reducing benefits), and are not considered here. most of the supply-side and much of the end-user portfo- Attention focuses instead on urban transit, where there is lio for this period. The remaining topics, including district potential scope for shifting away from carbon-intensive heating, were covered at length in Phase I and are briefly auto traffic. Here, bus rapid transit and its variants consti- synopsized in this volume. tute half of the overall portfolio (see figure 1.5) and 80 per- cent of the operations (by number) where GHG reduction Much of the WBG's transportation investments go to is an explicit goal. intercity and rural road construction, an emissions- Introduction | 9 FIGURE 1.3 WBG Investments in Renewable FIGURE 1.5 WBG Investments in Urban Energy 2003­08: Evaluation Transport 2003­08: Evaluation Coverage (by $ commitments) Coverage (by $ commitments) Off-grid solar Urban roads Solar CSP Biomass and traffic Landfill gas Other management Traditional Geothermal public Wind transport Small hydropower Large hydropower Urban rail, Source: IEG. Bus lanes/BRTs light and heavy Note: Black = detailed analysis with portfolio review.; grey = partial coverage/discussion of key issues; pattern = no explicit coverage. Source: IEG. CSP = concentrated solar power; WBG = World Bank Group. Note: Black = detailed analysis with portfolio review; grey = no explicit coverage. BRT = bus rapid transit; WBG = World Bank Group. FIGURE 1.4 WBG Investments in Low-Carbon Energy Efficiency 2003­08: finance to retard deforestation): establishment of protected Evaluation Coverage (by $ and indigenous areas; pilots of payment for environmen- commitments) tal services projects, including BioCarbon Fund projects; Energy and attempts to foster sustainable agriculture at the forest efficiency frontier. Omitted are large plantation projects, which can Combined heat investments via and power-- financial be carbon sequestering, and community forest projects. district heating intermediaries The latter, though concerned with impoverished popula- tions and important natural resources, have in general had End user energy inadequate monitoring components and hence are difficult efficiency to evaluate. The evaluation also looks at WBG experi- Supply-side T&D loss ence in coal power, technology transfer, and CFL energy reduction carbon finance. efficiency Source: IEG. In addition to sectoral discussions, the evaluation addresses Note: Black = detailed analysis with portfolio review; grey = partial coverage/discussion of key issues. Note that Phase I of this series three areas of intense current interest. Two are cross cutting: discussed district heating and end user energy efficiency in detail. the experience of the WBG in technology transfer and the CFL = compact fluorescent light bulb; T&D = transmission and distribution. experience of the WBG's carbon funds, both as institutional innovations and as financial instruments. The third is an examination of the WBG's controversial role in support- The coverage of forestry is the most selective of the sectors. ing coal-fired power plants. This will illuminate some of The focus is on three types of activities with strong implica- the general issues regarding the WBG's role in other high- tions for REDD (an initiative that seeks to harness carbon carbon sectors such as cement and steel production. 10 | Climate Change and the World Bank Group Chapter 2 EVALUATION HIGHLIGHTS · WBG financing of low-carbon energy has increased considerably. · About two-thirds of closed renewable energy and energy efficiency projects had outcomes that were moderately satisfactory or better. · Policy advice and piloting have been helpful in catalyzing diffusion of wind power. Photo by Martin Wright/Ashden Awards for Sustainable Energy. Used with permission http://www.Ashden Awards.org. · Carbon finance has little impact on the bank- ability of wind power and hydropower, but significant impact for landfill gas projects. · Long loan tenors (time to repay) are an impor- tant stimulus to project bankability. · Guarantees and political risk insurance may play an increasingly important role for renew- able energy. · Quality-contingent producer subsidies plus microfinance have been successful in promot- ing the diffusion of solar home photovoltaic systems. · Capacity utilization is a key determinant of economic and carbon impacts. · Better monitoring of costs and impacts is needed to guide future investments. Renewable Energy This evaluation devotes special attention to energy because it is by far the largest part of the mitigation-relevant WBG portfolio, is the focus of most existing mitigation- oriented projects and funds, and will play the dominant role in long-term mitigation efforts. As an introduction to both chapters on energy, this section begins by reviewing the outcomes of evaluated renewable energy and energy efficiency projects and then comprehensively describes the recent pattern of low-carbon energy investments. The chapter goes on to discuss the impact of interventions to overcome barriers to on-grid renewable energy investment. It then discusses the experience with hydropower and with solar photovoltaics, the on-grid and off-grid renewable energy technologies, respectively, with the longest evaluable record at the WBG. Low-Carbon Energy Projects and Their Performance of closed World Bank projects Performance Investments in low-carbon energy have increased consider- ably over the past five years, so most are still ongoing and As a backdrop it is useful to consider the International En- unevaluated.1 Of World Bank renewable energy and energy ergy Agency's projections of how future power needs will efficiency projects2 initiated between 1990 and 2007, 91 had be met over the coming two decades, in two scenarios: closed and been evaluated by 2009. Table 2.2 shows the out- reference and ambitious mitigation (450 parts per mil- come of these projects as rated by IEG. lion; table 2.1). While some energy efficiency is included in the reference scenario, additional efficiency is the main Two-thirds of evaluated renewable energy way to satisfy demand while reducing emissions. In both and energy efficiency projects since scenarios, increases in hydropower far outpace growth in other types of renewable energy outside the Organisation 1990 had outcome ratings of moderately for Economic Co-operation and Development (OECD). satisfactory or better. TABLE 2.1 International Energy Agency Projections of Power Production, 2007­30 Increase in electricity generation 2007­30: baseline versus 450 ppm CO2 scenarios (terawatt hours per year) 2007­30 increase under baseline 2007­30 increase under 450 ppm Power source OECD+ Rest of world OECD+ Rest of world Hydro 164 1,437 384 2,196 Wind 918 443 1,425 1,180 Solar 215 182 376 554 Other renewable energy 330 414 536 957 Fossil and nuclear power 790 9,644 ­1,175 3,751 Total electricity generation 2,417 12,120 1,546 8,638 Incremental energy efficiency 871 3,482 Source: OECD/IEA 2009. Note: Energy efficiency includes price-induced demand reduction. OECD+ = Organisation for Economic Co-operation and Development + non-OECD European Union members; ppm = parts per million. 12 | Climate Change and the World Bank Group TABLE 2.2 Evaluated World Bank Renewable Energy and Energy Efficiency Projects by Rating, Projects Initiated 1990­2007 Rating Energy efficiency New renewable energy Large hydro (>10 MW) Highly satisfactory 2 1 2 Satisfactory 21 14 3 Moderately satisfactory 10 4 2 Marginally satisfactory 0 1 1 Marginally unsatisfactory 1 0 0 Moderately unsatisfactory 7 2 3 Unsatisfactory 5 8 2 Highly unsatisfactory 1 1 0 Total number 47 31 13 Percent moderately satisfactory or better 70 65 62 Source: IEG based on ICR reviews. Note: MW = megawatts. Two-thirds of these projects were rated moderately sat- anchor (appendix G). In some cases, IEG revised the clas- isfactory or better, versus 72 percent of all energy proj- sification or funding amount of a component designated ects. Energy efficiency projects fared slightly better than as "low carbon." renewable energy projects. Just over half of such projects The WBG has three arms with different products. Two of in low-income countries3 were marginally satisfactory or those arms (the World Bank and IFC) can use both tradi- better, compared to 70 percent in higher-income countries. tional finance and new, environmentally oriented finance: China had 13 projects, the largest number of any country, GEF grants and carbon payments. and all were rated marginally satisfactory or better. About one-third of this portfolio was in energy efficiency projects Table 2.3 breaks down commitments by technology and by in transition countries, with a 64 percent success rate. whether financed traditionally or together with environ- mental finance. Off-grid investments are about 11 percent Performance of evaluated IFC investment projects of this $8 billion low-carbon portfolio and roughly one-fifth During the period of fiscal 1990­2008, IFC made commit- of all rural energy access commitments. Grid-connected ments to 102 investment projects in support of renewable renewable energy accounts for $3.3 billion, compared with energy or energy efficiency, of which 81 were committed $2.9 billion for energy efficiency. Projects that use financial during fiscal 2005­08. Because IFC projects are evalu- or other intermediaries account for about 20 percent of this ated on a sample basis after five years of operation, only portfolio. eight projects have been evaluated, all committed between fiscal 1992 and 1999. Five received satisfactory ratings. Projects with exclusively traditional financing (Interna- Twenty-six ongoing projects, committed during fiscal tional Bank for Reconstruction and Development [IBRD], 1992­2008, have internal monitoring data available.4 Of International Development Association [IDA], and IFC)-- these ongoing projects, 22 were reported as progressing that is, without even small amounts of GEF or carbon successfully. cofinancing--comprise 70 percent of the 2003­08 port- folio and more than three-quarters of the grid-connected The 2003­08 portfolio of WBG investment projects renewable energy portion. Nontraditional finance is most To assess the portfolio of recently initiated (2003­08) proj- important in financial intermediation for energy efficiency, ects, IEG reviewed and validated a database of low-carbon reflecting a perception that risk aversion is deterring profit- project components assembled by the Bank's energy able efficiency loans. Renewable Energy | 13 TABLE 2.3 WBG Low-Carbon Energy Commitments ($ millions) by Product Line and Investment Category, 2003­08 Type of project Traditional Blended financing Stand- alone Total financing (IBRD, (traditional + GEF GEF and IDA, IFC, MIGA) or carbon finance) carbon finance Off-grid and mini-grid renewables Direct investments, including cookstoves and household biomass/ 228 224 64 515 biogas Indirect, with funds that support subprojects 101 124 10 235 On-grid renewable energy Direct investments in renewable energy (may include some ancillary 2,277 282 496 3,055 transmission and distribution loss reduction) Indirect, with financial intermediaries 202 0 11 213 Energy efficiency Transmission and distribution loss reduction 529 104 0 633 End user energy efficiency 338 21 63 422 Combined heat and power and/or district heating 344 77 56 477 Supply-side energy efficiency 460 2 66 528 Energy efficiency via financial intermediaries 200 514 98 812 Other Both renewable energy and energy efficiency, or unspecified, via 227 85 23 335 financial intermediaries Development program lending, other investment programs, and 646 14 93 753 technical assistance Total 5,553 1,446 980 7,978 Source: IEG calculations, low-carbon component database. Note: Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and special financing. Note that these data exclude transmission and distribution projects that may reduce technical losses but were not classified by the WBG as low-carbon activities. IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation; GEF = Global Environment Facility; MIGA = Multilateral Investment Guarantee Agency. FIGURE 2.1 Location of 2003­08 Low-Carbon Figure 2.1 shows the location of these projects. Africa's Portfolio, by Type share is large relative to its population; its 30 percent share of grid-connected renewable energy reflects investments in SAR large hydropower. The Europe and Central Asia Region has MENA a large relative and absolute investment in energy efficiency, Region LCR reflecting a legacy of inefficient equipment and underpriced ECA energy in the transition countries. In contrast, energy EAP efficiency investments in South Asia are small relative to AFR investments in hydropower and coal; this is striking in view 0 500 1,000 1,500 2,000 2,500 of large transmission and distribution losses. (Efficiency $ (millions) and transmission investments increased in fiscal 2009, Off-grid renewable Grid renewable energy however.) The Middle East and North African portfolio for Energy efficiency Other this period is very small; the amount counted as renewable energy includes hybrid solar thermal plants that are mostly Source: IEG. Note: Unit of analysis is the project component. Excludes freestand- gas fired. ing WBG analytic and advisory activities, IFC advisory services, and special financing. Regions: SAR = South Asia, MENA = Middle East Seventy percent of the low-carbon energy and North Africa, LCR = Latin America Caribbean, ECA = Europe and Central Asia, EAP = East Asia and Pacific, AFR = Sub-Saharan Africa. portfolio was financed purely through WBG = World Bank Group. traditional instruments. 14 | Climate Change and the World Bank Group FIGURE 2.2 Breakdown of 2003­08 Low-Carbon Portfolio by Country Income Group and Type 3,500 3,000 2,500 Amount ($ millions) 2,000 1,500 1,000 500 0 Low income Lower middle Upper middle High income Regional income income Income group Off-grid renewable Grid energy renewable Energy and efficiency Other Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and special financing. Figure 2.2 show the breakdown of this portfolio by coun- The WBG funds committed to energy try income group. About 60 percent goes to low- and lower-middle-income countries; China, the single largest efficiency and new renewable energy greatly recipient, accounts for 16 percent. Energy efficiency is more exceed the amounts agreed under the Bonn prominent in the wealthier countries. Commitment. Meeting the Bonn commitment Based on data reported by the Investment Framework for At the Bonn Conference on Renewable Energy, the WBG Clean Energy and Development (management), low-carbon promised that with the aim of ensuring an institutional focus on the transition toward cleaner energy sources, FIGURE 2.3 Growth in Low-Carbon Portfolio by it would commit to a target of at least 20 percent average Project Type growth annually--in both energy efficiency and new re- newable energy commitments--over the next five years Low carbon: Groups of technologies versus FI, by financing amount (fiscal 2005­09). 3,000 Amount ($ millions) IEG's reckoning of funds committed to energy efficiency and new renewable energy exceeds that of the WBG. The 2,000 Bonn Commitment was surpassed, with commitments growing from a base of $209 million to $2,061 million in 1,000 2008 (IEG calculation) and $3,128 in 2009 (management calculation).5 Figures 2.3 and 2.4 show the growth in total 0 low-carbon commitments, indicating a sizeable boom in 2003 2004 2005 2006 2007 2008 grid-connected renewable energy, much of it large hydro- Year power not counted under the Bonn Commitment. Off-grid renewable, no FI Grid renewable Energy efficiency, no FI energy, no FI Energy efficiency grew with large spurts in 2006 and 2008, FI, total Other, no FI with financial intermediaries assuming more prominence Source: IEG. in the latter period. The growth was mostly in projects that Note: Unit of analysis is the project component. Excludes freestand- were purely traditionally financed, with a rapid expansion ing WBG analytic and advisory activities, IFC advisory services, and of IFC and IBRD funds, and it occurred disproportionately special financing. FI = financial intermediation. in the lower-middle-income countries. Renewable Energy | 15 FIGURE 2.4 Growth in Low-Carbon Portfolio by Coal accounted for one-third of new gener- Country Income Class ating capacity supported in IBRD countries. 3,500 3,000 The WBG's on-grid renewable energy portfolio Amount ($ millions) 2,500 Hydropower is the renewable energy technology with the 2,000 longest and largest record within the WBG and the one with the greatest predicted potential scale-up over coming 1,500 decades. However, there has been a rapid increase in "new 1,000 renewable energy": wind, geothermal, biomass/ biogas/land- 500 fill gas, and solar (table 2.4) Although this chapter devotes 0 special attention to hydropower, a discussion of barriers and 2003 2004 2005 2006 2007 2008 interventions in this chapter also draws on recent experi- Year ence with wind projects, and lessons from these barriers High income Low income and interventions apply to other forms of renewable energy. Lower middle income Upper middle income Grid-connected solar power is discussed in chapter 6. Regional Source: IEG. The WBG's off-grid renewable energy portfolio Note: Unit of analysis is the project component. Excludes freestand- In remote areas with low population densities, it can be ing WBG analytic and advisory activities, IFC advisory services, and cheaper to provide decentralized renewable power through special financing. home systems or mini-grids than to extend the main elec- tric grid.6 This has raised hopes of fighting both climate change and poverty with a single instrument, or using cli- and blended low-carbon and access projects account for mate finance to promote rural access. 37 percent of all energy portfolio financing in 2003­09. Those hopes are manifest in the large investments in solar Figure 2.5 shows the growth of the remainder. home photovoltaic systems (SHS), the off-grid technol- ogy with which the WBG has the longest record and the Hydropower is by far the largest subcompo- focus of the discussion of off-grid renewable energy in this nent of the recent renewable energy portfolio. chapter. However, in the recent portfolio, SHS projects have been overtaken by small hydro and biomass (see table 2.5). Biomass projects include efficient cookstove projects as well Figure 2.6 shows how total new energy generation capac- as power projects. ity was divided between fossil fuels and renewable sources. Large hydropower dominated power investments in IDA Among off-grid renewable energy technol- countries. In IBRD and blend countries, coal accounted for ogies, solar home photovoltaic systems have a third of new capacity, gas 28 percent, and large hydro- the longest record at the WBG power 18 percent. FIGURE 2.5 Breakdown of Non-Low-Carbon FIGURE 2.6 WBG-Supported Grid-Connected WBG Energy Investments Generation Capacity by Technology, 5,000 2003­08 Amount ($ millions) 4,000 Gas Power source 3,000 Oil Coal 2,000 Geothermal 1,000 Wind and solar Large hydropower 0 2003 2004 2005 2006 2007 2008 Small hydropower Year 0 2,000 4,000 6,000 8,000 10,000 Megawatts Transmission and Thermal generation distribution Other energy IDA countries IBRD/Blend countries Oil, gas, and coal Access Source: Investment Framework for Clean Energy and Development, Source: IEG component database. 2003­08. Note: Includes privatization and asset purchase in addition to Note: WBG = World Bank Group. greenfield investments. 16 | Climate Change and the World Bank Group TABLE 2.4 Commitments to Grid-Connected Renewable Energy by Technology and Funding, 2003­08 Technology IBRD IDA IFC MIGA GEF Carbon Finance, World Bank & IFC Total Wind 335.7 32.9 38.5 71.2 42.8 521.1 Hydropower 849.4 825.8 358.7 225.5 0.4 182.3 2,442.2 Geothermal 202.0 31.5 57.3 88.3 8.5 18.6 406.3 Biomass 20.0 28.0 32.7 40.2 108.1 229.1 Solar 142.4 142.4 Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and special financing. Components that support multiple technologies are included in each relevant row, so column totals should not be used. GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency. Analytic, advisory, and technical assistance projects involvement in 1.03 GW of capacity from direct projects The WBG also conducts analytic, advisory, and techni- and 12.4 GW from framework, regulation, and investment cal assistance outside of investment projects. Within the mechanisms), energy efficiency savings (1.6 terawatt-hours World Bank, many of these activities have been funded by direct, 26.2 terawatt-hours indirect 2007­09), household two donor-supported programs resident in the Bank: the access (611,000 new households direct, 200,000 indirect), Energy Sector Management Assistance Program (ESMAP) and avoided CO2 emissions (99 million tons direct, 1,003 and the Asia Sustainable and Alternative Energy Program million tons indirect). (ASTAE). IFC advisory services cover a diverse range Many of the WBG analytic, advisory, and of activities related to renewable energy and technical assistance activities have been energy efficiency. funded by separate donor-funded programs within the Bank. IFC's advisory services cover a diverse range of activity, including some investments. In the 2005­08 renewable ASTAE is focused on energy efficiency, scaling up use energy/energy efficiency portfolio of $40 million, $25 million of renewable energy, and increasing access to energy; it was in GEF-supported projects with explicit climate goals. specifically aims for high leverage. In contrast to other The largest, comprising about one-third of total value, was analytic and advisory assistance and investment units, linked to an IFC investment project; 19 of the remaining 20 ASTAE tracks specific indicators on its projects and were not. Some projects included broad-based training and sets impact-based (rather than expenditure-based) tar- capacity building. The non-GEF projects were mostly small gets, though tracking and attribution is difficult. With (median size of $130,000) and involved technical assistance $6.2 million of disbursements for fiscal 2007­09, ASTAE to a specific firm; almost half were linked to an existing or clamied support for new renewable energy capacity (with prospective investment. TABLE 2.5 Off-Grid Investment Projects, 2003­08 IBRD IDA IFC MIGA GEF Carbon finance World Bank & IFC Total Wind 4.1 23.9 35.0 18.4 0.0 81.4 Hydropower, all 84.0 222.8 0.0 64.0 6.8 377.6 Biomass, all types 0.0 71.5 140.4 1.8 30.8 35.0 279.5 Solar 50.5 171.9 10.0 73.2 7.1 312.7 Unknown off-grid 7.1 67.3 0.0 25.3 0.0 99.6 Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and special financing. Individual components may appear in multiple rows if they support more than one technology, so column totals should not be used. GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Associa- tion; IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency. Renewable Energy | 17 Overcoming Barriers to On-Grid Support more profitable technologies Renewable Energy Some technologies are inherently more profitable than others and are thus easier to finance and more competi- Renewable energy has strong local advantages in addition tive with fossil fuels. The key determinants of returns, as to its global benefits. The electricity it provides can drive shown in box 2.1, are construction cost and capacity uti- development and satisfy consumer aspirations. A switch lization. Both can vary substantially. For instance, cost for from fossil fuels to renewable power abates acid rain and small hydropower plants has varied from $1,400 to $3,000 noxious air pollution. Renewable power also enhances do- per KW. Overall, hydropower economics are generally mestic energy security and buffers a country's economy much more favorable than for wind power. IFC experi- against the gyrations of international prices for oil, coal, ence (on a small sample) shows that large hydropower and gas. plants have an appraised average financial rate of return On-grid renewable energy faces barriers to investment: of 17 percent, small plants have a 13 percent rate of re- turn, and wind a 9 percent rate. IEG analysis of project · Renewable power is usually more expensive to produce finance confirms this relationship, holding constant varia- than coal or diesel power, so it can compete only if pro- tion in taxes and power tariffs, and shows that returns on ducers are rewarded for its local or global benefits. equity increase sharply as financial rates of return grow · More of the cost is up-front capital than is the case (figure A.1 in appendix A). with fossil-fueled power. So developers need affordable loans, and bankers need reassurance that a stream of The key determinants of returns for grid- repayment will continue for many years. connected renewable energy are unit cost of · Power sector laws, regulations, and operations may be capacity, capacity utilization rate, and tariff. poorly adapted to the peculiarities of renewable energy and often discriminate against small producers. Boost capacity utilization · In many countries, technical capacity for building, The economic and carbon returns of a renewable energy maintaining, and integrating renewable energy may be plant are directly proportional to capacity utilization (the weak. ratio of actual to potential power production). So bankabil- ity can be strongly improved by favorable siting of plants · Renewable energy, especially large hydropower, can (for example, where winds or river flows are more reliable) present environmental and social risks. and by ensuring better maintenance and operations. · Many kinds of renewable energy are intermittent and thus less convenient than plants that produce assured The economic and carbon returns of a baseload or peak power. renewable energy plant can be boosted Among the barriers to on-grid renewable significantly by improvements in capacity energy are costs relative to coal, oil, or gas; utilization. up-front capital needs; lack of adequate Capacity utilization varies greatly and is not strongly corre- regulations and technical capacity; and lated with the size of the facility (see figure A.2). Figure 2.7 environmental and social risks. shows the distribution of imputed7 capacity utilization among hydropower plants registered with the Clean This analysis of grid renewable energy uses a spreadsheet- Development Mechanism (CDM), most of which are run- based financial model to assess how interventions available of-river. The capacity factor among all plants varied from to the WBG can boost project bankability, overcoming these less than 10 percent to more than 90 percent. No WBG barriers. The model, inspired by de Jager and Rathmann carbon-funded plant achieved greater than 60 percent. (2008), is based on detailed financial appraisals of 20 hy- In China, CDM-registered wind plants have an average dropower, wind, gas, and coal projects financed by IFC and capacity factor of just 23 percent (for comparison, the US the Bank's Carbon Finance Unit. The projects, chosen for average is 34 percent). The low utilization rate has been at- the depth of their documentation, are not a random sample tributed to poor siting, inadequate grid integration, and but do illustrate a range of project costs, performance, and low-quality turbines (Lewis 2010). economic and fiscal environments. Although the financial model can involve baroque complexities of loans and taxes, Detailed resource maps, such as wind atlases, could in prin- a simple approximation (box 2.1) provides powerful in- ciple help governments and private developers ensure that re- sights. (Box 2.5 illustrates how some of these interventions newable energy facilities are well utilized, taking into account were applied in Sri Lanka.) environmental constraints and availability of transmission 18 | Climate Change and the World Bank Group BOX 2.1 The Economics of Grid-Connected Renewable Energy A stylized model provides useful insight into what financial and policy levers can boost the economic attractive- ness of a renewable energy project. The economics depend on four factors: unit cost, capacity utilization, tariff, and carbon credit rate. A developer needs to finance a power plant with a unit cost of $1,000­$4,000 per kW. The plant will produce a flow of electricity. But most renewable energy plants do not operate at full capacity. Wind plants, for instance, may only produce 25­40 percent of their theoretical full output. This ratio is the capacity utilization. The electricity is sold at a net tariff of, say, 5­15 cents per kWh after transmission costs. This renewably generated electricity may also displace fossil-generated electricity, generating a carbon credit rate of, say, 0.2­1.2 cents per kWh, depending on the price of carbon and the kind of fuel displaced. Then (with some simplifying assumptions, such as negligible costs of operations and maintenance, no peak-period tariffs, and no payments for capacity or penalties for intermittency) the pretax financial rate of return to the project is i 8,760 * Capacity Utilization Financial rate of return = (Tariff + Carbon Credit Rate) . Unit Cost (To get the ERR, use economic rather than market values for electricity and carbon, and account for local environ- mental benefits.) This shows that if electricity sells for $.06 per kWh, then the following actions would have equivalent impacts on the rate of return: · Adding carbon credits at $10 per ton CO2 (assuming displacement of .6 kilograms per kWh) · Adding a renewable energy premium of $0.006 to the tariff · Boosting capacity utilization from 30 to 33 percent through better siting, better design, or improved maintenance · Reducing construction costs from $1,100 to $1,000 per KW. The developer cares about the return on equity, not the overall return, and therefore leverages its equity by borrowing, ideally, 60­80 percent of the capital cost. This works as long as the returns are greater than the interest rate on the loan. The prospective returns have to be high enough to outweigh the risks. These include the risk that the buyer will renege on the promised tariff, which must be sustained over many years to pay back the large initial capital investment. Meanwhile, the lender wants to make sure that the investment is sufficiently lucrative that the developer can readily afford the loan repayments. So lenders insist that the project's revenue be sufficient to easily cover the loan repayments--that is, that the debt service coverage ratio be significantly greater than one. This ratio can be enhanced through longer loan lengths and lower interest rates. Source: IEG. Note: 8,760 is the approximate number of hours in a year. lines. The WBG has funded a number of mapping exercises undershot their planned production levels; in many cases (appendix B). Most of these modestly funded exercises are this is because of inadequate assessment of resources at the still under way, and impact evaluation is not possible. site. Box 2.2 explains why this has happened for landfill gas projects and what is being done in response. The WBG has financed development of a Operations and maintenance can affect capacity utilization. number of renewable energy resource maps Unavailability of spare parts can put turbines out of commis- that might assist in siting decisions and sion, for instance. Technical assistance for maintenance and thus improve capacity utilization. manufacturing could reduce downtime. As a crude measure of WBG support in this area, IEG's review of the 2003­08 The WBG could also help, through technical assistance, to portfolio found that about one-third of minihydro and one- ensure that projects' design plans for capacity utilization quarter of wind investment components included training are realistic. Hydropower, wind, and landfill gas plants have and capacity building for installation or maintenance. Renewable Energy | 19 FIGURE 2.7 Distribution of Capacity Factors of feed-in tariff, will be one of many factors that elicits a Hydropower CDM Projects response from investors. 20 CDM projects must explain the barriers faced by the project and how carbon finance will help overcome them. A review Number of projects 16 of Bank-financed hydropower plants found that many proj- 12 ects (in China, Guatemala, Honduras, India, Nigeria, and Ukraine) claim barriers related to insecure or short-term 8 power purchase agreements. If these are in fact the barriers, 4 then the use of carbon finance is a project-specific bandage for a sectorwide problem. A higher leverage intervention 0 would be to work at the policy level to correct the problem, 5 15 25 35 45 55 65 75 85 95 potentially catalyzing the entry of many plants. Capacity factor group (mid point %) WBG Non-WBG Carbon finance has had modest impacts Source: IEG calculations based on UNEP Risoe 2009. on investor returns for CO2-reducing Note: CDM = Clean Development Mechanism; WBG = World Bank renewable energy projects. Group. Figure 2.8 shows the impact of carbon finance in a sample of WBG projects, based on financial data presented for appraisal. The figure shows the return on equity (ROE) com- Landfill gas projects have produced much puted with and without the contracted carbon payments. less gas than expected, but good monitoring The degree to which carbon may have affected investors' in- and rapid feedback have prompted more centives clearly differs among the cases. A strong nudge to- realistic appraisal. ward investment is plausible in the case of one project with a base ROE of about 13 percent, which received a boost of 2.5 percentage points from carbon. It is less plausible for Provide carbon finance projects that started with a return of 20 percent or above From an economic viewpoint, carbon payments reward and received only 0.5 percent additional from carbon. renewable energy sources for reduced emissions. In the idealized world of the CDM, such a payment is supposed The relatively modest impacts on ROE reflect the basic eco- to nudge an investment project over the threshold of nomics of carbon. Renewable energy projects that substitute financial viability. In reality, a carbon payment, like a for fossil fuels reduce CO2 emissions by 0.8 kilograms/kWh, BOX 2.2 Monitoring and Evaluation Provides Rapid Feedback on the Performance of Landfill Gas Projects "Sanitary" landfills, as the name suggests, are a big improvement over open dumps and are an essential part of modern urban development. But when waste rots anaerobically in these landfills, it produces methane, a GHG 25 times more potent than the CO2 produced in open dumps. With the advent of the CDM, landfill gas projects can claim credit for destroying methane at 25 times the rate, per ton, of CO2 reduction. This could make them bankable, even in the absence of electricity sales. Consequently, 136 landfill gas projects were registered under the CDM between 2001 and 2009, and the World Bank's CFU has purchase agreements with 21. Like all carbon projects, landfill gas projects must report and verify their production annually. This mandatory monitoring soon revealed that many of these projects were grossly underperforming relative to design expectations, producing on average only about half the planned credits. In 2007, the World Bank's carbon fund sponsored an analysis of the reasons for underperformance. This and other studies showed that project appraisers had estimated the landfill's methane yield based on models of US landfills. But developing country garbage is different from US garbage--it is richer in food waste and moisture content, generates less methane per ton, and decays faster. Investigation showed specific ways in which poor operation and construction of the landfill can also depress yields. Feedback on these factors has improved the appraisal and design of subsequent landfill projects, for instance, leading to more conservative estimates of production. Sources: IEG; SCS Engineers 2007. 20 | Climate Change and the World Bank Group on average (Iyadomi 2010). (Reductions are smaller in hydro- FIGURE 2.8 Impact of Carbon Payments on power-dominated countries such as Brazil.) Thus, carbon pay- Return on Equity ments at $10 per ton (World Bank 2009)8 would add roughly 3.0 0.8 cents/kWh to the investor's revenue--a relatively small in- Addition to ROE (%) 2.5 crement in many competitively priced power markets. These carbon flows may offer greater security and less exchange rate 2.0 risk than domestic payments from an uncreditworthy elec- 1.5 tricity off-taker, and thus serve a kind of guarantee function 1.0 in some cases. However, as the formulas in box 2.1 show, the 0.5 impact of carbon on ROE and ERR is proportional to the ca- 0.0 pacity utilization factor. Thus, ironically, carbon payments are 0.0 5.0 10.0 15.0 20.0 25.0 30.0 less helpful to economically mediocre projects than to good Initial ROE (%) ones. Of course, the impact would be much stronger if CO2 Source: IEG. were priced at the $30­$60 levels that many analysts suggest Note: ROE = return on equity. is necessary for effective global climate change mitigation. Carbon sales have not catalyzed wind and hydropower investments. more, compared to prior norms of 4 years. This precedent also convinced other banks to offer lengthier repayment periods for renewable energy projects. Carbon market participants acknowledge that carbon sales have generally not been catalytic in triggering wind and Political risk insurance could be important hydropower investments. But carbon can make a big dif- ference for projects that capture methane emissions and in catalyzing renewable energy investment. destroy them or use them for energy, as noted earlier. Mitigate risks Provide better loan terms Renewable energy investments can be risky. The investor Lower interest rates and longer repayment periods make puts a large sum into an expensive, immovable installa- projects more bankable, though they do not affect the ERR. tion and must trust a utility to keep paying an agreed tariff The financial model suggests that a change from a 5-year to for many years. This risk is more acute than for fossil fuel a 10-year tenor could boost the debt service coverage ratio plants, because renewable energy plants cost more per MW. from 1 to 1.4. This is a very significant difference, which In many countries, the off-taker is in poor financial health might well be sufficient to make a project bankable. or subject to external pressures. The use of feed-in tariffs (a producer subsidy) poses an- Longer repayment periods make projects other risk. Governments may promise 10 or 15 years of much more bankable. these premium payments for renewable power to make the initial investment worthwhile for investors. But if a fi- Although IFC does not compete with commercial lenders nancial crisis were to hit, governments might be tempted on interest rates, it can and does offer longer tenors, of- to eliminate these subsidies, because the marginal costs of ten around 10 years as opposed to 5 for commercial loans continued operation are low. Governments might also be (with much variation). In syndicated loans, IFC terms are tempted to renege on feed-in tariffs if prices of coal, oil, or usually matched by other lenders. The IBRD can offer both gas declined. lower interest rates and longer tenors than commercial These considerations suggest that guarantees and political lenders. risk insurance could be important in catalyzing renew- IBRD's Turkey Renewable Energy Project (2004) is an ex- able energy investment. In principle, MIGA can provide ample of the catalytic effect of longer loan repayment peri- political risk insurance at lower cost than private agencies, ods. This project loaned about $200 million to a state bank because the WBG's special relationship with client govern- and a private bank. The funds were on-lent to 22 renewable ments lowers its risk. Both the World Bank and MIGA have energy investments (mostly hydropower, with wind and in fact provided such insurance. Box 2.3 describes a MIGA geothermal power plants as well) with total value of $774 example. Mostert, Johnson, and MacLean (2010) explain million and a capacity of 605 MW; claimed lifetime CO2 how WBG partial credit guarantees facilitated longer loan reductions are about 1 million tons.9 One success factor was terms for a Philippine geothermal and a Chinese hydro- that the Turkish banks offered loans of 10 years' duration or power plant, making them both bankable. Renewable Energy | 21 BOX 2.3 Mitigating Political Risks in Renewables: A MIGA Case In 2000, an energy company was awarded a build-own-operate contract for a geothermal power plant in Africa, with rights to develop additional geothermal fields and expand capacity. The company signed a 20-year power purchase agreement with the national power utility, a parastatal. The average base generation tariff was slightly higher than the average cost for domestically produced electricity but lower than the cost of imported hydropow- er from neighboring countries. The country has long suffered from power shortages, and in 2000, only 10 percent of the population had access to electricity. Major risks for the investor included currency transfer restrictions, government breach of obligations under the power purchase agreement, and civil disturbances. MIGA provided the company (a repeat client) coverage against currency transfer restrictions, war and civil disturbance, and expropriation. Expropriation coverage insures broadly not only against the risk of outright seizure but also against breach of contract and other forms of de facto expropriation. Shortly after MIGA issued the guarantee for Phase 1 of the project, the government attempted to renegotiate the tariffs because the off-taker's power purchase price from the company, as agreed under the power purchase agreement, was higher than the tariff it charged to end users. The government also refused to honor some of its contractual obligations under the power purchase agreement. The dispute resulted in additional costs and delayed completion of the first phase of the project. MIGA worked with both parties over five years and played a crucial part in reaching a resolution. The World Bank's long involvement in the sector--it had financed two adjacent geothermal plants--provided a foundation for these discussions. The disputes were resolved when the utility agreed to honor the existing power purchase agreement without price renegotiation. The investor considered MIGA's guarantee as critical for the implementation of Phase 1 of the project and, on resolving the dispute, obtained additional MIGA political risk insurance to cover expansion of the geothermal plant's installed capacity. Source: IEG-MIGA. Over 2003­08, guarantees for grid-connected renew- Guarantees have benefits, but add to the cost of finance. able energy were $541 million, about 15 percent of WBG It may be possible to use carbon finance to offset some commitments for grid-renewable energy. During this period, of this cost. As noted, at current carbon prices, annual MIGA issued six guarantees for renewable energy projects. revenues from carbon credit sales provides little help By far the largest guarantee was for the 1-GW Nam Thuen with debt finance and little impetus for investment. Much 2 hydropower project in Lao PDR, which benefited from greater leverage could be achieved, however, if carbon $91 million in MIGA political risk insurance and $50 million sales revenue were used to finance guarantee or insurance in an IDA partial risk guarantee. These guarantees were es- payments, which in turn permitted lenders to offer longer sential for the participation of private lenders in the $1 billion loan durations. loan consortium, which also included public agencies. Promote renewable energy -friendly pricing regulation Is there scope for greatly expanded use of the World Bank's A renewable energy plant's ROE is very sensitive to pricing partial risk guarantees or MIGA's political risk insurance of power. Appendix figure A.3 shows the ROE for three dif- in promoting renewable energy? IEG's evaluation of WBG ferent plants, evaluated at a range of different tariffs. As in guarantees found that guarantees had been underutilized the case of carbon revenue, higher tariffs have a bigger ef- and that high processing and transaction costs and--in fect on plants with higher capacity utilization, other things MIGA's case--eligibility restrictions on the type of risks that being equal. Under the assumptions shown, wind does can be covered limited the WBG's ability to expand guar- not become commercially attractive until tariffs exceed antees. With a change in the MIGA Convention, MIGA's 10 cents/kWh. coverage is now expanded, but its institutional constraints would still need to be overcome. The returns to a renewable energy plant are For the World Bank, supporting national guarantee facili- very sensitive to power tariffs. ties is one approach.10 The World Bank could, for instance, help countries assess the fiscally prudent opportunities for Countries have purely domestic rationales for paying a pre- feed-in tariffs or renewable portfolio standards and support mium for renewable energy, including local pollution reduc- guarantees for countries with sustainable plans. tion, insurance against fuel price shocks (Hertzmark 2007), 22 | Climate Change and the World Bank Group and industrial policy. An increasing number of countries, contributing to the renewable energy law of 2006. The law both developed and developing, have adopted policies that enabled a systemwide levy to fund renewable energy, trig- award premium prices to generators of renewable power, gering growth of wind power capacity from 3 GW in 2006 for instance, through feed-in tariffs. By early 2009, 43 de- to 26 GW at the end of 2009. veloping and transition countries or subnational regions Dialogue in Mexico, together with demonstration wind had adopted feed-in tariffs for renewable (REEEP 2009). projects, contributed to a renewable energy law that over- However, pricing policies are often unfavorable to renew- comes previous policy biases against renewable power. GEF able energy. Fossil fuel subsidies and artificially low funding was used to simulate a feed-in tariff, allowing con- electricity tariffs place renewable energy at a disadvantage. struction of the first independent wind power producer. (World Bank responses, in promoting rationalized fuel A sequence of dialogue and lending in Morocco culmi- and electricity pricing, were described in Phase I of this nated in a 2010 renewable energy law, but implementing evaluation.) regulations are not in place. In Egypt, there has been input into a proposed new electricity law. In many countries, small power producers, including hy- dropower and biomass plants, face unclear or discrimina- tory regulations on access to the grid. Producers may face Financing such advisory work can be daunting years-long negotiations with utilities. In contrast, difficult within the Bank's administrative utilities face difficulties in accommodating intermittent, budget. nondispatchable power sources. Starting in the 1990s, the World Bank assisted a number Financing this high-leverage advisory work can be diffi- of Asian countries in drawing up and implementing small cult within the Bank's administrative budget, even though power purchase agreements that reduced transaction costs the costs are relatively low. Some clients, such as Brazil, and risks for independent small power producers while have borrowed for technical assistance. The World Bank's providing incentives to serve peak loads. Ferry and Cabraal Mexico team has developed a strategy of concentrating (2006) describe the experience in India, Sri Lanka, and lending in a single large Development Policy Loan and Thailand as being generally successful, with less success in using the (proportional) preparation budget. Elsewhere, Indonesia and Vietnam. IEG's tally of the timing of small teams have relied on donor funding through ASTAE, power investments (figure A.4) supports a catalytic role in ESMAP, and GEF. ASTAE provided important inputs in Andhra Pradesh (India), Sri Lanka, and Thailand (where China. the emphasis was on small combined-cycle gas turbine An unusual IFC foray into policy was unsuccessful. Al- plants); additional factors may be at work in Tamil Nadu, though IFC routinely provides advice to governments on India. issues related to utility contracting and privatization, a Several WBG client countries have drafted or implemented GEF-funded advisory project in the Russian Federation renewable energy legislation. These legislative and regula- sought to provide broad regulatory advice to complement tory initiatives were complex, country-driven processes an IFC wind farm investment. Even under the proposed often involving many external counterparts, so attribution rules, however, wind prices were not competitive with ex- of impact is difficult. Nonetheless, it appears that relatively isting, subsidized fossil-fuel energy prices. The project was low-cost analytic assistance and capacity building from the not implemented, and wind power capacity in Russia stood World Bank has helped countries craft domestically accept- at just 16.5 MW at the end of 2009. able policies to promote renewable energy. In many cases, receptivity to this advice is heightened by associated invest- On-Grid Renewable Energy: Hydropower ments. However, counterparts view the World Bank as a Hydropower is by far the largest source of renewable energy trustworthy source of advice and analysis. and according to most predictions will retain that position for decades to come. Hydropower with storage reservoirs is Relatively low-cost analytic assistance and the main form of renewable energy that can provide reliable capacity building have helped countries baseload power. craft policies to promote renewable energy. Hydropower has been controversial because of its potential for environmental and social damage. These risks are greater This was true in China, where there is a history of analytic for storage dams, which have sizable reservoirs, than for work dating back to the early 1990s. World Bank-funded run-of-river facilities, which have little or no reservoir stor- seminars, study tours, and analyses helped lay out the de- age. Risks and damages can be mitigated by consideration sign choices for renewable energy pricing and funding, of siting; for instance, there may be less risk in favoring Renewable Energy | 23 deep, narrow reservoirs in less populated and sensitive ar- Figure 2.9 documents the decline and rise of hydropower eas. Strategic environmental assessment provides a vehicle in the WBG portfolio. During the 1990s, criticism of the for optimizing siting, as in the case of the one undertaken environmental and social impacts of dams and hydro- for the Nile Equatorial Lakes region. power led to the convening of the World Commission on Dams and a slowdown in related WBG commitments. The Depending on location, reservoirs in WBG endorsed most of the World Commission's recom- tropical forest areas can have disparate mendations, and commitments rebounded after 2000. The levels of GHG emissions. WBG recently released a document outlining a vision of increased investment in hydropower, especially in Africa Hydropower reservoirs can produce methane, a powerful (World Bank 2009). GHG, if drowned forests or vegetation inflows decay anaero- Table 2.6 shows the breakdown of recent investments by bically. Complex biophysical processes determine the rate of size and presence of storage. Large hydropower with stor- methane production, which is thought to be highest in shal- age (the most environmentally and socially sensitive cat- low tropical reservoirs (Metz and others, 2007). A study of egory) constitutes about one-third of these commitments 9 Brazilian hydropower plants (dos Santos and others 2006) in volume; some of this is rehabilitation. found 3 that produced less than 3 percent of the GHGs of a comparable combined-cycle gas plant and 5 that produced Regionally, Sub-Saharan Africa accounts for one-third of 100­400 percent as much. The study did not measure out- commitments overall, a quarter of the large hydropower gassing at the turbines, which may be significant. projects with reservoirs, and about half of the micro and pico (ultra small) hydropower projects. Half of large hydro The fall and rise of WBG involvement in hydropower with reservoirs is in Europe and Central Asia. 1990­2008 Hydropower comprises the largest share of the current Large hydropower with storage constitutes WBG renewable energy portfolio and has the longest re- about one-third of World Bank hydropower cord within the WBG. Hydropower has been supported by commitments. every unit of the WBG. FIGURE 2.9 The Fall and Rise of WBG Hydropower Commitments, 1990­2008 1,400 1,200 1,000 Commitment ($ millions) 800 600 400 200 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2000 2002 2003 2004 2005 2006 2007 2008 Year Hydro > 10 MW Hydro < 10 MW and other renewable energy Hydro < 10 MW Sources: IEG portfolio review and WBG renewable energy and energy efficiency progress reports, 1990­2008. Note: WBG = World Bank Group; MW = megawatts. 24 | Climate Change and the World Bank Group TABLE 2.6 Hydropower Investments by Size, Storage, and Funding, 2003­08 Hydropower by size All hydropower >10 MW, with storage >10 MW, run-of-river 1­10 MW <1 MW a Guarantees 453.0 203.1 249.9 IBRD stand-alone 849.4 394.9 540.4 202.0 IDA stand-alone 528.5 190.9 213.6 28.0 IFC 358.7 351.6 7.1 Total traditional financing 2,189.7 789.0 1,355.5 237.1 IBRD-GEF-carbon finance blend IDA-GEF-carbon finance blend 72.9 72.9 Total blended financing 72.9 72.9 GEF stand-alone, 0.4 0.4 0.4 World Bank carbon finance 145.5 6.0 129.5 4.1 5.9 IFC carbon finance 33.7 28.7 14.0 Total new financing 179.6 6.0 158.2 18.5 6.4 Total 2,442.2 794.9 1,586.6 255.7 6.4 Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory assistance, IFC advisory services, and special financing. GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation. a. Guarantees include the World Bank and MIGA. The number of small hydro projects (hydro < 10 MW) in- large and four small projects with unsatisfactory ratings for creased significantly after 2002. Prior to 2002, four projects borrower performance). were approved. Between 2002 and 2008, 46 projects were approved that targeted development of small hydropower WBG-sponsored CDM hydropower facilities, of which 10 projects have specific measurable in- projects have had lower capacity utilization dicators for small hydropower investments. The 2003­08 than expected. portfolio consists mostly of active projects: eight are still un- der implementation, one was closed, and one was dropped. Unlike other WBG projects, CDM-registered carbon proj- ects and recent IFC projects provide systematic and timely Performance of WBG-supported hydropower information on postconstruction performance. CDM Forty-five closed Bank hydropower projects have been sub- projects report actual versus expected production of car- ject to desk evaluations by IEG; 11 of these have had field bon offsets; this ratio will reflect in large part actual versus evaluations. Of the 45, 34 were connected to the power expected production of power. Relative to expectations, grid.11 performance of WBG-sponsored CDM projects in pro- ducing carbon offsets was worse than that of other CDM Two-thirds of hydropower projects were sponsors. Only one of six of these WBG large hydropower rated moderately satisfactory or better. plants achieved a yield more than 100 percent of expecta- tions, versus 30 percent of non-WBG plants. Half of WBG Overall, outcomes for two-thirds of the portfolio were rated moderately satisfactory and better, with better performance for projects approved after 1998. Outcome ratings are simi- TABLE 2.7 Outcome Ratings of World Bank lar in both grid and off-grid projects. Hydropower Projects World Bank performance in 35 of the projects was rated Approval year Number rated Number rated moderately moderately moderately satisfactory and better, as was borrower perfor- satisfactory or better unsatisfactory or worse mance in 30 projects. All unsatisfactory ratings for Bank 1991­97 23 12 performance and borrower performance occurred in the 1998­2006 8 2 projects approved between 1990 and 1998. Bank perfor- Total 31 14 mance was rated unsatisfactory in small and large hydro- Source: IEG, based on WBG renewable energy and energy efficiency power projects equally, whereas borrowers' failures were progress reports, 1990­2008 and IEG 2010d. associated mainly with large hydropower projects (nine Renewable Energy | 25 small-scale hydropower projects had yields of less than Most increases in energy access will happen through expan- 60 percent, compared with 18 percent of non-WBG proj- sion of the grid, rather than expansion of off-grid power. ects. IFC's Development Outcome Tracking System showed A World Bank study (World Bank 2010) notes that in most that four of six reporting projects exceeded planned pro- countries 80­95 percent of unserved communities are tar- duction on average. One did not report a baseline. geted to receive electricity supply through grid extension. Cost estimates of grid expansion vary widely; however, for A review of project evaluations points to several recurrent all but the lowest density or most remote areas, the lower factors that affect project success (table C.4). Planning and cost of grid-based generation tends to outweigh the high execution of resettlement is a key factor for success or failure. cost of transmission and distribution extension. Planning for water rights has been critical. In the Tanzania Power IV Project, failure to define water rights up front led Though there are many barriers to electrification, key issues to environmental problems and implementation delays; an include the high costs of supplying rural and peri-urban Armenian project, in contrast, was able to extend water rights households, a lack of appropriate incentives or financial ca- validity to a 40-year term. In several cases, lack of a regulatory pability for utilities, and a shortage of electricity generation framework or failure of the borrower to implement expected relative to demand from existing customers (World Bank reforms was a factor in performance. In sum, and not surpris- 2010). Some actions can address these barriers while also ingly, thorough project preparation is critical to success. reducing carbon emissions. Supply constraints can be alleviated through either genera- Energy Access and Low-Carbon tion increase (renewable or not) or energy efficiency. Effi- Development ciency improvements can be cheaper. Moreover, to meet an A billion and a half people lack electricity. An IEG review end user's demand, new generation has to allow for trans- (IEG 2008) showed that poor people place an extraordi- mission losses. With technical losses of 11 percent,12 a kWh narily high value on electricity. Even with their extremely saved is worth 1.11 kWh generated. limited income, people are willing to pay up to $1/kWh to Though energy shortages have traditionally been alleviated power lights, televisions, and cell phone chargers. Improv- largely through generation increases, energy efficiency can ing access to household electricity is particularly important play a key role. For example, Bank projects in Vietnam have for women, who often have the greater work burden for do- reduced supply shortages through a mix of transmission mestic tasks (box 2.4). Access is a critical development goal and distribution (T&D) capacity expansion and efficiency for both reducing poverty and fostering growth. How can improvements, demand side management, and on-grid low-carbon activities support energy access? and off-grid renewable energy. Energy efficiency and de- mand-side management projects have led to a combined reduction in peak load of 1,997 MW at far lower cost than BOX 2.4 Gender and Low-Carbon Energy construction of new generation; at the same time this leads to lifetime emission reductions of 130 million tons.Techni- An IEG evaluation of gender issues in World Bank cal losses fell from 15 percent in 2000 to 9 percent in 2009 investment projects from 2002 to 2008 (IEG 2010c) identified 890 (of 1,183) projects where gender because of Bank projects and other Vietnamese invest- was relevant. Nineteen of these were energy ments, easing the need for new power generation. In addi- projects containing low-carbon components, tion, distribution of CFLs has proved to be a highly effective primarily energy access expansion through grid tool in reducing peak demand to alleviate urgent supply power extension, off-grid hydropower, or SHS. constraints both in Vietnam and in Sub-Saharan Africa. These projects had a range of differential gender impacts, including labor savings for women from Energy efficiency can play a key role in access to electric appliances, health benefits for alleviating power supply shortages and thus women and girls from substituting electrical power for kerosene or wood fuel, and high vulnerability expanding access. for female-headed households from reservoir hydropower resettlement policies. Project design Most access improvements have been accomplished through documents were rated by degree of gender analy- grid expansion. Early pilot projects in Vietnam with reha- sis, consultation, activities, and monitoring. Of the bilitating micro-hydropower to increase off-grid access low-carbon energy projects, seven were rated low, were initially successful and connected 5,000 households. five moderate, eight substantial, and none high But these projects were not expanded, in part because of for their treatment of these criteria. greater-than-expected success in rapid grid expansion. In Source: IEG. contrast, grid-expansion projects have provided access to power for roughly 2.5 million people. But with connection 26 | Climate Change and the World Bank Group costs for remaining unelectrified areas exceeding $0.50/ Barriers and interventions kWh because of small loads, off-grid supply may be the The barriers to SHS are well established: least cost alternative. · Cost and financing for consumers: The cost of a 20-peak watt (Wp) system ranged from $150 to $490 in the portfo- Off-Grid Renewable Energy: Solar lio. Although the operating cost per lumen (unit of illumi- Photovoltaics nation) is theoretically less than that of a kerosene lamp, the up-front cost is prohibitive for most rural poor with- This section focuses on SHS--historically the biggest out financing. And rural finance poses its own problems. recipient of WBG support for off-grid renewable ener- · Financing for manufacturers and dealers: SHS systems gy and still prominent in the portfolio (table 2.5). SHSs are assembled by small manufacturers that find it dif- provide individual rural households with modest levels ficult to get capital. of power primarily for lighting and television. SHSs can reduce carbon emissions by substituting for kerosene · Biased pricing policies: In Sri Lanka, for instance, solar lamps and grid-charged batteries. Because they promise photovoltaic modules were initially subject to 35 per- both rural access and GHG reductions, they have attracted cent import duties. In Indonesia, when the price of photovoltaic systems increased by 400 percent due to substantial funding. currency depreciation, the import price of kerosene and diesel only increased by 40 percent and 58 per- Since 1992, the WBG has contributed cent, respectively, thanks to government subsidies. In $790 million to SHS components. Uganda, solar purchases were subject to extra duties aimed at protecting a local battery company. Since 1992, the WBG has contributed $790 million to SHS · Anticipation of grid connection: Households much prefer Photo by Dana Smillie, courtesy of the World Bank Photo Library. components in 33 Bank and 4 IFC projects in 34 countries. the convenience and reliability of grid connections and Virtually all had some degree of GEF support. The port- will not invest large sums in SHS if connection to the grid folio is concentrated in East Asia and the Pacific and Africa. is imminent. Ambiguous plans or too-optimistic prom- The Middle East and North Africa is represented only by ises on grid integration can discourage demand for SHS. a $1 million project in Morocco, despite the region's solar · Poor quality--actual or perceived: Uncertainty about resource. SHS quality and reliability dampens consumer demand for these expensive investments; uncertainty about con- This section draws on a review of the 12 World Bank projects sumer demand dampens industry supply. that contain an off-grid solar photovoltaic component and were closed or open and well documented, and that have an · Geographic barriers: Off-grid populations tend to be in installation target greater than 10,000 SHSs (see table A.7). areas of low population density with difficult terrain. Renewable Energy | 27 Sellers and microfinanciers find it costly to service these An IFC self-assessment (IFC 2007) was pessimistic also, populations. concluding that without some level of subsidies, solar photovoltaic power in developing countries is often too Against these barriers the WBG has deployed a number of expensive for the average rural consumer; that "the rural, instruments: off-grid, solar photovoltaic industry in emerging markets is · Most projects employed subsidies. These subsidies a low-margin, high-risk business"; and that IFC has "been were to buyers or renters, dealers or manufacturers, or unable to significantly transform markets and create sus- winning concessionaires under a fee­for-service model. tainable business as originally anticipated." Subsidies were often 10­20 percent of cost, but ranged up to 60 percent. They aimed at making the systems However, emerging evidence from evolving World Bank more affordable and at expanding overall production experience paints a more positive picture--though still and thus pushing the entire industry down the learning with the qualifications that SHS appears to be a small niche curve, resulting in sustained cost reductions. In Bolivia market rather than a rural panacea and is largely still de- and China, dealer/manufacturer subsidies were contin- pendent on subsidies. gent on meeting quality standards. All projects in the evaluation portfolio had the development · Consumer credits addressed the financing barrier and objectives of (i) increasing access to electricity in rural areas were provided through three primary mechanisms: in an environmentally sustainable manner and (ii) facilitat- dealer extended credit, credit through local banks, and ing greater participation by the private sector in advancing credit through microfinance institutions. the commercialization of photovoltaic technology. In addi- · Investor financing (beyond subsidies) was provided in tion, 4 of the 12 projects specifically spelled out the goal of some projects. fostering economic growth or improving the delivery of so- cial services such as health and education through the provi- · Technical assistance and support for standards and certi- fication addressed the quality barrier. sion of electricity services. The global environmental objec- tive of the solar photovoltaic projects was to remove barriers WBG-supported projects deployed to the adoption of emissions-reducing energy technologies. subsidies and consumer credit. Outcomes for four of the five evaluated Project outcomes projects with large SHS components were Active promotion of SHS now dates back two decades, to rated satisfactory. a time when solar modules (the main component of SHS) were much more expensive than they are now. Reviews Table 2.8 reports the rated outcomes of the five completed looking over the first decade of that experience pointed to projects in the evaluation sample with large SHS compo- the persistence of price and credit as barriers (Martinot, nents. With the exception of Indonesia--where the 1997 Ramankutty, and Frank 2000; GEF 2004a; GEF 2004b). macroeconomic crisis crippled consumer demand--all the Disappointment in these outcomes has led the GEF--the projects performed well against targets. But good measures main financier of these projects--to deemphasize them. of SHS longevity are lacking.13 TABLE 2.8 Rated Outcomes of Completed Projects with Large SHS Components Project Number of installed SHS Total capacity of installed SHS (MWp) Targets Actual Targets Actual China Renewable Energy Development Project 350,000 400,000 11 10 India Renewable Resources Development NA 2.5 ­ 3 2.145 Project Indonesia 200,000 (appraisal) 8,054 NA SHSs 70,000 (revised) Sri Lanka 30,000 (appraisal) 21,000 NA Energy Services Delivery 15,000 (revised) Sri Lanka Renewable Energy for Rural Economic 87,000 by 2009 (appraisal) 105,398 (as of 4.622 Development (RERED) 155,000 by 2011 (revised) June 30, 2009) Sources: Implementation and Completion Reports and Sri Lanka RERED Statistics and Reports (http://www.energyservices.lk/statistics/index.htm). Note: MWp = peak megawatts; SHS = solar home systems. 28 | Climate Change and the World Bank Group World Bank experience rural electrification policy, which aims to promote sustain- Two factors accounted for the success of the projects in able market-based provision of rural service. In contrast, Bangladesh, Sri Lanka, and China. Consumer finance was in China, India, and the Philippines, multiple competing crucial. In Sri Lanka's energy services delivery project, the programs for SHS promotion sometimes worked at cross SHS vendors and commercial banks were expected to pro- purposes, with heavily subsidized programs undercutting vide financing but proved ill suited to deal with collecting the progress of more market-oriented ones. payments from the highly decentralized off-grid custom- ers, and the project languished. The project took off after IFC experience shifting to a microfinance model. IFC's attempts at promoting private sector development in the SHS market were generally less successful than the The Bangladesh Renewable Energy for Rural Economic Bank's. A candid IFC review (IFC 2007) points to a lack of Development project also relied on well-functioning mi- flexibility; this is consistent with internal evaluations and crofinance institutions. China's Renewable Energy Devel- with the views of an industry participant and former client opment Project (REDP) achieved success despite lack of (Miller 2009). A $41 million effort initiated in 2000, the Solar financing arrangements in provinces where many clients Development Group, comprised for-profit private equity fi- were yak herders who could self-finance a system through nance and nonprofit technical assistance--in two arms that sales of their animals. were intended to cooperate but failed to do so. The equity finance arm collapsed having disbursed only $650,000, a Microfinance was a critical input for victim of unrealistic expectations about industry profitabil- success in several projects. ity and rigid procedures. The technical assistance arm, more flexible and less demanding of returns, disbursed about The second factor was the use of output-based producer $2.2 million to 53 small companies spread across many subsidies. The development of the Chinese industry is countries, so that the overall impact was highly diluted. IFC noteworthy, as it illustrates an effective set of mecha- noted also a failure to coordinate IFC activities with World nisms to promote manufacturing quality and capabilities. Bank support for favorable renewable energy policies. Demand-driven grants enabled companies to improve their technologies and financial management systems. Technol- IFC's approach has been less flexible than ogy-neutral subsidies--contingent on achieving quality the Bank's and has had less success. standards--served as an incentive to improve quality, pro- vided small firms with capital for expansion, and were to A more recent IFC-GEF effort, the Photovoltaic Market some degree passed on to consumers, boosting demand. Transformation Initiative, provided $30 million to support As a result, the SHS companies doubled their employment, photovoltaic enterprises in India, Kenya, and Morocco. tripled sales and service outlets from 266 to 721, and more Initially overly bureaucratic, it was restructured for more than tripled sales. The inland city of Xining emerged as a flexibility. It has been successful in India, where it has manufacturing center and began to export products. supported performance guarantees and higher-quality products, though initially it was poorly coordinated with the Quality-contingent output-based producer World Bank project. The Initiative has been less successful subsidies were important. in Morocco and Kenya. It is difficult to discern the impact of certification or label- Impacts ing on consumer perception of quality and therefore on A goal of these projects was to sustainably reduce the price of demand. China REDP supported the development of a SHS and thereby increase access. In general, closed projects "Golden Sun" quality label, but rural familiarity with the all observed reduction in the cost of photovoltaic systems. label appears to be low, and exporters seek internationally Under China REDP, photovoltaic system costs declined recognized certification. from about $16/Wp to $9/Wp. In Uganda, the photovoltaic system cost declined from $20/Wp to $12­17/Wp by the end Projects in Argentina, Bolivia, Indonesia, Mongolia, and of 2008. These declines probably reflect increased domestic Sri Lanka aimed to support the development of policy competition. The programs are too small to have affected the frameworks for off-grid electrification. The Sri Lanka ef- global market for solar modules, where increased European fort was most clearly successful. In Sri Lanka, the energy demand drove down prices over the decade. service delivery project indirectly influenced the govern- ment to rationalize a photovoltaic module import tariff, Projects have generally reduced the local which was reduced from 35 to 10 percent. Toward the end cost of photovoltaic systems. of the project, the government also introduced its new Renewable Energy | 29 Overall, the closed projects have not made a significant · Although reducing CO2 emissions is a critical goal of contribution to the reduction of GHG emissions. This is most of the projects, actual CO2 savings was not care- a consequence of the target users' poverty and low energy fully monitored. consumption. In India, the avoided carbon emissions were estimated to be 94,000 tons over the lifetime of the photo- The Way Forward for Renewable Energy voltaic subproject. In China, a rough extrapolation implies Economic and GHG returns to renewable energy total CO2 reductions on the order of 7,000 tons per year. investment Evidence on these projects' poverty reduction impacts is Hydropower projects with high capacity factors and low spotty because of the lack of monitoring. In India, some costs per KW can be cost competitive with fossil fuel plants traders reported a 50 percent increase in net income by and also offer GHG reductions and other environmental using solar instead of kerosene lighting; income of some benefits. Wind and other renewable energy typically offer rural households increased by about 15­30 percent be- significantly lower returns per dollar on both dimensions. cause of increased home industry output. SHSs also But capacity factors make a large difference in returns. Re- allowed longer study hours for children under better light- newable energy offers additional benefits of energy security ing conditions. In China, a 2007 end-user survey covering (for fuel importing countries) and a possible basis for stim- 1,203 households in 6 villages reported that 95 percent of ulating domestic manufacturing. But low-capacity-factor, SHS users claimed that the use of a photovoltaic system in- high-cost renewable energy may not be advantageous for creased their incomes; 15 percent claimed that the increase low-income countries. was significant. SHSs can have extremely high economic Project monitoring and evaluation needs returns, but they have relatively low carbon to be strengthened, particularly regarding benefits. cost data, performance of installed systems, SHSs supply power at high cost yet offer extremely high poverty impacts, and CO2 savings. economic returns to off-grid households because of the households' large benefits from electricity access. However, Calculation of ERRs depends on technical assumptions the systems have relatively low carbon benefits. The eco- about consumers' benefit from lighting and may not be nomics of other kinds of off-grid renewables will be similar, comparable between projects. In Bolivia, Indonesia, the because of low capacity factors and low usage of energy by Philippines, and Sri Lanka, ERRs for the consumers' invest- poor rural people. ment in SHS were calculated in the 27­47 percent range. For China, IEG estimated a phenomenal 115 percent ERR Overcoming barriers to adoption and diffusion (World Bank 2010). These very high numbers are consistent Middle-income countries are increasingly willing to pay with studies that show huge gains to rural electrification premium prices for renewable energy because of its envi- (IEG 2008) and could be higher in areas where grid con- ronmental and energy security benefits. World Bank policy nection is possible. However, the ERRs do not include the advice and piloting has been helpful in China and Mexico dynamic gains of industry technical progress and cost re- in catalyzing large-scale installation of wind facilities. This ductions for future consumers. is a relatively low-cost, potentially high-leverage, but un- Overall, projects monitoring and evaluation needs to be certain line of intervention that may take years to bear further strengthened: fruit. It is through this kind of indirect catalysis, rather than investment in individual power plants, that the WBG can · Disaggregated cost data, such as assembly cost, installa- affect a large enough volume of investment to help these tion cost, and financing cost were usually not monitored technologies make globally relevant advances in cost com- and reported, preventing assessment of the impact of petitiveness. industrial development on price. · Performance of installed photovoltaic systems was WBG support has helped develop SHS not always monitored and reported. Monitoring sys- manufacturing capacity. tems are shut down when the project closes, inhibiting evaluation of the program's sustainability--the crucial World Bank support has helped develop manufacturing ca- question of whether consumers continue to purchase pacity for SHSs and reduce local prices in China, Sri Lanka, systems after the subsidy ends. and Uganda. Markets are still reliant on subsidies, however, · Baseline and comparison group data are lacking, so it is and are limited by the still-high prices of solar modules. difficult to assess impacts on poverty. Sustained declines in module cost, together with promotion 30 | Climate Change and the World Bank Group BOX 2.5 On-Grid and Off-Grid Renewable Energy in Sri Lanka The World Bank has helped promote significant growth in renewable energy in Sri Lanka, through two IDA-GEF projects, beginning in 1997. The largest impact was through catalyzing the growth of grid-connected, independently operated small hydropower plants. This was done by facilitating finance. A small power purchase agreement eliminated time-consuming, asymmetric negotiations between small companies and the electricity board. A market-based feed-in tariff, with a floor, ensured a minimum income. IDA funds were on-lent by private banks for durations of 7­9 years, as opposed to the usual 4. The government assumed the foreign exchange risk (and has borne the cost of a devaluation). As a result, 153 MW of minihydro have been installed, generating 4.4 percent of grid-connected power (2008) and saving a claimed 550,000 tons of CO2 per year. Sri Lanka has gained technical manufacturing expertise in the process and is now exporting turbines and engineering services. The projects also supported the rapid growth of solar photovoltaic home systems, from near zero to 125,000 systems totaling 5.5 peak MW of capacity. Output-based subsidies (as in China's REDP) and specialized microfi- nance were key. Success was more modest for village hydro systems, supported through grants and loans, which installed 1.3 MW serving 4,696 households. And a wind project, designed to demonstration commercial feasibility, performed below expectations and was not replicated. Recently, a new IFC project, PADGO, has begun to promote decentralized energy, including combined heat and power fueled by biomass. Challenges for further expansion of renewable electricity include an inadequate grid; decreasing quality of remaining hydropower sites; wind sites that are remote and can support only small turbines; and an increas- ingly bureaucratic plant licensing process that now requires two years. Demand-side management and energy efficiency have also been less successful than hoped. However, a 30 percent increase in electricity tariffs in 2009 (that preserved lifeline tariffs) should increase the attractiveness of both renewable energy and energy efficiency. Source: IEG background study. of smaller systems (as in the Lighting Africa Project), could environmental assessments to aid in optimizing hydropower help with diffusion. sites, taking account of economics, environmental impacts, transmission needs, and integration of intermittent power Long loan durations are an important stim- sources. Spatial planning of this kind will become increas- ulus to project bankability and are featured ingly important to aid in integration of wind, biomass, so- in IFC lending and Bank on-lending. lar, and other site-specific resources, especially as climate adaptation needs are factored in. Long loan tenors are an important stimulus to project Learning and feedback bankability and are a feature of IFC direct lending and Systematic monitoring of output of grid-connected renew- on-lending by the World Bank. At current carbon prices, able energy can help explain why new types of projects are carbon finance has a very modest leverage on the financial underperforming, so that design and operations of repeater viability of hydropower, wind, or geothermal projects but projects can be improved. a profound effect on projects that involve the capture of methane. Better monitoring of costs and impacts is needed to guide future investment portfolios. Actual long-term impacts of Systems issues solar home systems are poorly measured--including how As renewable energy expands, systems integration is- long they last. sues become critical. There is increasing use of strategic Renewable Energy | 31 Chapter 3 EVALUATION HIGHLIGHTS · Efficient lighting may offer very high economic returns and significant GHG reductions. · Reducing technical losses in transmission and distribution offers high returns and large scope for investment. · There are large energy efficiency opportunities in the building sector, where market failures Photo by Martin Wright/Ashden Awards for Sustainable Energy. Used with permission. http://www.Ashden Awards.org. abound; this represents a largely untapped area for WBG intervention. · Guarantees have stimulated lending by banks to enterprises with poor collateral but have not been transformative in reducing banks' risk aversion. · By screening existing clients for cleaner pro- duction opportunities, IFC found projects with good projected returns but small absolute levels of energy and CO2 savings. · There remains a tremendous need to under- stand what works and what does not in this still-evolving field. Energy Efficiency The first phase in this evaluation series (IEG 2009) assessed projects related to demand-side efficiency policy and to energy pricing. It highlighted the importance of removing poorly targeted energy subsidies as a win-win policy that can promote energy efficiency, poverty reduction, fiscal balance, and GHG reductions. Since then, the Bank has codirected a G20 study to examine distribution (T&D) loss reduction, financial intermediar- policies to reduce energy subsidies (IEA and others 2010). ies, direct IFC investments in industrial energy efficiency, The previous evaluation also urged increased attention for and promotion of efficient light bulbs (table 3.1 puts this in the intersection between efficiency investments and pric- the context of all low-carbon investments from 2003­08). ing reform. Such attention is now evident in the Vietnam Power Sector Development Policy Operation (2010). Using Financial Intermediaries to Overcome Energy Efficiency in the First Phase Barriers to Energy Efficiency Investments Evaluation In China, Eastern Europe, and Russia, a history of com- mand economies and low energy prices had fostered District heating was one area of World Bank activity re- industries and housing that were wasteful of energy. Start- viewed in the Phase I report. Concentrated mostly in ing in the 1990s, the World Bank and IFC moved in par- Eastern Europe, this has been a large area of energy ef- allel to equip financial intermediaries to promote energy ficiency emphasis. Over the period 1991­2008, there were efficiency in these regions. These efforts were mostly sup- 41 projects with $2.1 billion in commitments. Of the 25 ported by GEF and had GHG reduction as a goal. This sec- closed projects, about three-quarters had outcomes that tion reviews 11 such projects (table C.4, which includes IEG rated moderately satisfactory or better. To a large all but two of the energy efficiency financial intermediary extent these were "engineering" projects focusing on sup- projects initiated by 2005).1 ply-side efficiency improvements. However, some included policy elements such as tariff reform. Some ongoing Chinese projects are combining supply-side interventions Diagnosis of barriers with promotion of far-reaching reforms that provide con- The projects had similar diagnoses of energy efficiency sumers with the means and incentive to reduce excessive barriers: energy use. · Banks do not understand energy efficiency financing. In In its review, IEG found 34 projects initiated over 1996­ this view, banks either did not understand that the sav- 2007 that had policy content that related (under a broad ings flow from energy efficiency improvements could definition) to end-user efficiency. These included nine that back a loan or did not know how to appraise that flow supported the creation of appliance or building standards. or the exaggerated the risk of these loans. Although the projects were successful in supporting adop- · End users--factory or housing owners--do not under- tion of codes, there was been less attention over this period stand their energy efficiency savings potential or how to sustained support for implementation and enforcement, to realize it. and very little monitoring and evaluation of impacts. There were about a dozen projects that supported demand-side Although the World Bank and IFC had management, usually through a utility. similar diagnoses of barriers to energy Complementing the earlier volume, this chapter reviews efficiency, they arrived at different several energy efficiency business lines that are large in prescriptions. volume or have potential for scale-up: transmission and 34 | Climate Change and the World Bank Group TABLE 3.1 Energy Efficiency Interventions by Type in the Low-Carbon Investment Portfolio, 2003­08 Type of energy efficiency Component cost Percent of Number of (millions) low carbon components District heating and combined heat and power $573 7.2 25 End user energy efficiency, government and municipal $484 6.1 22 End user efficiency: industrial energy efficiency $1,128 14.1 47 End user energy efficiency residential and commercial $572 7.2 40 End user efficiency: multiple or unspecified user types $370 4.6 19 Supply side efficiency: thermal power rehabilitation $656 8.2 15 Supply side efficiency: Reduced transmission, distribution or system losses $916 11.5 37 Supply side efficiency: other or unspecified $340 4.3 12 Energy efficiency in transport $23 0.3 2 Energy efficiency multiple, unspecified, or unknown $449 5.6 24 Source: World Bank. Note: Individual components may appear in multiple categories, so column totals are not meaningful. IFC and the World Bank arrived at different prescriptions. would provide both finance and technical know-how to Both hoped for a transformative impact (see table 3.2). IFC their clients (box 3.1). Because ESCOs were unknown focused on the presumed risk aversion and inexperience of in China and therefore highly risky, the Energy Conser- commercial banks and therefore prescribed a combination vation Project used GEF funds to help capitalize three of technical assistance and loan guarantees. Technical assis- companies to test and popularize the idea, which was tance would train banks to appraise and structure energy expected to provoke spontaneous replication. Later, the efficiency loans and to fill a pipeline of future projects. Bank used GEF-supported loan guarantees to back ESCO GEF-subsidized loan guarantees would act like training financing, again with the presumption that this would be wheels. Once the banks realized that risks were low, the a temporary measure to overcome banks' unfamiliarity guarantees could be removed. Success of the participating with energy efficiency finance. In Romania and Bulgaria, banks would spark emulation, and energy efficiency lend- the Bank used GEF grants to set up dedicated, revolv- ing would spread. ing energy efficiency funds as an alternative to banks and a complement to ESCOs, which had already arrived in In China, the World Bank prescribed energy service Europe. companies (ESCOs) to overcome these barriers. ESCOs TABLE 3.2 IFC and World Bank Approaches to Energy Efficiency Financial Intermediation in China and Eastern Europe IFC World Bank China Guarantees ESCO demonstration Technical assistance for banks Technical assistance for ESCOs Guarantees for ESCOs Eastern Europe Guarantees Dedicated energy funds Technical assistance for banks Technical assistance for funds On-lending (Russia) Source: IEG. Note: ESCO = energy service company. Energy Efficiency | 35 BOX 3.1 ESCOs and Energy Performance Contracting Pity the poor small factory owner. Busy running her business, she thinks there may be opportunities to save on energy expenses, but does not think it a good gamble to invest time and money in an energy audit. What if there are no savings? Or suppose the auditor recommends replacing old motors or boilers. Where will the proprietor, already at her borrowing limit, find funds? And how can she be sure that the investment will pay off? Enter the ESCO. Part consultant and part banker, the ESCO offers to reduce the factory's energy costs by a specified amount, splitting the gains with the owner. To do this, the ESCO will finance, purchase, and install any required equipment, carrying the loan on its own balance sheet. The owner need merely collect the savings. This arrangement is called energy performance contracting and is the canonical form of ESCO. It requires reliable enforcement of contracts in order to work, given the complicated interdependence of lender, ESCO, and client. Other, simpler, arrangements are also possible. Source: IEG, based on Taylor and others 2008. Prescription: Guarantees lending. These were familiar markets, and the banks were The barrier diagnosis was partially flawed, so the guaran- comfortable bearing the risk of lending to these clients. tees were less transformative than hoped. The assumption Guarantees were more successful with new or unconven- was that banks practice project finance--in other words, tional types of projects and borrowers, such as retrofitting they will finance a factory to set up a new assembly line, apartment blocks by homeowner associations in Hungary weighing the cost of the equipment against the return it and renewable energy projects in the Czech Republic, when provides. But, the diagnosis continued, the banks don't the regulatory framework and feed-in tariffs were still un- know how to appraise energy efficiency projects, which tested and uncertain. generate a cash flow from energy savings rather than from It is noteworthy that almost none of the guarantees have increased sales. been called. This experience may convince IFC to become In reality, most banks in these countries simply do not do less risk averse. In the CHUEE project, the IFC's $207 million practice project finance, because there is no way to en- guarantee was not at serious risk, buffered by a GEF-funded sure that they will get returns from that particular piece first loss guarantee. The first loss was much smaller in the of equipment. They are concerned with getting repaid and case of Hungary's OTP Schools Energy Efficiency project therefore look beyond the project at borrowers' overall (see next page). balance sheets and collateral. So for many banks the core constraint is their borrowers' lack of creditworthiness, not Guarantees helped less creditworthy the novelty of energy efficiency. However, a better under- borrowers but did not trigger market standing of energy efficiency did help banks market loans transformation. to their more creditworthy customers. And the China Utility-Based Energy Efficiency project (CHUEE) has In sum, the guarantees were useful for less-creditworthy helped banks structure efficiency loans as project finance, borrowers in underdeveloped financial markets. But they putting savings into escrow accounts which substitute for did not have a large transformative effect on reducing com- fixed collateral. mercial banks' risk aversion and are likely to be a perma- In China, collateral requirements are onerous. Hence, guar- nent rather than temporary measure. antees were important for credit access by cash-strapped Prescription: ESCOs ESCOs and small and medium enterprises. Although The Energy Conservation Project's introduction of ESCOs Chinese banks welcomed the guarantees, they were not (called energy management companies, or EMCs, in China) obviously critical to improved credit access by larger en- had significant direct effects. The three pilot companies re- terprises. In CHUEE, which catered to larger firms, 91 per- alized an average financial rate of return of 18 percent, with cent of a sample of borrowers said they could have financed assets growing from $20 million in 1999 to $91 million in their energy efficiency investment without the project and 2006. The total ERR (including benefits to the EMC's cli- its guarantee, though perhaps more slowly (IEG 2010b). ents) was calculated by IEG at 50 percent without CO2 ben- In IFC's European projects, the guarantees, although at- efits, or 58 percent with CO2 at $6/ton of CO2. Total claimed tractively priced, were generally not appealing to banks for energy and CO2 savings were 6 million tons of coal equiva- their small and medium enterprise (SME) or municipal lent and 18.6 million tons through 2006--below appraisal 36 | Climate Change and the World Bank Group estimates but still substantial. Note that these are unverified However, the scope of work does not include insulation, ex ante estimates. which means that potential cost and CO2 savings may be untapped. The introduction of ESCOs had significant Prescription: Technical assistance direct effects in China and spurred In Central Europe (Commercializing Energy Efficiency development of an energy management Finance Program) and Russia (Sustainable Energy Fi- industry. nance Program), IFC used donor funding to hire a large in-house team that provided free services to local banks; The project also spurred the development of an EMC in- there is a move now to increase cost recovery. Banks that dustry. As pilots, the EMCs immediately encountered a IEG interviewed confirmed that they benefited significantly regulatory obstacle: Should they be regulated as financial from the technical assistance program, especially training institutions, leasing companies, or sales outlets? The Bank on technologies and appraisal of energy efficiency projects. and the government worked to address the ambiguities, fa- It is difficult to assess whether the services provided were cilitating entry of other EMCs. This is a good example of cost-effective. (In some cases, projects are unable to track how pilot projects can reduce the costs of followers. precisely the use of technical assistance resources.) Some In addition, the EMCs participated in training programs banks have decided to build on and consolidate this learn- and opened their doors to would-be domestic and foreign ing by creating dedicated in-house units for energy effi- investors. GEF funding was crucial in motivating this open- ciency projects. Staff cuts as a result of the financial crisis ness to dissemination. In part because of these efforts and threaten the sustainability of these changes but may aid in in part to an ASTAE training program, an industry associa- diffusion of knowledge through the industry if staff are re- tion of EMCs was formed and grew to at least 400 member hired elsewhere. companies by 2007, with a core of 40­50 practicing energy performance contracting. Banks benefited from IFC technical However, the ESCO prescription required adaptation in assistance. China, and it has limits. First, the Chinese ESCOs did not write contracts based on measured savings, a practice that Prescription: Information dissemination requires a high degree of reliance on contract enforcement The China Energy Conservation Project also sponsored an and on sophisticated measurement of outcomes (box 3.1). information center, developing energy efficiency case study The three original EMCs have largely relied on agreed ex examples and technical guidelines and building outreach ante estimates of energy savings, or they simply became networks. An internal evaluation found that 6.2 percent of equipment leasing companies. Few of the emerging EMCs a random sample of 10,000 enterprises attributed energy ef- take a systemic approach to improving process efficiency, ficiency investment to the information center's influence. but rely instead on promoting specific kinds of energy The claimed impact was 27 million tons of coal equivalent efficiency equipment. Second, there are limits to the abil- of energy and 71 million tons of CO2. These are extraor- ity of ESCOs to provide financing. The original EMCs had dinary numbers, dwarfing the Energy Management Com- the advantage of substantial capital at concessional terms. pany Association's direct impact. Likely, other factors were The new ones are generally small and even more credit- at work, including policy pressure for energy efficiency constrained than their clients. improvements. However, even if overestimated by a factor of 10, these impacts would represent a good return on the Chinese ESCOs adopted a basic model of $10 million invested in the centers. operation akin to equipment leasing. Outcomes In Hungary, the OTP Schools Project (OTP being the Hun- Economic returns, energy savings, and emissions garian bank involved) supports Caminus, an ESCO that reductions. Impacts have varied substantially across won an umbrella contract for school heating and lighting projects. As noted, the Energy Conservation Project in upgrades. The umbrella contract is a noteworthy policy China racked up high economic and carbon returns at innovation, because it drastically reduced the transaction the subproject and project level. For CHUEE, which has costs for small municipalities (they do not have to organize been analyzed in more depth, subproject and project lev- individual tenders) and engages economies of scale for the el returns diverge. By June 2009, the guarantee program winning ESCO. Caminus finances all the investments except had supported $512 million in loans for $936 million in for the 20­25 percent paid from European Union grants projects, associated with a claimed GHG reduction of and is therefore taking the credit risk for municipalities. 14 million tons. However, as noted earlier, CHUEE may Energy Efficiency | 37 have had limited causal impact on these reductions. The that specifically targeted energy efficiency or renewable large client firms enjoyed good credit and were respond- energy financing. With significant input from the finance ing in part to China's vigorous pursuit of energy efficien- program's technical assistance team, two banks have cre- cy goals in the Five-Year Plan. Still, if CHUEE counted ated dedicated internal units and developed products all its project costs, but counted as beneficiaries only the specifically for the energy efficiency/renewable energy minority of clients who said they had no other potential markets. With the expiration of the subsidized guarantee lender, CHUEE's overall ERR was 38 percent (about half programs, however, some of the banks involved in the of which was carbon emission reductions, valued at $19/ energy finance program have discontinued lending for ton of CO2). street lighting and residential energy efficiency or have reverted to previous collateral requirements. Economic and financial returns from The catalytic impact of the WBG projects on the broader subprojects are not consistently monitored. energy efficiency finance market is difficult to evaluate be- cause of the impact of the financial crisis, because monitor- Economic and financial returns from subprojects are not ing and evaluation was not generally set up to track dif- consistently monitored across projects. The energy efficiency fusion, and because rising energy prices throughout the projects in Bulgaria and Romania, unlike the others, moni- region (figure C.1) would be expected to encourage energy tor ex post results. In Romania, where most projects were conservation regardless of WBG intervention. The Russia industrial, financial returns ranged from 15 to 87 percent. In Sustainable Energy Finance Program does have as an indi- Bulgaria, which had a more diverse portfolio, returns ranged cator adoption of energy efficiency lending by nonpartner from 13 to 37 percent. The Russian project (still in progress) banks and reports three instances. Observers of Hungarian reports a mean ratio of annual energy cost savings to project banking find it difficult to pinpoint diffusion impacts of the cost of 20 percent, but this value is problematic, reflecting an IFC projects. abstruse but crucial methodological issue.2 In Russia, joint IFC-IBRD technical assistance and ana- Projects with energy savings targets are lytic work, including an enterprise survey, highlighted the tremendous scope for profitable energy efficiency in the falling short of those targets. Russian economy. This work estimated that up to 40 per- cent of energy consumption could be cost-effectively re- All the projects with energy savings targets are falling short duced. WBG analytic efforts provided key inputs to the of those targets, often by a large margin. Croatia stands at Russian government as it drafted a new energy efficiency 3 percent, Bulgaria energy efficiency at 6 percent, and OTP law, recently adopted. The impacts of the law will depend at 19 percent. (Note, however, that these projects are still on yet-to-be-adopted implementation regulations. ongoing through 2010 or 2011, and final outcomes may dif- fer as experience progresses and data are reexamined.) The shortfall is evident even after allowing for the low disburse- Direct Investments in Energy Efficiency ment rate of some projects. IFC's energy efficiency emphasis has been on the use of fi- Appraisal of potential GHG savings appears to have used nancial intermediaries, but it also makes direct investments inconsistent and, in some cases, erroneous values relating associated with energy efficiency. Often energy efficiency is CO2 to energy. Reported achievements of CO2 savings are incidental to plant modernization or expansion. In other roughly commensurate with actual energy savings, except cases, energy efficiency is the main goal, as in installation of for the Bulgaria project. There the implied CO2 saving/en- waste-heat recovery equipment. ergy saving ratio appears to be unusually high. Overall it Mainstream investments is difficult to reconcile high financial rates of return with In 2005, IFC began to review projects to determine whether underachievement of energy targets. Further investigation they could be claimed as having energy efficiency content. into monitoring and appraisal methodologies is needed. Over the period fiscal 2005­08, 48 such projects were iden- tified. IFC assigned a notional proportion of each invest- Post-project sustainability and catalytic impacts. The ment to energy efficiency. In total, $392 million of IFC's clearest case of sustainability is in Russia, where some $1.96 billion investment (in projects valued at $3.96 bil- participating banks have begun to make loans without lion) was considered to be energy efficiency. Ten projects IFC resources, using IFC's energy efficiency Calculator accounted for more than 80 percent of the notional energy Tool. For Central Europe the case is less clear. Before efficiency investments. IFC's Commercializing Energy Efficiency Finance Pro- gram started operation in 2003, there was no bank in IFC has supported some CO2-intensive cement and steel markets like the Czech Republic, Hungary, or Slovakia companies in replacing obsolete, inefficient production 38 | Climate Change and the World Bank Group lines. Some of the companies involved emit more than and CO2 emissions, so it is impossible to quantify energy 10 million tons of CO2 annually--more than some coun- or GHG savings. Some of the projects were initiated before tries--so efficiency gains could have global significance. GHG monitoring was required. But even where required, Four cement projects replaced old wet process equipment compliance with monitoring is imperfect. with more efficient dry process production lines. Govern- The cleaner production initiative ment policies, together with cost savings, motivated the Approved in January 2007, the three-year, $20 million Clean- phase-out of old facilities, and these companies likely had er Production Lending Pilot is a proactive initiative to seek good access to credit, so IFC's additionality is not clear. and promote energy, water, and materials efficiency oppor- Two investments in an Eastern European steel company tunities within IFC's existing clientele. The program focused supported replacement of open-hearth furnaces with mod- on clients with good credit standings and environmental per- ern blast furnaces. In this case, the combination of difficult formance, enabling IFC to significantly reduce loan prepara- credit, low energy prices, and an IFC environmental and tion time and effort. Projects were identified either directly social action plan makes it plausible to attribute the effi- with clients or via optional donor-funded energy audits. ciency gains to IFC's intervention. In other cases, the basis for allocating investment amounts In 2009, the pilot was scaled up to a $125 million, three- to energy is unclear. Two investments, totaling $55 million, year Cleaner Production Lending Facility, covering all real supported airlines in modernizing their fleets. These invest- sector investments. To complement the loan funds, a ments were entirely classified as energy efficiency, although $5 million Global Cleaner Production Facility (GEF-funded they conferred other benefits, such as safety, comfort, and via the Earth Fund) will cofinance Cleaner Production reliability. audits. Clients will bear half the audit costs. The $20 million Cleaner Production Lending Pilot was fully In many cases, it is not clear if IFC's direct committed to eight projects, with an average loan size much investments have led to improvements in smaller than the IFC norm. Three of the projects employed the donor-funded energy audits; in other cases, the clients energy efficiency. identified energy efficiency savings. The projects' projected Photo by Gennadiy Ratushenko, courtesy of the World Bank Photo Library. In one case, IFC invested in an American-owned distribu- returns to investment were 22­117 percent (with a median tion utility in an Eastern European country, with an explicit of 36 percent) and are projected to yield 1­19 kilograms goal of reducing technical losses, which stood at 12.6 per- of CO2 per year per dollar invested (or roughly an addi- cent. Five years after the initial investment, the goal had not tional 1­19 percent to the return on investment if carbon been achieved: technical losses had actually increased to is valued at $10/ton of CO2), with carbon returns mostly 15 percent. Had the company reduced losses to 8 percent proportional to financial ones. (a conservative target), it could have cut CO2 emissions by Total annual CO2 savings are estimated at 136,613 tons. But 180 thousand tons per year. a single company accounted for half those savings. Thus, sig- Most of these ex post identified energy efficiency projects nificant resources are devoted to small loans that yield CO2 lack baseline and monitoring data on energy efficiency savings of just a few thousand tons of CO2 per year. Ex post Energy Efficiency | 39 measurement of achieved economic returns is lacking, under- · Reducing the illegal or unpaid consumption known as cutting the Lending Pilot's ambition to use program results to nontechnical losses (emissions are reduced if consum- convince other clients to invest in cleaner production. ers, confronted with a bill for electricity, reduce their consumption). The Cleaner Production Lending Facility Reducing losses funded small loans with a median projected Losses vary widely across regions and countries because rate of return of 36 percent, but most had of utility performance. A survey of 12 African utili- CO2 savings of just a few thousand tons ties found total loss rates ranging from 6 to 35.3 percent per year. (Pinto 2010). In these utilities, transmission losses ranged from 3 to 6.6 percent, distribution losses ranged from An early lesson from the audits was the necessity of cost- 2.4 to 20.5 percent, and nontechnical losses ranged from sharing. Initially, clients were only required to cover 10 per- 3.6 to 17.5 percent. cent of the cost but committed to reimburse the grant if audit recommendations were implemented. This created an Technical losses in transmission and incentive not to disclose implementation plans and not to distribution remain high in many regions. borrow from IFC. After full cost sharing was implemented, the three sponsored audits successfully identified cost- Technical losses can be reduced through direct investment saving measures with one- to four-year paybacks. in hardware and network management and by increasing The audit costs were small relative to the client's projected the institutional capacity of utilities to plan, finance, and returns. But the audit costs were relatively large compared to maintain their networks. Opportunities for very large eco- IFC's potential returns from lending. Hence, IFC-funded nomic returns from T&D projects exist largely because audits are not likely to be sustainable for small-scale proj- many power utilities have lacked the capacity, funds, and ects in the absence of concessional funding, though the incentives to undertake optimal network management. Un- audits themselves are potentially cost-effective. less performance of utilities is improved, there is a risk that T&D projects may not yield their expected economic and emission reduction benefits. Nontechnical losses are usually caused by a combination of faulty or inadequate metering, collusion between utility employees and power consumers, and theft. Nontechnical loss reduction entails collecting money from customers who were previously receiving power at no cost, provoking opposition from entrenched interest groups. Advanced metering infrastructure technology allows meters to be read remotely (using mobile phone networks), © Moodboard/Corbis. which reduces much of the scope for collusion and theft. Significant reductions in the price of advanced metering infrastructure components has made their widespread adoption economically feasible (Antmann 2009). Prelimi- nary evidence from Brazil, the Dominican Republic, and Honduras demonstrates their effectiveness in reducing nontechnical losses. Transmission and Distribution Electricity T&D projects provide a potentially cheaper al- Advanced metering infrastructure ternative to construction of new generation in countries technology has demonstrated effectiveness with high technical losses. They also offer major potential for reducing carbon emissions. Such projects can increase in reducing nontechnical losses. supply security and reduce outages and can be important for improving access. They can reduce carbon emissions by-- Nontechnical losses are often ascribed to poor people, but a significant portion of those losses comes from major · Connecting renewable power to the grid users, and targeting these users is often key to reducing · Reducing technical losses (dissipation of electricity as losses. For example, a loss-reduction effort in North Delhi waste heat) successfully reduced total losses from 53 percent in 2002 to 40 | Climate Change and the World Bank Group 18.5 percent in 2008. This was done primarily by using lighting constitutes 74 percent of power consumption for advanced metering infrastructure for the 30,000 major a typical household that has electricity access (Maurer and consumers, who collectively represent 3 percent of the cus- Nonay 2009). Because lighting demand is concentrated in tomers but 60 percent of the power sales (Antmann 2009). the early evening hours, utilities must build additional gen- eration capacity that is only used during this period. WBG portfolio, 2003­08 Switching from standard incandescent lamps to CFLs re- The Bank has a long history of investment in T&D proj- duces energy consumption (saving fuel costs) and capac- ects. Over 2003­08, the WBG committed $3.45 billion to ity costs while mitigating CO2 emissions. CFLs draw only 44 T&D projects that are expected to lead to significant car- 20­30 percent as much power as equally bright incandes- bon reduction benefits or technical loss reductions, though cent lights and last much longer. Households benefit from emission reduction was not an explicit goal for many of lower energy consumption, and CFL adoption can pay for them. (Table C.2 summarizes impacts and appendix D itself in 2­14 months. Utilities benefit from lower power presents lessons from completed projects). sales (when generation cost exceeds supply cost) and from The Bank's portfolio demonstrates recognition of the im- reduced capacity costs. portance of improving the financial state of utilities in or- der to improve long-term impacts. Among the low-carbon Replacement of all of Sub-Saharan Africa's T&D projects, 60 percent addressed nontechnical losses, incandescent lights would effectively and 82 percent of projects that specifically aimed at loss reduction included nontechnical loss-reduction measures. boost power availability by 23 percent, Projects have been aimed at the regions with the highest at a fraction of the cost of peaking diesel power losses (particularly Europe and Central Asia and generators. South Asia). Projected economic gains from these projects are often A recent ESMAP review (ESMAP 2009) finds that a "rep- large. Many projects calculate high ERRs on a large invest- resentative" CFL program, under optimistic assumptions, ment base (often 20­60 percent; see tables C.1 and C2). would have a benefit-cost ratio of nearly 28:1, based on en- Projected benefits are even higher if the project is expect- ergy and capacity savings, or nearly 30:1 if CO2 abatement ed to boost access or reduce outages. One project in the were valued at $10/ton. A Bank study for Sub-Saharan Dominican Republic projects a net present value of $428 Africa (de Gouvello, Dayo, and Thioye 2008) estimated that million on a $122 million investment. regionwide replacement of all 476 million inefficient lights (60 percent of these are in South Africa) with CFLs would The projected economic gains from these reduce peak power demand by 15,200 MW, represent- projects are often very large, but the ing about 23 percent of installed capacity for the region. Recent estimates of CFL bulk purchase projects (ESMAP disparate methodologies used make it 2009) suggest that one-shot replacement can be achieved difficult to validate or compare projections. at roughly $2 per bulb. Although full phase-out for Africa could cost $950 million, significant gains could be achieved Unfortunately, it is difficult to validate or compare these with a much smaller investment targeting residential users ex ante projections, because Bank projects do not use a or countries with high emission factors, expensive power, common methodology when valuing loss reduction, out- or supply shortages. age reduction, or other benefits. It is not always apparent whether loss reduction forecasts come from formal engi- Barriers and interventions neering studies or are rough estimates. Many projections Despite the large benefits, private households have been are contingent on assumptions that loss reductions will slow to adopt CFL technology. Where electricity prices are be sustained across many years after project completion, artificially low due to subsidies, consumers have low incen- presuming successfully institutionalized change in mainte- tive to adopt. Other adoption barriers include the higher nance and operations. upfront price of CFL bulbs, distaste for the color or qual- ity of the illumination, skepticism about the bulbs' lifespan, Efficient Light Bulbs and poor consumer knowledge. Electric lighting represents 19 percent of global electricity consumption (IEA 2006). In many developing countries, Although the potential benefits are large, lighting is the largest use of power in the residential sec- households have been slow to adopt CFL tor, particularly in the poorest countries, where households technology. have few electrical appliances. For example, in Ethiopia, Energy Efficiency | 41 Since the early 1990s, public entities, utilities, and devel- not fully sustained, as the project lacked effective mecha- opment agencies have use several (overlapping) design fea- nisms to sustain quality levels (GEF 2006a). tures to encourage CFL adoption: subsidizing bulbs, using Based on results from these projects, IFC undertook the bulk procurement, imposing quality standards, offering GEF-supported Efficient Lighting Initiative (ELI), which certification, and mounting advertising campaigns. carried out market-based programs in Argentina, the Czech Republic, Hungary, Latvia, Peru, the Philippines, and South WBG portfolio Africa. ELI supported public education, targeted subsidies, Since 1994, the WBG has supported residential CFL pro- demand-side management programs, and the development grams in more than 20 countries; the Bank has covered of standards and labeling for CFLs. some 50 million CFLs primarily through bulk distribu- tion or market-based projects. Many projects have received After a lull, there was a surge in World Bank projects in GEF or carbon fund support, though many recent projects 2007­09. Many of these were emergency projects to address aimed at rapid crisis mitigation have been implemented drought-induced hydropower shortages in Africa. Most of without GEF assistance. these new projects are bulk-purchase and distribution for residential CFLs. Bulk-purchase projects have become fa- The WBG has supported residential CFL vored because of their ability to reduce unit costs of bulbs programs in more than 20 countries. through bulk discounts, their substantial and immediate reductions in peak electricity demand, and the ability to ac- In the early 1990s, WBG-GEF projects supported CFL cess carbon financing. distribution in Jamaica, Mexico, Poland, and Thailand. In Poland, though CFL sales increased and significant power Economic, CO2 , and environmental impacts savings were attained, market transformation effects were CFL project appraisals are generally back-of-the-envelope exercises that calculate savings based on assumed num- ber of bulbs, wattage of new versus old bulbs, and hours used per bulb. These ex ante calculations suggest ERRs in the hundreds of percent together with more modest CO2 savings. Few of the WBG-supported projects have applied rigorous monitoring and evaluation. Well-developed methodologies exist for monitoring these outcomes and calculating impacts, as a result of decades of demand-side management programs in developed Photo by Dominic Sansom, courtesy of the World Bank Photo Library. countries (Vine and Fielding 2006). However, few WBG- supported projects to date have applied rigorous monitoring and evaluation methods. ELI mounted a large monitoring and evaluation effort, but long-term impact monitoring was not undertaken, and the interim results were never pub- licly released. Most other projects have undertaken limited ex-post monitoring, and few attempt to compare project versus control group areas. Hence, the impact assessments (table C.3) must be read with great caution. Early projects claimed positive impacts but faced barriers to sustainability: commercial prices of CFLs remained high and quality often low. Yet in Sri Lanka, despite a high bulb failure rate, a subsidy demonstration project with 100,000 bulbs led to a successful follow-up where 511,000 bulbs were purchased at commercial rates. Survey results found that 58 percent of customers thought the utility's endorse- ment of CFLs was important or very important in deter- mining their decision to purchase CFLs (SRC 1999). 42 | Climate Change and the World Bank Group ELI deployed a variety of tools to encourage commercial- CFL projects have also been a cost-effective response to en- ized use of CFLs, combining limited-term subsidies, stan- ergy emergencies, saving both costs of providing additional dards and labeling, public education, and targeted credit capacity and the fuel cost of running diesel generators. For schemes. Although the credit schemes were generally un- example, during a 2007 power crisis in Ethiopia, $5 million successful, the $15 million project claimed direct reduc- was spent on 4.6 million CFLs, which were expected to save tions of 2,590 GWh and 1.9 billion tons of CO2. The project 315 GWh per year for 4 years. Meeting the same demand claims also to have catalyzed reductions in CFL prices. It for 4 years using leased diesel generators would have cost is not possible to validate these claims--for instance, there $20­$115 million in leasing costs and $152 million in fuel are no statistics on CFL prices and diffusion in comparison costs (EEPC 2009) and resulted in about 750,000 tons of countries--but the project would have a high return even if additional CO2 emissions. these impacts are overstated by a factor of 10. Unlike incandescent lights, standard CFL bulbs contain a In a follow-on project, the Bank and IFC, with GEF fund- small amount of mercury (about 0.001­0.025 grams, com- ing, commissioned the China Standard Certification Cen- pared to 0.5­3.0 grams in a mercury thermometer.3 By ter to operate the ELI Quality Certification Institute, which some calculations, use of incandescent bulbs triggers more develops quality standards and licenses manufacturers who mercury release into the atmosphere because of the mer- comply to use the ELI label. Some Bank projects use ELI cury content of coal. Mercury concerns have not played a standards for procurement practices; so far the impact of major part in CFL project design. These projects typically ELI standards on commercial markets is unclear. trigger environmental category B for safeguards,4 but on the basis of other, larger, power sector components. Most The best-documented completed Bank project was CFL projects do not explicitly mention mercury issues, but undertaken by Electricity of Vietnam over 2004­07, with the most recent Bank CFL projects (Rwanda 2008, Senegal GEF funding. The project included a CFL component that 2008, Benin 2009, and Mali 2009) incorporate designs for distributed 1 million bulbs to rural customers at a cost collection or disposal mechanisms. Bank projects in Ethiopia of $1.8 million, along with other energy efficiency activi- (2006, 2007) are studying CFL disposal options for Sub- ties. Bulbs were purchased using bulk supply contracts at Saharan Africa. an average price of $1.07 per lamp and sold to customers by Electricity of Vietnam at an average price of $1.56 per Coordination with policy reform lamp. In comparison, existing retail prices were $2.00­ The first phase of this climate evaluation (IEG 2009) 3.00 per lamp. Many utilities lack incentive to participate pointed to the potential to combine electricity pricing re- in programs that reduce electricity sales, but Electricity of form with promotion of CFLs and other efficiency devices Viet Nam was strongly motivated because it is mandated as a way of cushioning the transition to environmentally to serve low-income and peak-hour customers at prices and financially sustainable pricing. Although many re- below its cost (average marginal revenue from power sales cent energy projects include both CFL distribution and was 4.5 cents/kWh as opposed to average marginal cost of tariff reform (for example, in Benin, Cote d'Ivoire, Mali, 8 cents/kWh). and Togo), this has tended to occur because both CFLs and tariff reform are practical responses to power supply The best-documented CFL project resulted shortages. In these cases, CFLs have been "sold" as a peak in energy savings of 46 GWh per year at a load reduction tool, rather than as a tool to mitigate tariff increases. Thus the potential for policy coordination re- cost of $1.8 million. mains unexplored. An ex post evaluation (IIEC 2006) found a peak load reduc- The potential for combining CFL tion of 30.1 MW, energy savings of 45.9 GWh per year, and distribution with tariff reforms remains expected lifetime energy savings of 243 GWh. Average cus- tomer power bill savings were estimated to be 15.2 percent. largely unexplored. Failure rates of CFLs were relatively low (0.5 percent), and the utility replaced failed lamps. A substantial subsequent Incentives for staff and managers rise in CFL sales was attributed to an accompanying public These projects offer high returns, but they may not be at- education and CFL promotion campaign. The benefits from tractive to Bank staff and management in an environment increased private sales potentially exceed the benefits from that measures results by volume of disbursements. As an the primary distribution campaign. Although this market example, compare a $5.7 million GEF-funded energy ef- transformation impact is difficult to validate, it is plausible ficiency project in Vietnam that included a $1.8 million given the extremely large increase (80 percent and 150 per- component for a residential CFL component to a $335 mil- cent increases in first-year sales for the two largest sellers). lion hydropower generation project in Ethiopia, funded in Energy Efficiency | 43 part with a $198 million IDA credit. The hydropower plant of market failures, these buildings are likely to be energy contributes 35 times as much to a tally of Bank disburse- inefficient and carbon intensive, and they will stand for de- ments but costs the Bank only 3.8 times as much in prepara- cades. At the same time, demand for energy-intensive appli- tion and supervision. Overall, the hydropower project cost ances such as televisions, refrigerators, and air conditioners 58 times as much as the energy efficiency project and 183 is growing rapidly. As noted in Phase I of this evaluation, times as much as the CFL component. Yet it generated only there is large scope for supporting policies for building and about 20 times as much power and provided only about appliance efficiency. 4.5 times as much capacity. This is not to suggest these two The WBG has modestly supported policy formulation but, particular projects were substitutes or were inappropriate. with the notable exception of two Chinese projects, has not Rather it serves to illustrate the order of magnitude of Bank been deeply involved in implementation. There is consider- costs, client costs, and client benefits in energy efficiency able scope here for public-private coordination. The World and renewable projects; it also suggests why preparation of Bank could support policy implementation, and IFC (fol- small energy efficiency projects has relied on trust funds lowing the precedent of ELI) could work with manufactur- rather than Bank budget. ers to promote more efficient and cost-effective products and practices. The Way Forward for Energy Efficiency Overcoming barriers to adoption and diffusion Economic and GHG returns to energy efficiency Many of the barriers to energy efficiency lending are in fact investments barriers to general lending: lack of liquidity, inability to Efficient lighting may offer extraordinarily high economic make long loans, and inability to rely on contracts. Hence, returns, with substantial GHG reductions as a by-product. guarantees have been useful not as a temporary device to Promotion of efficient lighting may have large catalytic or overcome banks' unfamiliarity with energy efficiency, but demonstration effects. A concerted, multinational effort to rather the means to convince them to lend to enterprises pursue incandescent phase-out could lead to economies of with poor collateral. Future use of guarantees should be scale in production and distribution. Such an effort might more tightly focused on these targets. Technical assistance require considerable WBG staff time for preparation and does appear to have helped some banks identify and market coordination but relatively low loan or grant amounts. Re- energy efficiency lending opportunities. duction of transmission and distribution losses also offers Energy efficiency policies loom large as complements to apparently high returns and scope for large investments. finance. China's vigorous push for energy efficiency was a Scattered information from industrial energy efficiency motivator for industrial investments. Hungary's innova- intermediation projects suggests that SMEs can achieve tions in municipal finance opened cost-saving, emissions- attractive rates of return through retrofits. But there may reducing opportunities. As noted in first phase of this also be high returns in large, greenfield companies. Many evaluation, cost-reflective prices are important motivators companies operate at the state of the art in efficiency, but for efficiency. not all do. A recent study in China found that large cement Growing but largely unevaluated experience with CFL dis- companies investing in new facilities failed to incorporate tribution projects suggests that public policies can over- technologies that would have financial returns greater than come household barriers to adoption. Carbon finance 35 percent (not taking into account carbon benefits) (Price would be another possible mechanism to pay for light bulb and others 2009). Globally, cement and steel account for distribution, because the carbon returns are large relative 15 percent of energy-related GHG emissions, about three- to CFL costs. Further analysis is needed to determine when quarters as much as coal burning, so this is an important a one-time subsidized distribution of CFLs is sufficient to target for improved efficiency. trigger follow-on adoption and diffusion. IFC could use its direct investments to promote energy ef- Studies project large energy efficiency ficiency at three levels. First, just as it has encouraged client opportunities in the building sector, where banks to market energy efficiency solutions to their own market failures abound, representing a clients, IFC itself could proactively seek new markets with largely untapped area for WBG intervention. large impacts. These could include, for instance, develop- ers of large commercial buildings and residential develop- ments that are interested in pursuing low-energy building Studies project large energy efficiency opportunities in concepts, including nascent proposals for "eco-cities." the building sector, where market failures abound. Rapid urbanization during the coming decades will result in the Second, within its current client base, IFC could prioritize construction of billions of square meters each year. Because the attention of energy efficiency staff to projects with the 44 | Climate Change and the World Bank Group highest potential for savings. Currently, IFC has devoted staff attention to small loans offering only a few thousand There remains a tremendous need to tons per year of CO2 savings, and in at least one case (the understand what works and what does not above-noted distribution utility) failing to follow up on a in the evolving field of energy efficiency. project offering energy and CO2 savings a hundred times greater. IFC has just hired an expert in building energy There remains a tremendous need to understand what efficiency--how should this expert's scarce time be allocated works and what does not in this still-evolving field. Finan- for maximum impact? Third, IFC could encourage bench- cial returns to energy efficiency are poorly and inconsis- marking of performance among its smaller direct clients tently measured. A lack of monitoring information on the and among clients of financial intermediaries, preparing state of T&D losses weakens power planning and makes it standardized audit services and loan products for them. more difficult to locate high-return investments. And there is a desperate need for applied operations research in effi- Systems issues cient lighting programs to understand which consumer and Energy efficiency can offer a cost-effective alternative to producer barriers are most salient and which interventions new generation, but this may be overlooked in the ab- are most effective. sence of a view of the entire power system. Similarly, the The first phase of this evaluation stressed the importance congestion impacts of new generation on transmission can of developing indicators for energy efficiency to set targets be overlooked. A systems view is important to address the and assess progress. Learning is critical, because energy degree to which energy efficiency provokes "snap-back"-- efficiency promotion is less well understood than renew- increased consumption of electricity as its effective price able energy promotion. However, current project-level drops. methodologies are haphazardly applied, often lack ex post measurement, and are inconsistent in their treatment of Learning and feedback projects that combine retrofits with capacity expansion. Most of the financial intermediation projects had a ratio- nale of promoting diffusion of financial technologies--that The United Nations Industrial Development Organization, is, the techniques of appraising and structuring energy ef- however, has documented that it is possible to set up infor- ficiency loans. However, this was most effective in China, mation networks that facilitate benchmarking and sharing where the Bank's Energy Conservation Project (especially) of infromation on efficiency performance. At the national and IFC's CHUEE Program (to a lesser extent) sought to level, several countries are beginning to assemble sectoral build networks and disseminate information throughout information on energy efficiency, as a recent ESMAP- the financial and end-user industries. In contrast, most sponsored workshop showed. "Bottom-up" indicators, for other projects did not create explicit channels for diffusion, example, for particular industry sectors or for power distri- and banks had little motivation for sharing their learning bution losses, would be more useful for the purposes dis- with competitors. cussed here than national level indicators. Energy Efficiency | 45 Chapter 4 EVALUATION HIGHLIGHTS · Bus rapid transit systems offer good returns in reduced travel time, congestion, and air pollution, with carbon cobenefits. · Targeting, price-setting, and financial sustain- ability are major challenges for forest projects using payments for environmental services. · The BioCarbon Fund has helped cata- Photo by NASA, used courtesy of NASA; found at Visible Earth (http://visibleearth.nasa.gov/view_detail.php?id=1598). lyze the forest carbon market but has had implementation problems. · Protected areas have been effective in reduc- ing tropical deforestation, especially where sustainable use is permitted; indigenous areas are even more effective. · IFC investments in the Amazon did not catalyze deforestation, but neither did they catalyze widespread changes in industry practice. Beyond Energy: Low-Carbon Paths in Cities and Forests The futures of cities, urban transport, and growth are intertwined. Urban agglomera- tions have the potential to provide a high-productivity, integrated labor market if urban services, especially transportation, work efficiently. Once urban layouts have been established, they can persist for decades, even centuries, shaping circulation patterns (Shalizi and Lecocq 2009). So avoiding lock-in is important for urban efficiency (and lower emissions) in those countries that are still urbanizing. Since the adoption of the SFDCC, the WBG has launched transport sector, the land transport subsector accounted for new analytic and collaborative activities to promote effi- 85 percent of all energy consumed in 2009. To make a dent cient cities, including the Eco2 Initiative and ESMAP's En- in CO2 reduction in the transport sector, the primary focus ergy Efficient Cities Initiative. will have to be on road transport, both within and between cities. Urban Transit In already urbanized regions such as Latin America, public This section examines bus rapid transit (BRT), for which transport typically accounts for at least half of public trips. there is a longer track record. Invented in the city of Curiti- There is an opportunity for developing countries to main- ba, Brazil, in the 1960s, this is emerging as the single largest tain this high share for public transport if they can avoid line of WBG action within urban transportation. the death spiral found in developed countries. In that spi- ral, a burgeoning middle class abandons poor-quality pub- BRT refers to a range of options (FTA 2003). At a mini- lic transport for autos, imposing congestion and pollution mum, it involves moving buses out of mixed traffic into bus costs on everyone. With ridership declining, public tran- priority lanes or into exclusive bus lanes as a way to ap- sit is forced to raise fares or further reduce quality, driv- peal to passengers who put a premium on time savings. At ing away more passengers, with a share declining to 10 or the high end, it includes bus rapid transit systems (BRTS). 20 percent. A low-budget version of a metro system, BRTS use artic- ulated buses on dedicated roadways, allowing the system to move more people more quickly than traditional buses Developing countries may be able to avoid on shared, clogged roadways. The capital costs (per kilo- the spiral of declining public transport meter of line) of a BRT can be a quarter to a third of the quality, rising fares, and declining market cost of building a comparable tramway and 5­10 percent share that some developed countries have of the cost of a metro system. (Nonetheless, metros may be experienced. cost-effective in certain high-density locales, and the World Bank continues to support them.) The consequences of this spiral are dire for developing Transport, development, and climate country cities because of their lack of road capacity. In In the non-OECD countries, GHG emissions from trans- many developing countries, the circulation system in cities port nearly doubled from 1990 to 2006, and transport's accounts for 10­20 percent of the urban area, in contrast to share of emissions rose from 5.6 to 12.8 percent.1 If these 35­50 percent in developed countries. Squeezing more cars countries emulate developed countries, transport emissions onto limited roadways generates congestion and height- will continue to grow rapidly. At the global level, within the ened CO2 emissions. 48 | Climate Change and the World Bank Group The WBG urban transport portfolio (2003­08) or informal2 carbon reduction goals, versus 19 percent in The IEG review of the overall transport portfolio (IEG the prereview period. As many as 10 operations in 2003­08 2007) noted that the number of urban transport operations had components to monitor carbon reduction (compared is small relative to the scale of the problem. It suggested to only 1 in the previous period), 6 of which involved GEF that the limited activity may reflect the complexity of these financing to develop the components. projects, but nonetheless it recommended that this subsec- tor of activity should grow. Since then the WBG Transport Barriers and interventions to reducing congestion and Business Strategy for 2008­12 has identified climate change CO2 emissions as one of its five strategic objectives. BRTSs face a number of barriers: · Conflicting demand for road space. Establishing dedicated Bus rapid transit projects, many with bus lanes can displace other road users, creating resis- carbon objectives, multiplied at the Bank tance to the loss of circulation space and leading to spill- after 2002. over of traffic to neighboring roads. Demand manage- ment and parking restrictions are potential responses. During 2003­08 there were 36 World Bank urban trans- · Institutional problems. The real benefits of mass public port operations, versus 37 in the previous five-year period transportation are only realized with a multicorridor 1998­2002. However, average Bank commitments per year trunk route system that is linked to a series of feeder declined from $713 to $611 million. The decline in part re- routes. Scaling up to such a system puts a premium on flects a complete lack of new operations in South Asia in coordinated planning in multi-jurisdictional metropol- 2003­08. However, a post-2008 upsurge may signal a par- itan areas and on sustained long-term political commit- tial reversal of trends. ment to routes and land use zoning. During 2003­08, there was a clear shift toward BRT. There · Opposition by taxi and minivan owners. BRT achieves were 19 such operations (11 for full BRTS), compared with pollution, congestion, and carbon emissions reductions 6 in 1998­2002 (only one of which was for a BRTS). The largely by substituting for existing fleets of minibuses. new operations were concentrated in Latin America and Such fleets are highly polluting and unsafe but employ East Asia. thousands of drivers, who tend to oppose change. This process has proven to be politically contentious in many Attention to carbon has been increasing. During 2003­08, cities; responses include finding ways to integrate the driv- 39 percent of the urban transport operations had formal ers into the new system or otherwise compensate them. Photo by Curt Carnemark, courtesy of the World Bank Photo Library. Beyond Energy: Low-Carbon Paths in Cities and Forests | 49 In Bogota (box 4.1), a sequence of learning-by-doing The challenges to bus rapid transit include loans totaling $887 million (together with non-Bank car- competing demand for road space, lack of bon revenues) supported expansion of BRT corridors and coordination between neighboring cities, their integration into a citywide trunk and feeder sys- and opposition by taxi and private minibus tem, with attention to bikeways and pedestrians. System expansion was complemented with serious demand-side owners. measures, including doubling parking fees, boosting the gasoline tax, and restricting car travel during peak hours. The BRT experience Cooperatives were formed to offer employment to the for- Among WBG-supported programs, the BRTSs that are mer bus drivers as part of the new feeder routes. Compa- most developed are those of Bogota and Mexico City. In nies participating in the new routes were required to scrap both cases, the WBG worked with willing clients, who had four to nine old buses for each new articulated bus added already concluded that BRTS was a desirable alternative. to the system. BOX 4.1 The TransMilenio BRTS Without an explicit goal to reduce CO2 emissions, the World Bank has been financing urban transport projects in Bogota since the mid-1990s and has contributed to the development of Bogota's TransMilenio BRT system. One of the earliest programs of Bank support for a BRTS, this is an example of learning by doing. Under the first Bank-funded Urban Transport Project, the World Bank helped finance traffic management systems along existing bus ways and connecting roads to improve the traffic throughput to an existing BRT corridor. This project also funded background studies that led to the development of a better parking policy for the city. According to the project completion report, this effort more than doubled average bus speeds, boosting them from an initial 12 kilometers per hour to 27 kilometers per hour post-project. The second project, the $130 million Bogota Urban Services, was designed to help implement the second corridor in the BRTS and promote nonmotorized traffic (an extensive network of bike paths). A third project, the $757 million Integrated Mass Transit System, was designed to support the critical second (post-demonstration) phase of Bogota's BRTS as a citywide integrated trunk-and-feeder system with 14 additional corridors and an integrated fare system, and to introduce a number of transport demand-management initiatives. Most importantly, the Integrated Mass Transit System expanded BRTSs to five other cities, replicating the experience of Bogota but tailoring it to specific conditions of those selected cities. By 2004, Bogota's BRTS already consisted of 58 kilometers of dedicated bus ways and 309 kilometers of feeder routes and moved more than 800,000 passengers per day. According to Wright (2004), carbon emissions reduction has been achieved through a combination of improved public transport and the introduction of complementary transport demand management policies to discourage the use of private vehicles and roadway space. The 20 percent increase in gasoline taxes, 100 percent increase in parking fees, and restriction on private car travel during peak hours are said to have reduced car traffic by 40 percent per day. Wright and Fulton (2005) list the key factors contributing to emission reduction: · Replacing four to five smaller buses with larger articulated buses and requiring the destruction of four to eight older buses for every new articulated vehicle introduced into the system; articulated buses are more fuel efficient per passenger-kilometer traveled. · Increasing the vehicle load factor to approximately 80­90 percent by implementing global positioning system- controlled management of the fleet, allowing the optimization of demand and supply during peak and nonpeak hours. · Enforcing emission standards, requiring buses to be EURO II emission level­compliant. · Increasing the share of public transport ridership in total transit. By 2002, the share of private car and taxi trips in total trips was said to have been reduced from 19.7 to 17.5 percent and the share of public transit trips increased from 67 to 68 percent (Karekezi, Majaro, and Johnson 2003). One of the main barriers to system expansion was resistance to expansion of the BRT from current bus owners--an issue endemic to BRT implementation. The two corridors of Phase I of the TransMilenio BRT were designed to meet only about 10 percent of the public transportation demand, with the remaining 90 percent being met 50 | Climate Change and the World Bank Group by conventional transport systems, in particular a number of small bus owners competing with each other for passengers. Hence, the first phase did not displace many bus owners. The subsequent phases (with an additional 14 corridors), however, were designed to increase the share of BRT in total public transit to 70 percent and could drastically reduce the role of the remaining small bus owners. The solution to this has been to form cooperatives or holding companies that would employ many of the bus owners/drivers (the balance being placed in alternate jobs through financial transfers). The difficulties in implementing this solution are ongoing but declining. A related problem has been the difficulty in enforcing the phase-out of old buses. This phase-out affects the expected reduction in externalities determined at appraisal--particularly GHG reductions. Despite a monitored scrapping program in which the low-quality minibuses were exchanged for higher-quality articulated buses at the prescribed exchange rate and their destruction supervised, the total number of minibuses in the city did not decline as expected. The inability to enforce regulations, such as licenses and routes for minibuses, resulted in new entrants and the use of secondhand mini-buses. It also generated congestion in other parts of the city. The hoped- for reduction in CO2 emissions from scrapping buses will be frustrated if other old buses are pressed into service and increase their annual mileage. Maintaining and increasing ridership is also a challenge. Gilbert (2008) points to contractual arrangements that necessitate raising fares when ridership projections are lower than anticipated. That creates a spiral of decreasing ridership caused by higher prices and leading to new rounds of price increases and the inability to ensure safety on the new lines, which also contributes to ridership loss. In addition, the cost differential between extending the BRTS and extending the metro is declining as the system expands into more difficult terrain. As a result of all of this, the middle class (whose rate of BRT usage is highest relative to the lower income and higher income groups) has started voicing support for new metro lines at the expense of the BRT network. The Bogota experience has piqued global interest in BRTSs. The Bank and other donors have facilitated visits by officials from other countries to see the experiment in Bogota. In fact, many other countries are learning from this experience and are now designing or implementing their own systems. However, the program is not yet fully implemented, and it is too early to judge whether it will realize the full benefits anticipated from expansion to a multiline, citywide, integrated system. Sources: Wright 2004, Gilbert 2008, TransMilenio PDD 2004. However, even as the old buses are scrapped and their driv- for $2.4 million in carbon credit purchase. This is a small ers assimilated into the system, it has been difficult to ex- portion of the total $49.4 million project cost, but the pro- clude new entrants who import additional second-hand ponents claim that the association with carbon has helped buses. Although the system was initially successful in at- popularize the project. In addition, the project was respon- tracting riders, there are signs of an incipient rising fare/ sible for developing the second CDM-approved method- declining ridership cycle; concerns about passenger safety ology for assessing GHG reductions in public transport, are also eroding ridership, and public sentiment is shifting opening the way for CDM finance of BRTS elsewhere. toward new metro lines (Gilbert 2008). Overall, however, the system is viewed as having demonstrated BRTS feasibil- Impacts ity, and the Bank has actively facilitated visits to the project Dedicated bus lanes (precursors to BRTS) have been shown by potential foreign emulators. Current projects seek to add to increase travel speeds for bus passengers by 20­60 per- eight more BRT lines to the Bogota system and replicate it cent, based on completion reports (for example, from in five other cities. 21.4 to 30 kilometers per hour in the Liaoning project in China, 15.6 to 25 kilometers per hour in the Shijiazhuang The most developed systems were initially project in China, and 15 to 22 kilometers per hour in the successful, but the future is uncertain. Dhaka project in Bangladesh). The Dhaka urban transport air-quality project also showed a dramatic drop in local In Mexico City, the BRTS was largely financed domesti- air pollutants (31 percent decrease in PM10, 59 percent in cally, but the World Bank had two catalytic interventions. hydrocarbons, 28 percent in carbon monoxide) after three First, a $6 million GEF-funded Bank project supported wheelers with highly polluting two-stroke engines were institutional development for implementing the system. removed, generating $25 million per annum in health ben- Second, a World Bank­financed carbon project arranged efits for the city. Beyond Energy: Low-Carbon Paths in Cities and Forests | 51 monitor systemwide travel patterns. This requires system- Dedicated bus lanes have been shown to wide travel surveys, which are expensive but informative. increase travel speeds. As the World Bank embarks on sponsoring BRTSs around In Bogota, CDM validation reports showed annual CO2 the world, it should take the opportunity to promote har- savings rising from 56,000 tons of CO2e in 2006 to 79,000 monized monitoring of impacts. The Clean Technology in 2009. Ridership increased from 346 to 449 million. The Fund or other concessional funds could be used to mount proportion of passengers attracted from private cars and regular, consistent travel surveys. This would allow correct taxis fell from 9.8 to 6.9 percent. measurement of impacts and could stimulate south-south sharing of experience and drawing of lessons. BRTSs offer attractive economic returns in fuel and time savings, reduced congestion, Forests and reduced air pollution. Deforestation accounts for roughly one-fifth to one-sixth of human-caused GHG emissions. Emissions result as forests In Mexico, the $47 million project is estimated to yield are cleared and burned to make way for farms and ranches annual noncarbon savings of $15.42 million (Schipper and and to a lesser extent from damage caused by careless log- others 2009). About a third is from fuel and time savings of gers. Most emissions are from tropical moist forests, where bus riders, and the remainder is external benefits from re- deforestation rates are high and biomass is dense. duced air pollution, congestion, and fuel expenditure by oth- ers. Annual CO2 reductions were measured at 39,870 tons At CO2 values of $10­$20 per ton, forests are worth much of CO2 for 2007­08. At current CO2 prices, these benefits more as living carbon storage than as sites for farms or for are small relative to the local economic benefits. cattle ranches. Forests have additional value as havens for biodiversity, and they play a role in regulating water flows. Conclusions Nevertheless, forests are cut. Where land and forest tenure Based on limited evidence, BRTSs offer attractive economic is well defined, landowners face strong incentives to liqui- returns to cities as a whole in time savings, fuel savings, re- date standing forests (rather than patiently harvest them duced pollution, and reduced congestion; the savings do over rotations of 30­100 years) and replace them with cash not go directly to the implementing agency. The short-run crops, cattle, or fast-growing trees. In many forests, tenure reductions in GHG generate carbon credits that are mod- is poorly defined, and people may use deforestation as a est in value compared to the direct local benefits. Single-line mechanism to claim land as the approach of roads or mar- BRTSs have little impact on overall urban CO2 emissions-- kets causes it to appreciate in value (Chomitz 2007). for instance, the reductions in Mexico city are less than 0.25 percent of urban emissions from transport (Schipper and Forests can be worth more as living carbon others 2009). In other words, these investments make a lot storage than as sites for farms or cattle ranches. of sense as development interventions with CO2 cobenefits; they would never be chosen solely as means to reduce CO2. In principle, landholders or nations would reduce defor- estation if they were compensated for the local and global In the medium run, there are likely to be declining returns benefits their forests provide. This has motivated the REDD as the number of corridors increases within a city; but cu- agenda, an element of ongoing negotiations on the interna- mulative emissions reductions for the system as a whole tional climate regime. REDD seeks to mobilize global funds could increase, to 250,000­400,000 tons of CO2e per year. to reward developing countries for reducing emissions. Long-term impacts could differ substantially; BRTSs could Countries would use these funds to implement programs be a contributing component in the construction of efficient and policies to promote sustainable land use. cities with low carbon footprints, if they are able to retain their share of passenger trips. Demand-side management How, exactly, would that work? Although the forest carbon will be an important part of such a scenario. agenda is new, the forest conservation and management agenda is not, and World Bank experience provides some Efficient transport planning will require a systems view for parallels for potential future REDD actions. planning and monitoring. Installation of a BRT corridor causes ripples throughout the entire transport network as After briefly reviewing the World Bank forest strategy and people change trip patterns and vehicles enter the system. portfolio, this section reviews three kinds of projects that Indirect impacts could magnify or counteract the corridor- may offer lessons for REDD. By far the largest set of projects level benefits; these need to be anticipated and tracked. with an explicit goal of forest conservation is protected area Although CDM projects have the tremendous benefit projects. A novel approach that closely resembles REDD is of tracking ridership and fuel use, they typically do not payment for environmental services, a category of projects that 52 | Climate Change and the World Bank Group include the forest carbon projects of the BioCarbon Fund. Fi- of forests into sustainable economic development, the Bank nally, the durability and acceptability of forest conservation would help governments improve forest governance by as- may depend on the sustainable intensification of agriculture, sisting with legal and institutional reforms and encouraging to provide the food, timber, and jobs that motivate deforesta- investments that catalyze production of forest products. tion in the first place. IFC has supported agribusiness at the The protection of local and global environmental services forest frontier with the goal of encouraging sustainability. and values, the third pillar, would be achieved by continuing to support the creation and expansion of protected areas, The Bank's 1991 Forest Strategy mainly improving forest management outside these areas, and focused on environmental issues, developing options to build markets and finance for particularly protecting tropical forests. international public goods such as biodiversity and carbon sequestration, that would include payments for forest eco- The Bank's forest strategy and portfolio system and environmental services. The Bank's 1991 Forest Strategy recognized the role that for- A forest portfolio review conducted for this study found ests could play in poverty reduction and the importance of that investment lending in forests has declined since the policy reforms in containing deforestation. However, it main- adoption of the 2002 Forest Strategy (see figure 4.1). The ly focused on environmental issues, particularly protecting portfolio composition has changed, with a shift from tropical moist forests. It reflected rising international con- investment projects to Development Policy Loans3 and cern about the rate of tropical deforestation through adopt- increased prominence of GEF-funded projects with global ing a "do no harm" approach of not financing commercial environmental goals. logging in primary tropical moist forests. Yet as the revised strategy attests, this emphasis on safeguarding forests did Investment lending in forests has declined little to help countries actively manage their natural forests, since adoption of the 2002 policy. especially in the tropics, and left the Bank scant opportunity to harness the poverty-reduction potential of forests. Termed Of the 124 forest-related projects in the 2002­08 portfolio, a "chilling effect" by the IEG (2000) forest strategy review, the 46 had objectives or components related to protected areas, strategy and associated safeguards prevented Bank staff from and 10 had connections with payment for environmental engaging the sector in proactive ways to improve economic services. Of the 17 projects for which forests were designated and environmental management of tropical forests. as the leading sector, 11 contained components related to community forest management. The 2002 Strategy refocused around poverty reduction, economic management, Payment for environmental services and environmental protection, expanding The World Bank has supported roughly a dozen projects over the past decade that have incorporated some form of to all forest areas. payment for environmental services (PES) scheme, mainly The revised 2002 Strategy expanded the Bank's forest policy in Africa and Latin America and the Caribbean. PES to include all forest areas; it refocused the strategy around schemes reward landholders for growing or conserving for- three pillars of engagement aligned with the Bank's mission: ests, which provide services such as watershed protection poverty reduction, economic management (including gov- and carbon storage. Payment is based on compliance with ernance), and protection of environmental services and val- agreed conditions. Because the forest holder is typically not ues. The revised strategy also recognized that the 1991 Strat- able to exclude particular beneficiaries, funds are typically egy did not clearly define implementation mechanisms, but raised through a levy on beneficiaries, or through taxation, rather set out a menu of approaches that could be pursued. though there are also voluntary payments and market- based schemes. PES schemes could be one model for imple- To harness the potential of forests to reduce poverty, mentation of REDD at the national level. the revised strategy recommended strengthening the rights of forest-dependent people--especially marginalized groups-- PES schemes provide one model for imple- by promoting community forest management and agrofor- mentation of REDD at the national level. estry. To achieve progress on the second pillar, the integration Beyond Energy: Low-Carbon Paths in Cities and Forests | 53 FIGURE 4.1 Average Annual Forest Commitments 400 350 Commitment ($ millions) 300 250 200 150 100 50 0 IBRD/IDA IBRD/IDA GEF- Other investments DPLs financed trust funds Funding 1992­2001 2002­08 Source: IEG. Note: DPL = Development Policy Loan; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association. Costa Rica has led the way in the design and piloting of provide. This runs into scientific and political difficulties. market-based instruments to enhance the provision of for- First, the services themselves may be poorly understood and est environmental services. The World Bank has been a measured. A strong folk belief holds that forests generate wa- partner in this effort since the mid-1990s. By the end of ter, while in fact forests typically are net consumers of water. the second phase of Bank support for Costa Rica's PES pro- Second, cost-effectiveness would require targeting pay- gram, the country will have put in place some 288,000 hect- ments toward forestholders most likely to be dissuaded ares of land with environmental service contracts (equal to from deforestation, with payment levels tied to the expected approximately 5.6 percent of Costa Rica's land area), half of benefits of conservation. This may conflict with notions of which will be financed by funding from service users. The equity that favor uniform payment rates (as occurred in program showed that PES schemes could be accomplished Mexico and Costa Rica) and favors payments to owners at relatively low administrative costs. A GEF-commissioned who are not inclined to deforest. Third, there is pressure to independent review (Hartshorn, Ferraro and Spergel 2005) target PES payments to poor people, thus combining social found that the program had achieved its output goals. But and environmental goals. However, poor people may own it also found that the program had not set up a monitoring relatively little forest, and the transactions cost of dealing program adequate to determine impacts. with many smallholders is a barrier to including them. The need for sustainable, long-term financing mechanisms is one of the main lessons that has emerged from the pilot- Targeting and price-setting are major ing of PES systems in Latin America. In Costa Rica, the bulk challenges for PES programs. of funding for the PES program comes from an earmarked fuel tax subject to political decision making; most of the Econometric analyses of the early experience of the Costa payments are for limited duration, leaving no incentive Rica and Mexico programs found that they were dispro- for continued forest care. New financing mechanisms are portionately targeted toward lands with little risk of defor- needed to increase the long-term sustainability of the pro- estation. In the first four rounds of the Mexican program, gram. For instance, the second phase of Bank support for 52­72 percent of PES contracts were in forests in the bottom the PES program in Costa Rica involves a water tariff that is two quintiles of deforestation risk. However, 72­83 percent expected to generate $5 million a year in support of water- were located in communities in the two highest quintiles of shed conservation. economic marginality (Muñoz-Piña and others 2008). Specifying whom to pay, and how much, is a major challenge However, one study (Alix-Garcia, Shapiro, and Sims 2010) for these programs. The economic logic of the programs re- found that the program may have reduced the probability quires rewarding landholders according to the services they of deforestation by about 10 percentage points. An analysis 54 | Climate Change and the World Bank Group for Costa Rica for the period 2000­05 found that only experimental determination of the impact of alternative 0.4 percent of targeted landholdings would have experi- payment schemes and agroforestry approaches on carbon, enced deforestation in the absence of the program; similar biodiversity, and farm profits.5 findings were found for earlier periods (Sánchez-Azofeifa and others 2007; Pfaff and others 2009). Sills and others BioCarbon Fund (2008) find that PES recipients did not reduce deforesta- Launched in 2004, the BioCarbon Fund provides carbon fi- tion, but increased reforestation.4 It is possible that the PES nance for projects that sequester or conserve GHGs in for- scheme worked at a political level rather than at the plot ests and agro- and other ecosystems. The BioCarbon Fund level, by reinforcing decisions to stiffen penalties for defor- is mostly oriented to forest projects creditable under the estation and to market Costa Rica as an ecological tourist Kyoto Protocol: afforestation and reforestation. But it also destination. Costa Rica's deforestation rate declined to very pays for credits generated from reduced deforestation and low levels by the late 1990s. from soil carbon, which are not recognized under Kyoto. It is thus a prototype of REDD and other post-Kyoto pro- Early programs targeted lands with little posed systems. risk of deforestation, but program designs have since improved. The BioCarbon Fund has helped catalyze the forest carbon market. In both countries, ongoing World Bank­supported pro- grams are contributing to better targeting. One lesson The BioCarbon Fund has helped catalyze the forest carbon learned has been the need to incorporate better up-front market by contributing to the development of 3 of the 12 design for monitoring and evaluation in PES programs to approved afforestation/reforestation methodologies. The allow more timely and reliable impact analysis. The Regional BioCarbon Fund accounts for 5 of the 13 forestry projects Silvopastoral Project (see box 4.2) is an exemplary use of registered with the CDM to date. BOX 4.2 The Silvopastoral Project: A Successful Demonstration The GEF/IBRD Regional Integrated Silvopastoral Approaches to Ecosystem Management Project (2002­08)-- implemented in Colombia, Costa Rica, and Nicaragua--was designed to test the effects of payment schemes on the adoption of conservation practices on cattle farms. The project, the outcome of which IEG rated as highly satisfactory, identified a range of technical approaches in each country and tested four main categories of silvopastoral systems: forest plantations with livestock grazing; live fencing, wind protection shields, biological corridors, and shade for animals; managed succession within silvopastoral systems; and intensive systems for cattle and other animal species. The implementation of these systems resulted in a large body of learning, including 70 reports, refereed journal articles, and books about how to induce farmers to adopt biodiversity-friendly, carbon-fixing land uses. In some cases, technical assistance and credit are sufficient. In other cases, short-term payments are needed to cover farmers' initial investment costs, but not thereafter. However, land use changes that represent an ongoing opportunity cost for farmers require mid- to long-term payments for the environmental services being produced; those services could include watershed protection or secondary forest recovery in degraded pastures. Different combinations of silvopastoral practices have proven to yield varying internal rates of return; economic analysis conducted in Esparaza, Costa Rica, revealed rates from 14 percent for a system with natural pasture and a fodder bank to 37 percent for a system with improved pasture and low tree density. Based on the attractiveness of a system to an individual farmer, some farmers may be willing to adopt certain systems even in the absence of short-term PES incentives. Lines of credit for scaled-up silvopastoral system implementation are now being made available through Costa Rica's Cattle Ranchers Association, Nicaragua's Local Development Fund, and the Ministry of Agriculture in Colombia. However, it is unlikely that most farmers will be able to afford the high initial costs of introducing a new land use system or that credit will be able to be tapped across all farm households across varying silvopastoral applications. Additional and recurrent finance will be especially needed to promote investments in silvopastoral systems that generate a high level of public environmental services compared to a more attractive private rate of return. Source: IEG. Beyond Energy: Low-Carbon Paths in Cities and Forests | 55 The BioCarbon Fund has signed emissions reduction pur- The Forest Carbon Partnership Facility chase agreements (carbon offset purchase agreements) with 19 projects, originally for a total of $26 million. Focusing is designed to pilot approaches that might on poor and rural communities, the fund's first tranche is be used in a future REDD regime. 25 percent invested in Africa. This is a far higher proportion than the African share of other carbon funds at the Bank or A follow-on to the BioCarbon Fund, the Forest Carbon of the CDM as a whole. In its first phase, the fund invested Partnership Facility is designed to pilot approaches that heavily in plantations and community reforestation (repre- might be used in a future REDD regime. It has supported senting 34 and 31 percent of the technical distribution of the development of readiness plans, broadly outlining plans the portfolio, respectively), in addition to other activities for accomplishing and measuring deforestation reduction, such as environmental restoration, assisted regeneration, in 37 forested countries. It will eventually purchase emis- and agroforestry. sions reductions from countries with approved plans. In- The Fund has struggled at the project level with implemen- vestments to implement the plans will be funded via the tation issues that are also encountered in the World Bank's Climate Investment Fund, a separate facility. forest operations. However, it has built a comprehensive monitoring system, allowing closer scrutiny of perfor- Protected areas mance than is possible for many noncarbon projects. As The World Bank, combined with finance from GEF, of June 2009, 12 of 19 tranche 1 projects were expected to has made a significant contribution to creating and deliver less than half of contracted emissions reductions. strengthening protected areas worldwide. According to the In five of the projects, the contracted amount had already GEF Secretariat, GEF assistance--since it began operations been revised downward. in 1991--has supported more than 1,600 protected areas covering 360 million hectares (GEF 2009). Protected The BioCarbon Fund has underdelivered areas now cover more than a quarter of the remaining carbon reductions. tropical forest, an area equivalent to Argentina and Bolivia combined (Nelson and Chomitz 2009). There are several reasons for underdelivery. In Costa Rica and Honduras, suitable CDM-eligible land was grossly The World Bank, together with GEF, has overestimated, and carbon payments were not competi- tive with other land uses; thus, these projects were scaled made a significant contribution to the back by 80 percent or more. Inadequate up-front financing creation and strengthening of protected constrained planting area in several projects. The project areas worldwide. implementer's capacity has been low in several cases, one factor behind low seedling survival rates in some proj- This review identified a population of 114 World Bank ects. Unexpectedly bad weather has hampered projects in protected area projects, approved between 1988 and 2000, China and Kenya. that are located in humid tropical forests. (With high Given these risks, the Bank has increased supervision to deforestation rates and high biomass, these forests account try to improve expected delivery from the portfolio. But most forest carbon emissions.) Seventy-four percent of average supervision budgets for these projects already these projects have been rated satisfactory by IEG (receiv- exceed the average for the PCF, which has much larger ing an outcome rating of moderately satisfactory or higher); projects. however, these ratings do not necessarily reflect the effec- tiveness of the protected area sited, because the protected Preliminary reports show success in the Humbo As- area in many cases is a component of a larger project. Like- sisted Natural Regeneration Project in Ethiopia, the first wise, although only 56 percent of this portfolio was rated large-scale African forestry project to be registered with sustainable (likely or highly likely or an equivalent thereof), the CDM. This project has adapted techniques demon- these risk ratings are composite ratings affecting the project strated in West Africa to promote natural regeneration as a whole. of woodlands and has restored more than 2,700 hectares of degraded land. The regeneration project has report- In fact, despite 20 years of effort in creating protected areas, edly resulted in increased production of honey, fruit, and systematic information is lacking on their impact on bio- fodder. Further study is needed to assess the economics diversity, on carbon storage, and on the welfare of people of the project: the labor costs, the impacts on income, who live in and around them. Hence, there is also no reli- and the generation of local hydrological and biodiversity able information on what external and internal factors are benefits. conducive to positive impacts. 56 | Climate Change and the World Bank Group to the contrary, that these areas are too effective, excluding After 20 years of effort, systematic local people from access to land and forest resources. information is still lacking on the impact As part of this evaluation, Nelson and Chomitz (2009) of protected areas on biodiversity, carbon sought to fill the evaluation gap by assessing the global storage, and the welfare of forest-dependent impact of all pre-2000 tropical forest protected areas on people. deforestation over 2000­08. They used spatial data on the location of protected areas and of forest fires, an indicator of deforestation, and controlled for potentially confound- Limited information is available from the Bank's World ing influences such as terrain and remoteness. Wildlife Fund Management Effectiveness Tracking Tool, a simple checklist that describes management elements Protected areas have been effective in but lacks outcome measures. For projects financed partly reducing tropical deforestation, especially or fully with GEF funding, the GEF Secretariat requires where sustainable use is permitted; tracking reports at inception, mid-term, and completion. Compliance with the latter two submissions is imperfect, indigenous areas have been even more and the Bank does not compile Management Effectiveness effective. Tracking Tool reports from its projects. The latest overall evaluation of the GEF (GEF Evaluation Office 2010), rec- They found that protected areas were on average effective in ognized the limitation of the tool and called for greater reducing deforestation (table 4.1). Multiple-use protected reinforcement of it by including indicators for progress to- areas--those that permitted some forms of sustainable use ward impact and integrating these systems into the overall by local populations--were at least as effective as strictly results based management system of the fifth replenish- protected areas. Areas that had been returned to indigenous ment of the GEF. control were most effective of all. Similar results were found in a sample restricted to World Bank-supported projects. IEG reviewed 34 protected area projects in forest ecosys- These effects have been obscured in studies which did not tems (approved between fiscal 2006 and 2008) for this allow for the possibility that some protected areas are pref- study and found severe limitations in monitoring. Only erentially sited in regions of low deforestation pressure six of the projects included indicators that could track the (because there are no politically powerful claimants on the financial sustainability of the targeted protected area-- land) or high pressure (because of the perceived impor- indicators such as revenue generation, park income, per- tance of conservation). sonnel budgets, or fund-related information. And only two projects included baseline measurements of vegeta- In Costa Rica and Thailand, protected areas tion cover and species count, although quantitative targets (usually in percent terms) for increased cover and greater have reduced poverty rates. species resilience are often targets set in protected area A recent study (Andam and others 2010) that also used projects. controlled comparisons shows that protected areas have In the absence of good information, controversy persists reduced local poverty rates in Costa Rica and Thailand. about the effectiveness of protected areas. Some deride Again, this impact had been obscured by the tendency for protected areas as ineffectual "paper parks." Others fear, protected areas to be located in impoverished regions. TABLE 4.1 Impact of Protected Areas in Tropical Forests on Forest Fire Incidence Area Mean fire incidence Mean reduction from Mean reduction from Mean reduction from strict protected areas multi-use protected areas indigenous areas Latin America and the Caribbean 7.4 2.7­4.3 4.8­6.4 16.3­16.5 3.8­7.7 6.2­7.5 12.7­12.8 Africa 6.1 1.0­1.3 (0.1)­3.0 Not applicable 4.4­4.5 Not calculated Asia 5.5 1.7­2.0 4.3­5.9 Not applicable 2.9­3.1 6.7­5.1 Source: Nelson and Chomitz 2009. Note: Table reports percentage point reduction in forest fire incidence, a proxy for deforestation over the entire period 2000­08. Figures in italics are for protected areas established 1990­2000; in plain text, all pre-2000 protected areas. Beyond Energy: Low-Carbon Paths in Cities and Forests | 57 demonstrate that chain-of-custody tracing was reliable and feasible, and that verifiably sustainably produced products command a market premium, other agriprocessors might "green" their own supply chain. This could drive unsustain- able producers out of business. Photo by Yosef Hadar, courtesy of the World Bank Photo Library. But the conditions for this scenario are stringent. The pro- cessors need to be able to trace the purchases to the point of origin--which is difficult because cows and soy can be "laundered." Then the processors have to verify that the originating farms are in compliance with the law, a task normally undertaken by government. To motivate these ac- tions, the processors would have to face a market in which a significant proportion of buyers will pay a premium for sustainably produced goods. And it has to be possible to sustainably intensify production on farms and ranches that comply with the law. If any of these conditions fails, new investments at the forest frontier could end up simply increasing pressure on the forest. Outcomes. IFC and Amaggi succeeded in ensuring that no new deforestation occurred on the company's own farms or on those of prefinanced suppliers. The company used a combination of satellite imagery, digital mapping, Agribusiness at the forest frontier and field visits to verify the behavior of those suppli- Deforestation in the Brazilian Amazon is largely driven ers. Development of this sophisticated monitoring sys- by conversion to pasture and soy. Over the period 2002­ tem served the firm's own quality control and fiduciary 07, IFC made three loans in the Brazilian Amazon: two purposes in addition to satisfying IFC requirements. to a soy processor (Amaggi) and one to a beef processor However, a significant proportion of the company's soy (Bertin). The projects aimed to demonstrate sustainable purchases were from the third parties that were out- agribusiness practices in the sector by building clients' en- side the conditions of the loan agreement and for which vironmental management capacity. Both loans attempted Amaggi had no capacity to identify the farm of origin. a "law abidance" strategy--that is, to bring the respective firms and their suppliers into compliance with Brazilian IFC's agribusiness investments did not environmental, social, and land tenure legislation, thereby catalyze deforestation, but neither did they reducing deforestation in the Amazon. catalyze widespread changes in industry Under the IFC loan, the soybean processor commit- practices. ted to ensuring that all soybeans grown on its farms and all soybeans purchased from prefinanced suppliers meet Little was accomplished under the environmental cov- Brazilian and IFC environmental and social regulations. enants of the agreement with the beef producer. Bertin had With the beef company, IFC sought to ensure compliance agreed to develop an environmentally sustainable supply with Brazilian legislation for all Bertin suppliers, as well chain, including 100 percent traceability of its cattle from as to develop a chain of custody system to track animals farm to final product , and to make 600 suppliers compli- throughout the supply chain. ant with labor, land acquisition, and environmental leg- islation. Although some progress was made with ranches IFC loans to agriprocessors in the Brazilian receiving direct support from IFC advisory services, many Amazon attempted to bring firms and supplier were noncomplant. The company also purchased suppliers into compliance with Brazilian slaughterhouses close to the Amazon biome in breach of IFC's requirements, without first ensuring the sustainabil- environmental law. ity of their supply chains. This noncompliance with IFC's social and environmental standards was in effect when IFC The law abidance/chain of custody strategy, if successful, decided to disengage from the project. would ensure that IFC was not directly associated with de- forestation. And, with the right conditions, it might have IFC wagered its reputation that these loans would tame, a market transformation effect. If the companies could rather than encourage, deforestation. On one hand, both 58 | Climate Change and the World Bank Group borrowers have demonstrated the ability to raise funding The success of the Soy Moratorium is based on three factors. far in excess of that provided by IFC, so IFC's financing per It is a policy of zero new deforestation, which bypasses the se was not catalytic of deforestation. On the other hand, question of the Legal Reserve and land ownership and neither did IFC catalyze the kind of widespread change in therefore is simple to monitor. Second, as an industrywide industry practice that would redeem its endorsement of soy action, it avoids leakage and achieves economies of scale in and beef production at the forest frontier. monitoring. Third, Greenpeace's participation as an inde- pendent monitor lends credibility to the enterprise. Alternative approaches to ensuring supplier compli- Beef. In June 2008, Greenpeace launched Slaughtering the ance with environmental rules. IFC's strategy was to hold Amazon, an international campaign exposing the market- buyers responsible for the legality of their supply chain, ing of beef and leather products from illegally deforested tracing the chain of custody to the original producer Amazonian areas. Shortly thereafter, the federal prosecutor and verifying that producer's compliance with the law. of Pará and the Brazilian Environmental Agency brought Without significantly strengthened supporting institu- action against 21 ranches and more than 13 slaughter- tions, this strategy was unviable. First, without effective houses that purchased cattle from these ranches, includ- institutions and infrastructure to create traceability, non- ing IFC's client. Following warnings that they would be compliant farmers could potentially launder their sales subject to prosecution if they continued to purchase from through "complying" farms. Second, being "out of com- these slaughterhouses, 35 supermarkets and wholesalers pliance" was difficult to define. Cases of land invasion, suspended contracts with the offending meat processors. rural violence, and forced labor in the Amazon remain in Subsequently, four meat processors (including the client) legal limbo for decades. Third, an effective, comprehen- agreed not to purchase cattle from ranches that are embar- sive georeferenced land registry was required to enforce goed by the Brazilian Environmental Agency or that engage the requirement that landholders keep 80 percent of their in unlicensed new deforestation in the next two years. property under forest cover (the legal forest reserve). But no such registry exists. And finally, the commitment of Success in the beef sector is being won through a strategy the beef purchasers lacked credibility. that depends heavily on government enforcement and the comprehensive use of remote sensing and georeferencing Although IFC's strategy had limited success in the Amazon, technologies. In February 2008, the national monetary alternative strategies have shown more success. These rely council in Brazil began embargoing the economic use of on a combination of external pressure on buyers and the lands illegally deforested, as well as making all agents in use of simple but geographically comprehensive approaches the productive chain co-responsible for deforestation from to monitoring compliance. these areas. The Brazilian Environmental Agency published a "dirty list" consisting of municipalities in which most The Soy Moratorium and government illegal deforestation is occurring and an Internet site listing enforcement to restrict deforestation for properties embargoed due to deforestation. cattle development have shown more In addition, the 2008 resolution required that all farmers success in reducing deforestation pressures wishing to receive credit in the Amazon biome present documents (issued by the state environmental agencies) Soy. In the soy sector, industry groups announced in July 2006 demonstrating compliance with Brazilian environmental a moratorium on the purchase of soybeans planted in the legislation. Mato Grosso and Pará have begun to create Amazon in areas deforested after that date. This closely fol- rural environmental cadastres that register land for envi- lowed Greenpeace's report "Eating up the Amazon" (Green- ronmental compliance purposes, sidestepping the complex peace 2006) and its subsequent international campaign. issue of regularizing ownership. Industry and nongovernmental organizations joined to im- Finally, the Brazilian government has built on an existing plement the Soy Moratorium, which continues to date. This cattle-tracking system to control the spread of hoof- monitoring system uses existing remote sensing data from and-mouth disease. Environmental compliance of land- the Brazilian Space Agency, supplemented by aerial flyovers. holders is now also tracked, incorporating the deforestation Beyond Energy: Low-Carbon Paths in Cities and Forests | 59 monitoring system. The cattle-tracking system has been areas where land and forest tenure is well defined. Project modified to track "lots" of animals rather than individuals. experience shows that countries can manage the logistics Throughout, the quasi-independent public prosecutor has of enrolling, monitoring, and paying service providers. En- been an important catalyst of action. suring sustainable finance has been a problem, but REDD Deforestation has fallen steadily from 25,000 square may solve this. More challenging is devising targeting kilometers in 2003 to 7,000 square kilometers in 2009; mechanisms and payment schedules that are socially and deforestation from September 2009 to February 2010 fell politically acceptable as well as cost-effective in providing more than 50 percent relative to the same months in the carbon storage and other environmental services. previous year. It is too early to tell the degree to which this is due to enhanced enforcement versus a decline in beef and Chain-of-custody tracing was an inefficient soy prices. way to monitor environmental compliance: Conclusions if trees are what you care about, it is cheaper If the REDD agenda succeeds, countries, donors, and in- to watch the forest than to follow the cows vestors will put up massive funds in hopes of conserving on their long journey to the market. forests and fostering sustainable land management in a so- cially acceptable way. Guidance is needed for these large, Promotion of sustainably intensified agriculture is the flip novel, and complex ventures, which will take many years side of forest conservation. If more forest is to be conserved, to implement. Unfortunately, the Bank's long experience in farms, ranches and tree plantations must be intensified on relevant areas is not well documented. However, some les- existing, perhaps degraded lands, to meet the demand that sons emerge from this review. is driving deforestation. Chain-of-custody certification Protected area creation has been effective, on average, in of forest-competing products has been seen as a way of reducing deforestation. Creation of large protected areas shifting private sector incentives to sustainability, without in remote areas where deforestation is currently low has relying on often-ineffective government enforcement. But been a farsighted strategy that could reduce future defor- a private-sector-only strategy is also problematic, and that estation as roads and markets expand. Evidence suggests chain-of-custody tracing is difficult and expensive. that sustainable-use protected areas are compatible with A combination of nongovernmental organization-triggered reduced deforestation and that indigenous areas (at least in pressure on buyers, an independent governmental advo- Latin America) are extremely effective in preventing defor- catefor environmental enforcement, and government sanc- estation. Together with recent findings that protected areas tions has been effective. A key technical feature has been may reduce local poverty, this points to the compatibility of the use of wide-area remote sensing rather than chain- REDD with sustainable development and suggests greater of-custody tracing. If trees are the focus of conservation, attention on the maintenance and expansion of protected it is cheaper to watch the forest than to follow the cows and sustainable use forest areas is necessary. and beans on their long journey to market. This experience Payment for environmental services schemes could con- could have important implications for palm oil, timber, stitute one element of a REDD strategy, appropriate for and other markets. 60 | Climate Change and the World Bank Group Chapter 5 EVALUATION HIGHLIGHTS · Over 2003­08, almost all WBG support for coal has been in IBRD countries. · WBG support for coal power had no impact on technology choice; in one case it may have accelerated diffusion of more efficient technology. · Rehabilitation of old coal plants proved more difficult than anticipated. · Technology transfer projects succeeded only when they planned well for demonstration, learning, and diffusion. · Private recipients of technology trans- fer are reluctant to share technology with competitors. · The World Bank's Carbon Finance Unit was important in catalyzing the emergence of the Photo by Dana Smillie, courtesy of the World Bank Photo Library. carbon market. · The World Bank has largely not realized synergies between operations and carbon finance. · A sequence of mostly unsuccessful GEF- financed, IFC-implemented projects has supported small-scale renewable energy enterprises. · The Bank moved into pilot areas of the carbon market as planned, but did not exit estab- lished parts of the market. Special Topics WBG stakeholders are polarized about the organization's role in supporting coal-fired power plants. Coal is the most CO2-polluting of fuels and a major contributor to climate change. Environmental nongovernmental organizations argue forcefully for the WBG to devote its resources and moral authority to finding alternatives. But some developing countries see no affordable alternative to power their aspirations for growth. Without the WBG's support for coal, "it is the cheaper, dirtier type of coal plants that will proliferate," argues its chief economist.1 Efficiency in Coal-Fired Generation active mitigation scenario, energy from coal over 2000­50 grows 12 percent in the United States, declines 11 percent in In response, the SFDCC sets out criteria for WBG sup- China, and grows about 30 percent elsewhere. Coal plants port for coal-based generation. The WBG can support cli- have a typical lifespan of 40 years, and many existing plants ent countries in developing new coal power projects if it are decades old. Thus even stringent climate scenarios fore- contributes to energy security, reduced power shortages, see new coal plants as part of the mix. or increased access; if it is least cost, taking environmen- tal impacts into account; if it uses best "appropriate avail- The WBG is too small to have a large direct impact on able technology"; and if no donor financing is available for global power plant construction. New power plants (across lower-emission alternatives. all fuels) with 607 GW capacity became operational over 2003­08 in countries eligible for Bank borrowing (IDA/ To assess the costs and benefits of the WBG's involvement IBRD/Blend), but WBG-supported projects approved over with coal power, this chapter of the evaluation examines five the period contribute only 28 GW.3 Total 2003­08 WBG of the six greenfield or rehabilitation coal power plants in the commitments of $5,768 million constitute, as an order of 2003­08 portfolio2 and addresses the following questions: magnitude, less than 1 percent of the cost of capacity in- · Were there alternatives that were both lower cost and stalled in borrower countries over this period. less GHG intensive? The WBG is too small to have a large direct · Did WBG involvement improve efficiency or reduce pollution at the plant level? impact on global power plant construction, but it has a significant role in new · Does the intervention promote or retard diffusion of higher efficiency technologies? generation in the poorest countries. Global context and the WBG's role in power sector The WBG does play a significant role in new generation finance in the poorest countries. New generation installed in IDA Barring revolutionary technological developments, coal will countries over 2003­08 was 21.8 GW, whereas new genera- be in use through mid-century and beyond. International tion planned in these countries with some WBG involve- Energy Agency projections (OECD-IEA 2009) show that ment was 6.2 GW, or 29 percent. However, over 2003­08, under a scenario where the world meets a stringent 450 ppm WBG support for coal-fired generation was much more goal for atmospheric CO2, coal will still provide 7,300 tera- prominent outside IDA countries (figure 2.6). watt hours (TWh) in 2030 (24 percent of global generation), down from 8,200 TWh in 2007 (42 percent). Even in this Over 2003­08, almost all WBG support for 450 ppm scenario, coal generation in non-OECD countries coal has been outside IDA countries. will be higher in absolute terms in 2030 (5,608 TWh) than in 2007 (4,194 TWh). The Massachusetts Institute of Tech- In sum, substantial developing world investment in coal nology Future of Coal study (MIT 2007) projected that in an appears to be inevitable over the coming half century. 62 | Climate Change and the World Bank Group Consequently, the efficiency with which new or renovated when carbon prices (or carbon credits) are of the order of plants burn coal will affect global CO2 emissions. The scale 10/ton of CO2. of that investment for non-IDA countries dwarfs the WBG's MIGA has issued guarantees for the construction of a financial resources, so any significant WBG influence on 660-MW lignite coal power plant in Bulgaria against risks coal investment or efficiency would have to be primarily via of expropriation, war, and civil disturbance. The new plant other channels, including policy, technical assistance, and is designed to meet European Union environmental stan- demonstration effects. dards and replaces 500 MW of older, more polluting ca- pacity (MIGA 2008). MIGA claims that its support was Assessment of WBG support for five coal plants essential for the project to mobilize long-term commercial In Turkey, the World Bank offered support for the rehabili- bank financing. Alternative sources of power for Bulgaria tation of the Afsin-Elbistan A thermal power plant to rem- include nuclear, which has lower conventional pollutants edy power supply shortages. The plant runs on lignite coal, and would potentially allow Bulgaria to sell CO2 allow- which is plentiful in Turkey but CO2 intensive. The plant's ances. Nuclear has, however, costs of debated magnitude, thermal efficiency fell from its design rate of 37 percent related to safety and waste disposal. to 27 percent as a result of poor operations. Rehabilita- IFC invested $8 million as equity in the 660-MW Lanco tion seemed an obvious, cost-effective way to boost power Amarkantak coal-based power plant project in Chhattis- supply. One would expect CO2 reduction as a side benefit, garh, India. IFC's investment is a small portion of the overall though this was not a project objective. However, this proj- cost of the project, which is expected to be about $578 mil- ect was cancelled after two efforts at procurement failed to lion. The financial closure for both units was achieved by attract qualified bids, an indication that rehabilitation can September 2006--prior to IFC's approval of equity support be complicated. in June 2007. Power generation from natural gas--a lower-carbon IFC's support played a marginal role in improving the social alternative--would have been economically competitive impact assessment from the power plant and improved the with the rehabilitation project, if planning had attached environmental design standards of the plant. The plant's de- a shadow price to the local air pollution damages from sign efficiency and GHG emissions are at business-as-usual coal use. A shadow price of $5/ton of CO2 would also levels, and IFC cannot be credited with supporting any have made gas cheaper; this may possibly be monetizable technological improvements. The environmental impact depending on Turkey's role in a future climate regime. analysis discusses the possibility of cofiring the plant with However, energy security considerations might put a strong biomass, which would reduce net emissions. Given IFC's premium on diversification away from gas. relatively small investment, it remains to be seen whether In Kosovo, IDA provided a grant totaling $10.5 million in any of the proposed social and environmental improve- technical assistance to help bring in new investments in ments will be implemented. the energy sector and attract private investors to develop In April 2008, the IFC Board approved a $450 million debt Kosovo's lignite mines and increase capacity for lignite- investment in the Tata Mundra Ultra Mega Power Plant in fired power generation. Kosovo's 11.5 billion ton reserve of Gujarat, India. The 4-GW project is IFC's largest coal-fired easily accessible lignite constitutes one of this poor coun- project and IFC's largest financing to date. The Indian gov- try's main assets, for both internal consumption and export ernment promoted the development of this plant as critical as electricity. The technical assistance was broad, including in meeting the power needs of a number of Indian states an assessment of carbon mitigation options (including op- through transmission of power on regional and national tions to leave space for a carbon capture and storage plant) grids. The plant is currently under construction. as well as policies for promoting renewable energy in the country. The economic analysis for the new plant includ- IFC's support for this project probably resulted in improved ed costs of decreased air quality from plant emissions of design standards for environmental performance. IFC did air pollutants. A systemwide analysis indicated that a new not have a role in the technology choice, as the Indian lignite-based plant in Kosovo is the least-cost option even government preselected the supercritical technology. Special Topics | 63 However, to the extent that the plant displaced subcritical and distribution system losses are 27 percent (though coal plants, it may result in emissions reductions of about lower in the areas served by the plant under construction). 10 percent--significant, but far less than the 40 percent dif- The scope for efficiency improvements in India appears to ferential relative to the existing coal fleet average that IFC be large and likely insufficiently tapped. cites in the project's Environmental and Social Review. Kosovo and southeast Europe analyses It is likely that IFC's funding was required for the plant to secure financing, and its successful closure has helped demonstrate an approach for considering reduce doubts within the domestic banking industry about damages from local air pollution and the viability of such large competitively bid projects. Thus incorporating the shadow price of CO2. it is plausible that the project may help catalyze the Indian power sector's movement away from subcritical to more Do plant-level efficiency improvements, such as those argu- efficient supercritical technologies. This provides a clear ably achieved in India, promote or undermine systemwide demonstration of the WBG dilemma: the investment has levels of energy intensity and CO2 intensity? It is difficult supported what will be one of the largest point sources of to answer this question quantitatively, but the channels of CO2 on the planet, but may well have reduced them incre- impact can be sketched out and in some cases the level of mentally compared to a scenario without IFC involvement. impact indicated. Appendix tables E.1 and E.2 summarize the five cases. First, as seen in the case of the Indian power plant, WBG The WBG had little direct impact on technology choice. support could help reduce perceived risk of a new technol- Kosovo was the only case in which the WBG supported ex ogy in a new setting, catalyzing its adoption and reduc- ante planning, but a definitive technology recommendation ing CO2 emissions against a business-as-usual scenario at was not made. In the other cases, technology was largely some plants. Second, such support could in theory reduce or entirely predetermined by project sponsors before WBG the price of coal power relative to gas or hydropower. This involvement. Hence, the main potential channel of WBG could induce a country to shift, at the margin, to greater involvement was through the decision on whether to sup- investment in coal, counteracting the new technology's port the project--and whether that decision was critical to efficiency gains. the fate of the project. This was likely in the case of Tata However, this risk appears to be implausible in the case of Mundra and possible for Maritza. There was no impact in a shifts to supercritical, ultrasupercritical, or Integrated the cases of Lanco (which would have taken place anyway) Gasification Combined Cycle coal technologies. These or the Afsin-Elbistan A thermal power plant in Turkey. technologies save fuel costs relative to subcritical coal, but have higher capital costs and so, on balance, produce power The WBG has little direct impact on at about the same cost. Promotion of these technologies would therefore be expected to reduce emissions but not to technology choices. appreciably induce shifts from gas or hydropower to coal. Did the WBG explore cost-effective alternatives to these Most difficult to assess is the symbolic or leadership impact plants? (All these plants were appraised before the SFDCC. of the WBG in supporting or disengaging from coal power. However, the IFC plants were subject to Performance Stan- However, there are analogies in other sectors. The WBG has dard 3, which requires investigation of alternatives.) The supported global phase-out of leaded gasoline, prohibition best case is that of Kosovo. The Kosovo analysis and the re- of project support for tobacco, and phase-out of gas flaring lated southeast Europe analyses explicitly considered dam- and venting. The leaded gasoline phase-out has had consid- ages from local air pollution and the systemwide impacts of erable success. Tobacco and lead control offer large domes- a shadow price on CO2. tic benefits, facilitating acceptance of the WBG role. The gas flaring initiative also potentially offers domestic benefits Nonetheless, a recent World Bank study points to very low and has nominal support from many country partners. electricity tariffs in Kosovo, and high rates of nonpayment by customers, with the result that "35­60 percent of the to- Does the WBG have a compelling role in support for mak- tal final energy consumption in households is technically ing coal power plants more efficient? It is clear that "retail" or economically lost" (Renner and others 2009). Techni- WBG support makes little difference, one way or the other, to cal losses alone are estimated at 18 percent. So there could global generating capacity because of the vast scale involved. be cost-effective ways to reduce excess demand, in part It is conceivable that such support might be essential to through increased technical efficiency or by boosting prices particular low-income countries with poor credit and no and collections to financially sustainable levels. In the case alternative power sources. It is conceivable also that support of India, the government reports that overall transmission for regulatory changes or pilots that promote efficient coal 64 | Climate Change and the World Bank Group technologies could accelerate diffusion of those technolo- At the global level, technology costs decline gies within particular middle-income countries, possibly with high leverage in reducing CO2 emissions. Recently with increasing production. approved World Bank projects to rehabilitate Chinese and Indian coal generators use this rationale. There is debate about where to draw the line between public and private support and between coordination and Choices at the country level--whether financed by the WBG competition. There is general agreement, however, that ex- or not--would be illuminated by systemwide analyses of ex- pensive basic research, such as that underpinning nuclear pansion options. Such assessments would consider efficien- fusion, must be government supported. Public sponsor- cy options, assign costs to domestic pollution, and explore ship of pilot or demonstration plants, with data provided different shadow prices for CO2. Such analyses would clearly to all in the industry, also makes sense as a public good. show when there are no domestically affordable alternatives The existence of a declining cost curve suggests that there to coal power and would help to defuse controversy. This are increasing returns to concentrating resources in a few approach is consistent with that of the SFDCC, but with an technologies--a "big push" could produce a competitive emphasis of the additionality of WBG support in effecting product. However, many worry that public sector groups poverty reduction or technology diffusion benefits. are ill equipped to pick winners in this manner. Decisions about coal should use systemwide analyses that consider There is debate about where in the efficiency alternatives, local pollution costs, technology development cycle to draw the and shadow prices of CO2. line between public and private support. Similarly, there has been a vigorous debate about the role Technology Promotion and Transfer of intellectual property rights (IPRs) in energy and cli- Great hopes are pinned on technology, a cornerstone of mate technologies. What is the proper balance between both the Bali Action Plan and the SFDCC. Developing rewarding innovators and accelerating access to new ideas? countries hope not only to acquire hardware--such as wind A growing literature on this topic notes that patents, or turbines and solar panels--but also to gain the capability to even trade secrets, are only one facet of technology transfer manufacture and innovate, sparking industrial growth. and typically represent only a small proportion of energy technology costs. Possibly more important are transfer of At the global level, new technologies are conventionally un- tacit knowledge and learning by doing. derstood to follow a path from laboratory research, through piloting and technical demonstration, to commercial dem- Complementing the global technology development cycle is onstration, and finally widespread deployment and diffu- the process through which technologies diffuse across and sion, with continual improvements and innovations along within nations. The WBG has been active in this technol- the way. With increasing cumulative production, firms ogy transfer process. It encompasses piloting, where glob- learn and costs decline, tracing a learning or experience ally available technologies are tested against and adapted curve. This reflects the solution of technical problems and to local conditions; demonstration, to convince producers, the advantage of economies of scale (box 5.1). investors, and users of the technology's reliability and cost BOX 5.1 Technology Learning (or Experience) Curves Many studies have shown that manufacturing costs decline with an industry's cumulative production. The reasons include debugging and refinement of processes and economies of scale. Learning rates are expressed as the percentage decline in unit costs with each doubling of cumulative industry production. According to a review by Neij (2008), learning rates in renewable energy range from 2.5 percent for geothermal and 5 percent for biofuel to 15 percent for wind and 20 percent for solar photovoltaics. These statistical results are useful for summarizing experience, but they do not tell us how learning works. Costs can decline as a result of true learning as manufacturers tune their equipment and procedures, research and devel- opment, economies of scale, or increased competition among producers or component suppliers. The rate of cost decline is not predetermined, but can be influenced through these different channels. Source: Neij 2008. Special Topics | 65 FIGURE 5.1 Spectrum of Technology Support In 1996, the GEF's Scientific and Technical Advisory Panel identified CSP as a promising target for technology Commercial promotion under the GEF's new Operational Program 7 Scale-up Diffusion demo (OP7). At the time, although a subsidized CSP plant had been operating in the United States since the 1980s, no CSP Fuel cells Photovoltaic Boilers new plant had been constructed anywhere since 1991; the Source: IEG. technology's high cost was unsupportable, especially as Note: CSP = concentrated solar power. electricity deregulation progressed. Support for CSP was in line with the goal of OP7, that "through learning and economies of scale, the levelized energy costs (of renew- effectiveness; and diffusion and scale-up, to reduce local able technologies) will decline to commercially competi- costs toward the global minimum and to help stimulate tive levels" (GEF 2003). supply and demand. In April 1997, the GEF approved a grant of $47 million to WBG support for technology transfer India for a CSP project and subsequently approved requests for projects in Egypt, Mexico, and Morocco. The projects can help reduce local costs towards global went to the Bank for development and execution. The India levels. project was dropped; the others proceeded slowly. To bring concrete experience to these sometimes abstract A fundamental source of project delay was a mismatch debates, we review here some of the largest and most prom- between project goals and design. The projects' intent was inent examples of WBG support for energy technology pro- to drive the technology down the learning curve. How- motion and transfer, across the spectrum from upstream ever, the total planned capacity of 120 MW was only a to downstream. These are roughly depicted along an up- fraction of the amount needed to yield real cost reduc- stream-downstream spectrum in figure 5.1. tions. Moreover, a learning goal would have been more efficiently served by clustering the plants in the same However, this evaluation uses the term "technology" to re- country or region. This would have allowed manufactur- fer any kind of know-how or innovation that can advance ers and developers to more easily assemble the necessary development and GHG mitigation. For instance, ESCOs, skills and build manufacturing for components in large chain-of-custody tracing of beef, and BRTSs all qualify as quantity locally--activities that can help drive costs down technologies. more quickly. The concentrating solar power experience Project delays were in part due to mismatch In 1997, the GEF approved the first of four World Bank- between project goals and design. executed projects designed to accelerate the diffusion of concentrated solar power (CSP). CSP, which uses focused From the host countries' viewpoint, these plants were an sunlight to drive a steam turbine or heat engine, is at- unproven and potentially unreliable source of power. To tractive to the developing world. It can take advantage of address host countries' concerns about power reliability, high levels of insolation in arid and semi-arid areas such the plants were designed as hybrids, incorporating much as northern Africa, the Middle East, western India, south- larger gas-fired generators. This greatly complicated project ern Africa, and northeastern Brazil. It is steadier than wind design and procurement. In India, it proved economically power, providing power throughout the day and even into infeasible to build a gas pipeline to the project, which was the night, using molten salt to store heat. And it is based dropped. on relatively low-tech components--mirrors and pipes-- potentially within the manufacturing capabilities of many Bidding the hybrids was problematic. An integrated ap- developing countries. proach to project contracting carried the risk that there would be little competition or that contractors would be un- An effort to accelerate concentrated solar willing to guarantee performance of the novel system. The power technology bogged down. alternative approach--separate contracts for gas, solar, and for systems integration--is complex to manage and could Yet this effort to accelerate technology bogged down. After lead to disputes in the case of poor performance. Both ap- 13 years, 2 of the projects are finally under construction, proaches have now been employed. A retrospective on this 1 is out for bid, and the last was cancelled. What are the experience, when complete, could provide useful guidance lessons of that 13-year experience for WBG technology for future WBG work on integrated systems--for instance, policy? in potential work on carbon capture and storage. 66 | Climate Change and the World Bank Group A second issue, inherent to any advanced technology air pollution and crop-damaging acid rain. The report sug- project, has to do with cost uncertainty and paucity of sup- gested that better boiler designs could yield 10­20 percent pliers. When a technology is new, there will be few experi- efficiency gains. enced suppliers, and cost information will be uncertain and Consequently, a 1997 GEF-funded, Bank-executed project closely held by those few. In the case of the GEF-Bank CSP sought to spur Chinese capacity to build efficient industrial projects, initial cost estimates were grossly underestimated. boilers, complementing government efficiency policies. The Actual bids came in well above the estimates, but the GEF project's objectives were to reduce GHG emissions and lo- grant amounts were already fixed. Hence the size of the CSP cal air pollution through the development and deployment plants had to be scaled back, a process that incurred rene- of "affordable, energy-efficient and cleaner" boilers through gotiation and delay. In addition, procurement staff had to design and policy reform. Most of the $32 million grant was wrestle with the problem of few qualified bidders. Although spent on acquiring technology (IPRs) for new or upgraded procurement rules exist for this circumstance, its relative boiler designs and auxiliary equipment (such as grates) and novelty led to a cautious and protracted process. transferring the technology to domestic manufacturers. A further obstacle was the Bank's initial insistence that the CSP plants be operated by private sector independent Procurement was protracted and difficult power producers (IPPs). There was great enthusiasm for because few companies were interested in IPPs in the Bank at the time, but they were not present in selling the technology. the CSP host countries even for traditional power plants. The IPP requirement thus complicated a technological Two problems were encountered during implementation. innovation by overlaying an institutional one. Moreover, Both related to the project's strategy of picking winners, that the IPP approach held no attractions for the state utilities, is, precisely specifying the boiler types to be transferred. whose cooperation was essential. First, procurement was protracted and difficult. A combi- During the long gestation period of the three surviving nation of small contracts, tightly specified technologies, and projects, much changed at GEF and in the power indus- a two-step (technical/financial) bidding process, together try at large. Disenchanted with OP7, the GEF eliminated with concerns about IPR security, deterred participation by it. Meanwhile, CSP experienced a renaissance, driven by a foreign technology suppliers. Only one package had mul- Spanish policy of generous feed-in tariffs and renewed in- tiple bidders, and two had none. Then, "once contracts were terest in the United States. (The GEF projects, according to awarded, contract negotiations proved difficult in some some industry observers, may have helped maintain inter- cases, due to difficulties in meeting commercial terms and est in CSP in the meantime.) Costs appear to have declined, performance criteria using Chinese coals. Coupled with and several different technologies became available. misunderstandings concerning Chinese and international contracting procedures, all of these factors contributed to Buoyed by these changes and the advent of the Clean delays in finalizing technology transfer contracts" (World Technology Fund, and subjected to vigorous external criti- Bank 2004). This process delayed implementation by at cism for prioritizing coal over CSP, the WBG is planning least two years. Meanwhile, evolving environmental regula- a $750 million investment in a $5.6 billion, 900-MW set tions banned the deployment of some of the smaller boilers of CSP projects in Algeria, Egypt, Morocco, Jordan, and selected for the project. Tunisia. A project is also planned for South Africa. Unlike the modest original investment, these new projects would The project concluded in 2004. A follow-up survey com- potentially increase cumulative global capacity by a signifi- missioned for this evaluation found that the beneficiary cant proportion and would be geographically concentrat- companies produced a total of 7,414 tons per hour of new ed. So there is a greater potential for advancing the global boilers in 2009, accounting for 3.3 percent of the national learning curve. The imminent completion of the CSP proj- market against an anticipated 35 percent. ects in Morocco and Egypt may help inspire interest in and support for the wider new venture. A 1997 project transferred technology licenses for efficient industrial boilers to China Efficient Industrial Boiler Project Chinese manufacturers. In the early 1990s, GEF-funded World Bank-Chinese anal- ysis (NEPA and others 1994) found that industrial boilers Firms had divergent experiences. Two companies were consumed 350 million tons of coal annually (more than highly successful in producing and marketing the new the power sector) and accounted for 30 percent of China's boilers. These well-run companies invested in their own re- energy-related CO2 emissions. The boilers were also re- search and development, improving the designs and keep- sponsible for a large proportion of health-damaging urban ing costs nearly competitive with the older, less-efficient Special Topics | 67 boilers. They also launched effective marketing campaigns. REDP spurred manufacturer capabilities In contrast, the other six companies abandoned or deem- phasized the new boilers, for a variety of reasons. They were through quality-contingent output less able to keep costs down, and customers were not will- subsidies. ing to pay a 20 percent premium for the new boilers, being distrustful of the promised three-year payback. As noted, REDP used a combination of technical assistance, incen- the markets were increasingly restricted by environmental tives, and subsidies to boost the capabilities of the small- rules. And finally, some companies found more lucrative scale SHS manufacturers. SHS manufacture is a relatively markets, such as waste heat recovery, in a rapidly changing low-tech assembly business carried out in small workshops. market. A nascent industry already existed, including spin-offs of a former government research institute in Xining. But manu- Two successful technology recipients facturing costs were high and SHS reliability low. improved the designs and reduced costs; REDP offered a $1.50/Wp subsidy for manufacturing, con- six others abandoned or deemphasized the tingent on meeting quality standards including component boilers. quality. To help companies meet those standards, it provid- ed partial funding for company proposals to improve finan- At appraisal, the project's intention was that "[t]echnolo- cial management, quality control, and marketing practices, gies that are proven to be technically and commercially and to adapt and develop technologies. The technologies successful will be disseminated to other boiler producers involved were modest but crucial. For instance, some com- in China" (World Bank 1996), a key avenue of technology panies developed improved charge controllers--the appa- diffusion. However, an IEG survey found that none of the ratus that prevents batteries from being overcharged and manufacturers deliberately licensed or retransferred their is thus essential for SHS life and performance. These were technologies to other firms, fearing competition. The most adapted to operating conditions typical of the high plateaus successful firm reported the existence of unauthorized cop- where customers lived. ies of their designs, so some informal diffusion may have occurred, but the quantity and efficiency of the copies are The project resulted in lower costs for not known. larger systems, growth of firms in size and Data are lacking on the performance of the auxiliary equip- competence, and improved technology. ment manufacturers. However, one of the grate manufac- The combination of financing, incentives, and technical turers has been successful, because the new grates are not assistance was effective. much more expensive than traditional ones but offer sig- nificant fuel savings. · SHS costs declined for larger systems. The project im- proved firms' quality control, reducing wastage; may None of the manufacturers licensed or have contributed to greater scale economies at the firm retransferred their technologies to other level; and reduced mark-ups as competition increased. firms, limiting the overall impact. · Firms grew. Employment in monitored companies more than doubled over 2002­07, and sales increased 363 Meanwhile, the government has imposed new mandatory percent. standards for boilers, effective 2010, that are somewhat less · Firms became more competent, and quality improved. All stringent than the boiler project's design standards. but two of the 17 participating firms received ISO 9001 certification. Seventy-four component suppliers were Renewable Energy Development Project REDP certified. The Chinese REDP (1999­2008) provides an interesting counterpoint to the Efficient Boiler Project. Another large · Technology improved. The technology improvement pro- technology transfer project, REDP emphasized support for gram supported 197 proposals, with an average grant of $17,500. The project reported that among 81 audited domestic research and development and manufacturing projects, 95 percent achieved their objectives. competence rather than licensing of foreign IPRs. With $40 million from an IBRD loan and a GEF grant, the project As in the case of the Efficient Boiler Project, project- focused primarily on establishing a sustainable market for supported technologies became proprietary and were not rural solar home systems (SHS). It aimed to do so by over- shared among companies. This might spur technological coming barriers to commercialization: inexperience of lo- competition but may sacrifice opportunities for industry- cal manufacturers, poor quality products, and high market wide advancement. The REDP model is now being applied prices. to the more expensive and technologically sophisticated 68 | Climate Change and the World Bank Group goal of promoting wind turbine improvements, under the China Renewable Energy Scale-Up Project. Photo by Trevor Samson, courtesy of the World Bank Photo Library. IFC support for technology transfer and deployment Over the past 15 years, IFC has mounted a number of initia- tives to invest equity, technical assistance, or both in start-up or early-stage clean technology ventures. Mostly funded by the GEF, these initiatives have targeted both precommercial and commercial technologies. These high-risk ventures have fit uneasily within IFC's generally conservative, risk-averse culture and indeed many have had a disappointing record. A sequence of mostly unsuccessful projects, financed by GEF and implemented by IFC, has supported high-risk, small-scale renewable energy enterprises. A sequence of mostly unsuccessful GEF-financed projects has supported small-scale renewable energy enterprises. These include the following: · The IFC-GEF Small and Medium Enterprise Program. In 1995, a $20 million initiative funded by GEF to in- emphasis has shifted from SHSs to support for manu- crease the markets of SMEs in the areas of climate change facturing of solar modules. mitigation. The program provided loans of $500,000 to $1 million to various intermediaries and private compa- · In 2001, IFC loaned $1 million to a private company nies for on-lending to SMEs. Though the program was to invest in sustainable energy SMEs, especially those not designed specifically to target the solar photovoltaic that offered electricity to unelectrified households, pro- sector, it included six solar photovoltaic-related invest- vided back-up energy sources to companies, or lacked ments. Although solar photovoltaic proved to be too risky access to financing and technical advice. The company for most financial intermediaries, the SME program was fully disbursed the $1 million loan to eight sustainable able to place funds in other technologies and sectors. energy SMEs in Latin America and Africa to finance in- vestments in fixed assets and working capital. Projects · Renewable Energy and Energy Efficiency Fund. In 1997, this funded include solar water heaters, photovoltaic power, fund was designed to place equity and debt investments natural gas power, hydropower, and energy efficiency in projects using renewable energy and energy efficiency improvements. technologies. But it had difficulty developing a project pipeline, failing to meet modest targets. Developed as a · The Solar Development Group, a $41 million initiative consortium, the division of responsibility among partici- funded by IFC and GEF, was initiated in 1999 with the pant companies was unclear. Having made only one in- goal of increasing the delivery of SHS to rural house- vestment, the project was restructured in 2006 and folded holds in developing countries. The group was comprised into the Sustainable Energy Facility (see below). of two separate entities: Solar Development Capital, a private equity fund for private solar photovoltaic and · Photovoltaic Market Transformation Initiative. In solar photovoltaic-related businesses, and the Solar De- 1998, IFC launched the $30 million Photovoltaic velopment Foundation, a nonprofit entity that provided Market Transformation Initiative to provide conces- grants for business development assistance. The Foun- sional finance and grants. The program was designed dation raised $12 million and disbursed $2.2 million in to accelerate the sustainable commercialization and technical assistance to 63 projects. Solar Development financial viability of solar photovoltaic technology Capital disbursed only $660,000 and was liquidated in India, Kenya, and Morocco. Early Initiative efforts (IFC 2007). Overall, the project did little to meet the took too long to materialize and required extensive objective of accelerating the growth of solar photovol- documentation that proved to be too burdensome for taic installations and closed in 2004. small investments. In addition, the photovoltaic SMEs were operating with thin margins. The project was · Environmental Opportunities Facility. In 2002, IFC es- restructured in 2004 and aimed at industry-level rather tablished this facility to provide catalytic funding for than project-level capacity building. Results have been innovative ventures with the potential to increase poor in Kenya and Morocco (IFC 2007). In India, the environmental sustainability and the need to overcome Special Topics | 69 significant barriers, such as entering new markets and that are proven elsewhere in the world; it is prepared to take applying new technologies and new business models. some risks for prospectively high returns. At the same time, The facility provided technical assistance grants and an investment in one of the developing world's first large investment funding to projects with significant environ- grid-connected solar photovoltaic power plants also stresses mental benefits or projects that led to cleaner production. working with a well-qualified company, and the project As of 2009, only 4 projects have been committed, and 25 provides for the construction of a "knowledge platform" to received technical assistance grants. High cost, low buy- share project results. in from bilateral donors, unfocused strategy, and resource limitations led to under achievements in placing funds. As a pilot facility, the program aimed to demonstrate the A fresh approach emphasizes transfer viability of early-stage cleaner production projects. How- of well-proven technologies and creation of ever, case studies and dissemination workshops appear knowledge platforms to share results. to have had little impact on technology diffusion. · Sustainable Energy Facility with E&Co. In 2005, IFC Demonstration and piloting in recent low-carbon established the Sustainable Energy Facility Project. The energy projects project consists of $14 million of investment capital Technology transfer can occur through piloting and dem- and up to an additional $ 2.6 million for technical onstration. Existing technologies face new challenges when assistance and capacity building. Based on a mid-term put in a new context. For instance, biomass technologies self-evaluation, this facility appears to have learned the may require technical, logistical, contractual, and regula- lessons of its predecessors, incorporating greater flex- tory adjustments to adapt to a novel location with untried ibility in technology and attention to making sure prod- feedstock. An effective pilot project will have a coherent ucts are demanded by markets. Like some of its prede- logical framework for demonstration. So, for instance, if cessors it combines technical assistance and investment, the goal was to demonstrate the technical and financial vi- taking a quasi-venture capital approach. ability of a biomass technology so as to induce spontane- One of IFC's furthest ventures into upstream tech- ous replication, the project should specify the technical and nologies is its GEF-supported Fuel Cell Initiative, initi- ated in 2001. The pilot phase was expected to support financial indicators that will be collected at the plant level, three companies with different fuel cell technologies the target audience, how the results will be communicated, and help increase their supply of fuel cells, reduce their and how uptake of the technology will be tracked. manufacturing and installation costs, and demonstrate the viability of the technology. The target market was Recently initiated pilot projects had good backup and remote-location power for telecom compa- plans for monitoring internal project nies. The program was supposed to close in December outcomes. 2008, but to date only about 85 systems have been in- stalled, against a target of 400. There was no demand for To gauge the extent and practice of such projects, IEG did the remote-location fuel cell. a desk survey of low-carbon energy projects over 2007­09 In sum, IFC's GEF-funded projects seem to have suffered for this evaluation. It found 21 projects that contained ei- from a persistent set of design flaws. They have often sup- ther pilot or demonstration in their project objectives, with ported companies with the double handicap of inexpe- total commitments of roughly $1.4 billion (see table H.1). rienced management and technology that is not locally Eleven of these projects were GEF supported; eight had familiar. They have supported products that are too ad- solely GEF support. Nearly all project designs contained vanced or expensive for the target market. And they have good plans for monitoring internal project outcomes, but sometimes presumed overoptimistically that providing only eight projects displayed a strong logical framework technology to specific firms would lead to spontaneous for demonstration; few project designs contained any mea- diffusion of that technology. surement of external demonstration effects. Although the three carbon finance project designs included excellent in- IFC's GEF projects have suffered from ternal outcome measures (through the CDM), they lacked persistent design flaws. a coherent mechanism for demonstration and contained no measurement of demonstration impacts. There are, however, indications of a fresh approach that recognizes these past shortcomings. A new initiative on Only 8 of 21 projects had strong logical early-stage clean-tech venture capital is led by staff who frameworks for demonstration, and were involved in IFC's high-risk but ultimately high-return few contained any measurement of external investments in African telecom. The new approach seeks to demonstration effects. support experienced management in adopting technologies 70 | Climate Change and the World Bank Group Conclusions Technology transfer projects face a number The WBG's efforts to promote technologies have often floun- dered. There is a recurrent set of factors in these failures: of barriers and disincentives. · The projects often did not set out a clear logical frame- Addressing these barriers requires a host of instruments. work linking interventions to technological progress. The prominence of GEF and donor funding points to con- Efforts to support upstream technologies have been far cessional funds as one way to overcome borrower risk too small by themselves to advance those technologies along a global learning curve. aversion and to support higher preparation and supervi- sion costs. Staff and management incentives need to be · New technologies inherently have few suppliers and addressed--at the very least, by ensuring that pilot and poorly known costs. The World Bank's procurement demonstration projects are assessed as pilots, with recog- system is not well adapted for these situations. nition of the benefit of informative "failures." The WBG · A combination of inexperienced entrepreneurs and un- should consider setting up a physical or virtual technology familiar technology constitutes a double set of hurdles. unit as a resource for project teams. The unit could provide REDP, however, shows that it is possible to address both advice on procurement, IPRs, diffusion mechanisms, and challenges. monitoring. It could also advise on the advantages and risks · "Demonstration" projects fail if private companies, un- of engaging with less-mature technologies. derstandably, want to keep technologies proprietary. The WBG should be cautious about trying to advance tech- Successful projects, in contrast, planned well for demon- nologies at the global level. It has little direct experience stration, learning, and diffusion. REDP supported techno- with upstream technology development. There is, how- logical progress in many competing firms, stimulating the ever, an a priori argument for research and development industry's growth. The Energy Conservation Project intro- support for technologies that reduce poverty and are easy duced the institutional technology of energy performance to replicate--meaning that there is little private sector in- contracting and arranged for beneficiary firms to partici- terest in them. These might include, for instance, farming pate in demonstration, while they adapted the practice to techniques such as biochar (which increase soil fertility and local conditions. It also disseminated 75 specific techniques sequester carbon), improved cookstoves, and techniques for industrial energy conservation. for reducing urban heat island effects. The Regional Silvopastoral Project rigorously documented To make a global difference at the scale-up stage--push a and publicized its achievements in boosting farm produc- technology down the cost curve at the global level--the tivity and sustainability, which facilitated scale-up. There scale of intervention needs to be large relative to cumulative are signs that some of these lessons are being incorporated global production. For instance, WBG and Clean Technol- in new efforts. The GEF Evaluation Office cites a United ogy Fund resources are large enough, if leveraged, to signifi- Nations Development Programme energy efficiency proj- cantly increase the global capacity of CSP but are small com- ect that was carefully designed for replication and success- pared to the global investment needed to advance carbon fully did that (NCSTE 2009). capture and storage. And such efforts require weighing the relative merits of a purely country-based approach with one Successful projects planned well for based on global procurement. For example, there are poten- demonstration, learning, and diffusion. tial advantages and disadvantages of a single global tender for CSP plants (resulting in a standardized design, with Technology transfer projects face a number of barriers and economies of scale and competition) versus a series of sepa- disincentives. Smaller (more pilot-like) projects may have rate smaller tenders in different countries (developing more disproportionately high costs of preparing and supervis- technology paths, but not moving far along each one). ing, including effective design and monitoring of diffu- sion impacts. Borrowers--and country directors--may These choices involve some degree of "picking winners," perceive (correctly or not) that these projects are risky. which requires balancing risks against rewards. If the WBG Projects that involve less-commercial technologies may gets involved in these activities, it needs to develop (or co- run into procurement issues beyond the expertise of most ordinate with others) a clear technology map with goals staff. Projects may also involve complex issues of intellec- and exit criteria. tual property rights. Should the WBG support the development of technologies Carbon Finance at the WBG proprietary to individual companies? Under what circum- The UNFCCC, to which virtually all countries subscribe, stances should publicly supported technologies be provided has the goal of stabilizing atmospheric GHGs to head off open source, as a public good, to an entire industry? dangerous climate impacts. The carbon market, a creation Special Topics | 71 of the Kyoto Protocol, is supposed to reduce the cost of new equipment to meet rapidly growing energy demands. achieving that goal, making it easier for countries to agree The carbon market can provide money and technology for on what to do and how to pay for it. It does this by requiring developing country infrastructure. Because carbon credits developed countries to limit their emissions, but allowing are a priced commodity, developing countries can realize them to meet that limit by paying to reduce emissions (buy- profits if they can produce them cheaply. Having a price on ing carbon credits) abroad rather than at home. Developing carbon emissions may motivate research and development countries face no caps but can sell carbon offsets--reduc- for low-carbon technologies. Finally, some view the carbon tions of emissions compared with emission levels from do- market as a more reliable means of raising funds from de- ing business as usual. veloped countries (which are historically responsible for current levels of GHGs) than the competing alternative: di- There are cheaper opportunities to reduce rect annual appropriations from those countries' individual emissions in transition and developing national budgets. countries than in developed ones. In contrast, the carbon market faces significant practical obstacles. The logic of the system requires that emissions The carbon market, inspired by successful market-based reductions must represent a new, additional effort so that schemes to reduce acid rain, was attractive for several rea- the developed country's extra emissions are exactly offset sons. The atmosphere does not care where the CO2 comes by reductions elsewhere. Otherwise, buyers and sellers from--the impact on climate change is the same. Compared might collude and claim bogus carbon credits, and total with developed countries, transition and developing coun- emissions would increase. To prevent this, an elaborate tries have cheaper opportunities to reduce emissions, the project-by-project validation system has been set up under former through replacing a legacy of energy-wasting infra- the auspices of the CDM to certify the additionality of car- structure and industry and the latter by installing efficient bon credits (box 5.2). BOX 5.2 Carbon Offsets--A Peculiar Commodity Carbon offsets are a peculiar commodity. They are defined as the difference between the number of tons of GHG you emit and the number of tons you would have emitted had you not been paid not to emit them. In an idealized example, the offer of carbon payments might induce a utility to build a geothermal power plant (with no emis- sions) rather than a cheaper diesel plant (which would have emitted 100,000 tons per year). The offset would then be 100,000 tons per year. Actual emissions can be measured with instruments, but quantifying counterfactual, business-as-usual emis- sions is difficult. Both sellers and buyers have an incentive to claim offsets for a project that they were going to do anyway--projects that are not "additional." But if many people did this, then these bogus offsets would be used by purchasers to increase their emissions above agreed limits, frustrating the goal of the Kyoto Protocol. This is the heart of the additionality dilemma. The CDM has set up an elaborate system for determining additional- ity for each proposed project. The project proponent must argue that carbon funding is critical to project bank- ability or helps to overcome other kinds of barriers. Methodologies for demonstrating additionality are developed at some cost by the first people to undertake a specific kind of project. Then, if approved by the CDM, that meth- odology is available to others, accelerating project approval. The CDM uses private third-party verifiers to validate additionality claims and to verify annual reports of emissions reductions. In sum, the carbon offset commodity is in effect an impact evaluation, and an elaborate institutional mechanism has been set up to conduct that evaluation. Few other development projects attract the same degree of scrutiny on impacts. However, the additionality screening process has been widely criticized as ponderous, costly, and ineffective. Environmentalists press for stricter screening, investors for more streamlined procedures. The current system may combine the worst of both worlds: high transaction cost with substantial nonadditionality. A growing consensus views determination of additionality as quixotic at the project level. An alternative would be to set up technology- specific crediting rules, creating a system akin to a feed-in tariff premium for renewable energy or energy efficien- cy, with higher credits for less-competitive technologies. Source: IEG. 72 | Climate Change and the World Bank Group TABLE 5.1 Carbon Funds at the World Bank Fund Year established Currency Capital % Private Kyoto Funds Prototype Carbon Fund 2000 $ 219.80 57.6 Danish Carbon Fund 2005 90.00 78.0 Community Development Carbon Fund 2003 $ 128.60 45.1 Spanish Carbon Fund Tranche 1/Tranche 2 2005/2008 220/70 22.7 BioCarbon Fund Tranche 1 2004 $ 53.80 51.0 Umbrella Carbon Facility 2006 799.1a 75.0 Netherlands CDM Facility 2002 $ -- 0.0 BioCarbon Fund Tranche 2 2007 $ 38.10 47.0 Netherlands European Carbon Facility 2004 $ -- 0.0 Carbon Fund for Europe 2007 50.00 20.0 Italian Carbon Fund 2004 $ 155.60 30.2 New facilities Forest Carbon Partnership Facility 2008 $ 155.00 3.2 Carbon Partnership Facility Source: World Bank data. Note: -- = not publicly available. a. Includes 224.54 million total participation of Prototype Carbon Fund, Netherlands CDM Facility, Italian Carbon Fund, Danish Carbon Fund, and Spanish Carbon Fund. Carbon funds at the WBG the carbon funds allow for some post-2012 purchase, but The World Bank carbon funds were conceived when the the market is limited.4 Kyoto Protocol was under discussion and the concept of Since 2002, IFC has managed carbon funds on behalf of the carbon markets was being explored. The WBG's carbon Netherlands government. The funds have contracted to buy funds were intended as a "proof of concept" for the car- $135 million in carbon credits from more than 40 projects. bon market and as a pilot device for testing practical ap- In addition, IFC has marketed a carbon delivery guaran- proaches to the novel challenges of defining, creating, and tee, booking guarantees for 2.2 million certified emission trading the carbon commodity, and integrating it with reductions (CERs) in three projects. development goals. Building on a precursor program, Ac- tivities Implemented Jointly, the Bank began consultations MIGA insured a landfill gas project against breach of con- on carbon in 1997. The first carbon fund was approved tract, including governmental failure to honor the CDM- in 1999 and launched in 2000. It was followed by several related Letter of Approval. There has been no a replication more (table 5.1). of this CDM-related insurance provision to date. By May 2010, the World Bank's Carbon Finance Unit (CFU) had $2.358 billion under management and signed Goals and operation of the funds purchase agreements for a total of 228 million tons of CO2 The World Bank carbon funds are trust funds managed by of carbon credits, with total value of $1.84 billion (implying the Bank's CFU. The participants are developed countries an average price of $8.07 per ton). Pipeline projects rep- and companies seeking to acquire carbon credits to fulfill resented, notionally, an additional 53 million tons worth their obligations under the Kyoto Protocol. The CFU so- $208 million. However, not all tons may be delivered be- licits carbon project proposals from the general public and fore Kyoto-driven carbon market provisions expire in 2012; writes purchase agreements for selected projects' emissions reductions. Typically it pays for offsets on delivery, with limited up-front payments. In May 2010, the World Bank's Carbon The CFU and its operations are entirely funded by the par- Finance Unit had $2.358 billion under ticipants, rather than through the Bank's own budget. Al- management and purchase agreements for though CFU staff act as "deal managers," the CFU engages regional Bank staff for project preparation. The CFU has carbon credits worth $1.84 billion. grown large, with 68 staff and 72 consultants. Special Topics | 73 · Ensure that there is a value added from carbon purchase, Catalytic or demonstration impacts were for instance, through the application of Bank safeguards. stressed in the publicly stated goals of the · Achieve greater integration of carbon finance into the Prototype Carbon Fund. mainstream of Bank lending operations. · Reach out to other international finance institutions Catalytic or demonstration impacts were stressed in the and entities. publicly stated goals of the Prototype Carbon Fund (PCF) (World Bank 2001): · Improve pipeline of carbon finance projects. 1. Show how project-based greenhouse gas emission re- duction transactions can promote and contribute to sus- Inherent tensions among the various strate- tainable development and lower the cost of compliance gic and fiduciary goals have been resolved with the Kyoto Protocol. in part through differentiation of funds. 2. Provide the parties to the UNFCCC, the private sec- tor, and other interested parties with an opportunity In addition to these overarching goals, the CFU wanted to to learn by doing in the development of policies, rules, fully use its funds on behalf of participants, to support sus- and business processes for the achievement of emis- tainable development in client countries, and to ensure an sion reductions under Joint Implementation and the equitable division of benefits between participants and host CDM. countries. 3. Demonstrate how the World Bank can work in partner- There are inherent tensions among the various strategic and ship with the public and private sector to mobilize new fiduciary goals: resources for its borrowing member countries while · Demonstration versus volume. Demonstration or pilot it addresses global environmental problems through projects tend to be risky and demanding in preparation. market-based mechanisms. Under UNFCCC regulations, first-of-a-kind projects require large fixed costs in methodology development. In 2005, the Bank's Board endorsed a revised approach to If, as is likely, these demonstration projects are small, carbon finance, with three general objectives: the preparation cost per ton of CO2 will be high. So · "To ensure that carbon finance contributes to sustain- there is a trade-off between demonstration (which ben- able development efits a global community) and maximization of carbon credits (which benefits fund participants and recipient · To assist in building, sustaining, and expanding the in- projects). ternational market for carbon emission reductions · Established versus less-established country locations. This · To further strengthen the capacity of developing coun- is the same kind of trade-off. "Frontier" projects in tries to benefit from the emerging market for emission countries with less CDM experience are costlier to pre- reduction credits" (World Bank 2006). pare but promote the geographic growth of the carbon market to poorer countries. In 2005, the Bank Board endorsed a revised approach that articulated more specific · Stringent versus less-stringent additionality determina- tion. As was recognized from the outset of the CDM, goals for the CFU. both buyers and sellers benefit from lax baselines--that is, funding of projects that are not really additional. But In addition, there were specific goals: additionality is difficult to determine, and screening for additionality has led to burdensome bureaucratic · Continue to align carbon finance more closely with procedures. So for the CFU there is a potential tension poverty alleviation and locally sustainable develop- between setting high standards for additionality dem- ment, ensuring that smaller, poorer countries benefit onstration and maximizing carbon credit transaction from carbon market development. volumes. · Expand the technology frontiers of the carbon market to ensure that carbon finance and carbon trade support · High versus low CO2 price; agent of buyers or sellers. energy infrastructure and technology transfer. In the early years of the PCF, the carbon market was very thin or nonexistent. Without an objective means · Expand the Bank's role in helping developing countries of price discovery, determination of a "fair" price was a develop and market portfolios of carbon assets directly challenge for the PCF. to OECD buyers, as a "lead buyer" that helps develop a project but purchases only a fraction of its emission These conflicting pressures were resolved in part through reductions. differentiation of funds. The PCF was launched as a 74 | Climate Change and the World Bank Group demonstration initiative. The Community Development From the beginning, there was concern about whether the Carbon Fund and the BioCarbon Fund have strong, explicit Bank's carbon funds would spur private sector participation demonstration goals. The other Kyoto Funds are strongly or crowd it out--especially given the Bank's perceived clout. oriented toward helping developed countries secure carbon UNFCCC statistics show that, using registered projects or credits for compliance purpose. The newer initiatives, the tons as a measure, the Bank's market share rapidly dwin- Carbon Partnership Facility and Forest Carbon Partnership dled (figure 5.2). There was a surge of project registrations Facility, return to the pioneering mode in seeking to dem- when the Kyoto Protocol came into force in 2005, so that by onstrate novel kinds of carbon transactions not yet recog- 2005 the World Bank comprised only a small share of the nized under Kyoto. market. That being so, one could question the relevance of the 2005 goal of helping countries to market carbon credits, The new facilities also feature equal representation of donor as a vibrant market was already emerging at the time. and host countries in fund governance. In contrast, earlier funds were governed by a committee of the participants (donors), though in consultation with host countries. The World Bank's market share of CDM projects dwindled rapidly over time as a Catalytic impact on the carbon market vibrant market emerged. The CFU played an important role in catalyzing the emer- gence of the market. Although there had been earlier One way to assess the CFU's demonstration effect on addi- carbon transactions (including Costa Rica's pioneering sale tionality is to compare its relative success in securing CDM of forest carbon credits), observers point to the PCF's early registration. Registration is a measure of a project's quality, mobilization of funds and private sector investors as galva- including its stringency in determining additionality. The nizing the realization that carbon markets were workable. CFU's ratio of problematic to registered projects is smaller The PCF invested heavily in developing monitoring and than that of the CDM at large (table 5.2). verification tools and in the legal apparatus for transact- ing offsets, which were diffused among practitioners in the FIGURE 5.2 World Bank Share of CDM Projects emerging market. and Tons Registered Panel A. Registered projects (log scale) The CFU was important in catalyzing the 1,000 Registered CDM, number emergence of the carbon market and active in developing methodologies for carbon 100 offset measurement. The CFU was active in developing methodologies for car- 10 bon offset measurement, though not uniquely so. As noted in box 5.2, development of a validation methodology is a 1 2004 2005 2006 2007 2008 2009 kind of public good: it cuts the development time, risk, and Registration, year cost for all subsequent projects that use the same technol- ogy. In the first five rounds of the CDM's Methodological Other WBG Panel, the WBG was responsible for 12 of the 44 submitted Panel B: CERs registered methodologies and for 6 of the 22 that were approved. CER by 2020 (tCO2) (millions) 1,200 1,000 Altogether, for large scale energy and transport technologies, 800 the CFU has been involved in the preparation of 45 method- ologies, of which 16 were eventually approved. Those meth- 600 odologies have been used so far in registered energy and 400 transport projects that are expected to produce 137 million 200 tons CO2e, or about 10 percent of the CDM total for these 0 2004 2005 2006 2007 2008 2009 categories. The CFU has also proposed most of the accepted Registration, year forestry methodologies, though there have been few other Other WBG users of these and many small-scale methodologies. Current Source: Calculated by IEG based on IGES Oct 2009, IGES as of work on the Forest Carbon Partnership Facility and Carbon October 2009. Partnership Facility aims at facilitating the development of Note: CDM = Clean Development Mechanism; CER = certified radically new approaches to the carbon market that work at emission reduction. scales much larger than site-specific projects. Special Topics | 75 TABLE 5.2 Comparative Success at Registration Poverty focus of CDM Projects, WBG versus Other As noted, the 2005 objectives called for ensuring that Sponsors and Purchasers smaller, poorer countries benefited from the carbon mar- WBG Other ket. This was inherently difficult, because these countries have very low levels of energy-related emissions to abate, Registered projects, Oct 2009 69 1,765 but their deforestation and agriculture-related emissions Ratio of rejected to registered 0 0.07 are ineligible under Kyoto rules. Ratio of validation negative, terminated or 0.26 0.34 withdrawn to registered This mission was carried out largely by the BioCarbon Fund and Community Development Carbon Fund, Ratio of in process to registered 0.65 1.58 which comprise 8 percent of the overall portfolio. These Source: IEG tabulation, UNEP Risoe center as of October 2009. have placed 39 percent of their purchases in low-income Note: CDM = Clean Development Mechanism; WBG = World Bank Group. countries, as opposed to 0.3 percent for the other carbon funds (table 5.3). However, these demonstration-oriented funds experienced high preparation and supervision The CFU has been more successful in costs, along with implementation problems. Outside the low-income countries, some projects (such as Jepirachi securing CDM registration than other Wind Farm) provided benefits to indigenous or low- non-WBG applicants. income communities. However, like previous observers, this evaluation finds that The BioCarbon Fund and Community the size and timing of carbon credit purchases is far too small, in many cases, to plausibly constitute a make-or-break Development Carbon Fund put 39 percent influence on the decision to undertake a project. Instead, of their purchases in low-income countries; carbon funds constitute a mild additional inducement to the other funds put 0.3 percent into investors that, statistically over the set of projects involved, low-income countries. may have contributed to some additional reductions. TABLE 5.3 Carbon Projects with Signed Purchase Agreements PCF CDCF BioCarbon Fund National + umbrella Total a Total project cost, ($ millions) 975 781 265 5,246 7,266 ERPA volume, million tons CO2e 23 9 7 168 208 Total volume, million tons CO2e 60 17 70 515 663 ERPA tons breakdown by country group (%) China 34 15 12 84 73 JI (transition countries) 13 0 0 5 5 Low income 2 42 35 0 3 Lower middle income 25 41 38 6 11 Upper middle income 26 3 14 5 8 Total 100 100 100 100 100 Total tons breakdown by country group (%) China 55 10 3 81 69 JI (transition countries) 10 0 0 7 7 Low income 1 49 74 0 9 Lower middle income 12 36 21 5 8 Upper middle income 22 5 2 5 7 Total 100 100 100 100 100 Source: World Bank CFU data. Note: CDCF = Community Development Carbon Fund; CO2e = carbon dioxide equivalent; ERPA = emissions reduction purchase agreement; PCF = Prototype Carbon Fund. Totals are not exact due to rounding. a. "Total project cost" refers to the investment cost of establishing the project, not to the purchase amount of carbon offsets. 76 | Climate Change and the World Bank Group Impacts on technology transfer have borne the cost or simply have been reimbursed for it, The 2005 goals called for the CFU to "expand the technol- analogously to the Montreal Protocol6 (Wara and Victor ogy frontiers of the carbon market to ensure that carbon 2008). There was also concern that companies might en- finance and carbon trade supports energy infrastructure ter the refrigerant business merely to profit from HFC-23 and technology transfer." Energy technology constitutes destruction, because destroying the by-product pays more a minority of total CERs under contract. The largest en- than creating the refrigerant. For this reason, UNFCCC ergy subsectors are hydropower at 6 percent of the over- rules were put in place to exclude new entrants from claim- all post-2004 portfolio, landfill gas (6 percent), energy ing emissions reductions.7 efficiency (4 percent), and methane avoidance (3 percent). Biomass, geothermal, and wind are about 1 percent each. Implementation and benefits For most projects, the production of carbon offsets is pro- The degree of emphasis on technology transfer varies. portional to the production of local benefits such as elec- The CFU has had an active role in the diffusion of landfill tricity or regrown forest volume. CDM monitoring reports gas technology. The Jepirachi Wind Farm Project was the allow comparison of planned versus actual issuance of first grid-connected wind farm in Colombia; its operation offsets. Looking at CDM-wide statistics, biogas, methane provided useful lessons on adapting turbine operations to recovery, cement, and transportation have performed far the coastal region's distinctive climate conditions (Pinilla, below expectations; for other technologies, there is wide Rodriguez, and Trujillo 2009). In contrast, hydropower dispersion in planned versus actual performance. was already well established in Chile and China before the Bank's carbon projects arrived in those countries. Chapter 2 discussed the performance of the 12 WBG carbon-financed hydropower projects for which formal CDM project proponents must note technology transfer in monitoring information is available. Information is avail- their project design document. Seres and Haites (2008) re- able also on 12 other WBG carbon projects (table A.6). Two viewed these documents for all CDM projects in the pipe- landfill gas projects have fared very poorly, with issuance line as of June 2008. IEG reviewed the categorization of the yields below 10 percent of planned levels (see box 2.2 on 59 WBG-sponsored projects in their database. Nineteen why landfill gas plans were too optimistic). Four other proj- specifically mentioned technology transfer, a slightly small- ects had yields below 65 percent. The remainder performed er proportion than the 36 percent in the overall sample. Of as designed or better. Internal tracking of BioCarbon Fund the 19, there were 6 landfill gas, 5 wind, 4 energy efficiency, projects shows that reforestation and afforestation are pro- 2 biogas, and 2 industrial gas projects. Eight cases involved ceeding more slowly than anticipated. equipment transfer only, 7 knowledge only, and 4 equip- ment and knowledge. Nepal was the only low-income Biogas, methane recovery, cement, and country in this group. transportation have performed below Almost two-thirds of the CERs under contract were for expectations, and for other technologies Chinese reductions of HFC-23, a highly potent, industrially there is wide dispersion in planned versus generated GHG. HFC-23 is a by-product of refrigerant pro- duction and can be abated at very low cost. This purchase actual performance. generated a large pulse of offsets at a time when there was increasing pressure on the Bank to deliver them. Globally, Integration with Bank activities HFC-23­based offsets accounted for half of all CERs vali- The World Bank has largely not realized synergies between dated in 2006, enabling the creation of a secondary market operations and carbon finance in the Kyoto Funds. Only 10 and allowing CER-short companies to meet immediate car- of the 108 agreements are associated with Bank operations. bon obligations. For the operational part of the Bank, mainstreaming of car- bon finance is seen as too much trouble, because of the time Almost two-thirds of carbon offset purchases and hassle of arranging for project registration. In contrast, four proposed operations under the Carbon Partnership were for Chinese reductions of HFC-23, a Facility are grounded in existing Bank projects. by-product of refrigerant production. Knowledge transfer and capacity building However, HFC-23 offsets provoked concerns. As permit- The carbon funds have supported CF Assist, a capacity- ted by the CDM, the refrigerant companies realized a large building program that advises countries on carbon profit on these transactions, subsequently taxed by China regulation, sponsors a range of training, helps identify car- at a 65 percent rate for development purposes.5 However, bon projects, and sponsors carbon trade fairs and expos. critics say that carbon finance was unnecessary and inef- The annual carbon trade fair has been cited as an impor- ficient for this purpose, suggesting that the industries could tant contribution to information diffusion. Over 2006­09, Special Topics | 77 CF Assist provided training to 6,225 people, more than a relatively small. CFU staff claim that the cachet of involve- quarter in Sub-Saharan Africa, and helped in the prepara- ment with the Bank's carbon fund has attracted investors tion of 300 projects, about half of which were in the Philip- to Bank-supported projects. To the extent that this is true, pines and Uzbekistan. there may be other, less complicated ways to put the WBG's prestige to use. Conclusions The World Bank's CFU has played an important role in The CFU has spent much of its creative opening an entirely new field of environmental finance, energy grappling with the perplexities of popularizing the idea of carbon markets and contributing to the institutional infrastructure of the market. Depend- establishing additionality and dealing with ing on the outcome of international negotiations, this could the CDM apparatus. evolve into a major financial vehicle for supporting devel- opment and climate mitigation. Higher carbon prices will On market exit, the 2005 Strategy statement put it this way: be necessary, though, to effect widespread transformation To the degree that carbon markets thrive, the Bank of energy technologies. will exit from the carbon market. The Bank as trustee of carbon funds will increasingly be able to act as the The 2005 exit strategy did not function "buyer of last resort" and transition from being a `buyer' smoothly; the Bank moved into pilot areas of carbon assets to helping its clients countries position of the carbon market as planned but did themselves as sellers. If risk and uncertainty declines in certain countries and for certain technologies, the not exit established parts of the market. Bank's carbon funds will be no longer needed as the Bank's participation becomes, over time, no longer nec- Constrained by the strictures of the Kyoto Protocol, the essary to help create viable projects and to manage risks CFU has spent much of its creative energy grappling with for buyers and sellers. This, in effect, constitutes a built- the perplexities of establishing additionality and dealing in exit approach for the Bank from the lower-risk part with the CDM apparatus. The additionality and impact of of the carbon market (World Bank 2006). its own actions are mixed. It has contributed to the diffu- This exit strategy has not functioned smoothly. Although sion of some technologies, such as landfill gas, and support- the Bank did indeed move into higher-risk, pilot areas of ed first-of-kind technology investments in some countries. the carbon market, it continued to build up its lower-risk The BioCarbon Fund and the Community Development Kyoto-oriented business after that market was already Carbon Fund have supported novel small-scale, rural, and thriving. It then became clear that the bottleneck was not forestry projects--and found in the process that this is dif- market demand for offsets, but creative, high-leverage ways ficult to do. to use those funds for sustainable development. This would In contrast, much of the CFU's support for energy technol- have suggested greater emphasis on the supply side of the ogies has gone to projects where its financial leverage was market. 78 | Climate Change and the World Bank Group Chapter 6 Photo by Martin Wright/Ashden Awards for sustainable Energy. Used with permission http://www.Ashden Awards.org Conclusions and Recommendations Economic life and GHG emissions have been closely intertwined. This evaluation has traced some of the most important parts of that large and complex knot, assessing the impacts of WBG attempts to disentangle the threads. Table 6.1 summarizes the sectoral findings. This chapter draws conclusions that cross-cut those diverse sectors and presents recommendations. The Congruence of Mitigation and and become mired in controversy uninformed by a consid- Development eration of alternatives. GHG mitigation directly contributes to development and For instance, the WBG's involvement in coal projects has poverty reduction. But it does so by managing long-term been a lightning rod for debate. If there were an interna- risks at the global level. Thus, countries are rightly con- tional agreement that clearly set out how to achieve the cerned about potential trade-offs between long-term, glob- UNFCCC goal of climate stabilization, with assigned roles ally shared benefits and short-term, local benefits. and responsibilities, such a debate would not be necessary. In the existing vacuum, the SFDCC set out criteria that IEG finds that there are many important areas of action that would restrict support to cases that are least cost, that op- combine significant global benefits with high local ones. timize energy efficiency options, and for which no finance- Figure 6.1 plots indicative estimates of the local economic able low-carbon alternative exists. returns and global mitigation returns of some of the inter- A study for Kosovo illustrates a way to apply these criteria. ventions discussed in this evaluation. These estimates must It employs a systemwide model to show that even in the be taken with extreme caution, as they are based on possi- presence of 10/ton of CO2 charges or credits, and taking bly overoptimistic appraisals or on sometimes inconsistent account of the damages from air pollution, it would still be or poorly documented monitoring reports. advantageous for Kosovo to build a large coal plant, while But this evaluation suggests that energy efficiency and BRT closing smaller, older ones. However, it is essential that such offer local ERRs that exceed most development projects, models incorporate the scope for efficiency improvements with GHG as a significant side benefit. At current valua- as an alternative to new power generation and consider tions of carbon reduction, the domestic benefits are much higher levels of carbon payment. larger than the carbon benefits. There was insufficient in- Similarly, assessment of the costs and benefits of large formation to compute returns to forest interventions, but hydropower plants should be made in the context of a there are large deforestation reductions (and therefore large systems model that identifies the advantages and disadvan- emissions reductions) from forest protection projects, es- tages of different sites (as in the Nile Equatorial Lake Stra- pecially where local sustainable use is allowed, and even tegic Environmental Assessment). The model should also greater reductions from the establishment or maintenance consider the social and environmental impacts of alterna- of indigenous forest areas. This suggests a combination of tive modes of power provision. social, biodiversity, and carbon gains from these projects. In the area of forests and land use, forest conservation needs to be accompanied by sustainable agricultural in- A Systems View Is Essential tensification. Increased agricultural profitability by itself As emphasized in Phase I of this evaluation (IEG 2009), a could motivate added deforestation; increased forest pro- systems view is often necessary to assess interventions' im- tection in one area could deflect pressures to another in pacts and to appraise alternatives. A narrow project-level the absence of a compensating supply of food, timber, and focus can fail to account for positive or negative indirect jobs. Likewise, the benefits of improved urban transit can effects, fail to identify important complementary efforts, be quickly eroded as cars expand into freed-up roadways; 80 | Climate Change and the World Bank Group FIGURE 6.1 Economic and Carbon Returns to Investments Panel A 800 700 600 CFLs 500 Project ERR Panel B 400 300 200 Energy efficiency 100 0 0 20 40 60 80 100 120 140 160 Lifetime CO2 emissions / investment cost (kgCO2 per $) T&D Off-grid solar Energy efficiency Hydropower Wind CFL BRT Panel B 160 140 120 CFLs 100 Project ERR SHS 80 BRT 60 T&D Energy efficiency 40 20 Wind Hydropower 0 0 20 40 60 80 100 120 140 Lifetime CO2 emissions / investment cost (kgCO2 per $) Source: IEG. Note: Estimates--all adapted from WBG project documents--are mostly based on ex ante appraisals, could be overly optimistic, and are selected on the basis of availability. They are not produced with consistent methodologies or rigor. See appendix I for a fuller description of data limitations. BRT = bus rapid transit; CFL = compact fluorescent light; ERR = economic rate of return; SHS = solar photovoltaic home system; T&D = transmission and distribution. a comprehensive system of transport demand management · Support favorable policies (discussed at length in is necessary for sustained gains. Phase I of this evaluation with respect to energy pricing and efficiency policies, and reiterated here in connec- Recommendations tion with renewable energy policies). · Be a venture capitalist for technical, financial, and The WBG's resources are small compared with the capital institutional innovations (in short, for fostering tech- cost of providing low-carbon energy to developing and nology transfer) by identifying innovations that have transition economies--to say nothing of broader develop- potentially high returns, using a cycle of piloting and ment needs. To make a difference for the planet, the WBG demonstration to test, adapt, upscale, and diffuse these needs to leverage its resources as far as possible. It can do technologies to wider and wider audiences this through four interlinked lines of action: Conclusions and Recommendations | 81 · Scale up high-impact investments for solutions that to share their experience with others, and the model dif- work. fused rapidly. · Use feedback and learning as a source of value for the In sum, the social networks and information mechanisms WBG and its clients. for demonstration and diffusion should be as important The first point, with associated recommendations, was in project design as the hardware being demonstrated. So, treated in Phase I. The other two are discussed here. too, is the capacity building, which is an integral part of technology transfer. The distinctive features of pilot, dem- Be a venture capitalist of technologies, broadly onstration, and technology transfer projects argue for addi- understood tional support for preparation and supervision in funding In both the public and private spheres, the WBG can sup- and on-call expertise. port the transfer, adaptation, piloting and demonstration of There is a clear case and large scope for WBG involvement innovative technologies, policies, and financial practices-- in technology transfer at the national level. The case is less as it has, for instance, with energy service companies, bus clear for WBG involvement in new technology development rapid transit, solar photovoltaic systems, and agroforestry. at the global level. Candidate technologies would be those As in the case of private investments, these demonstrations where WBG support could make an appreciable difference carry risks but can offer high returns. What counts for cli- to the global market, helping to push costs down. Of special ents, the WBG, and the world, however, is the return on interest are technologies that are beneficial for poor people the portfolio in development, poverty reduction, and GHG and difficult to protect from copying (and therefore attract mitigation. The vision is to prepare a pipeline of develop- little private research and development)--for instance, in ment solutions that can be pursued on a large scale by the agriculture and land use. The proposed new WBG effort WBG and other funders, as climate finance expands. to support concentrated solar power is a plausible area of A first challenge is to accept some prudent risks in pursuit support because a large proportion of the suitable resource of a high-return portfolio. For World Bank clients, this is located in client countries, the technology is suitable for means using GEF or other concessional funds to support manufacture in client countries, and the proposed effort is the earliest and riskiest ventures. Risk is further mitigated large enough to globally push the industry along the cost by starting small and staging successively larger pilots and curve. demonstrations, from test site to province to nation. With Specifically: increasing experience and comfort, the scale expands and the risk declines. For WBG staff and managers, it is impor- · The World Bank and IFC should create incentives and tant that demonstration and pilot projects' objectives be mobilize resources to support effective pilot, demon- framed in terms of learning. For instance, if the project's stration, and technology transfer projects that have a goal is to test the financial viability of an innovation and clear logic of demonstration and diffusion. This will the test shows convincingly that it is not viable, it should be include mobilizing GEF and other concessional funds to mitigate World Bank borrower risk, reshaping in- considered a successful project. centives for staff and managers, providing adequate But a more fundamental change in incentives may be neces- resources for the design and supervision of complex sary. In IFC, for instance, a venture capital team has secured projects, and making available specialized expertise in a niche within IFC's generally conservative and risk-averse technology transfer and procurement through a real or culture. This could be inspirational for the World Bank. virtual technology unit. A second challenge is to design projects effectively for Scale up high-impact investments leaning and diffusion. Pilot or demonstration projects In the process of scaling up, the WBG can work with clients must have a clear notion of what is being demonstrated, to to choose the sectors and instruments that offer the greatest whom, and how; demonstration should be formulated as return on investment. This evaluation finds that the WBG a goal and appropriately measured. For instance, the Re- could place more emphasis on energy efficiency. It is gener- gional Silvopastoral Project used experimental techniques ally cheaper than renewable energy and has fewer potential to rigorously document the private gains from some kinds negative environmental impacts. If coordinated with grid of agroforestry, and industry groups used this information expansion, it can be an important contributor to energy to get government support to scale up. But some projects access. It plays a prominent role in the 2010­30 time-slice failed to recognize that private firms are reluctant to share of most long-term climate stabilization scenarios. And it is proprietary information. So, for instance, the beneficiaries applicable to all countries--it is the poorest who can least of technology licenses in the Efficient Boiler Project did not afford inefficiency. There are many aspects of energy ef- share their boiler designs with competitors. In contrast, pi- ficiency that are in need of further piloting, but there are lot ESCOs in the Energy Conservation Project were obliged ample candidates for scale up. 82 | Climate Change and the World Bank Group Specifically, the WBG could: still for indigenous areas. This suggests compatibility of so- cial and environmental goals. Environmental service pay- · Place greater emphasis on large-scale energy efficiency scale-up, as measured by savings in energy and reduced ments can, in principle, achieve much the same results in need for new power plants. This includes support for forests where protected areas are not an option. However, efficient lighting and for exploration of the scope for payment for environmental services impacts have been di- accelerating the global phase-out of incandescent light luted by limitations of finance and unfocused targeting of bulbs. It includes continued and expanded support for payments. Consequently, IEG recommends the following: reductions in T&D losses. And it includes proactive · The WBG should continue to explore, in the REDD search by IFC for large-scale, catalytic investments in context, ways to finance and promote forest conserva- energy efficiency. There is scope to coordinate World tion and sustainable use, including support for indige- Bank support for demand-side energy efficiency poli- nous forest areas and maintenance of existing protected cies with IFC support for more efficient manufacturing areas. and more efficient products. In terms of WBG instruments-- The WBG should, wherever possible, help clients find cleaner, domestically available alternatives to coal power. · MIGA's upcoming FY 2012­15 Strategy should outline As is clear from the findings here and in Phase I, no-regrets MIGA's role and scope for MIGA to provide political risk alternatives can include energy efficiency, hydropower, and insurance to catalyze long-term financing for renewable natural gas. Moreover, the WBG faces strategic choices in energy projects, building on its expertise and existing staffing and programming between building up expertise portfolio of climate-friendly guarantee projects. in "sunrise" sectors of broad applicability (energy efficiency, · The World Bank should enhance the delivery of its land use management for carbon, energy systems planning) guarantee products by taking actions to improve poli- versus "sunset" sectors (coal power). cies and procedures, eliminate disincentives, increase flexibility, and strengthen skills for the deployment of But should the WBG completely forswear coal? Consider, the products. It should assess the potential for greater as an analogy, the 1991 Forest Strategy's ban on commercial use of partial risk guarantees to mobilize long-term fi- logging in primary moist tropical forests. IEG's review (IEG nancing for renewable energy projects, particularly in 2000) found that the strategy prevented Bank staff from en- the context of feed-in tariffs or other premiums to sup- gaging the sector in proactive ways to improve economic port investment in renewable energy. and environmental management of tropical forests. The · The Carbon Partnership Facility and other post-Kyoto ban was rescinded in the 2002 Strategy, without triggering carbon finance efforts should focus on demonstrat- logging investments. Analogously, it is important that the ing truly catalytic ways to overcome barriers to low- WBG maintain its "honest broker" ability to help countries carbon investments. They should also have clear exit engage in systemwide energy planning. A perverse result strategies. would occur if disengagement from coal had a chilling ef- fect on the WBG's ability to engage in policy and planning Reorient incentives toward learning and feedback dialogue that could promote low-carbon alternatives. The WBG is valued by clients for its knowledge. It produces IEG recommends that: and publishes an impressive array of research, analyses, re- · The WBG should help countries find alternatives to views, and toolkits, drawing in part on its experience. Yet coal power while retaining a rarely used option to sup- by failing to gather feedback from operations, it squanders port it, strictly following existing guidelines (including valuable sources of knowledge--knowledge that could optimal use of energy efficiency opportunities) and improve its products and advice in economically measur- being restricted to cases where there is a compelling able ways--by failing to learn from its project experience: argument for poverty or emissions reductions impacts that would not be achieved without WBG support for · Hundreds of millions of dollars are allocated in guaran- coal power. tees or loans for energy efficiency, without systematic feedback on how and where these interventions are in- The WBG cannot tackle coal substitution alone. Comple- ducing investments. mentary financing for renewable energy, and investments in · CFL distribution projects are being scaled up to multi- technology research and development, are needed from the million bulb efforts without systematic feedback from developed world to provide better options for WBG clients. earlier projects on which interventions are most effec- Protected areas deter tropical deforestation, providing local tive and sustainable.1 environmental benefits and conserving biodiversity as well · Protected area and community forest projects lack sys- as reducing carbon emissions. These impacts are greater tematic monitoring of forest conditions (including car- when sustainable use of the forest is permitted, and greater bon storage and biodiversity), of the welfare of forest Conclusions and Recommendations | 83 residents, and of the post-project financial sustainabil- products, the WBG has an interest in tracking the perfor- ity of management. Failure to document impacts or to mance and sustainability of its projects. At the same time, learn systematically from experience has kept the REDD it can work with public and private clients, when requested, initiative from having a 20-year "head start." to help them implement benchmarking and monitoring Failure to monitor can also lead to skewed incentives. For systems, so as to better define goals and track outcomes. lack of an alternative, the WBG (and to some extent this This becomes increasingly feasible as information costs evaluation) uses dollar volume of commitments to measure plummet; remote sensing resources multiply in number, the organization's orientation toward climate issues. Using sensitivity, and accessibility; and cell phone access becomes dollars as a scorecard was arguably important for the Bonn nearly universal. By wiring projects and sectors to return Commitment in directing attention and resources toward current and reliable information on forest cover, T&D renewable energy and energy efficiency. But ultimately the losses, household access to electricity, and so on, global in- use of an input rather than an outcome measure risks driving novation can be accelerated, and the returns to investment the organization toward inefficient or ineffective activities. enhanced. For instance, efficient lighting programs offer much higher returns--in cost savings and GHG reduction--than invest- The WBG is a natural nexus and starting point for this ment in renewable energy. But a hydro plant offers a much global public good, which should eventually expand to a higher ratio of loan amount to staff preparation cost and is global network of information sharing. This is consistent therefore potentially more attractive in a budget-constrained with the strategic objectives for knowledge creation and ca- organization that scores achievement by dollars loaned. pacity building. The CDM experience with monitoring points to a way Specific recommendations include the following: forward. Unlike most other development projects, carbon · Measure projects' economic and environmental impact projects are required to monitor their outputs. (Otherwise during execution and after closure and aggregate this they do not get paid.) Calculating carbon offset production information for analysis. For instance, renewable en- requires stipulating a "business as usual" emissions level. ergy projects should monitor capacity utilization, and This is difficult and has often been contentious. But it also energy efficiency projects should monitor energy sav- requires measuring the project's actual performance--for ings. This may require the use of concessional funds to instance, how many hours a wind turbine operates, or how defray additional costs of monitoring by staff, clients, and project proponents. many CFLs are distributed and installed. This generates timely, publically available, comparable information. · Link these measures to a results framework that shifts the SFDCC toward a focus on outputs such as power Just as private sector firms derive value from monitoring produced, power access, forest cover, and transit share the performance of and customer satisfaction with their of urban trips, rather than money spent. TABLE 6.1 Summary of Sectoral Findings Sector Intervention Direct impacts Leverage and diffusion Monitoring needs and issues impacts Renewable Lending Longer loan terms significantly What are the economic and carbon energy -- on improve bankability. impacts? grid Better upfront planning has What are the reasons for over or been important to assure better underperformance in capacity outcomes in hydropower. utilization? Hydropower has generally higher returns than wind power. Guarantees Guarantees against breach of contract could significantly improve bankability. 84 | Climate Change and the World Bank Group TABLE 6.1 Summary of Sectoral Findings (continued) Sector Intervention Direct impacts Leverage and diffusion Monitoring needs and issues impacts Carbon finance Carbon finance has little impact Thirty-five percent of Carbon project monitoring on bankability of wind and WBG carbon finance provides valuable feedback. For hydropower projects. Moreover, projects claimed some example, poor performance of the stated rationales for the use degree of technology landfill gas projects was detected of carbon funds often refer to transfer. and corrective actions taken. GEF barriers that are best addressed or other funds could enhance this with greater leverage through de facto monitoring system. policy reform (such as unreliable power purchase agreements) rather than at the project level. Carbon finance has significant impact on bankability of projects that reduce methane emissions. Performance of carbon projects has often been poor (lower production of permits than expected). Resource Siting makes a huge difference How useful are surveys? surveys in economic returns because of Can remote sensing provide spatial variation in wind, water, continually updated and improved geothermal, and so forth. There information on wind and water have been modest investments resources? by the Bank in resource surveys. Impact not evaluated. Policy reform Standardized small What is the fiscal impact and power purchase agree- investment response of feed-in ments have reduced the tariffs or renewable portfolio costs of entry of small standards? hydropower producers in Sri Lanka, with significant cumulative impact. Regulatory reforms in China, Mexico, and Turkey have catalyzed wind investments. Solar home Subsidies Subsidies increase household Quality-contingent sub- Longevity and utilization of the photovoltaics demand; impact not well sidies for manufacturers solar home systems measured. boost competition and Manufacturing quality quality, and reduce price Market penetration at the national level. Geographical extent of the electric No global impact on grid and connection rate within the price; scale was too small. grid (to assess market size for photo- voltaic); price elasticity of demand. Microfinance Specialized microfinance institutions were able to support SHS buyers in Bangladesh and Sri Lanka. (Continued) Conclusions and Recommendations | 85 TABLE 6.1 Summary of Sectoral Findings (continued) Sector Intervention Direct impacts Leverage and diffusion Monitoring needs and issues impacts Energy Subsidized Guarantees facilitate energy Guarantees were not, Pool information on subproject efficiency guarantees efficiency investment by SMEs as assumed, catalytic in performance to identify promising for financial with poor credit, in poorly inducing diffusion of en- market niches. intermediaries' developed credit markets, or for ergy efficiency lending. energy ef- housing coops in East Europe; ficiency lending but are superfluous for larger to industry, firms or for banks' trusted clients. commercial, and residential sector Technical assis- In China, technical assistance Some diffusion of energy tance for banks helped Industrial Bank gain efficiency practice among market share; in Russia, may Russian banks. have helped banks to convince customers to borrow for energy efficiency. Energy efficiency appraisal tool was useful to recipient banks. On-lending Useful in countries with poorly through finan- developed credit markets. cial intermedi- aries ESCO demon- High leverage in China: stration demonstration was scaled up. But ESCOs are small and are themselves credit- constrained, limiting scalability. Public sector re- In Hungary, facilitated na- form to permit tionwide investments by ESCO contracts municipalities in efficient heating and lighting. Direct IFC in- Screening existing clients for en- vestments in en- ergy efficiency opportunities has ergy efficiency identified small loans with low absolute levels of CO2 reduction and is likely not cost-effective in staff time. Mainstream lending is usually too late in the project cycle to affect technology choice. However IFC may be able to finance some credit-constrained large firms with high absolute levels of energy and GHG savings. 86 | Climate Change and the World Bank Group TABLE 6.1 Summary of Sectoral Findings (continued) Sector Intervention Direct impacts Leverage and diffusion Monitoring needs and issues impacts Efficient lighting Apparent very high returns Potentially very high Operations research on impact of to compact fluorescent light demonstration and alternative promotion strategies distribution diffusion effects; poorly on adoption and diffusion of CFLs; documented. surveys on CFL usage. Building and Evaluated in IEG (2009) With supportive enforce- Survey info on building energy appliance ef- ment and supply of consumption, both existing stock ficiency and ef- efficient materials, equip- and new construction. ficiency policies ment, and techniques, has had large cata- lytic impact in developed countries. T&D loss High returns to engineering- Institutional and legal Real time, spatially disaggregated reduction based reductions in technical reform can promote information on technical and non- losses. reduction of nontechnical technical losses; better understand- losses. ing of who benefits from nontechni- cal losses. Energy pricing Evaluated in IEG (2009). Some Very high leverage in pro- Information on levels and trends reform examples of progress, for moting energy efficiency in energy pricing; industry and example, Vietnam. and making renewable household surveys on incidence of energy more competitive. subsidies, burden of energy costs. Urban transit Bus Rapid Strong returns in health, conges- Bogota and Mexico City Information on ridership, auto ver- Transit tion reduction, fuel savings; projects have had dem- sus transport share, congestion, air modest CO2 reductions. onstration impact. pollution levels in transport corri- dors; evaluation of the effectiveness of vehicle scrappage programs. Forests Protected areas Strict protected areas reduce Info is lacking on protected area deforestation on average; reduc- impacts on biodiversity and local tions are higher for protected livelihoods and on protected area areas that allow sustainable use, management practices. and higher still for indigenous areas. Afforestation/ There have been implementa- Silvopastoral Project has Better documentation of the Reforestation/ tion problems in most afforesta- demonstration effect, impacts of reforestation and regeneration tion/reforestation was scaled up. afforestation on biomass, BioCarbon Fund projects. Small hydrology, biodiversity, and project scale makes these livelihoods. uneconomic; low GHG impact; trade-offs. Payment for Impact depends on the effi- Better information on behavior of environmental ciency with which payments are recipients versus nonrecipients. services sized and targeted at properties at risk for deforestation. Support for use Chain-of-custody tracing is Combination of NGO Impacts of certification schemes of sustainability expensive and has little impact pressure on buyers, and (timber, palm oil, etc) remain un- certification by in IFC-supported investments government monitoring known. Better information required agribusinesses in Brazil. may have had significant on relative prices of certified versus impact on reducing uncertified goods. Brazilian deforestation. (Continued) Conclusions and Recommendations | 87 TABLE 6.1 Summary of Sectoral Findings (continued) Sector Intervention Direct impacts Leverage and diffusion Monitoring needs and issues impacts Technology Venture capital Has failed when investments A new IFC approach-- transfer investments had multiple handicaps: invest in proven entre- in early stage noncommercial technologies, preneurs and globally clean technol- inexperienced entrepreneurs, proven technologies-- ogy companies uninterested markets. could be high leverage. Direct IPR Had modest effects in efficient Private companies did transfer boilers project. not share transferred technologies. Grants for R&D Had encouraging Monitor results of such projects. results in REDP project. Industry-wide support led to competition, price reductions. Demonstration Has been successful where Incorporate good monitoring into of new tech- there was a clear purpose for projects with pilot/demonstration nologies demonstration and target purposes; monitor diffusion if that audience and where adoption is the goal. was profitable: for example, introduction of ESCOs in China; Regional Silvopastoral program in Colombia. Has failed or bogged down where purpose was not clear, for example, 1990s era investments in concentrated solar power; or when there was an expectation that private companies would share proprietary technologies. Source: IEG. Note: CFL = compact fluorescent light bulb; ESCO = energy service company; GEF = Global Environment Fund; GHG = greenhouse gas; IFC = International Finance Corporation; IPR = intellectual property rights; NGO = nongovernmental organization; R&D = research and development; REDP = China's Renewable Energy Development Project; SHS = solar home voltaic system; SME = small and medium enterprise; T&D = transmission and distribution; WBG = World Bank Group. 88 | Climate Change and the World Bank Group APPENDIX A Renewable Energy Tables and Figures TABLE A.1 World Bank Group Commitments to 2003­08 Low-Carbon Projects (by source) Project type IBRD IDA IFC MIGA Guarantees GEF-World IFC-GEF Carbon Total Bank finance Off-grid and mini-grid renewables Direct investments including cook-stoves 86.2 141.5 165.4 1.8 0.0 273.1 0.0 380.1 515.0 and household biomass/biogas Via funds that support subprojects 3.5 199.5 0.0 0.0 0.0 0.0 0.0 0.0 235.4 Grid renewable energy Direct investments in RE 801.1 634.7 513.9 313.8 227.5 59.2 0.0 34.7 3,054.8 Via financial intermediaries 202.0 0.0 0.0 0.0 0.0 0.0 0.0 65.7 212.6 Energy efficiency Transmission and distribution loss 188.7 247.6 144.4 39.6 0.0 32.4 0.0 0.0 632.8 reduction End user energy efficiency 119.7 21.4 199.7 0.0 0.0 10.5 0.0 0.0 422.1 Combined heat and power and/or district 340.7 51.0 29.5 0.0 0.0 72.9 0.0 42.0 477.4 heating Supply-side energy efficiency 336.0 8.3 117.6 0.0 0.0 22.9 0.0 3.3 527.7 Energy efficiency investments via 314.0 3.8 214.1 0.0 0.0 10.3 165.1 20.6 811.8 financial intermediaries Other DPL, other investment programs and 192.4 74.7 389.3 0.0 0.0 3.9 0.0 93.0 753.3 technical assistance Combinations of RE and energy 0.0 5.0 227.1 0.0 0.0 18.0 77.0 38.2 335.3 efficiency, or unspecified, via financial intermediaries Total 2,584.3 1,387.4 2,000.8 355.2 227.5 503.0 242.1 677.7 7,978.1 Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG AAA and IFC advisory services, and "special financing." DPL = Development Policy Lending/Loan; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency; RE = renewable energy. Appendix A: Renewable Energy Tables and Figures | 89 TABLE A.2 Financial Rates of Return on IFC Infrastructure Investments Secondary and tertiary High risk Medium risk Low risk sector No. Max Min Avg No. Max Min Avg No. Max Min Avg FRR % FRR % FRR % FRR % FRR % FRR % FRR % FRR % FRR % Large hydro 0 0 4 34.0 10.4 16.5 Small hydro (<10 MW) 0 0 2 13.1 12.6 12.9 Wind power 1 0 5 9.9 8.0 8.6 Thermal power generation 6 18.0 7.2 12.3 Coal 0 0 3 14.0 7.2 11.6 Gas 1 1 3 18.0 10.6 13.1 All infrastructure (including 27 35.0 14.0 20.6 32 33.7 10.0 18.4 51 36.0 7.2 15.7 sectors not listed above) Source: IEG. Note: FRR = financial rate of return. TABLE A.3 Grid-Based Hydropower Investments, 2003­08 ($millions) Blended Traditional financing New financing activities IBRD -GEF-carbon finance IDA -GEF-carbon finance GEF standalone, includ- IFC-managed carbon Total Total Total World Bank carbon traditional blended new Total IBRD standalone IDA standalone financing financing financing ing med size Guarantees finance finance blend blend IFC All hydropower, 453.0 849.4 528.5 358.7 2,189.7 72.9 72.9 0.4 145.5 33.7 179.6 2,442.2 grid connected Large hydropower, 203.1 394.9 190.9 789.0 6.0 6.0 794.9 with reservoir (including rehabilitation) Large hydropower, 249.9 540.4 213.6 351.6 1,355.5 72.9 72.9 129.5 28.7 158.2 1,586.6 run-of-river Small hydropower 202.0 28.0 7.1 237.1 0.4 4.1 14.0 18.5 255.7 Mini/micro/pico 0.4 5.9 6.4 6.4 hydropower Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG AAA and IFC advisory services, and "special financing." GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation. 90 | Climate Change and the World Bank Group TABLE A.4 Grid-Based Biomass/Biogass/Landfill Gas/Methane Commitments 2003­08 by Technology and Product Line/Funding Source Blended Traditional financing New financing activities GEF standalone, including IBRD -GEF-carbon finance IDA -GEF-carbon finance IFC-managed carbon Total Total World Bank carbon traditional Total new blended Total IBRD standalone financing IDA standalone Guarantees financing financing med size finance finance blend blend IFC Biogas 2.8 2.8 40.2 40.2 5.8 4.2 10.0 53.0 Biomass 39.7 39.7 20.0 20.0 48.9 21.0 69.9 129.6 Municipal 18.4 18.4 18.4 landfill Biomass 28.0 28.0 0.0 28.0 unknown Source: IEG. Note: Unit of analysis is the project component. Excludes freestanding WBG AAA and IFC advisory services, and "special financing." GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation. FIGURE A.1 Comparative Return on Equity and Economic Rate of Return for Different Technologies 0.45 0.4 0.35 0.3 Return on equity 0.25 0.2 0.15 0.1 0.05 0 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 Economic rate of return Hydro Wind Source: IEG, based on project documents. Note: This comparative analysis does not represent actual or predicted performance of the projects, because of the following standardized as- sumptions: lifetime 30 years; tariff 6 cents/kWh; toll to grid 0.2 cent/kWh; no carbon finance or other incentives. Financing structure: interest rate 8 percent; grace period 2 years; maturity 10+ grace years; debt/equity 2.3; no local inflation; no hard currency inflation; stable exchange rate. Income tax rate 33 percent, capital gain tax rate 10 percent, VAT 18 percent; depreciation 10 years, 95 percent of total value at 10 percent rate. Appendix A: Renewable Energy Tables and Figures | 91 FIGURE A.2 Capacity versus Planned Capacity FIGURE A.3 Return on Equity as a Function of Utilization, CDM Hydropower Plants Electricity Tariff 120 0.8 Capacity factor, as planned (%) 0.7 100 0.6 0.5 80 0.4 ROE 0.3 60 0.2 40 0.1 0 20 0 0.02 0.04 0.06 0.08 0.1 0.12 ­0.1 Tariff ($ per kWh) 0 0 50 100 150 200 250 300 Medium hydro Large hydro Wind Capacity (MW) Source: IEG. Source: UNEP Risoe CDM database. Note: These are hypothetical returns using a standardized set of as- Note: CDM = Clean Development Mechanism; MW = megawatt. sumptions. kWh = kilowatt hour; ROE = return on equity. TABLE A.5 Key Factors in Hydropower Project Performance, with Outcomes and Lessons from Project Reviews Negative examples Positive examples Resettlement Latin America: One factor that led to unsatisfactory project East Asia: Ertan resettlement program appears to and ratings was that the resettlement and environmental have been successful overall and has given satisfac- environmental management program were only partly implemented, with tory results in terms of restoration or improvement issues major issues remaining unaddressed. In addition, poor of living standards and better access to infrastructure oversight of the areas to be flooded resulted in invasion of and other services for the bulk of the affected popula- families seeking resettlement compensation. tion. A 10-year post-project rehabilitation levy of on Government was slow in performing land acquisitions and the project company's electricity sales provided funds housing construction, adding to pressures that slowed for environmental protection around the reservoir, down project. infrastructure maintenance, infrastructure improve- ments, and income-boosting activities for the resettle- Africa: Absence of information disclosure and communica- ment villages. This is a useful instrument to help ensure tions developed in a sustainable manner. project sustainability, because it eliminates uncertainty East Asia: Until 2003, resettlement was carried out inad- about funding from budgetary sources. The use of an equately because of lack of knowledge or understanding at international environmental and resettlement panel the provincial level of the Resettlement Action Plan, some proved its worth. provincial offices' delayed approval of the compensation East Asia: High-quality up-front assessment ensured guidelines, and disparity between the compensation rates the project success--the highly satisfactory outcome of in the Resettlement Action Plan and that which the prov- resettling more than 74,000 people. inces approved. In 2003, the situation was resolved with Plan-based compensation agreements being signed with all East Asia: An independent review rated resettlement the households. performance highly -- "the best resettlement option was deduced from the country's past resettlement experience. The women's role in resettlement is empha- sized." An international panel of experts on environment and resettlement has conducted 12 meetings and helped ensure effective management of adverse envi- ronmental impacts, by overseeing implementation of a systematic environmental management plan. (continued) 92 | Climate Change and the World Bank Group TABLE A.5 (continued) Negative examples Positive examples Project design Low ratings in some unsatisfactory projects in Africa were East Asia: (a) The Bank assisted the utility in optimizing issues: Policy caused by weakness or absence of up-front detailed assess- its investment program, particularly at the time when context ment. the country had been severely affected by economic East Asia: Lack of sufficient counterpart funding from the and financial crises. The utility modified its power provincial government delayed the implementation of the development plans, deferred many independent power irrigation works and the resettlement program. Resettle- producer projects, reduced operating costs, and scaled ment problems were compounded by the absence of a down its investment Program. (b) The utility adopted provincial resettlement office (as has usually existed in sound policies and strategies for environmental and other Chinese resettlement cases) and the Bank's initial social management and defined a framework and overestimation of Hainan's institutional capacity. As a result, guidelines for environmental assessment of power de- the borrower has not yet achieved the project's resettle- velopment plans. (c) The utility implemented the recom- ment objectives. mendations of a study on economic regulation, tariffs, and development of bulk supply after the economic/ Africa: Failure to define water rights at an early stage of financial crises had faded out; these include efficiency development of a hydroelectric project created water use, considerations in determining revenue targets, trans- conservation, and environmental problems that were dif- parent mechanisms for transfer of subsidies, and the ficult to solve during project construction and introduced restructuring of the consumer billing system to provide implementation delays. for accounting of transmission and distribution charges. Africa: Lack of government ownership led to low perfor- (d) The Bank acted as a facilitator and played an informal mance. Weak government commitment to implement role in advising the government on the reform of the -- (unbundling generation, transmission and distribution, power sector, especially while the country experienced transparent subsidies) and low capacity of utilities to lead the economic and financial crises. During this period the sector reforms could be the main reason for failure. Bank, through Energy Sector Management Assistance South Asia: At the time of project appraisal, neither the Programme, had a more formal participation in an government nor the Bank had a clear vision of how power independent review of the Power Pool and Electricity sector reform would be carried out during the life of the Supply Industry Reform Study conducted by National project. Hence, in the two years before the project closing, Energy Policy Office as reforms started to take off in some states, the project A Southeast Asia project was built on the outcomes of was buffeted by unanticipated and sometimes ad hoc state the first renewable energy project; by then the general regulatory changes. With one exception, states did not ad- strategies for renewable energy had been coordinated dress the renewable energy dimension of the sector. to the project activities. Project design: East Asia: The bank instability in the lower reservoir and the Geological excessive local ground settlement in the upper reservoir study were all unforeseen and delayed work progress. Adequate risk coverage/insurance products could be built in the busi- ness model to mitigate such risks for both the developers and lenders. Development Africa: Project delay was caused by the absence of Renewable Energy Project: One of the most crucial of adequate coordination between the project implementation plans issues and/or potential barriers in the scaling up power and counterparts on provision of the energy delivery from development of large and small hydropower plants is evacuation the plant to the consumers. the interconnection between the plant and the nearest infrastructure grid point to maximize the power usage. Providing grid extension up to the plants based on an integrated basin development approach is one solution which should be considered when encouraging hydropower development. Source: IEG, based on ICR reviews and PPARs. Appendix A: Renewable Energy Tables and Figures | 93 TABLE A.6 CER Yield Rate, Non-Hydro CDM Projects Host party WBG unit Type of project Supplemental information Scale CER issuance rate Brazil Bank Methane recovery and utilization Landfill gas flaring Large 0.02866 Argentina IFC Methane recovery and utilization Landfill gas recovery and utilization Large 0.09123 Indonesia PCF Cement Alternative fuels Large 0.21724 Philippines Bank Wind power 1.65 MW x 20units Large 0.48997 India Bank Energy efficiency Factory Small 0.6457 India IFC Wind power 58.2 MW Large 0.82788 China Bank HFC reduction Large 0.9857 China Bank HFC reduction Large 1.03266 South Africa IFC N2O decomposition Large 1.05671 Columbia PCF Wind power 1.3 MW x 15units Large 1.07518 India IFC Wind power 0.6 MW x 28units Large 1.08339 Brazil Bank Biomass Bagasse Large 1.13683 Source: IEG. Note: CDM = Clean Development Mechanism; CER = certified emission reduction; HFC = Hydrofluorocarbon; IFC = International Finance Corporation; MW = megawatt; PCF = Prototype Carbon Fund; WBG = World Bank Group. TABLE A.7 Solar Projects Project Total project Project dates costsa ($ million) Initiation Completion Argentina Renewable Energy in the Rural Market 79.10 12/09/1999 12/31/2011 Bangladesh Rural Electrification and Renewable Energy Development 25.34 12/31/2002 12/31/2012 Bolivia Decentralized Energy, ICT for Rural Transformation 13.93 12/18/2003 11/27/2009 China Renewable Energy Development 155.90 12/12/2001 06/30/2008 India Renewable Resources Development 23.80 04/06/1993 12/31/2001 Mongolia Renewable Energy and Rural Access 9.76 05/04/2007 12/31/2011 Pacific Islands Regional Sustainable Energy Finance 5.00 06/21/1007 12/31/2017 Philippines Rural Power 11.90 05/06/2004 12/31/2012 Senegal Electricity Services for Rural Areasa 18.00 06/30/2005 12/31/2012 Sri Lanka Energy Services Delivery 9.20 2/20/1997 12/31/2002 Sri Lanka Renewable Energy for Rural Economic Development 28.30 10/07/2002 06/30/2011 Uganda Energy for Rural Transformation 9.80 07/30/2002 02/28/2009 Source: World Bank. a. Costs/financing are specific to solar component except Senegal Electricity Services of Rural Areas Project. 94 | Climate Change and the World Bank Group FIGURE A.4 Growth in Small Power Producers A. Hydro/biomass capacity expansion (< 10 MW), Sri Lanka 35 Capacity additions (MW) 30 25 20 15 10 5 0 85 86 88 89 90 92 93 95 96 97 98 99 00 01 02 03 04 05 06 08 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 Year Total capacity additions under 10 MW B. Gas capacity expansion (< 90 MW), Thailand 600 500 Capacity additions (MW) 400 300 200 100 0 19 5 19 6 19 7 19 8 19 9 19 0 19 1 19 2 19 3 19 4 19 5 96 19 7 19 8 20 9 20 0 20 1 20 2 20 3 20 4 05 20 6 07 08 8 8 8 8 8 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 19 19 20 20 Year Total capacity added from plants under 90 MW C. Renewable energy expansion (<50 MW), Andhra Pradesh 160 140 Capacity additions (MW) 120 100 80 60 40 20 0 19 5 19 6 19 7 19 8 19 9 90 19 1 19 2 19 3 94 19 5 19 6 19 7 19 8 20 9 20 0 20 1 02 20 3 20 4 20 5 20 6 20 7 08 8 8 8 8 8 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 19 19 19 20 Year Total new RE capacity from plants under 50 MW (continued) Appendix A: Renewable Energy Tables and Figures | 95 FIGURE A.4 Growth in Small Power Producers (continued) D. Renewable energy expansion (<50 MW), India: Tamil Nadu 250 200 Capacity additions (MW) 150 100 50 0 19 5 19 6 19 7 19 8 89 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 99 20 0 20 1 20 2 20 3 20 4 05 20 6 20 7 08 8 8 8 8 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 19 19 20 20 Year Total new RE capacity from plants under 50 MW E. Renewable energy expansion (< 50 MW), India excluding Tamil Nadu and Andhra Pradesh 900 800 Capacity additions (MW) 700 600 500 400 300 200 100 0 19 5 19 6 87 19 8 19 9 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 98 20 9 00 20 1 02 20 3 20 4 20 5 06 20 7 08 8 8 8 8 9 9 9 9 9 9 9 9 9 0 0 0 0 0 19 19 19 20 20 20 Year Total new RE capacity from plants under 50 MW F. Renewable energy expansion (< 50 MW), developing countries excluding India, Indonesia, Sri Lanka, and Thailand 8000 7000 Capacity additions (MW) 6000 5000 4000 3000 2000 1000 0 08 19 5 19 6 19 7 19 8 89 19 0 19 1 19 2 19 3 19 4 19 5 19 6 19 7 19 8 20 9 20 0 20 1 02 20 3 04 20 5 06 20 7 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 19 19 20 20 20 Year Total new RE capacity from plants under 50 MW Source: Platts World Electric Power Plant database. Note: Panel A--SPP initiation 1998; Panel B--SPP initiation 1992; Panel C--SPP initiation 1995; Panel D--SPP initiation 1995. 96 | Climate Change and the World Bank Group APPENDIX B World Bank Experience with Renewable Energy Surveys Survey projects aim to reduce barriers to renewable energy components typically constitute a minor part of a much development by developing or collating spatial and tempo- larger energy sector project--the component containing ral data on wind speeds, water flows, sunshine hours, geo- the resource survey typically constitutes 1­5 percent of the thermal potential, or biomass availability. These data, made total project spending, and this component often includes freely available, enable investors to select specific sites for technical assistance or capacity building that is not related the more intensive local surveys needed to instigate specific to the resource survey. projects. Resource-based site selection can make a huge dif- International Development Association/International Bank ference to project viability. For instance, an International for Reconstruction and Development or Global Environ- Finance Corporation-financed geothermal plant performed ment Facility (GEF) funding constitutes most or all of the poorly because the steam resource was much weaker than resource survey financing. GEF financing has played a ma- expected. Exploration constitutes a large proportion of geo- jor role in all the surveys save Morocco. Of the surveys listed thermal energy costs, so a tool that increases the yield rate here, only the Republic of Yemen and Armenia are complete. of exploratory drilling could boost profitability. Data on survey impacts are not available. The Bank has undertaken relatively few projects with sig- nificant renewable resource survey components. Survey TABLE B.1 World Bank and GEF Funding of Renewable Energy Resource Survey Projects Year Country Resources Scale Component Bank component cost contribution ($ millions) ($ millions) 2005 Yemen, Rep. of Wind National 1.00 1.00 2006 Mexico Wind National 4.27 3.90 2006 Lao PDR Biomass, micro-hydro National 1.70 1.70 2006 Armenia Hydro, wind, solar, biomass, geothermal National 3.65 3.00 2007 South Africa Solar, biomass, hydro. National 0.78 0.45 2008 Morocco Wind National 1.00 1.00 2008 Mexico Wind, hydro Unavailable 12.46 7.94 2008 Ghana Wind, biomass, micro-hydro National (biomass, hydro), 1.96 1.74 3 specific sites (wind) Total 25.82 20.73 Source: IEG review of project documents. Appendix B: World Bank Experience with Renewable Energy Surveys | 97 APPENDIX C Energy Efficiency: Supplementary Information TABLE C.1 Transmission and Distribution Projects with Low-Carbon Components, 2003­08 Country/Region Year Design features Expected outcomes Primary goal WBG commitment Commercial Technical loss NPV ERR ($ millions) loss reduction? reduction (percent ($ millions) (%) (T&D components of generation) 20 (reduced from Tajikistan 2003 26.4 30 to 10) -- -- Philippines 2004 Loss reduction 5 Yes -- -- Moldova 2004 Loss reduction 22 Yes 5 69.2 39.3 Sub-Saharan Africa 2005 Interconnection/trading 75 No 2 -- 48 Benin 2005 Access expansion 52.2 No -- 65 35 Tajikistan 2005 Commercial loss reduction 8.5 Yes -- -- -- Albania 2005 Loss reduction 41 No -- -- 46 Senegal 2005 Access expansion 15.7 Yes 2 (reduced from -- -- 17.5 to 15.5) Vietnam 2005 Access expansion 225 Yes -- 68.5 16.5 Sierra Leone 2005 Loss reduction 22 Yes -- -- 21 Turkey 2006 Capacity increase 150 No -- -- 15 Montenegro 2006 Capacity, outage reduction 2.1 No -- -- 13 Guinea 2006 Loss reduction 5.9 Yes -- -- -- Bosnia and Herzegovina 2006 Loss reduction 43 No -- -- 19 Sub-Saharan Africa 2006 Interconnection/trading 55 No 3 (reduced from -- -- 5 to 2) Lao PDR 2006 Access expansion 6 Yes 5 (reduced from 281 687 22 to 17) Yemen, Rep. 2006 Loss reduction 48 Yes 5.5 (reduced from 33 -- 25 to 19.5) Tajikistan 2007 Loss reduction 1 Yes 5 (reduced from -- -- 18.7 to13.7) (ex post) Madagascar 2007 Loss reduction 2.9 Yes -- -- -- Timor-Leste 2007 Loss reduction 1.6 Yes -- -- -- Nigeria 2008 Loss reduction 15 Yes 10 -- -- Guinea 2008 Loss reduction 7.4 yes -- 2.29 25 Dominican Republic 2008 Loss reduction 42 Yes 8 (reduced from 428 73 15 to 7) Ghana 2008 Loss reduction 77.4 Yes -- -- -- Burundi 2008 Loss reduction 22 Yes 5.4 (reduced from -- -- 24.4 to 19) Zambia 2008 Access expansion 21 No 9 (reduced from 69 45 23 to 14) Tajikistan 2008 Loss reduction 2.3 No -- -- -- Brazil 2008 25 -- -- -- Source: IEG component database. IEG has included some components not labeled as `low carbon' in CEIF database. Note: ERR = economic rate of return; NPV = net present value; T&D = transmission and distribution; WBG = World Bank Group. -- = information not available. 98 | Climate Change and the World Bank Group TABLE C.2 Completed Low-Carbon Energy Efficiency Projects with Transmission and Distribution Main Focus, 1999­2009 Year Country T&D Loss reduction Loss reduction impacts Expected economic Ex post economic project targets effects effects cost ($million) 1999 India (Andhra 260 Total losses Total losses ERR 37.6% ERR 41.8% Pradesh) 33% 26.4% 38% 26.5% 1999 Armenia 90 Total losses Total losses ERR 24%, NPV NPV $1,547m 33% 18% 33% 16.5% $106m 1999 Azerbaijan 9.4 1999 Thailand 943 ERR 13% (includes generation component) 1999 Yemen, Rep. of 19.4 Total losses Total losses EIRR 10.5% (includes 39.5% 31% 39.5% 33% generation) 2000 Kazakhstan 367 Transmission losses Transmission losses EIRR 24.5%, NPV EIRR 24.1%, NPV 6% 5% 6% 6.2% $146m $142m 2000 Uttar Pradesh, India 201 Technical losses Technical losses 29% ERR 18% ERR (changed 41% 30.4% 41% 32.8% WTP assumption) 2001 Bosnia and 36 Improve revenue Improve rev- Herzegovina collection, 97/89/87 enue collection to to 99/100/96 (%) 99/99/99 (%) 2001 India 1,465 17.2% ERR (sector) 15.9% (sector, using comparable assumptions) 2001 Rajasthan, India 221 Distribution losses Rural feeders losses 35% ERR (sector) ERR 22.39% 38% 12% reduced 62.2% 21.1% (sector), ERR 18.1% (transmission), 38.6% (distribution) 2002 Albania 40 Losses 41.8% to 41% 2002 Nigeria 122 Technical losses Technical losses 29.2%, $76.9m 11% 8% 11% 9.5% 2007 Tajikistan Losses kept Losses reduced Customer payment Customer payment below 19% 18.7 13.7% increased to 54% increased to 718% Source: World Bank. Note: Technical losses 33% 26.4% means that losses were reduced from 33% to 26.4%. This is not an exhaustive list of all completed projects since 1999 that had transmission and distribution focus. ERR = economic rate of return; NPV = net present value. Appendix C: Energy Efficiency: Supplementary Information | 99 FIGURE C.1 Natural Gas Prices for Industrial Users (Euros/GJ), 1998­2009 14 12 10 8 Price () 6 4 2 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year Bulgaria Estonia Hungary Slovak Rep. Czech Republic Latvia Poland United Kingdom Germany (excl. ex-German Lithuania Romania Croatia Dem. Rep. from 1991) Source: Eurostat 2010. Note: Prices are before taxes. GJ = gigajoules. TABLE C.3 Completed CFL Project Impacts Country, Number of Ex ante expectations Ex post direct impact approval year CFL bulbs Thailand, 1993 900,000 238-MW peak reduction, 1,427 GWh per yeara 566-MW peak reduction, 3,140 GWh per yeara Jamaica, 1994 100,000 1-MW reduction, 4.4 GWh per year, 5,200 tons CO2 1.7-MW reduction, 5.5-GWh savings, 6,500 tons CO2 Mexico, 1994 1,700,000 Peak demand reduction 100 MW, Energy savings Peak demand reduction 34 MW, energy savings 100 MW, 1,014 GWh 978 GWh Poland, 1994 1,218,000 519-GWh overall savings, 198,000 tons CO2 725 GWh overall savings, 206,000 tons CO2 (short term) Various (ELI), 3,364-GWh energy savings, 1.8 million tons CO2 2,590 GWh energy savings, 1.9 million tons CO2 2000 Uganda, 2001 800,000 20-MW peak demand reduction, 53,000 tons of 20-MW reduction carbon per year Vietnam, 2003 1,000,000 33.4-MW demand saving, energy savings 40 GWh 30.1-MW peak load reduction, 45.9 GWh per year per year, 48,000 tons of carbon per year energy savings Ethiopia, 2006 5,800,000 131-MW demand reduction, 560 GWh per year 5-MW demand reduction (first 350,000 bulbs only) (includes street lighting as well as CFLs) Source: World Bank data. Note: CFL = compact fluorescent light; DSM = Demand side management; ELI = efficient lighting initiative; GWh = gigawatt hour; MW = megawatt. a. Entire DSM project, not just CFLs. 100 | Climate Change and the World Bank Group TABLE C.4 Reviewed Energy Efficiency Financial Intermediation Projects Project name Country WBG Approach Closing approval Year year IBRD Bulgaria Energy Efficiency Fund (BEEF) Bulgaria 2005 Specialized fund 2010 Croatia Energy Efficiency Project Croatia 2003 Loan to ESCO+PCG (2) to local banks 2010 Poland GEF Energy Efficiency project Poland 2004 Grant to ESCO+PCG to local banks 2011 Romania Energy Efficiency Fund (FREE) Romania 2002 Specialized fund 2007 Energy Conservation Project I China ESCO IFC Hungary Energy Efficiency Co-financing Hungary 1997 PCG to local banks 2001 Program (HEECP) HEECP 2 Hungary 2001 PCG to local banks 2005 Commercializing Energy Efficiency Czech Republic, Estonia, 2002 PCG to local banks 2008 Finance (CEEF) (1) Hungary, Latvia, Lithuania, Slovak Republic OTP ESCO Hungary 2006 PCG to local banks 2011 Russian Sustainable Energy Finance Russian Federation 2005 Credit lines and PCG to local banks 2010 Program (RSEFP) CHUEE I China PCG to local banks Source: IEG. Note: ESCO = energy service company; GEF = Global Environment Facility; OTP = Hungarian bank; PCG = Partial Credit Guarantee. Appendix C: Energy Efficiency: Supplementary Information | 101 APPENDIX D Lessons from Completed Transmission and Distribution Projects Although little evidence is currently available from trans- A reform project in Andhra Pradesh, India, carried out by mission and distribution projects approved by the World the state government (without Bank support) over 2000­03 Bank over 2003­08, evaluation lessons can be drawn from had major success in reducing nontechnical losses (Bhatia previous Bank projects and reform efforts outside the and Gulati 2004). The state utility was in poor financial con- Bank. dition, with losses of $0.9 billion in 1997. Despite power sector restructuring, new distribution utilities remained Review of these projects provides some lessons: weak, billing only 42 percent of the power entering their Large reductions in technical and nontechnical losses are system because of losses and nonmetered agricultural us- feasible but are not always achieved. ers. The utility companies undertook major institutional A $201 million 2000­04 Bank project in Uttar Pradesh, change, replacing meters and introducing remote-metering India, was successful in its technical component (increasing technology. Irregularities in billing and metering were capacity and reducing losses) but unsuccessful in overall found for 15 percent of the 23,000 industrial connections power sector reforms because of a change of government. inspected in 2000­01. Total transmission and distribution The project was successful in reducing technical losses, losses were reduced from 38 percent in 2000 to 26 percent from 41 percent in 2002 to 32.8 percent in 2004 (though in 2003 through reductions in nontechnical losses caused by still behind a target of 30.4 percent) but unsuccessful at regularization of 2.25 million unauthorized connections. reducing nontechnical losses, which remained at roughly Impacts of transmission projects are tied to activity in 11 percent. The ex ante project rate of return was appraised the generation sector. Power planning requires a systems at 29 percent, and the ex post rate of return was estimated at approach. Separating transmission from generation is 18 percent (rising to 25 percent when gains to nonbilled difficult because of their complementarity. consumers are included); the shortfall was due to a more A Bank-supported transmission development project in conservative valuation of power. Nigeria (carried out over 2004­08) highlights the impact of Success depends crucially on local utility implementation, the generation sector on transmission investment economic particularly for nontechnical loss reductions. It is diffi- returns, as well as the potential vulnerability of loss reduc- cult to reduce nontechnical losses without a local reform tion gains. The project was designed to respond to critical "champion." power needs in Nigeria and an urgent request for assistance A $40 million Bank power sector rehabilitation project in from the newly elected democratic government. It aimed to Albania carried out over 2005­06 demonstrated weak re- implement a major transmission system investment while sults because of poor management by local utilities. The supporting power sector reforms, including commercial- project was designed to increase use of on-grid power and ization of the power sector. The project was also motivated to reduce transmission and distribution losses and outages. by the Bank's desire for involvement in the power sector The project failed to achieve sustained target improvements reform process. Total project cost was $122 million ($103 in loss reductions or bill collection. Total losses fell from million from the International Development Association). 44.8 percent in 2001 to 39.7 in 2004, but they increased to Transmission infrastructure investments reduced techni- 41 percent by 2006. Technical gains were difficult to esti- cal losses from 11 percent to 8 percent in 2007, but loss- mate and were offset by increases in nontechnical losses. es rebounded to nearly 9.5 percent by 2008 because of a The economic impact of the project was poor, as expected combination of poor maintenance and increased power increases in electricity sales did not eventuate. transmitted through the system transmission. Although Power sector restructuring alone has not been sufficient significant gains were made in system reliability, the pro- to improve transmission and distribution performance in jected economic benefits were not realized because power countries with high losses. generation did not increase by enough to take advantage of 102 | Climate Change and the World Bank Group the new capacity. Transmission system collapses were re- implemented over 2000­05 and added significant transmis- duced from 15 in 2000 to 5 in 2008. The project claimed an sion capacity to the system. The goal was for transmission economic rate of return of 29.2 percent and a net present losses to drop from 5.8 percent in 1998 to 5.0 percent by value of $76.9 million. However, these calculations assumed 2005, but losses actually increased to 6.9 percent in 2005 that grid users would switch from expensive off-grid power and 6.2 percent in 2006. However, this increase in losses to cheaper on-grid power, which has not yet happened. was due to a 40 percent increase in generation over the pe- riod, which was the result of a booming economy. Higher A Bank project in Kazakhstan further demonstrates the power generation causes higher transmission losses, as lines interplay between generation and transmission and a become congested. Without the transmission investments potential problem with using "percentage loss" project tar- from the project, losses would have been even higher. gets as a measure of project performance. The project was Appendix D: Lessons from Completed Transmission and Distribution Projects | 103 APPENDIX E Coal TABLE E.1 Coal Plant Case Studies Afsin-Elbistan A Lignite Power Technical Maritza East 1 Tata Mundra Ultra Lanco Thermal Power Plant Assistance Project Mega Power Plant Amarkantak Power Plant WBG unit World Bank (IBRD) World Bank (IDA) MIGA IFC IFC Country Turkey Kosovo Bulgaria India India Project type Rehabilitation Rehabilitation and new New Plant (replacing New Plant New Plant power plant older unit) Safeguards A B A A A category classification Power plant size 1,355 MW 600 MW (rehab of 660 MW 4000 MW 600 MW Kosovo A) and 600 MW (new Kosovo C) Unit sizes 3x340 MW + 1 x 335 3 x 200 MW (rehab); 2 x 330 MW 5 x 800 MW 2 x 300 MW MW 1 x 600 MW (new) Coal Domestic lignite Domestic lignite Domestic lignite Imported Indonesian Domestic coal coal Sulfur control FGD to be installed FGD is planned for FGD is part of the Use of low sulfur coal Use of low sulfur by 2010 Kosovo C, but not for design (0.6% S content) coal Kosovo A. (0.5% S content) Type of support Debt (Specific Invest- Technical Assistance Political risk Senior debt Equity ment Loan) (IDA Grant) insurance Approval date June 6, 2006 October 12, 2006 2006 April 8, 2008 June 1, 2007 WBG support $336 million $10.5 million Up to 99 million $450 million $8 million Total project cost $481 million Not yet defined 1.15 billion $3.2 billion $578 million Other Support for financial Sector policy, legal, components and generational regulatory, transactions restructuring (3 and safeguards advice million) Source: IEG (Chikkatur background paper, drawing on public documents including World Bank Project Appraisal Documents, IFC Summary of Proposed Investment and Environmental and Social Review). Note: MW = megawatt; WBG = World Bank Group. 104 | Climate Change and the World Bank Group TABLE E.2 Coal Plant Case Studies Emissions Afsin-Elbistan A Lignite Power Maritza East 1 Tata Mundra Lanco Thermal Power Technical (Bulgaria) Ultra Mega Amarkantak Plant (Turkey) Assistance Project Power Plant (India) (Kosovo) (India) Climate obligations Ratified Kyoto-- Not ratified UNFCCC; Ratified Kyoto. Ratified Kyoto. no obligations; no obligation; potential EU ETS Need to reduce potential CDM credits potential EU ETS by 8% below 1990 emissions Case study facility Subcritical rehab Kosovo C supercritical Subcritical w/ FGD Supercritical no Subcritical no FGD FGD Prior facility Pre-rehab plant Kosovo A Old plants None None Comparator (counterfactual) plant Pre-rehab plant Subcritical similar to Old plants 8 units of 500 MW Same plant Kosovo B each, subcritical Lower carbon alternative Gas Gas Nuclear Gas w/LNG Gas w/pipeline investmentb investmentb Size (case study) MW 1,355 600 660 4,000 660 Size (Prior facility) MW 1,000 275 500 Size (comparator) MW 1,000 600 500 4,000 660 c CO2 intensity kgco2/kWh (case study) 1.43 0.85 1.37 0.85 0.91 CO2 intensity kgco2/kWh (prior facility) 1.64 1.85 2.00 d CO2 intensity kgco2/kWh (comparator) 1.64 1.47 2.00 0.95 0.91 Reduction (case study/prior facility) 12.8% <54.1% 31.5% Reduction (case study/comparator) 12.8% <42.2% 31.5% <10.5% 0.0% CO2 emissions in Mt /year (case study)a 13.58 3.57 6.34 23.83 4.21 a CO2 emissions in Mt /year (prior facility) 11.49 3.57 7.01 CO2 emissions in Mt /year (comparator)a 11.49 6.18 7.01 26.63 4.21 Difference in annual emission mt/year 2.09 0.01 ­0.67 (case study-prior facility) Difference in annual emission mt/year 2.09 ­2.61 ­0.67 ­2.80 0.00 (case study-comparator) CO2 switching cost to lower carbon $5 $37 Not determined $135/$70 $115/$60 alternative ($/tCO2) For gas at For gas at $11/$7 per mm $11/$7 per mm BTU BTU WBG additionality in catalyzing the Not determined Yes Not determined Yes No investment WBG impact on technology choice No Yes No No No WBG impact on reducing social and local Yes Yes Yes (attribution to Yes Yes environmental impacts EBRD) Source: IEG (Based on public documents and imputations). Note: The italicized numbers reflect design parameters, bold numbers reflect intensities from operational data. In general, intensity based on actual operation would be higher than the design values. BTU = British thermal unit; CDM = Clean Development Mechanism; EBRD = European Bank for Reconstruction and Development; EU = European Union; ETS = Emissions trading scheme; FGD = Flue-gas desulfurization; LNG = ligue- fied natural gas; UNFCCC = United Nations Framework Convention on Climate Change; WBG = World Bank Group. a. The annual emissions are calculated with a capacity factor of 80% in all cases. b. LNG investment for the Tata case and the pipeline investment for the Lanco case is assumed to be $1,000/kW. c. The CO2 intensity for Tata is assumed to be 0.85 kgCo2/kWh, as per Tata's own calculation, as given in the supplemental EIA. IFC gives a rate of 0.75 kgCO2/kWh. d. Based on average emissions intensity of 500 MW units in India. Data based on version 5 of CEA's Baseline Carbon Dioxide Emissions from Power Sector. Appendix E: Coal | 105 APPENDIX F Transport Tables and Figures TABLE F.1 Number of Operations w/ GHG Reduction Objectives by Region and Subperiod Region Prereview period Review period 2003­08 Postreview period Total 1998­present 1998­2002 2009­pipeine GHG goal GHG goal GHG goal GHG goal GHG goal GHG goal GHG goal GHG goal Subtotal Subtotal Subtotal No GHG No GHG No GHG No GHG Total goal goal goal goal N/A N/A low low low low LAC 1 2 5 8 5 5 7 17 3 2 1 1 7 9 9 13 1 32 EAP 6 1 7 3 2 2 7 1 3 4 3 9 3 3 18 AFR 7 7 2 2 3 7 2 2 2 2 10 2 16 SA 2 3 5 2 2 2 2 4 2 4 5 11 ECA 6 6 1 1 7 7 MNA 4 4 2 2 1 1 7 7 Total 1 10 26 37 10 9 17 36 5 5 2 6 18 16 24 45 6 91 Source: World Bank project documents. Note: GHG goal includes operations with explicitly designed components to address carbon reduction with corresponding performance indicators and systems to track and monitor progress. GHG goal low includes other operations that explicitly mention carbon benefits (avoiding global warming) and assume fuel savings or mode shifting that could have carbon reduction potential, but that do not monitor or track carbon reductions. No GHG goal includes all other operations that do not mention GHG reduction explicitly. GHG = greenhouse gas. Regions: LAC = Latin America and the Caribbean; EAP = East Asia and Pacific; AFR = Sub-Saharan Africa; SA = South Asia; ECA = Europe and Central Asia; MNA = Middle East and North Africa. N/A Project document not available. 106 | Climate Change and the World Bank Group TABLE F.2 Number of Operations with GHG-Reduction Objectives, by Mode and Subperiod GHG objective Prereview period Review period Postreview period, after Total 1998­2002 2003­08 2008 GHG goal low GHG goal low GHG goal low GHG goal low Mode No GHG goal No GHG goal No GHG goal No GHG goal GHG goal GHG goal GHG goal GHG goal Total N/A N/A Totals 1 10 26 10 9 17 5 5 2 6 16 24 45 6 91 a A) No PT investments 8 6 1 15 15 B) Traditional PT investments 11 2 13 13 a) Traditional bus improvements 2 2 2 b) No dominant PT modeb 9 2 11 11 C) Urban rail investments 3 6 2 2 3 8 8 16 a) commuter rail 3 5 2 1 3 8 6 14 b) Metrollight rail 1 1 2 2 D) Newer PT investments 1 5 8 6 5 4 1 1 6 13 12 6 6 37 a) Dedicated bus lanes 5 3 1 8 1 9 b) Proto-BRTS 2 2 1 3 2 3 3 8 c) BRTS 1 6 1 4 4 1 3 11 1 5 3 20 E) Other interventionsc 2 1 2 1 2 1 1 3 4 3 10 a) NMT 1 1 1 b) Local air quality 1 2 1 1 1 3 3 6 c) Technical assistance 1 2 3 3 Source: World Bank project documents. Note: BRTS = bus rapid transit system; GHG = greenhouse gas; N/A = project document not available; NMT nonmotorized travel; PT = public transport. a. Includes operations with explicitly designed components to address carbon reduction with corresponding performance indicators and systems to track and monitor progress. b. Includes other operations that explicitly mention carbon benefits (avoiding global warming) and assume fuel savings or mode shifting that could have carbon reduction potential, but that do not monitor or track carbon reductions. c. Includes all other operations that do not mention GHG reduction explicitly. Appendix F: Transport Tables and Figures | 107 APPENDIX G Energy Project Portfolio Databases CEIF Database (Master Energy Database) and transmission and distribution are assigned to the Scope 2003­08 category of Access (as they all aimed to increase elec- trification); in IBRD countries only electricity access This database, compiled by the World Bank' Energy Anchor, projects and rural electrification projects are consid- was the starting point for IEG's analysis. Although the Clean ered as "Access." Energy Investment Framework (CEIF) was formulated in 2005, the database was backfilled to include projects approved · Blended low carbon and access: Those access projects in 2003. It covers all World Bank Group energy projects across that use low carbon energy options to increase access the International Bank for Reconstruction and Development/ to electricity. International Development Association, the Global Environ- · Transmission and distribution, oil and gas; other thermal ment Fund, Carbon Finance, International Finance Corpora- generation: projects that do not specifically target lower tion, and the Multilateral Investment Guarantee Agency. carbon or energy efficiency (some transmission and distribution is classified under low carbon, however). The unit of observation is the project component. Component type categories include-- · Other energy: Projects with energy policy support (De- velopment Policy Loans) or projects for which energy · Oil (extractive industries and downstream, excluding form cannot be defined clearly or that have multiple generation) energy subsector support--that do not target lower car- bon and/or energy efficiency. · Gas (extractive industries and downstream, excluding generation) IEG review of the database · Coal (extractive industries and downstream, excluding For this evaluation, IEG reviewed and modified the 2003­08 generation) CEIF database as follows. · Energy efficiency Some components were further disaggregated, based on · New renewable energy, broken down by technology, descriptions in appraisal documents. For instance, an for example, wind, small hydro, solar photovoltaic, so- $87 million component labeled "New Renewable Energy" lar thermal, geothermal, and bioenergy. If there is more was disaggregated into subcomponents: a $20 million than one technology supported by the component, the biomass facility and a $67 million wind project. general category "New Renewable Energy" is assigned. New Renewable Energy excludes hydropower> 10 MW. IEG used budget allocations reported in the appraisal document rather than the sectoral percentage assign- · Large hydro ments used for project classification. For instance, the · Thermal generation (oil, gas or coal, specified) Turkey Renewable Energy project is a $202 million opera- tion designed to support development of the renewable · Transmission and distribution energy, providing financing via Turkish banks to private · Other (including policy operations, environmental developers. CEIF recorded this project as $101 million op- assessment). eration, because the project was officially allocated among Components were also mapped to the following groups: the following sectors: central government administration (10 percent), micro- and small and medium enterprise fi- · Low carbon: Renewable energy projects (including all nance (40 percent), and renewable energy (50 percent). hydropower), energy efficiency, rehabilitation of power IEG classified the entire expenditure as financing for re- plants, district heating, biomass waste-fueled energy; reduction of gas flaring, transmission and distribution newable energy development ($202 million), including components that target low carbon and/or energy effi- large hydropower, geothermal energy, and wind (as in the ciency, and other--investments with lower carbon goals. Project Assessment Document). For this reason, IEG's reckoning of commitment amounts sometimes exceeded · Access: Those that increase access to electricity ser- the CEIF's. vices. In IDA countries, all investments in generation 108 | Climate Change and the World Bank Group IEG eliminated a few cases of double counting, usually in- energy and energy efficiency at a growth rate of 20 percent volving GEF-funded components. per annum between fiscal years 2005 and 2009, compared to a baseline commitment of $209 million (equal to the av- IEG identified some components that did not have clear erage of the previous three years). low-carbon content, based on review of project documents. These projects were excluded from the scope of the Climate The World Bank reported on this commitment annually. II database. For Bonn Commitment purposes, relevant project types were solar, wind, geothermal, biomass energy, hydropower CEIF designates some transmission and distribution proj- of 10 MW or less, waste to energy, and energy efficiency ects as "low carbon," but not others. In principle, improve- (demand-side management and end-use energy efficiency, ment of existing systems is considered as energy efficiency, supply side energy efficiency--including mass transit sys- as opposed to construction of new systems. In practice, tem). Large hydropower (>10 MW) was tallied but not some of the transmission and distribution projects dis- counted toward the Bonn Commitment. A comparable da- cussed in chapter 3 appear to result in loss reductions but tabase, but with different criteria for energy efficiency, was are not included in either the CEIF or IEG tally of low- backfilled to 1990. carbon projects. The following project types are classified by CEIF as low- IEG added information and codes describing component carbon but are not counted toward the Bonn Commit- or project objectives, technologies, instruments, and capac- ment: ity (if applicable). · Policy reform loans (except where directly concerned Bonn Commitment Database and Renewable with renewable energy and energy efficiency) Energy and Energy Efficiency WBG Progress · Reduction of gas flaring Reports · High-efficiency thermal plants are classified in CEIF Scope 1990­2008 as a low carbon, but not included in Progress Report/ At the Bonn International Conference on Renewable Ener- Bonn Commitment data gies in 2004, the WBG made a commitment to accelerate · Industrial low carbon investments its support for new renewable energy and energy efficiency · Landfill gas capture without utilization. and committed to increase its financing for new renewable Appendix G: Energy Project Portfolio Databases | 109 APPENDIX H Pilot and Demonstration Projects TABLE H.1 Assessment of Monitoring and Implementation Plans from Low-Carbon Energy Projects with Pilot or Demonstration Objectives, 2007­09 Assessment of monitoring and evaluation (0 = no details, 1 = moderate, 2 = strong) Project and Year Bank commit- Product What is being To whom? Internal Logical frame- Demon- location ment to project line demonstrated? project work for dem- stration (millions) outcome onstration impact Small Scale 2009 $6.39 Carbon Effectiveness of tech- Livestock 2 0 0 Livestock offset niques for reducing producers in Waste Manage- methane emissions Thailand ment Program, through improved live- Thailand stock waste management; economic viability of adopting these tech- niques when supported by carbon financing Rural Energy 2009 $26.4 IDA Feasibility of increasing Donor agen- 1 1 0 Access Project, energy access to rural cies that might Republic of households using SHS fund scale-up Yemen projects Renewable 2009 $200 IDA Financial viability of Commercial 1 1 1 Energy Develop- small-scale grid- banking sector ment Project, connected renewable Vietnam energy projects Coal-Fired 2009 $180 (IBRD) IBRD Effectiveness and financial Government 2 2 1 Generation $25.4 (GEF) GEF viability of energy-efficient of India, Rehabilitation rehabilitation of coal electricity Project, India plants (versus replace- utilities in India ment); effectiveness of framework for implemen- tation, risk mitigation and post-rehabilitation O&M of energy efficiency renova- tion and modernization Emergency 2009 $8 IDA Effectiveness of prepaid Enerca (power Un- 2 Un- Power Project, meters in reducing utility) known known Central African nontechnical losses from Republic power distribution (pilot) Regional Sustain- 2009 $40 GEF Effectiveness of transport Other cities in 2 2 1 able Transport investments in improving Latin America and Air Quality air quality and Caribbean Project, LAC Region Region 110 | Climate Change and the World Bank Group TABLE H.1 Assessment of Monitoring and Implementation Plans from Low-Carbon Energy Projects with Pilot or Demonstration Objectives, 2007­09 (continued) Assessment of monitoring and evaluation (0 = no details, 1 = moderate, 2 = strong) Project and Year Bank commit- Product What is being To whom? Internal Logical frame- Demon- location ment to project line demonstrated? project work for dem- stration (millions) outcome onstration impact Bioenergy Sugar 2009 4.5 Carbon Technology for methane 2 0 0 Ethanol Wastewa- offset capture from wastewater ter Management treatment Process, Thailand Energy Efficiency 2009 $9.4 IBRD Feasibility of energy Public 1 0 0 Project, efficiency program in agencies in Montenegro public sector Montenegro Thermal 2009 $19.7 GEF Viability of efficiency Power utilities 2 2 1 Power Efficiency improvements in thermal in China. Project, China power plants Ecofarming 2009 $120 IBRD Technology best practice Local 2 1 0 Project, China for integrating biogas governments into production systems in China. GEF-World Bank 2008 $21.0 GEF Series of high-profile Local 2 2 1 Urban Transport demonstration projects governments, Partnership, that will create models municipali- China of sustainable transport ties, transport solutions authorities GEF Increased 2008 $4.5 GEF Pilot "Sustainable Rural Energy 2 1 0 Access to Solar Market Packages Agency--to Electricity (SSMP)"--preparation provide solar Project, Zambia of nine sustainable solar photovoltaic market packages energy to pub- lic institutions, households, commercial consumers Energy Access 2008 $38.8 (pilot IDA Inerfuel substitutions: Private sector, 1 0 0 Project, Burkina $1 million) Pilot activities leading households Faso potentially to the produc- tion of biofuels from Jat- ropha, cotton, and other agricultural residues Energy Develop- 2008 $111.5 GEF/ Loss reduction in distri- Consumers in 2 1 0 ment & Access IDA bution systems. Rural energy efficien- Expansion Proj- energy agency is piloting cy component. ect, Tanzania schemes for off-grid and Private sector, energy expansion. Scale cooperatives, up of pilot activities: solar NGO--renew- photovoltaic, small PPA able energy component Electricity 2008 $256.7 IDA Pilot energy efficiency Utilities 2 0 0 Distribution and program, involving Transmission installation of energy Project, Pakistan saving equipment at the customer level (continued) Appendix H: Pilot and Demonstration Projects | 111 TABLE H.1 Assessment of Monitoring and Implementation Plans from Low-Carbon Energy Projects with Pilot or Demonstration Objectives, 2007­09 (continued) Assessment of monitoring and evaluation (0 = no details, 1 = moderate, 2 = strong) Project and Year Bank commit- Product What is being To whom? Internal Logical frame- Demon- location ment to project line demonstrated? project work for dem- stration (millions) outcome onstration impact Electricity Sec- 2008 $11.7 GEF Pilot operation focus- Government, 2 1 1 tor Efficiency ing on improvement of utilities Improvement commercial and technical Project, Guinea efficiencies Liaoning 2008 $191.0 IBRD Contribute to implemen- Provincial 2 2 1 Medium Cities tation of heating reform government, Infrastructure by implementing in new heating com- Project III, China heat-only boiler and CHP panies/utilities supplied systems: pilot- ing technical approaches in network design through use of about 150 building-level substa- tions and in metering through use of building- level meters Integrated Solar 2007 $43.2 GEF Demonstration of opera- ONE (utility), 2 2 1 Combined Cycle tional viability of hybrid government, Power Project, solar thermal power private sector Morocco generation (dissemina- tion of information) Renewable 2007 $7.0 GEF/ Demonstration of techni- Herders, 2 2 1 Energy for Rural IDA cal models for small private sector Access, Mongolia hybrid systems in the ex- treme climate conditions of Mongolia (dissemi- nation of information, public awareness) Hybrid Solar 2007 $49.4 GEF Demonstrate the opera- Utility, private 2 1 0 Thermal Inte- tional viability and value sector grated Cycle, added of integrating a Mexico solar field with a large con- ventional thermal facility Furatena Energy 2007 $1.1 Carbon Demonstration pilot Hillside sugar 2 0 0 Efficiency Proj- finance to exemplify a new ap- cane producers ect, Colombia proach to panela (sugar cane) production and commercialization Urban Transport 2007 $8.0 GEF BRT Infrastructure design Local 2 0 0 Project, Ghana and implementation governments, transportation authorities Source: World Bank data. Note: CHP = combined heat and power; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; LAC = Latin America and the Caribbean Region; NGO = nongovernmental organization; O&M = operations and maintenance; PPA = Power purchase agreement; SHS = solar home system. 112 | Climate Change and the World Bank Group APPENDIX I Carbon and Economic Returns of Projects TABLE I.1 Carbon and Economic Returns on Projects Type ERR (%) Lifetime CO2 reductions (kg per $ investment) Data source (appraisal, evaluation) CFL 714 80 Appraisal CFL 122 26.7 Evaluation CFL 178 134 Appraisal T&D 43.2 6.8 Appraisal T&D 16.5 10.6 Appraisal T&D 22.4 14.9 Evaluation Off-grid solar 93.4 3.1 Evaluation Off-grid solar 31.0 11.8 Evaluation energy efficiency finance 20.0 23.4 Evaluation Financial intermediary energy efficiency 22.0 61.4 Evaluation Financial intermediary energy efficiency 20 117.2 Evaluation Direct energy efficiency 143 160.3 Appraisal Large hydro 18.1 57.2 Appraisal Large hydro 7.0 15.4 Appraisal Large hydro 17.1 21.8 Appraisal Medium hydro run-of-river 18.0 42.8 Appraisal Hydro 6.7 42.4 Appraisal Hydro run-of-river 2.9 32.9 Appraisal Medium hydro run-of-river 11.9 37.3 Appraisal Medium hydro run-of-river 14.3 77.9 Appraisal Medium hydro run-of-river 14.7 75.4 Appraisal Medium hydro reservoir 16.5 82.8 Appraisal Medium hydro 13.3 76.0 Appraisal Medium hydro 9.5 25.4 Appraisal Hydro run-of-river 12.7 49.5 Appraisal Appendix I: Carbon and Economic Returns of Projects | 113 TABLE I.1 Carbon and Economic Returns on Projects (continued) Hydro run-of-river 8.7 76.9 Appraisal Hydro run-of river 4.7 71.1 Appraisal Mini-hydro 24 61.2 Evaluation Wind 11.9 15.0 Appraisal Wind 11.3 13.2 Appraisal Wind 5.5 14.1 Appraisal Wind 7.1 10.0 Appraisal Wind 12.5 34.7 Appraisal Wind 7.0 16.8 Appraisal Wind 14.7 41.0 Appraisal Wind 3.9 14.9 Evaluation BRT 81 9.6 Appraisal Source: World Bank data. Note: BRT = bus rapid transit; CFL = compact fluorescent light; T&D = transmission and distribution. Caveats: · These estimates have many limitations and are presented to indicate rough orders of magnitude and to illustrate the need for more thorough and rigorous analysis. · Estimates--all adapted from WBG project documents--are mostly based on ex ante appraisals and could be overly optimistic. They are not produced with consistent methodologies or rigor. · Carbon reductions per dollar consider only investment costs; operations and maintenance are excluded. · Economic rates of return (ERRs) typically do not include nonmonetized benefits such as reduction in local air pollution or the value of increased energy security. · ERRs take the electricity tariff (and any associated capacity payments) to represent the economic value of electricity (except in the case of solar home photovoltaics). In many cases tariffs are artificially low, so this will be an underestimate. · In this sample, wind projects receive tariffs that are 2.2 times higher, on average, than the tariffs received by hydropower plants. Hence these estimates should not be used for a head-to-head comparison of wind and hydro. · Lifetime emission reductions are based on approximations of project lifetime. Grid power plants are assumed to provide emission reductions for 20 years; solar home photovoltaic systems 15 years; bus rapid transit 14 years; energy efficiency projects, transmission and distribution projects and off-grid power have an assumed lifetime of 10 years; compact fluorescent light bulb life is 6 years. To the extent that projects provide emission reduc- tions beyond this, emission reductions are understated. · ERR values for compact fluorescent light bulb projects generally include only fuel savings; they do not also include the value of deferring the need for construction of peak load plants, or reductions in load shedding. · Much of the variation in emission reductions (particularly for hydro) comes from variation in the carbon intensity of the baseline power generation being displaced by the project. · Energy efficiency financial intermediary project ERR counts all benefits from subproject investments, regardless of whether they were triggered by WBG involvement. · For direct investments in energy efficiency, the (relatively small) costs of energy audits are excluded. · Most of the economic benefits from offgrid solar come from studies that find high household willingness to pay for electrical power. 114 | Climate Change and the World Bank Group APPENDIX J Recent WBG Developments in Emission Mitigation Activities The main body of this paper and portfolio analysis has fo- FIGURE J.1 Financing for Low and Non-Low cused on the 2003­08 period. As noted, there has been an Carbon Energy, 2003­09 increase in climate-related activity since the 2008 adoption 6,000 of the Strategic Framework on Development and Climate Commitment ($ millions) Change. This appendix provides a descriptive review of 5,000 key developments since 2008, including the 2009 energy 4,000 portfolio, the Climate Investment Funds, the Carbon Part- 3,000 nership Facility, the Forest Carbon Partnership Facility, 2,000 and the Low Carbon Growth Studies program of the En- ergy Sector Management Assistance Program. These areas 1,000 have not been evaluated in detail or fully validated by IEG 0 2003 2004 2005 2006 2007 2008 2009 analysis. Year Non-low-carbon energy, CEIF 2008­09 Energy Portfolio Developments Low-carbon energy, CEIF The growth in support for low carbon energy activities Low-carbon energy, IEG continued in fiscal 2009, reaching annual commitments of Source: IEG and CEIF. more than $3.3 billion. Low carbon financing constitutes Note: CEIF = Clean energy Investment Framework. roughly 40 percent of the energy portfolio. Although IEG has not formally validated the CEIF 2009 low carbon port- folio classification, the CEIF definitions have been very similar to IEG's reckoning of low carbon support in the past (see figure J.1). IBRD), India Coal-Fired Generation Rehabilitation ($225 million), Turkey Programmatic Electricity Sector Most financing continues to come from traditional (IDA, Development Policy Loan ($200 million), Vietnam Renew- IBRD, and International Finance Corporation) funding able Energy Development Project ($199 million), and sources, with the proportion coming from traditional fi- Nigeria Electricity and Gas Improvement ($182 million). nancing increasing in 2009. For the first time, more than half of the low carbon portfo- Recent Activities: Climate Investment Funds lio is for energy efficiency, though support for new renew- In 2008 the WBG and other multilateral development ables has also increased markedly. banks jointly established the $6.2 billion Climate Invest- The increase in financing for low carbon projects in fiscal ment Funds. The core of the Climate Investment Fund is 2008 and 2009 comes primarily from a few large invest- the $5.1 billion Clean Technology Fund (CTF), aimed at ments. In fiscal 2008, most financing for energy efficiency financing demonstration, large-scale deployment and and large hydropower was provided by stand-alone proj- transfer of low-carbon technologies in large or middle-in- ects; 26 percent came from just three IBRD projects: In- come countries. dia Rampur Hydropower Project ($395 million), China CTF financing eligibility requires the creation of coun- Energy Efficiency Financing ($200 million), and China try or sector investment plans, and then selects projects Liaoning Med. Cities III (an energy efficiency project, for financing on the basis of potential for greenhouse gas $185 million). savings, cost-effectiveness, demonstration potential at The following year, the portfolio was dominated by large scale, development impact, implementation potential, and energy efficiency investments; 40 percent of financing came additional costs and risk premium. Eligible technologies from 5 World Bank projects: Turkey Private Sector Renew- include the power sector, transportation, and energy effi- able Energy and Energy Efficiency Project ( $500 million ciency in buildings, industry, or agriculture. Appendix J: Recent WBG Developments in Emission Mitigation Activities | 115 FIGURE J.2 Low-Carbon Energy, 2003­09, Carbon Partnership Facility by Product Lines The Carbon Partnership Facility (CPF) was established 3,500 in 2007 as a response to uncertainty about the post-2012 3,000 international climate regime and the associated limited de- 2,500 mand for post-2012 carbon assets. It is designed to develop $ (millions) 2,000 and market emission reductions on a larger scale by pro- viding carbon finance to investments that will deliver post- 1,500 2012 emission reduction assets. 1,000 500 The CPF intends to scale up carbon finance by support- ing programmatic and sector-based approaches to re- 0 2003 2004 2005 2006 2007 2008 2009 duce greenhouse gas emissions and by collaborating with Year government and market participants. It will operate in tra- ditional sectors (power, gas flaring, transport, waste man- IBRD/IDA IFC MIGA GEF (WBG) agement systems, and urban development), in sectors that Carbon Finance (WBG) Other financing have not been reached by the Clean Development Mecha- nism (urban transport and energy efficiency), and will pilot Source: CEIF. Note: GEF = Global Environment Facility; IBRD = International city-wide carbon finance programs. Bank for Reconstruction and Development; IDA = International Development Association; IFC = International Finance Corporation; CPF will draw on the World Bank's financial and knowl- MIGA = Multilateral Investment Guarantee Agency; edge resources to strategically integrate carbon finance with WBG = World Bank Group. sustainable development plans. The emphasis on creating long-term credit streams will be attractive to both buyers and sellers, who prefer certainty in their offset require- ments and revenue streams. To date, the CTF has supported creation of investment plans for 12 countries, and for Concentrated Solar Power in The CPF framework creates two funds. The Carbon Asset the Middle East and North Africa Region. Together these Development Fund supports the preparation of emission represent planned investments of $40 billion, of which $4.4 reduction programs, including grants. It provides funding billion would be from CTF funds. Since May 2009, seven for methodology development, emission reduction pro- projects have been approved, five of which will be adminis- gram identification and development, and asset feasibility, tered by the WBG and the rest by other multilateral devel- Project Design Document development and monitoring opment banks. The WBG projects support wind power in plan. In addition, the Fund covers all facility costs for emis- Egypt and Mexico, urban transport in Mexico, renewable sion reduction program preparation. The main sources of energy in Thailand, and a mix of renewable energy and en- funding for CADF are buyers' payments and donors' con- ergy efficiency in Turkey. tribution (about 2 million from each donor). The second part of the Climate Investment Fund is the The Carbon Fund will purchase the emission reductions Strategic Climate Funds. With an initial capitalization of generated by the CPF programs. This fund became opera- $250 million, the Funds aim to provide financing to pi- tional in May 2010 with 100 million in assets. lot projects that target specific climate change challenges As of July 2010 the emission reduction program has signed or sector responses in five to ten low-income countries. agreements with a Moroccan solid waste management pro- The Strategic Climate Fund is currently supporting three gram (related to recent World Bank Development Policy programs. The Pilot Program for Climate Resilience funds Loans in Morocco on waste management), a Vietnam re- resilience projects and integration of resilience consider- newable energy program (corresponding to a World Bank ations into national development plans; the Forest Invest- loan in 2009), a Brazil solid waste management program, ment Program supports capacity building for forest gov- and an Amman city-wide program. In addition, there are ernance and investments to reduce pressure on forests; 13 different programs under development in East and and the Scaling up Renewable Energy Program supports South Asia, Europe and Central Asia, the Middle East and actions to remove barriers that inhibit private sector in- North Africa, and the Africa Regions. vestment in renewable energy in low-income countries. Whereas the CTF supports both renewable energy and energy efficiency, the much smaller, low-income-oriented Forest Carbon Partnership Facility Scaling up Renewable Energy Program supports only re- The Forest Carbon Partnership Facility is designed to re- newable energy. duce emissions from deforestation and forest degradation 116 | Climate Change and the World Bank Group by providing value to standing forests. It also seeks to access objectives are not highlighted in the studies pub- provide incentives and financing for the sustainable use of lished so far. forest resources and biodiversity conservation. The Facility The studies recognize that climate change harms develop- became operational in 2008. ment and that mitigation actions form part of a development The facility has two parts: a readiness mechanism, supported strategy. In each case, the studies recognize the vulnerabili- by the Readiness Fund, and a carbon finance mechanism, ties of the particular country to climate change, and thus supported by the Carbon Fund. Under REDD Readiness, the need for both mitigation and adaptation. However, they the Forest Carbon Partnership Facility will help developing generally support the need for mitigation through an inter- countries prepare national reference scenarios for emis- national climate agreement, and emphasize that any miti- sions from deforestation and forest degradation, develop gation obligations must not harm the development rights country-owned strategies for reducing deforestation and of the poor. Low carbon development is also emphasized forest degradation, and establish national measurement, as a means of supporting negative cost no-regrets options, reporting and verification systems for REDD. The Carbon energy security, nonclimate pollution reduction, and ability Fund will pilot and test REDD carbon transactions in the to access carbon market opportunities. countries that have established a sound national framework Though the studies consider mitigation options in each sec- through the readiness mechanism. tor sequentially, they attempt to take a systemic approach by Thirty-seven REDD countries had been selected for the readi- making cost comparisons across sectors. Most studies devel- ness mechanism by the end of fiscal 2009 (compared with the op a unified marginal abatement cost curve, where options original design target of 20). Thirty of these had signed par- are ranked by cost and scope. These lead to different strat- ticipation agreements, and 18 had submitted detailed grant egies across countries, depending on the specific details of proposals (with three of the grant agreements fully signed). each case. In each case, there are many negative or zero cost In this first year, the Facility has increased the target volume changes, particularly in energy efficiency or land use change. for the Readiness Fund from $100 million to about $185 mil- For example, for Brazil, the emphasis is on agriculture and lion; as of March 2010 the Readiness Fund has $115 million. deforestation, with emission reduction goals of 11.7 GtCO2e By the end of fiscal 2009 each country's Readiness Prepara- per year. There are few low-cost mitigation options in the tion Idea Note was submitted to the Facility and received energy and transport sectors, because emission intensity one to three Technical Advisory Panel reviews/discussions, is already low by international standards because of the Facility Management Team reviews, and informal reviews reliance on hydropower and ethanol fuel. The Brazil study by World Bank country teams. identifies negative cost options for roughly 1.1 GtCO2e per year (mostly energy efficiency) and a further 7.1 GtCO2e REDD methodology support claims progress in the follow- per year of roughly zero cost changes for avoided deforesta- ing areas: establishing the first Team Advisory Panel; devel- tion, livestock and zero-tillage cropping options. oping instruments to support the process of the Readiness Mechanism; advancing thinking on reference scenarios, For Mexico, the emphasis is still on agriculture and forestry, REDD modeling efforts, reporting and verification systems, but energy and transport are also important in achieving and economic analysis of the costs of REDD; and creation emission reductions of 5.3 GtCO2e per year. Under the low of a capacity-building program for forest-dependent indig- carbon scenario, the share of power from coal would drop enous peoples and other forest dwellers. from 31 to 6 percent, of which roughly 23.5 percentage points would come from increases in geothermal, biomass, wind, and small hydropower sources. Negative cost inter- Recent Activities: Low-Carbon Growth Studies ventions would save 3.4GtCO2e per year, including bus sys- Starting in 2006, ESMAP's Low-Carbon Growth Country tem optimization, cogeneration, charcoal production im- Studies Program began helping Brazil, China, India, In- provements, fuel economy standards, biomass power and donesia, Mexico, and South Africa assess their develop- improved cookstoves. ment goals and greenhouse gas mitigation strategies. The The strategies recognize that energy efficiency (including centerpiece of the program is a series of country studies transport efficiency) and demand-side management will designed to identify low carbon opportunities across a play a major role in any cost-effective mitigation strategy. range of sectors, including energy, transport, waste, and In nearly every case, the scope for efficiency improvements land use/land use change. The studies or summary case is large and can be achieved at lower cost than increases in studies have been publically released for Mexico, Brazil, increasing generation through renewable energy. and India. Most studies generate a baseline scenario and a low carbon alternative and describe the technical solu- Energy access issues were considered in the India study, tions by which the alternative could be achieved. Energy though not in Brazil, China, or Mexico. Appendix J: Recent WBG Developments in Emission Mitigation Activities | 117 APPENDIX K Evaluation Summary from Climate Change and the World Bank Group--Phase I Climate change threatens to derail development, even as de- have gone to specific efficiency efforts, including end- user velopment pumps ever-greater quantities of carbon dioxide efficiency and district heating. Including a broader range into an atmosphere already polluted with two centuries of of projects identified by management as supporting sup- Western emissions. The World Bank, with a newly articu- plyside energy efficiency would boost the proportion above lated Strategic Framework on Development and Climate 20 percent by number. Few projects tackled regulatory Change, must confront these entangled threats in helping issues related to end- user efficiency, though the Bank has its clients to carve out a sustainable growth path. invested in some technical assistance and analytical work. This historical lack of emphasis on energy efficiency is not But this is known territory--many of the climate change unique to the Bank and reflects the complexity of pursu- policies under discussion have close analogues in the past. ing end- user efficiency, a pervasive set of biases that favor This phase of the evaluation, focused on the World Bank electricity supply over efficiency, inadequate investments in (and not the International Finance Corporation or the Mul- learning, and inattention to energy systems in the wake of tilateral Investment Guarantee Agency), assesses the World power sector reform. Bank's experience with key win-win policies in the energy sector--policies that combine gains at the country level The record levels of energy prices in 2008, although they with globally beneficial greenhouse gas (GHG) reductions. have been relaxed, provide an impetus for the Bank and its The next phase will look across the entire World Bank clients to choose more sustainable long- term trajectories of Group at project-level experience in promoting technolo- growth. The mid-2008 oil price was equivalent to the 2006 gies for renewable energy and energy efficiency and at some price, plus a $135 per ton tax on carbon dioxide--the kind issues related to climate change in the Bank's transport and of level that energy modelers say is necessary for long-term forestry portfolios. climate stabilization. To help clients cope with the burden of these prices, and take advantage of the signals they send Within the range of win- win policies, this report exam- for sustainability, the Bank can do four things: ines two that have long been discussed but are more rel- evant than ever in light of record energy prices: removal 1. It can make promotion of energy efficiency a priority, of energy subsidies and promotion of end-user energy effi- using efficiency investments and policies to adjust to ciency. Energy subsidies are expensive, damage the climate, higher prices and constructing economies that are more and disproportionately benefit the well off. Their reduction resilient. can encourage energy efficiency, increase the attractiveness 2. It can assist countries in removing subsidies by helping of renewable energy, and allow more resources to flow to to design and finance programs that protect the poor poor people and to investments in cleaner power. Though and help others adjust to higher prices. subsidy reduction is never easy, the Bank has a record of accomplishment in this area, especially in the transition 3. It can promote a systems approach to energy. countries. About a quarter of Bank energy projects included 4. And it can motivate and inform these actions, internally attention to price reform. Improvements in the design and and externally, by supporting better measurement of en- implementation of social safety nets can help to rationalize ergy use, expenditures, and impacts. energy prices while protecting the poor. End-user energy efficiency has long been viewed as a win- win approach with great potential for reducing emissions. It Goals and Scope becomes increasingly attractive as the costs of constructing This evaluation is the first of a series that seeks lessons and fueling power plants rise. About 5 percent of the Bank's from the World Bank Group's experience on how to carve energy commitments by value (about 10 percent by number) out a sustainable growth path. The World Bank Group has 118 | Climate Change and the World Bank Group never had an explicit corporate strategy on climate change Findings against which evaluative assessments could be made. Development spurs emissions. However, a premise of this evaluation series is that many of the climate-oriented policies and investments under A 1 percent increase in per capita income induces--on discussion have close analogues in the past, and thus can average and with exceptions--a 1 percent increase in GHG be assessed, whether or not they were explicitly oriented to emissions. Hence, to the extent that the World Bank is suc- climate change mitigation. cessful in supporting broad- based growth, it will aggravate climate change. This report, which introduces the series, focuses on the World Bank (International Bank for Reconstruction and But there is no significant trade-off between climate change Development and International Development Associa- mitigation and energy access for the poorest. tion), and not on the International Finance Corporation Basic electricity services for the world's unconnected house- (IFC) or the Multilateral Investment Guarantee Agency holds, under the most unfavorable assumptions, would (MIGA). It assesses its experience with key win-win policies add only a third of a percent to global GHG emissions, in the energy sector: removal of energy subsidies and pro- and much less if renewable energy and efficient light bulbs motion of end-user energy efficiency. The next phase looks could be deployed. The welfare benefits of electricity access at the expanding project-level experience of the Bank and are on the order of $0.50 to $1 per kilowatt-hour, while a the IFC in promoting technologies for renewable energy stringent valuation of the corresponding carbon damages, and energy efficiency; it also addresses the role of carbon in a worst-case scenario, is a few cents per kilowatt-hour. finance. A parallel study examines the role of forests in cli- mate mitigation. The climate evaluation's final phase will Country policies can shape a low-carbon growth path. look at adaptation to climate change. Although there is a strong link between per capita income and energy-related GHG emissions, there is a sevenfold variation between the most and least emissions-intensive Motivation countries at a given income level. Reliance on hydropower Operationally, the World Bank has pursued three broad is part of the story behind these differences, but fuel pric- lines of action in promoting the mitigation of GHG emis- ing is another. High subsidizers--those whose diesel prices sions, the main contributor to climate change. First, it has are less than half the world market rate--emit about twice mobilized concessional finance from the Global Environ- as much per capita as other countries with similar income ment Facility (GEF) and carbon finance from the Clean levels. And countries with longstanding fuel taxes, such as Development Mechanism to promote renewable energy the United Kingdom, have evolved more energy-efficient and other GHG-reducing activities. Second, and to a much transport and land use. more limited extent, it has used GEF funds to stimulate the Energy subsidies are large, burdensome, regressive, and development of noncommercial technologies. Third, and damage the climate. the subject of this evaluation, it has supported win-win policies and projects--sometimes with an explicit climate The International Energy Agency's 2005 estimate of a quar- motivation, often without. ter-trillion dollars in subsidies each year outside the Organ- isation for Economic Cooperation and Development may These actions not only provide global benefits in reducing understate the current situation. While poor people receive GHGs, but also pay for themselves in purely domestic side some of these benefits, overall the benefits are skewed to benefits such as reduced fuel expenditure or improved air wealthier groups and often dwarf more progressive public quality. The win-win designation obscures the costs that expenditure. Fuel subsidies alone are 2 to 7.5 times as large these policies may impose on particular groups, even while as public spending on health in Bangladesh, Ecuador, the benefiting a nation as a whole. This presents challenges for Arab Republic of Egypt, India, Indonesia, Morocco, design and implementation. Pakistan, Turkmenistan, República Bolivariana de Venezu- Two sets of win-win policies are perennial topics of dis- ela, and the Republic of Yemen. At the same time, subsidies cussion in the energy sector: reduction in subsidies and encourage inefficient, carbon-intensive use of energy and energy-efficiency policies, particularly those relating to build constituencies for this inefficiency. end-user efficiency. This report looks at these, and at an- The Bank has supported more than 250 operations for other apparently win-win topic: gas flaring. Flaring is inter- energy pricing reform. esting because of its magnitude, the links to pricing policy and to carbon finance, and the existence of a World Bank­ Success has been achieved in the transition countries--in led initiative to reduce flaring. Romania and Ukraine, for example, where energy prices Appendix K: Evaluation Summary from Climate Change and the World Bank Group--Phase I | 119 were adjusted toward market levels, and the intensity of human behavior rather than electrical engineering, and carbon dioxide emissions dropped substantially. Subsidy whose efficacy is harder to measure. A general neglect of removal can threaten the poor, however. Recent efforts to rigorous monitoring and evaluation reinforces the negative assess poverty and welfare impacts systematically appear view of efficiency. to have informed the design and implementation of price The Bank- hosted Global Gas Flaring Reduction Partner- reform efforts, though not necessarily with direct Bank in- ship (GGFR) has fostered dialogue on gas flaring, but it is volvement. Examples include Ghana and Indonesia, where difficult to assess its impact on flaring activity to date. compensatory measures were deployed in connection with fuel price rises. Associated gas (a by-product of oil production) is often wastefully vented or flared, adding more than 400 million The Bank has rarely coordinated efficiency improvements tons of carbon dioxide equivalent to the atmosphere an- with subsidy reductions to lighten the immediate adjust- nually, or about 1 percent of global emissions. A modestly ment burden on energy users. funded public-private partnership, the GGFR has succeed- An exception is the China Heat Reform and Building Ef- ed in highlighting the issue, promoting dialogue, securing ficiency Project, which links improved insulation with heat agreement on a voluntary standard for flaring reduction, pricing. A growing number of projects sponsor nationwide and sponsoring useful diagnostic studies. But only four distribution of compact fluorescent light bulbs, but this has member countries have adopted the standard. The GGFR been done in response to power shortages (Rwanda, Uganda) has emphasized carbon finance as a remedy for flaring, but or to stanch utility losses (Argentina, Vietnam), rather than the use of project-level carbon finance is a mere bandage to facilitate subsidy reduction. for policy ailments that require a more fundamental cure. Despite emphasis on energy efficiency in Bank statements and in Country Assistance Strategies, the volume and pol- Recommendations icy orientation of IBRD/IDA efficiency lending has been In mid-2008, real energy prices were at a record high. While modest. this is burdensome for energy users, it opens an opportunity Although the IFC has recently increased its investments in for the Bank to support clients in making a transition to a energy-efficiency projects, World Bank commitments for long-term sustainable growth path that is resilient to en- efficiency were about 5 percent by value of energy finance ergy price volatility, entails less local environmental dam- over 1991­2007. This includes investments in demand-side age, and is a nationally appropriate contribution to global efficiency and district heating, and may also include some mitigation efforts. supply-side efficiency investments. By this definition, about Clearly the World Bank needs to focus its efforts strategi- 1 in 10 projects by number involve energy efficiency. cally on areas of its comparative advantage. This would Including a broader range of projects identified by manage- include supporting the provision of public goods and pro- ment as supporting supply-side energy efficiency would moting policy and institutional reform at the country level. boost the proportion above 20 percent by number over the Furthermore, the Bank can achieve the greatest leverage by period 1998­2007. Globally only about 34 projects under- promoting policies that catalyze private sector investments taken over the 1996­2007 period had components oriented in renewable energy and energy efficiency, including those to demand-side energy-efficiency policy. Among these, supported by IFC and MIGA. The analysis in this report many attempts to promote efficiency have had limited suc- supports the following recommendations: cess because the Bank has engaged with utilities, which Systematically promote the removal of energy subsidies, have limited incentives to restrict electricity sales. easing social and political economy concerns by provid- There are several reasons why end-user energyefficiency ing technical assistance and policy advice to help reform- projects, and especially policy-oriented projects, appear to ing client countries find effective solutions, and analytical be under- emphasized in the Bank's portfolio. work demonstrating the cost and distributional impact of removal of such subsidies and of building effective, broad- The Bank has carried out some successful and innova- based safety nets. tive efficiency projects. But internal Bank incentives work against these projects because they are often small in scale, Energy price reform can endanger poor people and arouse demanding of staff time and preparation funds, and may the opposition of groups used to low prices, thereby pos- require persistent client engagement over a period of years. ing political risks. But failure to reform can be worse, di- There is a general tendency to prefer investments in power verting public funds from investments that fight poverty generation, which are visible and easily understood, over and fostering an inefficient economy increasingly exposed investments in efficiency, which are less visible, involve to energy shocks. And reform need not be undertaken 120 | Climate Change and the World Bank Group overnight. The Bank can provide assistance in charting and current planning methods are inadequate in integrating financing adjustment paths that are politically, socially, and considerations of end-use efficiency and in balancing the environmentally sustainable. Factoring political economy risks of volatile fuel prices and weather-sensitive electricity into the design of reforms and supporting better- targeted, output from wind and hydropower plants. Water manage- more effective social protection systems will be elements of ment, urban management, and social safety nets are other this approach. areas where cross sectoral collaboration is essential to pro- moting win-win policies and programs. Emphasize policies that induce improvement in energy ef- ficiency as a way of reducing the burden of the transition Invest more in improving metrics and monitoring for mo- to market- based energy prices. tivation and learning--at the global, country, and project levels. Historically, energy efficiency has received rhetorical sup- port but garnered only a small share of financial support Good information can motivate and guide action. or policy attention. This is beginning to change with such First, building on the Bank's current collaboration with the moves as China's commitment to drastically reduce its en- International Energy Agency on energy efficiency indica- ergy intensity and India's Energy Conservation Act. But tors, the Bank could set up an Energy Scoreboard that will the Bank can do much more to help clients pursue this regularly compile up-to-date standardized information agenda. If a real reorientation to energy efficiency and re- on energy prices, collection rates, subsidies, policies, and newable energy is to occur, the Bank's internal incentive performance data at the national, subnational, and project system needs to be reshaped. Instead of targeting dollar levels. Borrowers could use indicators for benchmarking; growth in lending for energy efficiency (which may skew in the design and implementation of country strategies, effort away from the high-leverage, low-cost interven- including sectoral and cross- sectoral policies; and in as- tions), it needs to find indicators that more directly reflect sessing Bank performance. energy savings and harness them to country strategies and project decisions. It needs also to patiently support lon- Second, more rigorous economic and environmental as- ger, more staffintensive analysis and technical assistance sessment is needed for energy investments and those that activities. release or prevent carbon emissions. These assessments should draw on energy prices collected for the Scoreboard; Increased funding for preparation, policy dialogue, analy- account for externalities, including the net impact on GHG sis, and technical assistance is required. emissions; and account for price volatility. Investment proj- Promote a systems approach by providing incentives to ects should also be assessed, qualitatively, on a diffusion address climate change issues through cross-sectoral ap- index, which would indicate the expected catalytic effect of proaches and teams at the country level, and structured the investment in subsequent similar projects. It is desirable interaction between the Energy and Environment Sector to complement project-based analysis with assessment of Boards. indirect and policy-related impacts, which could be much larger. To tackle problems of climate change mitigation and adap- tation, the Bank and its clients need to think, organize, and Third, monitoring and evaluation of energy interventions act beyond the facility level, and outside subsectoral and continue to need more attention. Large-scale distribution sectoral confines. One avenue for this is through greater at- of compact fluorescent light bulbs is one example of an in- tention to systemwide energy planning. Integrated resource tervention that is well suited to impact analysis and where planning, once in vogue, has been largely abandoned in the a timely analysis could be important in informing massive wake of power sector privatization and unbundling. Yet scale-up activities. Appendix K: Evaluation Summary from Climate Change and the World Bank Group--Phase I | 121 Endnotes Chapter 1 and undertook a consumer satisfaction survey in 2006, but subsequent monitoring reports complained of an inad- 1. MIT Joint Program on the Science and Policy of Global equate response rate. Change (http://globalchange.mit.edu/resources/gamble/no- policy.html) based on the research described in Sokolov and Chapter 3 others (2009). 2. Carbon dioxide (CO2) is the most important anthropo- 1. Tunisia (2005, $8.5 million) and Uruguay (2004, genic greenhouse gas, but there are others, such as methane. $6.9 million) were excluded for geographic coherence. All are weighted according to their relative impact on climate 2. Many efficiency projects involve replacement of old change (for instance, methane is 25 times as potent as CO2). equipment with new machinery that is both more efficient The weighted sum is expressed as CO2-equivalent, ppm. but also has higher production capacity--for instance, re- placing a bakery oven with a new one that produces twice as Chapter 2 much bread per day. Energy savings are calculated by assum- 1. World Bank projects are evaluated after closure, and ing that, absent the project, the production would have been many investment projects last six to eight years or more. expanded using the old technology. This seems unlikely. IFC projects are usually evaluated five years after the initial 3. Environment Canada: http://www.ec.go.ca. investment. 4. An intermediate category of scrutiny for environmental 2. This set of projects follows the official classification of impacts. projects in an internal World Bank database. That classi- fication may exclude some supply-side energy efficiency Chapter 4 projects, including those that reduce T&D losses. 1. Source is CAIT 7.0. Tabulation includes all GHGs and 3. Classification based on 2009 status. land use change. 4. Data are from the Development Outcome Tracking 2. If a project had performance indicators linked to GHG System. reductions, it was classed as having a formal goal. Other- 5. IEG's calculation of Bonn Commitment volume exceed wise, if the project mentioned GHG reductions as a project management's report for 2005­08; no verification was at- benefit, it was classed as having an informal goal. tempted for the 2009 report. 3. Coincident with the financial crisis, which saw a 6. But see Deichmann and others (2010), whose spatial Bank-wide increase in Development Policy Loans, about analysis of Ethiopia suggests surprisingly broad competi- $600 million in forest-related loans were committed during tiveness for grid-based electricity. fiscal 2009­10. 7. To impute the capacity factor, nominal capacity was 4. The payments in question were for avoided deforesta- multiplied by the ratio of actual certified emission reduc- tion, not for reforestation or natural regeneration. Thus, tions/design certified emission reductions. this observation of increased forest growth could either in- 8. For comparison, the average price of World Bank- dicate a real but indirect impact (for instance, the abandon- purchased carbon credit is $8.07, according to the Carbon ment of marginal grazing land due to the PES payment) or Finance Unit's 2009 annual report. Average primary CER a spurious correlation (the recipients' land may, in fact, be price in 2009 was $12.69 according to World Bank (2010). of poorer quality than the control group's, for reasons that 9. Data from January 2009. are not observable, with the result that they are more likely 10. The World Bank has recently supported an Indonesia to give up grazing). Infrastructure Guarantee Fund, though it is not specifically 5. The Regional Silvopastoral Project is the reportedly the targeted on renewable energy. first World Bank-executed conservation project framed as 11. Two supported both on- and off-grid. an experiment. A review of the Nicaragua component of 12. Global average, excluding high-income countries, from the project (GEFEO 2009) found that its control group was World Development Indicators 2007 (World Bank 2007). poorly constituted and unsuitable for control/treatment 13. The Sri Lanka Renewable Energy for Rural Economic comparisons. The Colombia component appears to have a Development Project has an exemplary monitoring system better constructed control group. 122 | Climate Change and the World Bank Group Chapter 5 in the European Union Emissions Trading System carbon market after 2012. 1. From the chief economist's blog: http://blogs.worldbank. 5. CF Assist helped with the design of the Fund to which org/climatechange/why-coal. this tax contributes. 2. Excluded was a small (60 MW) Indonesian facility. The 6. The Montreal Protocol Fund's phase-out of ozone- investment in Medupi (South Africa) is out of the time destroying substances, many of which are also GHGs. It frame for analysis. helps transfer technology and pays for the marginal cost of 3. The figures are not directly comparable because of the lag abatement of the substances. between approval and installation, but they convey the rela- 7. However, new firms have entered the industry. They are tive scale of WBG involvement. Private sector companies en- ineligible for CDM payments for HFC-23 emissions, and tered contracts to build and operate 87.0 GW of new capacity are emitting growing amounts of the gas (Montzka and in Bank-borrower countries over 2003­08. Of these, projects others 2010). Thus, low-cost GHG abatement opportuni- totaling 10.9 GW had some WBG involvement. The WBG's ties are not being utilized. share of investment (loans plus equity) in the private projects was 1.6 percent, plus guarantees covering 0.3 percent. 4. The demand for carbon offsets is driven partly by the Chapter 6 need for some developed countries (appendix I) to meet 1. As this report was being finalized, a WBG-supported their obligations under the Kyoto Protocol. At this writing, mass distribution of CFLs in Bangladesh took place and those obligations are not defined past 2012. 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Bibliography | 127 Photographs x Women working in a compact fluorescent light bulb assembly plant. xiii Efficient steel press financed through an energy management company; Jinan, China. xix Lignite mining in Kosovo. xxi Cleaning solar panels. 1 Wind turbine in China. 7 People and livestock walking in a dust storm during a drought in Madagascar, circa 2007. 11 Boy stands in front of solar module at Caoduo School, Rongbo, Yu Shu--part of the 2008 Renewable Energy Development Project Ashden Award winner in China. 27 Ain Beni Mathar Integrated Combined Cycle Thermo-Solar Power Plant in Morocco. 33 Beneficiary of program that won Ashden Award for Sustainable Energy in Southeast Asia. 39 Energy transmission lines in Tajikistan. 40 Tangle of electric wires, Ho Chi Minh City, Vietnam. 42 Solar energy is used to light a village shop in Sri Lanka. 47 Deforestation in Brazil. 49 Traffic congestion in Mexico. 58 Deforestation in the Brazilian Amazon. 61 Ain Beni Mathar Integrated Combined Cycle Thermo-Solar Power Plant in Morocco. 69 Solar panels and telephones in Qunu in the Eastern Cape, South Africa. 79 Child standing on digester, which provides biogas from waste in a 2010 Ashden Award-winning project in Ngecha village, Kiambu West, Kenya. 128 | Climate Change and the World Bank Group IEG Publications Analyzing the Effects of Policy Reforms on the Poor: An Evaluation of the Effectiveness of World Bank Support to Poverty and Social Impact Analyses Annual Review of Development Effectiveness 2009: Achieving Sustainable Development Addressing the Challenges of Globalization: An Independent Evaluation of the World Bank's Approach to Global Programs Assessing World Bank Support for Trade, 1987­2004: An IEG Evaluation Climate Change and the World Bank Group--Phase I: An Evaluation of World Bank Win-Win energy Policy Reforms Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative A Decade of Action in Transport: An Evaluation of World Bank Assistance to the Transport Sector, 1995­2005 The Development Potential of Regional Programs: An Evaluation of World Bank Support of Multicountry Operations Development Results in Middle-Income Countries: An Evaluation of World Bank Support Doing Business: An Independent Evaluation--Taking the Measure of the World Bank­IFC Doing Business Indicators Egypt: Positive Results from Knowledge Sharing and Modest Lending--An IEG Country Assistance Evaluation 1999­2007 Energy Efficiency Finance: Assessing the Impact of IFC's China Utility-Based Energy Efficiency Finance Program Engaging with Fragile States: An IEG Review of World Bank Support to Low-Income Countries Under Stress Environmental Sustainability: An Evaluation of World Bank Group Support Evaluation of World Bank Assistance to Pacific Member Countries, 1992­2002 Financial Sector Assessment Program: IEG Review of the Joint World Bank and IMF Initiative From Schooling Access to Learning Outcomes: An Unfinished Agenda--An Evaluation of World Bank Support to Primary Education Gender and Development: An Evaluation of World Bank Support, 2002­08 Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural Disasters How to Build M&E Systems to Support Better Government IEG Review of World Bank Assistance for Financial Sector Reform An Impact Evaluation of India's Second and Third Andhra Pradesh Irrigation Projects: A Case of Poverty Reduction with Low Economic Returns Improving Effectiveness and Outcomes for the Poor in Health, Nutrition, and Population Improving the Lives of the Poor through Investment in Cities Improving Municipal Management for Cities to Succeed: An IEG Special Study Improving the World Bank's Development Assistance: What Does Evaluation Show: Maintaining Momentum to 2015: An Impact Evaluation of Interventions to Improve Maternal and Child Health and Nutrition Outcomes in Bangladesh New Renewable Energy: A Review of the World Bank's Assistance Pakistan: An Evaluation of the World Bank's Assistance Pension Reform and the Development of Pension Systems: An Evaluation of World Bank Assistance The Poverty Reduction Strategy Initiative: An Independent Evaluation of the World Bank's Support Through 2003 The Poverty Reduction Strategy Initiative: Findings from 10 Country Case Studies of World Bank and IMF Support Poverty Reduction Support Credits: An Evaluation of World Bank Support Public Sector Reform: What Works and Why? An IEG Evaluation of World Bank Support Small States: Making the Most of Development Assistance--A Synthesis of World Bank Findings Sourcebook for Evaluating Global and Regional Partnership Programs Using Knowledge to Improve Development Effectiveness: An Evaluation of World Bank Economic and Sector Work and Technical Assistance, 2000­2006 Using Training to Build Capacity for Development: An Evaluation of the World Bank's Project-Based and WBI Training Water and Development: An Evaluation of World Bank Support, 1997­2007 The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits--An IEG Impact Evaluation World Bank Assistance to Agriculture in Sub-Saharan Africa: An IEG Review World Bank Assistance to the Financial Sector: A Synthesis of IEG Evaluations World Bank Group Guarantee Instruments 1990­2007: An Independent Evaluation World Bank Engagement at the State Level: The Cases of Brazil, India, Nigeria, and Russia The World Bank's Country Policy and Institutional Assessment: An Evaluation All IEG evaluations are available, in whole or in part, in languages other than English. For our multilingual section, please visit http://www.worldbank.org/ieg. ISBN 978-0-8213-8653-8 SKU 18653