48897 THE WORLD BANK Climate Change and the World Bank Group Phase I: An Evaluation of World Bank Win-Win Energy Policy Reforms THE WORLD BANK GROUP WORKING FOR A WORLD FREE OF POVERTY The 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 envi- ronment 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 The 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 I: An Evaluation of World Bank Win-Win Energy Policy Reforms 2009 The World Bank http://www.worldbank.org/ieg Washington, D.C. ©2009 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 11 10 09 08 This volume, except for the "Management Response," "Statements by the External Review Panel," and the "Chairman's Summary," is a product of the staff of the Independent Evaluation 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. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. 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. Photo credits--Front cover: A coal-run power plant in Tangshan, China, in China's Hebei Province. Reproduced by permission from Corbis; photo © Jason Lee/Reuters/Corbis. Back cover: A natural gas flaring tower at Pemex's Dos Bocas petroleum-exporting complex, Mexico. Reproduced by permission of Corbis; photo © Keith Dannemiller/Corbis ISBN: 978-0-8213-7850-2 e-ISBN-13: 978-0-8213-7855-7 DOI: 10.1596/978-0-8213-7850-2 Library of Congress Cataloging-in-Publication Data has been applied for. World Bank InfoShop Independent Evaluation Group E-mail: pic@worldbank.org Knowledge Programs and Evaluation Capacity Telephone: 202-458-5454 Development (IEGKE) Facsimile: 202-522-1500 E-mail: ieg@worldbank.org Telephone: 202-458-4497 Facsimile: 202-522-3125 Printed on Recycled Paper Contents vii Abbreviations and Terminology ix Glossary xiii Acknowledgments xv Foreword xvii Executive Summary xxiii Management Response xxix Chairperson's Summary: Committee on Development Effectiveness (CODE) xxxiii Statements by the External Review Panel: Climate Evaluation, Phase I 1 1 Introduction, Scope, and Motivation 4 Confronting Inexorable Calamities and Unreckonable Risks 6 Three Approaches to Greenhouse Gas Mitigation 7 Priority Areas for Evaluation Related to Mitigation 8 Scope and Methods of This Evaluation 11 2 National Policies and Climate Change 13 Energy, CO2, and Development: A Strong but Pliable Relationship 17 Policies and Institutions Can Make a Big Difference 19 GHG Mitigation Need Not Compromise the Pursuit of Energy Access for the Poorest 21 3 World Bank Operations and Climate Change 23 Climate in World Bank Policies and Strategies 25 Global Finance and Institutions 26 Mainstreaming 31 Strategic Considerations for the Bank: Accounting for Local and Global Impacts 39 4 Subsidies and Energy Pricing 41 The Nature of Subsidies and Price Distortions 41 The Problem with Subsidies 44 Energy Subsidies and the Poor 48 Experience in the Transition Economies 50 Bank Engagement with the Large Subsidizers 50 Energy Loans and Pricing 52 Conclusion 57 5 Efficiency Policies 59 Overcoming the Barriers to Energy Efficiency 61 The Efficiency Portfolio 62 Demand-Side Management i i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P 64 Bank Engagement on DSM 68 Appliance Standards and Building Codes 73 Public Buildings 74 District Heating 75 Conclusion 77 6 Natural Gas Flaring 79 Context 81 The Paradox of Gas Flaring 81 The Global Gas Flaring Reduction Partnership 84 Economics of Gas Flaring 86 Conclusion 89 7 Findings and Recommendations 91 Findings 96 Conclusion and Recommendations 99 Appendixes 100 A: Bank Attention to Subsidies in the Large Subsidizing Countries 106 B: Energy-Efficiency Projects with Policy Components 114 C: Distributional Incidence of Subsidies 121 Endnotes 123 References Boxes 15 2.1 Emissions Intensities of Power Supply 37 3.1 The $135 per Ton CO2 Price Is Already Here 48 4.1 Ghana and Indonesia: Using Social Safety Nets to Protect the Poor from Fuel Price Rises 49 4.2 Ukraine: Gradual Energy Policy Reform and Decreasing Emissions Intensity 51 4.3 Egypt: Policy Dialogue and Pricing Reform 63 5.1 Rates of Return to Energy-Efficiency Projects 66 5.2 DSM in Brazil 73 5.3 Heat Reform and Building Efficiency in China 95 7.1 The Challenge of Catalyzing Technology Adoption Figures 4 1.1 Intersection of Issues Related to Climate Change 7 1.2 Global and Domestic Benefits 14 2.1 Per Capita Energy Emissions and Income, 2004 16 2.2 Absolute Changes in Emissions and Income, 1992­2004 20 2.3 Relative Emissions Are Higher in Countries with Diesel Subsidies 27 3.1 World Bank Climate-Themed Projects and Commitments 35 3.2 Real Energy Prices of Coal, Gas, and Oil, 1990­2008 46 4.1 Conditionality Related to Petroleum Products 52 4.2 Trends in Energy Sector Loans with Pricing Goals 53 4.3 Distribution of World Bank Lending Related to Electricity Power Pricing Policy, 1996­2007 61 5.1 Energy-Efficiency Investments 80 6.1 Recent and Planned Generation Capacity Additions by Fuel Type i v C O N T E N T S 84 6.2 Global Flaring: Comparison of GGFR Partner and Nonpartner Countries Tables 5 1.1 Topical Map of Issues in the Climate Evaluation Series 9 1.2 IEG Evaluations Relevant to Climate Change 17 2.1 How Policies Affect Energy-Related Emissions 18 2.2 Pathways from Policies to Emissions 26 3.1 Climate-Themed Projects by Sector Board and Funding Source, Cumulative, 1990­2007 28 3.2 CAS Goals for Energy Policies and Climate Change Issues, 1995­2007 34 3.3 Effect of Carbon Shadow Price on Generating Capacity Mix for South East Europe, 2020 43 4.1 Fuel Subsidies Compared with Health Expenditures 44 4.2 Sensitivity of Energy Demand to Price 54 4.3 Outcomes of Loans with Electricity Tariff Goals 60 5.1 A Typology of Efficiency Interventions 64 5.2 Utility-Based DSM Projects 70 5.3 Projects with Appliance Standard and Building Energy Code Components v A visible spectral band image of Tropical Storm Hudah, April 2000. Photo courtesy of the Visible Earth Team, NASA. Abbreviations and Terminology bcm Billion cubic meters CAS Country Assistance Strategy CDM Clean Development Mechanism CEA Country Environmental Analysis CFL Compact fluorescent light bulb CO2 Carbon dioxide CO2e Carbon dioxide equivalent DPL Development Policy Loan DSM Demand-side management EER Energy-Environment Review ERR Economic rate of return ESCO Energy service company ESMAP Energy Sector Management Assistance Program gas Natural gas gCO2 Grams of carbon dioxide GDP Gross domestic product GEF Global Environment Facility GHG Greenhouse gas GGFR Global Gas Flaring Reduction Partnership Gt Billion tons GTZ German Technical Cooperation GW Gigawatt IBRD International Bank for Reconstruction and Development (World Bank) IDA International Development Association IEA International Energy Agency IEG Independent Evaluation Group IFC International Finance Corporation IMF International Monetary Fund kg Kilogram kW Kilowatt kWh Kilowatt-hour LNG Liquefied natural gas mmbtu Millions of British thermal units mscf Thousand standard cubic feet MW Megawatt NOx Nitrogen oxides OECD Organisation for Economic Co-operation and Development OPEC Organization of Petroleum Exporting Countries PCF Prototype Carbon Fund PER Public Expenditure Review ppm Parts per million v i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P PSIA Poverty and Social Impact Analysis REDD Reduced Emissions from Deforestation and Degradation SEA Strategic Environmental Analysis SO2 Sulfur dioxide SOx Sulfur oxides tCO2e Tons CO2 equivalent ton Metric ton (=tonne; 1,000 kg) TW Terawatt UNFCCC United Nations Framework Convention on Climate Change v i i i Glossary Adaptation Measures taken by societies and individuals to adapt to actual or expected adverse impacts on the environment, especially as the result of climate change. Biodiversity Short for biological diversity. Refers to the wealth of ecosystems in the bios- phere, of species within ecosystems, and of genetic information within populations. Carbon capture and storage A technology for preventing the release of carbon dioxide to the atmos- phere from thermal power plants by capturing the gas and storing it under- ground. Carbon dioxide equivalent (CO2e) A standard unit for measuring the impact of a greenhouse gas on global warming. For instance, one ton of methane is considered equivalent in warming to 25 tons of carbon dioxide. Carbon accounting (and/or Measurement of the gross or net impact on greenhouse gas emis- carbon footprint) sions of an organization, project, or program. Carbon fund A fund set up for the purchase of carbon credits. Carbon offset (or credit) A financial instrument representing a reduction in greenhouse gas emis- sions (including gases other than carbon dioxide), used by purchasers to meet regulatory or voluntary limits on emissions. Carbon shadow pricing The practice of incorporating into the economic analysis of projects or pro- grams an economic value associated with the external costs of greenhouse gas emissions or external benefits of emissions reduction. Certified emission reduction A carbon credit (measured in tons CO2e) for an emissions reduction asso- ciated with a Clean Development Mechanism project. Clean Development Mechanism "A mechanism under the Kyoto Protocol through which developed coun- tries may finance greenhouse-gas emission reduction or removal projects in developing countries, and receive credits for doing so which they may apply towards meeting mandatory limits on their own emissions" (UNFCCC). Climate change Changes in climatic conditions and processes (including but not limited to warming) that go beyond natural climatic variability. When used in con- nection with mitigation, refers to human-induced changes. i x C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P Combined-cycle turbine A relatively efficient technology for power generation from combustion, usually of natural gas. Demand-side management Actions or incentives, often directed by energy utilities to their customers, to reduce the level of energy demands (typically through efficiency meas- ures) or change the timing of those demands. District heating Centralized system for the provision of steam heat to an urban neighbor- hood or district. Ecosystem The interacting system of a biological community and its nonliving envi- ronmental surroundings. Emission In this volume, emission primarily refers to the anthropogenic release of greenhouse gases, as from fossil fuel combustion or deforestation. Used also to refer to other kinds of air pollution from combustion, such as par- ticulates and sulfur oxides. Energy services company A company that provides clients with some combination of assessment, financing, and implementation of options for increased efficiency of use and reduced expenditure on energy. Environment The sum of all external conditions affecting the life, development, and sur- vival of an organism. Environmental assessment A process whose breadth, depth, and type of analysis depend on the pro- posed project. It evaluates a project's potential environmental risks and impacts in its area of influence and identifies ways of improving project design and implementation by preventing, minimizing, mitigating, or com- pensating for adverse environmental impacts and by enhancing positive impacts. Environmental impact Any change to the environment, whether adverse or beneficial, wholly or partially resulting from an organization's activities, products, or services (as defined in ISO 14001). Environmental mainstreaming The integration of environmental concerns into macroeconomic and sec- toral interventions. Environmental sustainability Ensuring that the overall productivity of accumulated human and physical capital resulting from development actions more than compensates for the direct or indirect loss or degradation of the environment. Goal 7 of the UN Millennium Development Goals specifically refers to this, in part, as inte- grating the principles of sustainable development into country policies and programs and reversing loss of environmental resources. Gas flaring Burning of natural gas, usually when released as an unintended by-product of oil production. x G L O S SA RY Greenhouse gas Gases whose atmospheric buildup contributes to global warming and cli- mate change. Greenhouse gases regulated under the Kyoto Protocol are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluoro- carbons, and sulphur hexafluoride. Mitigation Measures taken to reduce adverse impacts on the environment. Netback price Wellhead value of natural gas computed by netting transport costs from final market price. Ozone-depleting substances Manufactured chemical compounds that reduce the protective layer of ozone in the Earth's atmosphere. The Montreal Protocol, administered by the UN, maintains the list of ozone-depleting substances that are targeted for control, reduction, or phase-out. Performance Standards The eight Performance Standards establish requirements that the client is to meet in IFC-financed projects. Safeguard policies Policies designed specifically to ensure that the environmental and social impacts of projects supported by the Bank Group are considered during appraisal and preparation. The Bank's safeguard policies cover environ- mental assessment, natural habitats, pest management, indigenous peo- ples, cultural resources, involuntary resettlement, forests, dam safety, international waterways, and disputed areas. Sustainable development Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Win-win policy Here, a policy 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 called no-regrets policy. x i The cooling towers of an old power plant in Soweto are no longer in use. One now depicts local art and the other advertises a local power company, Photo by Christian Schlaeger, reproduced with his permission. Acknowledgments Kenneth Chomitz was the evaluation manager Initial drafts of the report benefited from editing and main author for this study. Major contribu- by William Hurlbut; the report was edited for tions to chapter 5 on efficiency policies were publication by Caroline McEuen with assistance made by Meredydd Evans and Bin Shui. from Heather Dittbrenner. Nik Harvey assisted in publication and managed Web site produc- The evaluation also drew on background studies tion. Gloria Mestre-Soria and Nischint Bhatnagar and evaluative work by Charles Ebinger (power provided administrative support. Vivian Jackson, policies), Donald Hertzmark (natural gas), and Alex McKenzie, and Melanie Zipperer assisted in Craig Meisner (cross-national analyses of energy dissemination. Thanks go to Ismail Arslan, Arup consumption and power sector fuel mix). Princi- Banerji, Sharokh Fardoust, Ali Khadr, and many pal research assistants Dinara Akhmetova, others at IEG for advice and help. Ashwin Bhouraskar, and Kunal Khatri undertook diligent portfolio analysis. Victoria Gunnarson, The evaluation team is grateful to David Victor and Stephen Hutton, Romain Lacombe, Urvashi colleagues at Stanford for discussions and notes Narain, and Yadviga Semikolenova also provided on the political economy of power reform. The valuable assistance. team is also grateful for the cooperation of World Bank staff members and others who were Peer reviewers Fernando Manibog, Siv Tokle, interviewed. and David Wheeler and external panel reviewers Geoffrey Heal and Thomas Heller provided IEG gratefully acknowledges InWEnt's cospon- useful feedback on the evaluation draft. The sorship of a workshop related to Phase II of the panel reviewers, including Rajendra K. Pachauri, evaluation series. also provided comments on the final draft that will also guide the next phase of the evaluation. Director-General, Evaluation: Vinod Thomas Director, IEG-World Bank: Cheryl Gray (director at inception: Ajay Chhibber) Task Manager: Kenneth M. Chomitz x i i i A natural gas flaring tower at Pemex's Dos Bocas petroleum-exporting complex, Mexico. Reproduced by permission of Corbis; photo © Keith Dannemiller/Corbis. Foreword Scientific consensus warns that climate change tion. The Bank's investments in energy efficiency threatens to derail development, while business- have often been effective, but they have been as-usual development threatens to destabilize modest, with little emphasis on policies. There is the climate. The World Bank Group has change, however, including a recent ramp-up in awakened to the challenge of disarming these International Finance Corporation investments. interlocking risks. But in doing so, it has to Countries are receptive, and Bank Group leader- confront areas of possible tension: ship could make a difference to this up-to-now under-prioritized area. · Between a country-focused operational model and support for global public goods Win-win policies will not be enough to meet · Between a global role encompassing devel- clients' energy needs or to decouple development oped countries and its focus on developing na- from emissions. The UN Framework Convention tions on Climate Change stresses developed countries' · Among greenhouse gas mitigation, climate responsibilities to reduce their own emissions and adaptation, and near-term growth. to provide financial and technological support to developing countries. Relevant to this is Bank Win-win policies in energy pricing and in non- Group experience in using concessional and price energy efficiency have the potential to carbon finance to support clean energy technolo- reconcile national and global goals. They can help gies--the subject of the second phase of the countries meet a good part of their incremental climate evaluation. IEG is also assessing forest energy needs at low cost, while freeing up funds sector experience that bears on reduced for social protection and increasing resilience to emissions from deforestation. international energy price shocks. About a fifth of the baseline global increase in energy-related CO2 The Bank has had limited direct experience in emissions could be reduced by 2030 through adaptation, although efforts in disaster preven- efficiency measures that pay for themselves, in tion and weather index insurance are cases that the developing world alone. suggest consonance with near-term develop- ment goals. Adaptation is the subject of the Policy reforms are needed to unlock these climate evaluation's third phase. benefits. Energy price reform is seldom easy, but 2008 market conditions showed the unsustain- The World Bank Group has a vital role in address- ability of energy subsidies, and the Bank is well ing the interlinked problems of development placed to help. Analytic and financial support can and climate change. IEG's three-year program of promote socially beneficial and politically evaluation is designed to assist the Bank Group feasible options--for instance, redirection of as it formulates and implements an operational poorly targeted energy subsidies to social protec- strategy in this critical area. Vinod Thomas Director-General, Evaluation x v A coal-run power plant in Tangshan, China, in China's Hebei Province. Reproduced by permission from Corbis; photo © Jason Lee/Reuters/Corbis. Executive Summary C limate change threatens to derail development, even as development pumps ever-greater quantities of carbon dioxide into an atmosphere already polluted with two centuries of Western emissions. The World Bank, with a newly-articulated Strategic Framework on Development and Cli- mate Change, must confront these entangled threats in helping its clients to carve out a sustainable growth path. But this is known territory--many of the climate Improvements in the design and implementation change policies under discussion have close of social safety nets can help to rationalize energy analogues in the past. This phase of the evalua- prices while protecting the poor. tion, focused on the World Bank (and not the International Finance Corporation or the End-user energy efficiency has long been viewed Multilateral Investment Guarantee Agency), as a win-win approach with great potential for assesses the World Bank's experience with key reducing emissions. It becomes increasingly win-win policies in the energy sector--policies attractive as the costs of constructing and fueling that combine gains at the country level with power plants rise. About 5 percent of the Bank's globally beneficial greenhouse gas (GHG) energy commitments by value (about 10 percent reductions. The next phase will look across the by number) have gone to specific efficiency entire World Bank Group at project-level experi- efforts, including end-user efficiency and district ence in promoting technologies for renewable heating. Including a broader range of projects energy and energy efficiency and at some issues identified by management as supporting supply- related to climate change in the Bank's transport side energy efficiency would boost the propor- and forestry portfolios. tion above 20 percent by number. Few projects tackled regulatory issues related to end-user Within the range of win-win policies, this report efficiency, though the Bank has invested in some examines two that have long been discussed but technical assistance and analytical work. This are more relevant than ever in light of record historical lack of emphasis on energy efficiency is energy prices: removal of energy subsidies and not unique to the Bank and reflects the complex- promotion of end-user energy efficiency. Energy ity of pursuing end-user efficiency, a pervasive subsidies are expensive, damage the climate, and set of biases that favor electricity supply over disproportionately benefit the well-off. Their efficiency, inadequate investments in learning, reduction can encourage energy efficiency, and inattention to energy systems in the wake of increase the attractiveness of renewable energy, power sector reform. and allow more resources to flow to poor people and to investments in cleaner power. Though The record levels of energy prices in 2008, subsidy reduction is never easy, the Bank has a although they have been relaxed, provide an record of accomplishment in this area, especially impetus for the Bank and its clients to choose in the transition countries. About a quarter of Bank more sustainable long-term trajectories of energy projects included attention to price reform. growth. The mid-2008 oil price was equivalent to x v i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P the 2006 price, plus a $135 per ton tax on carbon addresses the role of carbon finance. A parallel dioxide--the kind of level that energy modelers study examines the role of forests in climate say is necessary for long-term climate stabiliza- mitigation. The climate evaluation's final phase tion. To help clients cope with the burden of will look at adaptation to climate change. these prices, and take advantage of the signals they send for sustainability, the Bank can do four Motivation things: Operationally, the World Bank has pursued three broad lines of action in promoting the mitigation 1. It can make promotion of energy efficiency a of GHG emissions, the main contributor to priority, using efficiency investments and poli- climate change. First, it has mobilized conces- cies to adjust to higher prices and construct- sional finance from the Global Environment ing economies that are more resilient. Facility (GEF) and carbon finance from the Clean 2. It can assist countries in removing subsidies by Development Mechanism (CDM) to promote helping to design and finance programs that renewable energy and other GHG-reducing activi- protect the poor and help others adjust to ties. Second, and to a much more limited extent, higher prices. it has used GEF funds to stimulate the develop- 3. It can promote a systems approach to energy. ment of noncommercial technologies. Third, and 4. And it can motivate and inform these actions, the subject of this evaluation, it has supported internally and externally, by supporting better win-win policies and projects--sometimes with measurement of energy use, expenditures, an explicit climate motivation, often without. and impacts. These actions not only provide global benefits in reducing GHGs, but also pay for themselves in Goals and Scope purely domestic side benefits such as reduced fuel This evaluation is the first of a series that seeks expenditure or improved air quality. The win-win lessons from the World Bank Group's experience designation obscures the costs that these policies on how to carve out a sustainable growth path. may impose on particular groups, even while The World Bank Group has never had an explicit benefiting a nation as a whole. This presents corporate strategy on climate change against challenges for design and implementation. which evaluative assessments could be made. However, a premise of this evaluation series is Two sets of win-win policies are perennial topics that many of the climate-oriented policies and of discussion in the energy sector: reduction in investments under discussion have close subsidies and energy-efficiency policies, particu- analogues in the past, and thus can be assessed, larly those relating to end-user efficiency. This whether or not they were explicitly oriented to report looks at these, and at another apparently climate change mitigation. win-win topic: gas flaring. Flaring is interesting because of its magnitude, the links to pricing This report, which introduces the series, focuses policy and to carbon finance, and the existence on the World Bank (International Bank for of a World Bank­led initiative to reduce flaring. Reconstruction and Development and Interna- tional Development Association), and not on the Findings International Finance Corporation (IFC) or the Multilateral Investment Guarantee Agency Development spurs emissions. (MIGA). It assesses its experience with key win- win policies in the energy sector: removal of A 1 percent increase in per capita income energy subsidies and promotion of end-user induces--on average and with exceptions--a 1 energy efficiency. The next phase looks at the percent increase in GHG emissions. Hence, to the expanding project-level experience of the Bank extent that the World Bank is successful in support- and the IFC in promoting technologies for ing broad-based growth, it will aggravate climate renewable energy and energy efficiency; it also change. x v i i i E X E C UT I V E S U M M A RY But there is no significant trade-off between climate inefficient, carbon-intensive use of energy and change mitigation and energy access for the poorest. build constituencies for this inefficiency. Basic electricity services for the world's un- The Bank has supported more than 250 operations for connected households, under the most unfavor- energy pricing reform. able assumptions, would add only a third of a percent to global GHG emissions, and much less Success has been achieved in the transition if renewable energy and efficient light bulbs countries--in Romania and Ukraine, for could be deployed. The welfare benefits of example, where energy prices were adjusted electricity access are on the order of $0.50 to $1 toward market levels, and the intensity of carbon per kilowatt-hour, while a stringent valuation of dioxide emissions dropped substantially. Subsidy the corresponding carbon damages, in a worst- removal can threaten the poor, however. Recent case scenario, is a few cents per kilowatt-hour. efforts to assess poverty and welfare impacts systematically appear to have informed the Country policies can shape a low-carbon growth design and implementation of price reform path. efforts, though not necessarily with direct Bank involvement. Examples include Ghana and Although there is a strong link between per Indonesia, where compensatory measures were capita income and energy-related GHG deployed in connection with fuel price rises. emissions, there is a sevenfold variation be- tween the most and least emissions-intensive The Bank has rarely coordinated efficiency improve- countries at a given income level. Reliance on ments with subsidy reductions to lighten the imme- hydropower is part of the story behind these diate adjustment burden on energy users. differences, but fuel pricing is another. High subsidizers--those whose diesel prices are less An exception is the China Heat Reform and than half the world market rate--emit about Building Efficiency Project, which links improved twice as much per capita as other countries with insulation with heat pricing. A growing number similar income levels. And countries with long- of projects sponsor nationwide distribution of standing fuel taxes, such as the United Kingdom, compact fluorescent light bulbs, but this has have evolved more energy-efficient transport been done in response to power shortages and land use. (Rwanda, Uganda) or to stanch utility losses (Argentina, Vietnam), rather than to facilitate Energy subsidies are large, burdensome, regressive, subsidy reduction. and damage the climate. Despite emphasis on energy efficiency in Bank The International Energy Agency's 2005 estimate statements and in Country Assistance Strategies of a quarter-trillion dollars in subsidies each year (CASs), the volume and policy orientation of outside the Organisation for Economic Co- IBRD/IDA efficiency lending has been modest. operation and Development (OECD) may understate the current situation. While poor Although the IFC has recently increased its people receive some of these benefits, overall the investments in energy-efficiency projects, World benefits are skewed to wealthier groups and often Bank commitments for efficiency were about 5 dwarf more progressive public expenditure. Fuel percent by value of energy finance over subsidies alone are 2 to 7.5 times as large as public 1991­2007. This includes investments in spending on health in Bangladesh, Ecuador, the demand-side efficiency and district heating, and Arab Republic of Egypt, India, Indonesia, may also include some supply-side efficiency Morocco, Pakistan, Turkmenistan, República investments. By this definition, about 1 in 10 Bolivariana de Venezuela, and the Republic of projects by number involve energy efficiency. Yemen. At the same time, subsidies encourage Including a broader range of projects identified x i x C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P by management as supporting supply-side flaring, but the use of project-level carbon energy efficiency would boost the proportion finance is a mere bandage for policy ailments that above 20 percent by number over the period require a more fundamental cure. 1998­2007. Globally only about 34 projects undertaken over the 1996­2007 period had Recommendations components oriented to demand-side energy- In mid-2008, real energy prices were at a record efficiency policy. Among these, many attempts to high. While this is burdensome for energy users, promote efficiency have had limited success it opens an opportunity for the Bank to support because the Bank has engaged with utilities, clients in making a transition to a long-term which have limited incentives to restrict electric- sustainable growth path that is resilient to energy ity sales. price volatility, entails less local environmental damage, and is a nationally appropriate contribu- There are several reasons why end-user energy- tion to global mitigation efforts. efficiency projects, and especially policy-oriented projects, appear to be under-emphasized in the Clearly the World Bank needs to focus its efforts Bank's portfolio. strategically on areas of its comparative advantage. This would include supporting the The Bank has carried out some successful and provision of public goods and promoting policy innovative efficiency projects. But internal Bank and institutional reform at the country level. incentives work against these projects because Furthermore, the Bank can achieve the greatest they are often small in scale, demanding of staff leverage by promoting policies that catalyze time and preparation funds, and may require private sector investments in renewable energy persistent client engagement over a period of and energy efficiency, including those supported years. There is a general tendency to prefer by IFC and MIGA. investments in power generation, which are visible and easily understood, over investments in The analysis in this report supports the following efficiency, which are less visible, involve human recommendations: behavior rather than electrical engineering, and whose efficacy is harder to measure. A general Systematically promote the removal of energy neglect of rigorous monitoring and evaluation subsidies, easing social and political economy reinforces the negative view of efficiency. concerns by providing technical assistance and policy advice to help reforming client countries find The Bank-hosted Global Gas Flaring Reduction effective solutions, and analytical work demonstrat- Partnership (GGFR) has fostered dialogue on gas ing the cost and distributional impact of removal of flaring, but it is difficult to assess its impact on such subsidies and of building effective, broad- flaring activity to date. based safety nets. Associated gas (a by-product of oil production) is Energy price reform can endanger poor people often wastefully vented or flared, adding more and arouse the opposition of groups used to low than 400 million tons of carbon dioxide equiva- prices, thereby posing political risks. But failure lent to the atmosphere annually, or about 1 to reform can be worse, diverting public funds percent of global emissions. A modestly funded from investments that fight poverty and foster- public-private partnership, the GGFR has ing an inefficient economy increasingly exposed succeeded in highlighting the issue, promoting to energy shocks. And reform need not be under- dialogue, securing agreement on a voluntary taken overnight. The Bank can provide assistance standard for flaring reduction, and sponsoring in charting and financing adjustment paths that useful diagnostic studies. But only four member are politically, socially, and environmentally countries have adopted the standard. The GGFR sustainable. Factoring political economy into the has emphasized carbon finance as a remedy for design of reforms and supporting better-targeted, x x E X E C UT I V E S U M M A RY more effective social protection systems will be plants. Water management, urban management, elements of this approach. and social safety nets are other areas where cross- sectoral collaboration is essential to promoting Emphasize policies that induce improvement in win-win policies and programs. energy efficiency as a way of reducing the burden of the transition to market-based energy prices. Invest more in improving metrics and monitoring for motivation and learning--at the global, country, and Historically, energy efficiency has received rhetori- project levels. cal support but garnered only a small share of financial support or policy attention. This is Good information can motivate and guide beginning to change with such moves as China's action. commitment to drastically reduce its energy intensity and India's Energy Conservation Act. But First, building on the Bank's current collabora- the Bank can do much more to help clients pursue tion with the International Energy Agency on this agenda. If a real reorientation to energy energy efficiency indicators, the Bank could set efficiency and renewable energy is to occur, the up an Energy Scoreboard that will regularly Bank's internal incentive system needs to be compile up-to-date standardized information reshaped. Instead of targeting dollar growth in on energy prices, collection rates, subsidies, lending for energy efficiency (which may skew policies, and performance data at the national, effort away from the high-leverage, low-cost subnational, and project levels. Borrowers could interventions), it needs to find indicators that more use indicators for benchmarking; in the design directly reflect energy savings and harness them to and implementation of country strategies, country strategies and project decisions. It needs including sectoral and cross-sectoral policies; also to patiently support longer, more staff- and in assessing Bank performance. intensive analysis and technical assistance activities. Increased funding for preparation, policy dialogue, Second, more rigorous economic and environ- analysis, and technical assistance is required. mental assessment is needed for energy invest- ments and those that release or prevent carbon Promote a systems approach by providing incentives emissions. These assessments should draw on to address climate change issues through cross- energy prices collected for the Scoreboard; sectoral approaches and teams at the country level, account for externalities, including the net impact and structured interaction between the Energy and on GHG emissions; and account for price volatil- Environment Sector Boards. ity. Investment projects should also be assessed, qualitatively, on a diffusion index, which would To tackle problems of climate change mitigation indicate the expected catalytic effect of the invest- and adaptation, the Bank and its clients need to ment in subsequent similar projects. It is think, organize, and act beyond the facility level, desirable to complement project-based analysis and outside subsectoral and sectoral confines. One with assessment of indirect and policy-related avenue for this is through greater attention to impacts, which could be much larger. systemwide energy planning. Integrated resource planning, once in vogue, has been largely Third, monitoring and evaluation of energy abandoned in the wake of power sector privatiza- interventions continue to need more attention. tion and unbundling. Yet current planning Large-scale distribution of compact fluorescent methods are inadequate in integrating considera- light bulbs is one example of an intervention that tions of end-use efficiency and in balancing the is well suited to impact analysis and where a risks of volatile fuel prices and weather-sensitive timely analysis could be important in informing electricity output from wind and hydropower massive scale-up activities. x x i Rising waters threaten a cement plant in Bangladesh. Photo by Jouni Martti Eerikainen, reproduced with his permission. Management Response M anagement welcomes the evaluation by the Independent Evalua- tion Group (IEG) of some of the World Bank's experience with "win- win" energy policy reforms, which constitute an important but not exhaustive set of activities within the wider suite of World Bank Group efforts on the energy front. It is useful to take stock of progress on the win- Key Issues of Agreement and Divergence win reforms as defined by IEG, as they are an This management response first outlines the important element of the World Bank Group's areas in which management broadly agrees with vision to contribute to inclusive and sustainable the analysis in the review, noting, however, areas globalization--to help reduce poverty, enhance where IEG could have given a fuller account of growth with care for the environment, and efforts the World Bank has made or is making. It expand individual opportunity. In this context, then discusses areas in which management management particularly would welcome the believes that IEG has drawn conclusions from an promised second phase of IEG's evaluation, analysis based on limited coverage or that do not covering the expanding project-level experience fully take into account the underlying context. of the Bank and International Finance Corpora- tion (IFC) in promoting renewable energy, Areas of Agreement energy efficiency, and carbon finance, the Management agrees with the importance of absence of which precludes a comprehensive energy efficiency and energy pricing in the assessment of the focus and success of World Bank's work and the need for strong collabora- Bank Group efforts on the energy front. tion across sectors on energy policy issues. However, management believes that the report Overview of Response does not adequately reflect the considerable Management concurs with several aspects of IEG's work the Bank has undertaken to address energy main findings, many of which reinforce important efficiency. The Bank's strong involvement in messages already captured in the Bank's energy energy efficiency began in the late 1970s/early sector practices or in the findings from Bank 1980s in response to oil price shocks. Although economic and sector work, internal reviews and interest in energy efficiency languished after the self-evaluation, and emerging lessons from subsequent fall in oil prices, it was rekindled in operational experience across the World Bank the early 1990s when Eastern European and Group. At the same time, management takes issue former Soviet Union countries became active with the evaluation scope of IEG's report; its borrowers. During the 1990s, the Bank sup- definition of win-win energy opportunities; the ported energy efficiency reforms in Europe and gaps in evaluated areas; and the use, in certain Central Asia Region countries through a combina- cases, of findings to draw overly broad conclu- tion of technical assistance, policy loans, and sions or recommendations, such as promoting investment projects.1 The role of energy the use of integrated resource planning by regula- efficiency was further reinforced by the Bank's tors of supply-side energy entities. Therefore, in Fuel for Thought (World Bank 2000), which several respects, management differs with IEG's pushed for market-based approaches to energy findings and recommendations. efficiency. x x i i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P Post-Bonn Efforts. The World Bank Group has Group's components are intended to comple- followed up on its commitment made at the 2004 ment one another and build on respective Bonn International Conference on Renewable comparative advantages and synergies, and it has Energy to increase annual energy efficiency and precluded a comprehensive evaluation of the new renewable energy lending by 20 percent, energy efficiency experience in the World Bank starting in fiscal year 2005. Indeed, average fiscal Group. As a result, management observes that 2005­07 energy-efficiency commitments have some of the report's Phase 1 findings paint an more than doubled compared with the previous incomplete picture of World Bank and World three-year period. The World Bank continues to Bank Group efforts on the energy front. scale up energy efficiency work in the energy sector. Staffing up to increase the skills base is Definition of Win-Win. IEG's report uses a narrow well under way in both the anchor and definition of win-win energy opportunities. operational units. Energy efficiency specialists Management is concerned that the report have been/are being hired by Regional units, focuses on, and draws conclusions from, one Carbon Finance, and the Energy Sector Manage- dimension of energy efficiency (end-user energy ment Assistance Program (ESMAP). efficiency), while not adequately incorporating other important win-win energy opportunities, Areas of Divergence in particular, supply-side energy efficiency Management believes that IEG has drawn conclu- (which covers power plant rehabilitation to sions from an analysis based on limited coverage improve efficiency and also electricity transmis- or that do not fully take into account the underly- sion and distribution system loss reduction), ing context. Management is concerned that renewable energy, and fuel switching. limitations on both definitions and the scope of IEG's report open the way to mischaracterization Indicator. The IEG report uses an indicator that is of the extent and impact of World Bank Group limited to "specific efficiency efforts, including effort on energy efficiency. end-user efficiency and district heating." This opens the way to conclusions and perceptions that Circumscribed Scope. The evaluation scope of may be misleading, including that only about 1 in IEG's report is circumscribed, incorporating only 10 World Bank energy projects involves energy International Bank for Reconstruction and efficiency. However, as noted in the IEG report, Development (IBRD) and International Devel- "including a broader range of projects identified by opment Association (IDA) energy-efficiency management as supporting supply-side energy policy, energy pricing, and gas flaring initiatives, efficiency would boost the proportion above 20 while excluding IFC's substantive role (except, percent by number."2 very occasionally, at the margins). Management observes that excluding IFC programs and activi- Management, and certainly the clients of the World ties that target the key private sector role in Bank Group, would have benefited from a more promoting energy efficiency is a major shortcom- comprehensive analysis and an indicator that ing. IFC activities encompass a range of initiatives included all energy supply-side efficiency, technical (such as the Efficient Lighting Initiative) and assistance, and development policy lending, as sustainability advisory services. By focusing well as IFC investments in energy efficiency. piecemeal on Bank policy experience and deferring project-level experience to a second Management Action Record. Management's specific phase of review, IEG has not taken into account responses to IEG recommendations are outlined that the efforts of each of the World Bank in the attached draft Management Action Record. x x i v M A N AG E M E N T R E S P O N S E Management Action Record Recommendation Management Response Systematically promote the removal of energy subsidies, Agreed; work is already ongoing. easing social and political economy concerns by provid- ing technical assistance and policy advice to help re- forming client countries find effective solutions, and analytical work demonstrating the cost and distributional impact of removal of such subsidies and of building ef- fective, broad-based safety nets. Energy price reform, never easy or painless, can pose social and The Bank continues to work with client countries to address the political economy risks in client countries. But the Bank can help issue of energy subsidies. Technical assistance and policy advice provoke and promote reforms by providing clients with assistance are provided, as requested by our client countries. The Bank fo- in charting and financing adjustment paths that are politically, cuses on the legal and regulatory mechanisms needed to sup- socially, and environmentally sustainable. port sustainable energy pricing reforms. One way to do this is for the Bank to continue to develop and share Energy staff will continue to work with Poverty Reduction and Eco- knowledge on the use of cash transfer systems or other social nomic Management Network and Human Development Network protection programs as potentially superior alternatives to fuel staff (for example, Guidance for Responses from the Human subsidies in assisting the poor. This would include systematic Development Sectors to Rising Food and Fuel Prices, World Bank analyses of the distributional impact of energy subsidies. Timely HDN 2008) to develop and apply social safety nets, including cash monitoring and analysis of energy use and expenditure, at the transfers, designed to protect the poor from the impact of energy household and firm levels, will also be important in policy design, price adjustments. A regulatory thematic group has been es- in securing public support, and in detecting and repairing holes tablished in the Bank to foster dissemination of lessons learned. in the safety net. These lessons will be applied, taking into account the unique cir- cumstances in client countries. When requested, the Bank pro- vides support to enable countries to monitor and analyze energy use so that findings can be applied to their energy policies. Emphasize policies that induce improvement in energy Partially agreed; work is already ongoing. efficiency as a way of reducing the burden of transition to market-based energy prices. Cost-reflective prices for energy boost the returns to efficiency, The Bank has established an Energy Efficiency for Sustainable but the Bank should support country policies that allow house- Development program to help guide and scale up energy efficiency holds and firms to exploit efficiency opportunities. Conversely, activities. It is implementing the first step of this program, to in- the deployment of energy-efficient equipment such as compact crease the staffing with energy-efficiency experience, in ESMAP, fluorescent lights can be used as a device for cushioning the im- the Energy Anchor Unit, and the Regions. This effort is comple- pact of price increases. The Bank should explore innovative ways mented by a learning program developed by the Bank's energy- to finance efficiency (and renewable energy) investments in the efficiency thematic group, under the oversight of the Energy and face of fuel price volatility. Mining Sector Board. Another step is the development of programs and projects at the country/policy level, the industry level, and the equipment level to ensure that a broad-based implementa- tion program evolves. x x v C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P Management Action Record Recommendation Management Response To foster World Bank Group support for energy efficiency, the draft "Development and Climate Change: A Strategic Framework for the World Bank" (World Bank 2008) has proposed an initiative to screen the project pipeline for energy-efficiency potential early in the project design phase. The Bank is working with the donor community to: (i) increase the financial support needed to intensify energy-efficiency efforts; (ii) increase low-cost funding to support energy-efficiency and renew- able energy programs; and (iii) broaden the support from partners in implementing a renewable energy and energy-efficiency program. In order to strengthen internal incentives toward promotion of In terms of internal incentives, the discussion on developing ap- energy efficiency, the Bank should develop appropriate metrics, propriate metrics has been ongoing with the International Energy such as indicators that more directly reflect energy savings, in- Agency and with UN Energy, but to date it has been inconclusive. stead of dollar growth targets in lending for energy efficiency Given the inconclusive nature of the discussion to date, man- (which may distort effort away from the high-leverage, low-cost agement is not prepared to agree with establishing new metrics interventions). These indicators, in turn, need to be harnessed to that focus solely on energy efficiency. The World Bank Group has country strategies and project decisions. All of these efforts are committed to accelerate lending for new renewable energy and likely to call for increased funding for preparation, policy dialogue, energy efficiency to 30 percent per annum over the next three analysis, and technical assistance rather than lending. years, a 50 percent increase over the 2004 Bonn commitment (which it has consistently met since that time). Promote a systems approach by providing incentives to ad- Partially agreed; work is already ongoing. dress climate change issues through cross-sectoral ap- proaches, teams at the country level, and structured interaction between the Energy and Environment Sector Boards. Helping clients reform will require a systems view, such as look- The Bank will continue to use a system-wide approach in re- ing at the power system as a whole; looking at energy subsidies viewing projects and programs. as just one, undesirable, part of a social protection system; and looking at the connections between water and power management. To be effective the Bank needs to break down sectoral silos and Most Regions and many country teams have already created cli- encourage cross-sector approaches and teams. This will require mate change teams of staff from several sectors to promote championship by country directors and vice presidents, to pro- synergies, and are developing cross-sectoral business strategies mote incentives such as supporting capacity building for power to integrate climate change considerations. The World Bank system regulators in integrated resource planning, and using Group established a Climate Change Management Group as a the Clean Technology Fund to support public systems that will focal point to discuss cross-sectoral issues and promote synergies. catalyze widespread investments. The Bank supports regulatory capacity building, drawing on les- x x v i M A N AG E M E N T R E S P O N S E Management Action Record Recommendation Management Response sons learned from successful cases accomplished to date. On the basis of previous experience, management disagrees with the proposed use of integrated resource planning, as it is unconvinced of the effectiveness of the use of integrated resource planning by either supply-side entities or their regulators. However, the Bank supports the use of broad-based planning tools by policy makers to support the implementation of policies in the legal and regulatory framework. The Bank is currently considering large-scale responses to demand-side issues using new funding for low-carbon tech- nologies when the funds become available. Structured interaction of the Energy and Environment Sector The merging of infrastructure and environment into a common Boards, initiated with ad hoc groups to address specific cross- vice presidency has facilitated interaction at the sector boards sectoral challenges, could move the Bank closer toward main- and thematic working groups. streaming sustainable development. Invest more in improving metrics and monitoring for mo- Partially agreed; work is already ongoing. tivation and learning at the global, country, and project levels. Good information can motivate and guide action. One particularly The Bank has been working with the International Energy Agency useful global initiative for the World Bank would be to collabo- on collecting energy-efficiency­related information in pilot coun- rate with the International Energy Agency or other partners to set tries for two years, with limited success. Management does not up an Energy Scorecard that would compile up-to-date and reg- commit to the idea of establishing a centrally maintained Energy ular standardized information on efficiency indicators, energy Scorecard. Rather, the focus of our efforts is now on helping client prices, policies, and subsidies at the national and sectoral lev- countries establish their capacity to undertake the data collection els. Indicators could be used by borrowers for benchmarking; in exercise in a manner that targets both effective implementation the design and implementation of country strategies, including and related policy-making guidance. Without this capacity and coun- sectoral and cross-sectoral policies; and in assessing Bank per- try willingness to participate in and lead this initiative, it will not formance in assisting countries. be sustained. The Bank is also looking into possible new, innova- tive knowledge-sharing mechanisms to facilitate sharing lessons learned. At the national level, the Bank should support integration of The Bank lacks the resources to maintain a comprehensive and household and firm surveys with energy consumption and access reliable database on energy policies, prices, subsidies, and en- information to lay the foundation for assessing impacts of price ergy efficiency at the national level. Regional organizations pro- rises and mitigatory measures, as well as planning for improved vide part of this information, which the Bank selectively draws access. upon, depending on the information's reliability. x x v i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P Management Action Record Recommendation Management Response The Bank, with ESMAP support, has led in improving Living Stan- dards Measurement Survey (LSMS) instruments for increased col- lection of energy data as part of LSMS surveys. At the project level, the Bank should invest in rapid-feedback mon- The Bank will include rapid-feedback and monitoring and impact itoring and impact evaluation of efficiency projects and policies. evaluation of efficiency projects when requested by our borrowers. x x v i i i Chairperson's Summary: Committee on Development Effectiveness (CODE) O n August 27, 2008, the Committee on Development Effectiveness (CODE) met to consider the report entitled Climate Change and the World Bank Group--Phase I: An Evaluation of World Bank Win-Win Energy Policy Reform prepared by the Independent Evaluation Group (IEG), together with the draft Management Response. Background concerns by providing technical assistance and On December 17, 2007, the Committee consid- policy advice to help reforming client countries ered a study entitled The Welfare Impact of Rural find effective, broad-based safety nets. Electrification: A Reassessment of the Costs and · Emphasize policies that induce improvements Benefits, prepared by IEG. The Committee consid- in energy efficiency as a way of reducing the ered the IEG report Supporting Environmental burden of transition to market-based energy Sustainability--An Evaluation of World Bank prices. Group Experience, 1990­2007, and draft Manage- · Promote a systems approach by providing in- ment Response on June 18, 2008. Recently, the centives to address climate change issues Committee discussed the draft Strategic through cross-sectoral approaches and teams Framework on Climate Change for the World at the country level and structured interaction Bank Group at its meeting of August 6, 2008. between the energy and environment sector boards. IEG Evaluation · Invest more in improving metrics and moni- IEG introduced the current evaluation report as toring for motivation and learning at the global, part of a phased series on climate change. country, and project levels. Subsequent phases will address issues of clean technology investments, carbon finance, and Draft Management Response adaptation, and will look across the World Bank Management agreed with the importance of Group. This Phase I evaluation assessed the energy efficiency and energy pricing in the World Bank's experience with key win-win Bank's work and the need for collaboration policies in the energy sector--those that across sectors on energy policy issues. At the combine gains at the country level with globally same time, management believes that IEG has beneficial greenhouse gas (GHG) reductions. drawn conclusions from an incomplete analysis The analysis of this report supported the follow- based on limited coverage and that do not fully ing recommendations: take into account the underlying context. Management expressed concerns that the IEG · Systematically promote the removal of energy report does not cover the full range of the World subsidies, easing social and political economy Bank Group's programs and activities (for x x i x C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P example, assisting the private sector in promot- analytical and design work in this regard should ing energy efficiency) and that it focuses on one be at a global level, encompassing developed subset of win-win energy opportunities and countries as well. Thus, the World Bank Group excludes others, such as energy conservation, could play a very useful role in making high- load management, and supply-side efficiency quality information and a balanced monitoring investments, as well as renewable energies and framework for a global public good. fuel switching. Next Steps Overall Conclusions The report is the first of a three-part IEG evalua- The Committee commended IEG for an tion on Climate Change and the World Bank excellent report, which members found very Group, and focuses on IBRD-IDA experience. In informative, and acknowledged the trade-offs of response to the Committee's request, IEG undertaking the evaluation in appropriate, committed to clarify the scope, content, and sequenced parts as had been outlined and context of the Phase I report as part of its agreed in the Approach Paper. Nevertheless, it preparation for publication. This includes clarify- was essential that strategic communication be ing how it fits in the three-phase evaluation by carefully designed to avoid misleading or unfair IEG (where the second phase will look at the interpretations of the findings. The plan for a World Bank Group's project-level experience in capstone paper covering all three phases was promoting technologies for renewable energy, endorsed. There was strong support for deepen- energy efficiency, and transport; and the third ing the Bank's engagement with clients on phase will look at adaptation issues). IEG also energy pricing policies, though there was committed to prepare a capstone paper recognition that it is a complex issue encompass- summarizing the three phases at the conclusion ing economic, environmental, social, and politi- of the series; the Committee will consider cal aspects that were likely to vary country by whether or not to recommend this paper for a country and over time. The Bank could play a full Board discussion. useful role in sharing best practices and distilling lessons of experience, particularly on energy Main Issues Raised at the Meeting taxes and subsidies and on pricing policies for The principal issues discussed were the renewable energy to help countries institute following: socially and environmentally sustainable pricing. Scope of IEG Report The general sentiment was for greater emphasis Some speakers would have liked to have seen than hitherto on energy pricing policy, and immediate treatment (in the current phase) of a energy efficiency in a broad sense. In this regard, broader range of topics, including energy conser- the issues of external institutional incentives and vation and energy access; supply-side in addition internal incentives resonated with several to demand-side efficiency; discussion of new and attendees who recommended that management additional financing, particularly for technology pay greater attention to this matter, including and equipment; discussion of additional energy one suggestion to consider organizational sources, including biofuel or nuclear; coverage changes (noting parenthetically that this issue's and targeted analysis of Bank support for adapta- relevance goes well beyond the energy sector). tion; and extension of the evaluation beyond While noting management's point about dividing energy to forestry, transport, and agriculture labor appropriately with other agencies such as issues. One member agreed with IEG's the International Energy Agency (IEA), the broad recommendations but felt that further thought sentiment at the meeting was supportive of IEG's should be given on how to implement them. recommendations that the Bank be more involved in developing metrics and performance IEG's definition of win-win (or no-regret) indicators. Indeed, several speakers added that policies and projects offering potential gains at x x x C H A I R P E RS O N ' S S U M M A RY: C O M M IT T E E O N D E V E L O P M E N T E F E C T I V E N E S S ( C O D E ) the country level aligned to global interest (for and institutional settings. Some speakers stressed example, reduction in GHG) drew some the importance of adjusting the internal (for staff comments. One member felt the report could and management) and external (countries, Bank, have expanded this concept to consider environ- and development partners) institutional incentive mental taxation and subsidies for renewable system. However, they also cautioned about the energy. Some others underscored that the paper need to consider political economy considera- should have given more emphasis to the princi- tions, as well as market failure and institutional ple of "common but differentiated responsibili- constraints in client countries. A question was ties and respective capacities" in emissions and raised about the adequacy of the Bank's resources in additional financing, rather than focusing on as well as organizational and operational capabili- savings from removal of subsidies. In this regard, ties to address the challenges of policy dialogue a member noted that the poorest countries, and reforms. In addition, one member stressed which emit only a tiny fraction of the per capita the need to balance the emphasis between emissions of developed countries, will be dispro- software (price reform and regulatory framework) portionately affected by climate change. At the and hardware (energy-efficiency equipment). same time, the need to address subsidy Management affirmed the Bank's internal capacity reductions and energy efficiency in developed to provide a full package: 200 experts in thematic countries was raised by another speaker. teams and cross-sectoral teams in the Regions, offering not only lending but also technical Some members stressed the importance of assistance, as well as social safety nets and policy broadening the evaluation to World Bank Group advice. activities, including synergies between institu- tions. One speaker considered that the structure Subsidies and Energy Pricing of IEG's proposed suite of climate-related There was general consensus on the need to be analyses would be incomplete without explicitly mindful of the political challenges of subsidies addressing the GHG implications of the Bank and pricing reforms, as well as economic and Group's engagements to help developing social dimensions at the national and regional countries reform their power sectors. This levels. Speakers agreed that more emphasis speaker suggested that IEG should evaluate the should be given to removal of energy subsidies positive and negative links between different and were not surprised by IEG findings that power sector reforms and low-carbon electricity subsidies were a poorly monitored drag on the services as part of the second phase of its climate economies of developing countries. They also evaluation. IEG said that Phase I focused mainly stressed the importance of supporting energy on the World Bank, but the next phase will pricing reform, an area recommended by IEG for certainly include the International Finance greater emphasis. On price reform, the Corporation and the Multilateral Investment importance of diversity of reform packages to Guarantee Agency. A few members suggested an address country-specific circumstances; of a appropriate communication strategy for dissem- gradual approach to complement progress in inating the IEG three-phased review in a compre- institutional development; of finding windows of hensive manner to avoid misunderstandings. As opportunity for analytical work and policy suggested by some speakers, IEG agreed to dialogue to motivate reform; and of client highlight, during the dissemination of each ownership were noted. It was also added that the phase of the report, that it is part of a broader adjustment of prices to market level should take review. into account vulnerable groups in relation to the other interests vested in the society, and the Bank's Assistance need for appropriate compensation systems. The Bank was encouraged to deepen its engage- ment with countries through policy dialogue and Speakers encouraged the Bank to disseminate to support them to pursue appropriate regulatory lessons learned, good practices, and guidelines, x x x i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P as well as more analytic work on implementing and have been repeatedly stressed in Bank policy various reforms including fiscal sustainability, documents. cross-subsidization, distributional impact, and cap-and-trade schemes. Management indicated Metrics and Monitoring that the Bank uses a number of instruments to Several speakers concurred with IEG's appreciate the political economy, such as Poverty recommendation that the Bank should work and Social Impact Analyses. Management also toward developing appropriate metrics, while noted that the Organisation for Economic Co- recognizing management's point that data operation and Development (OECD) has done collection would be costly. A few speakers work on best practices in environmental taxation pointed to a 1999 ESMAP "scorecard" publication and cap-and-trade that the Bank is using in its as precedent. Additionally, some speakers analysis. Some speakers stressed the importance stressed the need for the Bank to play an of addressing energy subsidies analysis and advocacy role in promoting a more balanced energy pricing reform in the new Strategic global monitoring mechanism by including Framework on Climate Change and Develop- indicators such as mobilizing financial and ment (SFCCD), which management indicated technological support to developing countries, would be addressed in the full SFCCD paper. while the political sensitivities and technical complexities of carbon accounting were Efficiency Policies acknowledged. Management indicated that it Some speakers agreed with IEG on the need for does not commit to developing and maintaining the Bank to systematically encourage more a database of this type, but it will work to develop energy-efficiency activities in client countries. indicators and help countries to establish Management agreed, and stated that the full range capacity. Management noted that the Bank works of interventions, including the supply side of together with the OECD, EUROSTAT, and energy efficiency (loss reduction in distribution, multilateral development banks, and supports transmission, and generation), and alternatives specialized agencies such as the IEA and UN, such as buses and public transportation systems trying to help them formulate better indicators. need to be taken into account, depending on the country-specific circumstances. While acknowl- Global Gas Flaring Reduction Partnership edging the importance of supply-side efficiency, (GGFR) IEG stressed that demand-side efficiency A few speakers noted that the Bank has played an measures have been viewed by recent studies as advocacy role in promoting reduction of gas offering the largest opportunities for energy flaring, but that adherence to the initiative has savings and emissions reductions--larger than been below expectations. Questions were raised those offered by supply-side measures. Demand- on whether there was a lack of interaction between side and end-use efficiency require policy the GGFR and Bank's business or lack of competi- attention because of underlying market failures tiveness of the Bank's financial instruments. Jiayi Zou, Chairperson x x x i i Statements by the External Review Panel: Climate Evaluation, Phase I Geoffrey M. Heal likely that there are real gains in this area but I Paul Garrett Professor of Public Policy and feel that this is something that should be spelled Business Responsibility, Columbia University out more clearly. Overall I think this is a very good report. It I was impressed by the comment that the social focuses on important issues that are ones where benefits of providing power to the poorest the Bank can make some difference. My greatly outweigh the social costs, even if power is comments are minor. provided in a way that generates greenhouse gases. These numbers should be more widely I think that the two main themes, removal of known. They are important in the global discus- energy subsidies and improvement of energy sions on climate change and the role of the poor efficiency, are critical issues in the context of countries in mitigating this. developing countries (and rich countries too!) facing rising energy prices and threatened by I like the suggestion of Energy Scorecards. These climate change. We know from experience that can provide a basis for benchmarking, often neither is easy to achieve, but for both I feel sure important in the policy-making context, and that the benefits outweigh the costs and fully could also be useful in climate negotiations. justify the efforts. I do think it is particularly Connected to this is the idea of carbon pricing of important to stress, as the report does, that projects that emit CO2, even when there is no removing energy subsidies need not compro- legal requirement to purchase permits. Most mise the ability to get energy to the poorest in major banks in the West now require this of their society more efficiently, and that the main benefi- clients: U.S. banks, for example, require their ciaries of subsidies are often the middle and clients to charge for carbon emissions in project upper classes. I was struck by the numbers evaluations even though there is no need to buy indicating that high subsidizers have much carbon permits. It would be natural for the Bank higher emissions per capita than others: not to do this too. surprising, but the numbers are impressive. As the report mentions, emissions from The report refers several times in the early deforestation are large and generated by sections to a systems approach to energy. I am developing countries: Brazil, Indonesia, and still not completely sure what is meant by this. I China are in the top four emitters, and for Brazil take it to mean looking simultaneously at all and Indonesia it is the case that most emissions aspects of energy production and consumption come from deforestation. There is scope for a and thinking through interactions and possible global win-win move if we implement one of the duplication and overlap, worrying more about Reduced Emissions from Deforestation and joint heat and power schemes, and so on. It is Degradation (REDD) ideas now under discus- x x x i i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P sion, as this will not only reduce emissions but clarify and elaborate, in the light of its recorded also lead to new development finance. The behavior, the Bank's comparative advantage in the Bank's Prototype Carbon Fund is important in field of climate change. this context. Part A Again, in summary, I was impressed by the There are very many discrete elements of the review: it seems to address very important report that I found coherent, enlightening, and issues, and does so clearly. innovatively put forward. It makes a very useful contribution to the literature on energy and Thomas C. Heller climate that would well be read within and Lewis Talbot and Nadine Hearn Shelton Profes- outside the Bank Group. I'll list areas of sor of International Legal Studies, Stanford treatment that, in my view, reinforce this University conclusion. My comments are intended to be useful and 1 provocative, even though I understand that, as The initial chapters on the relationships among detailed in chapter 1, the segment of the overall energy growth, carbon emissions, and economic projected IEG evaluation we have before us is growth are concise and precise statements of very restricted. It deals with win-win opportuni- what we know about these essential matters. ties and defers systematic consideration of major They stress the critical points for the Bank Group issues (like carbon markets) that are only alluded and other major actors in the climate/energy to in this initial treatment. Any criticism of intersection that poverty reduction and energy findings or recommendations in these areas of growth are not directly in conflict, that carbon work key to rating and reforming Bank Group and energy intensity are partially functions of performance is evidently unfair as premature. natural endowments and partially products of Still, I hope that these remarks on the in- clear choices about economic development complete work may contribute to shaping the paths, and that wide variation between nations in entire final product. carbon emission performance is in part a function of energy policy and pricing. (Although I want to state immediately that I like the report given different labor, capital, and energy and find its organization, analyses, and endowments, as well as the lack of understand- recommendations generally clear, well founded, ing of carbon dynamics during the period in and pertinent. I will describe below the main which basic patterns of economic development points that exemplify these contributions. After and resource use were set, the province and stressing my strong appreciation for the tenor and maintenance of these policies may themselves content the report already makes (part A), I would be subject to alternative interpretations.) like to discuss an implicit issue that runs through- out that is troubling (part B). The issue is that even 2 a cursory history of the Bank Group's engage- The tabular and analytical work on the carbon ment, though admittedly indirect, with climate tax equivalence of recent increases in resource change since the early 1990s indicates the matters prices is original and quite helpful. stressed in the report have been known to the Bank's actors and central to the Bank's agenda for 3 this whole period. The unanswered question that The case against subsidies and its political runs through the report is why outcomes should dynamics in the emerging era of high com- be different now, and in years to come, than they modity prices and resource rent transfers have been in the past. As the report implies in summarizes well a mass of (fragmented) data chapter 7, box 7.1, what is needed most in the clearly and deals nicely with the lack of basis for future elaboration of the entire IEG project is to pushing these policies forward in the name of x x x i v STAT E M E N T S BY T H E E X T E R N A L R E V I E W PA N E L : C L I M AT E E VA L UAT I O N , P H AS E I the poor, much better aided through other increases in the productivity of investment. policy means. These observations most often are made in the course of case or project studies. Examples 4 include: The scale of the economic opportunities to reduce waste through energy efficiency and a. DSM projects may often be undertaken as thereby avoid the construction of additional economical by utilities in developing coun- carbon-intensive generation is restated, but with tries that are forced by subsidized pricing to apt attention directed to the gap between the realize losses in some retail services. technical and engineering potential of improving b. In many cases there are serious questions both economic and environmental performance about the causal impacts of Bank Group and the far weaker experience of closing this gap. projects. Brazilian gains in conservation and There are many particular and original observa- energy efficiency in the 2001 drought period tions throughout the report, based on case were more likely attributable to learning studies of the Bank Group's energy-efficiency during mandatory rationing than codes or program record (see #6 below) that contribute other policy reforms. Eastern European to the political economy or organizational theory price reforms were more likely due to wide explanations of why energy-efficiency gains are systemic movement toward markets than often ignored in practice. specific policy measures. c. Even in cases where the economies of en- 5 ergy efficiency seem clear, subsidies to com- The report is very informative in describing pact fluorescent lighting (ILUMEX) were World Bank concentrations of loans and invest- not sustainable learning instruments that led ments in specific dimensions of broad project to changed behavior when terminated. categories. For example, in the area of energy d. The best energy-efficiency codes have little efficiency, the bulk of projects and funds are impact in the longer run without greater and placed in supply-side efficiency (equipment). sustained attention to monitoring and im- Even in the limited set of projects aimed at plementation capacity. managing demand- side efficiency (DSM), there e. Favorable organizational image (public re- is more emphasis given to technology (for lations) was a more effective cause of re- example, CFL bulbs) than policy reforms (tariff producible behavior than other policies or decoupling--though it is shown that Bank subsidies in EGAT's (Thailand) success with Group electricity pricing reform should have a compact fluorescent lightbulbs, indicating positive impact on the demand for energy- the potential of properly incentivized efficiency measures of all types). In the area of utilities. codes and standards, the emphasis is more on the elaboration and enactment of codes than on 7 their monitoring or enforcement. Equally The report details well how and why what appear important, there are allusions to the role of to be win-win investments, especially in the area organizational structures and incentives in of energy efficiency, do not eventuate in a great producing these concentrations. number of instances. The roster of reasons varies from an absence of core collective goods like 6 information to the presence of intranational The report is replete with valuable and original resource transfer that requires either compensa- observations that reflect the IEG author's tion or regulatory expropriation. But the report substantial knowledge of the sectors and also makes it clear that many of these collective programs under review. They often stand in gains are efficient at the national level and that contrast to the lack of quality evaluation in other international transfers may be an unwise use of Bank Group processes designed to yield ongoing scarce financial resources. With these insights, it x x x v C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P would seem that it would by now, after many Europe did better than large-scale fuel-produc- years of Bank Group investment in this area, be ing nations. Moreover, the report notes very standard operating practice within the Group to variable performance in project monitoring, have developed effective analytical tools to analysis, and performance evaluation in the discriminate between what should be done Bank's portfolio as well. (It is again surprising nationally and what internationally. However, that there is as little systematic examination and there is no case made in the evaluation that any learning from the variable record of performance such tools have been consistently applied as as one would gather has occurred from a reading normal use. The lack of attention over the years of the report's description of the materials to of Bank Group experience raises concerns about which it had access.) the incentives within the Group to manage these issues as well as might be hoped. 3 There is good emphasis given in the report to Part B the need for greater coordination across depart- Before explaining my questions about the ments of the Bank Group to reduce intra-organi- implications of the report for defining the zational stove-piping and the loss of potential comparative advantage of the World Bank Group benefits from a more comprehensive and in the area of climate change, I want to list a systematic evaluation of the productivity of number of specific criticisms of the record made different investment options. in the Report itself that are both persuasive and tempered. These three main themes form the logical and empirical basis for some of the key recommen- 1 dations for reform. The first four recommenda- Although there is increasing recent attention tions are indisputable and well supported by the given to energy-efficiency support, especially by internal analysis of the report. These are: (1) the IFC, when one considers the full spectrum of focus on the removal of subsidies and provide Bank Group investment in the energy/climate targeted income compensation to the poor intersection (one in five projects has some damaged thereby; (2) emphasize energy- connection to efficiency if a broader range of efficiency opportunities and correct fuel and supply-side measures is considered), the relative power prices to support these initiatives; (3) proportion of the project funding going to approach climate change systematically across energy efficiency has been less than optimal. the full range of World Bank country engage- Within this class of under-funded activities, the ments because of the risk of perverse incentives relative proportion to demand-side management under stove-piping; (4) improve the metrics and is especially low in comparison to supply-side monitoring capacities to improve the informa- efficiency. tion base on which such policy and program choices are made. 2 The report presents a good compilation of the It is the fifth recommendation--that it would be mixed record of effectiveness of many of the core better for the Bank to concentrate on those areas programs in the World Bank portfolio. These of the Bank Group's competitive advantage, include the large number of investments in namely, promoting policy and institutional power sector reform, gas flaring in general and reform--that I think would benefit from clearer the Global Gas Flaring Reduction Partnership in and more explicit elaboration in future work. I particular, and energy pricing reforms. There do not suggest this because I disagree with the are patterns observable in the variation in recommendation. I agree wholeheartedly that effectiveness within these programs. For the weak record of positive results of all of our example, fuel price reforms have been less institutions around global climate change is successful than electricity price reforms; Eastern generally best explained by hard problems x x x v i STAT E M E N T S BY T H E E X T E R N A L R E V I E W PA N E L : C L I M AT E E VA L UAT I O N , P H AS E I associated with the implementation, monitoring, critics in areas including liberalization, privatiza- evaluation, and reform of misgovernance. What tion, and sectoral reforms. Related is the refrain seems to merit further development in the light that the path of transition from state-controlled of this perception is more empirical evidence or to market-dominated economies was imagined organizational analysis that it is the comparative as straightforward and technical, rather than advantage of the Bank Group to be the agent profoundly political and conditioned by historical best positioned to improve the record with and institutional particularities in different regard to these agreed institutional objectives. countries. All of these claims could suggest the Bank Group has internal incentives to emphasize Just as the report correctly emphasizes that the nonpolitical, often technical, remedies for poor problems with the realization in practice of win- growth performance; to stress upstream (techno- win opportunities in theory lie often in political logical) and normative solutions instead of economy and organizational behavior, it may be downstream regulatory, behavioral, or implemen- useful in framing the future completion of this tation problems because the latter are relatively IEG project to ask directly why the Bank Group, more constrained by fundamental concerns after some 15 years of programming in the about intrusion into political operations that climate/energy intersection, continues to operate impose larger sovereignty conflicts. with a suboptimal investment portfolio and highly inconsistent analysis based on an An alternative line of explanation might begin in inadequate information base. Project assessment organizational sociology. The report notes that has been narrow; carbon footprints have been many of the relatively less frequent elements of haphazard; funding for renewables and energy Bank Group programs, like DSM or particular efficiency has been generally low; implementa- types of renewable generation, have been carried tion and monitoring are less attended than are on under the particular aegis of GEF funding or normative prescriptions in policy-oriented activi- are championed by small expert teams marginal ties. Are there systemic or institutional reasons to the larger Bank system. This observation that cause the persistence of these obvious and suggests the foundational proposition of organi- long-standing attributes of Bank Group practice? zation theory that large organizations have a core After initial experience with earlier programs that mission and an attendant adapted culture that were subject to these same criticisms, why have dominates their priorities and performance. Such there not been processes of systematic and organizations respond to threats from the sustained correction in later investment vintages? environment by establishing marginal groups that Would ongoing IEG work be more likely to mediate external demands without disturbing induce positive change in the development in the core operations. Bank Group's program over time if there were more explicit discussion of the reasons that clarify The Bank Group's core mission in this perspec- why it has mainly stuck to a course that has long tive is certainly to foster economic growth, with a been subject to serious criticism? strong amendment in the last decade to an express poverty alleviation orientation. This is We might here only speculate on types of organi- reflected in an incentive system that concentrates zational explanations that might be subjected to on economic expansion and a commitment to more intensive analysis to improve Bank Group short-run measures that bring poverty relief. practice by exposing the incentives that still are Outcomes such as continued investment in manifest in a relatively stagnant and problematic energy infrastructure growth not necessarily investment program. These might include constrained by environmental considerations (for arguments that an emphasis on normative example, coal plant investment) or technology economic prescription is too clear and too easy. diffusion rather than (longer-run) technology This argument has been leveled at other innovation would be expected in such an organi- dimensions of Bank Group programs by internal zational culture explanation. (Conversely, focus x x x v i i C L I M AT E C H A N G E A N D T H E WO R L D BA N K G ROU P on demand restriction might be less prized and should have a strong, though reformed, role in the reinforced because efficiency projects are compli- growing world of carbon finance or climate policy. cated and staff-intensive, don't expend a lot of cash, and are less tangible and less prone to offer In conclusion, at the end of discussing an ceremonial occasions.) excellent report, I wonder whether the report can best further the more effective resolution of such These deeper issues of Bank organizational key climate change questions and help steer the culture or internal incentives raise questions Bank's internal evolution through more direct about what the report poses as the key issue attention in the phases of the project to come to going forward: what is the Bank Group's com- the issue of whether the Bank Group does have parative advantage that should define its comparative advantages in climate in comparison climate/energy strategy? With vast new resources to other potential climate institutions or to other coming onto the climate table, should primary public purposes the Bank Group might pursue. responsibility be assigned to the Bank in allocat- ing important segments of these resources, given Rajendra K. Pachauri its own institutional incentives? These questions Chairman, Intergovernmental Panel on may be premature in terms of the various phases Climate Change; Director-General, Tata Energy of the complete IEG evaluation project. Major Research Institute. issues are not yet examined. These include both the contested record of the Bank Group in The report is comprehensive and reviews a range expending many times the funds on fossil fuel of World Bank activities that fit into an overall infrastructure financing than on noncarbon program related to climate change. Quite alternatives and the record of the Bank Group's appropriately, the report traces the history and carbon market initiatives. While the former is not record of World Bank activities that are expected addressed at all in the report, there are important to have driven mitigation of GHG emissions over anecdotal accounts of the latter. the years. The emphasis on institutional changes and reform measures is quite appropriate, Yet the preliminary work in the report also because in the operations of the World Bank questions the Bank Group's early engagement these assume logical primacy and should lead to with the CDM market in energy-efficiency financ- outcomes in developing countries ensuring ing, raising well-founded concerns about addition- higher levels of energy efficiency and reduced ality if international funds are devoted to reducing emissions of GHGs as a consequence. It may be costs of projects that are economically efficient at mentioned that the Intergovernmental Panel on the national level. This is particularly true if contin- Climate Change (IPCC) in its Fourth Assessment uing subsidies in retail prices reduce incentives for Report (AR4, 2007) has very clearly emphasized demand management. The report's chapter on gas the importance of placing a price on carbon as flaring also analyses critically the Bank's use of perhaps the most effective policy measure for CDM in cases where gas is not flared in the promoting technological change and other common cases where the regulated wholesale actions that could result in reduced emissions price of gas undercuts its collection and transmis- of GHGs. Hence, the viewpoint of the Bank on sion, where electricity prices are held at levels too the issue of subsidies and their removal as well as low to justify gas-fired generation, and where gas rational pricing for different applications consti- transportation projects that should be wholly tutes an important set of priorities that over a economic at oil prices in excess of $40 per barrel period of time can bring about change in the right do not take place because of risks of nonpayment direction. Addressing the assessment of several from state-owned and run-off-takers. These co-benefits, including lower levels of air pollution prospective questions, yet to receive comprehen- at the local level with attendant health benefits, sive IEG analysis, may be seen as challenges to the higher security of energy supply, and the like in conclusory proposition that the Bank Group relation to mitigation of GHGs would have x x x v i i i STAT E M E N T S BY T H E E X T E R N A L R E V I E W PA N E L : C L I M AT E E VA L UAT I O N , P H AS E I provided another dimension of externalities that 2. The second subject on which greater coverage should be part of economic decision making. and targeted analysis would have been useful This aspect has not been addressed adequately. relates to adaptation to the impacts of climate change. It is very clear that effective climate In my view, two additional aspects in preparing policy in every country of the world would re- this report could have enhanced its value: quire a combination of mitigation as well as adaptation, most effectively to be conceptu- 1. Research and development and technology is- alized and implemented by the same organi- suesforensuringmitigationofgreenhousegases. zations and authorities handling both. By not While a number of technological innovations covering adaptation measures in adequate de- would generally flow from the developed to the tail and confining the report essentially to mit- developing countries, the need for customization igation, this dimension has been a loss in of specific technologies to suit local conditions terms of the value of what is presented in the is an important aspect of technological change report. that perhaps deserved greater analysis and cov- erage in the report. This would also be justified All in all, this is a useful document, which, I am by the fact that in several developing countries, sure, will not only help the Bank in developing technological capabilities have reached a level its own climate change portfolio in the coming where they are making a significant difference years but would also be of value to policy makers in bringing about efficiency improvements and and analysts in both the developing as well as the reduced emissions of GHGs. developed world. x x x i x Chapter 1 Evaluation Highlights · The evaluation seeks lessons from policy experience in the energy sec- tor to guide future policies on green- house gas mitigation. · Mitigation of climate change will require a clean development path in both developed and developing countries. · The central challenge of climate change mitigation is how to align national and global interests. Person walks on a dirt road in Mali. Photo by Curt Carnemark, courtesy of the World Bank Photo Library. Introduction, Scope, and Motivation C limate and development are closely interlinked. Development has his- torically driven increased greenhouse gas (GHG) emissions. The buildup of these GHGs in the atmosphere is altering the global climate and threatening development. The developed countries are responsible for most sets the context for the series. Second, This volume offers limited of the buildup of GHGs, and still emit far more per it tackles a small but ambitious coverage of the Bank's capita than the rest of world. But the developing segment of the climate development role in climate change. and transition countries contribute the bulk of agenda as it pertains to the World current emissions, and their contribution is Bank: key win-win policies related to mitigation. swelling rapidly. To stabilize GHGs, all countries, Figure 1.1 shows how this segment is nested both developed and developing, need to move within the broader issues. Table 1.1 describes toward a more sustainable growth path. To do so, how mitigation topics are divided between this however, developing countries will require phase and the next, whose project-level focus financial and technological assistance. Appropri- includes the International Finance Corporation ate policies will be critical for all countries. (IFC) and the Multilateral Investment Guarantee Agency (MIGA). This evaluation is the first of a series that seeks lessons from Bank experience on how to carve Although there are important overlaps, climate out a sustainable growth path. A premise of the issues can be divided into those of adaptation and series is that many climate-oriented policies and those of mitigation. Energy issues loom large in investments now under discussion have close mitigation. (Emissions from deforestation, though analogues in the past. That is, policies and large in the tropical world, have historically projects adopted with other aims--from fiscal attracted less attention.) Within energy concerns, discipline to biodiversity conservation--may this volume focuses on World Bank­client engage- have had significant impacts on GHG emissions ment on policy interventions with the potential or on adaptation to climate change. to confer immediate domestic benefits, while reducing emissions. These interventions have A final, capstone summary to the evaluation series been pursued for many years and are still em- will offer a comprehensive look at the World phasized in discussions of current climate policy. Bank's role in climate change. This initial phase Has the scope for such policies been exhausted? If has a more limited scope. First, it introduces and not, what has been the record in pursuing them? 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Figure 1.1: Intersection of Issues Related Increased climate variability brings a host of risks. to Climate Change As temperatures rise more than 2° C over 1990­2000 levels, the frequency or intensity of extreme events such as hurricanes is likely to increase. Repeated weather shocks could threaten growth in poor, climate-vulnerable countries and Climate regions. Risks are increasingly becoming unreck- mitigation Climate onable, which complicates planning for a wide Energy adaptation range of endeavors. Because of climate change, the past is no longer a reliable guide to the future. While climate models are improving, and show robust agreement about global trends, they often Win-win offer divergent forecasts of future average policies precipitation at the level of a specific province or river basin. Less predictable still are changes in the local likelihood of droughts, floods, and storms. Investments in water systems, agricul- Compared with most Independent Evaluation ture, and disaster preparedness thus have to Group (IEG) thematic studies, this volume hedge bets against an increasingly uncertain places more emphasis on policy context. This is future, an expensive undertaking. At the global Energy policies are a because the Bank lacks formal goals scale, there is a small but growing chance of a significant concern for related to climate change against planetary catastrophe--an increase of 5° C or climate change which evaluative assessments could more that would lead to profound and universal mitigation. be made. It also reflects a goal of changes in sea level, weather, and ecosystems drawing lessons for the Bank from (Stern 2007). external experience. Adaptation to these changes has to be combined The remainder of this section briefly sketches the with mitigation of their severity. Indeed, in the striped territory shown in figure 1.1 and sets this short run there is no way to alter the climate evaluation and the rest of those in this series in changes that are already in train, so that adapta- context. tion is essential. The longer the horizon, however, the more leverage there is to moderate GHG Confronting Inexorable Calamities and emissions and reduce the worst long-term risks. Unreckonable Risks A changing climate threatens development and The United Nations Framework Convention on requires costly adaptations.1 Higher tempera- Climate Change (UNFCCC) requires that the A changing climate tures bring inexorable calamities, with atmospheric concentration of GHGs--now at threatens development. irreversible changes at specific locales. 430 ppm CO2e (parts per million of carbon The sea will rise, exposing the large dioxide equivalent)--be stabilized at safe levels. proportion of humanity that lives near a coast to "Safe" levels are debated: the Stern Review inundation, flooding, and salinized water advises a target between 450 and 550 ppm to supplies. The Himalayan and Andean glaciers will minimize the chance of catastrophic outcomes; melt, affecting water supplies to billions of others, worried about crossing a tipping point to people. Some areas could tip from accelerated CO2 release, recommend lower Climate variability is semi-arid to arid, threatening the levels. Global models (IPCC 2007a) show that to increasingly unreckonable, livelihood of some of the world's stabilize CO2e concentrations below 535 ppm, complicating development poorest people, and perhaps inducing global emissions must begin to decrease before planning. mass migrations. 2020--sooner, if more stringent limits are sought. 4 I N T R O D U C T I O N , S C O P E , A N D M OT I VAT I O N Table 1.1: Topical Map of Issues in the Climate Evaluation Series (Topics in shaded areas are covered in this phase; those in unshaded areas will be discussed in the second phase of the evaluation.) Investments in technologies, facilities, Policies: design and hardware, financial intermediaries Issue implementation (IDA/IBRD) (IDA/IBRD/IFC/MIGA/carbon finance) Energy pricing National adoption of policies that Impact of power pricing policies on remove energy subsidies or rationalize specific investments in renewable energy prices energy and energy efficiency Energy efficiency Policies (in addition to pricing) that Efficiency finance, including ESCOs; encourage energy efficiency, with facility-level investments in demand- and emphasis on end-user and supply-side efficiency demand-side efficiency Gas flaring Natural gas pricing policies and gas Not covered flaring reduction; GGFR experience Transport Fuel pricing policies Transport projects Renewable energy Renewable energy policies (feed in Investments in specific technologies tariffs) affecting investments (wind, water, and the like) Reduced emissions Not covered Protected areas, enforcement of anti- from deforestation deforestation laws, community forests and forest degradation Note: IDA = International Development Association; IBRD = International Bank for Reconstruction and Development (World Bank); GGFR = Global Gas Flaring Reduction Partnership; ESCO = energy service company. Developed countries are largely responsible for finding a better path to wealth for Adaptation must be the current level of climate change, and emit far the developing countries than that combined with more GHGs per person than the developing trod by the developed countries. mitigation. countries. Climate stabilization requires Both the Bali Action Plan and the essentially a complete phase-out of these UNFCCC call for developed countries to emissions in the long run, with significant near- provide "new and additional" funds and term progress toward that goal. The UNFCCC technology that would allow the developing calls on developed countries to take the lead in countries to do this. mitigating emissions. Near-term actions can shape that long- Stabilization of climate However, climate stabilization is not possible term trajectory, with big conse- change requires a clean without the availability of a clean development quences for long-term growth and development path in path in the developing and transition emissions. The concern is with lock- both developed and countries. Even complete elimination of in. For example, poorly insulated developing countries, developed-country emissions would not suf- buildings and inefficient coal plants but developing countries fice by itself. The Bali Action Plan (UNFCCC built today will be in place for decades, need financing. 2007) commits all members of the UNFCCC to consuming money and emitting CO2. the pursuit of "deep cuts in global emissions," Energy subsidies not only stimulate inefficient, "in accordance . . . with the [UNFCCC] princi- emissive energy use; they also generate strong ple of common but differentiated responsibil- constituencies for those inefficiencies, ities and respective capabilities, and taking which makes them difficult to reverse. Actions taken now can into account social and economic conditions Similarly, it is easier to fight conges- shape long-term emission and other relevant factors." That means tion and pollution by establishing patterns. 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P road-user charges before car ownership is into strategies for designing and implementing widespread, than after. them in the face of various barriers. Some analysts (IEA 2006; McKinsey Global Institute 2008) see Three Approaches to Greenhouse tremendous untapped opportunities for win-win Gas Mitigation policies and projects; others are skeptical. There Mitigation of GHGs presents a classic problem in are questions about both the applicability and the environmental economics. A country that reduces feasibility of implementing these policies. The its emissions typically incurs costs, but reaps only World Bank Group's extensive involvement in a small proportion of the global benefits of an supporting win-win climate policies has sometimes improved climate. So countries are not motivated, been framed in climate terms, but more often individually, to undertake the optimal degree of justified on purely domestic, sectoral grounds. global mitigation. IEG's Annual Review of Development Effectiveness 2008 discusses The second approach is to seek compensation the challenge of global public goods at length from the global community for countries that (IEG 2008a). provide GHG reductions. This approach is attractive to a country if the combination of One approach is to seek There are three prominent policy compensation and domestic side benefits win-win policies and approaches to this dilemma. They outweighs the costs of policy adoption. (See projects, but broadly represent the World Bank's carbon finance segments in figure 1.2.) It implementation is often past approach to climate change and underlies the UNFCCC principle of "common impeded by regulatory are consistent with the UNFCCC but differentiated responsibilities." This princi- barriers, coordination principle of "common but differenti- ple reflects the unwillingness of developing problems, vested ated responsibilities" of developed and countries to accept limits on emissions or incur interests, and developing countries. The first is to costs to limit emissions. They point to much institutional and market seek win-win (or no regrets) policies higher per capita emissions by developed failures. and projects. These not only provide countries, and have called on them to take the global benefits in reducing GHGs but lead in global reductions. also pay for themselves in purely domestic side benefits such as reduced fuel expenditure or Compensation could take the form of grants to improved air quality. (See upper-right quadrant of cover the additional costs of providing figure 1.2.) For instance, countries could remove reductions (an approach that has been used by fossil fuel subsidies, thereby curbing GHGs, the Global Environment Facility [GEF]) or improving local air quality, and freeing govern- payments for the reductions themselves (the ment funds for better-targeted social programs. carbon market approach). For convenience, this report will refer to both as carbon finance. The If win-win policies were easy to implement, they Clean Development Mechanism (CDM)--a would have been put in place long ago. But regula- creation of the Kyoto Protocol--is the biggest tory barriers, coordination problems, institutional vehicle for carbon finance, which allows failures, opposition by vested interests, or market developed countries to meet their climate failures impede them. That is, the nation may obligations by paying for emissions reductions benefit as a whole, but there are groups in the developing world. The CDM is currently Another approach is to who lose under win-win policies. restricted to project finance and excludes seek compensation from External finance, such as development support for GHG-reducing policy reforms. The the global community for lending or concessional funds, could Kyoto Protocol also sets up incentives for some countries that provide be used to facilitate adjustment to the developed countries to fund reductions in GHG reductions. win-win policies. transition economies. GEF projects can also be viewed as a kind of carbon finance, though funds A major goal of this evaluation is to provide insight are usually represented as supporting catalytic into the potential scope for win-win policies and actions rather than as compensation. The World 6 I N T R O D U C T I O N , S C O P E , A N D M OT I VAT I O N Figure 1. 2: Global and Domestic Benefits Global Benefits Carbon finance: supporting projects whose global benefits exceed domestic Win-win projects and policies confer strong costs, by sharing the benefits. domestic and global benefits but may not be undertaken if there are regulatory barriers, coordination problems, institutional failures, opposition by vested interests, or market failures. This is the traditional domain of development policy (adjustment) lending. Carbon finance is also discussed as a possible remedy. Domestic Costs Domestic Benefits Lose-lose policies and projects may be undertaken due to perverse incentives, regulatory flaws, or vested interests. Carbon finance: Supporting alternatives to projects whose global costs exceed domestic benefits. Global Costs Bank has been extensively involved in develop- change mitigation. To focus this evalua- A third approach is to ing and implementing CDM and GEF projects. tion series, the following criteria were promote research and considered: development in clean A third, hybrid approach promotes research and technologies. development in clean technologies. Immature · Large potential for mitigation at low technologies are expensive and risky, so few cost in developing and transition countries people will use them without incentives. For · An evaluable World Bank Group record, in- instance, solar power is cleaner but more cluding incorporation in policy and strategy expensive than fossil fuels for grid-connected statements electricity. But the cost of solar power, like most · Relevance to future World Bank Group strategy technologies, decreases as there is more and more · Solid scientific basis for linking activities to experience with manufacturing and using it. For GHG emissions. this reason, industrial strategists advocate pushing technologies down the learning curve, so that they With respect to mitigation potential, IPCC (2007a, end up in the win-win segment. GEF's Operational p. 632) presents a synthesis of current estimates, Program 7 has attempted to do this with concen- using reduction potential relative to a business- trated solar power and other technologies. as-usual baseline in 2030 as a benchmark. For the developing world (that is, outside the Organisa- Priority Areas for Evaluation Related to tion for Economic Co-operation and Develop- Mitigation ment [OECD] and economies in transition), it There is an immense range of activities, across estimates that there are 2.7 billion tons of CO2e of many sectors, that can contribute to climate negative-cost potential savings through end-use 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P efficiency in commercial and residential world, where energy demand is growing rapidly. buildings, including appliances. The availability of The complexity of the international negotiations negative-cost opportunities indicates market around climate change revolves largely around failures in need of policy attention. This compares how the burden of abatement costs--the with 0.1 billion tons in negative-cost transport incremental costs of GHG-reducing technolo- opportunities. In power generation, IPCC es- gies--will be shared. Under the Kyoto Protocol, timates available savings of 0.8 billion tons for developed countries take on obligations for developing countries at a cost of less than $20 reducing emissions but can satisfy these obliga- per ton (possibly including some negative-cost tions, in part, by financing emission reductions options) from cleaner fuels, renewable energy, in the developing world. The Bali Action Plan and increased generation efficiency; another 1.25 calls for provision of new and additional financial become available at costs up to $100 per ton. End- resources for developing countries to address use efficiency in industry offers 0.6 billion tons at both adaptation and mitigation. The World Bank less than $20 per ton. Agriculture and forestry Group has been involved in mobilizing public account for about 1.1 billion tons each at that and private sector funds to support the cost. Low-cost (less than $20 per ton) reduction incremental costs of adopting and diffusing low- opportunities, across all sectors, amount to 6.9 carbon technologies. So this, too, is a focus of billion tons for the developing world, 1.2 for the the climate evaluation series, though not of the economies in transition, and 4.5 for the OECD; 1 current volume. billion tons are regionally unallocated. Emissions from deforestation in the developing This overview suggests that policies affecting end- world are significant. Reduction of deforestation, user energy efficiency stand out as the area with in theory, could be accomplished at low cost and the single greatest potential for emissions would offer numerous local side benefits reduction, and at potentially negative rather than (Chomitz and others 2007). The World Bank has positive cost--a win-win option. As subsequent been a supporter of forest conservation and chapters of this evaluation will show, it is an area sustainable use; lessons from that experience are that the World Bank has stressed in relevant to plans to use carbon finance to Policies affecting end-user sectoral strategies, and where it has support reduced emissions from deforestation energy efficiency stand deployed project, analytic, and and degradation (REDD). In contrast, while out as the area with the capacity-building effort. One set of agriculture is known to be a significant source of single greatest potential win-win policies--removal of energy GHG emissions, and there are prospects of win- for emissions reduction. subsidies--potentially promotes not win approaches, there is much less of an only end-user efficiency, but also evaluable record to examine. Some of the basic supply efficiency and renewable energy. Here, science is still imperfectly understood, and too, there has been extensive World Bank involve- measurement of emissions from nonpoint ment. So energy pricing policies, and non-price- sources (livestock, rice fields) is difficult. related energy-efficiency policies, constitute one focus of IEG's evaluation series. Scope and Methods of This Evaluation Table 1.2 places this volume within IEG's All models of global mitigation show that examination of climate issues. This evaluation is exploitation of win-win opportunities is insuffi- concerned with the first of the three mitigation cient to stabilize GHGs in the atmosphere. approaches--the win-win policies. It confines its Massive investments in low-carbon energy attention to the energy sector, where experience technologies--the menu includes is greater and where there has been more This report is mainly solar, wind, hydropower, nuclear, and attention to climate implications. Because of the concerned with win-win carbon capture and storage--will be policy focus, it is mostly restricted to the experi- policies in the energy necessary. Much of this investment ence of the World Bank (International Bank for sector. will take place in the developing Reconstruction and Development [IBRD] and 8 I N T R O D U C T I O N , S C O P E , A N D M OT I VAT I O N the International Development Association thematic studies that are relevant to climate [IDA]), although IFC experience is referenced change adaptation. These include published where useful for context and comparison. An evaluations of the power sector (IEG 2003), of ongoing IEG evaluation is examining the Bank's renewable energy (IEG 2006b), and of natural recent implementation of its forest policy. disaster prevention and relief (IEG 2006a). Ongoing evaluations of World Bank support for Phase II of the climate evaluation will look at the water management and for agriculture provide second and third approaches to mitigation. background for adaptation issues. Drawing on and expanding an earlier IEG report on renewable energy (IEG 2006b), it will review The plan for this evaluation is as Later phases of the the World Bank Group's record in promoting follows. Chapter 2 uses cross-national evaluation will examine investments in renewable energy and energy data to illustrate the link between the other approaches to efficiency. The World Bank Group has used development and energy-based emis- mitigation. different units and financing mechanisms-- sions, including the scope for policies including carbon finance, IFC investments, GEF to weaken this link. It presents a general frame- grants, and IDA lending--to promote technol- work for understanding energy policy-to- ogy diffusion or to compensate countries for the emissions links, which are numerous and cost of adopting technologies with global complex. It also examines the interlinkage benefits. This phase of the evaluation will also between the energy access and climate mitiga- assess the institutional contributions of the tion agendas. Bank's Carbon Finance Unit in spurring global transfers and aspects of the Bank's forest experi- Chapter 3 is a selective review of World Bank ence relevant to the REDD agenda. Table 1.1 involvement in issues related to climate change shows the division of mitigation topics between mitigation. It traces the treatment of climate the two phases. change in sector strategic documents over the past 15 years. It gauges the extent and correlates A planned third phase will look at emerging of attention to climate and related issues in the practice in adapting to climate change. IEG has country strategies of the largest emitters among also undertaken or planned a number of the Bank's clients. Table 1.2: IEG Evaluations Relevant to Climate Change Theme Coverage Evaluation Date Climate mitigation National policies, concentrating on energy Climate Change, Phase I 2008 Forest policies and projects Evaluation of Bank's Forest Strategy 2009 Low-carbon investment projects, technology diffusion, carbon finance Climate Change, Phase II 2009 Climate adaptation Project and policy experience specifically related to adaptation Climate Change, Phase III 2010 Capstone summary of Synthesis of Phases I­III 2010 climate evaluation Sectoral evaluations on Water Sector 2010 related topics Agriculture 2009 Renewable Energy 2006 Natural Disasters 2006 Power Sector Reform 2003 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P While the evaluation focuses on learning lessons tion and of modeling, it was not, in general, for GHG reduction, it is important to acknowl- possible to make quantitative estimates of the edge that the Bank Group's activities can impacts on GHG emissions. potentially promote GHG emissions as well as mitigate them. While it is beyond the scope of Chapter 6 is a case study of an apparently win- the evaluation to assess the Bank Group's carbon win topic: gas flaring. The topic is interesting footprint, chapter 3 reviews precedents and because of its magnitude (more than 400 million approaches to doing so, including the use of tons of CO2e per year), the links to policy and to carbon shadow pricing in project appraisal and carbon finance, and the existence of a World portfolio decisions. Bank­led initiative for flaring reduction. Chapters 4 and 5 examine two related areas that A final chapter summarizes findings and synthe- have large economic and environmental scale sizes cross-cutting recommendations. It also and are thought to offer large win-win opportu- looks forward to the second phase, presenting nities: energy pricing and subsidies and energy an analytic framework for thinking about clean efficiency. In both areas, literature reviews technology diffusion. establish the scope for economic gains and for emissions reductions. Special attention is paid to This volume does not offer a comprehensive compilation of evidence on the impact of price assessment of the World Bank's role in climate reform on poor people. change. It leaves out many important areas of engagement. It does not discuss forest issues, For both areas, content review of Bank lending and contains only a superficial discussion of over 1996­2007 (with selective attention to policies related to renewable energy. It does not earlier years) identifies policy components of cover the Bank's advisory and capacity-building development and investment lending, again efforts related to the Kyoto Protocol. permitting assessment of patterns and correlates of engagement. Documentary and statistical The forthcoming second phase, with its concen- evidence and interviews were used to assess tration on the project-level experience with low- patterns and correlates of engagement and of carbon technologies--including renewable outcomes. Engagement and outcomes on energy and energy efficiency--will cover much pricing were assessed in more depth in the World Bank Group activity explicitly oriented to countries with the largest absolute levels of mitigating climate change, including the role of subsidy. Because of the complexities of attribu- the carbon funds. 1 0 Chapter 2 Evaluation Highlights · Emissions levels are closely tied to income level and population, but pol- icy has substantial leeway to reduce emissions. · Fuel subsidies increase emissions. · Poor countries emit relatively small amounts of GHGs, and the benefits of increased electricity access far outweigh the costs. Indonesian motorists line up for gasoline in Bogor. Photo ©Dadang Tri/Reuters/Corbis, reproduced by permission. National Policies and Climate Change T his chapter looks at the relationship between development and energy- related GHG emissions. It examines the degree to which the Bank's sup- port for clients' growth and poverty reduction places pressure on GHG emissions, with particular attention to the issue of energy access for the poor- est. It also assesses the scope for policies and investments to affect national GHG emissions. Energy, CO2, and Development: development will generally result in Emission intensity is A Strong but Pliable Relationship higher emissions. It is crucial to keep in linked to per capita Energy use is a large and growing source of GHG mind that the graph is logarithmic: income. emissions. In transition economies, combustion emissions per capita of low-income of fossil fuels (including transport and industry) countries are only a small fraction of those of high- accounts for almost 90 percent of emissions. In income countries. There is a 600-fold difference in developing countries, 43 percent of emissions are per capita emissions between the highest- and from energy and industrial processes, 37 percent lowest-emitting countries shown. from deforestation and land use change, and 16 percent from agriculture.1 The energy proportion Figure 2.1 also distinguishes among countries will rise over time, since energy use is growing with different climates, indexed by heating degree faster than emissions from deforestation. days. The warmest countries are represented by triangles, temperate countries by circles, and the Emissions rise with income and population, and coldest countries by pluses. Colder countries tend are higher in colder climates. CO2 emissions are to be wealthier, but the relationship deeply connected, through energy use, to between income and emissions is less But some countries are development. Figure 2.1 shows the strong pronounced in this group. Income and much less intensive than relationship between per capita income and per heating need together explain more others at the same capita emissions of energy-related CO2. This than 85 percent of the variation in per income level. relationship is tighter than the more frequently capita emissions. displayed relationship between CO2 and gross domestic product (GDP), because countries shift Nonetheless, countries vary significantly in their into and then out of manufacturing as income emissions intensity, even after adjusting for level of increases. It underlines the expectation that development. Although the relationship in figure 1 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Figure 2.1: Per Capita Energy Emissions and Income, 2004 Source: IEG calculations based on International Energy Agency and World Resources Institute data. Note: HDD = Heating degree days. Countries with population < 4mln (2004) excluded: PPP = purchasing power parity. 2.1 is strong, it is a thick band, not a thin line. Most luck of being endowed with coal or oil deposits. countries lie along the center of the band, but, The use of hydropower is a significant determi- holding income constant, there can be a sevenfold nant of emissions intensity, and reflects both difference in emissions intensity. In other words, water resources and energy policy.2 Specialization somecountriesemitmuchlessthanpeersatsimilar in fossil fuel-intensive exports (such as refinery levels of development, and some emit much more. products, steel, and aluminum) will boost relative emissions, especially for small or poor countries. This variability reflects some leeway in the linkages Measurement error also plays a role, since it is between GDP and energy use, between energy difficult to measure CO2 emissions comprehen- use and fossil fuel consumption, or between fuel sively. However, the relative emissions may in part combustion and CO2 emissions. The energy-GDP reflect policy decisions--on energy pricing, for ratio depends on a nation's mix of agriculture, example. So, while this report attaches neither manufacturing, and services--more energy is blame nor praise to relative emissions, it uses required to produce a dollar's worth of aluminum them as a diagnostic, a useful but imperfect than an equivalent value of cassava or insurance indicator of the scope for reducing GHGs at a policies. It also depends on how efficiently firms given income level. and households use that energy--for instance, on how well they insulate their homes and factories. Some countries have moderated their emissions The emissions-energy ratio depends not only on per capita despite increased income. Figure 2.2 the role of fossil fuels versus renewables, but also showshowabsolutelevelsofpercapitaincomeand on the precise mix of fossil fuels and the technolo- emissions changed over the period 1992­2004 for gies used to burn them (box 2.1). all countries. Most countries have moved up along the diagonal, increasing both income per capita What determines a country's emissions level and emissions per capita. But a few countries (blue relative to its peers? Chance, to some extent--the arrows)havemoveddownandtotheright,increas- 1 4 N AT I O N A L P O L I C I E S A N D C L I M AT E C H A N G E Box 2.1: Emissions Intensities of Power Supply Generators transform energy into electricity. The emissions in- big variations in power plant efficiency--the proportion of en- tensity of supply--CO2 emissions per kilowatt-hour (kWh)--de- ergy that gets transformed into electricity or commercially valu- pends on the source of primary energy and the efficiency with able heat. Small plants tend to be less efficient in producing heat which that energy is transformed into electricity. than larger ones, and hence more CO2-intensive. Cogeneration-- Nonfossil energy sources--wind, solar, nuclear, sustainably the combined production of heat and power from a single plant-- grown biomass, and some kinds of water power--can produce saves energy and emissions compared with separate production power without net CO2 emissions (setting aside the CO2 emitted in of these two services. In principle, power plants can reduce their the course of manufacturing turbines and other equipment). An In- emissions to zero by capturing and burying CO2 emissions from their tergovernmental Panel on Climate Change (IPCC 2007b) review smokestack, but carbon capture and storage technologies are found that most hydropower plants offered "low net GHG emis- still experimental. sions," but that scientific uncertainties remain. In the tropics, The table below illustrates the range of emissions intensities emissions of methane--a more potent GHG than CO2-- from shal- associated with different fuels and technologies based on new low plateau-type reservoirs and from reservoirs with low power- plants. Life-cycle measures are higher. Liquefied natural gas (LNG) to-flooded-area ratios have been found to be relatively large, but requires substantial energy for liquefaction and transport, but on are smaller from deep reservoirs. Emissions are thought to be low a life-cycle basis, a modern LNG-fueled generating plant is still 38­ from most boreal and temperate reservoirs (UNESCO 2006) and are 47 percent less carbon-intensive than a modern coal plant (Hondo not an issue for run-of-river plants that have no reservoir. 2005). A substantial amount of electricity can be physically dissi- As a rule, gas generates less CO2 per unit of heat than oil, and pated (as opposed to stolen) in transmission and distribution. oil generates less than coal. Fuel switching is thus an important These losses would have to be taken into account to estimate emis- strategy for emissions reduction. Even for a specific fuel there are sions per kWh consumed by end-users. CO2 Emissions of New Power Plants by Fuel andTechnology (grams per net kWh) Source NETL ESMAP Gasoline 1 kW 1,500­1,900 Coal subcritical 855 880 Coal supercritical 804 Coal IGCC 752­796 700­750 Diesel 5 MW 650 Oil combustion turbine 780 Oil combined cycle 520 Gas combustion turbine 600 Gas combined cycle 362 400 Sources: ESMAP 2007; NETL 2007. Note: ESMAP = Energy Sector Management Assistance Program; NETL = National Energy Technology Laboratory. ing per-person income while decreasing per- relative level of emissions through Emissions levels are person emissions. Many of these are transition substantial restructuring of their related to natural economies that also managed to drastically economies and adjustments in energy resource endowments, decrease emissions per dollar of GDP. Most of these prices. In addition, some developing but policy decisions also countries began this reduction from a very high countries--such as Botswana, China, play a role. 1 5 16 CLIMA TE CHANGE Figure 2.2: Absolute Changes in Emissions and Income, 1992­2004 AND THE 30 W ARE ORLD 20 USA AUCAN S SAU FIN DEUBELAUT NLD 10 KAZ CZE RUS B KOR IRL ISR SGPJPNDNK GBR ANK ZAF POL GRCNZLESPITA NOR UKRBLRIRN SVK FRA BGR MYS HUN PRT SWECHE UZB VEN HRV GR ROU 1992­2004):n AZE CHN MEXCHL ARG O JOR THA TUR UP SYR sor DZA DOM TUN per MDA EGY ECU BRA IDN pe CRI MAR COL sn BOL 1 KGZ VNMIND PER YEM TJK HND GTMPHL SLV (to PAK NIC ZWE GEO LKA PRY 0.5 AGO capitar NGA SEN pe BEN TGOCIV 2 KEN SBGD DN GHA CO ZMB HTI ERI CMR 0.1 TZA NPL MOZ ETH ZAR 10 20 30 40 GDP per capita PPP (constant 2000 intl $) ($0000 per person: 1992­2004) Source: Authors' calculation based on International Energy Agency data.. Note: Blue = CO2 1992 > CO2 2004 and GDP 1992 < GDP 2004; countries with population < 4 mln (2004) excluded. N AT I O N A L P O L I C I E S A N D C L I M AT E C H A N G E and India--registered large gains in income per ones; and how much energy is lost in Emissions depend on the capita with relatively modest gains in emissions. transmission before it reaches homes mix of energy used to and factories. generate electricity and In sum, the tide of development strongly pulls the efficiency of countries to higher emissions per capita. But Scale and mix of power generation are generation and some countries swim across this current. shaped by three related sets of policies: transmission. Policy--at least potentially--has substantial those affecting supply of primary leeway to reduce emissions. Next we look at the energy, power plant technology choice, and pathways through which this might occur. demand. On the supply side, pricing and regula- tory policies affect the relative price and availabil- Policies and Institutions Can Make ity of coal, oil, gas, and hydro. Energy availability is a Big Difference an obvious determinant of power system tech- Supply, transformation, and demand policies nology. But power sector regulations matter too, affect the scale and mix of energy use. Table 2.1 and can affect the efficiency of power transmis- presents a policy typology that guides this sion and distribution--an important but evaluation of energy policies and emissions. At sometimes overlooked factor affecting emissions. the center of the diagram is infrastructure for On the demand side, price policies and efficiency power generation and transmission. Emissions policies guide people, companies, and govern- go up with the scale of generation: the total ment agencies as they choose how much electric- amount of power produced. ity and heat to consume. Emissions also depend on the mix of primary Public policies also shape the scale and mix of energy used to generate electricity and on how energy use for transport. Supply-side policies efficiently power is generated and transmitted. include those on investments in roads and transit Coal combustion releases about a ton of CO2 for and public transport systems. Demand-side each megawatt-hour produced (with consider- policies include fuel prices, vehicle taxes and able variation, depending on plant efficiency); standards, and urban planning. natural gas releases about half as much; wind and run-of-river hydropower release none. So, from Table 2.2 sketches specific pathways through an emissions perspective, it matters a great deal which broad policy reforms can affect emissions whether a country builds coal, gas, or hydroelec- intensity at the provincial or national level. Note tric power plants; whether its fossil fuel plants that these pathways can affect emissions directly squeeze more or less electricity out of each ton of by influencing demand for energy, the source of carbon burned; whether low-emissions plants are energy, or the efficiency with which energy is dispatched in preference to higher-emissions used. They can also affect emissions indirectly by Table 2.1: How Policies Affect Energy-Related Emissions Supply Transformation Demand · Primary fuel price and · Renewable portfolio standards; · End-user tariffs and collections: electricity, heat, availability pollution regulations gasoline, diesel · Coal regulation and mining · Demand-side management subsidies · Gas regulation, pricing, and · Building, appliance, vehicle standards and infrastructure regulations · Flaring regulation · Public procurement Source: Author. 1 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Table 2.2: Pathways from Policies to Emissions CO2 impact (+ indicates Policy an increase in CO2 intensity) Policies affecting supply Remove subsidies to or protection of coal supply or transport; shut down uneconomical coal mines Remove price controls on natural gas supply Remove regulatory barriers to use of associated gas from oil fields Provide capital subsidies to generation (from domestic or international sources) Coordinate international energy infrastructure Privatize generation Regulate hydropower facilities Incorporate energy security considerations into energy sector expansion plans Promote renewable fuels for power generation Regulate and enhance enforcement of limits on industrial pollution and pollution from power generation Promote bus rapid transit Shift buses to compressed natural gas ? Policies affecting demand Remove subsidies or price caps on electricity; increase collection rate of fees Institute time-of-use charges for electricity ? Remove consumer subsidies for heat while enabling control of heat use Remove subsidies for kerosene, gasoline, and diesel fuel Implement efficiency standards for buildings and appliances Promote financing for energy efficiency Promote more efficient urban land use Policies regarding energy stimulating or stunting growth, given (German Technical Cooperation) (GTZ 2007) supply, technology the close relationship between regularly collects this information and suggests choices, and demand income and emissions. (In some that the price relative to the U.S. price can be affect the scale and mix cases, these policies will reduce viewed as an indicator of subsidies or taxes, since of power generation. emissions intensity, but increase the U.S. price is close to a free market value. power production, so it is possible that absolute emissions could increase.) Figure 2.3 shows this relationship for 2004. There is a relatively strong negative correlation ( As an illustration of the link between policy and 0.39) between diesel price and relative emissions, consider the relationship between emissions. Note the well-known tendency for oil diesel pricing and relative emissions. Diesel is a producers to subsidize fuel. Most striking, globally traded commodity, but tax and subsidy essentially all countries that maintain diesel policies cause its price to vary widely among prices below half the reference level exhibit high countries. (Diesel is more likely than relative emissions--on average, 91 percent Fuel subsidies are gasoline to be subsidized.) Unlike most above their peers. This differential is too large to associated with increased other energy prices, retail diesel prices be understood merely as the effect of excessive emissions. are readily observable. The GTZ diesel use (though that may be part of the story). 1 8 N AT I O N A L P O L I C I E S A N D C L I M AT E C H A N G E Pathway Shift to lower-carbon energy sources Increases supply of gas, induces shift away from coal or oil Increases supply of gas, induces shift away from coal or oil; harnesses energy otherwise wasted in flaring Favors generation over end-use efficiency International sharing of hydropower supply and coordination on natural gas pipeline can substitute for smaller-scale, less-efficient coal or diesel power generation Probably favors gas-based generation over coal (reducing emissions) or hydro (increasing emissions); should promote generation efficiency Depending on their application, environmental and social regulations could expand or contract the development of hydropower facilities and restrict or allow plants that create methane emissions Could promote a shift toward coal (if reserves are available) or renewables, boosting or decreasing emissions intensity Substitutes for fossil fuels Particulates and sulfur oxide (SOx) pollution from power generation and industrial activity can be mitigated in part through greater efficiency in the combustion of coal and oil, through cogeneration, and by switching to gas and renewables. However, there are also pollution mitigation options that do not involve GHG reductions. Reduces fuel consumption by shifting passengers from cars and reducing congestion Possible reduction in emissions intensity Where consumers have unrationed access to subsidized energy, higher prices will lead to reduced consumption and emissions. Where low prices have led to inadequate investment, removal of subsidies could result in expanded supply of grid-based power and decreased use of small or captive plants, probably with a net decline in emissions intensity. Depends on fuel source for peak versus base load; could reduce emissions where peak load is met with old, inefficient generators In many transition economies, heat has been subsidized, and consumers lack both the ability and incentive to economize on heat use. Higher prices will lead to reduced consumption and emissions. Reduces energy consumption (unless demand for energy is extremely price-elastic) Reduces industrial and commercial energy consumption Reduces fuel consumption by reducing the demand for transport Rather, the diesel subsidies may reflect more electricity access--one kWh per Poor countries emit only pervasive energy-price distortions.3 household each day--would boost a tiny fraction of the per world GHG emissions by less than 0.4 capita emissions of rich GHG Mitigation Need Not Compromise percent, even if power were provided countries. the Pursuit of Energy Access for the entirely by the most carbon-intensive Poorest means. The rest of the world increases its carbon About 2 billion people lack access to electricity. emissions by this much about every two months. Electricity provides poor people with a broad range of social and productive benefits and is The benefits of electricity access to the poor also widely viewed as an important tool for achieving far exceed any conceivable damages from the the Millennium Development Goals. Does the goal associated emissions. An IEG review of willing- of mitigating GHGs stand in the way? ness-to-pay for grid-connected electricity found values of $0.47 to $1.11 per kilowatt-hour4 (IEG It need not. Figure 2.1 shows that poor countries 2008c). A project to meet unserved needs emit only a tiny fraction of the per capita through diesel power (a typical option in Africa) emissions of rich ones. A rough calculation would result in emissions of 600­1,000 grams per shows that providing 2 billion people with basic kWh. So even if damages were assumed to fall 1 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Figure 2.3: Relative Emissions Are Higher in Countries with Diesel Subsidies 2 ome incr 1 milais thi w s peer 0 to e elativr 1 onsis emis Log 2 0 1 2 3 Diesel prices, local/global Sources: Relative emissions: Chomitz and Meisner (2008); diesel subsidies: GTZ. Note: For the year 2004. = Oil supply >10 years of domestic demand and >30 million tons CO2 emissions per year. The benefits of electricity entirely on other poor people and burden on the world's poorest people. The access far exceed the were assessed at a carbon shadow energy access agenda could proceed independ- damage of associated price of $50 per ton of CO2, and if no ently of the mitigation agenda. emissions. low-carbon alternatives were avail- able, gross project benefits would be Nonetheless, there are important areas of connec- reduced by no more than $0.03 to $0.05 per tion between these two agendas. First, it is possible kWh. And lower-carbon alternatives are available that carbon finance could support provision of and the damages, if any, would be smaller. electricity access through renewable energy. Second, price reform policies--which can have Of course, people depend on energy in indirect economywide emissions-reducing impacts-- ways,asformanufacturedgoodsandemployment. could help or hurt poor people, depending on But figure 2.1 suggests that economic growth in how the reforms are implemented. This issue will the poorest countries generates little pressure on be discussed at greater length in chapter 4. Third, the atmosphere. The 50 least-developed countries, policy choices, including pricing policies, can affect with a population of about 725 million, had energy- a country's long-term trajectory--that is, whether related emissions5 of 121 million tons of carbon it follows the steep (emissions-intensive) or dioxide equivalent (CO2e) in 2004, against the shallow path to wealth in figure 2.2. Finally, as the 12,949 million tons of CO2e of the OECD. Since concept of energy access is broadened to include emissions are roughly proportional to income per increased energy consumption by wealthier capita, a 100 percent growth in the least-developed groups in middle- and upper-middle-income countries' income would generate about the same countries, growth begins to put more significant incremental emissions as a 1 percent growth in pressures on emissions. It is in these countries that income in the OECD countries. the efficiency and pricing policies examined in chapters 5 and 6 offer the highest absolute levels So there is no reason to impose any mitigation of domestic savings and emissions reductions. 2 0 Chapter 3 Evaluation Highlights · Since 1992, Bank operations have evolved an approach to climate change. · Bank strategies have continually stressed energy efficiency and re- moval of price distortions. · About two-thirds of Country Assis- tance Strategies in countries with high GHG emissions included a goal related to reductions, but only half of those that mentioned energy effi- ciency included specific objectives. · Carbon accounting provides a way to balance the environmental costs and benefits of investments, but it should be approached with care. · A systemwide approach is impor- tant to take account of trade-offs among economic and environmen- tal costs and benefits. The lights of human habitation at night on Earth, as it would look from space with no clouds. This view of the Earth is a composite of many different satellite images. Photo ©NASA/Corbis, reproduced with their permission. World Bank Operations and Climate Change U ntil the 2008 announcement of its Strategic Framework on Develop- ment and Climate Change, the Bank Group had lacked a corporate ap- proach to climate change. However, there has been scattered and increasing attention to GHG mitigation in energy and environment strategies and in country dialogue, and a growing portfolio of GHG-reduction and clean energy projects. This chapter briefly reviews relevant World Bank activities. Climate in World Bank Policies · Integrate energy efficiency issues into country and Strategies policy dialogue. Global attention to climate change surged during · Decline to finance energy supply in the ab- the 1980s and emerged with full force with the sence of structural reform. 1992 Rio Conference of the UN Conference on · Give demand-side management (DSM) "high- Environment and Development. The World level, in-country visibility." Bank's World Development Report of that year · "Monitor, review, and disseminate the experi- highlighted the importance of addressing climate ence of new efficiency-enhancing supply-side change (World Bank 1992). It pointed to ample and end-use . . . technologies . . . help finance scope for win-win policies, such as energy price their application; and encourage the reduc- reform and improvements in energy efficiency, tion of barriers to their adoption." but also noted the need to address environmen- tal externalities through taxes or grants. The Bank's Energy Policy was published at about the same time and remains in force. It stresses The win-win message was picked up in a 1993 "integrated energy strategies that help borrowing policy paper, Energy Efficiency and Conserva- countries take advantage of all energy supply tion in the Developing World: The World Bank's options, including cost-effective conservation- Role (World Bank 1993). The paper promised based supplies and renewable energy sources" as that the Bank would "continue its efforts toward well as "cost-effective . . . options . . . to mitigate increasing lending for components to improve the negative environmental impacts of EE [energy efficiency] and promote economi- electricity supply and end use." It Bank policies have cally justified fuel switching." While only briefly briefly mentions fuel switching and included concerns about mentioning GHGs, it outlined a four-point energy efficiency as means of abating climate change since program to: CO2 emissions. 1992. 2 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P About seven years later, four strategic documents stay the course and to achieve real change; reemphasized the themes of the 1992 World and that while there is strong engagement Development Report, while elevating the promi- in the reform agenda, the strength of the nence of climate change. Come Hell or Group's commitment to energy efficiency In the late 1990s, High Water (World Bank 1999) was and the environment is not what it should strategic documents concerned with climate change vulner- or could be. The Group must substantially elevated the prominence ability and adaptation. It found that increase its efforts and improve its staff and of climate change. climate change risks were not well skills mix if it is serious about implement- assessed in project preparation or in ing its principles in these areas. Country Assistance Strategies (CASs) and recommended attention to current and future The World Bank Group's Energy Program was climate variability. presented to the Board of Directors and published in 2001. Although not a formal policy Fuel for Thought: An Environmental Strategy document, it reported that the "World Bank for the Energy Sector (World Bank 2000) drew Group has set quantitative objectives for attention to mainstreaming energy into CASs and developing and transition economies to be operations. It stated, "At the heart of mainstream- reached by 2010." These included "reducing the ing environment within the Bank is the elimina- average intensity of carbon dioxide emissions tion of market distortions, particularly in energy from energy production from 2.90 tons per ton pricing. As long as energy prices are subsidized of oil equivalent to 2.75" and "reducing the or not at market level, and as long as gross inter- average energy consumption per unit of GDP fuel pricing differences remain, it is difficult to from 0.27 ton of oil equivalent per thousand formulate cost-effective measures to mitigate dollars of output to 0.24." pollution from energy use." The World Bank Group Environment Strategy With an emphasis on reducing the damages of 2001 dealt at length with the "threat posed by of local air pollution, Fuel for Thought stressed climate change to the development process." It the need for a cross-sectoral perspective and continued to stress the twin themes of no-regret proposed the use of "Energy-Environment Re- policies (including energy sector reform, energy views" as an upstream analytic tool for promoting efficiency, and fuel switching), together with this perspective. One of the document's strategic continued collaboration with the GEF on objectives was to "mitigate the potential impact of renewables and use of the Prototype Carbon energy use on global climate change." Its medium- Fund (PCF) as a pilot to demonstrate the and long-term outcome indicators for achieving potential for carbon trading under the Kyoto this objective (through fiscal year 2008) include Protocol. The strategy also pointed to mitigation energy-efficiency programs in 10 states or opportunities in forestry and transport and countries; development of cleaner sources of promoted attention to mainstreaming efforts in energy (no quantitative goals); increasing the climate adaptation. It stressed the use of Strate- volume of energy trade among at least 6 countries; gic Environmental Assessments, including and doubling of power generation through Energy-Environment Reviews to ensure that local renewable energy sources in at least 10 borrowers. and global environmental issues are considered in the context of energy systems choices. Reviewing post-1992 progress on this agenda, Fuel for Thought drew three main lessons: The World Bank Group reports that it committed $6.1 billion to renewable energy and $2.1 billion That more time than initially estimated is to energy efficiency during 1990­2004. In 2004, needed to achieve results on environmen- in Bonn, the World Bank Group made a commit- tal and social issues; that commitment is ment to expand its investments in new often missing on the part of the borrower to renewables (excluding large hydropower) and 2 4 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E energy efficiency by 20 percent annually over million in three special funds, the The 2001 Environment 2005­09. Total reported commitments for new Least-Developed Countries Fund, the Strategy stressed no-regret renewables were $860 million from fiscal 2005 to Special Climate Change Fund, and the policies and 2007, and commitments to energy efficiency Strategic Priority for Adaptation Fund. collaboration with GEF were $952 million over the same period. Accord- and the Prototype Carbon ing to data released by the Bank, the World Bank The World Bank is an implementing Fund. Group outperformed its Bonn commitment agency of the GEF and, as such, has during 2005­07, committing about double its helped its client countries mobilize resources to goal of $913 million. cover the additional costs of initiatives aimed at meeting UNFCCC objectives. The World Bank In support of its commitments expressed through Group GEF Climate Change Portfolio has the Gleneagles Communiqué, "Climate Change, evolved from mainly demonstration As it agreed to do in Clean Energy and Sustainable Development" (July projects (that is, how to increase the 2004, the Bank increased 2005), the Bank developed an Investment efficiency of existing energy facilities its commitments to Framework for Clean Energy and Development and how to feasibly develop new and renewables and energy that was formally presented to the Development renewable energy sources) to a focus efficiency. Committee in the spring of 2006; an Action Plan on market transformation in an effort was endorsed by the Committee in spring of 2007. to remove barriers to its present focus Inaccurately named, this evolving framework has on mobilizing and enhancing the capacity of local three pillars: investment in power system financial markets to support environmental expansion, with emphasis on increasing access for investments. the poor; mitigation of GHGs from both energy and land use change; and adaptation to climate Building on its experience with the set of pilot change. The mitigation component stressed projects known as Activities Implemented Jointly, energy efficiency as a "quick-win and high-payoff" the Bank developed the Prototype Carbon Fund pursuit, but focused on the mobilization of conces- (PCF). The PCF was intended to pilot mech- sional funds for investments in clean technologies anisms for project-based GHG emissions and the promotion of carbon trading. reductions under the Kyoto Protocol. Already under development while the Kyoto Protocol was Global Finance and Institutions being negotiated, the PCF was formally launched In the post-Rio era, the World Bank has been in January 2000. The PCF was successful in raising involved in the development of global institu- funds and has since been supplemented by tions for climate change mitigation. These are another 10 funds, all of them overseen by the briefly reviewed here for context. Bank's Carbon Finance Unit. The GEF was established in 1991 as the financial The Carbon Finance Unit operates by identifying mechanism of the UNFCCC. The World Bank and financing emissions-reducing projects contributed to the design of the GEF's through agreements to purchase emissions operational programs in climate change: removal reductions, for the most part destined for use of barriers to energy conservation and energy under the Clean Development Mechanism efficiency, removal of barriers and reduction of (CDM). implementation costs for renewable energy, and reduction of the long-term costs of low-GHG- By August 2007, the Carbon Finance Unit had emitting energy technologies. The GEF has raised a total of $2 billion. It signed purchase approved 634 climate change projects with agreements of about $1.5 billion for 200 million grants totaling $2.3 billion and cofinancing of tons of reductions from 89 projects (World Bank $14.6 billion. The GEF also supports interven- 2007a). This constituted about 20 percent of all tions that increase resilience to the adverse transactions in the CDM. However, only 21 impacts of climate change. It administers $300 million tons had been issued through 2007. 2 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P About 11 percent of the portfolio is devoted to bankable. Third, PCF/Carbon Finance Unit waste management (landfill-gas recovery), 7 projects have mostly originated outside the percent to hydropower, 3 percent to biomass, 2 Bank. percent to wind, and 9 percent to energy efficiency. The portfolio is currently dominated Mainstreaming (56 percent) by projects for the destruction of HFC-23, a potent GHG that is produced as a by- Projects product of HCFC-22, a refrigerant that is a GHG There are 308 World Bank projects with an and an ozone-depleting substance. explicit climate change theme; of these, 132 are Two-thirds of the 308 HCFC-22 has been phased out in the IBRD/IDA investment loans, 10 are Development projects with climate developed world, but it is temporarily Policy Loans (DPLs), 86 are GEF, and 46 are change themes are in the permitted for manufacture in the carbon offsets (table 3.1). About two-thirds of energy/mining sector. developing world. these projects are mapped to the Energy/Mining Sector and include natural gas recovery, coal bed The impact and additionality of these projects, methane recovery, renewable fuel development, and the role of the PCF in shaping carbon market and energy conservation, among other activities. institutions, will be addressed in the subsequent Projects mapped to the Environment Sector phase of this evaluation. For current discussion, Board also involve energy efficiency and there are three noteworthy features of Carbon renewable energy. Rural development projects Finance Unit projects. The first is that, by design, are mostly forestry related. These tallies include they incorporate some form of carbon pricing. all projects with a climate change theme, regard- Second, they generally have no policy content. less of the notional proportion dealing with Carbon projects currently operate at a project or climate. The thematic mapping, however, which facility level, using payments for reductions as a is done by task team leaders, is not necessarily way to make otherwise marginal projects consistent or accurate. Table 3.1: Climate-Themed Projects by Sector Board and Funding Source, Cumulative, 1990­2007 Investments Other Carbon product Non- Total Sector board DPL IBRD/IDA GEFa offset linesb lending financing Education 3 3 Energy and mining 8 103 51 16 3 7 188 Environment 1 11 24 24 5 14 79 Economic policy 1 1 Financial sector 1 1 1 3 Private sector development 1 1 Rural developmentc 3 5 4 1 2 15 Transport 4 3 7 Urban development 4 2 1 1 8 Water supply and sanitation 3 3 Total 10 132 86 46 10 24 308 Source: World Bank data, June 2008. a. GEF includes GEF and GEF medium-size projects. b. Other product lines include guarantees, Montreal Protocol, special financing, and recipient-executed projects. c. Investments in rural development and agriculture and rural development are combined under the section "rural development." 2 6 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E The number of projects has increased sharply GHG mitigation in a sectoral context, With the introduction of since 2004, reflecting the entrance of the carbon 18 with concrete targets related to carbon funds, the number funds (figure 3.1a). However, the total volume of mitigation. However, the quality and of projects increased climate-related components has stayed relatively nature of these references varied. sharply. constant since Rio (1992), except for a large spike Some were concerned with CDM in 2006 associated with the two large HFC-23 participation, while most did not mention GHGs carbon projects (figure 3.1b). The other carbon explicitly. Only 11 mentioned climate vulnerabil- projects are relatively small. ity or adaptation finance. Country Assistance Strategies For this evaluation, IEG reviewed the country A recent review by Nakhooda (2008) assessed 54 strategies of the 33 Bank clients with the largest CASs issued over the period 2004­07 for mention energy-related GHG emissions over the period of climate change. She found 32 that discussed 1995­2007 (table 3.2). Twenty of these countries Figure 3.1: World Bank Climate-Themed Projects and Commitments (in $ millions by year, 1990­2007) a. Number of Projects 40 35 30 25 projects of 20 15 Number 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 b. Commitments 1,200 1,000 millions US$ 800 600 commitments, 400 Bank 200 orld W 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Other lines IBRD/IDA Carbon offset GEF Source: World Bank data, June 2008. Note: Commitment amounts reflect proportion of total commitments associated with climate change; 2006 spike in commitments reflects two large carbon finance operations. 2 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Table 3.2: CAS Goals for Energy Policies and Climate Change Issues, 1995­2007 Primary energy sector reforms, Power Primary including Efficiency GDP per unit CO2 sector energy Power closing of policies of energy emissions pricing pricing sector loss-making and Country use (2005)a (2005)b policies policies reformsc coal mines investmentsd Algeria 6 88.10 0 1 1 1 0 Argentina 7 146.64 1 1 3 0 0 Azerbaijan 3 37.03 2 3 2 2 1 Bangladesh 7 39.82 4 3 6 2 0 Brazil 8 360.57 1 0 5 3 0 Bulgaria 4 50.54 2 3 5 3 1 Chile 7 66.19 0 0 0 0 0 China 3 5,322.69 2 1 7 1 5 Colombia 9 58.80 2 0 1 0 0 Egypt, Arab Rep. of 5 161.79 1 1 3 0 1 Hungary 8 59.84 0 0 1 0 0 India 5 1,165.72 3 1 4 1 1 Indonesia 4 359.47 4 3 3 4 0 Kazakhstan 3 198.01 2 0 2 1 0 Malaysia 5 155.51 0 0 0 0 0 Mexico 7 398.25 2 1 6 2 0 Nigeria 2 105.19 0 0 1 1 0 Pakistan 5 121.49 2 2 3 1 0 Philippines 6 78.06 4 1 5 0 0 Poland 6 284.64 0 0 3 5 2 Romania 5 99.34 3 2 5 4 0 Russian Federation 3 1,696.00 2 3 6 6 0 Serbia na 52.56 1 0 0 0 1 Slovak Rep. 5 37.81 1 1 1 1 0 South Africa 3 423.81 0 0 0 0 0 Thailand 4 234.16 0 0 2 0 1 Turkey 7 230.04 0 0 4 4 0 Turkmenistan na 49.64 0 0 0 1 0 Ukraine 2 342.57 3 1 4 4 1 Uzbekistan 1 117.97 2 4 2 2 0 Venezuela, R.B. de 4 151.29 0 0 1 1 0 Vietnam 4 80.38 5 0 4 1 2 Note: na = not available. a. GDP per unit of energy use, 2005 purchasing power parity $ per kilogram of oil equivalent. World Development Indicators 2008, 2005 data table 3.8, p.168. b. Energy Information Administration. World Carbon Dioxide Emissions from the Consumption and Flaring of Fossil Fuels, 1980­2005 (Million Metric Tons of Carbon Dioxide). International Energy Annual 2005 Table Posted: September 18, 2007. http://www.eia.doe.gov/iea/carbon.html. c. Including regulatory agency setup and reform. d. Includes research, development, demonstration, and planning for energy efficiency, standards and certification, mandates and incentives for DSM promotion, marketing awareness of energy-efficient technologies to support DSM, investments in DSM and supply-side efficiency. e. Includes incentives for use of renewable energy or clean fuels, markets for grid-connected renewable energy; sharing of power from renewable energy; investments in hydropower, wind, biomass, and other types of renewable energy. f. Energy efficiency identified in CAS document as an overall objective for the energy sector. 2 8 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E CAS goals on Share of Share of Energy security GHG reduction, energy- energy- Renewable Energy-efficiency (fuel mix; global treaties efficiency efficiency Total policies goal alternative on climate change component in projects in energy and (high-level sources of and ozone-depleting total spending energy commitments,k investmentse target)f energy)g substancesh for energy, %i portfolio, %j US$mln 0 0 0 1 0.0 0.0 126.34 1 0 0 6 0.0 0.0 557.81 0 0 0 0 0.0 0.0 125.94 2 1 1 0 0.0 0.0 919.84 0 4 0 4 1.0 3.6 1,558.93 1 4 0 2 25.3 27.3 191.60 2 1 1 1 30.6 14.3 22.84 1 9 5 5 5.7 15.9 8,138.29 0 1 0 1 0.0 0.0 321.76 0 0 0 1 0.0 0.0 650.55 0 0 0 0 0.2 33.3 235.70 0 2 1 1 0.5 6.8 6,243.18 1 2 1 1 0.4 4.8 2,525.44 0 0 0 0 0.0 0.0 427.49 0 1 1 0 0.0 0.0 200.00 0 3 3 6 1.5 8.0 1,027.41 0 0 0 0 1.4 14.3 624.45 0 1 1 2 0.0 0.0 2,327.04 2 2 1 1 0.1 4.8 1,410.35 0 2 0 0 31.9 41.2 1,295.97 1 2 1 1 2.3 12.5 879.72 0 3 1 5 13.7 31.6 3,291.09 0 0 0 0 45.0 25.0 107.06 1 1 0 1 0.0 0.0 0.00 0 1 0 2 0.0 0.0 3.34 0 1 0 1 0.9 13.3 1,337.55 1 0 2 0 0.0 0.0 2,391.62 0 0 0 0 0.0 0.0 2.25 0 4 2 3 18.8 17.6 1,310.39 0 0 0 0 0.0 0.0 0.63 0 0 0 0 0.0 0.0 9.00 5 3 0 1 0.7 11.1 1,460.71 g. Energy security identified as a high-level goal, includes also the objectives for fuel mix improvement and search for alternative energy sources. h. CAS objectives related to CO2 reduction, ratification/discussion of Kyoto and Montreal Protocols, interest, and priority of climate change issue. i. Energy efficiency components' share based on World Bank 2005c, 2005e, 2006b; World Bank and IFC 2007, and total energy spending in 1990­2007. Excludes IFC and MIGA. j. Share of projects with energy efficiency components based on World Bank 2005c, 2005e, 2006b; World Bank and IFC 2007, and total number of Bank Group renewable energy and energy efficiency reports. Excludes IFC and MIGA. k. World Bank data. Energy commitments represent the commitments only for energy sectors. 2 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P had at least one strategy with overall goals and EERs were introduced around 2000, while related to GHG reduction, the UNFCCC, or CEAs started in 2003. the Montreal Protocol. But emphasis was un- even among countries. The greatest attention Full-scale EERs have been completed and was given to these goals in Argentina, published for Bulgaria, Egypt (incorporated in Of 33 CASs for the Bank China, Mexico, and Russia. the subsequent CEA), Iran, Mexico, and Turkey. clients with the largest The Egypt, Iran, and Mexico EERs address the energy-related GHG Table 3.2 also tabulates CAS goals countries' large fuel subsidies, finding them a emissions, 20 had a related to some of the potential win-win major source of health damage as well as fiscal strategy with a goal policies discussed later in this report. drains. related to GHG The tabulation includes statements of reduction. high-level goals and specific, potentially Iran's fuel subsidies in 2001 were estimated at monitorable objectives. For 20 of the 17.8 percent of GDP, and the damage of air countries there was some mention of energy pollution to health was estimated at 8.4 percent efficiency as a high-level goal. However, in only 10 of GDP and growing. The report explored countries were specific goals mentioned. This scenarios for price reform and additional sectoral suggests a disconnect between rhetoric and measures, finding that price reform would cut action. But of the 10 countries singled out, 7 were health damage in half, though at some cost in in the most energy-intensive half of the group. inflation. In this set of countries, 17 had specific goals The Egypt CEA similarly found that adjusting related to primary fuel pricing, 21 had power- energy prices to opportunity cost levels would pricing goals, and 25 had goals related reduce local damage by $200 million yearly, with For the 20 countries with to power sector reform. The out- additional savings available from implementing CASs that mentioned comes of some of these goals will be win-win efficiency measures. energy efficiency, only 10 examined in chapter 4. In sum, taking included a specific goal. the Bank's country strategies as strong The Mexico EER found that removal of power indicators of country interest in these subsidies would reduce CO2 emissions by about agendas, such interest is widespread but not 3 percent. There would be a very small (<0.1 universal among client countries. percent) negative effect on the welfare of the poor, which could easily be compensated Cross-Sectoral Analyses through subsidy savings. IEG's Environmental Sustainability: An Assess- ment of World Bank Group Support (IEG 2008b) It is difficult to trace impacts of these studies. stressed the need for cross-sectoral integration of Egypt and Iran have increased fuel prices, environment and infrastructure concerns. As though their prices remain well below world noted above, cross-sectoral analysis was levels. Mexico has increased its level of fuel emphasized in 2000 by Fuel for Thought and in the subsidies, but partnered with the Bank on a 2001 Environment Strategy, which pointed to climate-oriented DPL. Strategic Environmental Analyses (SEAs) and Energy-Environment Reviews (EERs) as instru- SEAs have been used to systematically assess ments for accomplishing this. SEAs are the sectoral hydropower options. Hydropower has been or policy generalization of project-level environ- contentious because of its potential for environ- mental impact analyses, which comprehensively mental damage and social disruption. While assess the costs and benefits of alternative plans, generally considered to have low GHG taking environmental externalities into account. A emissions, hydro plants with anoxic tropical related tool is the Country Environmental Analysis reservoirs can emit methane. In principle, a (CEA), intended to mainstream environmental comprehensive multi-attribute assessment of all issues into overall country strategic planning. SEAs options is superior to an environmental impact 3 0 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E assessment of a predetermined and possibly have been initiated in Serbia-Montenegro. The suboptimal site. An SEA for Nepal (Government Bangladesh, Colombia, and Pakistan CEAs discuss of Nepal 1997) ranked 138 potential medium-size vehicle-related emissions and fuel quality, but do hydropower projects for economic, environmen- not link the discussion to tal, and social impact; it prioritized 7 as having broader energy or transport SEAs have been used to low impact. One of the seven was chosen for issues. The Bangladesh CEA, systematically assess finance under the subsequent Nepal Power for instance, discusses pol- hydropower operations. Development Project. An SEA for the Laos lution from diesel engines but hydropower sector (Norplan 2004) assessed 21 does not discuss the role of diesel subsidies. This proposed hydropower sites. While it notes that is in contrast to the Egypt CEA. some threaten primary forests, and calculates environmental costs ranging from $0.001 to Strategic Considerations for the Bank: $0.136 per kWh, it does not propose a ranking or Accounting for Local and Global Impacts do a trade-off analysis. Finally, an SEA for the Nile Policies and projects supported by the World Bank Equatorial Lakes Region (SNC Lavalin Interna- Group have both local and global effects. Not all of tional 2007) screens hydropower options (and them are win-win. In the Bank Group's country- thermal alternatives) against economic, environ- based model, infrastructure investments, includ- mental, social, and risk criteria, including life- ing those in transport and power, are seen by many cycle CO2 emissions, although it does not take clients as an important source of growth and account of methane emissions. It discusses a poverty reduction. Support for growth, rather than variety of scenarios for sector expansion and climate change mitigation, remains the focus of considers a complex set of trade-offs. the Bank Group's energy support, even as it moves to Of 16 completed CEAs, 3 According to the recently released World Bank increase the share of renewable mentioned climate assessment of CEAs (Pillai 2008), as of early 2008 power within that support. As it change in the context of the Bank had initiated 25 of the analyses. Of the allocates its efforts and funds energy policies. 16 completed CEAs, those on Belarus, Egypt, and across activities, should the India mentioned climate change in the context Bank Group take into account their global impact of energy policies. These sectors were treated on climate as well as their local impact on welfare? also in Bangladesh, Colombia, Pakistan, and Without presuming to answer that question, this Serbia-Montenegro. The India CEA dealt at evaluation looks at methods for assessing the length with the relationship between coal power trade-offs and complementarities, rationales for and air pollution. It emphasizes the promotion using them, and experience in their application. of energy efficiency and renewable energy, including finalization of the Renewable Energy There are divergent opinions on whether and Policy and support for upgrading inefficient old how carbon emissions should enter into project coal plants. (A contemporaneously prepared analysis and selection. One view holds that since IBRD/GEF project proposes to provide such developing countries have not taken on respon- support.) However, the CEA is silent on the well- sibility for emissions reductions, emissions known energy-irrigation nexus: the poorly should not be a consideration in project se- targeted electricity subsidies that encourage lection, except where emissions reductions are a unsustainable use of scarce groundwater. source of revenue. An opposing view holds the Bank responsible for emissions it finances, in the The Belarus (2002) and Serbia-Montenegro same way that private companies are beginning (2003) CEAs emphasize energy efficiency and the to view carbon emissions as liabilities. need to rationalize prices and reduce subsidies. Tariffs did rise in Belarus over 2002­05. An A third view sees valid differences in scope efficiency project is in the pipeline for Belarus, between the concerns of the Bank Group and and several projects with efficiency components those of any individual developing-country client. 3 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P A Bank-supported project This reflects the underlying tension plant. Alternative technologies, such as coal and in one country could between the Bank Group's country- geothermal, could be compared on purely eco- damage or benefit other based model and its support for global nomic criteria as well as on carbon emissions. Four client countries. public goods, an issue discussed at uses have been suggested for this information. length in IEG's 2008 Annual Review of Development Effectiveness. The client is properly · First, carbon accounting may promote more interested in promoting its own development, analytic rigor and uncover win-win project al- does not accept limits on emissions, and correctly ternatives with higher returns and lower emis- considers that its historical or per capita contribu- sions. tion to global emissions is small relative to that · Second, carbon accounting may be used to jus- made by developed countries. The Bank, tify carbon market finance. If the coal plant is however, is concerned with the welfare of all its cheaper than the geothermal plant but emits clients and with climate risks to its global portfo- more CO2, it is possible to compute the value lio. From the viewpoint of environmental per ton of CO2 reductions at which the geo- economics, a Bank Group­supported project in thermal plant becomes more attractive (the one country may, at the margin, accelerate or switching cost). If emissions reductions can be retard climate change, and thereby damage or sold at this price on the carbon market, then the benefit other vulnerable client countries. These cleaner plant can be funded. Note, however, that marginal impacts are in addition to the much the long-term and large-scale availability of car- more substantial damages from the cumulative bon finance is uncertain, pending the outcome emissions of developed countries. of negotiations on the global climate regime. · Third, carbon accounting provides informa- Carbon Accounting at the Investment Level tion on the switching cost. This information is How might the Bank take emissions into account useful in assessing the impact of future policies in project design and selection? Some observers on emissions and on the economy. It can inform advocate proscribing all funding for coal power models used by climate scientists, negotiators, plants, oil extraction, or other fossil fuel-related and others. activities. A provocative analogy would be the · Finally, and most controversially, a shadow Bank's policy toward tobacco. Tobacco is a price--representing the marginal impact of a remunerative export crop that provides domestic change in emissions--could be applied to a poverty-reduction benefits through employment. project's emissions, and this impact incorpo- But it is also an addictive substance that imposes rated in an economic rate of return or cost-ben- substantial transborder economic and health efit analysis. These, in turn, could enter project costs. So Bank investments in tobacco pose a appraisals or evaluations, as is often done with trade-off between local benefits and global other kinds of environmental externalities. damages. Recognizing this, in 1991 the World Bank adopted a policy prohibiting lending or Carbon shadow pricing is not new to the Bank. In investments in tobacco production, processing, 1999, the Bank published a pilot study (ESMAP or marketing. (However, the policy allows for 1999) that examined how carbon shadow pricing exceptions in countries where tobacco represents might affect project choice. It found that 41 percent more than 10 percent of exports.) of loans examined would become uneconomic if their gross emissions carried a shadow price of $11 Carbon accounting--estimating and monitoring per ton of CO2; this proportion was lower if project emissions--provides a more emissions were netted against a business-as-usual Carbon accounting nuanced way to balance the costs and baseline. But among the eight thermal plants provides a nuanced way benefits of investments. It can be used examined, negative switching values (that is, to balance the climate to assess alternative ways of fulfilling a apparently overlooked win-win alternatives) were costs and benefits of particular project objective, such as found for six. The study found no barriers to investments. constructing a 200-megawatt power calculating carbon footprints in the projects it 3 2 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E assessed, which were well-defined generation This monitoring and assess- Carbon shadow pricing projects. Even in the absence of carbon markets, it ment requirement--which has dates back to 1999 in the recommended shadow pricing as an informational no counterpart in the World Bank. practice that might uncover cost-effective switches. Bank's safeguard policy--is a step forward in disclosure and transparency and Carbon shadow-pricing is often incorporated in will provide lessons for the World Bank and other GEF and other projects that have emissions funders. It will stimulate scrutiny and discussion of reduction as a cobenefit. For instance, the project alternatives. As an early example of the efficiency projects and subprojects described in standard's application, consider the IFC's environ- box 5.1 had returns of up to 289 percent when mental assessment for the Lanco Amarkantak carbon benefits were included. Carbon pricing thermal power plant, which is scheduled to emit and monitoring is already a feature of project 4.2 million tons of CO2 per year. design and appraisal for the Bank's carbon In addressing Performance IFC's recently adopted projects. Under the CDM, carbon projects must Standard 3, the publicly dis- Performance Standard for estimate, and then verify, actual emissions. These closed environmental review GHG emissions is an emissions are compared to business-as-usual represents the plant's emissions important step, for which emissions to assess project impact--that is, to intensity of 910 gCO2/kWh as there is no counterpart in quantify emissions reductions. Financial better than the Indian national the Bank. appraisal takes into account the value of average of coal plants at 1,225 emissions reductions--an actual, rather than a gCO2/kWh.2 However, the relevant comparison is shadow, price of carbon. A standard procedure to new coal plants, rather than the existing semi- for justifying a carbon project is to argue that the obsolescent fleet as a whole. carbon price is greater than the switching price. Modern subcritical coal plants Monitoring and reporting emit 855­880 gCO2/kWh (see emissions could stimulate An important feature of CDM projects, including box 2.1), though Indian levels discussion of project those of the World Bank, is that they require may be higher because of differ- alternatives. rigorous independent monitoring and verifica- ences in coal quality. Alterna- tion of emissions. This information is published tively, one could compare the plant's performance through the CDM and provides a public good: to the systemwide build margin across all energy rapid feedback on the outcomes of new types of types, which is 680 gCO2/kWh according to the clean technology. For instance, through this Central Electricity Authority.3 However, the plant's reporting process it has rapidly become clear environmental statement says that the owner will that projects involving landfill-gas recovery explore various means of reducing emissions, (generation of power from municipal waste) are including afforestation offsets and cofiring with consistently underperforming compared with biomass. appraisal projections. This is prompting re- examination of the engineering models used to Carbon Accounting at the System Level predict project output. As the review of SEAs and EERs pointed out, any individual power plant is a small component in an IFC's recently adopted Performance Standard 3 interconnected energy system. Many of the requires its corporate clients to annually quantify important trade-offs among economic and direct and some indirect1 GHG emissions for environmental costs and benefits occur at this projects that are expected to emit more than system level. So an analysis of choice of technol- 100,000 tons of CO2e annually. Clients are also ogy for a predetermined goal at a predetermined required to evaluate "technically and financially location may completely miss the crucial feasible and cost-effective options to reduce or systemwide options. For instance, systemwide offset project-related GHG emissions," including power efficiency improvements might substitute carbon finance, changes in project design, and for a new generating plant. At the same time, it emissions offsets. is possible that a proposed fossil fuel plant, 3 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P emissions-intensive when considered on its own, Table 3.3: Effect of Carbon Shadow is a necessary part of a portfolio that includes Price on Generating Capacity Mix for lower-carbon sources. This suggests a system- South East Europe, 2020 wide approach to assessing costs and benefits, including emissions. CO2 Lignite shadow plus Nuclear Again, this approach is not new to the Bank. Two price coal (%) Gas (%) (%) state-level studies of the Indian power sector, 0 36.9 13.1 10.3 while not formally designated as EERs, exemplify 5 34.0 16.0 10.4 the approach and are noteworthy for monetizing 10 30.9 17.2 12.3 local and global environmental damages and Source: South East Europe Consultants (2005). assessing trade-offs against the consumption Note: The baseline is a cost-minimizing optimal scenario, which features less value of electricity. The studies of rehabilitation of old plants than the official scenario. Other elements of the A systemwide approach Rajasthan and Karnataka (ESMAP and generating mix, including hydropower, are constant across scenarios. has been studied in others 2004a, 2004b), undertaken in collaboration with the state govern- of CO2 shadow price shifts 6 percent of total ments, examine supply and demand alterna- capacity from lignite and coal to gas and nuclear. tives--including power sector and tariff Even at 10 per ton, the optimal plan still reform--for meeting the states' power needs. involves the construction of large new lignite- Environmental impacts include three kinds of fired plants in Kosovo. However, since the plan local air pollution (SOx, NOx, and PM10 [partic- was generated, the European Trading System for ulate matter of 10 micrometers or less]), carbon has started operation, and CO2 traded at consumptive water use, and CO2 emissions, with 25­30 in mid-2008. damages put at $55 per ton of CO2e. The Role of Economic Analysis of Projects The Rajasthan study shows that failure of reform, Among practitioners of carbon shadow pricing, by choking off power capacity expansion, there is a debate on what price level to assign. This severely stunts economic performance and value, which represents the damages imposed by leaves local pollution virtually unchanged as an additional ton of CO2, is set in the Stern Review industry switches to small, polluting diesel at $85 per ton of CO2e; the U.K.'s Department for generators. Stunted growth leads to slightly Environment, Food, and Rural Affairs recom- lower CO2 emissions, but the extreme implicit mends a value of £26 per ton of CO2e for project cost of this reduction--$480 per ton of CO2e-- appraisal (rising over time).4 easily rules out policy failure as a climate mitiga- tion strategy. At the same time, going from a basic However, while this debate was going on, the price reform scenario to one that includes some of oil, gas, and coal rose drastically (see figure 3.2). degree of tariff rationalization and DSM is win- The mid-2008 price of oil was equivalent to the win. It boosts the value of the investment 2006 price of oil plus a $135 per ton CO2 price. program by 13 percent and reduces air pollution Although prices have since declined, expected and water use by about 6 percent, and CO2 future prices remain high by recent standards. emissions by about 4 percent. Hence, actual project appraisal decisions should already be moving in directions similar to those The South East Europe Generation Investment suggested by carbon shadow pricing. Plan computes a least-cost power expansion plan for the region (2005­20) under a number of For project appraisal to send these signals, it must scenarios that comply with European Union (EU) value energy and electricity at economic prices. environmental standards for air This is not easy in systems where prices are And it has been applied pollutants, including CO2. Table 3.3 distorted or where electricity supply is in South East Europe. shows that imposition of a 10 per ton constrained. For instance, the Rwanda Emergency 3 4 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E Electricity Project values additional electric output the risk-hedging value associ- High energy prices act at $0.15 per kWh, even though this is below the ated with renewables is a clear like carbon taxes in some cost of provision, and far below the likely willing- benefit to the investor or to the ways. ness to pay. And correctly valuing additional host nation--depending who electricity access is a technical problem that bears the price risk. requires information or assumptions about demand, and the IEG review of rural electrifica- Furthermore, most develop- For project appraisals to tion (IEG 2008d) found that only 5 of 13 projects ment and carbon impact send the right signals they examined used best-practice techniques. Similarly, assessments look within the must value energy and distortions in coal and (especially) gas markets boundaries of the project. But electricity at economic need to be accounted for in project appraisal. projects--especially low-car- prices, but this is not bon projects--often aspire to easily done. Moreover, economic analysis should incorporate catalyze replication and dif- allowance for energy price volatility. Because fossil fusion through demonstration or market fuel prices are volatile and uncorrelated with transformation effects. These include learning- variation in wind and rain, investments in curve effects, reduction of perceived risk, and renewables and energy efficiency carry a risk- stimulus of supply and service markets. Multipli- hedging benefit--in effect, another kind of ers should therefore attach to shadow value. Some ESMAP work has been both the development and Renewable energy and important in drawing attention to this (Hertzmark carbon effects of these proj- energy efficiency are 2007). But while the carbon shadow value is ects. In practice, spillover ef- hedges against volatility perceived only when carbon markets are active, fects may dominate within- of fossil fuel prices. Figure 3.2: Real Energy Prices of Coal, Gas, and Oil, 1990­2008 12 10 8 6 $/mmbtu 1990 4 2 0 1990M11990M6 1990M11 1991M41991M91992M21992M7 1992M12 1993M10 1993M5 1994M31994M81995M11995M6 1995M11 1996M41996M91997M21997M7 1997M12 1998M10 1998M5 1999M31999M82000M12000M6 2000M11 2001M42001M92002M22002M7 2002M12 2003M10 2003M5 2004M32004M82005M12005M6 2005M11 2006M42006M92007M22007M7 2007M12 Date Coal, Australia, real $/mmbtu Crude oil, average, spot real $/mmbtu Natural gas, Europe, real $/mmbtu Natural gas, U.S., real $/mmbtu Source: World Bank Global Economic Monitor. 3 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Appraisal should consider project impacts. Consideration of spill- power plants are large gross emitters of CO2. But spillover and over effects in project selection and where these plants substitute for coal-fired demonstration effects. appraisal would tend to bring power, they could realize very large reductions in efficiency and renewables projects to emissions. Emphasis on gross footprints might much greater prominence. discourage such win-win investments. At the same time, net footprints have to be reckoned While measuring a Carbon Accounting at the Level of against a counterfactual: what would have project's gross emission the Bank Group happened in the absence of the Bank project? may be straightforward, The Bank needs to recognize that These counterfactuals are potentially subject to the net impact on pursuing its primary mission of poverty manipulation. This possibility has become a emissions could be very reduction will inevitably put upward lightning rod for criticism of the CDM (which also different. pressure on global emissions, simply uses such counterfactuals) and will be considered because people with rising incomes at greater length in the second phase of this demand more energy, and more agricultural evaluation. products that will compete for land with forests. While provision of basic energy access to the A second and even more fundamental problem is poorest will have little aggregate impact on that Bank-supported policy reforms could easily emissions, policies stimulating robust, shared have impacts (positive or negative) that swamp growth in the developing world will indirectly investment-level footprints. Thus footprinting spur emissions in rough proportion to income. efforts, if undertaken, should be carefully qualified These pressures can be moderated or exacer- as to scope and methods. bated by Bank-assisted policies that shape energy and land use. Taken together, these considerations suggest a multilevel menu of options related to carbon Carbon accounting (or footprinting) of Bank accounting. First and most basic projects should operations should be approached with caution. employ rigorous economic analysis in appraisal, An advantage of footprinting is its ability to focus using economic values for fuel and power prices attention and stimulate critical and creative and taking price volatility, local environmental thinking on emissions reductions. (See, for externalities, and demonstration effects into instance, the success of carma.org, which reports account. Second, the Bank could undertake on worldwide emissions of all power-generating carbon accounting at the project level, comput- plants.) However, to the extent that footprinting ing switching values for high- and low-carbon is not comprehensive in scope, it could be alternatives. Publication of these analyses would misleading or even lead to perverse outcomes. inform the global community about the costs of And it is important to note that the Bank Group's carbon abatement and would be an important current ability to quantify aggregate public good. Third, the Bank could support Bank-supported policy impacts on other aspects of develop- interested clients in creating energy system reforms could have larger ment is limited. expansion plans that take environmental impacts impacts than into consideration. These could be used to investments. One problem--which also applies to validate that proposed investments were consis- project-level carbon accounting-- tent with economic and national environmental concerns measuring a project's GHG impact. It is priorities. With the Bank's supporting role relatively straightforward to measure gross defined, these plans could also be used to emissions. But the net impact on emissions could provide a more comprehensive measure of the be very different. Gas and combined heat and Bank's impact on emissions. 3 6 WO R L D B A N K O P E R AT I O N S A N D C L I M AT E C H A N G E Box 3.1:The $135 perTon CO2 Price Is Already Here Just a few years ago, climate policy scenarios controversially 2008 levels. For instance, the May 2008 petroleum price is equiv- envisioned a world of universal high carbon taxes in the 2030s. alent to that of 2006, with a $135 per ton of CO2 tax added. The CO2 The mid-2008 world bore a striking resemblance to those price equivalent differs among fuels because of their different scenarios. carbon content. Plans for climate change mitigation usually include some pro- The table provides food for thought. First, mid-2008 price lev- vision to attach a real or implicit price to GHG emissions. The pro- els give some indication of the impact of high carbon prices in a posal is a mainstay of environmental economics: GHGs impose scenario where global energy prices subside. Second, reactions widespread costs on the environment, so those costs should be to those prices give some indication of the short-run scope for ad- internalized in people's decisions on burning fuel, clearing forests, justment to carbon prices and the implications for carbon emis- and so forth. This would balance costs and benefits in the short sions. In the United States, for instance, there has already been a run, and motivate research and development toward cleaner tech- sharp drop in sales of fuel-inefficient vehicles and an increase in nologies over the longer run. CO2 prices could take the form of taxes ridership in public transportation. Third, the equivalence provides on emissions, a requirement to buy an emissions permit, an op- a new perspective on carbon shadow pricing of investments. portunity to sell emissions reductions, or a combination of these There have been objections by developing countries to the use of measures. Thus, pricing CO2 does not necessarily entail a tax on carbon shadow pricing in the investment decisions of multilateral developing countries. development banks as an unwarranted imposition of responsibil- Much debate and analysis have been devoted to assessing car- ity for emissions. However, prudent investment decisions should bon prices that would advance GHG stabilization goals, and yet be account for the possibility that energy prices will stay high (or spike politically feasible. Various global models of mitigation, for in- high) during the life of a project. This self-interested calculation, stance, require CO2 prices of $30 to $275 in 2020 (rising over time) focusing entirely on energy price volatility and not on carbon, will to stabilize atmospheric concentrations at 550 ppm (Clarke and oth- tend to favor renewable energy and energy efficiency in much the ers 2007). Questions about the acceptability of this kind of price same manner as would a carbon shadow price. It does not obvi- level underlie much of the negotiation on the global climate regime. ate the burden of financing these investments. Carbon financiers have explored the impact of certified emissions However, note that the analogy between energy price hikes and reductions (carbon credits) at $5 to $10/ton of CO2 on investments carbon prices is imperfect in several important respects. First, in clean energy. And there is an ongoing debate about whether to the differing carbon and energy contents of fuels mean that a true incorporate carbon pricing in the World Bank's investment analy- carbon price would fall most heavily on coal, inducing substitution sis. (That is, in assessing a project's benefit-cost ratio, should of other fuels. Second, energy price hikes, unlike a carbon price, global damages attributable to GHG emissions be included in the would encourage the development of nonconventional sources of cost?) Meanwhile, skyrocketing energy prices provide a taste of fossil fuels, including highly emissions-intensive sources such as what carbon prices would feel like for consumers of fossil fuel. The oil shale and tar sands. Third, a global carbon price would depress table below shows the equivalence between a carbon price and the supply price of energy, so that its effect on final prices would a fuel price increase for three fuels. Suppose fossil fuel prices had be somewhat muted. Finally, the distributional consequences of remained at their 2006 levels. The table shows the CO2 price (or tax) carbon taxes, carbon permits, and high energy prices are quite equivalent that would equate consumer prices to observed May different. Australian Crude oil, LNG (Japan) coal $/ton avg. spot $/bbl $/mmbtu Mean price, Jan-Dec 2006 $49.09 $64.29 $7.08 Price, May 2008 $131.00 $122.63 $11.90 $/tonCO2 equivalent of the 2006­08 fuel price increase $31.77 $135.08 $80.52 Notes: Equivalence of a $1/ton CO2 price on commodity price in physical units $2.58 $0.43 $0.06 Equivalence of a $1/ton CO2 price on commodity price per energy unit (mmbtu) $0.103 $0.074 $0.060 Source: IEG calculation based on Development Prospect Group "Pink Sheet" (at http://www.worldbank.org/) commodity price data. Note: Bbl = barrel, mmbtu = millions of British thermal units. 3 7 Chapter 4 Evaluation Highlights · Subsidies are a large but poorly monitored drag on developing-coun- try economies--removing them would increase economic efficiency and reduce GHG emissions. · In countries where taxation has kept fuel prices high, emissions are lower. · Most subsidies go to better-off consumers. · Subsidy reduction can fund social protection that is better targeted to poor people. · Power price reform goals have often been achieved, especially in transi- tion countries. A resident of Palu, Indonesia, receives money under a cash transfer program instituted by the government to cushion the impact on poor people of a reduction in fuel subsidies. Photo by Basri Marzuki, reproduced with his permission. Subsidies and Energy Pricing E nergy subsidies hobble economies, spur GHG emissions, and benefit primarily the better-off. While the record energy prices of 2008 under- line the lose-lose nature of most subsidies, the drawbacks of energy sub- sidies are a longstanding concern. The solution seems obvious: rationalize prices and use the savings to provide more effective social protection for the poor and vulnerable. But like most apparently win-win propositions, it is not easy to put into practice. This chapter reviews efforts to do so. The Nature of Subsidies and Price still large subsidies to gas and oil outside the Distortions OECD, and substantial remaining coal subsidies Subsidies and price distortions take many forms within the OECD. These subsidies are not and can be difficult to measure with precision regularly, comprehensively, or consistently (Morgan 2007; UNEP 2003). The most obvious monitored. But ad hoc surveys show them to be are on-budget payments by governments to huge. The International Energy Agency producers or consumers of energy. However, estimated that there was about a quarter-trillion many subsidies are off-budget, and therefore dollars of annual consumption subsidies for harder to detect and calculate. Oil- and gas- electricity and fossil fuels outside the OECD in producing countries often sell these fuels to 2005 (IEA 2007). The largest subsidizers in consumers at a price below their economic value. absolute terms were Russia, Iran, Saudi Arabia, The forgone revenue or opportunity cost consti- India, Indonesia, Ukraine, and Egypt--all with tutes a subsidy to buyers. Similarly, electricity is more than $10 billion a year in subsidies.1 sometimes sold to consumers below the short- Implicit subsidies for gas and oil play a large role. run marginal cost, and often below the long-run marginal cost. Assessing these implicit subsidies The OECD has about 29 billion in subsidies, requires accurate estimation of the economic mostly to energy producers (European Environ- values involved. There can also be direct capital ment Agency 2004, quoted in Morgan 2007). subsidies or tax benefits for energy producers. Developed-country subsidies for biofuels are increasingly important. However, subsidies are The Problem with Subsidies poorly monitored and take a variety of forms. For First, energy subsidies are enormous. Despite instance, public spending preferences for roads considerable progress in policy reform, there are versus urban transit or long-distance rail 4 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Subsidies, though large, provides an implicit subsidy for more economic efficiency and reduce GHG emissions are not regularly, emissions-intensive transport. Thus, over the long run. In the short run, people have comprehensively, or the total scale of energy subsidies may limited options to react to price changes, consistently monitored. be extremely large. especially where energy is rationed (for example, through load-shedding). Some analysts also Not included in these estimates is theft of or assert that demand is insensitive to price in the nonpayment for electricity. These effectively act long run (IEA 2007). But ample evidence shows as subsidies to nonpaying users, many of whom that higher energy prices induce substantially are poor, but some of which are large farms, lower demand, and, by extension, lower CO2 enterprises, or government entities (Smith emissions. Dahl and Roman (2004) reviewed 191 2004). A rough guide to the magnitude of these studies of energy demand since 1991. The studies subsidies is provided by statistics on transmis- found that a 10 percent increase in energy prices sion and distribution losses, both technical would be expected to reduce long-run demand (physical) and nontechnical. Purely technical by 7 percent, on average. Table 4.2 shows results losses are likely to be less than 15 percent, so for specific fuels. excessive losses suggest theft. Reported transmission and distribution losses exceed Sterner (2007) compares gasoline demand these rates in many countries, including Ecuador across countries and shows that the decades- (43 percent), Moldova (38 percent), India (31 long price differentials among OECD countries percent), and Pakistan (24 percent).2 have resulted in markedly lower demand in the countries that have maintained high fuel prices They are a huge drag on Second, in some countries subsidies through taxation. In these areas, infrastructure the economy and the are a huge drag on the economy and and transport use patterns have evolved in a public purse in some on the public purse. In Egypt in 2006, more energy-efficient manner. Sterner's results countries. for instance, energy subsidies were suggest that if the OECD had long ago about 12 percent of GDP--a bit more harmonized prices at the level of the country than half on budget, the remainder consisting of with the highest tax (the United Kingdom), implicit opportunity costs. Energy subsidies are overall fuel consumption and emissions would among the largest social expenditures in govern- be 36 percent lower. Had they coordinated at the ment budgets. Table 4.1 compares fuel subsidies lowest price (the United States), emissions from a recent IMF survey to public spending on would be 30 percent higher. health. Subsidies are 2 to 7.5 times as large as public spending on health in Bangladesh, Subsidies to fossil fuels also boost CO2 emissions Ecuador, Egypt, India, Morocco, Pakistan, by reducing the relative attractiveness of Turkmenistan, Venezuela, and Yemen. renewable energy. Subsidies to electricity Removal of subsidies Other sources point to additional similarly reduce the returns to investment in would be expected to countries with high subsidy-to-GDP renewable sources. increase economic ratios. Carey (2008), using IMF reports efficiency and reduce for 2006, lists Algeria (7.5 percent), At the global level, several studies show that GHG emissions over the Syria (12.2 percent), and Libya (15 removal of domestic subsidies leads not only to long run. percent). Indonesia's subsidies were domestic gains but also to global improvements $12 billion in 2005, and have since in welfare and reductions in GHG emissions. risen with fuel prices. As figure 2.3 shows, oil These studies trace the impacts of energy price producers are prone to subsidize changes through all interconnected markets. Emissions are markedly diesel fuel. Anderson and McKibbin (2000) estimated that lower where countries removal of coal subsidies (in both OECD and have maintained high Third, removal of subsidies would non-OECD countries) would reduce global CO2 fuel prices through generally be expected to increase emissions by 8 percent from the business-as- taxation. 4 2 S U B S I D I E S A N D E N E R G Y P R I C I N G Table 4.1: Fuel Subsidies Compared with Health Expenditures Fuel subsidies Ratio of fuel (percent of GDP) subsidies to public Region/country 2006 2007 2008 expenditures on health (%) Africa Angola 3.5 3.6 2.5 170 Burkina Faso 0.7 0.7 1.0 24 Cameroon 0.0 0.0 1.0 69 Cape Verde 1.9 0.0 0.0 0 Gabon 2.0 1.3 1.7 57 Mauritania 0.0 0.0 0.1 6 Mauritius 0.0 0.0 0.5 23 Nigeria 0.0 1.3 2.0 168 Senegal 0.6 0.3 1.3 77 Sudan 2.2 1.0 1.6 112 South Asia Bangladesh 1.8 2.9 3.0 362 India 1.6 1.2 2.0 213 Sri Lanka 0.8 0.3 0.4 21 East Asia and the Pacific Brunei Darussalam 1.0 1.0 1.0 63 Cambodia 1.5 2.1 2.6 168 Malaysia 1.3 1.4 2.8 149 Nepal 1.8 1.8 2.0 123 Pakistan 0.5 0.5 2.8 751 Europe and Central Asia Azerbaijan 2.2 0.9 0.2 21 Bosnia & Herzegovina 0.3 0.4 0.4 8 Belarus 4.4 4.9 7.4 148 Russian Federation 0.5 0.4 0.3 9 Turkmenistan 11.3 13.3 15.2 475 Ukraine 2.3 2.3 3.3 89 Middle East and North Africa Egypt, Arab Rep. of 8.3 7.0 8.4 362 Iraq 5.7 0.2 0.4 13 Jordan 3.6 4.5 2.5 53 Lebanon 0.1 0.1 0.2 5 Morocco 2.3 2.7 5.0 258 Oman 2.8 3.2 3.2 151 Tunisia 1.9 2.3 2.2 90 United Arab Emirates 2.9 2.7 2.5 134 Yemen, Republic of 8.3 9.4 11.6 544 Latin America and the Caribbean Argentina 1.1 1.7 0.0 0 Belize 0.1 0.4 0.4 16 Barbados 0.0 1.0 0.3 7 Costa Rica 0.0 0.0 0.5 9 Ecuador 5.6 6.4 8.7 410 El Salvador 0.0 1.4 2.0 53 Guatemala 0.0 0.0 0.4 19 Honduras 0.9 0.9 0.8 20 Mexico 0.0 1.6 2.1 72 Panama 0.0 0.5 0.5 10 Peru 0.0 0.2 1.0 47 St. Vincent and Grenadines 0.5 1.0 0.0 0 Trinidad and Tobago 0.8 0.8 0.8 35 Uruguay 0.0 0.4 0.4 11 Venezuela, Rep. Bol. de 4.6 5.9 7.7 363 Sources: Subsidies from IMF (2008). Health expenditure from World Development Indicators. Note: Last column shows ratio of 2008 GDP share of fuel subsidies to 2005 GDP share of public expenditure on health. 4 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P The dearth of statistical information on subsidies Table 4.2: Sensitivity of Energy Demand to Price is striking in view of their magnitude and economic and environmental importance. Aside Energy type Long-run price elasticity of demand from GTZ's invaluable biennial compilation of Energy 0.72 retail vehicle fuel prices, there is no comprehen- sive, public, and reasonably current source of Industrial energy 0.93 comparative data on domestic energy prices. IEA Electricity 0.69 discussed energy subsidies in its 1999 and 2006 Electricity-- industry 0.32 Energy Outlooks but does not publish regular Electricity--residential 0.56 data on global subsidies. Its data on energy prices Coal 0.60 are mostly restricted to OECD members. The IMF Diesel 0.67 sometimes discusses energy pricing and Gasoline 0.61 subsidies in its Article IV reports, and has just Natural gas--industry 1.35 undertaken a selective rapid survey of Natural gas --residential 0.56 subsidies--illustrating the feasibility of providing Source: Mean values from a metareview by Dahl and Roman 2004. up-to-date information. Within the World Bank, the Latin America and Caribbean and Europe and Studies suggest that usual baseline, with little impact on Central Asia units have independently compiled subsidy removal leads to GDP. IEA (1999) simulated the useful summary tables of information on energy both domestic gains and removal of energy subsidies in eight pricing for countries in their Regions, drawing in global improvements in non-OECD countries and predicted a part on reports by regional associations, includ- welfare and reductions in global reduction in CO2 of 4.6 percent, ing the Latin American Energy Organization and GHG emissions. while the countries concerned would Europe's Energy Regulators Regional Association. improve GDP by an average of 0.7 However, these compilations are not kept percent. Saunders and Schneider (2000), using a current. lower baseline level of coal subsidies in the developing world, found a more modest 1.1 There are considerable methodological chal- percent reduction in global emissions, but their lenges in quantifying subsidies. Many subsidies model included more GHGs and international do not appear in government accounts. For linkages than IEA (1999). Ivanic and Martin instance, oil and gas producers and processors (2008) focused on the Middle East and North may be compelled to sell products at prices Africa, where energy subsidies are high. They below alternative levels. Utilities may be required found that removal of subsidies in the Region to sell electricity below the marginal cost of would boost welfare by $15.3 billion in the production, with indirect compensation. Or, per- reforming countries and by $30.4 billion in the haps more commonly, utility tariffs are set below rest of the world, outside the Organization of long-run marginal cost, so that consumers are Petroleum Exporting Countries (OPEC), though not faced with the cost of system expansion. OPEC members outside the Middle East and North Africa would incur a $2.5 billion loss if The recent rapid run-up in energy prices placed supply was unchanged. Ivanic and Martin (2008) huge stress on existing subsidy systems. In some do not compute CO2 impacts but note countries, this stress was unsupportable, and reductions of 7­30 percent in energy use in the subsidies were scaled back. Elsewhere, rising reforming countries. There are, however, prices translated directly into larger subsidies. compensating increases in the rest of the world if This underlines the need for real-time monitor- oil conservation results in increased ing of prices and subsidies. There are considerable exports. In general, one would expect methodological the greatest global impacts on CO2 Energy Subsidies and the Poor challenges in quantifying from the removal of electricity and gas Energy subsidies are often justified as protecting subsidies. subsidies. poor people, but the bulk of energy subsidies go 4 4 S U B S I D I E S A N D E N E R G Y P R I C I N G to better-off consumers. Given the magnitude of This ratio ranges from .20 in Guatemala to 1.0 in subsidies, there is comparatively little informa- Gujarat, with a median of 0.66. The poor target- tion on their beneficiaries. However, the ing performance reflects low proportions of poor scattered information that is available shows that people connected to the grid and the persistence these subsidies are not well targeted. This is an of subsidies for high consumers. However, almost automatic consequence of the relation Komives and others (2006) note three utilities between income and energy consumption. Most that employ means-tested tariffs and achieve poor people in developing countries are not progressive targeting ratios of 1.2 to 1.5. connected to the electric grid and do not own cars, so they get no direct benefit from fuel and But even when richer people receive a gasoline subsidies. They do receive indirect larger share of the subsidy pie, poor The bulk of subsidies go benefits through lower prices of energy-intensive people may derive a greater propor- to the better-off goods and services such as public transit. tion of their income from those consumers. Nonetheless, a study by Coady and others (2006) subsidies. For instance, though much found that even when such indirect benefits are of the subsidized kerosene intended for the poor considered, the bottom 40 percent of the popula- is diverted to other uses, poor people nonethe- tion in Bolivia, Ghana, Jordan, Mali, and Sri Lanka less would be more burdened than the better-off received only 15 to 25 percent of fuel subsidies. by increases in kerosene prices. Appendix C presents a selection of information For this reason, an understanding of the poverty on the distribution of subsidies. The typical and distributional impact of energy finding is that the bottom 40 percent of the pricing reform would seem to be But some subsidies are income distribution receives 15­20 percent of crucial for design of the reform and important to poor people. the subsidies. Subsidies for liquefied petroleum the monitoring of its impact. While gas and cooking gas are quite poorly targeted, long recognized, this was formalized only in 2004, because these items are consumed by better-off with the Bank's adoption of the Operational people. In Ecuador, the top quintile gets 17 Policy on Development Policy Lending percent of the cooking gas subsidy, the bottom (Operational Policy 8.60). This requires the Bank quintile only 3 percent. In Bangladesh, the 4 to determine whether a proposed Development percent of the population with gas access Policy Loan (DPL) is likely to have significant received 1.4 billion taka in subsidies. adverse social impacts, particularly on poor and vulnerable populations; to summarize the state of Residential electricity tariffs are designed to knowledge on how to mitigate those impacts; subsidize poor people, but are often poorly and to fill gaps where necessary. targeted. Typically, tariffs increase with the quantity of electricity consumed or with the DPLs (and their predecessor, Structural Price reform policies capacity of the connection. But even when rates Adjustment Loans) have frequently ap- should be guided by rise with consumption, or differ by connection plied conditions related to energy analysis and monitoring capacity, wealthier people derive large absolute pricing or subsidies. Figure 4.1 provides of poverty impacts. benefits. In Indonesia, for instance, in 2005 the an indication of the application of top decile received 44 percent more electricity conditionality over time, and includes general as subsidies than the bottom decile (World Bank well as sector-specific loans. It is an incomplete 2006b). Komives and others (2006) reviewed 22 index because some conditions with pricing intent utilities (mostly in India) using quantity-based may be stated in an indirect manner. subsidies and found that none of them is progres- sive. Their targeting indicator is the ratio of the Poverty and Social Impact Analyses (PSIAs) are poor's share of subsidies to their share of the one tool for fulfilling the Operational Policy 8.60 population (where the poor population is the requirement.3 First formalized in 2001, and bottom 40 percent of the income distribution). piloted over 2002­03 by the Bank, the IMF, and 4 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Figure 4.1: Conditionality Related to Petroleum Products a. Number of Countries with Conditionalities 16 14 12 10 conditions 8 of 6 4 Number 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year b. Number of Conditions 12 10 8 countries of 6 4 Number 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year Petroleum-diesel-gasoline pricing Petroleum-diesel-gasoline sector reforms Petroleum-diesel-gasoline privatization Source: IEG analysis. others, they constitute a structured approach to Most of the PSIAs attempted to document the assessing the distributional impacts of reform. current proportion of income devoted to They are not mandatory. A Good Practice Note energy expenditures by poor people, using this (World Bank 2004a) encourages selectivity in as a basis to assess the burden of price undertaking PSIAs, prioritizing them where the increases. Some also attempted to determine distributional issues are most important, the what coping strategies might be used by poor policy options most precisely defined, and people to adjust to price changes. A few knowledge gaps the greatest. assessed specific policy alternatives for mitigat- ing price impacts. IEG identified 19 completed PSIAs PSIAs provide a done by the Bank since 2001 that Accurate assessment of current budget shares structured approach to relate to pricing of electricity, heat, or and subsidy incidence requires good survey data. assessing the fuels. All were done in the context of Some PSIAs used small purposive samples or distributional impacts of proposed price increases; a few were focus groups, which cannot give reliable reform, but they are not able to analyze retrospectively the estimates of the magnitude of expenditure. mandatory. effect of a previous price hike. Others commissioned custom surveys or were 4 6 S U B S I D I E S A N D E N E R G Y P R I C I N G able to make use of existing high-quality, nation- development of a comprehensive In two cases, detailed ally representative survey data. However, survey safety net system. Fuel prices have PSIA analysis and data were often poorly suited to the task--for subsequently risen, though they still recommendations seem example, by failing to distinguish between billed fall short of world prices. A natural gas to have shaped successful and consumed electricity. Few of the PSIAs were connections project, designed to shift policies of price rises with able to undertake the sophisticated task of consumers from highly subsidized compensation. computing the indirect effect of price hikes on liquefied petroleum gas to less- goods and services consumed by the poor. subsidized piped gas, refers to the PSIA, and the 2008 CAS describes ongoing policy dialogue in PSIAs tended to make generic recommenda- energy price reform. tions, such as advocating improved safety nets as compensation for price hikes or improved In two other cases, PSIA impacts were less clear. quality of utility service as a precondition for the A 2005 PSIA of the Ghana electricity sector will political acceptability of raising tariffs. be the subject of an in-depth IEG case study; for current purposes it suffices to note that the PSIA IEG examined in more detail five Bank- recommended raising tariffs while maintaining a supported PSIAs or PSIA-like analyses, together relatively poorly targeted lifeline tariff (box 4.1). with an IMF-assisted PSIA for linkages to policy, The government at first declined to change Poverty Reduction Strategy Paper (PRSP), and tariffs, but doubled them in 2007. In Bolivia, a loan outcomes. Outcomes were divergent. In 2004 study found that hydrocarbon subsidies two cases (see box 4.1 on Indonesia and Ghana), were important to the poor, but leak substan- detailed PSIA analysis and specific recommenda- tially to non-poor households. The study is not tions appear to have shaped successful policies cited in the Social Sectors Programmatic of price rises with compensation. In Yemen, Structural Adjustment Credit or in the 2005 which has some of the proportionally highest Poverty Assessment. fuel subsidies, and where underpricing of fuel has encouraged unsustainable extraction of On balance, it appears that PSIAs or groundwater, long-standing policy dialogue drew similar analyses have sometimes PSIAs have sometimes on an ESMAP-sponsored study of household played a useful and substantial role in played a useful and energy (not formally designated as a PSIA). The informing decisions on pricing substantial role in Bank recommended a combination of gradual reform. The availability of good survey informing decisions on price rises to allow time for adaptation, data for use in the analyses appears to pricing reform. combined with improved targeting of the help, as does a substantial period of existing Social Welfare Fund. The government policy dialogue. implemented enhanced social safety nets but raised diesel prices sharply--by 165 percent-- PSIAs on energy often present generic rather than gradually. This triggered riots and 36 recommendations for the use of targeted social reported deaths, prompting a partial rollback of safety nets. This is an area of increasing research the price rise, which was still short of eliminating and implementation at the Bank, following on the the subsidy. celebrated success of Mexico's conditional cash transfer program, PROGRESA-Oportunidades. In Egypt, a 2005 PSIA (World Bank 2005b) Attention is being devoted to assessing the cost showed that energy subsidies are regressive. effectiveness and error rates of alternative Although the poor and vulnerable receive a methods of targeting (Castañeda and others disproportionately small share of the energy 2005; Coady, Grosh, and Hoddinott 2004). subsidies, the PSIA concluded that removal of Combinations of geographic targeting and means the energy subsidies would increase poverty. It testing (or proxy means testing) offer favorable recommended that the phasing out of the targeting performance and could be superior to energy subsidies be coordinated with the fuel or electricity subsidies in this regard. As 4 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Box 4.1: Ghana and Indonesia: Using Social Safety Nets to Protect the Poor from Fuel Price Rises In Ghana, rising world prices led to increasing subsidies to the thought to have contributed to the downfall of the Suharto gov- national oil refinery; these subsidies reached 2.2 percent of GDP ernment. Subsequent price hikes in 2000 and 2003 provoked in 2004. An IMF program pressed for reform of the sector. A protests. Attempts to compensate poor people met with little suc- government-commissioned PSIA, together with IMF-led re- cess (Bacon and Kojima 2006). In 2005, the government confronted search, analyzed the relative targeting effectiveness of a vari- subsidies reaching 7 percent of GDP. The government drew on an- ety of specific compensatory mechanisms and recommended alytic work from many sources, including a PSIA. The PSIA showed implementing educational or health benefits or means-tested that the fuel subsidies were regressive and that past mechanisms transfers. These were predicted to be more effective in reach- to compensate the poor for price hikes had been ineffective. It sug- ing the bottom quintiles of the population than the existing gested a geographically targeted cash transfer mechanism. The kerosene subsidies. government subsequently undertook two large price hikes of fuels, These analyses may have supported the 50 percent increase including kerosene, in tandem with a means-tested, unconditional in fuel prices in February 2005 (which had been signaled the pre- cash transfer system. Thanks to the Indonesian statistical bu- vious year) and probably helped to support announcement of a reau's well-developed household survey system, the government range of mitigatory measures, including elimination of fees for was able to develop and implement the targeting and transfer primary and junior secondary school, increased funding for primary system within a couple of months. The price of diesel fuel doubled health care in the poorest areas, investments in urban mass tran- and that of kerosene nearly tripled; but monthly cash payments of sit, and rural electrification. These measures remain in place. $10 were distributed to each of 19.2 million households for a year. Prices for petroleum products have been linked to world markets. Subsequent simulation analysis suggests that, even if substantial However, with the continued rise in oil prices, a gasoline tax (which mistargeting is assumed, the bottom four deciles of the population funded some of the mitigatory measures) has been reduced. gained during the period of transfer (World Bank 2006d). However, Indonesia has long subsidized petroleum products, which has the continued rise in oil prices has again boosted subsidies. In May led to severe fiscal burdens. But eliminating the subsidies has 2008, fuel prices were again raised, and the cash transfer program been problematic. A 1998 price hike led to riots and is popularly continues. Sources: Azeem (2005); Bacon and Kojima (2006); Coady and others (2006); World Bank (2005e). countries face a combination of high energy and In Ukraine, a combination of fiscal stress, govern- high food prices (often in conjunction with food ment ownership, and cross-sectoral coordina- subsidies), interest in unified social protection tion of reforms, DPLs, and analytic work has systems grows. facilitated price adjustments and a reduction in emissions intensity (box 4.2). Experience in the Transition Economies Although their experience was histori- In Romania, the 1995 CAS aimed at pricing In the transition cally singular, the transition economies reform in the energy sector and was supported countries, the Bank of Eastern Europe and the former by investment and adjustment lending. By 2001, supported reforms that Soviet Union provide interesting energy sector subsidies were estimated by the made rapid pricing examples of massive and rapid adjust- IMF (Cossé 2003) at 5.2 percent of GDP, includ- adjustments and, in most ments in energy pricing. These adjust- ing 3.3 percent in off-budget transfers to cases, reduced emissions. ments have been accompanied in industrial users. However, IEG (2005) found that most cases by sharp reductions in significant reforms were spurred mainly by emissions intensity. They certainly reflect the conditionality attached to EU accession, IMF huge structural changes in the economies, but standbys, and the World Bank Programmatic the structural changes themselves were Structural Adjustment Loan 2 in 2002­03. entangled with changes in energy pricing. Electricity tariffs increased (in 2001 prices) from 4 8 S U B S I D I E S A N D E N E R G Y P R I C I N G Box 4.2: Ukraine: Gradual Energy Policy Reform and Decreasing Emissions Intensity Ukraine began the transition period of the 1990s with one of the policy-based loans, including energy. The supervisory committee world's most energy-inefficient and emissions-intensive and working groups helped improve information flows across gov- economies. Energy prices were far below economic levels and ernment agencies and provided a forum to design strategic deci- collection rates were low. Restructuring of the energy sector sions, as well as for monitoring their implementation. The began in 1994 with some early successes, including shutdown of policy-based operations were complemented by a set of sectoral uneconomic coal mines, but subsequently faltered. A Bank- loans that focused on energy efficiency. supported Electricity Market Development Project (fiscal 1997), Pressure for reform was driven in part by a large quasi-fiscal failed because of a premature approach to privatization. Mean- deficit--6percentofGDPin2003--whichhadresultedfromasharp while, the economy was suffering a severe contraction from increase in the imported energy prices that had been heavily sub- pretransition levels, exacerbated in 1998 by the regional crisis trig- sidized until then. Sector reforms resulted in a tremendous in- gered by a sharp rise in the prices of imported energy. The cri- crease in cash collection rates, rising from 8 percent in 1999 to 98 sis forced the government to introduce stabilization measures and percent in 2005, thus establishing an effective demand price for en- to agree with the IMF on a standby arrangement and with the Bank ergy consumption. State-regulated energy tariffs (electricity, gas, on a financial sector adjustment loan operation in late 1998. and coal) were increased between 25 and 50 percent during the During the current decade, energy reforms have accelerated 2002­07 period, with additional pressure coming from a hike in the and have been supported by the Bank through analytical inputs and price of imported gas. Economy-wide energy efficiency increased, policy advice as well as investment. The Bank's energy policy en- and CO2 emissions/GDP dropped from 5.6 tons/$ in 1998 to 3.9 in 2005. gagement in the 2000s has included three policy-based operations The impact of the increase in energy payments on the popu- (Program Adjustment Loan I and II and DPL I) and extensive ana- lation was partially cushioned by vigorous economic growth and lytical work, including reviews of energy sector reform options, elec- a corresponding decrease in poverty during this period. In addi- tricity, mining, and gas markets. The supervisory committee tion, Ukraine already had social support mechanisms in place to established for each policy-based operation included not only the protect the most vulnerable. To further protect the poorest against line ministers, but also other key cabinet members, including the the rise in energy tariffs, the government also introduced a grad- minister of finance, and the central bank governor. There were mul- uated (lifeline) tariff in November 2006 to those whose utility pay- tiple working groups on each of the main themes in the Bank's ments exceeded 20 percent of their income. Sources: IEG 2008c; IEG staff. 3.8 to 7.9 cents per kWh from 2001 to 2005, and pensioners reached 37 percent of the bottom collection rates went from 49 to 99 percent. quintile, but went to 24 percent of the top However, safety net features of the Programmatic quintile as well. Overall, the average share of Structural Adjustment Loan 2 were focused on household expenditure going to energy stayed unemployment and pensions rather than on constant, as did energy consumption. Reform energy prices. rates faltered, but revived with the Rose Revolu- tion of 2003, and subsidies for electricity fell from Georgian power reform followed an uneven path 6 percent of GDP to zero. Concerns remain (IEG 2008e; Lampietti, Banerjee, and Branczik about the independence of the regulator. 2007). Bank-supported reform commenced in 1995. An independent regulator was established, Overall, the transition experience shows that and Tbilisi's power system was privatized. There progress in rationalizing energy prices is was a dramatic hike in collection rates across all possible. Fiscal stress and the prospect of EU income groups, spurred by an aggressive system access have served as incentives to undertake of re-metering. Tariffs also increased steadily. In- difficult reforms. Dramatic improvements in kind transfers intended to help the poor and collections have taken place, in part due to 4 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Fiscal stress and the privatization and metering. Coordina- among countries. China, Indonesia, Russia, and prospect of EU accession tion across sectors is an issue; Ukraine stand out as examples of long-term helped spur the reforms. increases in heating tariffs shifted engagement associated with bold action by consumers to subsidized gas, threat- governments to rationalize prices. India, ening the viability of the heating systems. The Mexico, and Pakistan, in contrast, present a result of these changes has been substantial sequence of CASs that repeat the same set of reductions in emissions intensity of these concerns, but with relatively modest apparent economies. But the impact on welfare of the impact. In Vietnam, there has been slow poor is not well understood and needs to be progress on prices, with little or none in better tracked (Lampietti, Banerjee, and Branczik Argentina, Kazakhstan, and Nigeria. In Egypt, 2007). analytic work on pricing may have contributed to recent natural gas and fuel pricing decisions. Bank Engagement with the The two biggest diesel and gasoline subsidizers Large Subsidizers are Iran, where there has been some analytic Roughly speaking, the largest impact on global work, and Venezuela, where there has been no emissions might be expected from the largest engagement on this issue. subsidies in absolute magnitude. This section looks at the Bank's engagement on these issues Russia presents a complex record of Bank with the largest subsidizers among its borrowers, involvement and price reform. There were 10 based on the IEA (2007) list of large, non-OECD loans with primary fuel pricing or subsidy subsidizers of 2005. The list is augmented with reduction objectives during 1993­99. The three Mexico, a large electricity subsidizer and member coal sector loans succeeded in drastically of the OECD. (See appendix A.) The analysis reducing subsidies to loss-making coal mines--a looks at the role of Public Expenditure Reviews difficult task that has challenged many countries. (PERs) in identifying and drawing attention to The Russian effort combined extensive, effective subsidies, and of CASs in prioritizing action. safety nets and job creation programs for the PERs, introduced around 2000, are of interest affected communities and improved, transpar- because one might expect this to be an apt tool ent systems for managing and winding down the for detecting and diagnosing subsidy issues. subsidies. At the same time, a series of loans directed at oil and gas market reform were Returning to appendix A, there are eight countries mostly unsuccessful. One loan with gas pricing without PERs. These include Egypt, Iran, objectives, for instance, focused on gas users Kazakhstan, and Venezuela, where implicit rather than the gas supplier and failed to achieve subsidies are large in both absolute terms and as a its objective. Since 1999, however, gasoline and proportion of GDP. Some countries without PERs, diesel prices have increased to world market such as China, India, and Vietnam, nonetheless levels. Gas prices have increased but remain include detailed treatment of subsidies and below netback (export parity) levels. pricing in their CASs or Country Partnership Strategies (CPSs). Among the countries with PERs, Energy Loans and Pricing energy subsides receive no mention or only a This section considers the global experience perfunctory mention in the documents for with pricing-oriented loans in the energy sector. Argentina, Malaysia, Nigeria, and Pakistan, al- Figure 4.2 tallies experience with such loans, though the Pakistan CASs devote significant distinguishing between those concerned with attention to pricing issues. In the remaining primary energy (petroleum products and gas) countries, PER treatment of subsidies and those involving electric power. It shows a Outcomes of Bank includes detailed analyses and decline in loans dealing with primary fuel pricing. engagement with the recommendations. Few countries have had more than one such largest subsidizers have loan. There is, however, an apparent post-2000 varied greatly. Outcomes of engagement vary greatly increase in loans dealing with power pricing. 5 0 S U B S I D I E S A N D E N E R G Y P R I C I N G Box 4.3: Egypt: Policy Dialogue and Pricing Reform Egypt has long maintained energy subsidies. After bitter dis- cent in 2005, and by 7.5 percent in 2006. A further 5 percent annual agreements with the Bank on tariffs and financial management, increase is planned for the next five years. The prices of gasoline, the fiscal 1992 Kureimat Power Project was closed in fiscal 1994 diesel, fuel oil, and natural gas increased in 2004, 2006, and 2008. and $199 million of the $220 million loan was canceled. This ef- The Ministry of Finance started to record energy subsidies in the fectively ended the Bank's lending role in the power sector in budget in 2005/06 to increase transparency. In August 2007, the gov- Egypt until 2006, even though it did provide advisory services dur- ernment announced plans to eliminate gas and electricity subsi- ing this period. dies for energy-intensive industries over the coming three years By 2004, rising international energy prices had boosted the to help reduce budget deficits. cost of Egypt's energy subsidy policies to more than 8 percent of These structural reforms have been homegrown, as a result GDP and prompted renewed attention to the country's social safety of government initiative, and have drawn on Bank advisory ser- net policies. A retreat at Luxor in February 2005, led by the prime vices. The Bank had traditionally engaged on energy issues with minister and the World Bank president, included most of the Cab- the Ministry of Petroleum and the Ministry of Electricity and En- inet and brought senior officials from Mexico and Brazil, who pre- ergy, but began to work with the Ministry of Finance in 2005. The sented their experiences with safety nets. The retreat was followed Bank arranged an international conference in September 2005 on by a joint study entitled Egypt--Toward a More Effective Social DSM and energy efficiency. In 2006, two studies were delivered, Policy: Subsidies and Social Safety Net in December 2005 (World one on the Economic Costs of Gas in Egypt and another on the Bank 2005b). The report demonstrated clearly that "energy sub- Load Management Program and Time Use of Tariffs. An inter- sidies distort economic decisions and benefit the rich more than ministerial steering group, which includes the minister of finance, the poor." The Bank also provided a set of reform options for the the minister of investment (economy), the minister of petroleum, energy and food subsidies. the minister of electricity and energy, the minister of social sol- Underpricing of energy has been a problem for the country since idarity, and the minister of industry and trade, was established the early 1990s, and remains so today, though recent years have in late 2007 for working with the Bank on the energy pricing seen an increase in tariffs. Prices of electricity were adjusted in strategy. The overall objective of this study is to formulate an en- October 2004 (from an average of 12.8 Pt/kWh, 2.2 cents, to 14.06 ergy pricing strategy that ensures energy price levels are re- Pt/kWh, 2.4 cents) for the first time since 1992. Electricity prices flective of the underlying economic costs. The study is scheduled were increased at an average rate of 8.6 percent in 2004, by 5 per- for completion in 2009. Source: IEG staff. Figure 4.3 maps countries where there has been (through an ex-post PSIA; Lampietti Pricing-oriented lending project-level engagement in electricity pricing. and others 2007) is noteworthy for its for primary fuels has India and China stand out as areas of significant inclusion of an alternative social safety been declining, while that engagement. net, although that protection failed to for power has increased reach half the poor. In other since 2000. Table 4.3 summarizes the impact of loans countries, the experience was mixed oriented toward electricity pricing for the subset or unsustained. with detailed IEG audits. This is not a random sample, but it provides a wide set of experience Additional evidence comes from the experience for which outcome information is available. The in India. The World Bank has completed five state- overall message is one of general success in level power sector restructuring projects in India, transition economies, including Armenia, Bosnia in Orissa (fiscal 1996), Haryana (fiscal and Herzegovina, Bulgaria, China, and Georgia, 1998), Andhra Pradesh (fiscal 1999), Lending for power-price sometimes through structural adjustment Uttar Pradesh (fiscal 2000), and reforms has generally credits and sometimes through investment Rajasthan (fiscal 2001). IEG rated the been successful in loans. The well-documented Armenian case outcomes in Orissa, Haryana, and transition economies. 5 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Figure 4.2:Trends in Energy Sector Loans with Pricing Goals 18 16 14 12 10 projects of 8 6 Number 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Power Primary fuel Source: IEG tabulation. Rajasthan as moderately unsatisfactory, and that in Conclusion Uttar Pradesh unsatisfactory. Only the Andhra Price reform in energy is more urgent than ever, Pradesh project was rated satisfactory. All sought given the run-up in international market prices. to privatize distribution and establish or In principle, adjustment to higher and more strengthen independent regulatory commissions volatile energy prices could yield fiscal dividends with the aim of reforming tariffs, and thereby and long-run reductions in the level of GHG boosting the sector's financial health. All the emissions. Also in principle, reallocation of the projects fell short of the desired tariff objectives, savings from lower subsidies and lower energy in part due to a premature emphasis on privatiza- use could benefit poor people and society at tion. This goal of removing the subsidies for large. But in all societies the adjustment costs are farmers proved the subsidies to be too deep- large, especially for those who have benefited seated an issue to be addressed through power most from low prices. sector reform. However, some of the states have since made progress in increasing collection rates Over the past 18 years, the World Bank has and improving financial sustainability. frequently supported energy subsidy removal or price rationalization through both investment We identified 107 loans with goals related to and policy lending. Price reform goals have often primary fuel pricing since 1990; 66 of these were been at least partially achieved, especially in DPLs or adjustment loans. We were transition economies. In many transition Attempts to reduce power able to assess the outcomes of 50 post- economies, price reform has accompanied subsidies to agriculture 1995 loans, most of which were DPLs. absolute declines in emissions per capita and per failed. Thirty of these reported achievement unit of GDP, while incomes have risen. But in of pricing goals, though sustainability was not many cases, prices remain below the long-run assessed. marginal cost. 5 2 Figure 4.3: Distribution of World Bank Lending Related to Electricity Power Pricing Policy, 1996­2007 POWER PRICING POLICIES WORLD BANK BORROWERS SUBSIDIES No Projects 1­3 Projects 4­6 Projects 7­9 Projects AND Non-borrowers ENER GY PRICING 53 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Table 4.3: Outcomes of Loans with ElectricityTariff Goals Country Project (year approved) Tariff outcome of the project Armenia SAC I (1996) + + SAC II (1998) Succeeded in raising tariffs from 0.2 to 4.9 cents/kWh, and household col- SAC III (1999) lection rate from 10 to 88 percent; implicit subsidies through the water sec- tor remained. Safety nets targeted vulnerable groups. Established quan- titative goals for utilities. Improved service (in part due to restart of large nuclear plant). Côte d'Ivoire Energy Sector Loan (1990) ­ Economically unjustified tariff reduction. Laos Provincial Grid Integration (1993) + + Tariffs increased 70 percent. No action taken at the time to reduce unpaid government bills. Indonesia Suralaya Thermal Power (1992) + / ­ Automatic tariff adjustment mechanism introduced in 1994 was only partially successful in tracking changes in cost of power generation and was abandoned in the wake of the financial crisis. China Ertan Hydropower Projects (1991, 1995) + / ­ Planned tariff increases related to Ertan generation were inadequate SN Sichuan Power Transmission Project and remained below marginal cost, but adjustment of consumer tariffs (1995); Zhejiang Power Development in the other two projects was successful--particularly introduction of Project time-of-day rates in Zhejiang. Georgia SAC I (1996) + + Tariffs raised in three steps from near 0 in 1995 to 3.5 cents in 1997. SAC II (1998) Collections rate increase from 10 to 65 percent. SAC III (1999) Pakistan SAC I (2001) + / ­ Power tariffs were adjusted as a prior condition of SAC I, but there- SAC II (2004) after stalled or reversed; power subsidies constituted 1.6 percent of GDP in 2002/03. Jordan ESL (1994) + + One-time rationalization of power prices succeeded in bringing them up to long-run marginal cost; however, prices were pegged to oil prices, provided at concessional rates from Iraq. Bosnia and EMG Electric Power + + Household tariffs raised 20 to 60 percent, but still 40 percent below Herzegovina Reconstruction (1997) long-run marginal cost. Electric Power Reconstruction II (1998) Honduras HN Public Sector Modernization SAC + / ­ New tariff structure adopted as a condition of loan, but average (1996) rates are low, and subsidies go mostly to the non-poor. Bulgaria REHAB (1997) + + Tariffs were doubled, to 3.3 cents/kWh and adjustments were contin- ued after the loan's ending. Note: + + = general tariff increase of more than 10 percent; + = tariff increase of an unspecified percentage less than 10 percent or covering only some residential consumers; ­ = tariffs decreased during and/or after the project; + / ­ = mixed or unsustained results. While generalizations are difficult in this complex stress, or the prospect of a significant gain (such area, some lessons emerge. As in other areas of as accession to the EU), can motivate interest in reform, client ownership is a key prerequisite. reform. Cross-sectoral, ministerial-level involve- Engagement is often lacking when subsidies do ment, including the finance ministry as well as not cause immediate fiscal stress, as in energy agencies, may be an important feature of Price reform goals have the case of implicit subsidies to oil and successful energy reforms. Interactive and client- often been achieved. gas in net exporters. Conversely, fiscal responsive policy dialogue over an extended 5 4 S U B S I D I E S A N D E N E R G Y P R I C I N G period, supported by strong analytic work, is permit real-time and long-term assess- But the Bank has found it another recurrent theme, though it does not ment of welfare and emissions impacts. difficult to engage in guarantee results. Overcoming vested interests, price reforms in especially highly subsidized agricultural users, has These and other examples point to petroleum- or gas- been difficult, even in the presence of such work. growing interest in scrapping energy producing countries not subsidies in favor of more efficient and under fiscal stress. In at least two cases--Ghana and Indonesia--the integrated social protection systems. availability of pre-existing, good-quality household Systems using proxy means testing and survey information on welfare and on energy geographic targeting could be more effective in consumption helped in assessing the impacts of helping poor people and could free up resources price reform and in the design of programs that for investment in energy efficiency. But little mitigated adverse impacts on poor people. But effort has been made to use the introduction of there has been a lack of the systematic monitoring energy efficiency as an adjustment vehicle for of energy expenditure and usage that would higher tariffs. 5 5 Chapter 5 Evaluation Highlights · The Bank's energy efficiency proj- ects have had high domestic and global returns. · Five percent of the value of the Bank's energy lending has been for end-user efficiency and district heat- ing projects. · Only a handful of projects have ef- fectively supported efficiency pol- icy, though there is institutional innovation in efficiency finance. · Bank and borrower incentives favor supply over efficiency. · Modest GEF and trust fund finance has supported long-term policy en- gagement on efficiency issues. Solar energy is used to light village shop, Sri Lanka. Photo by Dominic Sansoni, courtesy of the World Bank Photo Library. Efficiency Policies E nhanced energy efficiency is seen by many as the largest single win-win opportunity to reduce emissions. Ultimately, people care less about en- ergy than they do about the services it provides. And much energy is simply wasted. The famous satellite photo of the world's urban These analyses are not novel. As noted earlier, lights is a graphic illustration of energy being the World Bank's 1993 energy policy pointed to cast uselessly into space, where, as light increased energy efficiency as an important area pollution, it spoils enjoyment of the nighttime for attention. And global energy efficiency sky. Coal plants throw off two-thirds of the (measured as GDP$ per unit of energy energy they burn--energy that in principle consumed) increased over 1990­2005, particu- could be captured for heating or industrial larly in China, India, and Russia (IEA 2008b). But purposes. Energy costs money, so efficiency end-user energy efficiency appears to be elusive: offers the prospect of reducing emissions at for at least 20 years, energy experts have pointed negative cost. to high-return opportunities that have been missed. According to the McKinsey Global Institute (Bressand and others 2007), growth in global Overcoming the Barriers to Energy energy demand could be halved through invest- Efficiency ments with financial rates of return over 10 The persistence of high-return opportunities for percent. IEA (2007) identifies increased energy end-user efficiency seems paradoxical. There is a efficiency as a crucial and cost-effective standard set of explanations of the market and component of a global energy strategy over the policy failures that result in barriers to the coming decades. In the electricity sector, it pursuit of these opportunities. These include: estimates that non-OECD countries would save $3 in supply investment for each $1 in demand- · Information failures--Firms and households can- side efficiency investment. (Fuel savings would not gauge the potential for energy savings, are be an additional payoff.) Across all energy unwilling to pay for an energy audit that may sectors, the IEA estimates that there is scope for fail to identify savings, and doubt whether ef- nearly a trillion dollars of efficiency investments ficiency investments will be as profitable as in non-OECD countries over the next 25 years. advertised. 5 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Standard explanations · Financial market failures--Banks do investment versus policy. (See table 5.1.) Supply- for the barriers to energy not know how to appraise loans for side interventions concentrate on the generation efficiency include market efficiency improvements, or per- or transmission of electricity, and are often and policy failures. ceive this to be an unusually risky components of sector reform efforts. Demand- business. side interventions focus on the behavior and · Attention failures and transactions costs--Where technology of energy users, and are therefore energy costs are a small part of overall expen- more diffuse and varied. ditures, other issues and opportunities may command decision makers' attention. For in- The investment-versus-policy distinction is cru- stance, neither consumers nor manufacturers cial to the discussion in this report. It roughly pay much attention to standby power demands corresponds to retail-versus-wholesale interven- of appliances, which may be only a few watts tion. Investment projects without strong policy each, but the aggregate national burden of these components intervene directly to install or fund appliances on the power system could be large. efficiency measures. On the supply side, these · Split incentives--If buyers or renters cannot include measures such as improved boilers in gauge the energy costs of buildings, builders power or district heating plants or transformers may have no incentive to invest in costly but in electric distribution, so that more electricity is energy-saving construction methods. delivered per unit of fuel burned. On the · Otherincentiveorregulatoryfailures--Unmetered demand side, analogous projects fund installa- heat consumers may lack the incentive or tion of insulation, efficient lights, or improved means to adjust temperatures; public agen- electric motors. cies may be barred from considering life-cycle costs in procurement decisions; and utility In contrast, policy interventions seek to remove rate-setting procedures may reward inefficiency. the barriers that inhibit firms and households · Underpricing of energy, so that users lack in- from pursuing these investments themselves. centives to conserve it. Supply-side policies might encourage these investments through incentive changes--for There is a standard set of remedies for these instance, through corporatization of a utility. failures. These can be roughly categorized along Demand-side policies include standard setting or two dimensions: supply versus demand and certification systems that establish efficiency Table 5.1: ATypology of Efficiency Interventions Investments Policies Supply side District heating renovation Power sector restructuring Combined heat and power Coal boiler renovation Improved transformers Demand side Distribution of compact fluorescent Utility DSM light bulbs (CFLs) Appliance and building standards and Building retrofits certification District heating renovation Public procurement policies Funding for energy financial Capacity building and promotion of energy intermediaries including energy service companies service companies Source: IEG. 6 0 E F F I C I E N C Y P O L I C I E S requirements for appliances or enable con- at the Bank Group's efforts at ESCO promotion, sumers to reliably distinguish differences in which constitute a significant and interesting efficiency. The IEA has recently published a segment of the efficiency portfolio. comprehensive set of public policy recommen- dations related to energy efficiency (IEA 2008a). The Efficiency Portfolio Figure 5.1 draws on data and categorizations This Phase I report concentrates primarily on presented in the Bank Group's reports on policy-level interventions; analysis of invest- renewable energy and energy efficiency.1 It ments will be presented in Phase II. That report shows the total value of energy-related lending at will look at the impact of policy changes on the the World Bank, and the proportion devoted diffusion of efficiency technologies. However, specifically to energy-efficiency components, there is not a sharp distinction between policy including both supply- and demand-side ef- and project. At the intersection is an area of ficiency.2 Over the period 1991­2007, about 5 increasing Bank Group activity: efficiency finance percent of the value of the World Bank's $48.7 and promotion of energy service companies billion energy investments were devoted to (ESCOs). At the core of these projects is the goal energy efficiency. (These figures exclude IFC and of introducing new mechanisms to identify and MIGA.) The proportion has oscillated widely finance retrofits that make equipment or from year to year. This 5 percent of value was buildings more energy efficient. Sometimes concentrated in about one-tenth of all projects. there are also public policy elements in promot- Among high-emitting countries (table 3.2), this ing capacity and demand for these services, and proportion was 6.7 percent for countries with in some cases public funds are provided. high-level CAS/Country Partnership Strategy Similarly, public policies may be used to promote goals related to efficiency, and 3.9 percent for the the diffusion of new technologies, such as remainder. A broader count, including transmis- compact fluorescent light bulbs. The second sion and generation rehabilitation projects phase of this evaluation will look in more detail deemed by the World Bank Energy Anchor to Figure 5.1: Energy-Efficiency Investments 4,500 18 4,000 16 3,500 14 3,000 12 mln. 2,500 10 US$2,000 8 Percent 1,500 6 1,000 4 500 2 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total energy spending, US$ mln EE/total energy spending, percent Sources: Total energy spending: IEG computation based on energy-designated proportion of project commitments. Efficiency component spending: World Bank Progress on Renewable Energy and Energy Efficiency reports 2004, 2005, 2006, 2007 (World Bank 2005d, 2005b, 2006a, 2007b). Scope of coverage was more precisely defined for 2006 and 2007. Includes Bank-executed medium-size and large GEF projects. Excludes IFC and MIGA. 6 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P increase efficiency or reduce emissions, exceeds minor policy and regulatory components. one in five for 1998­2007. Others, such as the Morocco DPL, aim at economy-wide impacts. The list contains nine While this evaluation is concerned primarily with projects that deal with standards and codes, and the World Bank, it is important to note that IFC nine that deal with utility-based DSM; these investments in energy efficiency have grown topics are discussed at greater length below. sharply since the Bonn Commitment of 2004 and There are at least seven projects on the list that now exceed those of the World Bank. IFC deal with ESCOs or efficiency finance. commitments for energy efficiency were $94 million over 1991­2004, but jumped to $621 Energy-efficiency staff in the World Bank are million over 2005­07. relatively few: about 22 staff members work a substantial portion of their time in this area. A The World Bank has also undertaken analytical few additional staff are slated for recruitment and advisory work in this area. One line of action under the Energy Efficiency for Sustainable is in support of Green Investment Schemes in Development Scale-Up Strategy and Action Plan, Europe and Central Asia. Some Eastern European a program announced in 2007. and former Soviet Union nations, parties to the Kyoto Protocol, have an excess supply of assigned The remainder of this section examines key areas amount units (carbon allowances). Some would- of the portfolio for policy content, including DSM, be purchasers of these units seek assurances that appliance and building codes and standards, sale revenues will be used for emissions district heating, and public buildings. We touch reduction or other environmental services. The only briefly on supply-side efficiency, which is World Bank has helped some of these countries difficult to disentangle from more general energy explore how such revenues could be used to investments. support energy efficiency. For example, in Bulgaria, a country where the World Bank has Demand-Side Management supported energy efficiency, Green Investment DSM programs are traditionally run by utilities to Scheme potential was identified in cogeneration encourage customers to reduce and shift their and energy efficiency. energy use. Program design can vary. Some examples of programs include marketing efforts Although energy-efficiency investments consti- to encourage customers to adopt new technolo- tute a small proportion of all investments in gies (such as efficient lighting), rebates for certain energy, they offer economic returns that are as types of energy-efficiency equipment, free energy good or better as those of other investments in audits, and energy-efficiency advice. Typically, the sector. (See box 5.1.) programs will look either at reducing total consumption or shifting consumption to reduce IEG coded energy-efficiency projects for policy peak demand. (Load shifting reduces investment content related to end-user efficiency, including costs substantially, but its impact on GHG regulatory provisions for DSM; appliance or emissions depends on how peak versus baseload building standards and certification; and power is generated.) DSM programs can cover a research, demonstration, or planning of energy range of technologies, though efficient lighting is efficiency during 1996­2007. This policy coding one of the most common of those covered. Most excluded projects confined to engineering activi- DSM programs are in the power sector, although ties. A total of just 34 projects met these criteria there are programs for other types of energy as (see appendix C), about one-third in the last well, including natural gas, district heating, and third of this period. fuel oil. While DSM can be in a utility's financial interest (particularly for load shifting), sustaining This is a heterogeneous list, including many DSM in the long term requires supportive projects--such as a small study--with only regulations. 6 2 E F F I C I E N C Y P O L I C I E S Box 5.1: Rates of Return to Energy-Efficiency Projects Limited evidence suggests that energy-efficiency projects offer losses were achieved in Rajasthan and Orissa. The rates of return attractive domestic economic rates of return (ERRs) that are depend on the true economic valuation of electricity, which is greatly enhanced when the global benefits of emissions reduc- above the tariff level but difficult to estimate. Depending on this tion are factored in. Over 2000­05, six Bank projects supporting value, the ERR of the Rajasthan transmission investment ranged energy efficiency closed, all of them involving supply-side or from 18 to 28 percent; a subcomponent on reducing technical demand-side improvements to district heating systems. ERRs losses in distribution had an ERR of 39 to 65 percent. In addition, ranged from 22 to 44 percent, not including environmental ben- the transmission investment is reported to save 500 GWh a year. efits. Including those benefits, which comprised reductions in At the average emissions intensity of the Indian power sector, local air pollution as well as CO2, the ERRs of projects and sub- this implies a CO2 reduction of 340,000 tons a year. Valued at $10 projects ranged from 27 to 289 percent. This compares to an un- per ton, this would quadruple the annual stream of net benefits. weighted mean of 22.4 percent for the 45 nonrenewable power In India, owners of inefficient coal-fired power plants lack in- sector projects that closed over the same period. centives to improve their equipment for two reasons. First, the reg- Transmission projects are not included in the tally of efficiency ulators would require that the cost savings be passed on to projects above, but reductions in transmission losses offer po- consumers. Second, the utility would have to purchase power on tentially high efficiency and GHG mitigation gains, require large in- the market while their plant is down for repairs--and the market vestments, and may include a role for public policy because of the price of power is above the artificially low depreciated price of old regulated or monopoly nature of most transmission systems. power plants. Consequently, according to the appraisal of the pro- Experience has been variable. Projects in Albania and Uganda posed Coal-Fired Generation Rehabilitation Project, utilities forgo failed to achieve their objectives, with continued nontechnical opportunities to reduce coal consumption per KWh by 22 percent losses (that is, theft) that could not be distinguished from techni- and realize financial returns of 28 percent. Since these returns are cal losses. In Macedonia, Serbia, and Zambia, ERRs were 111, 18, based on existing tariffs, the true economic rates of return are and 35 percent. In India, significant reductions in transmission higher. Sources: Implementation Completion Reports and Implementation Completion Report reviews; GEF 2006a. DSM can be a cost-effective way to meet energy that are able to reduce demand, and Utilities have limited demand. IEA (van der Laar and Vreuls 2004) has California maintains a structure incentives to promote assembled a database of DSM programs around where utility revenues are decoupled DSM . . . the world. Most of these have capital and operat- from electricity sales. Vermont has ing costs of less than 0.06 per kWh, which is introduced an efficiency utility. Funded by a significantly lower than the cost of supply in charge on utility bills, this nonprofit corporation most of the utilities with such programs. These is contracted by the state's Public Service Depart- offer the potential for negative-cost emissions ment to undertake DSM. In 2006, the cost of reductions. saved energy was 3.7 cents per kWh, against a supply cost of 10.4 cents.3 Savings are verified However, DSM faces a fundamental incentive and audited by the Public Service Department. problem: why should a utility encourage its customers to consume less electricity? Utilities Utilities in developing countries often have an can be induced to do so mainly through regula- indirect motivation to promote DSM. tion (van der Laar and Vreuls 2004). This has When they are compelled to serve except when they serve become more difficult to do in the wake of poor people or peak-period cus- customers below cost. market liberalization and competition. Never- tomers at tariffs that are below the cost theless, some states in the United States have of provision, the utilities can cut their losses if introduced performance incentives for utilities they can convince these customers to conserve. 6 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Bank Engagement on DSM Many of the World Bank Group's DSM projects The World Bank and IFC have worked on several have attempted to estimate the CO2 reductions DSM projects, in most cases with GEF funding. resulting from the project. Table 5.2 provides an Table 5.2 summarizes 12 of these. indication of the range of emission reductions Table 5.2: Utility-Based DSM Projects World Bank Group loan/ Project name Country Years grant amount CO2 savings Thailand Promotion of Thailand 1993­98 $9.5 million GEF grant 27­45 million tons Electrical Energy Efficiency Project High-Efficiency Lighting Mexico 1994­97 $10 million GEF grant 763,700 tons Project Poland Efficient Lighting Poland 1994­98 $5 million GEF grant (IFC implemented ) 3.62 million tons Project Demand-Side Management Jamaica 1994­99 $3.8 million GEF grant 14,800-22,100 tons Demonstration Project Energy Services Delivery Sri Lanka 1997­2002 $13.7 million loan plus $5.9 million GEF grant n.a. Project (mostly for renewable energy) Energy Efficiency Project Brazil 1999­2003 $11.9 million GEF grant 1.7 million tons Energy Efficiency Project Croatia 2003­ongoing $7 million GEF grant and $4.95 million loan 960,000 tons (est.) Demand-Side Management Vietnam 2003­ongoing $10.7 million, grant from GEF and IDA Fund 3.5 million tons (est.) and Energy Efficiency Project Uruguay Energy Efficiency Uruguay 2004­ongoing $6.88 million grant from GEF n.a. Project Argentina Energy- Argentina 2006­ongoing $15.2 million GEF grant 5.9 million tons by Efficiency Project 2012, 28.1 million by 2017, and 71.9 million by 2022 Power Sector Uganda 2007­ongoing $300 million loan ($16 million of the n.a. Development Operation loan is for DSM-type investments) Urgent Electricity Rwanda 2007­ongoing $4.5 million GEF grant, mostly for renewable n.a. Rehabilitation energy; the DSM component relates to studies only Note: n.a. = Not available. a. From Implementation Completion Report reviews. b. In Thailand, the utility, EGAT, funded DSM through a special, government-authorized tariff charge during the project period. Since the project ended, EGAT began funding DSM from its regular tariff revenue and funding has decreased for the most part. Thus, the regulations support DSM but fall short of requiring it. c. In Vietnam, several laws and decrees support DSM and require the government to consider it. There appear to be no requirements for the utility to invest in DSM. d. Uruguay is evaluating several options for regulatory support of DSM as part of the project, including a system benefit charge or an obligation to include financially attractive DSM measures in utility investment plans. 6 4 E F F I C I E N C Y P O L I C I E S reported from these efforts. These estimates include projections. The estimates will be very must be taken with extreme caution, however, sensitive to baseline assumptions--what kind of as methodologies differ and are poorly power source would have been used at the documented, and reports of actual savings margin, had the efficiency program not been Utility Regulatory Outcome/sustainability/ as DSM requirement institutional development manager? for DSM? Other policy components in funding impact ratingsa Yes Yesb Appliance labeling, building certification, public Highly satisfactory/likely/substantial education and awareness Yes No No Marginally unsatisfactory/uncertain/ modest No No No n.a. Yes No Appliance energy-efficiency testing and labeling; Moderately satisfactory/unlikely/ capacity building substantial Yes No Design Code of Practice for Energy Efficiency, Satisfactory/likely/high Commercial Buildings (mandatory for new buildings) Yes Yes Appliance testing, certification, and labeling Moderately satisfactory/n.a./n.a. Yes No No n.a. Yes Yesc No, though one of the DSM components (energy n.a. efficiency in commercial facilities) implemented through a government program Yes Yesd Development of regulations to support DSM; n.a. assistance with incorporating energy efficiency in the overall energy strategy of Uruguay; appliance testing, labeling, and standards Yes (3+ utilities Under active Preparation of energy sector, tax, and financial n.a. involved) development policies and regulations for the promotion of energy-efficiency activities; standardization, testing, certification, and labeling program No No, though the $80 million policy support program, including n.a. program is implementation of an energy-efficiency strategy implemented by and plan, as well as tariff increases (drafting the the government, Energy Efficiency Strategy and Plan was a loan not the utility approval condition) Yes No Support of energy policy development related to DSM n.a. 6 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Bank-supported DSM implemented. For instance, the Brazil- importance of regulatory and policy support for projects use utilities as ian energy efficiency program claims DSM projects. (See box 5.2.) However, most of managers. to have reduced CO2 emissions by the projects have fairly limited policy and regula- about 900 gCO2/kWh saved; this is tory elements. And 10 of the 12 projects listed in more than twice the emissions factor claimed by table 5.2 have a utility as the DSM manager, even current large-scale Clean Development Mech- though problems can occur if utilities lack anism projects in Brazil. appropriate incentives, as noted in the GEF Evaluation Office's Climate Change Program The projects have been successful in reducing Study (GEF 2004). Such incentive problems have energy demand and CO2 emissions during the restricted the sustainability and durability of DSM project term, although policy engagement has efforts. Most of the completion reviews and sometimes been missing or unsuccessful. The other project reviews note some problems with Thai project was particularly successful in DSM program reductions after the projects transforming markets for energy-consuming ended. products such as lighting. The current evaluation focuses on policy engagement, so it will not The Project Document used to design the repeat a detailed analysis of overall project Mexican High-Efficiency Lighting Project results, but rather will examine how the Bank (ILUMEX), for example, states that no policy or engaged in policy discussions and how the institutional reforms were needed to ensure existing policies affected the project outcomes, effective project implementation. Instead of based mostly on documentary evidence. relying on utility funds or regulatory require- ments for DSM, the pilot project encouraged Through the course of these DSM projects, the DSM through GEF-sponsored subsidies for World Bank and GEF have learned about the efficient lighting. Thus, the project was able to Box 5.2: DSM in Brazil Brazil provides a useful case study on the regulatory frame- port for ESCOs was cut back and the project self-evaluation noted work and incentives needed for utilities to undertake DSM. In that the project design, which assumed there would be utility de- 1985, Brazil established PROCEL, an agency to promote energy mand for ESCO services, failed to take into account the lack of util- efficiency. In 2001, the Bank began to implement a GEF project ity incentives for efficiency. that was designed to build capacity at PROCEL, support standards In 1998, after the privatization of Brazil's utilities in the mid-1990s, and certification development, and help to support market- the regulator, ANEEL, set up a wire charge to finance energy ef- oriented ESCOs. A complementary $125 million Bank loan was ficiency. A 1 percent charge was added to consumer bills, and the arranged to support 50 energy-efficiency demonstration projects proceeds were to be used by the utilities to promote efficiency. In- to encourage demand for ESCO services. stead, the utilities have used these funds for supply-side efficiency As the project started, a severe energy crisis hit Brazil, ne- (for which they already had an incentive) or to support efficiency cessitating emergency efforts in electricity rationing and effi- in public lighting (where official tariffs were low, and municipal gov- ciency, including distribution of compact fluorescent light bulbs ernments often slow to pay). The utilities simply have no incentive (CFLs). These efforts succeeded in rapidly reducing demand. Yet to reduce profitable electricity sales. the Bank loan was canceled because the utilities, under severe Another issue both for PROCEL and for the wire charge is lack financial stress, had no incentive to promote efficiency. of thorough and independent monitoring and evaluation (Januzzi Meanwhile, the GEF project focused on capacity building and 2005). Although there are well-developed international standards equipment certification and was credited with a proportional share for measuring energy savings, they were not applied in the Brazil- of PROCEL's large reported energy and CO2 savings. But GEF sup- ian programs. This situation is not unique to Brazil. Sources: Januzzi 2005; World Bank 2007c, 2007d. 6 6 E F F I C I E N C Y P O L I C I E S demonstrate that energy savings are achievable, suggest that this reduced peak demand The Bank Group has but because of the design and lack of built-in by 30 MW, at a cost far below that of 30 supported a number of measures for replication, the DSM efforts MW of additional generation (DCI projects that distributed essentially ended after the project was over. 2008). The Ethiopia project contains a compact fluorescent $1.25 million technical assistance bulbs. A number of projects have followed ILUMEX in component to assist the Ministry of promoting the adoption of compact fluorescent Energy to study DSM. A recently approved $15 light bulbs (CFLs), which consume only a million grant project will sponsor mass CFL distri- fraction of the power of equally bright incandes- bution in Argentina. This is attractive to the cent lamps. A classic example of the energy- utilities, which are required to sell power below efficiency conundrum, they typically offer high cost. However, the impact would be far greater if implicit rates of return, and yet are not adopted the distribution were used to facilitate an increase by users. A rough calculation based on current in Argentina's unsustainably low tariffs. prices suggests that CFLs can save electricity at the rate of $0.01 per kWh,4 with additional The Thailand Promotion of Electrical Energy savings from the reduced need for generating Efficiency Project, launched at about the same capacity to serve peak demand. time as ILUMEX, proved more durable. This project also involved more extensive regulatory One reason that consumers do not adopt CFLs and policy discussions and components. The or other efficiency measures is that they do not Thai utility, EGAT, found DSM to be very face the marginal cost of providing peak-hour worthwhile because of its ability to improve electricity. This is especially perverse in the case EGAT's public image. There was strong govern- of large commercial buildings with inefficient ment support for the DSM program in EGAT. The insulation and air conditioning systems, and is an DSM Office in EGAT was able to successfully argument for peak-hour pricing. In addition, influence government policy--for example, the there are information problems leading to Ministry of Energy adopted new Minimum market failure. Consumers do not trust that the Energy Performance Standards. Thus, in many light bulbs will work as advertised. They may fear, ways, this project is a good indication of how with reason, that the unstable voltage typical of stronger engagement on energy-efficiency policy many overstretched power systems will cause can enhance project outcomes and transform the relatively expensive bulb to burn out early. So markets for energy appliances. one line of projects, including the IFC's Electric Lighting Initiative, seeks to certify and label During the project period, EGAT funded DSM good-quality bulbs or to provide warranties for through a tariff surcharge; the regulator supported their replacement. An early evaluation of the but did not require this. After the project ended, Electric Lighting Initiative estimated that the $25 EGAT eliminated this surcharge and began funding million investment had catalyzed a reduction in DSM through its regular tariff revenue, but DSM CO2 emissions by about 2 million tons and was rarely funded at the allocated level. EGAT still electricity consumption by 2.6 TWh. However, maintains its DSM program, 10 years after the these estimates are based on assumptions about project closed, but the program's future is not some crucial but unmeasured parameters. entirely certain. EGAT is undergoing restructuring and privatization, and the DSM Office no longer The World Bank has recently sponsored or has a strong advocate in EGAT. planned mass distribution of CFLs in Ethiopia, Rwanda, Uganda, and Vietnam, often as an Overall, the Thai DSM program has been very emergency measure to address shortages of successful, in part because it has been able to power supply. The Uganda project has dem- involve key stakeholders in ways that highlighted onstrated the feasibility of rapid distribution of their own self-interest in participating. However, more than half a million CFLs. Rough calculations such stakeholder involvement can take time, and 6 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Many DSM programs have without external funding, the benefits the start. This has not proved possible in no regulatory of initial stakeholder involvement can emergency-driven projects. However, the current requirements for demand fade if there is no clear mechanism to CFL project in Ethiopia incorporates a management, and ensure funding for DSM. randomized control trial impact analysis. And monitoring and with the advent of programmatic CDM (under evaluation are weak. The DSM project in Vietnam has many which these projects could be presented for elements similar to those of the Thai carbon finance), much more rigorous monitoring DSM project. The government of Vietnam drew could be brought to bear. In India (unconnected from Thai examples in drafting its legislation and to the Bank), an innovative monitoring effort decrees to support energy efficiency. Because sponsored by the Bureau of Energy Efficiency will this project was launched in 2003, it is too early use automatic wireless data reporting from a to say if it will be sustainable in the long term, but sample of residences to measure the impact of to date, progress seems impressive. As in CFLs on electricity consumption. Thailand, there is no firm requirement for the utility to invest in DSM. Now the utility is very Lessons Learned much in favor of DSM because it is reducing the Most of the Bank's DSM efforts are investment- utility's losses for electricity sold to customers focused. Thus, they achieved meaningful energy eligible for below-cost electricity rates. The efficiency gains during the project period, but the project does not explicitly fund policy-related projects did not typically result in new legislation work to support DSM. or regulation that would provide ongoing financ- ing for DSM. Some CFL distribution projects have Many other DSM programs with World Bank included standards or certification components, support have no regulatory requirements for whose long term-effect is yet to be seen. DSM. This includes several of the most recent DSM-style projects. Utility DSM funding has at The Bank has consistently partnered with times been reduced during or after a World Bank utilities--rather than regulators or energy project when the utilities that fund DSM find ministries--in supporting DSM programs, often other priorities. An example of this is the building on existing relationships. Utilities may Jamaican Demand-Side Management Demonstra- have the capacity to implement these programs, tion Project, where the local utility used a large but their incentives to do so are limited to portion of its own funds, initially designated for specific market segments or situations. The Bank DSM, on emergency power plant repair. Group's current emphasis on energy finance and ESCOs can be seen as a way of promoting DSM Monitoring and evaluation are generally weak, while bypassing engagement with utilities or but there are signs of improvement. The CFL regulators. However, global experience suggests projects are of special interest in this regard that regulatory drivers of DSM can complement because they are potentially highly amenable to ESCO market expansion. monitoring and because evaluation could answer a number of critical questions for policy and Successful DSM programs benefit from well- program design. These include the degree to designed systems for monitoring and verification which free or low-price distribution induces of energy savings. While such requirements can consumer willingness for subsequent commer- be adopted at the utility level, policies and cial purchase and the degree to which consumers regulations can also provide support for robust take advantage of efficient bulbs through monitoring and verification systems. increased lighting hours rather than reduced electricity consumption. The Electric Lighting Appliance Standards and Building Codes Initiative evaluation stressed the need to include Appliance standards and building energy codes better planning for rigorous data collection from have proven to be some of the most effective and 6 8 E F F I C I E N C Y P O L I C I E S cost-effective policies for improving energy Building Energy Codes Appliance standards and efficiency globally. A review of U.S. experience There are two main types of building building energy codes are with appliance standards (Gillingham, Newell, energy codes: prescriptive and per- among the most effective and Palmer 2006) found estimates of the net formance-based. Prescriptive codes and cost-effective policies benefits of appliance labeling of $56 to $196 specify the characteristics of building for improving energy billion over 25- to 30-year periods. A self- components--regulating, for instance, efficiency globally. evaluation of the Thai energy efficiency project, the insulation efficiency of windows or which emphasized labeling of high-efficiency walls. Performance-based codes set an energy lights, refrigerators, and air conditioners, found budget for a whole building. This allows building savings of 28 TWh over 1993­2004 and projected designers the flexibility to trade off different types savings of 61 TWh over 2004­10, arising from a of components. Enforcing prescriptive codes is $40 million project (GEF 2006). typically easier than enforcing performance-based codes, because inspectors can check the specific Building energy codes are important because of components against a set standard. Performance- the long-term and significant impact they can based codes offer potentially greater cost- have on reducing energy demand. Buildings effectiveness, but require the development and typically last for 30 to 40 years. The initial design use of software that can model the building's total of buildings is the single most important factor energy use. in determining their energy consumption pattern. Energy savings measures are less Because enforcement of building energy codes is expensive during the initial construction than necessarily local, and compliance requires through retrofits later on. But builders rarely checks at the building level, strong capacity and have an incentive to maximize efficiency adequate staff are needed. Inspections and because they do not pay the energy bills, and compliance checking may be done either by the buyers have little way of knowing what future entity that checks for compliance with other energy performance may be. Globally, buildings types of building codes (such as codes for are responsible for 15.3 percent of GHG structural integrity and fire safety), or in some emissions--more than the transport sector countries, by specialized building energy units. (Baumert, Herzog, and Pershing 2005). The Each approach has advantages and disadvan- construction boom in fast-growing economies tages. Testing laboratories and procedures are such as China and India presents an opportunity also essential to independently determine the to adopt high-efficiency energy standards in performance of building materials and compon- order to change demand trajectories for the life ents such as windows and insulation. of these new buildings. Many developing countries have building energy Appliance Standards and Labels codes, but compliance systems may be weak. The term appliance standard is often used to Where staffing is inadequate, the inspection describe two different, though related, types of system may rely on checking plans rather than policies. The first sets minimum efficiency levels implementation. for appliances such as refrigerators, lighting ballasts, boilers, hot water heaters, and air Bank Engagement on Standards and Codes conditioners. The second type of policy involves The World Bank has engaged on codes and appliance labels (voluntary or mandatory) that standards several times during the past 15 years. describe energy performance and consumption This work is not as broad or robust as the work or endorse a product as energy efficient. Testing on DSM or tariff policy, so there is not as much laboratories and protocols are essential in evidence to examine. Most of this work has been implementing appliance standards and labeling done as relatively small components of other programs. DSM or energy-efficiency projects. Table 5.3 6 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Table 5.3: Projects with Appliance Standard and Building Energy Code Components Component funding Project Approval (total When name year funding) code adopted Description of component Thailand Promotion 1993 > $1.67M During project (later · Appliance labeling (by utility) of Electrical ($9.5M) adopted by · Development and promulgation of building and appliance Efficiency Projecta government too) codes in order to enforce minimum efficiency standards (done by utility) · Establishment of testing laboratories Jamaica Demand- 1994 $0.6M Before project; · Strengthening of capability of Jamaica Bureau of Side Management ($3.8M) strengthened during Standards Demonstration project · Enhancement of testing laboratory capabilities Projecta · Campaign to promote voluntary building code and appliance labeling program Brazil Energy 1999 $3.4M Before, though enhanced · Support of utility-funded standard and labeling program Efficiency Projecta ($11.9M) law covering standards · Definition of energy-efficiency standards to comply adopted during project with efficiency law (this component later canceled because of poor consultant performance) · Strengthening of capacity of testing laboratory Uruguay Energy 2004 > $1M n.a. · Appliance testing program Efficiency Projecta ($6.88M) · Labeling and standards program including a voluntary Funding for energy-efficiency seal for main household appliances, lighting standard equipment, building thermal envelope, and industrial and other component equipment and materials decreased after proj- ect start Argentina Energy 2008 > $3.7M During project · Comprehensive program for energy-efficiency standards Efficiency Projecta ($15.2M) and labeling of key equipment, including appliances, industrial equipment, and building materials · Modernization of certification laboratories · Strengthening of capacity of standardization bureaus · Regulatory and enforcement activities Sri Lanka Energy 1997 > $1.9M During project · Design Code of Practice for Energy Efficient Commercial Services Delivery ($5.9M Buildings (mandatory code, written and adopted during project) Projecta grant + · Development of institutional capacity in the energy- $13.7M related public and private sectors to incorporate the Code of loan) Practice into building design and operations and to monitor the energy saving China Heat 2005 > 0.8M Before project, · Technical studies on developing more stringent code Reform and ($18M) strengthened during · Development of code compliance enforcement Building Energy project capacity Efficiency Project Source: Project documents. Note: n.a. = Not available. Unless noted otherwise, all funds are from GEF grants. Numbers shown as less than the listed amount mean that project documents combine several project components into one budget line, making it impossible to determine how much is spent on codes and standards alone. In most such cases, it appears that the spending on the codes or standards component is less than half of the figure given. a. Project was also reviewed in the DSM chapter. 7 0 E F F I C I E N C Y P O L I C I E S highlights projects with appliance standard or programs (all but one of the projects The Bank's work on codes building energy code components. No projects described in table 5.3 have a major and standards is not as focus exclusively on these issues, and even DSM component). This can be useful broad or robust as that among the projects in the table, there are several and effective, in that the DSM organi- on DSM or tariff policy. where the code and standard component was zation can help ensure that there is a wide not actually funded directly by the Bank or GEF, market--for compliant appliances, for example. but rather with local resources. The Thai project provides an excellent example of this. However, this approach can also be Overall, the World Bank and GEF work on limiting if the codes and standards are written by appliance standards and building codes is very or for the DSM program instead of for the successful in adopting new codes and standards, country as a whole. When codes and and somewhat less successful in establishing the standards are written for a DSM Bank and GEF efforts necessary infrastructure to implement the codes. program, compliance systems outside have generally succeeded Funding is the key limiting factor, both with the program are often weak or in the adoption of new assistance on code adoptions and with capacity nonexistent. So while this situation is appliance standards and building for enforcement. In evaluating the better than having no code at all and it building codes, but have Bank's experience in more detail, it is helpful to may eventually lead to a broader been less successful in look at it from three perspectives: national compliance system, it may establishing the also create vulnerabilities by linking so infrastructure needed to 1. Results in assisting countries in adopting new much to a single DSM entity. implement them. codes and standards 2. Experience in helping countries develop Aside from voluntary efforts to use standards and stronger enforcement systems to make the labeling as DSM tools, the Bank's main engage- codes work in practice ment on code and standard implementation has 3. Monitoring and learning from experience. been in partially funding testing laboratories. All of the projects with appliance standard components Table 5.3 indicates that the Bank has had much have worked to develop testing laboratory capabil- success in its work to assist countries in adopting ities. Except for the China Heat Reform and new codes and standards. In almost every case, Building Efficiency Project, there is little evidence the countries have adopted new regulations or of project-based work to enhance other types of strengthened existing code and standard inspection and enforcement systems or to build systems. This is an extremely high success rate government capacity for disseminating the code. for engagement on any policy, and it is particu- In other words, the Bank's efforts have done larly noteworthy given the Bank's low level of relatively little to create capacity for enforcement funding for code and standard development. By of mandatory codes and standards. Interestingly, 2004, 74 countries had adopted codes or one of the concerns that Bank staff have expressed standards of some kind.5 The challenge for these about work on mandatory codes and standards in countries, and for the Bank, is to create the general is that codes and standards are difficult to institutions that will oversee the effective enforce. Yet one could argue that this is a self- implementation of these standards. fulfilling prophesy if enforcement systems are not included in the program design from the However, regardless of how large or small a beginning. One of the problems in this regard is country's codes and standards programs are, the the level of funding. At current levels, it is not largest costs associated with the programs are enough to engage on both the development of for implementation. regulations and the capacity building to enforce them. Codes and standards components of Bank projects are often envisioned as a tool that can Monitoring and learning from experience is also enhance the ability of utilities to implement DSM very important, particularly in a developing area 7 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P such as codes and standards. While programs in restructured. However, a subcomponent most the West have been extensively evaluated and closely linked to code and standard development modified based on these evaluations, there has was canceled: the problem was a poor-quality been much less monitoring and evaluation of report prepared by a consultant. codes and standards programs in developing countries. This is in part because these programs In the case of the Jamaica DSM project, the are younger, but also because the programs are Jamaica Bureau of Standards had initially stretched to deal with enforcement, and requested a higher level of funding for testing monitoring may drop in the list of priorities of a and building capability to handle the country's poor country. new appliance standard program, but ultimately this was not considered a priority for DSM. The There is very little World Bank documentary Project Appraisal Document also mentions a evidence on the success or failure of the codes concern that the Jamaica Bureau of Standards and standards components of Bank projects. might not be able to test equipment for the DSM Monitoring and evaluation of this kind of effort program fast enough; the project contingency cannot end with project closure, but requires plan for handling this risk was to test equipment tracking of standard adoption and implementa- in the United States. The Jamaica DSM project tion. Aside from the Thai project, there is very little did build some lasting capacity and testing evaluation of the energy and emission capabilities at the Jamaica Bureau of Standards, There is little results of the codes and standards. The but the country was clearly willing to go farther documentary evidence Thai labels, for example, have reduced during the project. regarding the success of annual electricity consumption by the codes and standards 1,200 GWh. For most projects, there is The designers of the Vietnam DSM project components in Bank no information on the estimated CO2 actually considered including a component on projects. emission reductions from the stan- codes and standards, but this was not part of the dards, labeling, and/or building energy code final project design. The Project Appraisal components. Calculating these emission re- Document notes: ductions is relatively easy once the energy savings are determined, given information about the The project considered additional efforts to source of electric power. support the codes and standards work initiated under the SIDA-supported first The lack of documentary evidence is most likely phase. However, given the very low linked to financing: the codes and standards work demand for energy efficiency equipment at received only a fraction of the financing in any present, combined with the limited govern- given project, and was thus not the priority of ment capacity to test and enforce national assessments at project close. The lack of evidence standards, it was determined that an on the results of these project components also initial focus on creating greater market makes it difficult to learn from them. demand for energy efficiency equipment would be a more appropriate priority at One point that does come through from the this stage. As the program and markets documentary evidence is that funding for the develop further, the appropriateness for codes and standards components was reduced national standards and codes would in several cases. This is true in both Uruguay and, improve as well as the prospects for success- to a certain extent, Brazil. There is no reason ful introduction and implementation. given for the funding reduction in the Uruguay project. In Brazil, overall, the testing, This excerpt reflects the view that codes and In several cases, funding certification, and labeling component standards are unlikely to transform markets. for the components was of the project was given greater Experience from around the world indicates that reduced. emphasis when the project was this is not the case. 7 2 E F F I C I E N C Y P O L I C I E S Clearly, the engagement on codes and standards Public Buildings to date has been very small, and such small The World Bank is also considering expanding its projects can be difficult to implement at the work on energy efficiency in public buildings. To World Bank. The question, then, is: are there date, the Bank has engaged in two or three such ways to structure projects that involve building projects. The largest (in funding) was the Kiev energy codes and appliance standards that might Public Building Energy Efficiency Project, be better suited to the World Bank's structure? If approved in 2000 with an $18 million World Bank implementation is a greater focus, projects or loan. This project was rated as satisfactory. The project components related to codes and Bank is also investing $12 million in energy standards will necessarily become larger. efficiency upgrades in state hospitals and schools under the Serbia Energy Efficiency Project, The Heat Reform and Building Energy Efficiency approved in 2004. In addition, Argentina has a Project in China (see box 5.3) can provide nascent government program to promote insights into how projects might address energy efficiency in public buildings. While the implementation needs. This project involves GEF's Energy Efficiency Project devotes some working with local authorities to design better technical assistance to that program, the building inspection procedures and capacity; it project's efficiency fund targets small and also involves a significant investment component medium-size enterprises. This focus was ques- related to improving energy efficiency in existing tioned in a project design (or STAP) review, buildings. Working with local builders and which suggested: helping them to improve new buildings to meet the code may also be a useful approach to Devoting some funds to developing the enhancing understanding and enforcement of demand for ESCO services in a few key the code, and for ensuring that the code takes sectors such as in large office buildings and builders into account. in the public sector. These sectors are typical Box 5.3: Heat Reform and Building Efficiency in China Heating efficiency in China's colder northern areas is a matter authorities, dating back at least to 1990. Energy efficiency, including of national economic concern with global implications. Housing residential heat efficiency, was stressed in the 1994 study China: Is- is expanding rapidly. It is expected that 6 billion square meters suesandOptionsinGreenhouseGasEmissionsControl, undertaken of new space will be erected over the next 20 years. Heating these jointlybytheBank,theUnitedNationsDevelopmentProgramme,and buildings consumes an inordinately large quantity of energy, theChinesegovernment(NationalEnvironmentalProtectionAgency most of it from carbon-intensive coal consumption. ofChinaandothers1994).TheWorldBankhasbeeninvolvedinproj- There are interlocking reasons for this inefficiency. On the de- ects for the promotion of energy-efficiency finance and the intro- mand side, incentives are askew. Heating costs are paid by em- duction and diffusion of efficient boilers. Dialogue on efficiency ployers, so households have no incentive to control heat. Heat is issues continued, and two studies on building efficiency (in 2000 billed at a flat rate, so no one has an incentive to reduce heat at and 2002) provided inputs for policy setting. Trust fund support, in- the margin. Even if they wanted to do so, heat is generally not con- cluding that of ESMAP and the Asia Sustainable Alternative Energy trollable at the household level. On the supply side, materials and Program (ASTAE), was crucial to maintaining a stream of formal techniques fall short of what is technically and economically fea- andinformalstudiesanddialogue.Withtheseinputs,Tianjinemerged sible, and existing building codes are imperfectly enforced. Progress asacityinterestedininnovatinginheatpolicyandbuildingstandards. requires advances on all fronts, since there will be little demand The GEF/World Bank China Heat Reform and Building Efficiency for better insulation without price incentives, and little appetite for Project, initiated in 2005, supports Tianjin as a demonstration center assuming price responsibility without improved heating efficiency. for these reforms, with components to support replication in other TheBankhashadalonginteractionontheseissueswithChinese cities and to support capacity for national policy making in this area. 7 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P markets for ESCO services in other adopted programs to help finance energy- countries. Some funds could be used to efficiency improvements in state-owned facili- promote use of ESCOs in these sectors, ties, based largely on the U.S. Federal Energy publicize the results of demonstration Management Program. India is trying to promote projects, and if necessary reform govern- energy efficiency in new government buildings ment procurement rules to enable perform- by ensuring that these buildings meet or exceed ance contracting and use of ESCOs by the the new voluntary energy code for commercial federal, state, and local governments. The buildings. The plan is to use this effort to public sector often lacks the capital to make spearhead nationwide implementation of the energy-efficiency investments on its own, new code (APP 2007; PNNL/ARENA-ECO 2003). and thus is an excellent market for ESCOs if This growing interest among developing third-party financing is available. countries creates an excellent opportunity for the Bank to engage constructively in this area. The response to this review defended the project's main focus on small and medium-size District Heating enterprises as a lower-risk area for ESCOs. But District heating has also been an important area from a policy perspective, what is important is of engagement for the World Bank, with total finding where market failures are greatest and commitments of $1.8 billion. Much of this invest- addressing them in a sustainable way. ment has gone to supply-side efficiency: the replacement of inefficient, polluting boilers. The potential for energy savings (and thus lower GHG emissions) in the public sector is great in The Bank began working on district heating in the most countries. Governments have early 1990s, after the fall of the Berlin Wall created The potential for energy more control over their own energy new opportunities for engagement in the former savings in the public use than they do over energy use in Eastern Bloc. District heating is a very important sector is great in most the broader economy, and govern- form of energy in Eastern Europe and the former countries, but there are ments are often among the largest Soviet Union. It provides up to 70 percent of significant challenges to energy consumers in a country, given residential space heating, with the more northern realizing that potential. the scope of their activities. countries typically seeing the largest shares of heat from district heating. The Soviet-designed systems Still, the public sector presents unique challenges. were inefficient compared with the district For example, public entities may not have the heating systems in the West. They did not have power to reallocate their budget to energy- adequate controls and were often oversized. They efficiency investments, so financing is essential. also relied less on combined heat and power ESCOs can often play a positive role in this area. production, which is typically very efficient, than Public entities may not be allowed to use future was rational given the concentration of heating energy savings: their budgets may be reduced to demand that the systems created. cover only actual energy costs, which reduces incentives (and creates challenges for repay- The Bank has undertaken 41 district heating ment). Procurement rules may force government projects since 1991. Some of the projects agencies to award contracts to the lowest bidder, involved policy elements, either at the local or without considering life-cycle costs. national level. For example, the Bank encour- aged tariff increases and reform and restructur- Many developing countries have begun to ing of systems to make them more commercially address these issues. For example, China has oriented. In some cases, as in Poland and developed an energy-efficiency procurement Romania, policy engagement encouraged gov- program, with a list of qualifying energy-efficient ernments to take a broad look at integrating products that receive preferential treatment in district heating in the overall energy policy and procurements. Russia and Ukraine have both strategy. These were all positive steps. 7 4 E F F I C I E N C Y P O L I C I E S However, there were also cases where the Bank's the city has reduced its heat subsidies, In some cases the Bank's policy advice and focus may have been too created a targeted poverty benefit for policy advice and focus narrow, which created problems in the long the poor, improved the fiscal position may have been too term. One of the most important examples of of both the city and the district narrow. this related to demand. Demand for district heating company, and improved heating sometimes dropped dramatically follow- district heating services (IEG 2008c; World Bank ing the introduction of reforms. To some extent, 2008d). this shift was a natural decline linked to structural shifts (industrial demand dropped The other place where the Bank has invested particularly fast). However, the extent of decline significantly in district heating is China. China has went beyond this in many countries. There were the second-largest district heating sector in the many factors behind this, including the poor world, and, unlike in Russia, where demand is quality of the service during interim years and growing moderately now, demand is growing rising heat tariffs, which encouraged efficiency. quite quickly in China. In response to Chinese Rising district heating prices relative to the prices interest, the Bank has had a deep and broad of other heat alternatives, such as natural gas, district heating policy dialogue with China for were also a major issue. This created a market most of the past decade. Major policy reforms imbalance and encouraged customers to discon- have grown out of this dialogue. The reforms nect from district heating. This illustrates the consider the need to raise tariffs to cost-recovery importance of coordinating price reforms across levels; to ensure that consumers are responsible competing fuels. for their own bills (and not their employers); and to provide better controls and metering, paired Clearly, district heating in transition economies with consumption-based billing (instead of billing went through major changes from 1989 to the based on apartment size). present, most for the better. Demand has begun to increase again in most countries and A large share of district heating investment is customers are starting to return. At the same linked to consolidating small, inefficient (and time, an overly narrow focus on reducing polluting) municipal boilers. Such consolidation subsidies and improving supply may have missed makes sense, but from an efficiency perspective, opportunities to help systems adjust during the it would make even more sense if the new supply transition with less destructive declines in came from combined heat and power plants and demand. not heat-only boilers. Only one of the Bank's six district heating investments in China has Today, many of the customers who switched involved new combined heat and power plants. away from district heating are finding that their Such production is more efficient than separate natural gas bills are very high. The poorest power and heat production, and it reduces customers have struggled to find alternatives emissions by half because the heat (in the form when district heating systems have collapsed-- of steam) is first used to generate power, and for example, in Romania. then the exhaust heat is used as heat supply for district heating or industry, rather than being In its more recent engagements, the Bank has wasted (as in a single-purpose plant). taken a broader approach--for example, en- suring that natural gas reforms take district Conclusion heating into account and vice versa. A recent Energy-efficiency efforts--at the Bank, and project in Kazan, Russia, included comprehen- arguably in the world at large--consistently fall sive collaboration with the city in improving short of the level suggested by rhetoric and communal and housing services; the Bank analysis. At the Bank, a small group of dedicat- collaborated closely with the city on fiscal, ed enthusiasts has pursued energy-efficiency administrative, and pricing reforms. As a result, projects, despite an incentive structure that does 7 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P not favor small, staff-intensive projects that agencies that use disbursements as a measure of require sustained, long-term engagement with action and large turbines as a visible symbol of clients. In this they have been supported by trust achievement. Energy efficiency is viewed by some fund sources such as the Asia Sustainable and as being less real than generation, although Alternative Energy Program and ESMAP. Projects numerous analyses show that much of the have relied heavily on GEF support, suggesting demand for energy services over the next 30 years that concessional resources were important can be provided more cheaply through increased in securing client interest. At the same time, efficiency than through increased generation. A few energy projects have had strong policy lack of rigorous monitoring and evaluation components. Among the projects with policy reinforces skepticism about the true magnitude components, many involved partnerships with or cost of achieving efficiency gains. IEA (2008b) utilities that had sharply constrained interest in notes the large gaps in energy efficiency indica- promoting efficiency. tors that countries could use to diagnose areas of opportunity and to track progress. Discussions with staff and other stakeholders are consistent, with some standard diagnoses about Yet it is worth stressing that there is client willing- the neglect of energy-efficiency opportunities. ness to engage on the issue of efficiency policy. Energy efficiency is simply not as As noted, the country strategies for many of the Internal and external visible as energy generation. It is dif- Bank's clients with large or inefficient energy incentives favor supply ficult to spend large sums of money on sectors include efficiency objectives. Many over efficiency. energy efficiency quickly (except with countries have adopted national energy effi- the mass distribution of CFLs or in ciency policies. Prominent examples include some supply-side projects), and yet energy- India's Energy Efficiency Act (2001) and China's efficiency projects are often complex or difficult. goal of reducing energy/GDP by 20 percent This makes them less attractive to managers and between 2005 and 2010. 7 6 Chapter 6 Evaluation Highlights · Gas generation is more flexible, has lower environmental cost, and is easy to install, so the main barrier to the use of natural gas is its avail- ability. · The flaring of gas associated with oil production wastes energy and re- leases large amounts of CO2 into the atmosphere. · In many cases it makes economic sense to recover the associated gas. · The Global Gas Flaring Reduction Partnership has had some success in promoting dialogue, raising awareness, and developing and dis- seminating knowledge, but flaring remains at high levels. · The ERR to the use of associated gas is high, but financial rates of re- turn are strongly affected by pricing policies. Gas flaring and pipeline equipment, SASOL Pipeline, Sub-Saharan Africa. Photo courtesy of SASOL/IFC. Natural Gas Flaring W hen it comes to generating power, natural gas is more appealing than its main competitor, coal. Gas burns cleaner, without spewing lung- damaging particulates and contributing to acid rain. Gas plants are much cheaper and faster to atmosphere could be more than 400 million tons construct than coal-burning plants--important of CO2e--about 1 percent of the global total. The considerations for private investors--and can be logistical and incentive problems of capturing used for baseload or peak power. And, of crucial and tapping this energy are illustrative of wider importance to the topic at hand, a modern gas policy issues. combined-cycle turbine power plant emits only about half as much CO2 per kilowatt-hour as a Context coal plant. Utilities continue to opt for gas-powered plants where gas is available, even though some calcula- Promotion of natural gas for power would seem tions show coal plants to have lower average to be an attractive win-win policy for climate generation costs. Figure 6.1 shows a breakdown of mitigation. The technology is proven, and the recent, current, and planned power plant capacity potential scale is large. What are the barriers? In for two groups of countries: those with gas access brief: geography, which has scattered gas but no coal reserves, and those with deposits quite unevenly across the planet; lack of access to both. Countries with gas but Where gas is available-- infrastructure to transport the gas from its often no coal continue to opt for gas and even in some countries remote origins; and policy that shapes the hydropower, even though coal is with coal reserves--it is incentives for extraction, transmission, and use. transportable. More surprising, even often the fuel of choice to countries with coal reserves are putting generate electricity. We focus here on policy, with particular attention 29 percent of new capacity into gas to the problem of gas flaring. Associated gas, a versus 21 percent for coal. There are large dispari- by-product of oil production, is often vented or ties within this group: China, Indonesia, and India flared (burned at the wellhead) instead of being continue to rely on coal, while Russia and captured and transmitted. The scale of flaring is Kazakhstan emphasize gas. The numerous, but immense: about 160 cubic kilometers per year, mostly small, countries with neither coal nor gas containing enough energy to power Sub-Saharan opt mostly for oil-fired power plants. (Only seven Africa twice over. The annual flux to the countries had coal reserves but no gas access.) 7 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Figure 6.1: Recent and Planned Generation Capacity Additions by FuelType a. Positive coal­positive gas reserves/imports 1.0 0.8 0.6 0.4 0.2 0 1999­2006 2006­11 b. Zero coal­positive gas reserves/imports 1.0 0.8 0.6 0.4 0.2 0 1999­2006 2006­11 Coal Gas Oil + other fossil fuels Hydro + renewables Source: Meisner (2008) based on Platts World Electric Power Plant database. Costs of gas generation are slightly higher than global environmental benefits. The National costs of coal generation. A detailed study by the Energy Technology Laboratory study estimated National Energy Technology Laboratory (NETL that a 600 MW coal plant would emit 211 tons of 2007) shows capital costs for gas to be about 35 particulates and 1,400 tons of SO2 annually, with percent of those for a comparable subcritical or emissions controls in place. However, many supercritical coal plant, with total levelized plants in developing countries do not have such electricity cost about 6 percent higher. ESMAP controls. In contrast, particulate and SO2 (2007), however, reports a 24 percent differential emissions from gas plants are negligible, and NOx in levelized cost. These 2007 calculations are emissions are only about 10 percent of those already out of date because of changes in energy from coal. and capital costs, but coal prices are rising more quickly than gas prices at this writing. And Blyth The CO2 differential is very large. For the 600 MW and others (2007) reckon that gas is preferred plant, emissions would be 1.5 million tons from even when the price per energy unit is twice that gas, but 3.3 to 3.5 million from coal. The differ- of coal. ential remains even when life-cycle emissions are factored in for LNG (liquefied natural gas), which And compared with coal, gas also offers local and requires energy-consuming liquefaction. Hondo 8 0 N AT U R A L G A S F L A R I N G (2005) considers coal transport, LNG liquefac- Russia, with an estimated 51 bcm2 in The cost of gas generation tion, transportation, and leakage, and finds that 2004, followed by Nigeria (23), Iran is slightly higher than for life-cycle emissions per kilowatt-hour are still 47 (11), and Iraq (8). Another 18 countries coal, but it offers percent lower for gas than for coal. each flared more than 1 bcm (enough environmental benefits to power an 850 MW power plant). over coal. Given the superior flexibility of gas, lower local environmental costs, and ease of installation, a Why waste valuable fuel? A basic question is major barrier to its use is physical availability. Gas whether it makes economic sense to collect, deposits are highly concentrated in a few compress, and transport the gas. For wells that countries, and transport requires expensive are scattered, small, and far from pipelines pipelines or liquefaction facilities. From an or electricity consumers, it will not. Nonethe- energy security standpoint, consuming nations less, governments may restrict or are concerned about reliability of supply in a thin prohibit such flaring on environmen- Significant amounts of market. So increasing the supply of gas in areas tal grounds. These restrictions impose gas associated with oil that would otherwise depend on coal or oil is costs on the oil producer and owner are simply burned off, a win-win approach to increasing electricity and require the will and capacity to wasting the energy and availability while reducing GHGs. enforce them on the part of the en- releasing large amounts vironmental authorities. of CO2 to the atmosphere. Gas supply depends on exploration and field development, infrastructure construction, and However, in many cases, economic fundamen- policies that regulate and motivate gas develop- tals would support the recovery of associated ment, transportation, and use. While the Bank gas--if gas were valued at world market levels or has had a role in pipeline construction, here we at the cost of the alternatives available to local focus on its involvement at the policy level, gas users. So the persistence of gas flaring particularly with regard to gas pricing and suggests a combination of technical, regulatory, regulation. market, and policy failures. The Paradox of Gas Flaring The Global Gas Flaring Reduction Oil wells sometimes spout dissolved gas. Some Partnership of this associated gas is captured and used The Bank-led Global Gas Flaring Reduction productively--burned for power or reinjected Partnership (GGFR) was initiated in 2001 to into the earth to prime more oil production. But "support national efforts to use over the period 1995­2006, an estimated 160 currently flared gas by promoting In many cases, economic billion cubic meters (bcm) per year were flared effective regulatory frameworks and fundamentals suggest (Elvidge and others 2007). If used for power tackling the constraints on gas utiliza- that recovery of the generation, this gas could have produced about tion." A public-private partnership, its associated gas would 6.75 TWh of electricity annually, nearly twice the members include governments of 14 make sense. current output of Sub-Saharan Africa. If delivered gas-producing countries and regions, to markets at current world prices, the value of 10 oil companies, the World Bank Group, and this gas would be about $60 billion per year. But OPEC. Its budget was $1.5 million in 2007, rising instead, flaring releases the equivalent of more to $3.5 million in 2008, and it is supported by a than 400 million tons of CO2 into the atmosphere number of national donors. each year, and soot from incomplete combustion adds an additional warming load. In addition, an Some initial studies (Gerner, Svensson, and unmeasured amount of gas is simply vented, Djumena 2004) diagnosed several generic with 25 times the warming effect of CO2. problems: Based on satellite observation (Elvidge and others · Inadequate technical practices and regulation of 2007),1 the largest source of this flared gas is flaring operations--Some operators may lack 8 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P technical expertise in handling flares. Regula- responsible for about 50 percent of flaring. It has tory agencies may lack the knowledge and re- sponsored stakeholder dialogue in a number of sources to set and enforce rules. countries. It has produced informative studies on · Poor contractual arrangements--For instance, the state of gas flaring regulation, the causes of production-sharing contracts (between gov- gas flaring, and methodologies for assessing the ernments and oil producers) may not allow pro- potential of flaring projects to use carbon finance. ducers to recover the costs of collecting and transporting associated gas. Or governments The GGFR, working in consultation with part- may have legal rights to associated gas, but no ners, published a Voluntary Standard in 2004. At ability to use it. its core is a commitment to eliminate "continu- · Inadequate pricing or access policies--Legal or ous flaring and venting of associated gas, unless regulatory caps on gas or electricity prices may there are no feasible alternatives." Those endors- dampen incentives to recover flared gas. Sub- ing the standard commit themselves to develop sidies for alternative fuels could have the same and implement action plans and to "regular effect. reporting of flaring and venting levels and progress on implementation," with public report- To address these barriers, the GGFR set up the ing required within two years after adoption. following objectives and lines of action:3 GGFR regards the consensus-creation of the standard to be a significant accomplishment. · Develop and promote voluntary standards on flaring practice. However, endorsement of and adherence to the · "Survey and establish regulations followed by standard have been below expectations. The disseminating upstream regulatory best prac- standard has been officially endorsed by all the tice," where "regulation" refers narrowly to GGFR's international oil company partners, flaring and venting practice rather than broad but by only four national partners: Algeria, Cam- sectoral policies. eroon, Chad, and Nigeria. However, four coun- · Help to "realize gas flaring reduc- tries (Equatorial Guinea, Kazakhstan, Nigeria, The GGFR has promoted tion projects by establishing appro- and Qatar) have deadlines for zero flaring. Only dialogue, raised priate incentives mechanisms one company and one country have adopted awareness, and (carbon credits for lowered emis- formal implementation plans for gas flaring developed and sion, establishment of methodolo- reductions that are consistent with the Voluntary disseminated knowledge. gies) leading to a reduction of Standard, although additional partners have financial barriers. Carbon credits will similar programs in place. While all companies be utilized, where feasible, as a possible in- are reporting flaring and venting data to the centive to develop, especially, marginal fields." GGFR, only four countries (Cameroon, Canada, · "Facilitate commercialization of otherwise Norway, and the United States) have reported flared gas in GGFR focus countries through flaring data for 2006, and venting has been identification of projects and reduction of reported only by Canada and Norway. These barriers. This includes achieving access reports are not publicly disseminated by the to international markets, local/domestic mar- GGFR. ket development, and small-scale gas use, es- pecially for remote areas and marginal Slow progress on reporting undermines the developments." flaring reduction agenda and points to deep- seated issues. Reporting has been shown to be a But endorsement of and The GGFR has promoted dialogue, key feature of other voluntary environmental adherence to the flaring raised awareness, and developed and standards, and accurate data are essential for standard that it helped to disseminated knowledge. With a direct tracking progress toward reduction goals. develop have been below membership of 14 countries, the part- Measuring flaring and venting at the wellhead is expectations. nership now comprises territories technically difficult and expensive, and compila- 8 2 N AT U R A L G A S F L A R I N G tion of data across many producing locations by oil producers with more remunerative requires standardized procedures. Recognizing opportunities. But use of associated gas can also this, the GGFR developed and tried to popular- reduce GHG emissions. These reductions, worth ize a data tool for reporting. The failure of this money on carbon markets, could tip the financial tool to find takers suggests nontechnical barriers balance toward gas recovery. For instance, the to reporting. Given the legal penalties and social Kwale oil-gas processing plant, a GGFR- disapproval associated with flaring, the costs of supported project, uses associated gas for power reduction (which may include reduced oil generation at an independent power producer. production in some cases), the expense of The stated rationale for emissions reductions is measurement equipment, and the weak capacity that, in the absence of carbon finance, the of regulatory agencies for monitoring and returns to establishing the power plant would enforcement, some oil producers do not have have been on the order of 13 to 15 percent, an strong incentives for accurate reporting of flares inadequate inducement given the risky invest- and vents. ment climate, including the risk of nonpayment by the electricity off-taker. (The data and assump- Against this context, the GGFR has invested in an tions underpinning this estimate were not made innovative alternative for monitoring flare public.4) The estimated emissions reductions of volumes and locations: the use of remote 1.5 million tons CO2e5 will provide additional sensing. A GGFR-sponsored study used night- revenue, with security of payments guaranteed time satellite imagery to detect global flaring as long as the plant is running and producing activity over 1995­2006 (Elvidge and others electricity. 2007), with updates in progress. While these estimates are themselves subject to measure- To jump-start the carbon market, the ment errors, they provide a useful cross-check GGFR has supported studies, technical The program has devoted on reported volumes, and for some areas may assistance, project preparation, and effort to developing constitute the only available data. The greatest demonstration projects. One line of carbon markets to help disparity between official reports and the satellite effort has been to develop and dissemi- reduce flaring. data is for Russia, where the satellite observa- nate the methodologies needed to tions suggest a much larger volume than demonstrate emissions reductions. The Clean reported. The publication of these reports in Development Mechanism (CDM) works by case May 2007 followed closely on then-President law: once a methodology has been developed for a Putin's state of the union address, which particular technology, subsequent similar projects declared flaring to be an "unacceptable waste" can apply this methodology, substantially diminish- and cited a flaring volume higher than previous ing their development costs and reducing official reports. uncertainty about whether the project will be approved. The GGFR is developing two such The GGFR has worked with partners to facilitate methodologies for distinct approaches to flare commercialization of currently flared gas. It has reduction. The GGFR has also sponsored detailed encouraged multilateral discussions on commer- screening exercises for Algeria and Indonesia to cializing flared gas in the Gulf of Guinea and has identify carbon investment opportunities. And it is supported economic analyses of commercializa- involved in four CDM projects, two of which have tion constraints and possibilities in Nigeria, been registered with the CDM, including the Russia, and elsewhere. Kwale project, the largest CDM project in Africa. But uptake has been very slow: there are only 26 The GGFR has devoted considerable effort to flaring-reduction projects in the CDM's pipeline of promoting the use of carbon markets to reduce more than 3,000. flaring. The underlying idea is that use of associ- ated gas may, by itself, provide only marginal Divergent country outcomes defy easy general- returns and may therefore not attract investment ization on the impacts of GGFR on flaring. In its 8 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P early phases, the GGFR envisioned a goal of ued, while there was no trend or no change in substantial absolute global reductions in flaring four others. On balance, aggregate flaring by over 2005­2010 in a context of higher produc- GGFR members stayed about the same in tion.6 Figure 6.2 shows total flaring by long- absolute terms but decreased relative to standing partner countries versus others over nonmembers, continuing a trend that was the past 12 years, using the remote sensing ongoing before the GGFR. Some flare reduction dataset. The graph compares the ratio of flaring activities take years to implement. The expected in the two groups before and after the advent of release of remote sensing data for 2007 will the GGFR (2002); this provides a rough control provide an update on progress.7 for market changes that affect the production of oil or demand for gas. Economics of Gas Flaring Our review of GGFR studies and other analyses Since that time, aggregate flaring by the GGFR calls into question whether carbon markets partners has stayed roughly constant, while total address the root causes of much flaring, and flaring by nonpartners has increased. Much of whether carbon credits are necessary or the increase took place in Russia, outside part- sufficient to motivate flare reductions. The ner region Khanty-Mansijsysk. Because flaring analysis for Indonesia (PA Consulting Group is related to oil production, it is interesting to 2006), for instance, found that, in 10 of 26 fields track changes in flaring volume/barrels of oil analyzed, flared gas recovery projects offered produced. Cameroon's ratio was high and substantial economic and financial returns even increasing until the advent of the without carbon credits. If carbon finance were Flaring has stayed about GGFR, after which it declined. Four available at $15 per ton, it would boost the the same among the other GGFR members showed post- financial net present value of these potential GGFR partners and 2002 declines in this ratio. In another projects by 6 to 13 percent. The report concludes increased among three partners, a downward trend that "the use of CDM adds value for project nonpartners. began before the GGFR and contin- sponsors, but does not significantly change the Figure 6.2: Global Flaring: Comparison of GGFR Partner and Nonpartner Countries 140 1.5 120 100 80 1 BCM 60 Ratio Flares, 40 0.5 20 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GGFR partners Other countries Flaring ratio: GGFR members to nonmember countries Source: IEG computations based on flaring data from http://www.ngdc.noaa.gov/dmsp/interest/ gas_flares.html (downloaded 9 June 2008), described by Elvidge and others 2007. 8 4 N AT U R A L G A S F L A R I N G ranking of projects or make marginal projects one potential buyer. The value to the Carbon markets may not highly attractive." buyer, at most, is the cost of using an address the root causes of alternative fuel or feedstock--for flaring and may not be A reanalysis of the data by IEG shows that the instance, the cost of fueling a generat- necessary or sufficient to economic rate of return (ERR) to associated gas ing plant with diesel rather than gas. motivate flaring use is large, even without carbon credits. When This value may be considerably higher reductions. gas at one of these fields is used to generate than the cost to the producer of capturing and electricity, and electricity is valued at long-run transporting the gas. The gap between low marginal cost, the ERR to capturing the otherwise supply price and high demand price represents wasted gas stream is an astounding 163 percent. economic rent, to be divvied up between buyer That calculation assumes an oil price (the alterna- and seller, and can be a source of contention, tive fuel for power generation) of $70 per barrel. especially when the true supply and At $100 per barrel, the ERR soars to 223 percent. demand prices are private informa- The economic rate of Even at $40 per barrel, the ERR is above 100 tion. (The same problem arises in return to the use of percent. In sum, economic fundamentals strongly determining the degree to which oil associated gas is high, support gas recovery in this case, even if global producers can afford to pay for flaring but financial rates of externalities are ignored. control out of oil profits.) return are strongly affected by pricing However, financial rates of return, and the role of Second, the demand price may itself policies. carbon, will be strongly affected by pricing reflect distortions in downstream policies. This is evident, for instance, in the IEA markets. When electricity or heat tariffs are kept (2006) analysis of a typical potential flaring artificially low, or when alternative fuels are project in Russia. The internal rate of return subsidized, users' willingness to pay for gas is (IRR) is 10 percent without carbon, but +5 diminished. At economic prices for electricity, it percent with carbon, when gas is purchased at would generally be economically and environ- $22 per thousand cubic meters, which IEA mentally preferable to use associated gas for local viewed at the time as an institutionally electricity production rather than bear the costs determined price. But the returns rise to 23 (and incur the emissions) of transforming the gas percent (without carbon) and 32 percent (with) to LNG for export. when the gas price is assumed to be $60--still substantially below the netback price that might Consequently, there can be tension among the be obtained if transmission to export markets goals of maximizing public revenues from gas were possible. Similar analyses were undertaken exploitation, subsidizing the cost of downstream in a GGFR-commissioned study (PFC Energy goods such as electricity and fertilizer, and provid- 2007), suggesting that essentially all currently ing adequate incentives and finance for extraction flared Russian gas could profitably be recovered or recovery of gas. One danger is that regulators, at a gas price of $87, which is well below potential not knowing producers' actual costs, may set gas export values. Controlled prices may account for prices too low to allow recovery or control of the low without-carbon internal rates of return flaring, restricting the supply of gas (and possibly that Kwale noted earlier. of oil as well). Another is that price controls, or restrictions on accessing export markets through Gas and energy pricing and regulatory policies pipelines or LNG, divert gas to lower-value or are thus crucial considerations in increasing the inefficient use, with the consequence that availability of both associated and nonassociated relatively clean and efficient sources of power are gas. Policy issues stem from two dilemmas. forgone. Policies with these outcomes could hurt the domestic economy while contributing to First, gas markets are not globally integrated with excessive CO2 emissions. But full analysis of these a market-determined price. Because gas trans- policies would also entail looking at their distribu- port is expensive, a gas producer may have just tional consequences. 8 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P The Bank has had long-standing engagement on would be readily recoverable at economic prices, gas policy (focusing on nonassociated gas) in 3,500 MW of gas turbines are being run on more some countries. Engagement was stronger in the polluting, more carbon-intensive, more expensive 1980s when the Bank lent for gas development, diesel (World Bank 2007e). And because electric- declined as investment attention focused more ity tariffs are held below the long-run marginal on transmission and distribution networks, and cost, the government is forced to subsidize the may now be increasing. Analytic work, including consumption of this diesel. However, Bank analysis of the economic value of gas in alterna- engagement continues, and the Bank has recently tive uses, has been a frequent feature of this supported studies of gas pricing and pipeline engagement. policy. The impact of the Bank's engagement in gas Nigeria, the world's second-largest flarer, has reform is mixed, and it can be difficult to attribute reduced flares significantly over the past two results to a given intervention. In Egypt, Bank decades through increased LNG exports, but it engagement traces back at least to the still has far to go to reach its long-standing goal of The impact of the Bank's early 1980s when it supported a ending flaring in 2008. An ESMAP (2004) study engagement on gas number of gas investment projects. It outlined the scale of the problem: flaring reform is mixed, and continued through a 1990s investment consumes gas potentially worth $2.5 billion per attibution can be project to a recently initiated project year, while producing 70 million tons CO2e of difficult. that seeks to promote use of LNG over GHGs. The study found that prices of $0.75/mscf heavily subsidized liquified petroleum would be necessary to elicit supply of associated gas. That engagement has had some positive gas and $1.00/mscf for nonassociated gas. The outcomes. While gas has been subsidized, it has study focused attention on supplying gas for been explicitly subsidized at the consumer level domestic power generation, noting the im- rather than imposed through price caps on portance of maintaining gas prices sufficient to producer payments. Prices paid to producers elicit demand. A country review by IEG found (currently $2.65/mmbtu) are lower than the little indication that the ESMAP study had been economic value (estimated at $3.65/mmbtu), but used until recently, and found inadequate have still been sufficient to stimulate massive attention by the Bank to these issues over the expansion in gas production and to switch Egypt's past eight years. However, the government of expanding power sector, at the margin, to gas from Nigeria announced a Gas Master Plan and pricing more polluting and carbon-intensive petroleum strategy in early 2008. The extent to which it products. Recently announced reforms have draws on the ESMAP study or Bank advice is boosted the price of gas to energy-intensive unclear. consuming industries from $1.10 to $2.65, which should encourage greater energy efficiency while Conclusion reducing expenditures on subsidies. While gas flaring is a complex phenomenon, economic fundamentals would often support The experience in Indonesia, which dates at least the recovery and productive use of currently to pipeline projects of the early 1990s, has been flared gas. Continued flaring thus reflects--in less successful. Gas is purchased at low prices for part--regulatory and policy failures, particularly many uses. For instance, although the potential in gas pricing. Where this is the case, the use of netback price of LNG sales is $11 per thousand carbon finance as an instrument to reduce flaring standard cubic feet, much gas is sold to is problematic. First, carbon payments may not petrochemical or fertilizer producers at $6. Gas change incentives significantly, even under transport policies may inhibit the ability of current pricing policies. This would mean that producers to find remunerative markets. One such carbon projects are not additional, and that consequence is that although Indonesia flares the carbon payments merely add to producer (or about 3 bcm of gas per year, and much of that gas gas owner) profits. Second, policy or regulatory 8 6 N AT U R A L G A S F L A R I N G reform, though difficult, may offer greater and no financial need for Bank investment loans, more widely shared domestic economic benefits. opportunities for dialogue may be limited. Finally, the option of carbon finance may reduce Nonetheless, there are examples of success. pressures for reform. Reforms, such as more World Bank experience shows that policy reform effective enforcement of regulations against requires sustained engagement over long flaring and higher prices for associated gas, make periods, detailed analytic underpinnings, and recovery of associated gas more attractive, and favorable political conditions. The GGFR can thus undercut arguments for the additionality of continue to contribute to this process by encour- carbon projects. aging dialogue among stakeholders, by serving as an honest broker in discussions between govern- Carbon finance may nonetheless be justified for ments and oil companies. Efforts to popularize activities that are on the edge of economic viabil- the issue and to encourage independent ity, such as collection of associated gas from small monitoring of flare locations, volumes, and actors sources and use for local poverty reduction. could help to create conditions for progress. These measures need to be complemented with Gas policy reform is not easy. National gas continued cross-sector efforts, focused on the monopolies and other groups benefiting from large flaring countries, to put flaring and gas the status quo may resist change. Where there is policy into a broader cross-sectoral perspective. 8 7 Chapter 7 Wind turbines contrast with the architecture of the 300-year-old buildings of Bada Bagh, Rajasthan, India. Photo ©Jacqueline M. Koch/Corbis, reproduced by permission. Findings and Recommendations O ver the years, the World Bank's strategic documents have pointed to three approaches to the promotion of climate mitigation activities that are consistent with developing countries' "common but differentiated responsibilities." One approach involves assembling global funds Findings to compensate nations for the added expense of undertaking low-carbon development proj- Development spurs emissions. ects. A second, related approach is to sup- port technology research, development, and A 1 percent increase in income induces--on diffusion. These approaches are covered here average, and with exceptions--a 1 percent only tangentially and will be a topic for the next increase in emissions. To the extent that the phase of the climate evaluation. (See box 7.1 for World Bank Group is successful in supporting a discussion of the challenges related to technol- broad-based growth, it will put pressure on ogy adoption.) A third approach is to pursue win- climate change. This is the fundamental challenge win or no-regrets policies and investments that of development in a carbon-constrained world offer both attractive domestic benefits and global and underlines the need to find counter- gains. vailing strategies, especially for middle-income countries. Strategy documents dating to 1993 emphasize energy efficiency and removal of energy sub- But there is no significant trade-off between climate sidies as important win-win approaches. This change mitigation and energy access for the poorest. evaluation has mainly looked at policies in these two areas, which the IEA and others stress as key The poorest people and the poorest countries approaches to emissions reductions over the currently emit only tiny amounts of GHGs, so next 20 to 50 years. The evaluation has also growth for them puts no real pressure on the discussed the specific issue of gas flaring, which world's carbon budget. Basic electricity access can be seen as an example of both a pricing and for the world's unconnected households, under an efficiency problem. Finally, the report has the most unfavorable assumptions, would add examined the potential trade-offs among growth, only a third of a percent to global GHG energy access for the poor, and emissions. emissions, and much less if renewable energy 9 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P and efficient light bulbs could be deployed. The outside the OECD cost a quarter-trillion dollars welfare benefits of electricity access have been yearly. Subsidies also promote excessive GHG estimated in the range of $0.50 to $1 per kWh emissions. In many developing countries, these (IEG 2008e), while a stringent valuation of the subsidies exceed the public expenditure on corresponding carbon damages, in a worst-case health, yet they are not well-targeted to the most scenario, is a few cents per kWh. vulnerable. Removal of these subsidies would bring domestic fiscal and economic dividends Policies can shape a low-carbon growth path. and could reduce global emissions by several percentage points. The link between growth and emissions is strong but malleable. It is strong because income per The World Bank has been very active in supporting capita and heating needs explain most of the 600- rationalization of energy pricing and increased fold variation between countries in energy collection. emissions per capita. It is malleable because there is still great potential for reductions. The Bank has been a mainstay of power sector Although most countries follow a tight linkage of reform. While attribution is difficult, Bank- income to emissions, there is still a sevenfold supported pricing reforms have often helped to variation between the most and the least boost tariffs and collection rates. Policy dialogue emissions-intensive countries at a given income and analytic work have been associated with level. successful reforms. Success is noteworthy in many transition economies, which also recorded Part of that variation is luck--including natural reductions in emissions per capita and emissions endowments of coal, gas, and hydropower--but per dollar of GDP. it is also the product of policies that shape the use of those resources. So, in the relation Country ownership of reforms is key. The between income per capita and emissions from prospect of EU accession has been a motivation power and heat generation, the share of electric- for reform, and severe fiscal pressure has ity from hydropower accounts for half of the sometimes, but not always, facilitated reform. variation among countries not linked to income But tariff reform has been difficult where it and heat needs. threatens entrenched interests, such as agricul- tural users in India. Countries that are not under Fuel pricing is a key policy affecting emissions. fiscal stress--such as those with ample oil revenues--are less likely to seek or accept World This is especially clear for vehicle fuels, where Bank advice on subsidy removal, especially with high subsidizers--those whose diesel prices are regard to implicit (off-budget) subsidies. less than half the world market rate--emit about twice as much per capita as other countries at Although poorer groups often get a small share of similar income levels. Within the OECD, the energy subsidies, subsidy removal can threaten their countries that have maintained high fuel prices welfare. for decades (through taxation) have evolved more efficient transport systems. If all the While some subsidies scarcely reach poor member countries had maintained these levels, people, energy subsidies constitute 5 to 10 the OECD's emissions would be 36 percent percent of household budgets of the lowest lower (Sterner 2007). quintile in some countries. Removal of these subsidies can be painful to all, but especially Energy subsidies are large, burdensome, regressive, dangerous for the poorest. Sharp increases in and damage the climate. energy prices can be politically perilous, and are perceived as having sparked deadly riots and the IEA (2006) estimates that energy subsidies fall of governments. The political feasibility of 9 2 F I N D I N G S A N D R E C O M M E N DAT I O N S price rises, therefore, can depend on the energy efficiency and district heating. (Efficiency presence of mechanisms that protect both gains may also accrue from improvements vulnerable and influential groups. in transmission and distribution.) However, the limited evidence suggests that efficiency projects One way to facilitate energy price adjustments is to have had high rates of return compared with couple them with social protection measures funded other energy sector projects, even without from the savings from reduced subsidies. accounting for GHG benefits. In Ghana, the government removed school fees Policy engagement on efficiency has been even more and boosted funding of clinics in poor areas as limited. compensation for gasoline and kerosene price rises. In Indonesia, an unconditional cash Only 34 energy-efficiency projects supported by transfer, targeted to the bottom two income the World Bank during 1996­2007 included quintiles, was put in place to complement a steep activities related to public policies, broadly fuel price rise. In both cases, ex ante analysis construed. Among these, DSM projects have showed that lower-income groups would be been limited in scope and sustainability because better off, on average. In Armenia, a social of a tendency to partner with utilities, which transfer payment, designed to offset an electric- make money by selling electricity, and only in ity price hike, initially reached only 55 percent of special cases by conserving it. Projects in poor people, but coverage is thought to have standards and codes have succeeded in stimulat- improved. But such compensatory programs ing policy or regulatory change, but often may not be sufficient to secure the acquiescence devoted inadequate attention to institutions and of wealthier interests who benefit from subsidies. implementation. Another potentially important way to ease the adjust- However, there have been some innovative efforts. ment to higher energy prices is to couple price hikes with efficiency measures, so that net outlays on The China Heat Reform and Building Project is energy increase less steeply than prices. pursuing a difficult--but potentially very high pay-off--comprehensive policy and investment In principle, subsidy savings could fund such approach that promotes demand for and supply efficiency investments. This adjustment tech- of efficiency. And there has been a spate of nique has been little used to date (though see innovative projects in energy finance, including the discussion of the China Heat Reform Project, ESCOs, that seek to overcome credit market below). While several Bank projects promote failures and transactions cost barriers. Although mass distribution of compact fluorescent light these contract-intensive institutions face chal- bulbs, these have not been linked to tariff lenges in weak institutional and legal environ- reforms. ments, they appear to be expanding and will be assessed at greater length in Phase II of this End-user energy efficiency has been relatively evaluation. The availability of grant funds from neglected. GEF, ESMAP, and the Asia Sustainable and Alternative Energy Program has been critical in Efforts on energy efficiency, especially on the allowing staff to pursue innovative efficiency and demand side, have been modest compared with renewables projects. its potential and its stated priorities. While country strategies for 20 of the 33 top emitters There are several reasons why energy-efficiency contained general references to energy effi- projects, and especially policy-oriented projects, ciency, only 10 had specific objectives. About 5 appear to be underemphasized in Bank lending. percent of energy lending by volume since 1990 has been for components specifically related to Internal Bank incentives work against these 9 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P projects because they are often small in scale and appropriate only where the economics of demanding of staff time and preparation funds. reduction are marginal. However, the GGFR's There is a general tendency (including among diagnostic work suggests that flaring often borrowers) to prefer investments in generation, results from lose-lose policy-level natural gas which are highly visible and easily understood, to pricing decisions rather than inherently marginal investments in efficiency, which are less visible, economics. Where this is so, the use of project- involve human behavior rather than electrical level carbon finance is a mere bandage for policy engineering, and whose efficacy is harder to ailments that require a more fundamental cure. measure. A neglect of rigorous monitoring and evaluation reinforces the negative view of Important information for the design and manage- efficiency. And investments often take place in ment of emissions-related policies is missing. the absence of an integrated resource plan (for power system expansion) that takes efficiency At the international level, there is no timely, options into account. A paucity of Bank staff with comprehensive, and consistent monitoring of expertise in efficiency (now being remedied) has energy subsidies or prices. At the national level, both reflected and contributed to the neglect of there is a lack of basic data on key factors related the issue. to energy efficiency, such as technical losses in transmission and the extent and emissions of The Bank, through the GGFR, has fostered dialogue captive power plants. Lacking also are timely and on gas flaring, but flaring activity has not yet been accurate data on household, commercial, reduced. municipal, and industrial consumption and expenditures on energy. This makes it difficult to Flaring of associated gas contributes more than design and monitor the impact of price reform 400 million tons of CO2 to the atmosphere each and efficiency policies. And monitoring and year; if used for power, it would produce twice evaluation remain inadequate at the project the amount consumed in Sub-Saharan Africa. level. For instance, only one of many compact Using flared gas is in many cases a clear win-win fluorescent light distribution projects has built in proposition. The Bank-hosted GGFR Partnership a rigorous impact analysis. represents a modest but innovative effort to tackle this large problem. The GGFR has fostered The World Bank has a significant history of involve- dialogue on the issue among countries and oil ment with carbon accounting. companies, raised the issue's profile, and sponsored useful diagnostic analyses and data A pilot study on carbon shadow pricing was collection. The GGFR's global remote sensing carried out 10 years ago, and carbon pricing is survey of gas flaring provides objective and verifi- integral to the activities of the Bank's carbon able data in an area that is difficult to monitor funds. Carbon shadow pricing has been systemat- and where some participants may have low ically incorporated in long-term planning of the incentives for accurate reporting. However, by expansion of Southeast Europe's power system. 2006 there had not yet been any aggregate And the IFC has already adopted a Performance reduction in flaring among GGFR partners, Standard that requires projects with significant although flaring per barrel of oil has decreased in GHG emissions to quantify them annually and to most partner countries. seek avenues for reducing them, including offsets. While there are important technical issues in Carbon finance does not address the fundamental footprinting and shadow pricing, these prec- policy and institutional failures that cause gas edents suggest that they can be overcome and flaring. could be informative. However, quantifying the Bank's indirect and policy impacts on GHGs is The GGFR has devoted attention to carbon more difficult, though these impacts may be larger finance as a means of flaring reduction, which is than those of the direct, project-level effects. 9 4 F I N D I N G S A N D R E C O M M E N DAT I O N S Box 7.1:The Challenge of CatalyzingTechnology Adoption The next phase of the climate change evaluation will look in depth enough to push the project over the threshold from unprofitable at the Bank Group's experience related to technology. The frame- to profitable. However, the carbon finance transaction may have work is presented here and may be helpful in exploring uses for provided some other catalytic benefits. For instance, the due dili- the recently established Clean Technology Fund. gence associated with carbon finance may have crowded-in The public policy rationale for supporting renewable energy and investors and financiers. energy efficiency revolves around barriers or market failures, in- These additionality concerns are not unique to CDM projects. cluding regulatory barriers, information and transactions costs, and They also apply to pricing policies (such as feed-in tariffs or re- spillover or demonstration effects that are not captured by newable portfolio standards) that promote renewable energy. As innovators. the level of support increases, to what extent is there a supply re- GEF climate projects and CDM projects are required to predi- sponse, and to what extent do incumbents simply receive higher cate their financial support for a project on a barrier-removal ar- profits? This is a fundamental question to ask with regard to choos- gument of this kind. IFC and IBRD/IDA support may do so implicitly. ing mechanisms, technologies, and locations to support. The next phase of the evaluation will examine a set of low-carbon With regard to spillover effects, the technology projects with technologies through this barrier-removal lens. Three evaluative the most leverage are those that trigger spontaneous diffusion or questions stand out: replication. One well-known mechanism for spillovers is the learn- ing curve. Technology costs decline with cumulative production · Are the barriers as severe as they are represented to be? In volume, as has been well documented for solar photovoltaics and the project context, could the project have been undertaken wind power. Taking advantage of these learning curves is in- in the absence of concessional finance (known as the addi- evitably an exercise in "picking winners," or at least short-listing tionality test)? them. Success is achieved when cumulative production of a par- · What are the spillover impacts of particular technology ticular technology is enough to push costs below the threshold of choices? competitiveness. · What is the Bank's comparative advantage and how does that Another mechanism is to reduce uncertainty among technol- find expression in the strategic choices it makes among in- ogy investors or users. For instance, the first wind or minihydro plant struments and technologies? in a country or region may be viewed with skepticism. Risk-averse investors may demand a premium; lenders may simply be unwill- On the additionality question, the experience of the CDM will ing to lend. Successful demonstration of the technology in local be instructive, both for the Bank's expanded use of carbon finance circumstances could reduce the risk premium, making it easier for (through the Carbon Prototype Fund) and for the deployment of the follow-on projects to get financing. Clean Technology Fund. The CDM has built an elaborate appara- Finally, public policies can deter or enable investment. Subsi- tus to try to ensure additionality, project by project. Contentious from dies to fossil fuels or red tape for small power producers are ex- the start, the additionality tests are perceived as onerous red tape amples of deterrents. Building and appliance codes, in contrast, by some investors. At the same time, serious questions have been increase the salability of efficient building material and machinery. raised about whether these tests truly screen out projects that could A starting place for the discussion of the Bank's comparative have succeeded without carbon finance (Michaelowa and Puro- advantage is to look at activities that are unattractive to the pri- hit 2007; Schneider 2007; Wara 2008). vate sector, or the public sector in the developed world. Within that For instance, some observers cite a proliferation of CDM- set, the Bank could focus on those that have the highest spillover financed hydropower plants in places where similar plants were effects. already widespread. Analysis by the Bank's Carbon Finance Unit These considerations suggest concentrating Clean Technology has shown that in many cases the sale of carbon offsets makes Fund and other new resources on technologies and activities that: only a very small difference in the project's financial bottom line-- a percentage point or less in the internal rate of return. For these · Are not the subject of research and development in the de- projects, it is not plausible that carbon revenues alone were veloped world (Box continues on the next page.) 9 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Box 7.1:The Challenge of CatalyzingTechnology Adoption (continued) · Are easy to replicate and therefore difficult to protect by · Detailed wind resource surveys for windpower site identifi- patent or other means cation and investment decisions · Could be rapidly pushed down the learning curve · Geological surveys on the availability and integrity of carbon · Facilitate public sector activities that encourage investments capture and storage sites in efficiency and renewables · Capacity building for regulators on integrated resource plan- · Cannot be financed through existing Bank instruments. ning and on technology and regulatory issues for nuclear and carbon capture and storage technologies Examples include: · Land management techniques that reduce demand for · Improved procedures for targeting social safety net pay- energy-intensive fertilizer production ments to poor and vulnerable people, as a means to reduce · Solar technologies of all kinds, given higher average insola- energy subsidies tion in developing regions. · Institutions, procedures, and technologies for ex ante as- sessment of energy consumption by buildings, and for im- Strategic consideration of these options will force some diffi- plementing building code inspections cult choices. For instance, pursuing the learning curve route to tech- · Lower-cost technologies for delivering and installing (as op- nology commercialization requires focusing on a limited set of posed to manufacturing) efficiency measures and decen- technologies and coordinating these investments across countries, tralized renewable power sources while an emphasis on removing uncertainty as a barrier to in- · Low-cost technologies for DSM of traffic in high-density vestment would argue for a very diffuse set of investments across cities a wide range of countries. Source: IEG. Conclusion and Recommendations pursue nationally appropriate actions that meet The Bank is just one contributor toward the long- pressing development objectives, while position- term goal of mitigating and adapting to climate ing them on a lower-emissions growth path. It change. The long-run solution to mitigation entails can best do so by seeking maximum leverage in the invention and wide-scale deployment of zero- its actions. This entails a strategic focus on its carbon technologies. Developing and deploying comparative advantage in supporting policy these technologies will require massive near-term reforms, public goods, and institutional innova- increases in research and development expendi- tions that transform markets. There is ample ture in the developed countries, and trillions of scope for clients to pursue win-win policies--but dollarsofinvestment--farbeyondtheBank'sdirect if these were easy, they would have been financial resources--in developing countries. undertaken long ago. Reform will require a systems view: looking at the power system as a Still, the Bank can aspire to play a catalytic role whole; looking at energy subsidies as just in this global transformation. Based on the anal- one, dysfunctional, part of a social protection sys- ysis in this report, IEG makes the following tem; and looking at the connections between recommendations. water and power management. And it will re- quire big investments in real-time monitoring Focus World Bank efforts more strategically on areas and learning. of its comparative advantage, which include sup- porting the provision of public goods and, at the Systematically promote the removal of energy country level, promoting policy and institutional subsidies, easing social and political economy reform. concerns by providing technical assistance and policy advice to help reforming client countries find The Bank has the potential to help its clients effective solutions, and analytical work demonstrat- 9 6 F I N D I N G S A N D R E C O M M E N DAT I O N S ing the cost and distributional impact of removal of exploit efficiency opportunities. Conversely, the such subsidies and of building effective, broad- deployment of energy-efficient equipment such based safety nets. as compact fluorescent lights can be used as a device for cushioning the impact of price The mid-2008 level of energy prices, while increases. The Bank should explore innovative burdensome for many countries, nonetheless ways to finance efficiency (and renewable en- prompts a fresh look at policies on energy ergy) investments in the face of fuel price subsidies, energy efficiency, and renewable energy volatility. sources. The recent experience of these prices may open doors for policy and regulatory reform. This report calls for much greater emphasis on The Bank can provide analytic support for promotion of energy efficiency. But similar calls countries to explore the potential for gains from in the past have not evoked a strong response. If reform, and financial and technical support for a real reorientation to energy efficiency and carrying out reforms if desired. renewable energy is to occur, the Bank's internal incentive system needs to be reshaped. Instead Energy price reform is never easy or painless. It of targeting dollar growth in lending for energy can endanger poor people, arouse the opposi- efficiency (which may distort effort away from tion of groups used to low prices, and trigger the high-leverage, low-cost interventions), it inflation, thereby posing political risks. But needs to find indicators that more directly reflect failure to reform can be worse, diverting public energy savings and harness them to country funds from investments that fight poverty and strategies and project decisions. It also needs to fostering an inefficient economy that is increas- patiently support longer, more staff-intensive ingly exposed to energy shocks. And reform analysis and technical assistance activities. need not be undertaken overnight. The Bank can Increased funding for preparation, policy provide assistance in charting and financing dialogue, analysis, and technical assistance is adjustment paths that are politically, socially, and required. Trust fund resources have been helpful environmentally sustainable. for this in the past; the Clean Technology Fund may provide additional, near-term funds. One way to do this is for the Bank to continue to develop and share knowledge on the use of cash- Promote a systems approach by providing incentives transfer systems or other social protection to address climate change issues through cross- programs as potentially superior alternatives to sectoral approaches and teams at the country level, fuel subsidies in assisting the poor. To assist and structured interaction between the Energy and countries in dismantling subsidies that benefit Environment Sector Boards. special interest groups, the Bank should foster cross-sectoral cooperation and greater use of To tackle problems of climate change mitigation political economic analysis. Timely monitoring and adaptation, the Bank and its clients need to and analysis of energy use and expenditure, at think beyond the facility level, beyond subsec- the household and firm levels, will be important tors, and beyond sectors. The value of a windmill in policy design, in securing public support, and depends on the load patterns of the grid to which in detecting and repairing holes in the safety net. it is connected. Removing electricity subsidies for farmers requires an understanding of agricultural Emphasize policies that induce improvement in policies and conditions. Promoting municipal energy efficiency as a way of reducing the burden of electricity efficiency is closely bound up with transition to market-based energy prices. reducing distribution losses in water systems. Traffic congestion and air pollution are a Cost-reflective prices for energy boost the consequence of fuel subsidies. Urban forestry returns to efficiency, but policies may need to promotes mitigation by cooling cities and fosters be put in place to allow households and firms to adaptation by reducing flooding. 9 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P To be effective, the Bank needs to break down for improved access. The Bank could explore the sectoral stovepipes and encourage cross-sector use of advances in information technology (such approaches and teams. This will require champi- as meters with automated, wireless reporting), onship by country directors and vice presidents. together with statistical sampling, to undertake The unfulfilled promise of mainstreaming real-time monitoring of energy use and patterns. sustainable development needs to be realized Affordable monitoring systems could pay big through structured interaction of the Energy and dividends in improved energy management at Environment Sector Boards. This could be the sectoral and national levels. initiated with ad hoc groups to address specific cross-sectoral challenges. More rigorous economic and environmental assessment is needed for energy investments and At the country level, the Bank should support those which release or prevent carbon emissions. capacity building for a systems approach--for These assessments should draw on energy prices instance, for power system regulators in the area of collected for the Energy Scoreboard and account integrated resource planning. And it should think forpricevolatility.Inaddition,theycouldundertake about using the Clean Technology Fund to support carbon accounting at the project level, computing public systems that will catalyze widespread invest- switching values for high- and low-carbon alterna- ments. For instance, capacity building for building tives. Investment projects should also be assessed, inspectors and for the construction industry could qualitatively, on a diffusion index, which would transform that industry. indicate the expected catalytic effect of the invest- ment on subsequent similar projects. Where Invest more in improving metrics and monitoring for proprietary information is not involved, these motivation and learning--at the global, country, and assessments should be made public for informa- project levels. tion and comment. Public disclosure will provide incentives for accurate assessment and will also Good information can motivate and guide inform global technology and investment planning. action. Building on the Bank's current collabora- tion with the IEA or other partners on energy- Ideally, investments should fund projects identi- efficiency indicators, the Bank should set up an fied under an active integrated resource plan for Energy Scoreboard that will regularly compile system expansion. Such plans should allow for up-to-date standardized information on energy energy efficiency as a source of increased prices, collection rates, subsidies, policies, and capacity and take account of the value of performance data at the national, subnational, renewables in reducing pollution and exposure and project levels. Indicators could be used by to external price shocks. The Bank should assist borrowers for benchmarking; in the design and countries in preparing and implementing these implementation of country strategies, including plans. Countries may wish to compare expansion sectoral and cross-sectoral policies; and in assess- plans under different shadow prices for carbon. ing Bank performance. The Bank could look for inspiration to India, which already publishes It is desirable to complement project-based detailed data on power plant CO2 emissions, analysis with assessment of indirect and policy- state-level utility performance, and fuel subsidy related impacts, which could be much larger. levels, or to China, which is aggressively pursuing a goal of energy-efficiency improvement. Monitoring and evaluation of energy efficiency interventions continues to need more attention. At the national level, the Bank should support Large-scale distribution of compact fluorescent integration of household and firm surveys with light bulbs is one example of an intervention that energy consumption and access information to is well suited to impact analysis and where a lay the foundation for assessing impacts of price timely analysis could be important in informing rises and mitigatory measures, as well as planning possibly massive scale-up activities. 9 8 Appendixes APPENDIX A: BANK ATTENTION TO SUBSIDIES IN THE LARGE SUBSIDIZING COUNTRIES Subsidy PER Country Total subsidies Electricity Fuel Gas attention Argentina 1990­91: $0.6 blna $1.5 blnb $1.0 blnb $4.0 blnb 2003 + 1995­96: $0.15 blna China 1990­91: $24.5 blna $5.0 blnb $7.0 blnb $4.0 blnb No PER 1995­96: $10.3 blna Egypt, Arab 11.9% of GDPc $2.0 blnb $9.5 blnb $1.0 blnb No PER Rep. of Indonesia 1990­91: $2 blna $2.0 blnb $15.5 blnb 2007 ++ 1995­96: $1.3 blna PER $3.8 bln. PER: 1.5% PER: 2006­$12 bln =1.4% of GDP, GDP includes explicit 2004­3% and implicit (2005) 2005­3.5% India 1990­91: $4.2 blna $10.0 blnb $7.0 blnb $2.0 blnb No PER 1995­96: $2.7 blna Iran, Islamic 17.5% of GDPc $2.5 blnb $24.0 blnb $9.5 blnb No PER Rep. of 1 0 0 A P P E N D I X A : B A N K AT T E N T I O N TO S U B S I D I E S I N T H E L A R G E S U B S I D I Z I N G C O U N T R I E S CAS objectives related to energy pricing or subsidies Outcomes and status 2004: Social tariff to be targeted to the poor. Sanction 2006: Social tariff: draft law before Congress, but government is temporary seasonal price adjustment mechanisms in unreceptive. the energy sector. 2007: Electricity tariffs raised but still substantially below long-run marginal cost; gas subsidies in place. 1995: Average power tariffs should approach long-run marginal 2003: Average power prices cover cost; higher than long-run marginal cost countrywide, but especially in the interior provinces. cost in coastal provinces. 1997: Enact price reforms and user fees to increase retained earnings of infrastructure companies. No energy pricing/subsidy target in CASs. 2007: GoE announced plans to eliminate gas and electricity subsidies for energy-intensive industries over the coming three years. Bank provided input on energy prices and subsidies. 2008: Increases in electricity, natural gas, and fuel prices, but still low by in- ternational and regional standards. The Ministry of Finance started to record energy subsidies in the budget in 2005/06 to increase transparency. 1995: Institute electricity rate increases. 1999: Financial crisis constrains tariff hikes. 1997: Raise domestic fuel prices. Power: increase household 2003: Some tariff increases in electricity, but prices still inadequate to at- electrification ratio; raise electricity tariffs. tract investors. 2001: Phase out fuel and power subsidies to solve the 2005: Fuel price hiked, with compensatory targeted assistance to the poor. problem with power sector bottlenecks. An unconditional cash transfer program reached 19.2 million poor and near- 2004: Cost-effective tariff/user charges policies; automatic poor households (34% of the national population). Fuel price adjustments tariff adjustment mechanisms for power. saved $15 bln in public funds over 2005­06. 2006: Electricity and petroleum prices remain below cost levels as world prices rise. 1995: Depoliticize tariff adjustments and other decisions 1999: Adjustment of domestic diesel prices (40% price hike). in power sector. Higher electricity tariffs, reduced power subsidies. 1998: Implement power tariff adjustments. Liberalize coal 1996-2006: Bank's five state-level power restructuring projects fail to pricing and distribution. achieve expected tariff increases. 2002: Bring down theft and losses. Reduce fiscal drain of the 2008: After-tax petroleum prices are above world market levels; kerosene power sector. Better cost recovery for power through appropriate heavily subsidized. tariff schedules, lower subsidies, and reversal in culture of nonpayment. 2005: Tariffs should cover the cost of service provision. Progressively reduce the primary deficit at the center and in states by reducing power sector losses and phasing out petroleum subsidies. 2001: Interim Assistance Strategy 2001: Study on the reform of the energy pricing system finalized. Subsidies Country Economic Reform agenda addresses subsidies. Bank continue. will intensify economic and sector work, including a study on the reform of the energy pricing system. (Continues on the next page.) 1 0 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Bank Attention to Subsidies in the Large Subsidizing Countries (continued) Subsidy PER Country Total subsidies Electricity Fuel Gas attention Kazakhstan $0.5 blnb $1.0 blnb $4.0 blnb No PER Malaysia $0.4 blnb $3.5 blnb -- 1999 + Nigeria 1990­91: $0.9 blna $0.4 blnb $2.0 blnb 2001 + 1995­96: $0.5 blna PER: power and steel sectors (% of total budget): 1998--2.6% 2000--7.9% Implicit fuel subsidies: 2003--1.6% of GDPc 2005 estimate: 2.2% of GDPc Pakistan Explicit fuel subsidies: $2.0 blnb $3.0 blnb -- 2003--0.1% of GDPc 2005 estimated: 0.2% of GDPc Russian 2003 (PER): $14.0 blnb $26.0 blnb 2005 ++ Federation 3.3% of GDP in housing and utility subsidies, direct budget support, quasi-fiscal financing 1 0 2 A P P E N D I X A : B A N K AT T E N T I O N TO S U B S I D I E S I N T H E L A R G E S U B S I D I Z I N G C O U N T R I E S CAS objectives related to energy pricing or subsidies Outcomes and status 1998: Liberalization of pricing and regulations in energy. 2002: Government will introduce a new tariff policy that will fully cover the cost and will be aimed at reducing the independence of the tariff on electricity transmission distance. No energy pricing/subsidy target in CAS. No energy pricing/subsidy target in CAS. 2000: Government implemented the replacement of the petroleum subsidy by a consumption tax resulting in a doubling of the gasoline price. 2004: Nigeria successfully implemented a fiscal rule de-linking the budget from current oil prices. 1995: Improve structure of energy prices. Increase gas, 1998: Electricity tariffs increased by 21%. petroleum, and electricity prices. Introduce an automatic 2001: Formula-based adjustment of petroleum prices introduced. adjustment mechanism for petroleum prices. Consumer gas prices increased, but gas is still sold at $0.77/mmbtu when 1998: Increase electricity tariffs, with possible delay in opportunity cost is $1.76/mmbtu. petroleum price adjustment. 2004: Gas subsidy to fertilizer industry continued, electricity rates were re- 2002: Increase in electricity tariffs, gas prices (to be linked duced despite continued high losses. Little progress in reducing public sector to international crude price), with possible delay in arrears. Petroleum prices adjusted partially to reflect international oil prices. petroleum prices adjustment. 2005: Government temporarily suspended policy of automatic petroleum 2006: Oil and gas prices should fully reflect world price adjustment. Reduction in petroleum taxes, to reduce the impact of market conditions. rising international prices. Gas tariff collections met policy goals but price adjustment mechanism is not consistent. Gas tariffs are priced close to long- run costs on average but are still below opportunity costs for households and for the fertilizer industry. 2006 Inability of government to adjust petroleum consumer prices as fore- seen in the CAS. Good progress made in the pricing of natural gas, but gas tariffs continue to be distorted by cross-subsidies among different classes of consumer, and implementation of the gas price adjustment mechanism has been erratic. 1995: Pricing, cost recovery in utility sector (power). Substantial improvements in cash collection. 1997: Reduction in subsidies to coal enterprises for 1997: Introduced new pricing principles in infrastructure monopolies--elec- investment and production. tricity, natural gas, and railways--to cost-based pricing and reduced cross- 1999: Energy sector--district heating--tariff level; structure; cash subsidization. Electricity prices to industrial customers are comparable to collection. Coal--improve subsidy management system, social many OECD countries. safety net, level/composition of subsidies and sector governance. 1999: State subsidies to the coal industry declined from 1% to 0.2% of GDP. Indicator: Real reduction in level of coal sector production subsidies. 2002: Substantial improvements in cash collection in electricity and gas. 2002: Reduction of subsidies in energy sector (coal, district 2005: Subsidies to natural monopolies reduced. Though tariffs are being heating, power tariffs). gradually increased toward long-run marginal costs, price subsidies remain substantial. Domestic prices of gas still well below export levels. (Continues on the next page.) 1 0 3 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Bank Attention to Subsidies in the Large Subsidizing Countries (continued) Subsidy PER Country Total subsidies Electricity Fuel Gas attention South Africa 1990­91: $0.9 blna $4.0 blnb No PER 1995­96: $0.4 blna Thailand 1990­91: $0.5 blna $1.0 blnb $2.0 blnb $0.3 blnb No PER 1995­96: $0.4 blna Ukraine PER: $2.5 blnb $0.3 blnb $13.0 blnb 2006 ++ Quasi-fiscal activities in the energy sector (% GDP): 2001: 7.4; 2005: 4.3 Venezuela, 1990­91: $3.4 blna $1.5 blnb $8.5 blnb No PER R. B. de 1995­96: $2.4 blna Vietnam $0.7 blnb $0.7 blnb No PER Mexico 1990­91: $5.4 blna PER: 1% of GDP 2005 ++ 1995­96: $2.2 blna in 2003 Sources for subsidy estimates: a. World Bank 1995. b. Estimate of energy subsidies based on IEA 2007, figure 11.7: Economic Value of Energy Subsidies in non-OECD Countries for 2005. c. Baig and others 2006. d. Bacon and Kojima 2006. Note: No PER = no PER implemented; ­ = no subsidy analysis in PER; + = perfunctory analysis and general recommendations; ++ = detailed analysis and specific recommendations. 1 0 4 A P P E N D I X A : B A N K AT T E N T I O N TO S U B S I D I E S I N T H E L A R G E S U B S I D I Z I N G C O U N T R I E S CAS objectives related to energy pricing or subsidies Outcomes and status 2007: Assess competition and regulation in the energy sector. 1995: Assessment of impact of power tariff and connection charges. Fuel subsidies phased out over 2004­05. 2000: Improve financial discipline across the economy (including 1999­2006: Collection rates in the energy sector increased from 8% to 98%, energy sector--full payment in cash). coal tariffs doubled, gas tariffs increased by 25%, and electricity by 47%. 2003: Financially sustainable sectors: Energy and Infrastructure CO2 emissions/$ dropped substantially. Bank lending and advisory work (tariff, regulatory, and old debt issues addressed). helped. However, the rise in energy prices leaves tariffs still below economic Set tariffs sets close to cost recovery (coal, gas, electricity). costs. 1997: Maintain domestic petroleum prices at export parity. 1996­2002: Raise power tariffs to long-run marginal cost 2002: Tariffs are still below long-run marginal cost. countrywide. 2006: Gradual convergence to regional prices. Cost recovery in electricity. 2003: Rationalize pricing policies for infrastructure policies. 2007: Institute cost-effective electricity tariffs for different consumer categories. 1997: Reduce price distortions in infrastructure, technical assistance on tariff policies in power sector. 1999: New approach to pricing and subsidization needed at both the national and subnational levels. 1997: "On the top of environmental agenda is efficient energy pricing." 2002: "Revise pricing policies and subsidies (including energy) that claim to assist the poor, actually convey perverse signals and induce overuse, misallocation, and waste of environmental assets." 2004: Better targeting of subsidies. 2008: Electricity subsidies study. 1 0 5 APPENDIX B: ENERGY-EFFICIENCY PROJECTS WITH POLICY COMPONENTS Projects with Energy-Efficiency Policy Component, 1996­2007 IBRD/IDA IEG Fiscal Project Project and status grant amount outcome Type of year ID (closed [C]/active [A]) (US$ million) rating efficiency measures 1996 P034491 Albania Power Transmission C 29.50 Unsatisfactory Appliances and buildings and Distribution--IBRD/IDA standards 1996 P034617 Mali Selingue Power C 27.30 Highly DSM study Rehabilitation Project-- satisfactory IBRD/IDA 1997 P035693 China Efficient Industrial C 32.80 Satisfactory Technology diffusion Boilers--GEF 1997 P035163 Lithuania Energy Efficiency/ C 10.00 Moderately Efficiency finance fund Housing Pilot Project-- satisfactory IBRD/IDA 1997 P042056 Senegal SN-GEF Energy C 4.70 Not rated Technology diffusion Mgmt Sust Prtn SIL--GEF 1997 P010498 Sri Lanka Energy Services C 24.20 Satisfactory Voluntary building standards; Delivery--IBRD/IDA capacity building for DSM 1998 P000532 Chad Household Energy C 5.30 Moderately Household energy DSM/ Project--IBRD/IDA satisfactory technology diffusion 1998 P003606 China Energy Conservation-- C 63.00 Satisfactory ESCO demonstration and IBRD/IDA market information 1998 P037859 China Energy Conservation-- C 22.00 Satisfactory Energy conservation GEF information center 1998 P000736 Ethiopia Energy 2--IBRD/IDA C 200.00 Moderately Electric Standards and satisfactory Technical Regulation study 1 0 6 A P P E N D I X B : E N E R G Y- E F F I C I E N C Y P R O J E C T S W I T H P O L I C Y C O M P O N E N T S Energy- efficiency component, (US$ million) Efficiency measures detail Outcome 8.7 Purchase of meters and related accessories. Meters purchased. The study on energy conservation in (metering) UNDP-financed studies on appliance efficiency and buildings was completed and a law was passed in 2002 to energy conservation in buildings. prescribe insulation standards. The study on appliance efficiency was not done. Not identified Purchase and installation of equipment for reducing Never implemented distribution network technical losses and the design and promotion of end-use efficiency programs. 31.49 Development, production, marketing of energy-efficient Achieved and cleaner industrial boiler designs. 9.80 Loan finance for energy-efficient rehabilitation of The investments introduced controllable heat residential buildings. consumption. 0.33 Demand management and fuel substitution component to Achieved promote substitution of kerosene and liquid petroleum gas for charcoal, and will disseminate efficient charcoal stoves. 1.9 Energy-efficiency objectives within the capacity-building The project launched DSM programs, including: a code of component. practice for energy-efficient commercial buildings; increased technical capacity to carry out energy audits and provide advice on energy efficiency measures; and an appliance energy-labeling program. 0.53 actual Improve the efficiency of household fuel use: DSM to Not achieved, subcomponent was discontinued--produc- reduce wood fuel consumption, through: (a) commercial- tion problems and lack of demand. ization of efficient cooking stoves (firewood, charcoal); and (b) promotion of the use of low-cost kerosene and liquefied petroleum gas stoves. 57.96 Adapting the EPC (energy performance contract) model; Energy management company demonstration. By 2007, the energy management company demonstration; energy efficiency achieved total energy savings of 5.92 information dissemination. mmtce, and associated reductions in carbon dioxide emis- sions of 5.06 million tons of carbon equivalent versus the target of 3.77 in 2002. 22 The Energy Conservation Information Dissemination NECIDC was established. Center (NECIDC). Not identified Supply-side efficiency investment--energy-efficiency Improve utilization efficiency of rural renewable energy: subcomponent related to increasing efficiency in the not achieved. power sector. (Continues on the next page.) 1 0 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Projects with Energy-Efficiency Policy Component, 1996­2007 (continued) IBRD/IDA IEG Fiscal Project Project and status grant amount outcome Type of year ID (closed [C]/active [A]) (US$ million) rating efficiency measures 2000 P047309 Brazil Energy Efficiency--GEF C 15.00 Moderately Standards, testing, satisfactory capacity building 2000 P066345 Mauritania Energy, Water, C 9.90 Unsatisfactory Energy-saving action plan and Sanitation Sector Reform Technical Assistance Project-- IBRD/IDA 2002 P074040 Bangladesh Renewable A 8.20 Not rated DSM and master plan Energy Development--GEF 2002 P063644 Ecuador Power and A 23.00 Not rated Standards, tariffs incentives Communications Sectors for energy conservation in Modernization and Rural electricity; efficiency finance Services-- IBRD/IDA 2002 P072527 Ecuador Power and A 2.80 Not rated Building standards and Communications Sectors efficiency Modernization and Rural Services--GEF 2002 P076702 Sri Lanka Renewable Energy A 75.00 Not rated DSM technical assistance, for Rural Economic including efficiency finance Development--IBRD/IDA 2002 P066396 Vietnam System Efficiency A 225.00 Not rated Utility-based DSM Improvement, Equitization, and Renewables Project-- IBRD/IDA 2003 P076977 Brazil Energy Sector A 12.10 Not rated Expansion planning, tariff Technical Assistance reform with targeted smart Project--IBRD/IDA subsidies 2003 P049395 Ethiopia Energy Access SIL-- A 132.70 Not rated Technology diffusion IBRD/IDA 1 0 8 A P P E N D I X B : E N E R G Y- E F F I C I E N C Y P R O J E C T S W I T H P O L I C Y C O M P O N E N T S Energy- efficiency component, (US$ million) Efficiency measures detail Outcome 11.9 Capacity building for improving the efficiency of electricity GEF project implemented, IBRD loan canceled. Energy Ef- use by the residential and commercial sectors in Brazil. ficiency Reference Center is fully operational. Marketing Removal of barriers to energy efficiency and energy Plan and Publicity Campaign implemented. National Elec- conservation. tric Laboratory is fully operative--testing and labeling programs in place. Testing, Certification, and Labeling Pro- gram supported the implementation of the Law on Energy Efficiency (approved October 2001). Research on accept- ance of efficiency equipment by market. Training on en- ergy-efficiency management and capacity-building program. Not identified The preparation of an energy-saving action plan Studies deemed of limited utility. Complementary tariff for public services. reforms not enacted. Not identified Introducing standards and programs for testing and certification. 1.74 Develop strategies and policies to remove barriers; standards for efficient design and use of buildings and electrical appliances, public information, and support to the establishment of ESCOs. Not identified Design of energy-efficiency standards for buildings and energy equipment. 0.75 Energy efficiency and DSM. Technical assistance and credit support for provision of energy-efficiency services. Public policy and ESCO elements. 5.5 DSM components. 1.4 Increasing access to and affordability of electricity, natural gas, and liquefied petroleum gas including through tariff reform with targeted, smart subsidies. Demand- and supply-side possibilities--through training and capacity building. Not identified Promotion of commercially based production and dissemination of approximately 320,000 improved baking stoves. (Continues on the next page.) 1 0 9 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Projects with Energy-Efficiency Policy Component, 1996­2007 (continued) IBRD/IDA IEG Fiscal Project Project and status grant amount outcome Type of year ID (closed [C]/active [A]) (US$ million) rating efficiency measures 2003 P071019 Vietnam Demand-Side A 5.50 Not rated Utility-based DSM Management and Energy-- GEF 2004 P073036 Mali Household Energy and A 35.70 Not rated Energy services, charcoal- Universal Access Project-- efficiency promotion IBRD/IDA 2004 P074686 Morocco Energy and C 0.80 Not rated Capacity building for Environment Upgrading-- efficiency finance GEF Medium Size 2004 P068124 Uruguay Energy Efficiency A 6.90 Not rated Utility-based efficiency Project--GEF services 2005 P077575 Bulgaria District Heating-- A 4.30 Not rated DSM public awareness Carbon Offset 2005 P069126 Burkina Faso Power Sector A 63.60 Not rated DSM institutional Development--IBRD/IDA strengthening 2005 P072721 China Heat Reform and A 18.00 Not rated Codes and standards; Building Energy Efficiency metering Project--GEF 2005 P070246 Poland Energy Efficiency-- A 11.00 Not rated Efficiency finance, capacity GEF building, and demonstration 1 1 0 A P P E N D I X B : E N E R G Y- E F F I C I E N C Y P R O J E C T S W I T H P O L I C Y C O M P O N E N T S Energy- efficiency component, (US$ million) Efficiency measures detail Outcome 5.5 1. Electricity of Vietnam's DSM Program: expanded time-of-use metering, pilot direct-load control program, CFL promotion, fluorescent tube lamp market transformation; 2. Ministry of Industry Pilot Commercial Energy Efficiency Program: training, subproject financing, grants, program marketing. 10.56 Interfuel substitution and household energy efficiency. Not identified Energy (electricity and fuel) savings in an industrial park in Casablanca by facilitating local ESCO businesses and strengthening the local executing agency. 6.48 Improved efficiency of energy use: energy-efficiency market development (implemented by the Ministry of Industry, Energy, and Mining); utility-based energy- efficiency services. 4.34 Rehabilitation of pipeline and district heating sub- stations. The technical assistance supported by the KIDS component of the project will support a public awareness campaign to promote DSM. 3.38 1. Design a DSM policy framework and implement DSM programs, including capacity building in Energy Manage- ment Unit, to build a base for building code and appliance standards. 2. Purchase of efficient air-conditioning and lighting system. 3. Information awareness campaign. 18 Promote simultaneous development of both heating sector reforms and building energy-efficiency improve- ments in 4-6 northern Chinese municipalities, achieving broad national impact. 12.37 Components: 1. A partial guarantee. 2. Investments in bundled energy efficiency projects in the Krakow region. 3. Technical assistance for: deployment of guarantee mechanism; ESCO subsidiary in the development of the performance contracting model; training to local banks; awareness and demand for efficiency investments; project monitoring data and dissemination of results. (Continues on the next page.) 1 1 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Projects with Energy-Efficiency Policy Component, 1996­2007 (continued) IBRD/IDA IEG Fiscal Project Project and status grant amount outcome Type of year ID (closed [C]/active [A]) (US$ million) rating efficiency measures 2006 P086379 Djibouti Power Access and A 7.00 Not rated Studies on sector efficiency Diversification--IBRD/IDA 2007 P097635 Kosovo Lignite Power TA-- A 8.50 Not rated Technical assistance policies IBRD/IDA and strategies on energy efficiency 2007 P099618 Morocco Energy Sector C 100.00 Not rated Standards, energy-efficiency DPL--IBRD/IDA audits, public policy, efficiency finance 1996 P091074 Philippines Public and C Not rated Capacity building for DSM Private Sectors Capacity policy development Building Project (TF028553)--IDF 1997 P039965 Sri Lanka Energy Services C 5.90 Not rated DSM policy; efficiency Delivery--GEF finance 2004 P066532 Philippines Electric A 12.00 Not rated Capacity building for Cooperative System Loss efficiency finance Reduction Project--GEF Source: IEG based on project appraisals, Implementation Completion Reports, Implementation Completion Report reviews, and Project Performance Assessment Reports. 1 1 2 A P P E N D I X B : E N E R G Y- E F F I C I E N C Y P R O J E C T S W I T H P O L I C Y C O M P O N E N T S Energy- efficiency component, (US$ million) Efficiency measures detail Outcome < 0.5 Technical assistance directed on tariffs and losses study. Not identified Policies and strategies to promote renewable energy, cogeneration, and energy efficiency in Kosovo. 16 1. Set energy-efficiency standards for appliances, appliance labeling, new buildings, street lighting, and public buildings. 2. Organize the execution and monitoring of mandatory energy-efficiency audits in large and medium-size industries. 3. Government support for financing of energy efficiency programs. Conditionality: Adoption of implementing decrees on Energy Efficiency and Renewable Energy. Not identified Support to the process of public consultation to design a DSM strategic plan and foster ownership of DSM programs through shared energy efficiency and energy conservation objectives. 1.06 Strengthen the environment for DSM implementation, and improve the public and private sector performance to deliver energy services through renewable energy and DSM. 12.00 Partial Credit Guarantee Program. Capacity building: 1. Provide technical assistance and training to financial intermediaries, electric cooperatives (ECs), and ECs' investors, in power distribution systems; 2. Technical assistance to the Department of Energy for energy- efficiency gains of ECs from improved access to commercial lending. 1 1 3 APPENDIX C: DISTRIBUTIONAL INCIDENCE OF SUBSIDIES Energy expenditure as a Energy share of household expenditure Country subsector Source Poor Non-poor Albania No subsidy PSIA, 2003 >20% on electricity of the cash income of the core poor (bottom 12%) Argentina Patagonian gas PER, Sept. 2003 ... ... Armenia Utilities PSIA, 2001 18% on utilities such 11% on utilities such as as telephone, gas, telephone, gas, central heat, central heat, and water and water for the non-poor for the poor Electricity Tajikistan PSIA, 2006 13.9% for bottom quintile 6.5% for top quintile Bangladesh Residential gas PER, Sept. 2003 ... ... Bolivia Hydrocarbon PSIA 2004, Coady, Grosh, 7.8% on transportation, 9.3% on transportation, derivatives and Hoddinott 2006 fuel, and lubricants fuel, and lubricants Transportation PSIA, 2004 5.4% on transportation 5.9% on transportation Fuels and lubri- PSIA, 2004 0.6% on fuels for vehicles 2.2% on fuels for vehicles cants for vehicles Fuels and lubri- PSIA, 2004 1.9% on fuels for cooking 1.2% on fuels for cooking cants to cook LPG Coady, Grosh, and Hoddinott 2006 2.6% for bottom quintile 1.1% for top quintile Gasoline and Coady, Grosh, and Hoddinott 2006 0.0% for bottom quintile 2.5% for top quintile diesel Djibouti No subsidy PSIA, 2005 18.2% (18.5)a on biomass, 16.3% (13.4)a on biomass, electricity, and other energy electricity, and other energy sources in bottom quintile sources in top quintile Ecuador Cooking gas PER, Nov. 2004 ... ... Electricity, cooking PER, Nov. 2004 ... ... gas and fuel Egypt, Arab Kerosene PSIA, 2005 ... ... Rep. of Natural gas PSIA, 2005 ... ... 1 1 4 A P P E N D I X C : D I S T R I B U T I O N A L I N C I D E N C E O F S U B S I D I E S Income impact of subsidy Share of benefit from removal/price increase the energy subsidy Poor Non-poor Poor Non-poor ... ... ... ... ... ... Subsidy excludes 95% of poor gas consumers, while 63% of its beneficiar- ies are non-poor; 100% of the resources of the subsidy go to the far south, which has only 3% of the nation's poor. 9 percentage point increase 3 percentage point increase ... ... in expenditure for in expenditure for the the poor non-poor ... ... ... ... ... ... The 4% of households with gas access receive Tk1.6 billion in implicit subsidies 5.8% reduction in real 4.7% reduction in real 15.3% for bottom two ... income for bottom quintile income for top quintile deciles ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 3% to bottom quintile 17% to top quintile ... ... ... 67% to top four deciles 2.2 percentage point reduction 0.1 percentage point reduction ... ... of income for bottom quintile of income for top quintile 0.1 percentage point reduction 0.6 percentage point reduction ... ... of income for bottom quintile of income for top quintile (Continues on the next page.) 1 1 5 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Distributional Incidence of Subsidies (continued) Energy expenditure as a Energy share of household expenditure Country subsector Source Poor Non-poor Egypt, Arab Gasoline PSIA, 2005 ... ... Rep. of (continued) LPG PSIA, 2005 ... ... Above four PSIA, 2005 ... ... products Georgia Electricity Tajikistan PSIA, 2006 6.3% for bottom quintile 2.0% for top quintile Ghana Petrol Coady and Newhouse 0.1% for bottom quintile 2.1% for top quintile 2006 Kerosene Coady and Newhouse 5.9% for bottom quintile 1.6% for top quintile 2006 LPG Coady and Newhouse 0.0% for bottom quintile 0.2% for top quintile 2006 Above three Coady and Newhouse ... ... products 2006; Coady and others 2006 Electricity PSIA, 2004 ... ... Hungary Electricity Tajikistan PSIA, 2006 6.5% for bottom quintile 3.7% for top quintile Indonesia Fuel DPL-II Program 3.6% for the bottom two Document, 2005 deciles spent on fuel (3% on kerosene) ... Electricity PER, 2007 ... ... Jordan Fuel Coady and others 2006 7.1% for bottom quintile 7.1% for top quintile Kerosene Coady and others 2006 1.0% for bottom quintile 0.3% for top quintile LPG Coady and others 2006 1.8% for bottom quintile 0.7% for top quintile Gas, regular Coady and others 2006 0.9% for bottom quintile 2.3% for top quintile Gas, premium Coady and others 2006 0.0% for bottom quintile 1.1% for top quintile Diesel Coady and others 2006 0.3% for bottom quintile 0.9% for top quintile Electricity Coady and others 2006 3.1% for bottom quintile 1.8% for top quintile Kazakhstan Electricity Tajikistan PSIA, 2006 0.9% for bottom quintile 0.6% for top quintile Mali Fuel Coady and others 2006 ... ... 1 1 6 A P P E N D I X C : D I S T R I B U T I O N A L I N C I D E N C E O F S U B S I D I E S Income impact of subsidy Share of benefit from removal/price increase the energy subsidy Poor Non-poor Poor Non-poor 0.04 percentage point reduction 1.4 percentage point reduction ... ... of income for bottom quintile of income for top quintile 5.4 percentage point reduction 2.0 percentage point reduction ... ... of income for bottom quintile of income for top quintile 7.7 percentage point reduction 4.1 percentage point reduction 13% for LPG, kerosene, 34% for LPG, kerosene, gasoline, and of income for bottom quintile of income for top quintile gasoline, and natural gas natural gas for top quintile for bottom quintile ... ... ... ... Progressive ... ... Regressive 17.8% for bottom quintile 20.9% for top quintile ... ... ... ... 9.1% reduction in income 8.2% reduction in income 23.0% for bottom four deciles ... Lifeline tariff is 4% of income ... ... ... for the lowest decile of connected households ... ... ... ... The fuel price hike corresponded The fuel price hike corre- The subsidies accruing to the top decile from fuel subsidies were 5 times to 5.1% of per capita expenditure sponded to 6.2% of per those accruing to the bottom decile. The top 40% got 60% of the subsidy. for the bottom decile capita expenditure for the top decile Progressive within the 450VA subsidy category but regressive 8% for bottom decile 12% for top decile within the 900­6600VA subsidy range. 5.4% reduction in real income 4.1% reduction in real 21.2% for bottom four deciles ... for bottom quintile income for top quintile ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... Regressive 23.9% for bottom four deciles ... (Continues on the next page.) 1 1 7 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Distributional Incidence of Subsidies (continued) Energy expenditure as a Energy share of household expenditure Country subsector Source Poor Non-poor Mexico Electricity Coady and others 2006 ... ... Moldova Electricity Tajikistan PSIA, 2006; 6.3% for bottom quintile, 3.0% for top quintile, Moldova PSIA, 2004 4.7% for the poor 3.4% for the non-poor Central heat PSIA, 2006 0.1% for bottom quintile 1.8% for top quintile Central gas PSIA, 2006 1.0% for bottom quintile 1.9% for top quintile LPG PSIA, 2006 0.4% for bottom quintile 0.4% for top quintile Mongolia Heating PSIA, 2003 10.8% for the poor on 5.7% for the poor on heating (18% in winter heating (10.1% in winter months)b months)b Morocco Diesel and fuel Coady and others 2006 ... ... Energy Program document for 8.7% for bottom quintile 9.3% for top quintile DPL-II, 2007 Poland Electricity Tajikistan PSIA, 2006 5.8% for bottom quintile 2.9% for top quintile Sri Lanka Fuel Coady and others 2006 ... ... Tajikistan Electricity PSIA, 2007 < 4% for bottom quintile ... a. Numbers are calculated for Djibouti Ville and shown in parentheses for other towns. b. For ger districts in Ulaanbaatar. Note: LPG = liquefied petroleum gas. 1 1 8 A P P E N D I X C : D I S T R I B U T I O N A L I N C I D E N C E O F S U B S I D I E S Income impact of subsidy Share of benefit from removal/price increase the energy subsidy Poor Non-poor Poor Non-poor ... ... Majority of subsidy goes to upper-middle-income households (deciles 6-8) 1.6­5.4% increase in household 1.1­3.6% increase in household ... ... expenditure for bottom quintile expenditure for top quintile 0.0­0.1% increase in household 0.7­1.8% increase in household ... ... expenditure for bottom quintile expenditure for top quintile 0.4­1.0% increase in household 0.7­1.9% increase in household ... ... expenditure for bottom quintile expenditure for top quintile 0.2­0.4% increase in household 0.1­0.4% increase in household ... ... expenditure for bottom quintile expenditure for top quintile ... ... 15% of lifeline tariff to the poor 85% of lifeline tariff to non-poor ... ... <10% for bottom quintile 33% for top quintile ... ... ... ... ... ... ... ... 2.9% reduction in real income 2.2% reduction in real income 25.1% for bottom four deciles ... for bottom quintile for top quintile 16% increase in spending for ... ... ... poor households under tariff adjustment, even with continued subsidies and lifelines. 1 1 9 ENDNOTES Management Response .wri.org/). Data for 2000 includes 6 GHGs and land use 1. The Bank's energy-efficiency work in the 1990s change. Based on G77+ China. was guided by the 1993 policy paper, Energy Efficiency 2. Emissions per capita as shown in figure 2.1 can be and Conservation in the Developing World: The World decomposed into power-related emissions and other en- Bank's Role, and by the companion "Power and Energy ergy emissions. The extent of hydropower explains Efficiency--Status Report on the Bank's Policy and IFC about half the variance in power-related emissions per Activities." capita that is not accounted for by income per capita and 2. Management notes that the definitions underly- heating needs (Meisner 2008). ing the figures it shared with IEG reflect, as well as en- 3. The negative relationship between diesel price and ergy efficiency captured by IEG, all World Bank lending emissions may in part be due to subsidy-induced meas- for (i) supply-side energy-efficiency measures, includ- urement error--but only in part. Explicit and implicit ing power generation plant rehabilitation, transmission fuel subsidies do not show up as added value in GDP. In and distribution loss reduction, and energy sector tech- other words, the true GDP of large energy subsidizers is nical assistance with pricing covenants, and (ii) devel- larger than measured. However, this does not explain opment policy lending with energy price reform. the negative relationship. The largest subsidizer, Iran, On this basis, IEG observes that it may need to revise would have a 20 percent higher GDP per capita if energy the language in order to describe more precisely the were priced at economic levels (ignoring general equi- measures cited in the report and the differences be- librium effects). According to our regression, this means tween them. IEG acknowledges that alternative defini- that the reference level of emissions/capita should be 20 tions of energy efficiency are possible. IEG has reported percent higher than we have imputed. But, in fact, Iran's the proportion of energy efficiency projects using both relative emissions are about 67 percent higher than peers stricter and broader definitions. The latter used the at the same measured GDP. Other diesel subsidizers have management-supplied information to calculate the pro- lowerproportionsofsubsidyandhigherrelativeemissions, portion of projects incorporating plant rehabilitation so this result is not being driven by measurement error. and transmission and distribution measures. IEG has re- 4. The IEG review identified errors in some of these ported, separately, the proportion of projects involving appraisals that often tend to bias results upwards, but price reform. sometimes downward. However, the figure of $1.11/kWh, from Peru, was deemed the result of best practice in analy- Chapter 1 sis. Also, willingness to pay estimates do not include 1. A detailed exposition is beyond the scope of this various ancillary benefits, including improvements in report, and unnecessary given a proliferation of reviews indoor air quality and facilitation of small-scale enterprise. on the subject. These include IPCC (2007b), Stern Moreover, reported estimates for the value of off-grid elec- (2007), UNDP (2007), and the Global Monitoring Re- tricity were much higher than for on-grid. On balance, port 2008 (World Bank 2008c). the figures quoted here are likely to be conservative es- timates of the value of electricity to the unconnected. Chapter 2 5. Climate Analysis Indicators Tool Version 5.0. (Wash- 1. Climate Analysis Indicators Tool Version 5.0. (Wash- ington, DC: World Resources Institute, 2008; http://cait ington, DC: World Resources Institute, 2008; http://cait .wri.org/). 1 2 1 C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P Chapter 3 supply-side investments in generation. Some Bank 1. Indirect emissions are those "associated with off- Group­supported thermal plants might have been site production of power used by the project." more efficient than plants that would otherwise have 2. IFC, "Lanco Amarkantak Thermal Power Plant, been built. It excludes lending activity related to pric- Environmental and Social Review Summary." ing, discussed at length in the previous chapter. It is pos- 3. CO2 Baseline Database, version 2.0 side efficiency not included here. 4. See vermont.com> 4. Based on $1.50 for a 15W CFL with a 6,000-hour Chapter 4 lifetime; Ashok Sarkar (World Bank), presentation on 1. These figures are now out of date because of "Large Scale CFL Deployment Programs," Shanghai, changes in world energy prices. In many cases the ef- May 13, 2008. 2. Most recent data available in World Development 5. Energy-efficiency standards and labeling Infor- Indicators 2008, except India: proportion lost in trans- mation Clearinghouse. from Central Electricity Authority (Government of India, Ministry of Power, Central Electricity Authority 2006). Chapter 6 3. IEG is currently undertaking a comprehensive re- 1. The U.S. mainland was not included in the survey. view of PSIAs. 2. Flaring levels in Russia are disputed. The officially reported level for 2004 was 15 bcm. The 2007 Russian Chapter 5 State of the Union address quoted a figure of 20 bcm. 1. World Bank Progress Reports on Renewables for PFC Energy (2007) used a physical model of oil pro- 2004 (retrospective to 1991), 2005, 2006, 2007 (World duction, incorporating assumptions about gas-to-oil ra- Bank2005c,2005e,2006b;WorldBankandIFC2007).The tios, to estimate 38 bcm of flaring; they also note 2004 report included project components that improved anecdotal accounts that some gas is vented, which the efficiency by which energy is produced, transformed, has 22 times greater GHG impact than if the gas were and used; production, transportation, and distribution of flared. steam or hot water (heat) through an interconnected net- 3. Global Gas Flaring Reduction Public-Private Part- work; electrical energy-efficiency improvements; and nership--Expanded Update, October 2004. specialized entities providing energy-efficiency services. 4. This is consistent with CDM rules on proprietary The 2005 report included end-use thermal and electric information, but hinders external assessment of addi- efficiency activities, power sector rehabilitation, loss re- tionality determination. duction in transmission and distribution, and improve- 5. Reported actual reductions for the first 11 ments in the efficiency of district heating systems. The months of operation were 791,325 tons CO2e, ac- 2006 and 2007 reports exclude transmission and distri- cording to monitoring report CDM0553-MR01 filed bution rehabilitation if the share of such investments with the CDM. cannot be clearly disaggregated from other objectives. 6. GGFR Status Report, October 2003 Loans unless the efficiency share can be clearly deter- 7. As this volume goes to press, the GGFR reports mined. that estimates based on remote sensing data show a 6 2. 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Washington, DC: World Bank. 1 2 7 IEG PUBLICATIONS Annual Review of Development Effectiveness 2008: Shared Global Challenges 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 Books, Buildings, and Learning Outcomes: An Impact Evaluation of World Bank Support to Basic Education in Ghana Brazil: Forging a Strategic Partnership for Results--An OED Evaluation of World Bank Assistance Bridging Troubled Waters: Assessing the World Bank Water Resources Strategy Capacity Building in Africa: An OED Evaluation of World Bank Support China: An Evaluation of World Bank Assistance The CGIAR at 31: An Independent Meta-Evaluation of the Consultative Group on International Agricultural Research Committing to Results: Improving the Effectiveness of HIV/AIDS Assistance--An OED Evaluation of the World Bank's Assistance for HIV/AIDS Control Country Assistance Evaluation Retrospective: OED Self-Evaluation 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 the World Bank's Support Economies in Transition: An OED Evaluation of World Bank Assistance Engaging with Fragile States: An IEG Review of World Bank Support to Low-Income Countries Under Stress The Effectiveness of World Bank Support for Community-Based and ­Driven Development: An OED Evaluation Evaluating a Decade of World Bank Gender Policy: 1990­99 Evaluation of World Bank Assistance to Pacific Member Countries, 1992­2002 Extractive Industries and Sustainable Development: An Evaluation of World Bank Group Experience 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 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 Improving Investment Climates: An Evaluation of World Bank Group Assistance Improving the Lives of the Poor Through Investment in Cities 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 Poland Country Assistance Review: Partnership in a Transition Economy 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 Power for Development: A Review of the World Bank Group's Experience with Private Participation in the Electricity Sector Putting Social Development to Work for the Poor: An OED Review of World Bank Activities Small States: Making the Most of Development Assistance--A Synthesis of World Bank Findings Social Funds: Assessing Effectiveness Sourcebook for Evaluating Global and Regional Partnership Programs Water Management in Agriculture: Ten Years of World Bank Assistance, 1994­2004 World Bank Assistance to the Financial Sector: A Synthesis of IEG Evaluations The World Bank in Turkey: 1993­2004--An IEG Country Assistance Evaluation World Bank Lending for Lines of Credit: An IEG Evaluation All IEG evaluations are available, in whole or in part, in languages other than English. For our multilingual selection, please visit http://www.worldbank.org/ieg ISBN 978-0-8213-7850-2 THE WORLD BANK SKU 17850