Climate Change and the World Bank Group Climate Change and ...

Climate Change and the World Bank Group Climate Change and ...

THE WORLD BANK GROUPWORKING FOR A WORLD FREE OF POVERTYThe 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), theMultilateral Investment Guarantee Agency (MIGA), and the International Centre for the Settlement of InvestmentDisputes (ICSID). Its mission is to fight poverty for lasting results and to help people help themselves and their environmentby providing resources, sharing knowledge, building capacity, and forging partnerships in the public andprivate sectors.THE INDEPENDENT EVALUATION GROUPIMPROVING DEVELOPMENT RESULTS THROUGH EXCELLENCE IN EVALUATIONThe 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 onassessment of IFC’s work toward private sector development, and IEG-MIGA evaluates the contributions of MIGAguarantee 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 theBank Group’s work, and to provide accountability in the achievement of its objectives. It also improves Bank Groupwork by identifying and disseminating the lessons learned from experience and by framing recommendations drawnfrom evaluation findings.

©2009 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington, DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: feedback@worldbank.orgAll rights reserved1 2 3 4 5 11 10 09 08This volume, except for the “Management Response,” “Statements by the External Review Panel,” and the “Chairman's Summary,” is a product ofthe staff of the Independent Evaluation Group of the World Bank Group. The findings, interpretations, and conclusions expressed in this volumedo not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. This volume does notsupport any general inferences beyond the scope of the evaluation, including any inferences about the World Bank Group's past, current, orprospective overall performance.The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and otherinformation 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 anyterritory or the endorsement or acceptance of such boundaries.Rights and PermissionsThe material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation ofapplicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and willnormally 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 ClearanceCenter Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e- mail: 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 bypermission of Corbis; photo © Keith Dannemiller/CorbisISBN: 978-0-8213-7850-2e-ISBN-13: 978-0-8213-7855-7DOI: 10.1596/978-0-8213-7850-2Library of Congress Cataloging-in-Publication Data has been applied for.World Bank InfoShopE-mail: pic@worldbank.orgTelephone: 202-458-5454Facsimile: 202-522-1500Printed on Recycled PaperIndependent Evaluation GroupKnowledge Programs and Evaluation CapacityDevelopment (IEGKE)E-mail: ieg@worldbank.orgTelephone: 202-458-4497Facsimile: 202-522-3125

CLIMATE CHANGE AND THE WORLD BANK GROUP64 Bank Engagement on DSM68 Appliance Standards and Building Codes73 Public Buildings74 District Heating75 Conclusion77 6 Natural Gas Flaring79 Context81 The Paradox of Gas Flaring81 The Global Gas Flaring Reduction Partnership84 Economics of Gas Flaring86 Conclusion89 7 Findings and Recommendations91 Findings96 Conclusion and Recommendations99 Appendixes100 A: Bank Attention to Subsidies in the Large Subsidizing Countries106 B: Energy-Efficiency Projects with Policy Components114 C: Distributional Incidence of Subsidies121 Endnotes123 ReferencesBoxes15 2.1 Emissions Intensities of Power Supply37 3.1 The $135 per Ton CO 2Price Is Already Here48 4.1 Ghana and Indonesia: Using Social Safety Nets to Protect the Poorfrom Fuel Price Rises49 4.2 Ukraine: Gradual Energy Policy Reform and Decreasing EmissionsIntensity51 4.3 Egypt: Policy Dialogue and Pricing Reform63 5.1 Rates of Return to Energy-Efficiency Projects66 5.2 DSM in Brazil73 5.3 Heat Reform and Building Efficiency in China95 7.1 The Challenge of Catalyzing Technology AdoptionFigures4 1.1 Intersection of Issues Related to Climate Change7 1.2 Global and Domestic Benefits14 2.1 Per Capita Energy Emissions and Income, 200416 2.2 Absolute Changes in Emissions and Income, 1992–200420 2.3 Relative Emissions Are Higher in Countries with Diesel Subsidies27 3.1 World Bank Climate-Themed Projects and Commitments35 3.2 Real Energy Prices of Coal, Gas, and Oil, 1990–200846 4.1 Conditionality Related to Petroleum Products52 4.2 Trends in Energy Sector Loans with Pricing Goals53 4.3 Distribution of World Bank Lending Related to Electricity PowerPricing Policy, 1996– 200761 5.1 Energy-Efficiency Investments80 6.1 Recent and Planned Generation Capacity Additions by Fuel Typeiv

CONTENTS84 6.2 Global Flaring: Comparison of GGFR Partner and NonpartnerCountriesTables5 1.1 Topical Map of Issues in the Climate Evaluation Series9 1.2 IEG Evaluations Relevant to Climate Change17 2.1 How Policies Affect Energy-Related Emissions18 2.2 Pathways from Policies to Emissions26 3.1 Climate-Themed Projects by Sector Board and Funding Source,Cumulative, 1990–200728 3.2 CAS Goals for Energy Policies and Climate Change Issues, 1995–200734 3.3 Effect of Carbon Shadow Price on Generating Capacity Mix for SouthEast Europe, 202043 4.1 Fuel Subsidies Compared with Health Expenditures44 4.2 Sensitivity of Energy Demand to Price54 4.3 Outcomes of Loans with Electricity Tariff Goals60 5.1 A Typology of Efficiency Interventions64 5.2 Utility-Based DSM Projects70 5.3 Projects with Appliance Standard and Building Energy CodeComponentsv

A visible spectral band image of Tropical Storm Hudah, April 2000. Photo courtesy of the Visible Earth Team, NASA.

Abbreviations and TerminologybcmCASCDMCEACFLCO 2CO 2eDPLDSMEERERRESCOESMAPgasgCO 2GDPGEFGHGGGFRGtGTZGWIBRDIDAIEAIEGIFCIMFkgkWkWhLNGmmbtumscfMWNO xOECDOPECPCFPERppmBillion cubic metersCountry Assistance StrategyClean Development MechanismCountry Environmental AnalysisCompact fluorescent light bulbCarbon dioxideCarbon dioxide equivalentDevelopment Policy LoanDemand-side managementEnergy-Environment ReviewEconomic rate of returnEnergy service companyEnergy Sector Management Assistance ProgramNatural gasGrams of carbon dioxideGross domestic productGlobal Environment FacilityGreenhouse gasGlobal Gas Flaring Reduction PartnershipBillion tonsGerman Technical CooperationGigawattInternational Bank for Reconstruction and Development (World Bank)International Development AssociationInternational Energy AgencyIndependent Evaluation GroupInternational Finance CorporationInternational Monetary FundKilogramKilowattKilowatt-hourLiquefied natural gasMillions of British thermal unitsThousand standard cubic feetMegawattNitrogen oxidesOrganisation for Economic Co-operation and DevelopmentOrganization of Petroleum Exporting CountriesPrototype Carbon FundPublic Expenditure ReviewParts per millionvii

CLIMATE CHANGE AND THE WORLD BANK GROUPPSIAREDDSEASO 2SO xtCO 2etonTWUNFCCCPoverty and Social Impact AnalysisReduced Emissions from Deforestation and DegradationStrategic Environmental AnalysisSulfur dioxideSulfur oxidesTons CO 2equivalentMetric ton (=tonne; 1,000 kg)TerawattUnited Nations Framework Convention on Climate Changeviii

GlossaryMeasurement of the gross or net impact on greenhouse gas emis-sions of an organization, project, or program.AdaptationBiodiversityCarbon capture and storageCarbon dioxide equivalent (CO 2e)Carbon accounting (and/orcarbon footprint)Carbon fundCarbon offset (or credit)Carbon shadow pricingCertified emission reductionClean Development MechanismClimate changeMeasures taken by societies and individuals to adapt to actual or expectedadverse impacts on the environment, especially as the result of climatechange.Short for biological diversity. Refers to the wealth of ecosystems in the biosphere,of species within ecosystems, and of genetic information withinpopulations.A technology for preventing the release of carbon dioxide to the atmospherefrom thermal power plants by capturing the gas and storing it underground.A standard unit for measuring the impact of a greenhouse gas on globalwarming. For instance, one ton of methane is considered equivalent inwarming to 25 tons of carbon dioxide.A fund set up for the purchase of carbon credits.A financial instrument representing a reduction in greenhouse gas emissions(including gases other than carbon dioxide), used by purchasers tomeet regulatory or voluntary limits on emissions.The practice of incorporating into the economic analysis of projects or programsan economic value associated with the external costs of greenhousegas emissions or external benefits of emissions reduction.A carbon credit (measured in tons CO 2e) for an emissions reduction associatedwith a Clean Development Mechanism project.“A mechanism under the Kyoto Protocol through which developed countriesmay finance greenhouse-gas emission reduction or removal projectsin developing countries, and receive credits for doing so which they mayapply towards meeting mandatory limits on their own emissions”(UNFCCC).Changes in climatic conditions and processes (including but not limited towarming) that go beyond natural climatic variability. When used in connectionwith mitigation, refers to human-induced changes.ix

CLIMATE CHANGE AND THE WORLD BANK GROUPCombined-cycle turbineDemand-side managementDistrict heatingEcosystemEmissionEnergy services companyEnvironmentEnvironmental assessmentEnvironmental impactEnvironmental mainstreamingEnvironmental sustainabilityGas flaringA relatively efficient technology for power generation from combustion,usually of natural gas.Actions or incentives, often directed by energy utilities to their customers,to reduce the level of energy demands (typically through efficiency measures)or change the timing of those demands.Centralized system for the provision of steam heat to an urban neighborhoodor district.The interacting system of a biological community and its nonliving environmentalsurroundings.In this volume, emission primarily refers to the anthropogenic release ofgreenhouse gases, as from fossil fuel combustion or deforestation. Usedalso to refer to other kinds of air pollution from combustion, such as particulatesand sulfur oxides.A company that provides clients with some combination of assessment,financing, and implementation of options for increased efficiency of useand reduced expenditure on energy.The sum of all external conditions affecting the life, development, and survivalof an organism.A process whose breadth, depth, and type of analysis depend on the proposedproject. It evaluates a project’s potential environmental risks andimpacts in its area of influence and identifies ways of improving projectdesign and implementation by preventing, minimizing, mitigating, or compensatingfor adverse environmental impacts and by enhancing positiveimpacts.Any change to the environment, whether adverse or beneficial, wholly orpartially resulting from an organization’s activities, products, or services (asdefined in ISO 14001).The integration of environmental concerns into macroeconomic and sectoralinterventions.Ensuring that the overall productivity of accumulated human and physicalcapital resulting from development actions more than compensates for thedirect or indirect loss or degradation of the environment. Goal 7 of the UNMillennium Development Goals specifically refers to this, in part, as integratingthe principles of sustainable development into country policies andprograms and reversing loss of environmental resources.Burning of natural gas, usually when released as an unintended by-productof oil production.x

GLOSSARYGreenhouse gasMitigationNetback priceOzone-depleting substancesPerformance StandardsSafeguard policiesSustainable developmentWin-win policyGases whose atmospheric buildup contributes to global warming and climatechange. Greenhouse gases regulated under the Kyoto Protocol arecarbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons,and sulphur hexafluoride.Measures taken to reduce adverse impacts on the environment.Wellhead value of natural gas computed by netting transport costs fromfinal market price.Manufactured chemical compounds that reduce the protective layer ofozone in the Earth’s atmosphere. The Montreal Protocol, administered bythe UN, maintains the list of ozone-depleting substances that are targetedfor control, reduction, or phase-out.The eight Performance Standards establish requirements that the client isto meet in IFC-financed projects.Policies designed specifically to ensure that the environmental and socialimpacts of projects supported by the Bank Group are considered duringappraisal and preparation. The Bank’s safeguard policies cover environmentalassessment, natural habitats, pest management, indigenous peoples,cultural resources, involuntary resettlement, forests, dam safety,international waterways, and disputed areas.Development that meets the needs of the present without compromisingthe ability of future generations to meet their own needs.Here, a policy that provides net benefits both to the nation that adopts itand to the world at large. Individuals or groups may suffer losses underwin-win policies, though in principle they could be compensated from thebenefits. Also called no-regrets policy.xi

The cooling towers of an old power plant in Soweto are no longer in use. One now depicts local art andthe other advertises a local power company, Photo by Schlaeger, reproduced under the terms of theCreative Commons.

AcknowledgmentsKenneth Chomitz was the evaluation managerand main author for this study. Major contributionsto chapter 5 on efficiency policies weremade by Meredydd Evans and Bin Shui.The evaluation also drew on background studiesand evaluative work by Charles Ebinger (powerpolicies), Donald Hertzmark (natural gas), andCraig Meisner (cross- national analyses of energyconsumption and power sector fuel mix). Principalresearch assistants Dinara Akhmetova,Ashwin Bhouraskar, and Kunal Khatri undertookdiligent portfolio analysis. Victoria Gunnarson,Stephen Hutton, Romain Lacombe, UrvashiNarain, and Yadviga Semikolenova also providedvaluable assistance.Peer reviewers Fernando Manibog, Siv Tokle,and David Wheeler and external panel reviewersGeoffrey Heal and Thomas Heller provideduseful feedback on the evaluation draft. Thepanel reviewers, including Rajendra K. Pachauri,also provided comments on the final draft thatwill also guide the next phase of the evaluation.Initial drafts of the report benefited from editingby William Hurlbut; the report was edited forpublication by Caroline McEuen with assistancefrom Heather Dittbrenner. Nik Harvey assistedin publication and managed Web site production.Gloria Mestre-Soria and Nischint Bhatnagarprovided administrative support. Vivian Jackson,Alex McKenzie, and Melanie Zipperer assisted indissemination. Thanks go to Ismail Arslan, ArupBanerji, Sharokh Fardoust, Ali Khadr, and manyothers at IEG for advice and help.The evaluation team is grateful to David Victor andcolleagues at Stanford for discussions and noteson the political economy of power reform. Theteam is also grateful for the cooperation of WorldBank staff members and others who wereinterviewed.IEG gratefully acknowledges InWEnt’s cosponsorshipof a workshop related to Phase II of theevaluation series.Director- General, Evaluation: Vinod ThomasDirector, IEG-World Bank: Cheryl Gray(director at inception: Ajay Chhibber)Task Manager: Kenneth M. Chomitzxiii

A natural gas flaring tower at Pemex’s Dos Bocas petroleum-exporting complex, Mexico. Reproduced by permission ofCorbis; photo © Keith Dannemiller/Corbis.

ForewordScientific consensus warns that climate changethreatens to derail development, while businessas-usualdevelopment threatens to destabilizethe climate. The World Bank Group hasawakened to the challenge of disarming theseinterlocking risks. But in doing so, it has toconfront areas of possible tension:• Between a country-focused operational modeland support for global public goods• Between a global role encompassing developedcountries and its focus on developing nations• Among greenhouse gas mitigation, climateadaptation, and near-term growth.Win-win policies in energy pricing and in nonpriceenergy efficiency have the potential toreconcile national and global goals. They can helpcountries meet a good part of their incrementalenergy needs at low cost, while freeing up fundsfor social protection and increasing resilience tointernational energy price shocks. About a fifth ofthe baseline global increase in energy-related CO 2emissions could be reduced by 2030 throughefficiency measures that pay for themselves, inthe developing world alone.Policy reforms are needed to unlock thesebenefits. Energy price reform is seldom easy, but2008 market conditions showed the unsustainabilityof energy subsidies, and the Bank is wellplaced to help. Analytic and financial support canpromote socially beneficial and politicallyfeasible options—for instance, redirection ofpoorly targeted energy subsidies to social protection.The Bank’s investments in energy efficiencyhave often been effective, but they have beenmodest, with little emphasis on policies. There ischange, however, including a recent ramp-up inInternational Finance Corporation investments.Countries are receptive, and Bank Group leadershipcould make a difference to this up-to-nowunder-prioritized area.Win-win policies will not be enough to meetclients’ energy needs or to decouple developmentfrom emissions. The UN Framework Conventionon Climate Change stresses developed countries’responsibilities to reduce their own emissions andto provide financial and technological support todeveloping countries. Relevant to this is BankGroup experience in using concessional andcarbon finance to support clean energy technologies—thesubject of the second phase of theclimate evaluation. IEG is also assessing forestsector experience that bears on reducedemissions from deforestation.The Bank has had limited direct experience inadaptation, although efforts in disaster preventionand weather index insurance are cases thatsuggest consonance with near-term developmentgoals. Adaptation is the subject of theclimate evaluation’s third phase.The World Bank Group has a vital role in addressingthe interlinked problems of developmentand climate change. IEG’s three-year program ofevaluation is designed to assist the Bank Groupas it formulates and implements an operationalstrategy in this critical area.Vinod ThomasDirector- General, Evaluationxv

A coal-run power plant in Tangshan, China, in China’s Hebei Province. Reproduced by permission from Corbis; photo © Jason Lee/Reuters/Corbis.

Executive SummaryClimate change threatens to derail development, even as developmentpumps ever-greater quantities of carbon dioxide into an atmospherealready polluted with two centuries of Western emissions. The WorldBank, with a newly-articulated Strategic Framework on Development and ClimateChange, must confront these entangled threats in helping its clients tocarve out a sustainable growth path.But this is known territory— many of the climatechange policies under discussion have closeanalogues in the past. This phase of the evaluation,focused on the World Bank (and not theInternational Finance Corporation or theMultilateral Investment Guarantee Agency),assesses the World Bank’s experience with keywin- win policies in the energy sector— policiesthat combine gains at the country level withglobally beneficial greenhouse gas (GHG)reductions. The next phase will look across theentire World Bank Group at project-level experiencein promoting technologies for renewableenergy and energy efficiency and at some issuesrelated to climate change in the Bank’s transportand forestry portfolios.Within the range of win- win policies, this reportexamines two that have long been discussed butare more relevant than ever in light of recordenergy prices: removal of energy subsidies andpromotion of end- user energy efficiency. Energysubsidies are expensive, damage the climate, anddisproportionately benefit the well- off. Theirreduction can encourage energy efficiency,increase the attractiveness of renewable energy,and allow more resources to flow to poor peopleand to investments in cleaner power. Thoughsubsidy reduction is never easy, the Bank has arecord of accomplishment in this area, especiallyin the transition countries. About a quarter of Bankenergy projects included attention to price reform.Improvements in the design and implementationof social safety nets can help to rationalize energyprices while protecting the poor.End- user energy efficiency has long been viewedas a win- win approach with great potential forreducing emissions. It becomes increasinglyattractive as the costs of constructing and fuelingpower plants rise. About 5 percent of the Bank’senergy commitments by value (about 10 percentby number) have gone to specific efficiencyefforts, including end- user efficiency and districtheating. Including a broader range of projectsidentified by management as supporting supplysideenergy efficiency would boost the proportionabove 20 percent by number. Few projectstackled regulatory issues related to end- userefficiency, though the Bank has invested in sometechnical assistance and analytical work. Thishistorical lack of emphasis on energy efficiency isnot unique to the Bank and reflects the complexityof pursuing end- user efficiency, a pervasiveset of biases that favor electricity supply overefficiency, inadequate investments in learning,and inattention to energy systems in the wake ofpower sector reform.The record levels of energy prices in 2008,although they have been relaxed, provide animpetus for the Bank and its clients to choosemore sustainable long- term trajectories ofgrowth. The mid-2008 oil price was equivalent toxvii

CLIMATE CHANGE AND THE WORLD BANK GROUPthe 2006 price, plus a $135 per ton tax on carbondioxide— the kind of level that energy modelerssay is necessary for long- term climate stabilization.To help clients cope with the burden ofthese prices, and take advantage of the signalsthey send for sustainability, the Bank can do fourthings:1. It can make promotion of energy efficiency apriority, using efficiency investments and policiesto adjust to higher prices and constructingeconomies that are more resilient.2. It can assist countries in removing subsidies byhelping to design and finance programs thatprotect the poor and help others adjust tohigher prices.3. It can promote a systems approach to energy.4. And it can motivate and inform these actions,internally and externally, by supporting bettermeasurement of energy use, expenditures,and impacts.Goals and ScopeThis evaluation is the first of a series that seekslessons from the World Bank Group’s experienceon how to carve out a sustainable growth path.The World Bank Group has never had an explicitcorporate strategy on climate change againstwhich evaluative assessments could be made.However, a premise of this evaluation series isthat many of the climate- oriented policies andinvestments under discussion have closeanalogues in the past, and thus can be assessed,whether or not they were explicitly oriented toclimate change mitigation.This report, which introduces the series, focuseson the World Bank (International Bank forReconstruction and Development and InternationalDevelopment Association), and not on theInternational Finance Corporation (IFC) or theMultilateral Investment Guarantee Agency(MIGA). It assesses its experience with key winwinpolicies in the energy sector: removal ofenergy subsidies and promotion of end- userenergy efficiency. The next phase looks at theexpanding project- level experience of the Bankand the IFC in promoting technologies forrenewable energy and energy efficiency; it alsoaddresses the role of carbon finance. A parallelstudy examines the role of forests in climatemitigation. The climate evaluation’s final phasewill look at adaptation to climate change.MotivationOperationally, the World Bank has pursued threebroad lines of action in promoting the mitigationof GHG emissions, the main contributor toclimate change. First, it has mobilized concessionalfinance from the Global EnvironmentFacility (GEF) and carbon finance from the CleanDevelopment Mechanism (CDM) to promoterenewable energy and other GHG- reducing activities.Second, and to a much more limited extent,it has used GEF funds to stimulate the developmentof noncommercial technologies. Third, andthe subject of this evaluation, it has supportedwin- win policies and projects— sometimes withan explicit climate motivation, often without.These actions not only provide global benefits inreducing GHGs, but also pay for themselves inpurely domestic side benefits such as reduced fuelexpenditure or improved air quality. The win- windesignation obscures the costs that these policiesmay impose on particular groups, even whilebenefiting a nation as a whole. This presentschallenges for design and implementation.Two sets of win- win policies are perennial topicsof discussion in the energy sector: reduction insubsidies and energy- efficiency policies, particularlythose relating to end- user efficiency. Thisreport looks at these, and at another apparentlywin- win topic: gas flaring. Flaring is interestingbecause of its magnitude, the links to pricingpolicy and to carbon finance, and the existenceof a World Bank–led initiative to reduce flaring.FindingsDevelopment spurs emissions.A 1 percent increase in per capita incomeinduces— on average and with exceptions— a 1per cent increase in GHG emissions. Hence, to theextent that the World Bank is successful in supportingbroad- based growth, it will aggravate climatechange.xviii

EXECUTIVE SUMMARYBut there is no significant trade- off between climatechange mitigation and energy access for the poorest.Basic electricity services for the world’s un -connected households, under the most unfavorableassumptions, would add only a third of apercent to global GHG emissions, and much lessif renewable energy and efficient light bulbscould be deployed. The welfare benefits ofelectricity access are on the order of $0.50 to $1per kilowatt- hour, while a stringent valuation ofthe corresponding carbon damages, in a worstcasescenario, is a few cents per kilowatt- hour.Country policies can shape a low- carbon growthpath.Although there is a strong link between percapita income and energy- related GHGemissions, there is a sevenfold variation be -tween the most and least emissions- intensivecountries at a given income level. Reliance onhydropower is part of the story behind thesedifferences, but fuel pricing is another. Highsubsidizers— those whose diesel prices are lessthan half the world market rate— emit abouttwice as much per capita as other countries withsimilar income levels. And countries with longstandingfuel taxes, such as the United Kingdom,have evolved more energy- efficient transportand land use.Energy subsidies are large, burdensome, regressive,and damage the climate.The International Energy Agency’s 2005 estimateof a quarter-trillion dollars in subsidies each yearoutside the Organisation for Economic Cooperationand Development (OECD) mayunderstate the current situation. While poorpeople receive some of these benefits, overall thebenefits are skewed to wealthier groups and oftendwarf more progressive public expenditure. Fuelsubsidies alone are 2 to 7.5 times as large as publicspending on health in Bangladesh, Ecuador, theArab Republic of Egypt, India, Indonesia,Morocco, Pakistan, Turkmenistan, RepúblicaBolivariana de Venezuela, and the Republic ofYemen. At the same time, subsidies encourageinefficient, carbon-intensive use of energy andbuild constituencies for this inefficiency.The Bank has supported more than 250 operations forenergy pricing reform.Success has been achieved in the transitioncountries— in Romania and Ukraine, forexample, where energy prices were adjustedtoward market levels, and the intensity of carbondioxide emissions dropped substantially. Subsidyremoval can threaten the poor, however. Recentefforts to assess poverty and welfare impactssystematically appear to have informed thedesign and implementation of price reformefforts, though not necessarily with direct Bankinvolvement. Examples include Ghana andIndonesia, where compensatory measures weredeployed in connection with fuel price rises.The Bank has rarely coordinated efficiency improvementswith subsidy reductions to lighten the imme -diate adjustment burden on energy users.An exception is the China Heat Reform andBuilding Efficiency Project, which links improvedinsulation with heat pricing. A growing numberof projects sponsor nationwide distribution ofcompact fluorescent light bulbs, but this hasbeen done in response to power shortages(Rwanda, Uganda) or to stanch utility losses(Argentina, Vietnam), rather than to facilitatesubsidy reduction.Despite emphasis on energy efficiency in Bankstatements and in Country Assistance Strategies(CASs), the volume and policy orientation ofIBRD/IDA efficiency lending has been modest.Although the IFC has recently increased itsinvestments in energy- efficiency projects, WorldBank commitments for efficiency were about 5percent by value of energy finance over1991–2007. This includes investments indemand- side efficiency and district heating, andmay also include some supply- side efficiencyinvestments. By this definition, about 1 in 10projects by number involve energy efficiency.Including a broader range of projects identifiedxix

CLIMATE CHANGE AND THE WORLD BANK GROUPby management as supporting supply- sideenergy efficiency would boost the proportionabove 20 percent by number over the period1998–2007. Globally only about 34 projectsundertaken over the 1996–2007 period hadcomponents oriented to demand- side energyefficiencypolicy. Among these, many attempts topromote efficiency have had limited successbecause the Bank has engaged with utilities,which have limited incentives to restrict electricitysales.There are several reasons why end- user energyefficiencyprojects, and especially policy- orientedprojects, appear to be under- emphasized in theBank’s portfolio.The Bank has carried out some successful andinnovative efficiency projects. But internal Bankincentives work against these projects becausethey are often small in scale, demanding of stafftime and preparation funds, and may requirepersistent client engagement over a period ofyears. There is a general tendency to preferinvestments in power generation, which arevisible and easily understood, over investments inefficiency, which are less visible, involve humanbehavior rather than electrical engineering, andwhose efficacy is harder to measure. A generalneglect of rigorous monitoring and evaluationreinforces the negative view of efficiency.The Bank- hosted Global Gas Flaring ReductionPartnership (GGFR) has fostered dialogue on gasflaring, but it is difficult to assess its impact onflaring activity to date.Associated gas (a by- product of oil production) isoften wastefully vented or flared, adding morethan 400 million tons of carbon dioxide equivalentto the atmosphere annually, or about 1percent of global emissions. A modestly fundedpublic- private partnership, the GGFR hassucceeded in highlighting the issue, promotingdialogue, securing agreement on a voluntarystandard for flaring reduction, and sponsoringuseful diagnostic studies. But only four membercountries have adopted the standard. The GGFRhas emphasized carbon finance as a remedy forflaring, but the use of project- level carbonfinance is a mere bandage for policy ailments thatrequire a more fundamental cure.RecommendationsIn mid-2008, real energy prices were at a recordhigh. While this is burdensome for energy users,it opens an opportunity for the Bank to supportclients in making a transition to a long- termsustainable growth path that is resilient to energyprice volatility, entails less local environmentaldamage, and is a nationally appropriate contributionto global mitigation efforts.Clearly the World Bank needs to focus its effortsstrategically on areas of its comparativeadvantage. This would include supporting theprovision of public goods and promoting policyand institutional reform at the country level.Furthermore, the Bank can achieve the greatestleverage by promoting policies that catalyzeprivate sector investments in renewable energyand energy efficiency, including those supportedby IFC and MIGA.The analysis in this report supports the followingrecommendations:Systematically promote the removal of energysubsidies, easing social and political economyconcerns by providing technical assistance andpolicy advice to help reforming client countries findeffective solutions, and analytical work demonstratingthe cost and distributional impact of removal ofsuch subsidies and of building effective, broadbasedsafety nets.Energy price reform can endanger poor peopleand arouse the opposition of groups used to lowprices, thereby posing political risks. But failureto reform can be worse, diverting public fundsfrom investments that fight poverty and foster -ing an inefficient economy increasingly exposedto energy shocks. And reform need not be under -taken overnight. The Bank can provide assistancein charting and financing adjustment paths thatare politically, socially, and environmentallysustainable. Factoring political economy into thedesign of reforms and supporting better- targeted,xx

EXECUTIVE SUMMARYmore effective social protection systems will beelements of this approach.Emphasize policies that induce improvement inenergy efficiency as a way of reducing the burden ofthe transition to market- based energy prices.Historically, energy efficiency has received rhetoricalsupport but garnered only a small share offinancial support or policy attention. This isbeginning to change with such moves as China’scommitment to drastically reduce its energyintensity and India’s Energy Conservation Act. Butthe Bank can do much more to help clients pursuethis agenda. If a real reorientation to energyefficiency and renewable energy is to occur, theBank’s internal incentive system needs to bereshaped. Instead of targeting dollar growth inlending for energy efficiency (which may skeweffort away from the high- leverage, low- costinterventions), it needs to find indicators that moredirectly reflect energy savings and harness them tocountry strategies and project decisions. It needsalso to patiently support longer, more staffintensiveanalysis and tech nical assistance activities.Increased funding for preparation, policy dialogue,analysis, and technical assistance is required.Promote a systems approach by providing incentivesto address climate change issues through crosssectoralapproaches and teams at the country level,and structured interaction between the Energy andEnvironment Sector Boards.To tackle problems of climate change mitigationand adaptation, the Bank and its clients need tothink, organize, and act beyond the facility level,and outside subsectoral and sectoral confines. Oneavenue for this is through greater attention tosystemwide energy planning. Integrated resourceplanning, once in vogue, has been largelyabandoned in the wake of power sector privatizationand unbundling. Yet current planningmethods are inadequate in integrating considerationsof end- use efficiency and in balancing therisks of volatile fuel prices and weather- sensitiveelectricity output from wind and hydropowerplants. Water management, urban management,and social safety nets are other areas where crosssectoralcollaboration is essential to promotingwin- win policies and programs.Invest more in improving metrics and monitoring formotivation and learning— at the global, country, andproject levels.Good information can motivate and guideaction.First, building on the Bank’s current collaborationwith the International Energy Agency onenergy efficiency indicators, the Bank could setup an Energy Scoreboard that will regularlycompile up- to- date standardized informationon energy prices, collection rates, subsidies,policies, and performance data at the national,subnational, and project levels. Borrowers coulduse indicators for benchmarking; in the designand implementation of country strategies,including sectoral and cross- sectoral policies;and in assessing Bank performance.Second, more rigorous economic and environmentalassessment is needed for energy investmentsand those that release or prevent carbonemissions. These assessments should draw onenergy prices collected for the Scoreboard;account for externalities, including the net impacton GHG emissions; and account for price volatility.Investment projects should also be assessed,qualitatively, on a diffusion index, which wouldindicate the expected catalytic effect of the investmentin subsequent similar projects. It isdesirable to complement project-based analysiswith assessment of indirect and policy-relatedimpacts, which could be much larger.Third, monitoring and evaluation of energyinterventions continue to need more attention.Large- scale distribution of compact fluorescentlight bulbs is one example of an intervention thatis well suited to impact analysis and where atimely analysis could be important in informingmassive scale- up activities.xxi

Rising waters threaten a cement plant in Bangladesh. Photo by Jouni Martti Eerikainen, reproduced with his permission.

Management ResponseManagement welcomes the evaluation by the Independent EvaluationGroup (IEG) of some of the World Bank’s experience with “winwin”energy policy reforms, which constitute an important but notexhaustive set of activities within the wider suite of World Bank Group effortson the energy front.It is useful to take stock of progress on the winwinreforms as defined by IEG, as they are animportant element of the World Bank Group’svision to contribute to inclusive and sustainableglobalization— to help reduce poverty, enhancegrowth with care for the environment, andexpand individual opportunity. In this context,management particularly would welcome thepromised second phase of IEG’s evaluation,covering the expanding project- level experienceof the Bank and International Finance Corporation(IFC) in promoting renewable energy,energy efficiency, and carbon finance, theabsence of which precludes a comprehensiveassessment of the focus and success of WorldBank Group efforts on the energy front.Overview of ResponseManagement concurs with several aspects of IEG’smain findings, many of which reinforce importantmessages already captured in the Bank’s energysector practices or in the findings from Bankeconomic and sector work, internal reviews andself- evaluation, and emerging lessons fromoperational experience across the World BankGroup. At the same time, management takes issuewith the evaluation scope of IEG’s report; itsdefinition of win- win energy opportunities; thegaps in evaluated areas; and the use, in certaincases, of findings to draw overly broad conclusionsor recommendations, such as promotingthe use of integrated resource planning by regulatorsof supply- side energy entities. Therefore, inseveral respects, management differs with IEG’sfindings and recommendations.Key Issues of Agreement and DivergenceThis management response first outlines theareas in which management broadly agrees withthe analysis in the review, noting, however, areaswhere IEG could have given a fuller account ofefforts the World Bank has made or is making. Itthen discusses areas in which managementbelieves that IEG has drawn conclusions from ananalysis based on limited coverage or that do notfully take into account the underlying context.Areas of AgreementManagement agrees with the importance ofenergy efficiency and energy pricing in theBank’s work and the need for strong collaborationacross sectors on energy policy issues.However, management believes that the reportdoes not adequately reflect the considerablework the Bank has undertaken to address energyefficiency. The Bank’s strong involvement inenergy efficiency began in the late 1970s/early1980s in response to oil price shocks. Althoughinterest in energy efficiency languished after thesubsequent fall in oil prices, it was rekindled inthe early 1990s when Eastern European andformer Soviet Union countries became activeborrowers. During the 1990s, the Bank sup -ported energy efficiency reforms in Europe andCentral Asia Region countries through a combinationof technical assistance, policy loans, andinvestment projects. 1 The role of energyefficiency was further reinforced by the Bank’sFuel for Thought (World Bank 2000), whichpushed for market- based approaches to energyefficiency.xxiii

CLIMATE CHANGE AND THE WORLD BANK GROUPPost- Bonn Efforts. The World Bank Group hasfollowed up on its commitment made at the 2004Bonn International Conference on RenewableEnergy to increase annual energy efficiency andnew renewable energy lending by 20 percent,starting in fiscal year 2005. Indeed, average fiscal2005–07 energy- efficiency commitments havemore than doubled compared with the previousthree- year period. The World Bank continues toscale up energy efficiency work in the energysector. Staffing up to increase the skills base iswell under way in both the anchor andoperational units. Energy efficiency specialistshave been/are being hired by Regional units,Carbon Finance, and the Energy Sector ManagementAssistance Program (ESMAP).Areas of DivergenceManagement believes that IEG has drawn conclusionsfrom an analysis based on limited coverageor that do not fully take into account the underlyingcontext. Management is concerned thatlimitations on both definitions and the scope ofIEG’s report open the way to mischaracterizationof the extent and impact of World Bank Groupeffort on energy efficiency.Circumscribed Scope. The evaluation scope ofIEG’s report is circumscribed, incorporating onlyInternational Bank for Reconstruction andDevelopment (IBRD) and International Devel -opment Association (IDA) energy- efficiencypolicy, energy pricing, and gas flaring initiatives,while excluding IFC’s substantive role (except,very occasionally, at the margins). Managementobserves that excluding IFC programs and activitiesthat target the key private sector role inpromoting energy efficiency is a major shortcoming.IFC activities encompass a range of initiatives(such as the Efficient Lighting Initiative) andsustainability advisory services. By focusingpiecemeal on Bank policy experience anddeferring project- level experience to a secondphase of review, IEG has not taken into accountthat the efforts of each of the World BankGroup’s components are intended to complementone another and build on respectivecomparative advantages and synergies, and it hasprecluded a comprehensive evaluation of theenergy efficiency experience in the World BankGroup. As a result, management observes thatsome of the report’s Phase 1 findings paint anincomplete picture of World Bank and WorldBank Group efforts on the energy front.Definition of Win- Win. IEG’s report uses a narrowdefinition of win- win energy opportunities.Management is concerned that the reportfocuses on, and draws conclusions from, onedimension of energy efficiency (end- user energyefficiency), while not adequately incorporatingother important win- win energy opportunities,in particular, supply- side energy efficiency(which covers power plant rehabilitation toimprove efficiency and also electricity transmissionand distribution system loss reduction),renewable energy, and fuel switching.Indicator. The IEG report uses an indicator that islimited to “specific efficiency efforts, includingend-user efficiency and district heating.” Thisopens the way to conclusions and perceptions thatmay be misleading, including that only about 1 in10 World Bank energy projects involves energyefficiency. However, as noted in the IEG report,“including a broader range of projects identified bymanagement as supporting supply-side energyefficiency would boost the proportion above 20percent by number.” 2Management, and certainly the clients of the WorldBank Group, would have benefited from a morecomprehensive analysis and an indicator thatincluded all energy supply- side efficiency, technicalassistance, and development policy lending, aswell as IFC investments in energy efficiency.Management Action Record. Management’s specificresponses to IEG recommendations are outlinedin the attached draft Management Action Record.xxiv

MANAGEMENT RESPONSEManagement Action RecordRecommendationSystematically promote the removal of energy subsidies,easing social and political economy concerns by providingtechnical assistance and policy advice to help reformingclient countries find effective solutions, andanalytical work demonstrating the cost and distributionalimpact of removal of such subsidies and of building effective,broad- based safety nets.Management ResponseAgreed; work is already ongoing.Energy price reform, never easy or painless, can pose social andpolitical economy risks in client countries. But the Bank can helpprovoke and promote reforms by providing clients with assistancein charting and financing adjustment paths that are politically,socially, and environmentally sustainable.The Bank continues to work with client countries to address theissue of energy subsidies. Technical assistance and policy adviceare provided, as requested by our client countries. The Bank focuseson the legal and regulatory mechanisms needed to supportsustainable energy pricing reforms.One way to do this is for the Bank to continue to develop and shareknowledge on the use of cash transfer systems or other socialprotection programs as potentially superior alternatives to fuelsubsidies in assisting the poor. This would include systematicanalyses of the distributional impact of energy subsidies. Timelymonitoring and analysis of energy use and expenditure, at thehousehold and firm levels, will also be important in policy design,in securing public support, and in detecting and repairing holesin the safety net.Energy staff will continue to work with Poverty Reduction and EconomicManagement Network and Human Development Networkstaff (for example, Guidance for Responses from the Human DevelopmentSectors to Rising Food and Fuel Prices, World BankHDN 2008) to develop and apply social safety nets, including cashtransfers, designed to protect the poor from the impact of energyprice adjustments. A regulatory thematic group has been establishedin the Bank to foster dissemination of lessons learned.These lessons will be applied, taking into account the unique circumstancesin client countries. When requested, the Bank providessupport to enable countries to monitor and analyze energyuse so that findings can be applied to their energy policies.Emphasize policies that induce improvement in energyefficiency as a way of reducing the burden of transitionto market- based energy prices.Partially agreed; work is already ongoing.Cost- reflective prices for energy boost the returns to efficiency,but the Bank should support country policies that allow householdsand firms to exploit efficiency opportunities. Conversely,the deployment of energy- efficient equipment such as compactfluorescent lights can be used as a device for cushioning the impactof price increases. The Bank should explore innovative waysto finance efficiency (and renewable energy) investments in theface of fuel price volatility.The Bank has established an Energy Efficiency for SustainableDevelopment program to help guide and scale up energy efficiencyactivities. It is implementing the first step of this program, to increasethe staffing with energy-efficiency experience, in ESMAP,the Energy Anchor Unit, and the Regions. This effort is complementedby a learning program developed by the Bank’s energyefficiencythematic group, under the oversight of the Energy andMining Sector Board. Another step is the development of programsand projects at the country/policy level, the industry level, andthe equipment level to ensure that a broad- based implementationprogram evolves.xxv

CLIMATE CHANGE AND THE WORLD BANK GROUPManagement Action RecordRecommendationManagement ResponseTo foster World Bank Group support for energy efficiency, the draft“Development and Climate Change: A Strategic Framework forthe World Bank” (World Bank 2008) has proposed an initiativeto screen the project pipeline for energy-efficiency potentialearly in the project design phase.The Bank is working with the donor community to: (i) increase thefinancial support needed to intensify energy-efficiency efforts; (ii)increase low- cost funding to support energy-efficiency and renewableenergy programs; and (iii) broaden the support from partnersin implementing a renewable energy and energy-efficiency program.In order to strengthen internal incentives toward promotion ofenergy efficiency, the Bank should develop appropriate metrics,such as indicators that more directly reflect energy savings, insteadof dollar growth targets in lending for energy efficiency(which may distort effort away from the high- leverage, low- costinterventions). These indicators, in turn, need to be harnessed tocountry strategies and project decisions. All of these efforts arelikely to call for increased funding for preparation, policy dialogue,analysis, and technical assistance rather than lending.In terms of internal incentives, the discussion on developing appropriatemetrics has been ongoing with the International EnergyAgency and with UN Energy, but to date it has been inconclusive.Given the inconclusive nature of the discussion to date, managementis not prepared to agree with establishing new metricsthat focus solely on energy efficiency. The World Bank Group hascommitted to accelerate lending for new renewable energy andenergy efficiency to 30 percent per annum over the next threeyears, 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 addressclimate change issues through cross- sectoral approaches,teams at the country level, and structuredinteraction between the Energy and Environment SectorBoards.Partially agreed; work is already ongoing.Helping clients reform will require a systems view, such as lookingat the power system as a whole; looking at energy subsidiesas just one, undesirable, part of a social protection system; andlooking at the connections between water and powermanagement.The Bank will continue to use a system- wide approach in reviewingprojects and programs.To be effective the Bank needs to break down sectoral silos andencourage cross- sector approaches and teams. This will requirechampionship by country directors and vice presidents, to promoteincentives such as supporting capacity building for powersystem regulators in integrated resource planning, and usingthe Clean Technology Fund to support public systems that willcatalyze widespread investments.Most Regions and many country teams have already created climatechange teams of staff from several sectors to promotesynergies, and are developing cross- sectoral business strategiesto integrate climate change considerations. The World BankGroup established a Climate Change Management Group as afocal point to discuss cross- sectoral issues and promote synergies.The Bank supports regulatory capacity building, drawing on les-xxvi

MANAGEMENT RESPONSEManagement Action RecordRecommendationManagement Responsesons learned from successful cases accomplished to date. On thebasis of previous experience, management disagrees with theproposed use of integrated resource planning, as it is unconvincedof the effectiveness of the use of integrated resource planningby either supply- side entities or their regulators.However, the Bank supports the use of broad- based planning toolsby policy makers to support the implementation of policies in thelegal and regulatory framework.The Bank is currently considering large- scale responses todemand- side issues using new funding for low- carbon technologieswhen the funds become available.Structured interaction of the Energy and Environment SectorBoards, initiated with ad hoc groups to address specific crosssectoralchallenges, could move the Bank closer toward mainstreamingsustainable development.The merging of infrastructure and environment into a commonvice presidency has facilitated interaction at the sector boardsand thematic working groups.Invest more in improving metrics and monitoring for motivationand learning at the global, country, and projectlevels.Partially agreed; work is already ongoing.Good information can motivate and guide action. One particularlyuseful global initiative for the World Bank would be to collaboratewith the International Energy Agency or other partners to setup an Energy Scorecard that would compile up- to- date and regularstandardized information on efficiency indicators, energyprices, policies, and subsidies at the national and sectoral levels.Indicators could be used by borrowers for benchmarking; inthe design and implementation of country strategies, includingsectoral and cross- sectoral policies; and in assessing Bank performancein assisting countries.The Bank has been working with the International Energy Agencyon collecting energy-efficiency–related information in pilot countriesfor two years, with limited success. Management does notcommit to the idea of establishing a centrally maintained EnergyScorecard. Rather, the focus of our efforts is now on helping clientcountries establish their capacity to undertake the data collectionexercise in a manner that targets both effective implementationand related policy- making guidance. Without this capacity and countrywillingness to participate in and lead this initiative, it will notbe sustained. The Bank is also looking into possible new, innovativeknowledge- sharing mechanisms to facilitate sharing lessonslearned.At the national level, the Bank should support integration ofhousehold and firm surveys with energy consumption and accessinformation to lay the foundation for assessing impacts of pricerises and mitigatory measures, as well as planning for improvedaccess.The Bank lacks the resources to maintain a comprehensive andreliable database on energy policies, prices, subsidies, and energyefficiency at the national level. Regional organizations providepart of this information, which the Bank selectively drawsupon, depending on the information’s reliability.xxvii

CLIMATE CHANGE AND THE WORLD BANK GROUPManagement Action RecordRecommendationManagement ResponseThe Bank, with ESMAP support, has led in improving Living StandardsMeasurement Survey (LSMS) instruments for increased collectionof energy data as part of LSMS surveys.At the project level, the Bank should invest in rapid- feedback monitoringand impact evaluation of efficiency projects and policies.The Bank will include rapid- feedback and monitoring and impactevaluation of efficiency projects when requested by our borrowers.xxviii

Chairperson’s Summary:Committee on DevelopmentEffectiveness (CODE)On August 27, 2008, the Committee on Development Effectiveness(CODE) met to consider the report entitled Climate Change and theWorld Bank Group— Phase I: An Evaluation of World Bank Win- WinEnergy Policy Reform prepared by the Independent Evaluation Group (IEG),together with the draft Management Response.BackgroundOn December 17, 2007, the Committee considereda study entitled The Welfare Impact of RuralElectrification: A Reassessment of the Costs andBenefits, prepared by IEG. The Committee consideredthe IEG report Supporting EnvironmentalSustainability— An Evaluation of World BankGroup Experience, 1990–2007, and draft ManagementResponse on June 18, 2008. Recently, theCommittee discussed the draft StrategicFramework on Climate Change for the WorldBank Group at its meeting of August 6, 2008.IEG EvaluationIEG introduced the current evaluation report aspart of a phased series on climate change.Subsequent phases will address issues of cleantechnology investments, carbon finance, andadaptation, and will look across the World BankGroup. This Phase I evaluation assessed theWorld Bank’s experience with key win- winpolicies in the energy sector— those thatcombine gains at the country level with globallybeneficial greenhouse gas (GHG) reductions.The analysis of this report supported the followingrecommendations:• Systematically promote the removal of energysubsidies, easing social and political economyconcerns by providing technical assistance andpolicy advice to help reforming client countriesfind effective, broad- based safety nets.• Emphasize policies that induce improvementsin energy efficiency as a way of reducing theburden of transition to market- based energyprices.• Promote a systems approach by providing incentivesto address climate change issuesthrough cross- sectoral approaches and teamsat the country level and structured interactionbetween the energy and environment sectorboards.• Invest more in improving metrics and monitoringfor motivation and learning at the global,country, and project levels.Draft Management ResponseManagement agreed with the importance ofenergy efficiency and energy pricing in theBank’s work and the need for collaborationacross sectors on energy policy issues. At thesame time, management believes that IEG hasdrawn conclusions from an incomplete analysisbased on limited coverage and that do not fullytake into account the underlying context.Management expressed concerns that the IEGreport does not cover the full range of the WorldBank Group’s programs and activities (forxxix

CLIMATE CHANGE AND THE WORLD BANK GROUPexample, assisting the private sector in promotingenergy efficiency) and that it focuses on onesubset of win- win energy opportunities andexcludes others, such as energy conservation,load management, and supply- side efficiencyinvestments, as well as renewable energies andfuel switching.Overall ConclusionsThe Committee commended IEG for anexcellent report, which members found veryinformative, and acknowledged the trade- offs ofundertaking the evaluation in appropriate,sequenced parts as had been outlined andagreed in the Approach Paper. Nevertheless, itwas essential that strategic communication becarefully designed to avoid misleading or unfairinterpretations of the findings. The plan for acapstone paper covering all three phases wasendorsed. There was strong support for deepeningthe Bank’s engagement with clients onenergy pricing policies, though there wasrecognition that it is a complex issue encompassingeconomic, environmental, social, and politicalaspects that were likely to vary country bycountry and over time. The Bank could play auseful role in sharing best practices and distillinglessons of experience, particularly on energytaxes and subsidies and on pricing policies forrenewable energy to help countries institutesocially and environmentally sustainable pricing.The general sentiment was for greater emphasisthan hitherto on energy pricing policy, andenergy efficiency in a broad sense. In this regard,the issues of external institutional incentives andinternal incentives resonated with severalattendees who recommended that managementpay greater attention to this matter, includingone suggestion to consider organizationalchanges (noting parenthetically that this issue’srelevance goes well beyond the energy sector).While noting management’s point about dividinglabor appropriately with other agencies such asthe International Energy Agency (IEA), the broadsentiment at the meeting was supportive of IEG’srecommendations that the Bank be moreinvolved in developing metrics and performanceindicators. Indeed, several speakers added thatanalytical and design work in this regard shouldbe at a global level, encompassing developedcountries as well. Thus, the World Bank Groupcould play a very useful role in making highqualityinformation and a balanced monitoringframework for a global public good.Next StepsThe report is the first of a three- part IEG evaluationon Climate Change and the World BankGroup, and focuses on IBRD- IDA experience. Inresponse to the Committee’s request, IEGcommitted to clarify the scope, content, andcontext of the Phase I report as part of itspreparation for publication. This includes clarifyinghow it fits in the three- phase evaluation byIEG (where the second phase will look at theWorld Bank Group’s project- level experience inpromoting technologies for renewable energy,energy efficiency, and transport; and the thirdphase will look at adaptation issues). IEG alsocommitted to prepare a capstone papersummarizing the three phases at the conclusionof the series; the Committee will considerwhether or not to recommend this paper for afull Board discussion.Main Issues Raised at the MeetingThe principal issues discussed were thefollowing:Scope of IEG ReportSome speakers would have liked to have seenimmediate treatment (in the current phase) of abroader range of topics, including energy conservationand energy access; supply- side in additionto demand- side efficiency; discussion of new andadditional financing, particularly for technologyand equipment; discussion of additional energysources, including biofuel or nuclear; coverageand targeted analysis of Bank support for adaptation;and extension of the evaluation beyondenergy to forestry, transport, and agricultureissues. One member agreed with IEG’srecommendations but felt that further thoughtshould be given on how to implement them.IEG’s definition of win- win (or no-regret)policies and projects offering potential gains atxxx

CHAIRPERSON’S SUMMARY: COMMITTEE ON DEVELOPMENT EFECTIVENESS (CODE)the country level aligned to global interest (forexample, reduction in GHG) drew somecomments. One member felt the report couldhave expanded this concept to consider environmentaltaxation and subsidies for renewableenergy. Some others underscored that the papershould have given more emphasis to the principleof “common but differentiated responsibilitiesand respective capacities” in emissions andin additional financing, rather than focusing onsavings from removal of subsidies. In this regard,a member noted that the poorest countries,which emit only a tiny fraction of the per capitaemissions of developed countries, will be disproportionatelyaffected by climate change. At thesame time, the need to address subsidyreductions and energy efficiency in developedcountries was raised by another speaker.Some members stressed the importance ofbroadening the evaluation to World Bank Groupactivities, including synergies between institutions.One speaker considered that the structureof IEG’s proposed suite of climate- relatedanalyses would be incomplete without explicitlyaddressing the GHG implications of the BankGroup’s engagements to help developingcountries reform their power sectors. Thisspeaker suggested that IEG should evaluate thepositive and negative links between differentpower sector reforms and low- carbon electricityservices as part of the second phase of its climateevaluation. IEG said that Phase I focused mainlyon the World Bank, but the next phase willcertainly include the International FinanceCorporation and the Multilateral InvestmentGuarantee Agency. A few members suggested anappropriate communication strategy for disseminatingthe IEG three- phased review in a comprehensivemanner to avoid misunderstandings. Assuggested by some speakers, IEG agreed tohighlight, during the dissemination of eachphase of the report, that it is part of a broaderreview.Bank’s AssistanceThe Bank was encouraged to deepen its engagementwith countries through policy dialogue andto support them to pursue appropriate regulatoryand institutional settings. Some speakers stressedthe importance of adjusting the internal (for staffand management) and external (countries, Bank,and development partners) institutional incentivesystem. However, they also cautioned about theneed to consider political economy considerations,as well as market failure and institutionalconstraints in client countries. A question wasraised about the adequacy of the Bank’s resourcesas well as organizational and operational capabilitiesto address the challenges of policy dialogueand reforms. In addition, one member stressedthe need to balance the emphasis betweensoftware (price reform and regulatory framework)and hardware (energy- efficiency equipment).Management affirmed the Bank’s internal capacityto provide a full package: 200 experts in thematicteams and cross- sectoral teams in the Regions,offering not only lending but also technicalassistance, as well as social safety nets and policyadvice.Subsidies and Energy PricingThere was general consensus on the need to bemindful of the political challenges of subsidiesand pricing reforms, as well as economic andsocial dimensions at the national and regionallevels. Speakers agreed that more emphasisshould be given to removal of energy subsidiesand were not surprised by IEG findings thatsubsidies were a poorly monitored drag on theeconomies of developing countries. They alsostressed the importance of supporting energypricing reform, an area recommended by IEG forgreater emphasis. On price reform, theimportance of diversity of reform packages toaddress country- specific circumstances; of agradual approach to complement progress ininstitutional development; of finding windows ofopportunity for analytical work and policydialogue to motivate reform; and of clientownership were noted. It was also added that theadjustment of prices to market level should takeinto account vulnerable groups in relation to theother interests vested in the society, and theneed for appropriate compensation systems.Speakers encouraged the Bank to disseminatelessons learned, good practices, and guidelines,xxxi

CLIMATE CHANGE AND THE WORLD BANK GROUPas well as more analytic work on implementingvarious reforms including fiscal sustainability,cross- subsidization, distributional impact, andcap- and- trade schemes. Management indicatedthat the Bank uses a number of instruments toappreciate the political economy, such as Povertyand Social Impact Analyses. Management alsonoted that the Organisation for Economic Cooperationand Development (OECD) has donework on best practices in environmental taxationand cap- and- trade that the Bank is using in itsanalysis. Some speakers stressed the importanceof addressing energy subsidies analysis andenergy pricing reform in the new StrategicFramework on Climate Change and Development(SFCCD), which management indicatedwould be addressed in the full SFCCD paper.Efficiency PoliciesSome speakers agreed with IEG on the need forthe Bank to systematically encourage moreenergy-efficiency activities in client countries.Management agreed, and stated that the full rangeof interventions, including the supply side ofenergy efficiency (loss reduction in distribution,transmission, and generation), and alternativessuch as buses and public transportation systemsneed to be taken into account, depending on thecountry- specific circumstances. While acknowledgingthe importance of supply- side efficiency,IEG stressed that demand- side efficiencymeasures have been viewed by recent studies asoffering the largest opportunities for energysavings and emissions reductions— larger thanthose offered by supply- side measures. Demandsideand end- use efficiency require policyattention because of underlying market failuresand have been repeatedly stressed in Bank policydocuments.Metrics and MonitoringSeveral speakers concurred with IEG’srecommendation that the Bank should worktoward developing appropriate metrics, whilerecognizing management’s point that datacollection would be costly. A few speakerspointed to a 1999 ESMAP “scorecard” publicationas precedent. Additionally, some speakersstressed the need for the Bank to play anadvocacy role in promoting a more balancedglobal monitoring mechanism by includingindicators such as mobilizing financial andtechnological support to developing countries,while the political sensitivities and technicalcomplexities of carbon accounting wereacknowledged. Management indicated that itdoes not commit to developing and maintaininga database of this type, but it will work to developindicators and help countries to establishcapacity. Management noted that the Bank workstogether with the OECD, EUROSTAT, andmultilateral development banks, and supportsspecialized agencies such as the IEA and UN,trying to help them formulate better indicators.Global Gas Flaring Reduction Partnership(GGFR)A few speakers noted that the Bank has played anadvocacy role in promoting reduction of gasflaring, but that adherence to the initiative hasbeen below expectations. Questions were raisedon whether there was a lack of interaction betweenthe GGFR and Bank’s business or lack of competitivenessof the Bank’s financial instruments.Jiayi Zou, Chairpersonxxxii

Statements by the ExternalReview Panel:Climate Evaluation, Phase IGeoffrey M. HealPaul Garrett Professor of Public Policy andBusiness Responsibility, Columbia UniversityOverall I think this is a very good report. Itfocuses on important issues that are ones wherethe Bank can make some difference. Mycomments are minor.I think that the two main themes, removal ofenergy subsidies and improvement of energyefficiency, are critical issues in the context ofdeveloping countries (and rich countries too!)facing rising energy prices and threatened byclimate change. We know from experience thatneither is easy to achieve, but for both I feel surethat the benefits outweigh the costs and fullyjustify the efforts. I do think it is particularlyimportant to stress, as the report does, thatremoving energy subsidies need not compromisethe ability to get energy to the poorest insociety more efficiently, and that the main beneficiariesof subsidies are often the middle andupper classes. I was struck by the numbersindicating that high subsidizers have muchhigher emissions per capita than others: notsurprising, but the numbers are impressive.The report refers several times in the earlysections to a systems approach to energy. I amstill not completely sure what is meant by this. Itake it to mean looking simultaneously at allaspects of energy production and consumptionand thinking through interactions and possibleduplication and overlap, worrying more aboutjoint heat and power schemes, and so on. It islikely that there are real gains in this area but Ifeel that this is something that should be spelledout more clearly.I was impressed by the comment that the socialbenefits of providing power to the poorestgreatly outweigh the social costs, even if power isprovided in a way that generates greenhousegases. These numbers should be more widelyknown. They are important in the global discussionson climate change and the role of the poorcountries in mitigating this.I like the suggestion of Energy Scorecards. Thesecan provide a basis for benchmarking, oftenimportant in the policy- making context, andcould also be useful in climate negotiations.Connected to this is the idea of carbon pricing ofprojects that emit CO 2, even when there is nolegal requirement to purchase permits. Mostmajor banks in the West now require this of theirclients: U.S. banks, for example, require theirclients to charge for carbon emissions in projectevaluations even though there is no need to buycarbon permits. It would be natural for the Bankto do this too.As the report mentions, emissions fromdeforestation are large and generated bydeveloping countries: Brazil, Indonesia, andChina are in the top four emitters, and for Braziland Indonesia it is the case that most emissionscome from deforestation. There is scope for aglobal win- win move if we implement one of theReduced Emissions from Deforestation andDegradation (REDD) ideas now under discus-xxxiii

CLIMATE CHANGE AND THE WORLD BANK GROUPsion, as this will not only reduce emissions butalso lead to new development finance. TheBank’s Prototype Carbon Fund is important inthis context.Again, in summary, I was impressed by thereview: it seems to address very importantissues, and does so clearly.Thomas C. HellerLewis Talbot and Nadine Hearn Shelton Professorof International Legal Studies, StanfordUniversityMy comments are intended to be useful andprovocative, even though I understand that, asdetailed in chapter 1, the segment of the overallprojected IEG evaluation we have before us isvery restricted. It deals with win- win opportunitiesand defers systematic consideration of majorissues (like carbon markets) that are only alludedto in this initial treatment. Any criticism offindings or recommendations in these areas ofwork key to rating and reforming Bank Groupperformance is evidently unfair as premature.Still, I hope that these remarks on the in -complete work may contribute to shaping theentire final product.I want to state immediately that I like the reportand find its organization, analyses, andrecommendations generally clear, well founded,and pertinent. I will describe below the mainpoints that exemplify these contributions. Afterstressing my strong appreciation for the tenor andcontent the report already makes (part A), I wouldlike to discuss an implicit issue that runs throughoutthat is troubling (part B). The issue is that evena cursory history of the Bank Group’s engagement,though admittedly indirect, with climatechange since the early 1990s indicates the mattersstressed in the report have been known to theBank’s actors and central to the Bank’s agenda forthis whole period. The unanswered question thatruns through the report is why outcomes shouldbe different now, and in years to come, than theyhave been in the past. As the report implies inchapter 7, box 7.1, what is needed most in thefuture elaboration of the entire IEG project is toclarify and elaborate, in the light of its recordedbehavior, the Bank’s comparative advantage in thefield of climate change.Part AThere are very many discrete elements of thereport that I found coherent, enlightening, andinnovatively put forward. It makes a very usefulcontribution to the literature on energy andclimate that would well be read within andoutside the Bank Group. I’ll list areas oftreatment that, in my view, reinforce thisconclusion.1The initial chapters on the relationships amongenergy growth, carbon emissions, and economicgrowth are concise and precise statements ofwhat we know about these essential matters.They stress the critical points for the Bank Groupand other major actors in the climate/energyintersection that poverty reduction and energygrowth are not directly in conflict, that carbonand energy intensity are partially functions ofnatural endowments and partially products ofclear choices about economic developmentpaths, and that wide variation between nations incarbon emission performance is in part afunction of energy policy and pricing. (Althoughgiven different labor, capital, and energyendowments, as well as the lack of understandingof carbon dynamics during the period inwhich basic patterns of economic developmentand resource use were set, the province andmaintenance of these policies may themselvesbe subject to alternative interpretations.)2The tabular and analytical work on the carbontax equivalence of recent increases in resourceprices is original and quite helpful.3The case against subsidies and its politicaldynamics in the emerging era of high com -modity prices and resource rent transferssummarizes well a mass of (fragmented) dataclearly and deals nicely with the lack of basis forpushing these policies forward in the name ofxxxiv

STATEMENTS BY THE EXTERNAL REVIEW PANEL: CLIMATE EVALUATION, PHASE Ithe poor, much better aided through otherpolicy means.4The scale of the economic opportunities toreduce waste through energy efficiency andthereby avoid the construction of additionalcarbon- intensive generation is restated, but withapt attention directed to the gap between thetechnical and engineering potential of improvingboth economic and environmental performanceand the far weaker experience of closing this gap.There are many particular and original observationsthroughout the report, based on casestudies of the Bank Group’s energy-efficiencyprogram record (see #6 below) that contributeto the political economy or organizational theoryexplanations of why energy-efficiency gains areoften ignored in practice.5The report is very informative in describingWorld Bank concentrations of loans and investmentsin specific dimensions of broad projectcategories. For example, in the area of energyefficiency, the bulk of projects and funds areplaced in supply-side efficiency (equipment).Even in the limited set of projects aimed atmanaging demand- side efficiency (DSM), thereis more emphasis given to technology (forexample, CFL bulbs) than policy reforms (tariffdecoupling— though it is shown that BankGroup electricity pricing reform should have apositive impact on the demand for energyefficiencymeasures of all types). In the area ofcodes and standards, the emphasis is more onthe elaboration and enactment of codes than ontheir monitoring or enforcement. Equallyimportant, there are allusions to the role oforganizational structures and incentives inproducing these concentrations.6The report is replete with valuable and originalobservations that reflect the IEG author’ssubstantial knowledge of the sectors andprograms under review. They often stand incontrast to the lack of quality evaluation in otherBank Group processes designed to yield ongoingincreases in the productivity of investment.These observations most often are made in thecourse of case or project studies. Examplesinclude:a. DSM projects may often be undertaken aseconomical by utilities in developing countriesthat are forced by subsidized pricing torealize losses in some retail services.b. In many cases there are serious questionsabout the causal impacts of Bank Groupprojects. Brazilian gains in conservation andenergy efficiency in the 2001 drought periodwere more likely attributable to learningduring mandatory rationing than codes orother policy reforms. Eastern Europeanprice reforms were more likely due to widesystemic movement toward markets thanspecific policy measures.c. Even in cases where the economies of energyefficiency seem clear, subsidies to compactfluorescent lighting (ILUMEX) werenot sustainable learning instruments that ledto changed behavior when terminated.d. The best energy-efficiency codes have littleimpact in the longer run without greater andsustained attention to monitoring and implementationcapacity.e. Favorable organizational image (public relations)was a more effective cause of reproduciblebehavior than other policies orsubsidies in EGAT’s (Thailand) success withcompact fluorescent lightbulbs, indicatingthe potential of properly incentivizedutilities.7The report details well how and why what appearto be win- win investments, especially in the areaof energy efficiency, do not eventuate in a greatnumber of instances. The roster of reasons variesfrom an absence of core collective goods likeinformation to the presence of intranationalresource transfer that requires either compensationor regulatory expropriation. But the reportalso makes it clear that many of these collectivegains are efficient at the national level and thatinternational transfers may be an unwise use ofscarce financial resources. With these insights, itxxxv

CLIMATE CHANGE AND THE WORLD BANK GROUPwould seem that it would by now, after manyyears of Bank Group investment in this area, bestandard operating practice within the Group tohave developed effective analytical tools todiscriminate between what should be donenationally and what internationally. However,there is no case made in the evaluation that anysuch tools have been consistently applied asnormal use. The lack of attention over the yearsof Bank Group experience raises concerns aboutthe incentives within the Group to manage theseissues as well as might be hoped.Part BBefore explaining my questions about theimplications of the report for defining thecomparative advantage of the World Bank Groupin the area of climate change, I want to list anumber of specific criticisms of the record madein the Report itself that are both persuasive andtempered.1Although there is increasing recent attentiongiven to energy-efficiency support, especially bythe IFC, when one considers the full spectrum ofBank Group investment in the energy/climateintersection (one in five projects has someconnection to efficiency if a broader range ofsupply-side measures is considered), the relativeproportion of the project funding going toenergy efficiency has been less than optimal.Within this class of under-funded activities, therelative proportion to demand-side managementis especially low in comparison to supply-sideefficiency.2The report presents a good compilation of themixed record of effectiveness of many of the coreprograms in the World Bank portfolio. Theseinclude the large number of investments inpower sector reform, gas flaring in general andthe Global Gas Flaring Reduction Partnership inparticular, and energy pricing reforms. Thereare patterns observable in the variation ineffectiveness within these programs. Forexample, fuel price reforms have been lesssuccessful than electricity price reforms; EasternEurope did better than large-scale fuel-producingnations. Moreover, the report notes veryvariable performance in project monitoring,analysis, and performance evaluation in theBank’s portfolio as well. (It is again surprisingthat there is as little systematic examination andlearning from the variable record of performanceas one would gather has occurred from a readingof the report’s description of the materials towhich it had access.)3There is good emphasis given in the report tothe need for greater coordination across departmentsof the Bank Group to reduce intra-organizationalstove-piping and the loss of potentialbenefits from a more comprehensive andsystematic evaluation of the productivity ofdifferent investment options.These three main themes form the logical andempirical basis for some of the key recommendationsfor reform. The first four recommendationsare indisputable and well supported by theinternal analysis of the report. These are: (1)focus on the removal of subsidies and providetargeted income compensation to the poordamaged thereby; (2) emphasize energyefficiencyopportunities and correct fuel andpower prices to support these initiatives; (3)approach climate change systematically acrossthe full range of World Bank country engagementsbecause of the risk of perverse incentivesunder stove- piping; (4) improve the metrics andmonitoring capacities to improve the informationbase on which such policy and programchoices are made.It is the fifth recommendation—that it would bebetter for the Bank to concentrate on those areasof the Bank Group’s competitive advantage,namely, promoting policy and institutionalreform—that I think would benefit from clearerand more explicit elaboration in future work. Ido not suggest this because I disagree with therecommendation. I agree wholeheartedly thatthe weak record of positive results of all of ourinstitutions around global climate change isgenerally best explained by hard problemsxxxvi

STATEMENTS BY THE EXTERNAL REVIEW PANEL: CLIMATE EVALUATION, PHASE Iassociated with the implementation, monitoring,evaluation, and reform of misgovernance. Whatseems to merit further development in the lightof this perception is more empirical evidence ororganizational analysis that it is the comparativeadvantage of the Bank Group to be the agentbest positioned to improve the record withregard to these agreed institutional objectives.Just as the report correctly emphasizes that theproblems with the realization in practice of winwinopportunities in theory lie often in politicaleconomy and organizational behavior, it may beuseful in framing the future completion of thisIEG project to ask directly why the Bank Group,after some 15 years of programming in theclimate/energy intersection, continues to operatewith a suboptimal investment portfolio andhighly inconsistent analysis based on aninadequate information base. Project assessmenthas been narrow; carbon footprints have beenhaphazard; funding for renewables and energyefficiency has been generally low; implementationand monitoring are less attended than arenormative prescriptions in policy-oriented activities.Are there systemic or institutional reasonsthat cause the persistence of these obvious andlong-standing attributes of Bank Group practice?After initial experience with earlier programs thatwere subject to these same criticisms, why havethere not been processes of systematic andsustained correction in later investment vintages?Would ongoing IEG work be more likely toinduce positive change in the development in theBank Group’s program over time if there weremore explicit discussion of the reasons that clarifywhy it has mainly stuck to a course that has longbeen subject to serious criticism?We might here only speculate on types of organizationalexplanations that might be subjected tomore intensive analysis to improve Bank Grouppractice by exposing the incentives that still aremanifest in a relatively stagnant and problematicinvestment program. These might includearguments that an emphasis on normativeeconomic prescription is too clear and too easy.This argument has been leveled at otherdimensions of Bank Group programs by internalcritics in areas including liberalization, privatization,and sectoral reforms. Related is the refrainthat the path of transition from state-controlledto market-dominated economies was imaginedas straightforward and technical, rather thanprofoundly political and conditioned by historicaland institutional particularities in differentcountries. All of these claims could suggest theBank Group has internal incentives to emphasizenonpolitical, often technical, remedies for poorgrowth performance; to stress upstream (technological)and normative solutions instead ofdownstream regulatory, behavioral, or implementationproblems because the latter are relativelymore constrained by fundamental concernsabout intrusion into political operations thatimpose larger sovereignty conflicts.An alternative line of explanation might begin inorganizational sociology. The report notes thatmany of the relatively less frequent elements ofBank Group programs, like DSM or particulartypes of renewable generation, have been carriedon under the particular aegis of GEF funding orare championed by small expert teams marginalto the larger Bank system. This observationsuggests the foundational proposition of organizationtheory that large organizations have a coremission and an attendant adapted culture thatdominates their priorities and performance. Suchorganizations respond to threats from theenvironment by establishing marginal groups thatmediate external demands without disturbingcore operations.The Bank Group’s core mission in this perspectiveis certainly to foster economic growth, with astrong amendment in the last decade to anexpress poverty alleviation orientation. This isreflected in an incentive system that concentrateson economic expansion and a commitment toshort-run measures that bring poverty relief.Outcomes such as continued investment inenergy infrastructure growth not necessarilyconstrained by environmental considerations (forexample, coal plant investment) or technologydiffusion rather than (longer-run) technologyinnovation would be expected in such an organizationalculture explanation. (Conversely, focusxxxvii

CLIMATE CHANGE AND THE WORLD BANK GROUPon demand restriction might be less prized andreinforced because efficiency projects are complicatedand staff-intensive, don’t expend a lot ofcash, and are less tangible and less prone to offerceremonial occasions.)These deeper issues of Bank organizationalculture or internal incentives raise questionsabout what the report poses as the key issuegoing forward: what is the Bank Group’s com -parative advantage that should define itsclimate/energy strategy? With vast new resourcescoming onto the climate table, should primaryresponsibility be assigned to the Bank in allocatingimportant segments of these resources, givenits own institutional incentives? These questionsmay be premature in terms of the various phasesof the complete IEG evaluation project. Majorissues are not yet examined. These include boththe contested record of the Bank Group inexpending many times the funds on fossil fuelinfrastructure financing than on noncarbonalternatives and the record of the Bank Group’scarbon market initiatives. While the former is notaddressed at all in the report, there are importantanecdotal accounts of the latter.Yet the preliminary work in the report alsoquestions the Bank Group’s early engagementwith the CDM market in energy-efficiency financing,raising well-founded concerns about additionalityif international funds are devoted to reducingcosts of projects that are economically efficient atthe national level. This is particularly true if continuingsubsidies in retail prices reduce incentives fordemand management. The report’s chapter on gasflaring also analyses critically the Bank’s use ofCDM in cases where gas is not flared in thecommon cases where the regulated wholesaleprice of gas undercuts its collection and transmission,where electricity prices are held at levels toolow to justify gas-fired generation, and where gastransportation projects that should be whollyeconomic at oil prices in excess of $40 per barreldo not take place because of risks of nonpaymentfrom state-owned and run-off-takers. Theseprospective questions, yet to receive comprehensiveIEG analysis, may be seen as challenges to theconclusory proposition that the Bank Groupshould have a strong, though reformed, role in thegrowing world of carbon finance or climate policy.In conclusion, at the end of discussing anexcellent report, I wonder whether the report canbest further the more effective resolution of suchkey climate change questions and help steer theBank’s internal evolution through more directattention in the phases of the project to come tothe issue of whether the Bank Group does havecomparative advantages in climate in comparisonto other potential climate institutions or to otherpublic purposes the Bank Group might pursue.Rajendra K. PachauriChairman, Intergovernmental Panel onClimate Change; Director- General, Tata EnergyResearch Institute.The report is comprehensive and reviews a rangeof World Bank activities that fit into an overallprogram related to climate change. Quiteappropriately, the report traces the history andrecord of World Bank activities that are expectedto have driven mitigation of GHG emissions overthe years. The emphasis on institutional changesand reform measures is quite appropriate,because in the operations of the World Bankthese assume logical primacy and should lead tooutcomes in developing countries ensuringhigher levels of energy efficiency and reducedemissions of GHGs as a consequence. It may bementioned that the Intergovernmental Panel onClimate Change (IPCC) in its Fourth AssessmentReport (AR4, 2007) has very clearly emphasizedthe importance of placing a price on carbon asperhaps the most effective policy measure forpromoting technological change and otheractions that could result in reduced emissionsof GHGs. Hence, the viewpoint of the Bank onthe issue of subsidies and their removal as well asrational pricing for different applications constitutesan important set of priorities that over aperiod of time can bring about change in the rightdirection. Addressing the assessment of severalco-benefits, including lower levels of air pollutionat the local level with attendant health benefits,higher security of energy supply, and the like inrelation to mitigation of GHGs would havexxxviii

STATEMENTS BY THE EXTERNAL REVIEW PANEL: CLIMATE EVALUATION, PHASE Iprovided another dimension of externalities thatshould be part of economic decision making.This aspect has not been addressed adequately.In my view, two additional aspects in preparingthis report could have enhanced its value:1. Research and development and technology issuesfor ensuring mitigation of greenhouse gases.While a number of technological innovationswould generally flow from the developed to thedeveloping countries, the need for customizationof specific technologies to suit local conditionsis an important aspect of technological changethat perhaps deserved greater analysis and coveragein the report. This would also be justifiedby the fact that in several developing countries,technological capabilities have reached a levelwhere they are making a significant differencein bringing about efficiency improvements andreduced emissions of GHGs.2. The second subject on which greater coverageand targeted analysis would have been usefulrelates to adaptation to the impacts of climatechange. It is very clear that effective climatepolicy in every country of the world would requirea combination of mitigation as well asadaptation, most effectively to be conceptualizedand implemented by the same organizationsand authorities handling both. By notcovering adaptation measures in adequate detailand confining the report essentially to mitigation,this dimension has been a loss interms of the value of what is presented in thereport.All in all, this is a useful document, which, I amsure, will not only help the Bank in developingits own climate change portfolio in the comingyears but would also be of value to policy makersand analysts in both the developing as well as thedeveloped world.xxxix

Chapter 1Evaluation Highlights• The evaluation seeks lessons frompolicy experience in the energy sectorto guide future policies on greenhousegas mitigation.• Mitigation of climate change willrequire a clean development pathin both developed and developingcountries.• The central challenge of climatechange mitigation is how to alignnational and global interests.

Person walks on a dirt road in Mali. Photo by Curt Carnemark, courtesy of the World Bank Photo Library.

Introduction, Scope, andMotivationClimate and development are closely interlinked. Development has historicallydriven increased greenhouse gas (GHG) emissions. Thebuildup of these GHGs in the atmosphere is altering the global climateand threatening development.The developed countries are responsible for mostof the buildup of GHGs, and still emit far more percapita than the rest of world. But the developingand transition countries contribute the bulk ofcurrent emissions, and their contribution isswelling rapidly. To stabilize GHGs, all countries,both developed and developing, need to movetoward a more sustainable growth path. To do so,however, developing countries will requirefinancial and technological assistance. Appropriatepolicies will be critical for all countries.This evaluation is the first of a series that seekslessons from Bank experience on how to carveout a sustainable growth path. A premise of theseries is that many climate- oriented policies andinvestments now under discussion have closeanalogues in the past. That is, policies andprojects adopted with other aims— from fiscaldiscipline to biodiversity conservation— mayhave had significant impacts on GHG emissionsor on adaptation to climate change.A final, capstone summary to the evaluation serieswill offer a comprehensive look at the WorldBank’s role in climate change. This initial phasehas a more limited scope. First, it introduces andsets the context for the series. Second, This volume offers limitedit tackles a small but ambitious coverage of the Bank’ssegment of the climate development role in climate change.agenda as it pertains to the WorldBank: key win- win policies related to mitigation.Figure 1.1 shows how this segment is nestedwithin the broader issues. Table 1.1 describeshow mitigation topics are divided between thisphase and the next, whose project- level focusincludes the International Finance Corporation(IFC) and the Multilateral Investment GuaranteeAgency (MIGA).Although there are important overlaps, climateissues can be divided into those of adaptation andthose of mitigation. Energy issues loom large inmitigation. (Emissions from deforestation, thoughlarge in the tropical world, have historicallyattracted less attention.) Within energy concerns,this volume focuses on World Bank–client engagementon policy interventions with the potentialto confer immediate domestic benefits, whilereducing emissions. These interventions havebeen pursued for many years and are still em -phasized in discussions of current climate policy.Has the scope for such policies been exhausted? Ifnot, what has been the record in pursuing them?3

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 1.1: Intersection of Issues Relatedto Climate ChangeClimateadaptationClimatemitigationCompared with most Independent EvaluationGroup (IEG) thematic studies, this volumeplaces more emphasis on policy context. This isEnergy policies are a because the Bank lacks formal goalssignificant concern for related to climate change againstclimate change which evaluative assessments couldmitigation. be made. It also reflects a goal ofdrawing lessons for the Bank fromexternal experience.The remainder of this section briefly sketches thestriped territory shown in figure 1.1 and sets thisevaluation and the rest of those in this series incontext.Confronting Inexorable Calamities andUnreckonable RisksA changing climate threatens development andrequires costly adaptations. 1 Higher temperaturesbring inexorable calamities, withA changing climatethreatens development. ir reversible changes at specific locales.The sea will rise, exposing the largeproportion of humanity that lives near a coast toinundation, flooding, and salinized watersupplies. The Himalayan and Andean glaciers willmelt, affecting water supplies to billions ofClimate variability isincreasingly unreckonable,complicating developmentplanning.Win-winpoliciesEnergypeople. Some areas could tip fromsemi- arid to arid, threatening thelivelihood of some of the world’spoorest people, and perhaps inducingmass migrations.Increased climate variability brings a host of risks.As temperatures rise more than 2° C over1990–2000 levels, the frequency or intensity ofextreme events such as hurricanes is likely toincrease. Repeated weather shocks could threatengrowth in poor, climate- vulnerable countries andregions. Risks are increasingly becoming unreckonable,which complicates planning for a widerange of endeavors. Because of climate change,the past is no longer a reliable guide to the future.While climate models are improving, and showrobust agreement about global trends, they oftenoffer divergent forecasts of future averageprecipitation at the level of a specific province orriver basin. Less predictable still are changes inthe local likelihood of droughts, floods, andstorms. Investments in water systems, agriculture,and disaster preparedness thus have tohedge bets against an increasingly uncertainfuture, an expensive undertaking. At the globalscale, there is a small but growing chance of aplanetary catastrophe—an increase of 5° C ormore that would lead to profound and universalchanges in sea level, weather, and ecosystems(Stern 2007).Adaptation to these changes has to be combinedwith mitigation of their severity. Indeed, in theshort run there is no way to alter the climatechanges that are already in train, so that adaptationis essential. The longer the horizon, however,the more leverage there is to moderate GHGemissions and reduce the worst long- term risks.The United Nations Framework Convention onClimate Change (UNFCCC) requires that theatmospheric concentration of GHGs— now at430 ppm CO 2e (parts per million of carbondioxide equivalent)—be stabilized at safe levels.“Safe” levels are debated: the Stern Reviewadvises a target between 450 and 550 ppm tominimize the chance of catastrophic outcomes;others, worried about crossing a tipping point toaccelerated CO 2release, recommend lowerlevels. Global models (IPCC 2007a) show that tostabilize CO 2e concentrations below 535 ppm,global emissions must begin to decrease before2020—sooner, if more stringent limits are sought.4

INTRODUCTION, SCOPE, AND MOTIVATIONTable 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 inthe second phase of the evaluation.)Investments in technologies, facilities,Policies: design andhardware, financial intermediariesIssue implementation (IDA/IBRD) (IDA/IBRD/IFC/MIGA/carbon finance)Energy pricing National adoption of policies that Impact of power pricing policies onremove energy subsidies or rationalizespecific investments in renewableenergy pricesenergy and energy efficiencyEnergy efficiency Policies (in addition to pricing) that Efficiency finance, including ESCOs;encourage energy efficiency, withfacility-level investments in demand- andemphasis on end-user andsupply-side efficiencydemand-side efficiencyGas flaring Natural gas pricing policies and gas Not coveredflaring reduction; GGFR experienceTransport Fuel pricing policies Transport projectsRenewable energy Renewable energy policies (feed in Investments in specific technologiestariffs) affecting investments(wind, water, and the like)Reduced emissions Not covered Protected areas, enforcement of antifromdeforestationdeforestation laws, community forestsand forest degradationNote: 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 forthe current level of climate change, and emit farmore GHGs per person than the developingcountries. Climate stabilization requiresessentially a complete phase- out of theseemissions in the long run, with significant neartermprogress toward that goal. The UNFCCCcalls on developed countries to take the lead inmitigating emissions.However, climate stabilization is not possiblewithout the availability of a clean developmentpath in the developing and transitioncountries. Even complete elimination ofdeveloped- country emissions would not suf -fice by itself. The Bali Action Plan (UNFCCC2007) commits all members of the UNFCCC tothe pursuit of “deep cuts in global emissions,”“in accordance . . . with the [UNFCCC] principleof common but differentiated responsibilitiesand respective capabilities, and takinginto account social and economic conditionsand other relevant factors.” That meansfinding a better path to wealth for Adaptation must bethe developing countries than that combined withtrod by the developed countries. mitigation.Both the Bali Action Plan and theUNFCCC call for developed countries toprovide “new and additional” funds andtechnology that would allow the developingcountries to do this.Near- term actions can shape that longtermtrajectory, with big conse - change requires a cleanStabilization of climatequences for long- term growth and development path inemissions. The concern is with lockin.For example, poorly insulated developing countries,both developed andbuildings and inefficient coal plants but developing countriesbuilt today will be in place for decades, need financing.consuming money and emitting CO 2.Energy subsidies not only stimulate inefficient,emissive energy use; they also generate strongconstituencies for those inefficiencies,which makes them difficult to reverse.Similarly, it is easier to fight congestionand pollution by establishingActions taken now canshape long- term emissionpatterns.5

CLIMATE CHANGE AND THE WORLD BANK GROUProad-user charges before car ownership iswidespread, than after.Three Approaches to GreenhouseGas MitigationMitigation of GHGs presents a classic problem inenvironmental economics. A country that reducesits emissions typically incurs costs, but reaps onlya small proportion of the global benefits of animproved climate. So countries are not motivated,individually, to undertake the optimal degree ofglobal mitigation. IEG’s Annual Review ofDevelopment Effectiveness 2008 discussesthe challenge of global public goods at length(IEG 2008a).One approach is to seek There are three prominent policywin- win policies and approaches to this dilemma. Theyprojects, but broadly represent the World Bank’simplementation is often past approach to climate change andimpeded by regulatory are consistent with the UNFCCCbarriers, coordination principle of “common but differentiatedresponsibilities” of developed andproblems, vestedinterests, and developing countries. The first is toinstitutional and market seek win- win (or no regrets) policiesfailures. and projects. These not only provideglobal benefits in reducing GHGs butalso pay for themselves in purely domestic sidebenefits such as reduced fuel expenditure orimproved air quality. (See upper- right quadrant offigure 1.2.) For instance, countries could removefossil fuel subsidies, thereby curbing GHGs,improving local air quality, and freeing governmentfunds for better- targeted social programs.Another approach is toseek compensation fromthe global community forcountries that provideGHG reductions.If win- win policies were easy to implement, theywould have been put in place long ago. But regulatorybarriers, coordination problems, institutionalfailures, op position by vested interests, or marketfailures impede them. That is, the nation maybenefit as a whole, but there are groupswho lose under win- win policies.External finance, such as developmentlending or concessional funds, couldbe used to facilitate adjustment to thewin- win policies.A major goal of this evaluation is to provide insightinto the potential scope for win- win policies andinto strategies for designing and implementingthem in the face of various barriers. Some analysts(IEA 2006; McKinsey Global Institute 2008) seetremendous untapped opportunities for win- winpolicies and projects; others are skeptical. Thereare questions about both the applicability and thefeasibility of implementing these policies. TheWorld Bank Group’s extensive involvement insupporting win- win climate policies has sometimesbeen framed in climate terms, but more oftenjustified on purely domestic, sectoral grounds.The second approach is to seek compensationfrom the global community for countries thatprovide GHG reductions. This approach isattractive to a country if the combination ofcompensation and domestic side benefitsoutweighs the costs of policy adoption. (Seecarbon finance segments in figure 1.2.) Itunderlies the UNFCCC principle of “commonbut differentiated responsibilities.” This principlereflects the unwillingness of developingcountries to accept limits on emissions or incurcosts to limit emissions. They point to muchhigher per capita emissions by developedcountries, and have called on them to take thelead in global reductions.Compensation could take the form of grants tocover the additional costs of providingreductions (an approach that has been used bythe Global Environment Facility [GEF]) orpayments for the reductions themselves (thecarbon market approach). For convenience, thisreport will refer to both as carbon finance. TheClean Development Mechanism (CDM)—acreation of the Kyoto Protocol— is the biggestvehicle for carbon finance, which allowsdeveloped countries to meet their climateobligations by paying for emissions reductionsin the developing world. The CDM is currentlyrestricted to project finance and excludessupport for GHG- reducing policy reforms. TheKyoto Protocol also sets up incentives for somedeveloped countries to fund reductions intransition economies. GEF projects can also beviewed as a kind of carbon finance, though fundsare usually represented as supporting catalyticactions rather than as compensation. The World6

INTRODUCTION, SCOPE, AND MOTIVATIONFigure 1. 2: Global and Domestic BenefitsGlobalBenefitsDomestic CostsCarbon finance: supporting projectswhose global benefits exceed domesticcosts, by sharing the benefits.Win-win projects and policies confer strongdomestic and global benefits but may not beundertaken if there are regulatory barriers,coordination problems, institutional failures,opposition by vested interests, or market failures.This is the traditional domain of developmentpolicy (adjustment) lending. Carbon finance is alsodiscussed as a possible remedy.Domestic BenefitsLose-lose policies and projectsmay be undertaken due to perverseincentives, regulatory flaws, orvested interests.Carbon finance: Supporting alternativesto projects whose global costs exceeddomestic benefits.GlobalCostsBank has been extensively involved in developingand implementing CDM and GEF projects.A third, hybrid approach promotes research anddevelopment in clean technologies. Immaturetechnologies are expensive and risky, so fewpeople will use them without incentives. Forinstance, solar power is cleaner but moreexpensive than fossil fuels for grid- connectedelectricity. But the cost of solar power, like mosttechnologies, decreases as there is more and moreexperience with manufacturing and using it. Forthis reason, industrial strategists advocate pushingtechnologies down the learning curve, so that theyend up in the win- win segment. GEF’s OperationalProgram 7 has attempted to do this with concentratedsolar power and other technologies.Priority Areas for Evaluation Related toMitigationThere is an immense range of activities, acrossmany sectors, that can contribute to climatechange mitigation. To focus this evaluationseries, the following criteria wereconsidered:• Large potential for mitigation at lowcost in developing and transition countries• An evaluable World Bank Group record, includingincorporation in policy and strategystatements• Relevance to future World Bank Group strategy• Solid scientific basis for linking activities toGHG emissions.With respect to mitigation potential, IPCC (2007a,p. 632) presents a synthesis of current estimates,using reduction potential relative to a businessas-usual baseline in 2030 as a benchmark. For thedeveloping world (that is, outside the Organisationfor Economic Co-operation and Development[OECD] and economies in transition), itestimates that there are 2.7 billion tons of CO 2e ofnegative- cost potential savings through end- useA third approach is topromote research anddevelopment in cleantechnologies.7

CLIMATE CHANGE AND THE WORLD BANK GROUPefficiency in commercial and residentialbuildings, including appliances. The availability ofnegative- cost opportunities indicates marketfailures in need of policy attention. This compareswith 0.1 billion tons in negative- cost transportopportunities. In power generation, IPCC es -timates available savings of 0.8 billion tons fordeveloping countries at a cost of less than $20per ton (possibly including some negative- costoptions) from cleaner fuels, renewable energy,and increased generation efficiency; another 1.25become available at costs up to $100 per ton. Enduseefficiency in industry offers 0.6 billion tons atless than $20 per ton. Agriculture and forestryaccount for about 1.1 billion tons each at thatcost. Low- cost (less than $20 per ton) reductionopportunities, across all sectors, amount to 6.9billion tons for the developing world, 1.2 for theeconomies in transition, and 4.5 for the OECD; 1billion tons are regionally unallocated.This overview suggests that policies affecting enduserenergy efficiency stand out as the area withthe single greatest potential for emissionsreduction, and at potentially negative rather thanpositive cost— a win- win option. As subsequentchapters of this evaluation will show, it is an areathat the World Bank has stressed inPolicies affecting end- usersectoral strategies, and where it hasenergy efficiency standdeployed project, analytic, andout as the area with thecapacity- building effort. One set ofsingle greatest potentialwin- win policies—removal of energyfor emissions reduction.subsidies— potentially promotes notonly end- user efficiency, but alsosupply efficiency and renewable energy. Here,too, there has been extensive World Bank involvement.So energy pricing policies, and non- pricerelatedenergy- efficiency policies, constitute onefocus of IEG’s evaluation series.This report is mainlyconcerned with win- winpolicies in the energysector.All models of global mitigation show thatexploitation of win- win opportunities is insufficientto stabilize GHGs in the atmosphere.Massive investments in low- carbon energytechnologies— the menu includessolar, wind, hydropower, nuclear, andcarbon capture and storage— will benecessary. Much of this investmentwill take place in the developingworld, where energy demand is growing rapidly.The complexity of the international negotiationsaround climate change revolves largely aroundhow the burden of abatement costs— theincremental costs of GHG- reducing technolo -gies— will be shared. Under the Kyoto Protocol,developed coun tries take on obligations forreducing emissions but can satisfy these obligations,in part, by financing emission reductionsin the developing world. The Bali Action Plancalls for provision of new and additional financialresources for developing countries to addressboth adaptation and mitigation. The World BankGroup has been involved in mobilizing publicand private sector funds to support theincremental costs of adopting and diffusing lowcarbontechnologies. So this, too, is a focus ofthe climate evaluation series, though not of thecurrent volume.Emissions from deforestation in the developingworld are significant. Reduction of deforestation,in theory, could be accomplished at low cost andwould offer numerous local side benefits(Chomitz and others 2007). The World Bank hasbeen a supporter of forest conservation andsustainable use; lessons from that experience arerelevant to plans to use carbon finance tosupport reduced emissions from deforestationand degradation (REDD). In contrast, whileagriculture is known to be a significant source ofGHG emissions, and there are prospects of winwinapproaches, there is much less of anevaluable record to examine. Some of the basicscience is still imperfectly understood, andmeasurement of emissions from nonpointsources (livestock, rice fields) is difficult.Scope and Methods of This EvaluationTable 1.2 places this volume within IEG’sexamination of climate issues. This evaluation isconcerned with the first of the three mitigationapproaches— the win- win policies. It confines itsattention to the energy sector, where experienceis greater and where there has been moreattention to climate implications. Because of thepolicy focus, it is mostly restricted to the experienceof the World Bank (International Bank forReconstruction and Development [IBRD] and8

INTRODUCTION, SCOPE, AND MOTIVATIONthe International Development Association[IDA]), although IFC experience is referencedwhere useful for context and comparison. Anongoing IEG evaluation is examining the Bank’srecent implementation of its forest policy.Phase II of the climate evaluation will look at thesecond and third approaches to mitigation.Drawing on and expanding an earlier IEG reporton renewable energy (IEG 2006b), it will reviewthe World Bank Group’s record in promotinginvestments in renewable energy and energyefficiency. The World Bank Group has useddifferent units and financing mechanisms—including carbon finance, IFC investments, GEFgrants, and IDA lending— to promote technologydiffusion or to compensate countries for thecost of adopting technologies with globalbenefits. This phase of the evaluation will alsoassess the institutional contributions of theBank’s Carbon Finance Unit in spurring globaltransfers and aspects of the Bank’s forest experiencerelevant to the REDD agenda. Table 1.1shows the division of mitigation topics betweenthe two phases.A planned third phase will look at emergingpractice in adapting to climate change. IEG hasalso undertaken or planned a number ofthematic studies that are relevant to climatechange adaptation. These include publishedevaluations of the power sector (IEG 2003), ofrenewable energy (IEG 2006b), and of naturaldisaster prevention and relief (IEG 2006a).Ongoing evaluations of World Bank support forwater management and for agriculture providebackground for adaptation issues.The plan for this evaluation is as Later phases of thefollows. Chapter 2 uses cross- national evaluation will examinedata to illustrate the link between the other approaches todevelopment and energy- based emis - mitigation.sions, including the scope for policiesto weaken this link. It presents a general frame -work for understanding energy policy- toemissionslinks, which are numerous andcomplex. It also examines the interlinkagebetween the energy access and climate mitigationagendas.Chapter 3 is a selective review of World Bankinvolvement in issues related to climate changemitigation. It traces the treatment of climatechange in sector strategic documents over thepast 15 years. It gauges the extent and correlatesof attention to climate and related issues in thecountry strategies of the largest emitters amongthe Bank’s clients.Table 1.2: IEG Evaluations Relevant to Climate ChangeTheme Coverage EvaluationDateClimate mitigation National policies, concentrating on energy Climate Change, Phase I 2008Forest policies and projects Evaluation of Bank’s Forest Strategy 2009Low- carbon investment projects, technologydiffusion, carbon finance Climate Change, Phase II 2009Climate adaptation Project and policy experience specificallyrelated to adaptation Climate Change, Phase III 2010Capstone summary of Synthesis of Phases I–III 2010climate evaluationSectoral evaluations on Water Sector 2010related topics Agriculture 2009Renewable Energy 2006Natural Disasters 2006Power Sector Reform 20039

CLIMATE CHANGE AND THE WORLD BANK GROUPWhile the evaluation focuses on learning lessonsfor GHG reduction, it is important to acknowledgethat the Bank Group’s activities canpotentially promote GHG emissions as well asmitigate them. While it is beyond the scope ofthe evaluation to assess the Bank Group’s carbonfootprint, chapter 3 reviews precedents andapproaches to doing so, including the use ofcarbon shadow pricing in project appraisal andportfolio decisions.Chapters 4 and 5 examine two related areas thathave large economic and environmental scaleand are thought to offer large win- win opportunities:energy pricing and subsidies and energyefficiency. In both areas, literature reviewsestablish the scope for economic gains and foremissions reductions. Special attention is paid tocompilation of evidence on the impact of pricereform on poor people.For both areas, content review of Bank lendingover 1996–2007 (with selective attention toearlier years) identifies policy components ofdevelopment and investment lending, againpermitting assessment of patterns and correlatesof engagement. Documentary and statisticalevidence and interviews were used to assesspatterns and correlates of engagement and ofoutcomes. Engagement and outcomes onpricing were assessed in more depth in thecountries with the largest absolute levels ofsubsidy. Because of the complexities of attributionand of modeling, it was not, in general,possible to make quantitative estimates of theimpacts on GHG emissions.Chapter 6 is a case study of an apparently winwintopic: gas flaring. The topic is interestingbecause of its magnitude (more than 400 milliontons of CO 2e per year), the links to policy and tocarbon finance, and the existence of a WorldBank–led initiative for flaring reduction.A final chapter summarizes findings and synthesizescross- cutting recommendations. It alsolooks forward to the second phase, presentingan analytic framework for thinking about cleantechnology diffusion.This volume does not offer a comprehensiveassessment of the World Bank’s role in climatechange. It leaves out many important areas ofengagement. It does not discuss forest issues,and contains only a superficial discussion ofpolicies related to renewable energy. It does notcover the Bank’s advisory and capacity- buildingefforts related to the Kyoto Protocol.The forthcoming second phase, with its concentrationon the project- level experience with lowcarbontechnologies— including renewableenergy and energy efficiency— will cover muchWorld Bank Group activity explicitly oriented tomitigating climate change, including the role ofthe carbon funds.10

Chapter 2Evaluation Highlights• Emissions levels are closely tied toincome level and population, but policyhas substantial leeway to reduceemissions.• Fuel subsidies increase emissions.• Poor countries emit relatively smallamounts of GHGs, and the benefitsof increased electricity access faroutweigh the costs.

Indonesian motorists line up for gasoline in Bogor. Photo ©Dadang Tri/Reuters/Corbis, reproduced by permission.

National Policies andClimate ChangeThis chapter looks at the relationship between development and energyrelatedGHG emissions. It examines the degree to which the Bank’s supportfor clients’ growth and poverty reduction places pressure on GHGemissions, with particular attention to the issue of energy access for the poorest.It also assesses the scope for policies and investments to affect nationalGHG emissions.Energy, CO 2, and Development:A Strong but Pliable RelationshipEnergy use is a large and growing source of GHGemissions. In transition economies, combustionof fossil fuels (including transport and industry)accounts for almost 90 percent of emissions. Indeveloping countries, 43 percent of emissions arefrom energy and industrial processes, 37 percentfrom deforestation and land use change, and 16percent from agriculture. 1 The energy proportionwill rise over time, since energy use is growingfaster than emissions from deforestation.Emissions rise with income and population, andare higher in colder climates. CO 2emissions aredeeply connected, through energy use, todevelopment. Figure 2.1 shows the strongrelationship between per capita income and percapita emissions of energy-related CO 2. Thisrelationship is tighter than the more frequentlydisplayed relationship between CO 2and grossdomestic product (GDP), because countries shiftinto and then out of manufacturing as incomeincreases. It underlines the expectation thatdevelopment will generally result in Emission intensity ishigher emissions. It is crucial to keep in linked to per capitamind that the graph is logarithmic: income.emissions per capita of low-incomecountries are only a small fraction of those of highincomecountries. There is a 600-fold difference inper capita emissions between the highest- andlowest-emitting countries shown.Figure 2.1 also distinguishes among countrieswith different climates, indexed by heating degreedays. The warmest countries are represented bytriangles, temperate countries by circles, and thecoldest countries by pluses. Colder countries tendto be wealthier, but the relationshipbetween income and emissions is lesspronounced in this group. Income andheating need together explain morethan 85 percent of the variation in percapita emissions.Nonetheless, countries vary significantly in theiremissions intensity, even after adjusting for level ofdevelopment. Although the relationship in figureBut some countries aremuch less intensive thanothers at the sameincome level.13

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 2.1: Per Capita Energy Emissions and Income, 20043020Log CO2 per capita (tons per person)1010.50.110 20 30 40Log GDP per capita PPP (constant 2000 intl $) ($000 per person)HDD < 500 HDD 500–3,000 HDD > 3,000Source: 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. Mostcountries lie along the center of the band, but,holding income constant, there can be a sevenfolddifference in emissions intensity. In other words,some countries emit much less than peers at similarlevels of development, and some emit much more.This variability reflects some leeway in the linkagesbetween GDP and energy use, between energyuse and fossil fuel consumption, or between fuelcombustion and CO 2emissions. The energy-GDPratio depends on a nation’s mix of agriculture,manufacturing, and services—more energy isrequired to produce a dollar’s worth of aluminumthan an equivalent value of cassava or insurancepolicies. It also depends on how efficiently firmsand households use that energy—for instance, onhow well they insulate their homes and factories.The emissions-energy ratio depends not only onthe role of fossil fuels versus renewables, but alsoon the precise mix of fossil fuels and the technologiesused to burn them (box 2.1).What determines a country’s emissions levelrelative to its peers? Chance, to some extent—theluck of being endowed with coal or oil deposits.The use of hydropower is a significant determinantof emissions intensity, and reflects bothwater resources and energy policy. 2 Specializationin fossil fuel-intensive exports (such as refineryproducts, steel, and aluminum) will boost relativeemissions, especially for small or poor countries.Measurement error also plays a role, since it isdifficult to measure CO 2emissions comprehensively.However, the relative emissions may in partreflect policy decisions—on energy pricing, forexample. So, while this report attaches neitherblame nor praise to relative emissions, it usesthem as a diagnostic, a useful but imperfectindicator of the scope for reducing GHGs at agiven income level.Some countries have moderated their emissionsper capita despite increased income. Figure 2.2shows how absolute levels of per capita income andemissions changed over the period 1992–2004 forall countries. Most countries have moved up alongthe diagonal, increasing both income per capitaand emissions per capita. But a few countries (bluearrows) have moved down and to the right, increas-14

NATIONAL POLICIES AND CLIMATE CHANGEBox 2.1: Emissions Intensities of Power SupplyGenerators transform energy into electricity. The emissions intensityof supply—CO 2emissions per kilowatt-hour (kWh)—dependson the source of primary energy and the efficiency withwhich that energy is transformed into electricity.Nonfossil energy sources—wind, solar, nuclear, sustainablygrown biomass, and some kinds of water power—can producepower without net CO 2emissions (setting aside the CO 2emitted inthe course of manufacturing turbines and other equipment). An IntergovernmentalPanel on Climate Change (IPCC 2007b) reviewfound that most hydropower plants offered “low net GHG emissions,”but that scientific uncertainties remain. In the tropics,emissions of methane—a more potent GHG than CO 2— from shallowplateau-type reservoirs and from reservoirs with low powerto-flooded-arearatios have been found to be relatively large, butare smaller from deep reservoirs. Emissions are thought to be lowfrom most boreal and temperate reservoirs (UNESCO 2006) and arenot an issue for run-of-river plants that have no reservoir.As a rule, gas generates less CO 2per unit of heat than oil, andoil generates less than coal. Fuel switching is thus an importantstrategy for emissions reduction. Even for a specific fuel there arebig variations in power plant efficiency—the proportion of energythat gets transformed into electricity or commercially valuableheat. Small plants tend to be less efficient in producing heatthan larger ones, and hence more CO 2-intensive. Cogeneration—the combined production of heat and power from a single plant—saves energy and emissions compared with separate productionof these two services. In principle, power plants can reduce theiremissions to zero by capturing and burying CO 2emissions from theirsmokestack, but carbon capture and storage technologies arestill experimental.The table below illustrates the range of emissions intensitiesassociated with different fuels and technologies based on newplants. Life-cycle measures are higher. Liquefied natural gas (LNG)requires substantial energy for liquefaction and transport, but ona life-cycle basis, a modern LNG-fueled generating plant is still 38–47 percent less carbon-intensive than a modern coal plant (Hondo2005). A substantial amount of electricity can be physically dissipated(as opposed to stolen) in transmission and distribution.These losses would have to be taken into account to estimate emissionsper kWh consumed by end-users.CO 2Emissions of New Power Plants by Fuel and Technology (grams per net kWh)Source NETL ESMAPGasoline 1 kW 1,500–1,900Coal subcritical 855 880Coal supercritical 804Coal IGCC 752–796 700–750Diesel 5 MW 650Oil combustion turbine 780Oil combined cycle 520Gas combustion turbine 600Gas combined cycle 362 400Sources: ESMAP 2007; NETL 2007.Note: ESMAP = Energy Sector Management Assistance Program; NETL = National Energy Technology per-person income while decreasing perpersonemissions. Many of these are transitioneconomies that also managed to drasticallydecrease emissions per dollar of GDP. Most of thesecountries began this reduction from a very highrelative level of emissions throughsubstantial restructuring of theireconomies and adjustments in energyprices. In addition, some developingcountries—such as Botswana, China,Emissions levels arerelated to naturalresource endowments,but policy decisions alsoplay a role.15

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 2.2: Absolute Changes in Emissions and Income, 1992–200430201010.5YEMZMBNGABENKENERITJKTGOCIVHTISENUZBMDAKGZAGOSDNBGDZWE PAKGHACMRBOLVNM INDHNDNICGEOSYRIDNAZEEGYECUMARGTMLKA PRYJORPHL SLVPERAUS CANSAUFINKAZ RUSCZEKORDEU BEL NLDAUTGRC ISR JPNNZLSGP DNK GBRZAF POLESP ITAUKRSVKBLRIRN BGR MYSPRTFRAHUNSWE CHEVENROUHRVCHNMEX CHLTHAARGTURDZACOLDOM TUNBRACRIAREIRLUSANOR0.1TZANPLMOZETHZAR10 20 30 40GDP per capita PPP (constant 2000 intl $) ($0000 per person: 1992–2004)Source: Authors’ calculation based on International Energy Agency data..Note: Blue = CO 21992 > CO 22004 and GDP 1992 < GDP 2004; countries with population < 4 mln (2004) excluded.CO2 per capita (tons per person: 1992–2004)16

NATIONAL POLICIES AND CLIMATE CHANGEand India—registered large gains in income percapita with relatively modest gains in emissions.In sum, the tide of development strongly pullscountries to higher emissions per capita. Butsome countries swim across this current.Policy—at least potentially—has substantialleeway to reduce emissions. Next we look at thepathways through which this might occur.Policies and Institutions Can Makea Big DifferenceSupply, transformation, and demand policiesaffect the scale and mix of energy use. Table 2.1presents a policy typology that guides thisevaluation of energy policies and emissions. Atthe center of the diagram is infrastructure forpower generation and transmission. Emissionsgo up with the scale of generation: the totalamount of power produced.Emissions also depend on the mix of primaryenergy used to generate electricity and on howefficiently power is generated and transmitted.Coal combustion releases about a ton of CO 2foreach megawatt-hour produced (with considerablevariation, depending on plant efficiency);natural gas releases about half as much; wind andrun-of-river hydropower release none. So, froman emissions perspective, it matters a great dealwhether a country builds coal, gas, or hydroelectricpower plants; whether its fossil fuel plantssqueeze more or less electricity out of each ton ofcarbon burned; whether low-emissions plants aredispatched in preference to higher-emissionsones; and how much energy is lost intransmission before it reaches homesand factories.Scale and mix of power generation areshaped by three related sets of policies:those affecting supply of primaryenergy, power plant technology choice, anddemand. On the supply side, pricing and regulatorypolicies affect the relative price and availabilityof coal, oil, gas, and hydro. Energy availability isan obvious determinant of power system tech -nology. But power sector regulations matter too,and can affect the efficiency of power transmissionand distribution—an important butsometimes overlooked factor affecting emissions.On the demand side, price policies and efficiencypolicies guide people, companies, and governmentagencies as they choose how much electricityand heat to consume.Public policies also shape the scale and mix ofenergy use for transport. Supply-side policiesinclude those on investments in roads and transitand public transport systems. Demand-sidepolicies include fuel prices, vehicle taxes andstandards, and urban planning.Table 2.2 sketches specific pathways throughwhich broad policy reforms can affect emissionsintensity at the provincial or national level. Notethat these pathways can affect emissions directlyby influencing demand for energy, the source ofenergy, or the efficiency with which energy isused. They can also affect emissions indirectly byEmissions depend on themix of energy used togenerate electricity andthe efficiency ofgeneration andtransmission.Table 2.1: How Policies Affect Energy-Related EmissionsSupply 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 managementsubsidies• Gas regulation, pricing, and • Building, appliance, vehicle standards andinfrastructureregulations• Flaring regulation • Public procurementSource: Author.17

CLIMATE CHANGE AND THE WORLD BANK GROUPTable 2.2: Pathways from Policies to EmissionsPolicyPolicies affecting supplyRemove subsidies to or protection of coal supply or transport; shut down uneconomical coal minesRemove price controls on natural gas supplyRemove regulatory barriers to use of associated gas from oil fieldsProvide capital subsidies to generation (from domestic or international sources)Coordinate international energy infrastructurePrivatize generationRegulate hydropower facilitiesIncorporate energy security considerations into energy sector expansion plansPromote renewable fuels for power generationRegulate and enhance enforcement of limits on industrial pollution and pollution from power generationCO 2impact (+ indicatesan increase in CO 2intensity)Promote bus rapid transitShift buses to compressed natural gas ?Policies affecting demandRemove subsidies or price caps on electricity; increase collection rate of feesInstitute time-of-use charges for electricity ?Remove consumer subsidies for heat while enabling control of heat useRemove subsidies for kerosene, gasoline, and diesel fuelImplement efficiency standards for buildings and appliancesPromote financing for energy efficiencyPromote more efficient urban land usePolicies regarding energy stimulating or stunting growth, givensupply, technology the close relationship betweenchoices, and demandaffect the scale and mixof power generation.income and emissions. (In somecases, these policies will reduceemissions intensity, but increasepower production, so it is possiblethat absolute emissions could increase.)Fuel subsidies areassociated with increasedemissions.As an illustration of the link between policy andemissions, consider the relationship betweendiesel pricing and relative emissions. Diesel is aglobally traded commodity, but tax and subsidypolicies cause its price to vary widely amongcountries. (Diesel is more likely thangasoline to be subsidized.) Unlike mostother energy prices, retail diesel pricesare readily observable. The GTZ(German Technical Cooperation) (GTZ 2007)regularly collects this information and suggeststhat the price relative to the U.S. price can beviewed as an indicator of subsidies or taxes, sincethe U.S. price is close to a free market value.Figure 2.3 shows this relationship for 2004. Thereis a relatively strong negative correlation (ρ 0.39) between diesel price and relativeemissions. Note the well-known tendency for oilproducers to subsidize fuel. Most striking,essentially all countries that maintain dieselprices below half the reference level exhibit highrelative emissions—on average, 91 percentabove their peers. This differential is too large tobe understood merely as the effect of excessivediesel use (though that may be part of the story).18

NATIONAL POLICIES AND CLIMATE CHANGEPathwayShift to lower-carbon energy sourcesIncreases supply of gas, induces shift away from coal or oilIncreases supply of gas, induces shift away from coal or oil; harnesses energy otherwise wasted in flaringFavors generation over end-use efficiencyInternational sharing of hydropower supply and coordination on natural gas pipeline can substitute for smaller-scale, less-efficient coal or dieselpower generationProbably favors gas-based generation over coal (reducing emissions) or hydro (increasing emissions); should promote generation efficiencyDepending on their application, environmental and social regulations could expand or contract the development of hydropower facilities andrestrict or allow plants that create methane emissionsCould promote a shift toward coal (if reserves are available) or renewables, boosting or decreasing emissions intensitySubstitutes for fossil fuelsParticulates and sulfur oxide (SO x) pollution from power generation and industrial activity can be mitigated in part through greater efficiency inthe combustion of coal and oil, through cogeneration, and by switching to gas and renewables. However, there are also pollution mitigationoptions that do not involve GHG reductions.Reduces fuel consumption by shifting passengers from cars and reducing congestionPossible reduction in emissions intensityWhere consumers have unrationed access to subsidized energy, higher prices will lead to reduced consumption and emissions. Where low priceshave led to inadequate investment, removal of subsidies could result in expanded supply of grid-based power and decreased use of small orcaptive 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 generatorsIn 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 consumptionReduces fuel consumption by reducing the demand for transportRather, the diesel subsidies may reflect morepervasive energy-price distortions. 3GHG Mitigation Need Not Compromisethe Pursuit of Energy Access for thePoorestAbout 2 billion people lack access to electricity.Electricity provides poor people with a broadrange of social and productive benefits and iswidely viewed as an important tool for achievingthe Millennium Development Goals. Does the goalof mitigating GHGs stand in the way?It need not. Figure 2.1 shows that poor countriesemit only a tiny fraction of the per capitaemissions of rich ones. A rough calculationshows that providing 2 billion people with basicelectricity access—one kWh per Poor countries emit onlyhousehold each day—would boost a tiny fraction of the perworld GHG emissions by less than 0.4 capita emissions of richpercent, even if power were provided countries.entirely by the most carbon-intensivemeans. The rest of the world increases its carbonemissions by this much about every two months.The benefits of electricity access to the poor alsofar exceed any conceivable damages from theassociated emis sions. An IEG review of willingness-to-payfor grid-connected electricity foundvalues of $0.47 to $1.11 per kilowatt-hour 4 (IEG2008c). A project to meet unserved needsthrough diesel power (a typical option in Africa)would result in emissions of 600–1,000 grams perkWh. So even if damages were assumed to fall19

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 2.3: Relative Emissions Are Higher in Countries with Diesel Subsidies2Log emissions relative to peers with similar income10120 1 2 3Diesel prices, local/globalSources: 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 CO 2emissions per year.The benefits of electricity entirely on other poor people andaccess far exceed the were assessed at a carbon shadowdamage of associated price of $50 per ton of CO 2, and if noemissions. low-carbon alternatives were avail -able, gross project benefits would bereduced by no more than $0.03 to $0.05 perkWh. And lower-carbon alternatives are availableand the damages, if any, would be smaller.Of course, people depend on energy in indirectways, as for manufactured goods and employment.But figure 2.1 suggests that economic growth inthe poorest countries generates little pressure onthe atmosphere. The 50 least-developed countries,with a population of about 725 million, had energyrelatedemissions 5 of 121 million tons of carbondioxide equivalent (CO 2e) in 2004, against the12,949 million tons of CO 2e of the OECD. Sinceemissions are roughly proportional to income percapita, a 100 percent growth in the least-developedcountries’ income would generate about the sameincremental emissions as a 1 percent growth inincome in the OECD countries.So there is no reason to impose any mitigationburden on the world’s poorest people. Theenergy access agenda could proceed independentlyof the mitigation agenda.Nonetheless, there are important areas of connectionbetween these two agendas. First, it is possiblethat carbon finance could support provision ofelectricity access through renewable energy.Second, price reform policies—which can haveeconomywide emissions-reducing impacts—could help or hurt poor people, depending onhow the reforms are implemented. This issue willbe discussed at greater length in chapter 4. Third,policy choices, including pricing policies, can affecta country’s long-term trajectory—that is, whetherit follows the steep (emissions-intensive) orshallow path to wealth in figure 2.2. Finally, as theconcept of energy access is broadened to includeincreased energy consumption by wealthiergroups in middle- and upper-middle-incomecountries, growth begins to put more significantpressures on emissions. It is in these countries thatthe efficiency and pricing policies examined inchapters 5 and 6 offer the highest absolute levelsof domestic savings and emissions reductions.20

Chapter 3Evaluation Highlights• Since 1992, Bank operations haveevolved an approach to climatechange.• Bank strategies have continuallystressed energy efficiency and removalof price distortions.• About two-thirds of Country AssistanceStrategies in countries withhigh GHG emissions included a goalrelated to reductions, but only half ofthose that mentioned energy efficiencyincluded specific objectives.• Carbon accounting provides a wayto balance the environmental costsand benefits of investments, but itshould be approached with care.• A systemwide approach is importantto take account of trade-offsamong economic and environmentalcosts and benefits.

Satellite composite photo of the earth at night. Photo courtesy of NASA.

World Bank Operations andClimate ChangeUntil the 2008 announcement of its Strategic Framework on Developmentand Climate Change, the Bank Group had lacked a corporate approachto climate change. However, there has been scattered andincreasing attention to GHG mitigation in energy and environment strategiesand in country dialogue, and a growing portfolio of GHG-reduction and cleanenergy projects. This chapter briefly reviews relevant World Bank activities.Climate in World Bank Policiesand StrategiesGlobal attention to climate change surged duringthe 1980s and emerged with full force with the1992 Rio Conference of the UN Conference onEnvironment and Development. The WorldBank’s World Development Report of that yearhighlighted the importance of addressing climatechange (World Bank 1992). It pointed to amplescope for win-win policies, such as energy pricereform and improvements in energy efficiency,but also noted the need to address environmentalexternalities through taxes or grants.The win-win message was picked up in a 1993policy paper, Energy Efficiency and Conservationin the Developing World: The World Bank’sRole (World Bank 1993). The paper promisedthat the Bank would “continue its efforts towardincreasing lending for components to improveEE [energy efficiency] and promote economicallyjustified fuel switching.” While only brieflymentioning GHGs, it outlined a four-pointprogram to:• Integrate energy efficiency issues into countrypolicy dialogue.• Decline to finance energy supply in the absenceof structural reform.• Give demand-side management (DSM) “highlevel,in-country visibility.”• “Monitor, review, and disseminate the experienceof new efficiency-enhancing supply-sideand end-use . . . technologies . . . help financetheir application; and encourage the reductionof barriers to their adoption.”The Bank’s Energy Policy was published at aboutthe same time and remains in force. It stresses“integrated energy strategies that help borrowingcountries take advantage of all energy supplyoptions, including cost-effective conservationbasedsupplies and renewable energy sources” aswell as “cost-effective . . . options . . . to mitigatethe negative environmental impacts ofelectricity supply and end use.” Itbriefly mentions fuel switching andenergy efficiency as means of abatingCO 2emissions.Bank policies haveincluded concerns aboutclimate change since1992.23

CLIMATE CHANGE AND THE WORLD BANK GROUPAbout seven years later, four strategic documentsreemphasized the themes of the 1992 WorldDevelopment Report, while elevating the promi -nence of climate change. Come Hell orIn the late 1990s, High Water (World Bank 1999) wasstrategic documents concerned with climate change vulnerabilityand adaptation. It found thatelevated the prominenceof climate change. climate change risks were not wellassessed in project preparation or inCountry Assistance Strategies (CASs) andrecommended attention to current and futureclimate variability.Fuel for Thought: An Environmental Strategyfor the Energy Sector (World Bank 2000) drewattention to mainstreaming energy into CASs andoperations. It stated, “At the heart of mainstreamingenvironment within the Bank is the eliminationof market distortions, particularly in energypricing. As long as energy prices are subsidizedor not at market level, and as long as gross interfuelpricing differences remain, it is difficult toformulate cost-effective measures to mitigatepollution from energy use.”With an emphasis on reducing the damagesof local air pollution, Fuel for Thought stressedthe need for a cross-sectoral perspective andproposed the use of “Energy-Environment Re -views” as an upstream analytic tool for promotingthis perspective. One of the document’s strategicobjectives was to “mitigate the potential impact ofenergy use on global climate change.” Its mediumandlong-term outcome indicators for achievingthis objective (through fiscal year 2008) includeenergy-efficiency programs in 10 states orcountries; development of cleaner sources ofenergy (no quantitative goals); increasing thevolume of energy trade among at least 6 countries;and doubling of power generation throughrenewable energy sources in at least 10 borrowers.Reviewing post-1992 progress on this agenda,Fuel for Thought drew three main lessons:That more time than initially estimated isneeded to achieve results on environmentaland social issues; that commitment isoften missing on the part of the borrower tostay the course and to achieve real change;and that while there is strong engagementin the reform agenda, the strength of theGroup’s commitment to energy efficiencyand the environment is not what it shouldor could be. The Group must substantiallyincrease its efforts and improve its staff andskills mix if it is serious about implementingits principles in these areas.The World Bank Group’s Energy Program waspresented to the Board of Directors andpublished in 2001. Although not a formal policydocument, it reported that theWorld BankGroup has set quantitative objectives fordeveloping and transition economies to bereached by 2010.” These included “reducing theaverage intensity of carbon dioxide emissionsfrom energy production from 2.90 tons per tonof oil equivalent to 2.75” and “reducing theaverage energy consumption per unit of GDPfrom 0.27 ton of oil equivalent per thousanddollars of output to 0.24.”The World Bank Group Environment Strategyof 2001 dealt at length with the “threat posed byclimate change to the development process.” Itcontinued to stress the twin themes of no-regretpolicies (including energy sector reform, energyefficiency, and fuel switching), together withcontinued collaboration with the GEF onrenewables and use of the Prototype CarbonFund (PCF) as a pilot to demonstrate thepotential for carbon trading under the KyotoProtocol. The strategy also pointed to mitigationopportunities in forestry and transport andpromoted attention to mainstreaming efforts inclimate adaptation. It stressed the use of StrategicEnvironmental Assessments, includingEnergy-Environment Reviews to ensure that localand global environmental issues are consideredin the context of energy systems choices.The World Bank Group reports that it committed$6.1 billion to renewable energy and $2.1 billionto energy efficiency during 1990–2004. In 2004,in Bonn, the World Bank Group made a commitmentto expand its investments in newrenewables (excluding large hydropower) and24

WORLD BANK OPERATIONS AND CLIMATE CHANGEenergy efficiency by 20 percent annually over2005–09. Total reported commitments for newrenewables were $860 million from fiscal 2005 to2007, and commitments to energy efficiencywere $952 million over the same period. Accordingto data released by the Bank, the World BankGroup outperformed its Bonn commitmentduring 2005–07, committing about double itsgoal of $913 million.In support of its commitments expressed throughthe Gleneagles Communiqué, “Climate Change,Clean Energy and Sustainable Development” (July2005), the Bank developed an InvestmentFramework for Clean Energy and Developmentthat was formally presented to the DevelopmentCommittee in the spring of 2006; an Action Planwas endorsed by the Committee in spring of 2007.Inaccurately named, this evolving framework hasthree pillars: investment in power systemexpansion, with emphasis on increasing access forthe poor; mitigation of GHGs from both energyand land use change; and adaptation to climatechange. The mitigation component stressedenergy efficiency as a “quick-win and high-payoff”pursuit, but focused on the mobilization of concessionalfunds for investments in clean technologiesand the promotion of carbon trading.Global Finance and InstitutionsIn the post-Rio era, the World Bank has beeninvolved in the development of global institutionsfor climate change mitigation. These arebriefly reviewed here for context.The GEF was established in 1991 as the financialmechanism of the UNFCCC. The World Bankcontributed to the design of the GEF’soperational programs in climate change: removalof barriers to energy conservation and energyefficiency, removal of barriers and reduction ofimplementation costs for renewable energy, andreduction of the long-term costs of low-GHGemittingenergy technologies. The GEF hasapproved 634 climate change projects withgrants totaling $2.3 billion and cofinancing of$14.6 billion. The GEF also supports interventionsthat increase resilience to the adverseimpacts of climate change. It administers $300million in three special funds, theLeast-Developed Countries Fund, theSpecial Climate Change Fund, and theStrategic Priority for Adaptation Fund.The World Bank is an implementingagency of the GEF and, as such, hashelped its client countries mobilize resources tocover the additional costs of initiatives aimed atmeeting UNFCCC objectives. The World BankGroup GEF Climate Change Portfolio hasevolved from mainly demonstrationAs it agreed to do inprojects (that is, how to increase the2004, the Bank increasedefficiency of existing energy facilitiesits commitments toand how to feasibly develop new andrenewables and energyrenewable energy sources) to a focusefficiency.on market transformation in an effortto remove barriers to its present focuson mobilizing and enhancing the capacity of localfinancial markets to support environmentalinvestments.Building on its experience with the set of pilotprojects known as Activities Implemented Jointly,the Bank developed the Prototype Carbon Fund(PCF). The PCF was intended to pilot mech -anisms for project-based GHG emissionsreductions under the Kyoto Protocol. Alreadyunder development while the Kyoto Protocol wasbeing negotiated, the PCF was formally launchedin January 2000. The PCF was successful in raisingfunds and has since been supplemented byanother 10 funds, all of them overseen by theBank’s Carbon Finance Unit.The Carbon Finance Unit operates by identifyingand financing emissions-reducing projectsthrough agreements to purchase emissionsreductions, for the most part destined for useunder the Clean Development Mechanism(CDM).By August 2007, the Carbon Finance Unit hadraised a total of $2 billion. It signed purchaseagreements of about $1.5 billion for 200 milliontons of reductions from 89 projects (World Bank2007a). This constituted about 20 percent of alltransactions in the CDM. However, only 21million tons had been issued through 2007.The 2001 EnvironmentStrategy stressed no-regretpolicies andcollaboration with GEFand the Prototype CarbonFund.25

CLIMATE CHANGE AND THE WORLD BANK GROUPTwo-thirds of the 308projects with climatechange themes are in theenergy/mining sector.About 11 percent of the portfolio is devoted towaste management (landfill-gas recovery), 7percent to hydropower, 3 percent to biomass, 2percent to wind, and 9 percent to energyefficiency. The portfolio is currently dominated(56 percent) by projects for the destruction ofHFC-23, a potent GHG that is produced as a byproductof HCFC-22, a refrigerant that is a GHGand an ozone-depleting substance.HCFC-22 has been phased out in thedeveloped world, but it is temporarilypermitted for manufacture in thedeveloping world.The impact and additionality of these projects,and the role of the PCF in shaping carbon marketinstitutions, will be addressed in the subsequentphase of this evaluation. For current discussion,there are three noteworthy features of CarbonFinance Unit projects. The first is that, by design,they incorporate some form of carbon pricing.Second, they generally have no policy content.Carbon projects currently operate at a project orfacility level, using payments for reductions as away to make otherwise marginal projectsbankable. Third, PCF/Carbon Finance Unitprojects have mostly originated outside theBank.MainstreamingProjectsThere are 308 World Bank projects with anexplicit climate change theme; of these, 132 areIBRD/IDA investment loans, 10 are DevelopmentPolicy Loans (DPLs), 86 are GEF, and 46 arecarbon offsets (table 3.1). About two-thirds ofthese projects are mapped to the Energy/MiningSector and include natural gas recovery, coal bedmethane recovery, renewable fuel development,and energy conservation, among other activities.Projects mapped to the Environment SectorBoard also involve energy efficiency andrenewable energy. Rural development projectsare mostly forestry related. These tallies includeall projects with a climate change theme, regardlessof the notional proportion dealing withclimate. The thematic mapping, however, whichis done by task team leaders, is not necessarilyconsistent or accurate.Table 3.1: Climate-Themed Projects by Sector Board and Funding Source, Cumulative, 1990–2007InvestmentsOtherCarbon product Non- TotalSector board DPL IBRD/IDA GEF a offset lines b lending financingEducation 3 3Energy and mining 8 103 51 16 3 7 188Environment 1 11 24 24 5 14 79Economic policy 1 1Financial sector 1 1 1 3Private sector development 1 1Rural development c 3 5 4 1 2 15Transport 4 3 7Urban development 4 2 1 1 8Water supply and sanitation 3 3Total 10 132 86 46 10 24 308Source: 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.”26

WORLD BANK OPERATIONS AND CLIMATE CHANGEThe number of projects has increased sharplysince 2004, reflecting the entrance of the carbonfunds (figure 3.1a). However, the total volume ofclimate-related components has stayed relativelyconstant since Rio (1992), except for a large spikein 2006 associated with the two large HFC-23carbon projects (figure 3.1b). The other carbonprojects are relatively small.Country Assistance StrategiesA recent review by Nakhooda (2008) assessed 54CASs issued over the period 2004–07 for mentionof climate change. She found 32 that discussedGHG mitigation in a sectoral context, With the introduction of18 with concrete targets related to carbon funds, the numbermitigation. However, the quality and of projects increasednature of these references varied. sharply.Some were concerned with CDMparticipation, while most did not mention GHGsexplicitly. Only 11 mentioned climate vulnerabilityor adaptation finance.For this evaluation, IEG reviewed the countrystrategies of the 33 Bank clients with the largestenergy-related GHG emissions over the period1995–2007 (table 3.2). Twenty of these countriesFigure 3.1: World Bank Climate-Themed Projects and Commitments(in $ millions by year, 1990–2007)a. Number of Projects4035Number of projects3025201510501990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007b. Commitments1,200World Bank commitments, US$ millions1,00080060040020001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Other lines IBRD/IDA Carbon offset GEFSource: 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.27

CLIMATE CHANGE AND THE WORLD BANK GROUPTable 3.2: CAS Goals for Energy Policies and Climate Change Issues, 1995–2007Primary energysector reforms,Power Primary including EfficiencyGDP per unit CO 2sector energy Power closing of policiesof energy emissions pricing pricing sector loss-making andCountry use (2005) a (2005) b policies policies reforms c coal mines investments dAlgeria 6 88.10 0 1 1 1 0Argentina 7 146.64 1 1 3 0 0Azerbaijan 3 37.03 2 3 2 2 1Bangladesh 7 39.82 4 3 6 2 0Brazil 8 360.57 1 0 5 3 0Bulgaria 4 50.54 2 3 5 3 1Chile 7 66.19 0 0 0 0 0China 3 5,322.69 2 1 7 1 5Colombia 9 58.80 2 0 1 0 0Egypt, Arab Rep. of 5 161.79 1 1 3 0 1Hungary 8 59.84 0 0 1 0 0India 5 1,165.72 3 1 4 1 1Indonesia 4 359.47 4 3 3 4 0Kazakhstan 3 198.01 2 0 2 1 0Malaysia 5 155.51 0 0 0 0 0Mexico 7 398.25 2 1 6 2 0Nigeria 2 105.19 0 0 1 1 0Pakistan 5 121.49 2 2 3 1 0Philippines 6 78.06 4 1 5 0 0Poland 6 284.64 0 0 3 5 2Romania 5 99.34 3 2 5 4 0Russian Federation 3 1,696.00 2 3 6 6 0Serbia na 52.56 1 0 0 0 1Slovak Rep. 5 37.81 1 1 1 1 0South Africa 3 423.81 0 0 0 0 0Thailand 4 234.16 0 0 2 0 1Turkey 7 230.04 0 0 4 4 0Turkmenistan na 49.64 0 0 0 1 0Ukraine 2 342.57 3 1 4 4 1Uzbekistan 1 117.97 2 4 2 2 0Venezuela, R.B. de 4 151.29 0 0 1 1 0Vietnam 4 80.38 5 0 4 1 2Note: 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, 1980–2005 (Million Metric Tons of Carbon Dioxide). InternationalEnergy Annual 2005 Table Posted: September 18, 2007. 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 ofenergy-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.28

WORLD BANK OPERATIONS AND CLIMATE CHANGECAS goals on Share of Share ofEnergy security GHG reduction, energy- energy-Renewable Energy-efficiency (fuel mix; global treaties efficiency efficiency Totalpolicies goal alternative on climate change component in projects in energyand (high-level sources of and ozone-depleting total spending energy commitments, kinvestments e target) f energy) g substances h for energy, % i portfolio, % j US$mln0 0 0 1 0.0 0.0 126.341 0 0 6 0.0 0.0 557.810 0 0 0 0.0 0.0 125.942 1 1 0 0.0 0.0 919.840 4 0 4 1.0 3.6 1,558.931 4 0 2 25.3 27.3 191.602 1 1 1 30.6 14.3 22.841 9 5 5 5.7 15.9 8,138.290 1 0 1 0.0 0.0 321.760 0 0 1 0.0 0.0 650.550 0 0 0 0.2 33.3 235.700 2 1 1 0.5 6.8 6,243.181 2 1 1 0.4 4.8 2,525.440 0 0 0 0.0 0.0 427.490 1 1 0 0.0 0.0 200.000 3 3 6 1.5 8.0 1,027.410 0 0 0 1.4 14.3 624.450 1 1 2 0.0 0.0 2,327.042 2 1 1 0.1 4.8 1,410.350 2 0 0 31.9 41.2 1,295.971 2 1 1 2.3 12.5 879.720 3 1 5 13.7 31.6 3,291.090 0 0 0 45.0 25.0 107.061 1 0 1 0.0 0.0 0.000 1 0 2 0.0 0.0 3.340 1 0 1 0.9 13.3 1,337.551 0 2 0 0.0 0.0 2,391.620 0 0 0 0.0 0.0 2.250 4 2 3 18.8 17.6 1,310.390 0 0 0 0.0 0.0 0.630 0 0 0 0.0 0.0 9.005 3 0 1 0.7 11.1 1,460.71g. 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 CO 2reduction, 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 1990–2007. 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 ofBank Group renewable energy and energy efficiency reports. Excludes IFC and MIGA.k. World Bank data. Energy commitments represent the commitments only for energy sectors.29

CLIMATE CHANGE AND THE WORLD BANK GROUPOf 33 CASs for the Bankclients with the largestenergy-related GHGemissions, 20 had astrategy with a goalrelated to GHGreduction.had at least one strategy with overall goalsrelated to GHG reduction, the UNFCCC, orthe Montreal Protocol. But emphasis was unevenamong countries. The greatest attentionwas given to these goals in Argentina,China, Mexico, and Russia.Table 3.2 also tabulates CAS goalsrelated to some of the potential win-winpolicies discussed later in this report.The tabulation includes statements ofhigh-level goals and specific, potentiallymonitorable objectives. For 20 of thecountries there was some mention of energyefficiency as a high-level goal. However, in only 10countries were specific goals mentioned. Thissuggests a disconnect between rhetoric andaction. But of the 10 countries singled out, 7 werein the most energy-intensive half of the group.In this set of countries, 17 had specific goalsrelated to primary fuel pricing, 21 had powerpricinggoals, and 25 had goals relatedFor the 20 countries with to power sector reform. The out -CASs that mentioned comes of some of these goals will beenergy efficiency, only 10 examined in chapter 4. In sum, takingincluded a specific goal. the Bank’s country strategies as strongindicators of country interest in theseagendas, such interest is widespread but notuniversal among client countries.Cross-Sectoral AnalysesIEG’s Environmental Sustainability: An Assessmentof World Bank Group Support (IEG 2008b)stressed the need for cross-sectoral integration ofenvironment and infrastructure concerns. Asnoted above, cross-sectoral analysis wasemphasized in 2000 by Fuel for Thought and in the2001 Environment Strategy, which pointed toStrategic Environmental Analyses (SEAs) andEnergy-Environment Reviews (EERs) as instrumentsfor accomplishing this. SEAs are the sectoralor policy generalization of project-level environmentalimpact analyses, which comprehensivelyassess the costs and benefits of alternative plans,taking environmental externalities into account. Arelated tool is the Country Environmental Analysis(CEA), intended to mainstream environmentalissues into overall country strategic planning. SEAsand EERs were introduced around 2000, whileCEAs started in 2003.Full-scale EERs have been completed andpublished for Bulgaria, Egypt (incorporated inthe subsequent CEA), Iran, Mexico, and Turkey.The Egypt, Iran, and Mexico EERs address thecountries’ large fuel subsidies, finding them amajor source of health damage as well as fiscaldrains.Iran’s fuel subsidies in 2001 were estimated at17.8 percent of GDP, and the damage of airpollution to health was estimated at 8.4 percentof GDP and growing. The report exploredscenarios for price reform and additional sectoralmeasures, finding that price reform would cuthealth damage in half, though at some cost ininflation.The Egypt CEA similarly found that adjustingenergy prices to opportunity cost levels wouldreduce local damage by $200 million yearly, withadditional savings available from implementingwin-win efficiency measures.The Mexico EER found that removal of powersubsidies would reduce CO 2emissions by about3 percent. There would be a very small (

WORLD BANK OPERATIONS AND CLIMATE CHANGEassessment of a predetermined and possiblysuboptimal site. An SEA for Nepal (Governmentof Nepal 1997) ranked 138 potential medium-sizehydropower projects for economic, environmental,and social impact; it prioritized 7 as havinglow impact. One of the seven was chosen forfinance under the subsequent Nepal PowerDevelopment Project. An SEA for the Laoshydropower sector (Norplan 2004) assessed 21proposed hydropower sites. While it notes thatsome threaten primary forests, and calculatesenvironmental costs ranging from $0.001 to$0.136 per kWh, it does not propose a ranking ordo a trade-off analysis. Finally, an SEA for the NileEquatorial Lakes Region (SNC Lavalin International2007) screens hydropower options (andthermal alternatives) against economic, environmental,social, and risk criteria, including lifecycleCO 2emissions, although it does not takeaccount of methane emissions. It discusses avariety of scenarios for sector expansion andconsiders a complex set of trade-offs.According to the recently released World Bankassessment of CEAs (Pillai 2008), as of early 2008the Bank had initiated 25 of the analyses. Of the16 completed CEAs, those on Belarus, Egypt, andIndia mentioned climate change in the contextof energy policies. These sectors were treatedalso in Bangladesh, Colombia, Pakistan, andSerbia-Montenegro. The India CEA dealt atlength with the relationship between coal powerand air pollution. It emphasizes the promotionof energy efficiency and renewable energy,including finalization of the Renewable EnergyPolicy and support for upgrading inefficient oldcoal plants. (A contemporaneously preparedIBRD/GEF project proposes to provide suchsupport.) However, the CEA is silent on the wellknownenergy-irrigation nexus: the poorlytargeted electricity subsidies that encourageunsustainable use of scarce groundwater.The Belarus (2002) and Serbia-Montenegro(2003) CEAs emphasize energy efficiency and theneed to rationalize prices and reduce subsidies.Tariffs did rise in Belarus over 2002–05. Anefficiency project is in the pipeline for Belarus,and several projects with efficiency componentshave been in itiated in Serbia-Montenegro. TheBangladesh, Colombia, and Pakistan CEAs discussvehicle-related emissions and fuel quality, but donot link the discussion tobroader energy or transport SEAs have been used toissues. The Bangladesh CEA, systematically assessfor instance, discusses pol - hydropower operations.lution from diesel engines butdoes not discuss the role of diesel subsidies. Thisis in contrast to the Egypt CEA.Strategic Considerations for the Bank:Accounting for Local and Global ImpactsPolicies and projects supported by the World BankGroup have both local and global effects. Not all ofthem are win-win. In the Bank Group’s countrybasedmodel, infrastructure investments, includingthose in transport and power, are seen by manyclients as an important source of growth andpoverty reduction. Support for growth, rather thanclimate change mitigation, remains the focus ofthe Bank Group’s energysupport, even as it moves to Of 16 completed CEAs, 3increase the share of renewable mentioned climatepower within that support. As it change in the context ofallocates its efforts and funds energy policies.across activities, should theBank Group take into account their global impacton climate as well as their local impact on welfare?Without presuming to answer that question, thisevaluation looks at methods for assessing thetrade-offs and complementarities, rationales forusing them, and experience in their application.There are divergent opinions on whether andhow carbon emissions should enter into projectanalysis and selection. One view holds that sincedeveloping countries have not taken on responsibilityfor emissions reductions, emissionsshould not be a consideration in project se -lection, except where emissions reductions are asource of revenue. An opposing view holds theBank responsible for emissions it finances, in thesame way that private companies are beginningto view carbon emissions as liabilities.A third view sees valid differences in scopebetween the concerns of the Bank Group andthose of any individual developing-country client.31

CLIMATE CHANGE AND THE WORLD BANK GROUPA Bank-supported project This reflects the underlying tensionin one country could between the Bank Group’s countrybasedmodel and its support for globaldamage or benefit otherclient countries. public goods, an issue discussed atlength in IEG’s 2008 Annual Review ofDevelopment Effectiveness. The client is properlyinterested in promoting its own development,does not accept limits on emissions, and correctlyconsiders that its historical or per capita contributionto global emissions is small relative to thatmade by developed countries. The Bank,however, is concerned with the welfare of all itsclients and with climate risks to its global portfolio.From the viewpoint of environmentaleconomics, a Bank Group–supported project inone country may, at the margin, accelerate orretard climate change, and thereby damage orbenefit other vulnerable client countries. Thesemarginal impacts are in addition to the muchmore substantial damages from the cumulativeemissions of developed countries.Carbon accountingprovides a nuanced wayto balance the climatecosts and benefits ofinvestments.Carbon Accounting at the Investment LevelHow might the Bank take emissions into accountin project design and selection? Some observersadvocate proscribing all funding for coal powerplants, oil extraction, or other fossil fuel-relatedactivities. A provocative analogy would be theBank’s policy toward tobacco. Tobacco is aremunerative export crop that provides domesticpoverty-reduction benefits through employment.But it is also an addictive substance that imposessubstantial transborder economic and healthcosts. So Bank investments in tobacco pose atrade-off between local benefits and globaldamages. Recognizing this, in 1991 the WorldBank adopted a policy prohibiting lending orinvestments in tobacco production, processing,or marketing. (However, the policy allows forexceptions in countries where tobacco representsmore than 10 percent of exports.)Carbon accounting—estimating and monitoringproject emissions—provides a morenuanced way to balance the costs andbenefits of investments. It can be usedto assess alternative ways of fulfilling aparticular project objective, such asconstructing a 200-megawatt powerplant. Alternative technologies, such as coal andgeothermal, could be compared on purely eco -nomic criteria as well as on carbon emissions. Fouruses have been suggested for this information.• First, carbon accounting may promote moreanalytic rigor and uncover win-win project alternativeswith higher returns and lower emissions.• Second, carbon accounting may be used to justifycarbon market finance. If the coal plant ischeaper than the geothermal plant but emitsmore CO 2, it is possible to compute the valueper ton of CO 2reductions at which the geo -thermal plant becomes more attractive (theswitching cost). If emissions reductions can besold at this price on the carbon market, then thecleaner plant can be funded. Note, however, thatthe long-term and large-scale availability of carbonfinance is uncertain, pending the outcomeof negotiations on the global climate regime.• Third, carbon accounting provides informationon the switching cost. This information isuseful in assessing the impact of future policieson emissions and on the economy. It can informmodels used by climate scientists, negotiators,and others.• Finally, and most controversially, a shadowprice—representing the marginal impact of achange in emissions—could be applied to aproject’s emissions, and this impact incorporatedin an economic rate of return or cost-benefitanalysis. These, in turn, could enter projectappraisals or evaluations, as is often done withother kinds of environmental externalities.Carbon shadow pricing is not new to the Bank. In1999, the Bank published a pilot study (ESMAP1999) that examined how carbon shadow pricingmight affect project choice. It found that 41 percentof loans examined would become uneconomic iftheir gross emissions carried a shadow price of $11per ton of CO 2; this proportion was lower ifemissions were netted against a business-as-usualbaseline. But among the eight thermal plantsexamined, negative switching values (that is,apparently overlooked win-win alternatives) werefound for six. The study found no barriers tocalculating carbon footprints in the projects it32

WORLD BANK OPERATIONS AND CLIMATE CHANGEassessed, which were well-defined generationprojects. Even in the absence of carbon markets, itrecommended shadow pricing as an informationalpractice that might uncover cost-effective switches.Carbon shadow-pricing is often incorporated inGEF and other projects that have emissionsreduction as a cobenefit. For instance, theefficiency projects and subprojects described inbox 5.1 had returns of up to 289 percent whencarbon benefits were included. Carbon pricingand monitoring is already a feature of projectdesign and appraisal for the Bank’s carbonprojects. Under the CDM, carbon projects mustestimate, and then verify, actual emissions. Theseemissions are compared to business-as-usualemissions to assess project impact—that is, toquantify emissions reductions. Financialappraisal takes into account the value ofemissions reductions—an actual, rather than ashadow, price of carbon. A standard procedurefor justifying a carbon project is to argue that thecarbon price is greater than the switching price.An important feature of CDM projects, includingthose of the World Bank, is that they requirerigorous independent monitoring and verificationof emissions. This information is publishedthrough the CDM and provides a public good:rapid feedback on the outcomes of new types ofclean technology. For instance, through thisreporting process it has rapidly become clearthat projects involving landfill-gas recovery(generation of power from municipal waste) areconsistently underperforming compared withappraisal projections. This is prompting reexaminationof the engineering models used topredict project output.IFC’s recently adopted Performance Standard 3requires its corporate clients to annually quantifydirect and some indirect 1 GHG emissions forprojects that are expected to emit more than100,000 tons of CO 2e annually. Clients are alsorequired to evaluate “technically and financiallyfeasible and cost-effective options to reduce oroffset project-related GHG emissions,” includingcarbon finance, changes in project design, andemissions offsets.This monitoring and assessmentrequirement—which hasno counterpart in the WorldBank’s safeguard policy—is astep forward in disclosure and transparency andwill provide lessons for the World Bank and otherfunders. It will stimulate scrutiny and discussion ofproject alternatives. As an early example of thestandard’s application, consider the IFC’s environmentalassessment for the Lanco Amarkantakthermal power plant, which is scheduled to emit4.2 million tons of CO 2per year.In addressing PerformanceStandard 3, the publicly dis -closed environmental reviewrepresents the plant’s emissionsintensity of 910 gCO 2/kWh asbetter than the Indian nationalaverage of coal plants at 1,225gCO 2/kWh. 2 However, the relevant comparison isto new coal plants, rather than the existing semiobsolescentfleet as a whole.Carbon shadow pricingdates back to 1999 in theBank.IFC’s recently adoptedPerformance Standard forGHG emissions is animportant step, for whichthere is no counterpart inthe Bank.Monitoring and reportingemissions could stimulatediscussion of projectalternatives.Modern subcritical coal plantsemit 855–880 gCO 2/kWh (seebox 2.1), though Indian levelsmay be higher because of differencesin coal quality. Alternatively,one could compare the plant’s performanceto the systemwide build margin across all energytypes, which is 680 gCO 2/kWh according to theCentral Electricity Authority. 3 However, the plant’senvironmental statement says that the owner willexplore various means of reducing emissions,including afforestation offsets and cofiring withbiomass.Carbon Accounting at the System LevelAs the review of SEAs and EERs pointed out, anyindividual power plant is a small component in aninterconnected energy system. Many of theimportant trade-offs among economic andenvironmental costs and benefits occur at thissystem level. So an analysis of choice of technologyfor a predetermined goal at a predeterminedlocation may completely miss the crucialsystemwide options. For instance, systemwidepower efficiency improvements might substitutefor a new generating plant. At the same time, itis possible that a proposed fossil fuel plant,33

CLIMATE CHANGE AND THE WORLD BANK GROUPemissions-intensive when considered on its own,is a necessary part of a portfolio that includeslower-carbon sources. This suggests a system -wide approach to assessing costs and benefits,including emissions.Again, this approach is not new to the Bank. Twostate-level studies of the Indian power sector,while not formally designated as EERs, exemplifythe approach and are noteworthy for monetizinglocal and global environmental damages andassessing trade-offs against the consumptionvalue of electricity. The studies ofA systemwide approach Rajasthan and Karnataka (ESMAP andhas been studied in others 2004a, 2004b), undertaken incollaboration with the state governments,examine supply and demand alternatives—includingpower sector and tariffreform—for meeting the states’ power needs.Environmental impacts include three kinds oflocal air pollution (SO x, NO x, and PM 10[partic-ulate matter of 10 micrometers or less]),consumptive water use, and CO 2emissions, withdamages put at $55 per ton of CO 2e.And it has been appliedin South East Europe.The Rajasthan study shows that failure of reform,by choking off power capacity expansion,severely stunts economic performance andleaves local pollution virtually unchanged asindustry switches to small, polluting dieselgenerators. Stunted growth leads to slightlylower CO 2emissions, but the extreme implicitcost of this reduction—$480 per ton of CO 2e—easily rules out policy failure as a climate mitigationstrategy. At the same time, going from a basicreform scenario to one that includes somedegree of tariff rationalization and DSM is winwin.It boosts the value of the investmentprogram by 13 percent and reduces air pollutionand water use by about 6 percent, and CO 2emissions by about 4 percent.The South East Europe Generation InvestmentPlan computes a least-cost power expansion planfor the region (2005–20) under a number ofscenarios that comply with European Union (EU)environmental standards for airpollutants, including CO 2. Table 3.3shows that imposition of a €10 per tonTable 3.3: Effect of Carbon ShadowPrice on Generating Capacity Mix forSouth East Europe, 2020CO 2Ligniteshadow plus Nuclearprice coal (%) Gas (%) (%)€0 36.9 13.1 10.3€5 34.0 16.0 10.4€10 30.9 17.2 12.3Source: South East Europe Consultants (2005).Note: The baseline is a cost-minimizing optimal scenario, which features lessrehabilitation of old plants than the official scenario. Other elements of thegenerating mix, including hydropower, are constant across scenarios.of CO 2shadow price shifts 6 percent of totalcapacity from lignite and coal to gas and nuclear.Even at €10 per ton, the optimal plan stillinvolves the construction of large new lignitefiredplants in Kosovo. However, since the planwas generated, the European Trading System forcarbon has started operation, and CO 2traded at€25–30 in mid-2008.The Role of Economic Analysis of ProjectsAmong practitioners of carbon shadow pricing,there is a debate on what price level to assign. Thisvalue, which represents the damages imposed byan additional ton of CO 2, is set in the Stern Reviewat $85 per ton of CO 2e; the U.K.’s Department forEnvironment, Food, and Rural Affairs recom -mends a value of £26 per ton of CO 2e for projectappraisal (rising over time). 4However, while this debate was going on, the priceof oil, gas, and coal rose drastically (see figure 3.2).The mid-2008 price of oil was equivalent to the2006 price of oil plus a $135 per ton CO 2price.Although prices have since declined, expectedfuture prices remain high by recent standards.Hence, actual project appraisal decisions shouldalready be moving in directions similar to thosesuggested by carbon shadow pricing.For project appraisal to send these signals, it mustvalue energy and electricity at economic prices.This is not easy in systems where prices aredistorted or where electricity supply isconstrained. For instance, the Rwanda Emergency34

WORLD BANK OPERATIONS AND CLIMATE CHANGEElectricity Project values additional electric outputat $0.15 per kWh, even though this is below thecost of provision, and far below the likely willingnessto pay. And correctly valuing additionalelectricity access is a technical problem thatrequires information or assumptions aboutdemand, and the IEG review of rural electrification(IEG 2008d) found that only 5 of 13 projectsexamined used best-practice techniques. Similarly,distortions in coal and (especially) gas marketsneed to be accounted for in project appraisal.Moreover, economic analysis should incorporateallowance for energy price volatility. Because fossilfuel prices are volatile and uncorrelated withvariation in wind and rain, investments inrenewables and energy efficiency carry a riskhedgingbenefit—in effect, another kind ofshadow value. Some ESMAP work has beenimportant in drawing attention to this (Hertzmark2007). But while the carbon shadow value isperceived only when carbon markets are active,the risk-hedging value associatedwith renewables is a clearbenefit to the investor or to thehost nation—depending whobears the price risk.Furthermore, most developmentand carbon impactassessments look within theboundaries of the project. Butprojects—especially low-car -bon projects—often aspire tocatalyze replication and dif -fusion through demonstration or markettransformation effects. These include learningcurveeffects, reduction of perceived risk, andstimulus of supply and service markets. Multipliersshould therefore attach toboth the development andcarbon effects of these proj -ects. In practice, spillover ef -fects may dominate within-High energy prices actlike carbon taxes in someways.For project appraisals tosend the right signals theymust value energy andelectricity at economicprices, but this is noteasily done.Renewable energy andenergy efficiency arehedges against volatilityof fossil fuel prices.Figure 3.2: Real Energy Prices of Coal, Gas, and Oil, 1990–2008121081990 $/mmbtu64201990M11990M61990M11Coal, Australia, real $/mmbtuNatural gas, Europe, real $/mmbtuSource: World Bank Global Economic Monitor.1991M41991M91992M21992M71992M121993M51993M101994M31994M81995M11995M61995M111996M41996M91997M21997M71997M121998M51998M101999M3DateCrude oil, average, spot real $/mmbtuNatural gas, U.S., real $/mmbtu1999M82000M12000M62000M112001M42001M92002M22002M72002M122003M52003M102004M32004M82005M12005M62005M112006M42006M92007M22007M72007M1235

CLIMATE CHANGE AND THE WORLD BANK GROUPAppraisal should considerspillover andproject impacts. Con sid eration of spill -over effects in project selection anddemonstration effects. appraisal would tend to bringefficiency and renewables projects tomuch greater prominence.While measuring a Carbon Accounting at the Level ofproject’s gross emission the Bank Groupmay be straightforward, The Bank needs to recognize thatthe net impact on pursuing its primary mission of povertyemissions could be very reduction will inevitably put upwarddifferent. pressure on global emissions, simplybecause people with rising incomesdemand more energy, and more agriculturalproducts that will compete for land with forests.While provision of basic energy access to thepoorest will have little aggregate impact onemissions, policies stimulating robust, sharedgrowth in the developing world will indirectlyspur emissions in rough proportion to income.These pressures can be moderated or exacerbatedby Bank-assisted policies that shape energyand land use.Bank-supported policyreforms could have largerimpacts thaninvestments.Carbon accounting (or footprinting) of Bankoperations should be approached with caution.An advantage of footprinting is its ability to focusattention and stimulate critical and creativethinking on emissions reductions. (See, forinstance, the success of, which reportson worldwide emissions of all power-generatingplants.) However, to the extent that footprintingis not comprehensive in scope, it could bemisleading or even lead to perverse outcomes.And it is important to note that the Bank Group’scurrent ability to quantify aggregateimpacts on other aspects of developmentis limited.One problem—which also applies toproject-level carbon accounting—concerns measuring a project’s GHG impact. It isrelatively straightforward to measure grossemissions. But the net impact on emissions couldbe very different. Gas and combined heat andpower plants are large gross emitters of CO 2. Butwhere these plants substitute for coal-firedpower, they could realize very large reductions inemissions. Emphasis on gross footprints mightdiscourage such win-win investments. At thesame time, net footprints have to be reckonedagainst a counterfactual: what would havehappened in the absence of the Bank project?These counterfactuals are po tentially subject tomanipulation. This possibility has become alightning rod for criticism of the CDM (which alsouses such counterfactuals) and will be consideredat greater length in the second phase of thisevaluation.A second and even more fundamental problem isthat Bank-supported policy reforms could easilyhave impacts (positive or negative) that swampinvestment-level footprints. Thus footprintingefforts, if undertaken, should be carefully qualifiedas to scope and methods.Taken together, these considerations suggest amultilevel menu of options related to carbonaccounting. First and most basic projects shouldemploy rigorous economic analysis in appraisal,using economic values for fuel and power pricesand taking price volatility, local environmentalexternalities, and demonstration effects intoaccount. Second, the Bank could undertakecarbon accounting at the project level, computingswitching values for high- and low-carbonalternatives. Publication of these analyses wouldinform the global community about the costs ofcarbon abatement and would be an importantpublic good. Third, the Bank could supportinterested clients in creating energy systemexpansion plans that take environmental impactsinto consideration. These could be used tovalidate that proposed investments were consistentwith economic and national environmentalpriorities. With the Bank’s supporting roledefined, these plans could also be used toprovide a more comprehensive measure of theBank’s impact on emissions.36

WORLD BANK OPERATIONS AND CLIMATE CHANGEBox 3.1: The $135 per Ton CO 2Price Is Already HereJust a few years ago, climate policy scenarios controversiallyenvisioned a world of universal high carbon taxes in the 2030s.The mid-2008 world bore a striking resemblance to thosescenarios.Plans for climate change mitigation usually include some provisionto attach a real or implicit price to GHG emissions. The proposalis a mainstay of environmental economics: GHGs imposewidespread costs on the environment, so those costs should beinternalized in people’s decisions on burning fuel, clearing forests,and so forth. This would balance costs and benefits in the shortrun, and motivate research and development toward cleaner technologiesover the longer run. CO 2prices could take the form of taxeson emissions, a requirement to buy an emissions permit, an opportunityto sell emissions reductions, or a combination of thesemeasures. Thus, pricing CO 2does not necessarily entail a tax ondeveloping countries.Much debate and analysis have been devoted to assessing carbonprices that would advance GHG stabilization goals, and yet bepolitically feasible. Various global models of mitigation, for instance,require CO 2prices of $30 to $275 in 2020 (rising over time)to stabilize atmospheric concentrations at 550 ppm (Clarke and others2007). Questions about the acceptability of this kind of pricelevel underlie much of the negotiation on the global climate regime.Carbon financiers have explored the impact of certified emissionsreductions (carbon credits) at $5 to $10/ton of CO 2on investmentsin clean energy. And there is an ongoing debate about whether toincorporate carbon pricing in the World Bank’s investment analysis.(That is, in assessing a project’s benefit-cost ratio, shouldglobal damages attributable to GHG emissions be included in thecost?) Meanwhile, skyrocketing energy prices provide a taste ofwhat carbon prices would feel like for consumers of fossil fuel. Thetable below shows the equivalence between a carbon price anda fuel price increase for three fuels. Suppose fossil fuel prices hadremained at their 2006 levels. The table shows the CO 2price (or tax)equivalent that would equate consumer prices to observed May2008 levels. For instance, the May 2008 petroleum price is equivalentto that of 2006, with a $135 per ton of CO 2tax added. The CO 2price equivalent differs among fuels because of their differentcarbon content.The table provides food for thought. First, mid-2008 price levelsgive some indication of the impact of high carbon prices in ascenario where global energy prices subside. Second, reactionsto those prices give some indication of the short-run scope for adjustmentto carbon prices and the implications for carbon emissions.In the United States, for instance, there has already been asharp drop in sales of fuel-inefficient vehicles and an increase inridership in public transportation. Third, the equivalence providesa new perspective on carbon shadow pricing of investments.There have been objections by developing countries to the use ofcarbon shadow pricing in the investment decisions of multilateraldevelopment banks as an unwarranted imposition of responsibilityfor emissions. However, prudent investment decisions shouldaccount for the possibility that energy prices will stay high (or spikehigh) during the life of a project. This self-interested calculation,focusing entirely on energy price volatility and not on carbon, willtend to favor renewable energy and energy efficiency in much thesame manner as would a carbon shadow price. It does not obviatethe burden of financing these investments.However, note that the analogy between energy price hikes andcarbon prices is imperfect in several important respects. First,the differing carbon and energy contents of fuels mean that a truecarbon price would fall most heavily on coal, inducing substitutionof other fuels. Second, energy price hikes, unlike a carbon price,would encourage the development of nonconventional sources offossil fuels, including highly emissions-intensive sources such asoil shale and tar sands. Third, a global carbon price would depressthe supply price of energy, so that its effect on final prices wouldbe somewhat muted. Finally, the distributional consequences ofcarbon taxes, carbon permits, and high energy prices are quitedifferent.Australian Crude oil, LNG (Japan)coal $/ton avg. spot $/bbl $/mmbtuMean price, Jan-Dec 2006 $49.09 $64.29 $7.08Price, May 2008 $131.00 $122.63 $11.90$/tonCO 2equivalent of the 2006–08 fuel price increase $31.77 $135.08 $80.52Notes:Equivalence of a $1/ton CO 2price on commodity price in physical units $2.58 $0.43 $0.06Equivalence of a $1/ton CO 2price on commodity price per energy unit (mmbtu) $0.103 $0.074 $0.060Source: IEG calculation based on Development Prospect Group “Pink Sheet” (at commodity price data.Note: Bbl = barrel, mmbtu = millions of British thermal units.37

Chapter 4Evaluation Highlights• Subsidies are a large but poorlymonitored drag on developing-countryeconomies— removing themwould increase economic efficiencyand reduce GHG emissions.• In countries where taxation has keptfuel prices high, emissions are lower.• Most subsidies go to better- offconsumers.• Subsidy reduction can fund socialprotection that is better targeted topoor people.• Power price reform goals have oftenbeen achieved, especially in transitioncountries.

A resident of Palu, Indonesia, receives money under a cash transfer program instituted by the government to cushion the impact on poor people of areduction in fuel subsidies. Photo by Basri Marzuki, reproduced with his permission.

Subsidies and Energy PricingEnergy subsidies hobble economies, spur GHG emissions, and benefitprimarily the better- off. While the record energy prices of 2008 underlinethe lose- lose nature of most subsidies, the drawbacks of energy subsidiesare a longstanding concern. The solution seems obvious: rationalize pricesand use the savings to provide more effective social protection for the poorand vulnerable. But like most apparently win- win propositions, it is not easyto put into practice. This chapter reviews efforts to do so.The Nature of Subsidies and PriceDistortionsSubsidies and price distortions take many formsand can be difficult to measure with precision(Morgan 2007; UNEP 2003). The most obviousare on- budget payments by governments toproducers or consumers of energy. However,many subsidies are off-budget, and thereforeharder to detect and calculate. Oil- and gasproducingcountries often sell these fuels toconsumers at a price below their economic value.The forgone revenue or opportunity cost constitutesa subsidy to buyers. Similarly, electricity issometimes sold to consumers below the shortrunmarginal cost, and often below the long- runmarginal cost. Assessing these implicit subsidiesrequires accurate estimation of the economicvalues involved. There can also be direct capitalsubsidies or tax benefits for energy producers.The Problem with SubsidiesFirst, energy subsidies are enormous. Despiteconsiderable progress in policy reform, there arestill large subsidies to gas and oil outside theOECD, and substantial remaining coal subsidieswithin the OECD. These subsidies are notregularly, comprehensively, or consistentlymonitored. But ad hoc surveys show them to behuge. The International Energy Agencyestimated that there was about a quarter- trilliondollars of annual consumption subsidies forelectricity and fossil fuels outside the OECD in2005 (IEA 2007). The largest subsidizers inabsolute terms were Russia, Iran, Saudi Arabia,India, Indonesia, Ukraine, and Egypt— all withmore than $10 billion a year in subsidies. 1Implicit subsidies for gas and oil play a large role.The OECD has about €29 billion in subsidies,mostly to energy producers (European EnvironmentAgency 2004, quoted in Morgan 2007).Developed- country subsidies for biofuels areincreasingly important. However, subsidies arepoorly monitored and take a variety of forms. Forinstance, public spending preferences for roadsversus urban transit or long- distance rail41

CLIMATE CHANGE AND THE WORLD BANK GROUPSubsidies, though large,are not regularly,comprehensively, orconsistently monitored.provides an implicit subsidy for moreemissions- intensive transport. Thus,the total scale of energy subsidies maybe extremely large.Not included in these estimates is theft of ornonpayment for electricity. These effectively actas subsidies to nonpaying users, many of whomare poor, but some of which are large farms,enterprises, or government entities (Smith2004). A rough guide to the magnitude of thesesubsidies is provided by statistics on transmissionand distribution losses, both technical(physical) and nontechnical. Purely technicallosses are likely to be less than 15 percent, soexcessive losses suggest theft. Reportedtransmission and distribution losses exceedthese rates in many countries, including Ecuador(43 percent), Moldova (38 percent), India (31percent), and Pakistan (24 percent). 2They are a huge drag on Second, in some countries subsidiesthe economy and the are a huge drag on the economy andpublic purse in some on the public purse. In Egypt in 2006,countries. for instance, energy subsidies wereabout 12 percent of GDP— a bit morethan half on budget, the remainder consisting ofimplicit opportunity costs. Energy subsidies areamong the largest social expenditures in governmentbudgets. Table 4.1 compares fuel subsidiesfrom a recent IMF survey to public spending onhealth. Subsidies are 2 to 7.5 times as large aspublic spending on health in Bangladesh,Ecuador, Egypt, India, Morocco, Pakistan,Turkmenistan, Venezuela, and Yemen.Removal of subsidies Other sources point to additionalwould be expected to countries with high subsidy- to- GDPincrease economic ratios. Carey (2008), using IMF reportsefficiency and reduce for 2006, lists Algeria (7.5 percent),GHG emissions over the Syria (12.2 percent), and Libya (15long run. percent). Indonesia’s subsidies were$12 billion in 2005, and have sincerisen with fuel prices. As figure 2.3 shows, oilEmissions are markedlylower where countrieshave maintained highfuel prices throughtaxation.producers are prone to subsidizediesel fuel.Third, removal of subsidies wouldgenerally be expected to increaseeconomic efficiency and reduce GHG emissionsover the long run. In the short run, people havelimited options to react to price changes,especially where energy is rationed (for example,through load- shedding). Some analysts alsoassert that demand is insensitive to price in thelong run (IEA 2007). But ample evidence showsthat higher energy prices induce substantiallylower demand, and, by extension, lower CO 2emissions. Dahl and Roman (2004) reviewed 191studies of energy demand since 1991. The studiesfound that a 10 percent increase in energy priceswould be expected to reduce long- run demandby 7 percent, on average. Table 4.2 shows resultsfor specific fuels.Sterner (2007) compares gasoline demandacross countries and shows that the decadeslongprice differentials among OECD countrieshave resulted in markedly lower demand in thecountries that have maintained high fuel pricesthrough taxation. In these areas, infrastructureand transport use patterns have evolved in amore energy- efficient manner. Sterner’s resultssuggest that if the OECD had long agoharmonized prices at the level of the countrywith the highest tax (the United Kingdom),overall fuel consumption and emissions wouldbe 36 percent lower. Had they coordinated at thelowest price (the United States), emissionswould be 30 percent higher.Subsidies to fossil fuels also boost CO 2emissionsby reducing the relative attractiveness ofrenewable energy. Subsidies to electricitysimilarly reduce the returns to investment inrenewable sources.At the global level, several studies show thatremoval of domestic subsidies leads not only todomestic gains but also to global improvementsin welfare and reductions in GHG emissions.These studies trace the impacts of energy pricechanges through all interconnected markets.Anderson and McKibbin (2000) estimated thatremoval of coal subsidies (in both OECD andnon- OECD countries) would reduce global CO 2emissions by 8 percent from the business- as-42

SUBSIDIES AND ENERGY PRICINGTable 4.1: Fuel Subsidies Compared with Health ExpendituresFuel subsidiesRatio of fuel(percent of GDP)subsidies to publicRegion/country 2006 2007 2008 expenditures on health (%)AfricaAngola 3.5 3.6 2.5170Burkina Faso 0.7 0.7 1.0 24Cameroon 0.0 0.0 1.069Cape Verde 1.9 0.0 0.00Gabon 2.0 1.3 1.757Mauritania 0.0 0.0 0.16Mauritius 0.0 0.0 0.523Nigeria 0.0 1.3 2.0168Senegal 0.6 0.3 1.377Sudan 2.2 1.0 1.6112South AsiaBangladesh 1.8 2.9 3.0362India 1.6 1.2 2.0213Sri Lanka 0.8 0.3 0.4 21East Asia and the PacificBrunei Darussalam 1.0 1.0 1.0 63Cambodia 1.5 2.1 2.6168Malaysia 1.3 1.4 2.8149Nepal 1.8 1.8 2.0123Pakistan 0.5 0.5 2.8751Europe and Central AsiaAzerbaijan 2.2 0.9 0.221Bosnia & Herzegovina 0.3 0.4 0.4 8Belarus 4.4 4.9 7.4148Russian Federation 0.5 0.4 0.3 9Turkmenistan 11.3 13.3 15.2475Ukraine 2.3 2.3 3.389Middle East and North AfricaEgypt, Arab Rep. of 8.3 7.0 8.4 362Iraq 5.7 0.2 0.413Jordan 3.6 4.5 2.553Lebanon 0.1 0.1 0.25Morocco 2.3 2.7 5.0258Oman 2.8 3.2 3.2151Tunisia 1.9 2.3 2.290United Arab Emirates 2.9 2.7 2.5 134Yemen, Republic of 8.3 9.4 11.6 544Latin America and the CaribbeanArgentina 1.1 1.7 0.00Belize 0.1 0.4 0.416Barbados 0.0 1.0 0.37Costa Rica 0.0 0.0 0.5 9Ecuador 5.6 6.4 8.7410El Salvador 0.0 1.4 2.0 53Guatemala 0.0 0.0 0.419Honduras 0.9 0.9 0.820Mexico 0.0 1.6 2.172Panama 0.0 0.5 0.510Peru 0.0 0.2 1.047St. Vincent and Grenadines 0.5 1.0 0.0 0Trinidad and Tobago 0.8 0.8 0.8 35Uruguay 0.0 0.4 0.411Venezuela, Rep. Bol. de 4.6 5.9 7.7 363Sources: 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.43

CLIMATE CHANGE AND THE WORLD BANK GROUPTable 4.2: Sensitivity of Energy Demand to PriceEnergy typeLong- run price elasticity of demandEnergy 0.72Industrial energy 0.93Electricity 0.69Electricity— industry 0.32Electricity—residential 0.56Coal 0.60Diesel 0.67Gasoline 0.61Natural gas—industry 1.35Natural gas —residential 0.56Source: Mean values from a metareview by Dahl and Roman 2004.Studies suggest that usual baseline, with little impact onsubsidy removal leads to GDP. IEA (1999) simulated theboth domestic gains and removal of energy subsidies in eightglobal improvements in non- OECD countries and predicted awelfare and reductions in global reduction in CO 2of 4.6 percent,GHG emissions. while the countries concerned wouldimprove GDP by an average of 0.7percent. Saunders and Schneider (2000), using alower baseline level of coal subsidies in thedeveloping world, found a more modest 1.1percent reduction in global emissions, but theirmodel included more GHGs and internationallinkages than IEA (1999). Ivanic and Martin(2008) focused on the Middle East and NorthAfrica, where energy subsidies are high. Theyfound that removal of subsidies in the Regionwould boost welfare by $15.3 billion in thereforming countries and by $30.4 billion in therest of the world, outside the Organization ofPetroleum Exporting Countries (OPEC), thoughOPEC members outside the Middle East andNorth Africa would incur a $2.5 billion loss ifsupply was unchanged. Ivanic and Martin (2008)do not compute CO 2impacts but notereductions of 7–30 percent in energy use in thereforming countries. There are, however,compensating increases in the rest of the world ifThere are considerablemethodologicalchallenges in quantifyingsubsidies.oil conservation results in increasedexports. In general, one would expectthe greatest global impacts on CO 2from the removal of electricity and gassubsidies.The dearth of statistical information on subsidiesis striking in view of their magnitude andeconomic and environmental importance. Asidefrom GTZ’s invaluable biennial compilation ofretail vehicle fuel prices, there is no comprehensive,public, and reasonably current source ofcomparative data on domestic energy prices. IEAdiscussed energy subsidies in its 1999 and 2006Energy Outlooks but does not publish regulardata on global subsidies. Its data on energy pricesare mostly restricted to OECD members. The IMFsometimes discusses energy pricing andsubsidies in its Article IV reports, and has justundertaken a selective rapid survey ofsubsidies— illustrating the feasibility of providingup- to- date information. Within the World Bank,the Latin America and Caribbean and Europe andCentral Asia units have independently compileduseful summary tables of information on energypricing for countries in their Regions, drawing inpart on reports by regional associations, includingthe Latin American Energy Organization andEurope’s Energy Regulators Regional Association.However, these compilations are not keptcurrent.There are considerable methodological chal -lenges in quantifying subsidies. Many subsidiesdo not appear in government accounts. Forinstance, oil and gas producers and processorsmay be compelled to sell products at pricesbelow alternative levels. Utilities may be requiredto sell electricity below the marginal cost ofproduction, with indirect compensation. Or, per -haps more commonly, utility tariffs are set belowlong- run marginal cost, so that consumers arenot faced with the cost of system expansion.The recent rapid run- up in energy prices placedhuge stress on existing subsidy systems. In somecountries, this stress was unsupportable, andsubsidies were scaled back. Elsewhere, risingprices translated directly into larger subsidies.This underlines the need for real- time monitoringof prices and subsidies.Energy Subsidies and the PoorEnergy subsidies are often justified as protectingpoor people, but the bulk of energy subsidies go44

SUBSIDIES AND ENERGY PRICINGto better- off consumers. Given the magnitude ofsubsidies, there is comparatively little informationon their beneficiaries. However, thescattered information that is available shows thatthese subsidies are not well targeted. This is analmost automatic consequence of the relationbetween income and energy consumption. Mostpoor people in developing countries are notconnected to the electric grid and do not owncars, so they get no direct benefit from fuel andgasoline subsidies. They do receive indirectbenefits through lower prices of energy- intensivegoods and services such as public transit.Nonetheless, a study by Coady and others (2006)found that even when such indirect benefits areconsidered, the bottom 40 percent of the populationin Bolivia, Ghana, Jordan, Mali, and Sri Lankareceived only 15 to 25 percent of fuel subsidies.Appendix C presents a selection of informationon the distribution of subsidies. The typicalfinding is that the bottom 40 percent of theincome distribution receives 15–20 percent ofthe subsidies. Subsidies for liquefied petroleumgas and cooking gas are quite poorly targeted,because these items are consumed by better- offpeople. In Ecuador, the top quintile gets 17percent of the cooking gas subsidy, the bottomquintile only 3 percent. In Bangladesh, the 4percent of the population with gas accessreceived 1.4 billion taka in subsidies.Residential electricity tariffs are designed tosubsidize poor people, but are often poorlytargeted. Typically, tariffs increase with thequantity of electricity consumed or with thecapacity of the connection. But even when ratesrise with consumption, or differ by connectioncapacity, wealthier people derive large absolutebenefits. In Indonesia, for instance, in 2005 thetop decile received 44 percent more electricitysubsidies than the bottom decile (World Bank2006b). Komives and others (2006) reviewed 22utilities (mostly in India) using quantity- basedsubsidies and found that none of them is progressive.Their targeting indicator is the ratio of thepoor’s share of subsidies to their share of thepopulation (where the poor population is thebottom 40 percent of the income distribution).This ratio ranges from .20 in Guatemala to 1.0 inGujarat, with a median of 0.66. The poor targetingperformance reflects low proportions of poorpeople connected to the grid and the persistenceof subsidies for high consumers. However,Komives and others (2006) note three utilitiesthat employ means- tested tariffs and achieveprogressive targeting ratios of 1.2 to 1.5.But even when richer people receive alarger share of the subsidy pie, poor The bulk of subsidies gopeople may derive a greater proportionof their income from those the better- offsubsidies. For instance, though muchof the subsidized kerosene intended for the pooris diverted to other uses, poor people nonethelesswould be more burdened than the better- offby increases in kerosene prices.For this reason, an understanding of the povertyand distributional impact of energypricing reform would seem to be But some subsidies arecrucial for design of the reform and important to poor people.the monitoring of its impact. Whilelong recognized, this was formalized only in 2004,with the Bank’s adoption of the OperationalPolicy on Development Policy Lending(Operational Policy 8.60). This requires the Bankto determine whether a proposed DevelopmentPolicy Loan (DPL) is likely to have significantadverse social impacts, particularly on poor andvulnerable populations; to summarize the state ofknow ledge on how to mitigate those impacts;and to fill gaps where necessary.DPLs (and their predecessor, Structural Price reform policiesAdjustment Loans) have frequently ap - should be guided byplied conditions related to energy analysis and monitoringpricing or subsidies. Figure 4.1 provides of poverty indication of the application ofconditionality over time, and includes general aswell as sector- specific loans. It is an incompleteindex because some conditions with pricing intentmay be stated in an indirect manner.Poverty and Social Impact Analyses (PSIAs) areone tool for fulfilling the Operational Policy 8.60requirement. 3 First formalized in 2001, andpiloted over 2002–03 by the Bank, the IMF, and45

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 4.1: Conditionality Related to Petroleum Productsa. Number of Countries with Conditionalities1614Number of conditions1210864201990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Fiscal yearb. Number of Conditions12Number of countries10864201990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Fiscal yearPetroleum-diesel-gasoline pricing Petroleum-diesel-gasoline sector reforms Petroleum-diesel-gasoline privatizationSource: IEG analysis.PSIAs provide astructured approach toassessing thedistributional impacts ofreform, but they are notmandatory.others, they constitute a structured approach toassessing the distributional impacts of reform.They are not mandatory. A Good Practice Note(World Bank 2004a) encourages selectivity inundertaking PSIAs, prioritizing them where thedistributional issues are most important, thepolicy options most precisely defined, andknowledge gaps the greatest.IEG identified 19 completed PSIAsdone by the Bank since 2001 thatrelate to pricing of electricity, heat, orfuels. All were done in the context ofproposed price increases; a few wereable to analyze retrospectively theeffect of a previous price hike.Most of the PSIAs attempted to document thecurrent proportion of income devoted toenergy expenditures by poor people, using thisas a basis to assess the burden of priceincreases. Some also attempted to determinewhat coping strategies might be used by poorpeople to adjust to price changes. A fewassessed specific policy alternatives for mitigat -ing price impacts.Accurate assessment of current budget sharesand subsidy incidence requires good survey data.Some PSIAs used small purposive samples orfocus groups, which cannot give reliableestimates of the magnitude of expenditure.Others commissioned custom surveys or were46

SUBSIDIES AND ENERGY PRICINGable to make use of existing high- quality, nationallyrepresentative survey data. However, surveydata were often poorly suited to the task— forexample, by failing to distinguish between billedand consumed electricity. Few of the PSIAs wereable to undertake the sophisticated task ofcomputing the indirect effect of price hikes ongoods and services consumed by the poor.PSIAs tended to make generic recommendations,such as advocating improved safety nets ascompensation for price hikes or improvedquality of utility service as a precondition for thepolitical acceptability of raising tariffs.IEG examined in more detail five BanksupportedPSIAs or PSIA- like analyses, togetherwith an IMF- assisted PSIA for linkages to policy,Poverty Reduction Strategy Paper (PRSP), andloan outcomes. Outcomes were divergent. Intwo cases (see box 4.1 on Indonesia and Ghana),detailed PSIA analysis and specific recommendationsappear to have shaped successful policiesof price rises with compensation. In Yemen,which has some of the proportionally highestfuel subsidies, and where underpricing of fuelhas encouraged unsustainable extraction ofgroundwater, long- standing policy dialogue drewon an ESMAP- sponsored study of householdenergy (not formally designated as a PSIA). TheBank recommended a combination of gradualprice rises to allow time for adaptation,combined with improved targeting of theexisting Social Welfare Fund. The governmentimplemented enhanced social safety nets butraised diesel prices sharply— by 165 percent—rather than gradually. This triggered riots and 36reported deaths, prompting a partial rollback ofthe price rise, which was still short of eliminatingthe subsidy.In Egypt, a 2005 PSIA (World Bank 2005b)showed that energy subsidies are regressive.Although the poor and vulnerable receive adisproportionately small share of the energysubsidies, the PSIA concluded that removal ofthe energy subsidies would increase poverty. Itrecommended that the phasing out of theenergy subsidies be coordinated with thedevelopment of a comprehensive In two cases, detailedsafety net system. Fuel prices have PSIA analysis andsubsequently risen, though they still recommendations seemfall short of world prices. A natural gas to have shaped successfulconnections project, designed to shift policies of price rises withconsumers from highly subsidized compensation.liquefied petroleum gas to lesssubsidizedpiped gas, refers to the PSIA, and the2008 CAS describes ongoing policy dialogue inenergy price reform.In two other cases, PSIA impacts were less clear.A 2005 PSIA of the Ghana electricity sector willbe the subject of an in- depth IEG case study; forcurrent purposes it suffices to note that the PSIArecommended raising tariffs while maintaining arelatively poorly targeted lifeline tariff (box 4.1).The government at first declined to changetariffs, but doubled them in 2007. In Bolivia, a2004 study found that hydrocarbon subsidieswere important to the poor, but leak substantiallyto non- poor households. The study is notcited in the Social Sectors ProgrammaticStructural Adjustment Credit or in the 2005Poverty Assessment.On balance, it appears that PSIAs orsimilar analyses have sometimesplayed a useful and substantial role ininforming decisions on pricingreform. The availability of good surveydata for use in the analyses appears tohelp, as does a substantial period ofpolicy dialogue.PSIAs on energy often present genericrecommendations for the use of targeted socialsafety nets. This is an area of increasing researchand implementation at the Bank, following on thecelebrated success of Mexico’s conditional cashtransfer program, PROGRESA- Oportunidades.Attention is being devoted to assessing the costeffectiveness and error rates of alternativemethods of targeting (Castañeda and others2005; Coady, Grosh, and Hoddinott 2004).Combinations of geographic targeting and meanstesting (or proxy means testing) offer favorabletargeting performance and could be superior tofuel or electricity subsidies in this regard. AsPSIAs have sometimesplayed a useful andsubstantial role ininforming decisions onpricing reform.47

CLIMATE CHANGE AND THE WORLD BANK GROUPBox 4.1: Ghana and Indonesia: Using Social Safety Nets to Protect the Poor from Fuel Price RisesIn Ghana, rising world prices led to increasing subsidies to thenational oil refinery; these subsidies reached 2.2 percent of GDPin 2004. An IMF program pressed for reform of the sector. Agovernment- commissioned PSIA, together with IMF- led research,analyzed the relative targeting effectiveness of a varietyof specific compensatory mechanisms and recommendedimplementing educational or health benefits or means- testedtransfers. These were predicted to be more effective in reachingthe bottom quintiles of the population than the existingkerosene subsidies.These analyses may have supported the 50 percent increasein fuel prices in February 2005 (which had been signaled the previousyear) and probably helped to support announcement of arange of mitigatory measures, including elimination of fees forprimary and junior secondary school, increased funding for primaryhealth care in the poorest areas, investments in urban mass transit,and rural electrification. These measures remain in place.Prices for petroleum products have been linked to world markets.However, with the continued rise in oil prices, a gasoline tax (whichfunded some of the mitigatory measures) has been reduced.Indonesia has long subsidized petroleum products, which hasled to severe fiscal burdens. But eliminating the subsidies hasbeen problematic. A 1998 price hike led to riots and is popularlythought to have contributed to the downfall of the Suharto government.Subsequent price hikes in 2000 and 2003 provokedprotests. Attempts to compensate poor people met with little success(Bacon and Kojima 2006). In 2005, the government confrontedsubsidies reaching 7 percent of GDP. The government drew on analyticwork from many sources, including a PSIA. The PSIA showedthat the fuel subsidies were regressive and that past mechanismsto compensate the poor for price hikes had been ineffective. It suggesteda geographically targeted cash transfer mechanism. Thegovernment subsequently undertook two large price hikes of fuels,including kerosene, in tandem with a means- tested, unconditionalcash transfer system. Thanks to the Indonesian statistical bureau’swell- developed household survey system, the governmentwas able to develop and implement the targeting and transfersystem within a couple of months. The price of diesel fuel doubledand that of kerosene nearly tripled; but monthly cash payments of$10 were distributed to each of 19.2 million households for a year.Subsequent simulation analysis suggests that, even if substantialmistargeting is assumed, the bottom four deciles of the populationgained during the period of transfer (World Bank 2006d). However,the continued rise in oil prices has again boosted subsidies. In May2008, fuel prices were again raised, and the cash transfer programcontinues.Sources: Azeem (2005); Bacon and Kojima (2006); Coady and others (2006); World Bank (2005e).countries face a combination of high energy andhigh food prices (often in conjunction with foodsubsidies), interest in unified social protectionsystems grows.Experience in the Transition EconomiesAlthough their experience was historicallyIn the transitioncountries, the Banksupported reforms thatmade rapid pricingadjustments and, in mostsingular, the transition economiesof Eastern Europe and the formerSoviet Union provide interestingexamples of massive and rapid adjustmentsin energy pricing. These adjustmentshave been accompanied incases, reduced emissions.most cases by sharp reductions inemissions intensity. They certainly reflect thehuge structural changes in the economies, butthe structural changes themselves wereentangled with changes in energy pricing.In Ukraine, a combination of fiscal stress, governmentownership, and cross- sectoral coordinationof reforms, DPLs, and analytic work hasfacilitated price adjustments and a reduction inemissions intensity (box 4.2).In Romania, the 1995 CAS aimed at pricingreform in the energy sector and was supportedby investment and adjustment lending. By 2001,energy sector subsidies were estimated by theIMF (Cossé 2003) at 5.2 percent of GDP, including3.3 percent in off- budget transfers toindustrial users. However, IEG (2005) found thatsignificant reforms were spurred mainly byconditionality attached to EU accession, IMFstandbys, and the World Bank ProgrammaticStructural Adjustment Loan 2 in 2002–03.Electricity tariffs increased (in 2001 prices) from48

SUBSIDIES AND ENERGY PRICINGBox 4.2: Ukraine: Gradual Energy Policy Reform and Decreasing Emissions IntensityUkraine began the transition period of the 1990s with one of theworld’s most energy- inefficient and emissions- intensiveeconomies. Energy prices were far below economic levels andcollection rates were low. Restructuring of the energy sectorbegan in 1994 with some early successes, including shutdown ofuneconomic coal mines, but subsequently faltered. A BanksupportedElectricity Market Development Project (fiscal 1997),failed because of a premature approach to privatization. Meanwhile,the economy was suffering a severe contraction frompretransition levels, exacerbated in 1998 by the regional crisis triggeredby a sharp rise in the prices of imported energy. The crisisforced the government to introduce stabilization measures andto agree with the IMF on a standby arrangement and with the Bankon a financial sector adjustment loan operation in late 1998.During the current decade, energy reforms have acceleratedand have been supported by the Bank through analytical inputs andpolicy advice as well as investment. The Bank’s energy policy engagementin the 2000s has included three policy- based operations(Program Adjustment Loan I and II and DPL I) and extensive analyticalwork, including reviews of energy sector reform options, electricity,mining, and gas markets. The supervisory committeeestablished for each policy- based operation included not only theline ministers, but also other key cabinet members, including theminister of finance, and the central bank governor. There were multipleworking groups on each of the main themes in the Bank’spolicy- based loans, including energy. The supervisory committeeand working groups helped improve information flows across governmentagencies and provided a forum to design strategic decisions,as well as for monitoring their implementation. Thepolicy- based operations were complemented by a set of sectoralloans that focused on energy efficiency.Pressure for reform was driven in part by a large quasi- fiscaldeficit— 6 percent of GDP in 2003— which had resulted from a sharpincrease in the imported energy prices that had been heavily subsidizeduntil then. Sector reforms resulted in a tremendous increasein cash collection rates, rising from 8 percent in 1999 to 98percent in 2005, thus establishing an effective demand price for energyconsumption. State- regulated energy tariffs (electricity, gas,and coal) were increased between 25 and 50 percent during the2002–07 period, with additional pressure coming from a hike in theprice of imported gas. Economy- wide energy efficiency increased,and CO 2emissions/GDP dropped from 5.6 tons/$ in 1998 to 3.9 in 2005.The impact of the increase in energy payments on the populationwas partially cushioned by vigorous economic growth anda corresponding decrease in poverty during this period. In addition,Ukraine already had social support mechanisms in place toprotect the most vulnerable. To further protect the poorest againstthe rise in energy tariffs, the government also introduced a graduated(lifeline) tariff in November 2006 to those whose utility paymentsexceeded 20 percent of their income.Sources: IEG 2008c; IEG staff.3.8 to 7.9 cents per kWh from 2001 to 2005, andcollection rates went from 49 to 99 percent.However, safety net features of the ProgrammaticStructural Adjustment Loan 2 were focused onunemployment and pensions rather than onenergy prices.Georgian power reform followed an uneven path(IEG 2008e; Lampietti, Banerjee, and Branczik2007). Bank- supported reform commenced in1995. An independent regulator was established,and Tbilisi’s power system was privatized. Therewas a dramatic hike in collection rates across allincome groups, spurred by an aggressive systemof re- metering. Tariffs also increased steadily. Inkindtransfers intended to help the poor andpensioners reached 37 percent of the bottomquintile, but went to 24 percent of the topquintile as well. Overall, the average share ofhousehold expenditure going to energy stayedconstant, as did energy consumption. Reformrates faltered, but revived with the Rose Revolutionof 2003, and subsidies for electricity fell from6 percent of GDP to zero. Concerns remainabout the independence of the regulator.Overall, the transition experience shows thatprogress in rationalizing energy prices ispossible. Fiscal stress and the prospect of EUaccess have served as incentives to undertakedifficult reforms. Dramatic improvements incollections have taken place, in part due to49

CLIMATE CHANGE AND THE WORLD BANK GROUPFiscal stress and the privatization and metering. Coordinationacross sectors is an issue;prospect of EU accessionhelped spur the reforms. increases in heating tariffs shiftedconsumers to subsidized gas, threateningthe viability of the heating systems. Theresult of these changes has been substantialreductions in emissions intensity of theseeconomies. But the impact on welfare of thepoor is not well understood and needs to bebetter tracked (Lampietti, Banerjee, and Branczik2007).Outcomes of Bankengagement with thelargest subsidizers havevaried greatly.Bank Engagement with theLarge SubsidizersRoughly speaking, the largest impact on globalemissions might be expected from the largestsubsidies in absolute magnitude. This sectionlooks at the Bank’s engagement on these issueswith the largest subsidizers among its borrowers,based on the IEA (2007) list of large, non- OECDsubsidizers of 2005. The list is augmented withMexico, a large electricity subsidizer and memberof the OECD. (See appendix A.) The analysislooks at the role of Public Expenditure Reviews(PERs) in identifying and drawing attention tosubsidies, and of CASs in prioritizing action.PERs, introduced around 2000, are of interestbecause one might expect this to be an apt toolfor detecting and diagnosing subsidy issues.Returning to appendix A, there are eight countrieswithout PERs. These include Egypt, Iran,Kazakhstan, and Venezuela, where implicitsubsidies are large in both absolute terms and as aproportion of GDP. Some countries without PERs,such as China, India, and Vietnam, nonethelessinclude detailed treatment of subsidies andpricing in their CASs or Country PartnershipStrategies (CPSs). Among the countries with PERs,energy subsides receive no mention or only aperfunctory mention in the documents forArgentina, Malaysia, Nigeria, and Pakistan, al -though the Pakistan CASs devote significantattention to pricing issues. In the remainingcountries, PER treatment of subsidiesincludes detailed analyses andrecommendations.Outcomes of engagement vary greatlyamong countries. China, Indonesia, Russia, andUkraine stand out as examples of long- termengagement associated with bold action bygovernments to rationalize prices. India,Mexico, and Pakistan, in contrast, present asequence of CASs that repeat the same set ofconcerns, but with relatively modest apparentimpact. In Vietnam, there has been slowprogress on prices, with little or none inArgentina, Kazakhstan, and Nigeria. In Egypt,analytic work on pricing may have contributedto recent natural gas and fuel pricing decisions.The two biggest diesel and gasoline subsidizersare Iran, where there has been some analyticwork, and Venezuela, where there has been noengagement on this issue.Russia presents a complex record of Bankinvolvement and price reform. There were 10loans with primary fuel pricing or subsidyreduction objectives during 1993–99. The threecoal sector loans succeeded in drasticallyreducing subsidies to loss- making coal mines— adifficult task that has challenged many countries.The Russian effort combined extensive, effectivesafety nets and job creation programs for theaffected communities and improved, transparentsystems for managing and winding down thesubsidies. At the same time, a series of loansdirected at oil and gas market reform weremostly unsuccessful. One loan with gas pricingobjectives, for instance, focused on gas usersrather than the gas supplier and failed to achieveits objective. Since 1999, however, gasoline anddiesel prices have increased to world marketlevels. Gas prices have increased but remainbelow netback (export parity) levels.Energy Loans and PricingThis section considers the global experiencewith pricing- oriented loans in the energy sector.Figure 4.2 tallies experience with such loans,distinguishing between those concerned withprimary energy (petroleum products and gas)and those involving electric power. It shows adecline in loans dealing with primary fuel pricing.Few countries have had more than one suchloan. There is, however, an apparent post-2000increase in loans dealing with power pricing.50

SUBSIDIES AND ENERGY PRICINGBox 4.3: Egypt: Policy Dialogue and Pricing ReformEgypt has long maintained energy subsidies. After bitter disagreementswith the Bank on tariffs and financial management,the fiscal 1992 Kureimat Power Project was closed in fiscal 1994and $199 million of the $220 million loan was canceled. This effectivelyended the Bank’s lending role in the power sector inEgypt until 2006, even though it did provide advisory services duringthis period.By 2004, rising international energy prices had boosted thecost of Egypt’s energy subsidy policies to more than 8 percent ofGDP and prompted renewed attention to the country’s social safetynet policies. A retreat at Luxor in February 2005, led by the primeminister and the World Bank president, included most of the Cabinetand brought senior officials from Mexico and Brazil, who presentedtheir experiences with safety nets. The retreat was followedby a joint study entitled Egypt—Toward a More Effective SocialPolicy: Subsidies and Social Safety Net in December 2005 (WorldBank 2005b). The report demonstrated clearly that “energy subsidiesdistort economic decisions and benefit the rich more thanthe poor.” The Bank also provided a set of reform options for theenergy and food subsidies.Underpricing of energy has been a problem for the country sincethe early 1990s, and remains so today, though recent years haveseen an increase in tariffs. Prices of electricity were adjusted inOctober 2004 (from an average of 12.8 Pt/kWh, 2.2 cents, to 14.06Pt/kWh, 2.4 cents) for the first time since 1992. Electricity priceswere increased at an average rate of 8.6 percent in 2004, by 5 percentin 2005, and by 7.5 percent in 2006. A further 5 percent annualincrease is planned for the next five years. The prices of gasoline,diesel, fuel oil, and natural gas increased in 2004, 2006, and 2008.The Ministry of Finance started to record energy subsidies in thebudget in 2005/06 to increase transparency. In August 2007, the governmentannounced plans to eliminate gas and electricity subsidiesfor energy- intensive industries over the coming three yearsto help reduce budget deficits.These structural reforms have been homegrown, as a resultof government initiative, and have drawn on Bank advisory services.The Bank had traditionally engaged on energy issues withthe Ministry of Petroleum and the Ministry of Electricity and Energy,but began to work with the Ministry of Finance in 2005. TheBank arranged an international conference in September 2005 onDSM and energy efficiency. In 2006, two studies were delivered,one on the Economic Costs of Gas in Egypt and another on theLoad Management Program and Time Use of Tariffs. An interministerialsteering group, which includes the minister of finance,the minister of investment (economy), the minister of petroleum,the minister of electricity and energy, the minister of social solidarity,and the minister of industry and trade, was establishedin late 2007 for working with the Bank on the energy pricingstrategy. The overall objective of this study is to formulate an energypricing strategy that ensures energy price levels are reflectiveof the underlying economic costs. The study is scheduledfor completion in 2009.Source: IEG staff.Figure 4.3 maps countries where there has beenproject- level engagement in electricity pricing.India and China stand out as areas of significantengagement.Table 4.3 summarizes the impact of loansoriented toward electricity pricing for the subsetwith detailed IEG audits. This is not a randomsample, but it provides a wide set of experiencefor which outcome information is available. Theoverall message is one of general success intransition economies, including Armenia, Bosniaand Herzegovina, Bulgaria, China, and Georgia,sometimes through structural adjustmentcredits and sometimes through investmentloans. The well- documented Armenian case(through an ex- post PSIA; Lampiettiand others 2007) is noteworthy for itsinclusion of an alternative social safetynet, although that protection failed toreach half the poor. In othercountries, the experience was mixedor unsustained.Additional evidence comes from the experiencein India. The World Bank has completed five statelevelpower sector restructuring projects in India,in Orissa (fiscal 1996), Haryana (fiscal1998), Andhra Pradesh (fiscal 1999),Uttar Pradesh (fiscal 2000), andRajasthan (fiscal 2001). IEG rated theoutcomes in Orissa, Haryana, andPricing- oriented lendingfor primary fuels hasbeen declining, while thatfor power has increasedsince 2000.Lending for power- pricereforms has generallybeen successful intransition economies.51

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 4.2: Trends in Energy Sector Loans with Pricing Goals181614Number of projects1210864201990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Source: IEG tabulation.PowerPrimary fuelAttempts to reduce powersubsidies to agriculturefailed.Rajasthan as moderately unsatisfactory, and that inUttar Pradesh unsatisfactory. Only the AndhraPradesh project was rated satisfactory. All soughtto privatize distribution and establish orstrengthen independent regulatory commissionswith the aim of reforming tariffs, and therebyboosting the sector’s financial health. All theprojects fell short of the desired tariff objectives,in part due to a premature emphasis on privatization.This goal of removing the subsidies forfarmers proved the subsidies to be too deepseatedan issue to be addressed through powersector reform. However, some of the states havesince made progress in increasing collection ratesand improving financial sustainability.We identified 107 loans with goals related toprimary fuel pricing since 1990; 66 of these wereDPLs or adjustment loans. We wereable to assess the outcomes of 50 post-1995 loans, most of which were DPLs.Thirty of these reported achievementof pricing goals, though sustainability was notassessed.ConclusionPrice reform in energy is more urgent than ever,given the run- up in international market prices.In principle, adjustment to higher and morevolatile energy prices could yield fiscal dividendsand long- run reductions in the level of GHGemissions. Also in principle, reallocation of thesavings from lower subsidies and lower energyuse could benefit poor people and society atlarge. But in all societies the adjustment costs arelarge, especially for those who have benefitedmost from low prices.Over the past 18 years, the World Bank hasfrequently supported energy subsidy removal orprice rationalization through both investmentand policy lending. Price reform goals have oftenbeen at least partially achieved, especially intransition economies. In many transitioneconomies, price reform has accompaniedabsolute declines in emissions per capita and perunit of GDP, while incomes have risen. But inmany cases, prices remain below the long- runmarginal cost.52

SUBSIDIES AND ENERGY PRICINGFigure 4.3: Distribution of World Bank Lending Related to Electricity Power Pricing Policy, 1996– 2007POWER PRICING POLICIESWORLD BANK BORROWERSNo Projects1–3 Projects4–6 Projects7–9 ProjectsNon-borrowers53

CLIMATE CHANGE AND THE WORLD BANK GROUPTable 4.3: Outcomes of Loans with Electricity Tariff GoalsCountry Project (year approved) Tariff outcome of the projectArmenia 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 sectorremained. Safety nets targeted vulnerable groups. Established quantitativegoals for utilities. Improved service (in part due to restart of largenuclear 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 reduceunpaid government bills.Indonesia Suralaya Thermal Power (1992) + / – Automatic tariff adjustment mechanism introduced in 1994 was onlypartially successful in tracking changes in cost of power generation andwas abandoned in the wake of the financial crisis.China Ertan Hydropower Projects (1991, 1995) + / – Planned tariff increases related to Ertan generation were inadequateSN 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 ofProjecttime-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 GDPin 2002/03.Jordan ESL (1994) + + One- time rationalization of power prices succeeded in bringing themup 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 belowHerzegovina 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 continuedafter 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; – = tariffsdecreased during and/or after the project; + / – = mixed or unsustained results.Price reform goals haveoften been achieved.While generalizations are difficult in this complexarea, some lessons emerge. As in other areas ofreform, client ownership is a key prerequisite.Engagement is often lacking when subsidies donot cause immediate fiscal stress, as inthe case of implicit subsidies to oil andgas in net exporters. Conversely, fiscalstress, or the prospect of a significant gain (suchas accession to the EU), can motivate interest inreform. Cross- sectoral, ministerial- level involvement,including the finance ministry as well asenergy agencies, may be an important feature ofsuccessful energy reforms. Interactive and clientresponsivepolicy dialogue over an extended54

SUBSIDIES AND ENERGY PRICINGperiod, supported by strong analytic work, isanother recurrent theme, though it does notguarantee results. Overcoming vested interests,especially highly subsidized agricultural users, hasbeen difficult, even in the presence of such work.In at least two cases— Ghana and Indonesia— theavailability of pre- existing, good-quality householdsurvey information on welfare and on energyconsumption helped in assessing the impacts ofprice reform and in the design of programs thatmitigated adverse impacts on poor people. Butthere has been a lack of the systematic monitoringof energy expenditure and usage that wouldpermit real- time and long- term assessmentof welfare and emissions impacts.These and other examples point togrowing interest in scrapping energysubsidies in favor of more efficient andintegrated social protection systems.Systems using proxy means testing andgeographic targeting could be more effective inhelping poor people and could free up resourcesfor investment in energy efficiency. But littleeffort has been made to use the introduction ofenergy efficiency as an adjustment vehicle forhigher tariffs.But the Bank has found itdifficult to engage inprice reforms inpetroleum- or gasproducingcountries notunder fiscal stress.55

Chapter 5Evaluation Highlights• The Bank’s energy efficiency projectshave had high domestic andglobal returns.• Five percent of the value of theBank’s energy lending has been forend-user efficiency and district heatingprojects.• Only a handful of projects have effectivelysupported efficiency policy,though there is institutionalinnovation in efficiency finance.• Bank and borrower incentives favorsupply over efficiency.• Modest GEF and trust fund financehas supported long- term policy engagementon efficiency issues.

Solar energy is used to light village shop, Sri Lanka. Photo by Dominic Sansoni, courtesy of theWorld Bank Photo Library.

Efficiency PoliciesEnhanced energy efficiency is seen by many as the largest single win- winopportunity to reduce emissions. Ultimately, people care less about energythan they do about the services it provides. And much energy issimply wasted.The famous satellite photo of the world’s urbanlights is a graphic illustration of energy beingcast uselessly into space, where, as lightpollution, it spoils enjoyment of the nighttimesky. Coal plants throw off two- thirds of theenergy they burn— energy that in principlecould be captured for heating or industrialpurposes. Energy costs money, so efficiencyoffers the prospect of reducing emissions atnegative cost.According to the McKinsey Global Institute(Bressand and others 2007), growth in globalenergy demand could be halved through investmentswith financial rates of return over 10percent. IEA (2007) identifies increased energyefficiency as a crucial and cost- effectivecomponent of a global energy strategy over thecoming decades. In the electricity sector, itestimates that non- OECD countries would save$3 in supply investment for each $1 in demandsideefficiency investment. (Fuel savings wouldbe an additional payoff.) Across all energysectors, the IEA estimates that there is scope fornearly a trillion dollars of efficiency investmentsin non- OECD countries over the next 25 years.These analyses are not novel. As noted earlier,the World Bank’s 1993 energy policy pointed toincreased energy efficiency as an important areafor attention. And global energy efficiency(measured as GDP$ per unit of energyconsumed) increased over 1990–2005, particularlyin China, India, and Russia (IEA 2008b). Butend- user energy efficiency appears to be elusive:for at least 20 years, energy experts have pointedto high- return opportunities that have beenmissed.Overcoming the Barriers to EnergyEfficiencyThe persistence of high- return opportunities forend- user efficiency seems paradoxical. There is astandard set of explanations of the market andpolicy failures that result in barriers to thepursuit of these opportunities. These include:• Information failures— Firms and households cannotgauge the potential for energy savings, areunwilling to pay for an energy audit that mayfail to identify savings, and doubt whether efficiencyinvestments will be as profitable asadvertised.59

CLIMATE CHANGE AND THE WORLD BANK GROUPStandard explanations • Financial market failures— Banks dofor the barriers to energy not know how to appraise loans forefficiency include market efficiency improvements, or perceivethis to be an unusually riskyand policy• Attention failures and transactions costs— Whereenergy costs are a small part of overall expenditures,other issues and opportunities maycommand decision makers’ attention. For instance,neither consumers nor manufacturerspay much attention to standby power demandsof appliances, which may be only a few wattseach, but the aggregate national burden of theseappliances on the power system could be large.• Split incentives— If buyers or renters cannotgauge the energy costs of buildings, buildersmay have no incentive to invest in costly butenergy- saving construction methods.• Other incentive or regulatory failures— Unmeteredheat consumers may lack the incentive ormeans to adjust temperatures; public agenciesmay be barred from considering life- cyclecosts in procurement decisions; and utilityrate- setting procedures may reward inefficiency.• Underpricing of energy, so that users lack incentivesto conserve it.There is a standard set of remedies for thesefailures. These can be roughly categorized alongtwo dimensions: supply versus demand andinvestment versus policy. (See table 5.1.) Supplysideinterventions concentrate on the generationor transmission of electricity, and are oftencomponents of sector reform efforts. Demandsideinterventions focus on the behavior andtechnology of energy users, and are thereforemore diffuse and varied.The investment- versus- policy distinction is cru -cial to the discussion in this report. It roughlycorresponds to retail- versus- wholesale intervention.Investment projects without strong policycomponents intervene directly to install or fundefficiency measures. On the supply side, theseinclude measures such as improved boilers inpower or district heating plants or transformersin electric distribution, so that more electricity isdelivered per unit of fuel burned. On thedemand side, analogous projects fund installationof insulation, efficient lights, or improvedelectric motors.In contrast, policy interventions seek to removethe barriers that inhibit firms and householdsfrom pursuing these investments themselves.Supply- side policies might encourage theseinvestments through incentive changes— forinstance, through corporatization of a utility.Demand- side policies include standard setting orcertification systems that establish efficiencyTable 5.1: A Typology of Efficiency InterventionsInvestmentsPoliciesSupply side District heating renovation Power sector restructuringCombined heat and powerCoal boiler renovationImproved transformersDemand side Distribution of compact fluorescent Utility DSMlight bulbs (CFLs)Appliance and building standards andBuilding retrofitscertificationDistrict heating renovationPublic procurement policiesFunding for energy financialCapacity building and promotion of energyintermediaries including energy service companiesservice companiesSource: IEG.60

EFFICIENCY POLICIESrequirements for appliances or enable con -sumers to reliably distinguish differences inefficiency. The IEA has recently published acomprehensive set of public policy recommendationsrelated to energy efficiency (IEA 2008a).This Phase I report concentrates primarily onpolicy- level interventions; analysis of investmentswill be presented in Phase II. That reportwill look at the impact of policy changes on thediffusion of efficiency technologies. However,there is not a sharp distinction between policyand project. At the intersection is an area ofincreasing Bank Group activity: efficiency financeand promotion of energy service companies(ESCOs). At the core of these projects is the goalof introducing new mechanisms to identify andfinance retrofits that make equipment orbuildings more energy efficient. Sometimesthere are also public policy elements in promotingcapacity and demand for these services, andin some cases public funds are provided.Similarly, public policies may be used to promotethe diffusion of new technologies, such ascompact fluorescent light bulbs. The secondphase of this evaluation will look in more detailat the Bank Group’s efforts at ESCO promotion,which constitute a significant and interestingsegment of the efficiency portfolio.The Efficiency PortfolioFigure 5.1 draws on data and categorizationspresented in the Bank Group’s reports onrenewable energy and energy efficiency. 1 Itshows the total value of energy- related lending atthe World Bank, and the proportion devotedspecifically to energy-efficiency components,including both supply- and demand- side ef -ficiency. 2 Over the period 1991–2007, about 5percent of the value of the World Bank’s $48.7billion energy investments were devoted toenergy efficiency. (These figures exclude IFC andMIGA.) The proportion has oscillated widelyfrom year to year. This 5 percent of value wasconcentrated in about one- tenth of all projects.Among high- emitting countries (table 3.2), thisproportion was 6.7 percent for countries withhigh- level CAS/Country Partnership Strategygoals related to efficiency, and 3.9 percent for theremainder. A broader count, including transmissionand generation rehabilitation projectsdeemed by the World Bank Energy Anchor toFigure 5.1: Energy-Efficiency InvestmentsUS$ mln.4,5004,0003,5003,0002,5002,0001,5001,00050001991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007181614121086420PercentTotal energy spending, US$ mlnEE/total energy spending, percentSources: Total energy spending: IEG computation based on energy- designated proportion of project commitments. Efficiency component spending: World BankProgress on Renewable Energy and Energy Efficiency reports 2004, 2005, 2006, 2007 (World Bank 2005d, 2005b, 2006a, 2007b). Scope of coverage was moreprecisely defined for 2006 and 2007. Includes Bank- executed medium- size and large GEF projects. Excludes IFC and MIGA.61

CLIMATE CHANGE AND THE WORLD BANK GROUPincrease efficiency or reduce emissions, exceedsone in five for 1998– 2007.While this evaluation is concerned primarily withthe World Bank, it is important to note that IFCinvestments in energy efficiency have grownsharply since the Bonn Commitment of 2004 andnow exceed those of the World Bank. IFCcommitments for energy efficiency were $94million over 1991–2004, but jumped to $621million over 2005–07.The World Bank has also undertaken analyticaland advisory work in this area. One line of actionis in support of Green Investment Schemes inEurope and Central Asia. Some Eastern Europeanand former Soviet Union nations, parties to theKyoto Protocol, have an excess supply of assignedamount units (carbon allowances). Some wouldbepurchasers of these units seek assurances thatsale revenues will be used for emissionsreduction or other environmental services. TheWorld Bank has helped some of these countriesexplore how such revenues could be used tosupport energy efficiency. For example, inBulgaria, a country where the World Bank hassupported energy efficiency, Green InvestmentScheme potential was identified in co generationand energy efficiency.Although energy- efficiency investments constitutea small proportion of all investments inenergy, they offer economic returns that are asgood or better as those of other investments inthe sector. (See box 5.1.)IEG coded energy- efficiency projects for policycontent related to end- user efficiency, includingregulatory provisions for DSM; appliance orbuilding standards and certification; andresearch, demonstration, or planning of energyefficiency during 1996–2007. This policy codingexcluded projects confined to engineering activities.A total of just 34 projects met these criteria(see appendix C), about one- third in the lastthird of this period.This is a heterogeneous list, including manyprojects— such as a small study— with onlyminor policy and regulatory components.Others, such as the Morocco DPL, aim ateconomy- wide impacts. The list contains nineprojects that deal with standards and codes, andnine that deal with utility- based DSM; thesetopics are discussed at greater length below.There are at least seven projects on the list thatdeal with ESCOs or efficiency finance.Energy- efficiency staff in the World Bank arerelatively few: about 22 staff members work asubstantial portion of their time in this area. Afew additional staff are slated for recruitmentunder the Energy Efficiency for SustainableDevelopment Scale- Up Strategy and Action Plan,a program announced in 2007.The remainder of this section examines key areasof the portfolio for policy content, including DSM,appliance and building codes and standards,district heating, and public buildings. We touchonly briefly on supply- side efficiency, which isdifficult to disentangle from more general energyinvestments.Demand-Side ManagementDSM programs are traditionally run by utilities toencourage customers to reduce and shift theirenergy use. Program design can vary. Someexamples of programs include marketing effortsto encourage customers to adopt new technologies(such as efficient lighting), rebates for certaintypes of energy-efficiency equipment, free energyaudits, and energy-efficiency advice. Typically,programs will look either at reducing totalconsumption or shifting consumption to reducepeak demand. (Load shifting reduces investmentcosts substantially, but its impact on GHGemissions depends on how peak versus baseloadpower is generated.) DSM programs can cover arange of technologies, though efficient lighting isone of the most common of those covered. MostDSM programs are in the power sector, althoughthere are programs for other types of energy aswell, including natural gas, district heating, andfuel oil. While DSM can be in a utility’s financialinterest (particularly for load shifting), sustainingDSM in the long term requires supportiveregulations.62

EFFICIENCY POLICIESBox 5.1: Rates of Return to Energy-Efficiency ProjectsLimited evidence suggests that energy- efficiency projects offerattractive domestic economic rates of return (ERRs) that aregreatly enhanced when the global benefits of emissions reductionare factored in. Over 2000–05, six Bank projects supportingenergy efficiency closed, all of them involving supply- side ordemand- side improvements to district heating systems. ERRsranged from 22 to 44 percent, not including environmental benefits.Including those benefits, which comprised reductions inlocal air pollution as well as CO 2, the ERRs of projects and subprojectsranged from 27 to 289 percent. This compares to an unweightedmean of 22.4 percent for the 45 nonrenewable powersector projects that closed over the same period.Transmission projects are not included in the tally of efficiencyprojects above, but reductions in transmission losses offer potentiallyhigh efficiency and GHG mitigation gains, require large investments,and may include a role for public policy because of theregulated or monopoly nature of most transmission systems.Experience has been variable. Projects in Albania and Ugandafailed to achieve their objectives, with continued nontechnicallosses (that is, theft) that could not be distinguished from technicallosses. In Macedonia, Serbia, and Zambia, ERRs were 111, 18,and 35 percent. In India, significant reductions in transmissionlosses were achieved in Rajasthan and Orissa. The rates of returndepend on the true economic valuation of electricity, which isabove the tariff level but difficult to estimate. Depending on thisvalue, the ERR of the Rajasthan transmission investment rangedfrom 18 to 28 percent; a subcomponent on reducing technicallosses in distribution had an ERR of 39 to 65 percent. In addition,the transmission investment is reported to save 500 GWh a year.At the average emissions intensity of the Indian power sector,this implies a CO 2reduction of 340,000 tons a year. Valued at $10per ton, this would quadruple the annual stream of net benefits.In India, owners of inefficient coal- fired power plants lack incentivesto improve their equipment for two reasons. First, the regulatorswould require that the cost savings be passed on toconsumers. Second, the utility would have to purchase power onthe market while their plant is down for repairs— and the marketprice of power is above the artificially low depreciated price of oldpower plants. Consequently, according to the appraisal of the proposedCoal- Fired Generation Rehabilitation Project, utilities forgoopportunities to reduce coal consumption per KWh by 22 percentand realize financial returns of 28 percent. Since these returns arebased on existing tariffs, the true economic rates of return arehigher.Sources: Implementation Completion Reports and Implementation Completion Report reviews; GEF 2006a.DSM can be a cost- effective way to meet energydemand. IEA (van der Laar and Vreuls 2004) hasassembled a database of DSM programs aroundthe world. Most of these have capital and operatingcosts of less than €0.06 per kWh, which issignificantly lower than the cost of supply inmost of the utilities with such programs. Theseoffer the potential for negative- cost emissionsreductions.However, DSM faces a fundamental incentiveproblem: why should a utility encourage itscustomers to consume less electricity? Utilitiescan be induced to do so mainly through regulation(van der Laar and Vreuls 2004). This hasbecome more difficult to do in the wake ofmarket liberalization and competition. Never -theless, some states in the United States haveintroduced performance incentives for utilitiesthat are able to reduce demand, and Utilities have limitedCalifornia maintains a structure incentives to promotewhere utility revenues are decoupled DSM . . .from elec tricity sales. Vermont hasintroduced an efficiency utility. Funded by acharge on utility bills, this nonprofit corporationis contracted by the state’s Public Service Departmentto undertake DSM. In 2006, the cost ofsaved energy was 3.7 cents per kWh, against asupply cost of 10.4 cents. 3 Savings are verifiedand audited by the Public Service Department.Utilities in developing countries often have anindirect motivation to promote DSM.When they are compelled to serve except when they servepoor people or peak- period cus - customers below cost.tomers at tariffs that are below the costof provision, the utilities can cut their losses ifthey can convince these customers to conserve.63

CLIMATE CHANGE AND THE WORLD BANK GROUPBank Engagement on DSMThe World Bank and IFC have worked on severalDSM projects, in most cases with GEF funding.Table 5.2 summarizes 12 of these.Many of the World Bank Group’s DSM projectshave attempted to estimate the CO 2reductionsresulting from the project. Table 5.2 provides anindication of the range of emission reductionsTable 5.2: Utility-Based DSM ProjectsWorld Bank Group loan/Project name Country Years grant amount CO 2savingsThailand Promotion of Thailand 1993–98 $9.5 million GEF grant 27–45 million tonsElectrical EnergyEfficiency ProjectHigh-Efficiency Lighting Mexico 1994–97 $10 million GEF grant 763,700 tonsProjectPoland Efficient Lighting Poland 1994–98 $5 million GEF grant (IFC implemented ) 3.62 million tonsProjectDemand-Side Management Jamaica 1994–99 $3.8 million GEF grant 14,800-22,100 tonsDemonstration ProjectEnergy Services Delivery Sri Lanka 1997–2002 $13.7 million loan plus $5.9 million GEF grant n.a.Project(mostly for renewable energy)Energy Efficiency Project Brazil 1999–2003 $11.9 million GEF grant 1.7 million tonsEnergy Efficiency Project Croatia 2003–ongoing $7 million GEF grant and $4.95 million loan 960,000 tons (est.)Demand-Side Management Vietnam 2003–ongoing $10.7 million, grant from GEF and IDA Fund 3.5 million tons (est.)and Energy EfficiencyProjectUruguay Energy Efficiency Uruguay 2004–ongoing $6.88 million grant from GEF n.a.ProjectArgentina Energy- Argentina 2006–ongoing $15.2 million GEF grant 5.9 million tons byEfficiency Project2012, 28.1 millionby 2017, and 71.9million by 2022Power Sector Uganda 2007–ongoing $300 million loan ($16 million of the n.a.Development Operationloan is for DSM-type investments)Urgent Electricity Rwanda 2007–ongoing $4.5 million GEF grant, mostly for renewable n.a.Rehabilitationenergy; the DSM component relates to studiesonlyNote: 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 itsregular 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 DSMmeasures in utility investment plans.64

EFFICIENCY POLICIESreported from these efforts. These estimatesmust be taken with extreme caution, however,as methodologies differ and are poorlydocumented, and reports of actual savingsinclude projections. The estimates will be verysensitive to baseline assumptions— what kind ofpower source would have been used at themargin, had the efficiency program not beenUtility Regulatory Outcome/sustainability/as DSM requirement institutional developmentmanager? for DSM? Other policy components in funding impact ratings aYes Yes b Appliance labeling, building certification, public Highly satisfactory/likely/substantialeducation and awarenessYes No No Marginally unsatisfactory/uncertain/modestNo No No n.a.Yes No Appliance energy-efficiency testing and labeling; Moderately satisfactory/unlikely/capacity buildingsubstantialYes No Design Code of Practice for Energy Efficiency, Satisfactory/likely/highCommercial Buildings (mandatory for new buildings)Yes Yes Appliance testing, certification, and labeling Moderately satisfactory/n.a./n.a.Yes No No n.a.Yes Yes c No, though one of the DSM components (energy n.a.efficiency in commercial facilities) implementedthrough a government programYes Yes d Development of regulations to support DSM; n.a.assistance with incorporating energy efficiency inthe overall energy strategy of Uruguay; appliancetesting, labeling, and standardsYes (3+ utilities Under active Preparation of energy sector, tax, and financial n.a.involved) development policies and regulations for the promotion ofenergy-efficiency activities; standardization,testing, certification, and labeling programNo No, though the $80 million policy support program, including n.a.program is implementation of an energy-efficiency strategyimplemented by and plan, as well as tariff increases (drafting thethe government, Energy Efficiency Strategy and Plan was a loannot the utility approval condition)Yes No Support of energy policy development related to DSM n.a.65

CLIMATE CHANGE AND THE WORLD BANK GROUPBank- supported DSM implemented. For instance, the Brazilianenergy efficiency program claimsprojects use utilities asmanagers. to have reduced CO 2emissions byabout 900 gCO 2/kWh saved; this ismore than twice the emissions factor claimed bycurrent large- scale Clean Development Mech -anism projects in Brazil.The projects have been successful in reducingenergy demand and CO 2emissions during theproject term, although policy engagement hassometimes been missing or unsuccessful. TheThai project was particularly successful intransforming markets for energy- consumingproducts such as lighting. The current evaluationfocuses on policy engagement, so it will notrepeat a detailed analysis of overall projectresults, but rather will examine how the Bankengaged in policy discussions and how theexisting policies affected the project outcomes,based mostly on documentary evidence.Through the course of these DSM projects, theWorld Bank and GEF have learned about theimportance of regulatory and policy support forDSM projects. (See box 5.2.) However, most ofthe projects have fairly limited policy and regulatoryelements. And 10 of the 12 projects listed intable 5.2 have a utility as the DSM manager, eventhough problems can occur if utilities lackappropriate incentives, as noted in the GEFEvaluation Office’s Climate Change ProgramStudy (GEF 2004). Such incentive problems haverestricted the sustainability and durability of DSMefforts. Most of the completion reviews andother project reviews note some problems withDSM program reductions after the projectsended.The Project Document used to design theMexican High- Efficiency Lighting Project(ILUMEX), for example, states that no policy orinstitutional reforms were needed to ensureeffective project implementation. Instead ofrelying on utility funds or regulatory requirementsfor DSM, the pilot project encouragedDSM through GEF- sponsored subsidies forefficient lighting. Thus, the project was able toBox 5.2: DSM in BrazilBrazil provides a useful case study on the regulatory frameworkand incentives needed for utilities to undertake DSM. In1985, Brazil established PROCEL, an agency to promote energyefficiency. In 2001, the Bank began to implement a GEF projectthat was designed to build capacity at PROCEL, support standardsand certification development, and help to support marketorientedESCOs. A complementary $125 million Bank loan wasarranged to support 50 energy- efficiency demonstration projectsto encourage demand for ESCO services.As the project started, a severe energy crisis hit Brazil, necessitatingemergency efforts in electricity rationing and efficiency,including distribution of compact fluorescent light bulbs(CFLs). These efforts succeeded in rapidly reducing demand. Yetthe Bank loan was canceled because the utilities, under severefinancial stress, had no incentive to promote efficiency.Meanwhile, the GEF project focused on capacity building andequipment certification and was credited with a proportional shareof PROCEL’s large reported energy and CO 2savings. But GEF supportfor ESCOs was cut back and the project self- evaluation notedthat the project design, which assumed there would be utility demandfor ESCO services, failed to take into account the lack of utilityincentives for efficiency.In 1998, after the privatization of Brazil’s utilities in the mid-1990s,the regulator, ANEEL, set up a wire charge to finance energy efficiency.A 1 percent charge was added to consumer bills, and theproceeds were to be used by the utilities to promote efficiency. Instead,the utilities have used these funds for supply- side efficiency(for which they already had an incentive) or to support efficiencyin public lighting (where official tariffs were low, and municipal governmentsoften slow to pay). The utilities simply have no incentiveto reduce profitable electricity sales.Another issue both for PROCEL and for the wire charge is lackof thorough and independent monitoring and evaluation (Januzzi2005). Although there are well- developed international standardsfor measuring energy savings, they were not applied in the Brazilianprograms. This situation is not unique to Brazil.Sources: Januzzi 2005; World Bank 2007c, 2007d.66

EFFICIENCY POLICIESdemonstrate that energy savings are achievable,but because of the design and lack of built- inmeasures for replication, the DSM effortsessentially ended after the project was over.A number of projects have followed ILUMEX inpromoting the adoption of compact fluorescentlight bulbs (CFLs), which consume only afraction of the power of equally bright incandescentlamps. A classic example of the energyefficiencyconundrum, they typically offer highimplicit rates of return, and yet are not adoptedby users. A rough calculation based on currentprices suggests that CFLs can save electricity atthe rate of $0.01 per kWh, 4 with additionalsavings from the reduced need for generatingcapacity to serve peak demand.One reason that consumers do not adopt CFLsor other efficiency measures is that they do notface the marginal cost of providing peak-hourelectricity. This is especially perverse in the caseof large commercial buildings with inefficientinsulation and air conditioning systems, and is anargument for peak- hour pricing. In addition,there are information problems leading tomarket failure. Consumers do not trust that thelight bulbs will work as advertised. They may fear,with reason, that the unstable voltage typical ofmany overstretched power systems will causethe relatively expensive bulb to burn out early. Soone line of projects, including the IFC’s ElectricLighting Initiative, seeks to certify and labelgood- quality bulbs or to provide warranties fortheir replacement. An early evaluation of theElectric Lighting Initiative estimated that the $25million investment had catalyzed a reduction inCO 2emissions by about 2 million tons andelectricity consumption by 2.6 TWh. However,these estimates are based on assumptions aboutsome crucial but unmeasured parameters.The World Bank has recently sponsored orplanned mass distribution of CFLs in Ethiopia,Rwanda, Uganda, and Vietnam, often as anemergency measure to address shortages ofpower supply. The Uganda project has dem -onstrated the feasibility of rapid distribution ofmore than half a million CFLs. Rough calculationssuggest that this reduced peak demandby 30 MW, at a cost far below that of 30MW of additional generation (DCI2008). The Ethiopia project contains a$1.25 million technical assistancecomponent to assist the Ministry ofEnergy to study DSM. A recently approved $15million grant project will sponsor mass CFL distributionin Argentina. This is attractive to theutilities, which are required to sell power belowcost. However, the impact would be far greater ifthe distribution were used to facilitate an increasein Argentina’s unsustainably low tariffs.The Thailand Promotion of Electrical EnergyEfficiency Project, launched at about the sametime as ILUMEX, proved more durable. Thisproject also involved more extensive regulatoryand policy discussions and components. TheThai utility, EGAT, found DSM to be veryworthwhile because of its ability to improveEGAT’s public image. There was strong governmentsupport for the DSM program in EGAT. TheDSM Office in EGAT was able to successfullyinfluence government policy— for example, theMinistry of Energy adopted new MinimumEnergy Performance Standards. Thus, in manyways, this project is a good indication of howstronger engagement on energy- efficiency policycan enhance project outcomes and transformmarkets for energy appliances.During the project period, EGAT funded DSMthrough a tariff surcharge; the regulator supportedbut did not require this. After the project ended,EGAT eliminated this surcharge and began fundingDSM through its regular tariff revenue, but DSMwas rarely funded at the allocated level. EGAT stillmaintains its DSM program, 10 years after theproject closed, but the program’s future is notentirely certain. EGAT is undergoing restructuringand privatization, and the DSM Office no longerhas a strong advocate in EGAT.Overall, the Thai DSM program has been verysuccessful, in part because it has been able toinvolve key stakeholders in ways that highlightedtheir own self- interest in participating. However,such stakeholder involvement can take time, andThe Bank Group hassupported a number ofprojects that distributedcompact fluorescentbulbs.67

CLIMATE CHANGE AND THE WORLD BANK GROUPMany DSM programs haveno regulatoryrequirements for demandmanagement, andmonitoring andevaluation are weak.without external funding, the benefitsof initial stakeholder involvement canfade if there is no clear mechanism toensure funding for DSM.The DSM project in Vietnam has manyelements similar to those of the ThaiDSM project. The government of Vietnam drewfrom Thai examples in drafting its legislation anddecrees to support energy efficiency. Becausethis project was launched in 2003, it is too earlyto say if it will be sustainable in the long term, butto date, progress seems impressive. As inThailand, there is no firm requirement for theutility to invest in DSM. Now the utility is verymuch in favor of DSM because it is reducing theutility’s losses for electricity sold to customerseligible for below- cost electricity rates. Theproject does not explicitly fund policy- relatedwork to support DSM.Many other DSM programs with World Banksupport have no regulatory requirements forDSM. This includes several of the most recentDSM- style projects. Utility DSM funding has attimes been reduced during or after a World Bankproject when the utilities that fund DSM findother priorities. An example of this is theJamaican Demand- Side Management DemonstrationProject, where the local utility used a largeportion of its own funds, initially designated forDSM, on emergency power plant repair.Monitoring and evaluation are generally weak,but there are signs of improvement. The CFLprojects are of special interest in this regardbecause they are potentially highly amenable tomonitoring and because evaluation could answera number of critical questions for policy andprogram design. These include the degree towhich free or low- price distribution inducesconsumer willingness for subsequent commercialpurchase and the degree to which consumerstake advantage of efficient bulbs throughincreased lighting hours rather than reducedelectricity consumption. The Electric LightingInitiative evaluation stressed the need to includebetter planning for rigorous data collection fromthe start. This has not proved possible inemergency- driven projects. However, the currentCFL project in Ethiopia incorporates arandomized control trial impact analysis. Andwith the advent of programmatic CDM (underwhich these projects could be presented forcarbon finance), much more rigorous monitoringcould be brought to bear. In India (unconnectedto the Bank), an innovative monitoring effortsponsored by the Bureau of Energy Efficiency willuse automatic wireless data reporting from asample of residences to measure the impact ofCFLs on electricity consumption.Lessons LearnedMost of the Bank’s DSM efforts are investmentfocused.Thus, they achieved meaningful energyefficiency gains during the project period, but theprojects did not typically result in new legislationor regulation that would provide ongoing financingfor DSM. Some CFL distribution projects haveincluded standards or certification components,whose long term- effect is yet to be seen.The Bank has consistently partnered withutilities— rather than regulators or energyministries— in supporting DSM programs, oftenbuilding on existing relationships. Utilities mayhave the capacity to implement these programs,but their incentives to do so are limited tospecific market segments or situations. The BankGroup’s current emphasis on energy finance andESCOs can be seen as a way of promoting DSMwhile bypassing engagement with utilities orregulators. However, global experience suggeststhat regulatory drivers of DSM can complementESCO market expansion.Successful DSM programs benefit from welldesignedsystems for monitoring and verificationof energy savings. While such requirements canbe adopted at the utility level, policies andregulations can also provide support for robustmonitoring and verification systems.Appliance Standards and Building CodesAppliance standards and building energy codeshave proven to be some of the most effective and68

EFFICIENCY POLICIEScost- effective policies for improving energyefficiency globally. A review of U.S. experiencewith appliance standards (Gillingham, Newell,and Palmer 2006) found estimates of the netbenefits of appliance labeling of $56 to $196billion over 25- to 30-year periods. A selfevaluationof the Thai energy efficiency project,which emphasized labeling of high- efficiencylights, refrigerators, and air conditioners, foundsavings of 28 TWh over 1993–2004 and projectedsavings of 61 TWh over 2004–10, arising from a$40 million project (GEF 2006).Building energy codes are important because ofthe long- term and significant impact they canhave on reducing energy demand. Buildingstypically last for 30 to 40 years. The initial designof buildings is the single most important factorin determining their energy consumptionpattern. Energy savings measures are lessexpensive during the initial construction thanthrough retrofits later on. But builders rarelyhave an incentive to maximize efficiencybecause they do not pay the energy bills, andbuyers have little way of knowing what futureenergy performance may be. Globally, buildingsare responsible for 15.3 percent of GHGemissions— more than the transport sector(Baumert, Herzog, and Pershing 2005). Theconstruction boom in fast- growing economiessuch as China and India presents an opportunityto adopt high- efficiency energy standards inorder to change demand trajectories for the lifeof these new buildings.Appliance Standards and LabelsThe term appliance standard is often used todescribe two different, though related, types ofpolicies. The first sets minimum efficiency levelsfor appliances such as refrigerators, lightingballasts, boilers, hot water heaters, and airconditioners. The second type of policy involvesappliance labels (voluntary or mandatory) thatdescribe energy performance and consumptionor endorse a product as energy efficient. Testinglaboratories and protocols are essential inimplementing appliance standards and labelingprograms.Building Energy CodesAppliance standards andThere are two main types of building building energy codes areenergy codes: prescriptive and per - among the most effectiveformance- based. Prescriptive codes and cost- effective policiesspecify the characteristics of building for improving energycomponents— regulating, for instance, efficiency globally.the insulation efficiency of windows orwalls. Performance- based codes set an energybudget for a whole building. This allows buildingdesigners the flexibility to trade off different typesof components. Enforcing prescriptive codes istypically easier than enforcing performance- basedcodes, because inspectors can check the specificcomponents against a set standard. Performancebasedcodes offer potentially greater costeffectiveness,but require the development anduse of software that can model the building’s totalenergy use.Because enforcement of building energy codes isnecessarily local, and compliance requireschecks at the building level, strong capacity andadequate staff are needed. Inspections andcompliance checking may be done either by theentity that checks for compliance with othertypes of building codes (such as codes forstructural integrity and fire safety), or in somecountries, by specialized building energy units.Each approach has advantages and disadvantages.Testing laboratories and procedures arealso essential to independently determine theperformance of building materials and compon -ents such as windows and insulation.Many developing countries have building energycodes, but compliance systems may be weak.Where staffing is inadequate, the inspectionsystem may rely on checking plans rather thanimplementation.Bank Engagement on Standards and CodesThe World Bank has engaged on codes andstandards several times during the past 15 years.This work is not as broad or robust as the workon DSM or tariff policy, so there is not as muchevidence to examine. Most of this work has beendone as relatively small components of otherDSM or energy-efficiency projects. Table 5.369

CLIMATE CHANGE AND THE WORLD BANK GROUPTable 5.3: Projects with Appliance Standard and Building Energy Code ComponentsComponentfundingProject Approval (total Whenname year funding) code adopted Description of componentThailand Promotion 1993 > $ 1.67M During project (later • Appliance labeling (by utility)of Electrical ($9.5M) adopted by • Development and promulgation of building and applianceEfficiency Project a government too) codes in order to enforce minimum efficiency standards (doneby utility)• Establishment of testing laboratoriesJamaica Demand- 1994 $ 0.6M Before project; • Strengthening of capability of Jamaica Bureau ofSide Management ($3.8M) strengthened during StandardsDemonstration project • Enhancement of testing laboratory capabilitiesProject a• Campaign to promote voluntary building code andappliance labeling programBrazil Energy 1999 $ 3.4M Before, though enhanced • Support of utility- funded standard and labeling programEfficiency Project a ($11.9M) law covering standards • Definition of energy-efficiency standards to complyadopted during project with efficiency law (this component later canceled because ofpoor consultant performance)• Strengthening of capacity of testing laboratoryUruguay Energy 2004 > $ 1M n.a. • Appliance testing programEfficiency Project a ($6.88M) • Labeling and standards program including a voluntaryFunding forenergy-efficiency seal for main household appliances, lightingstandardequipment, building thermal envelope, and industrial and othercomponentequipment and materialsdecreasedafter projectstartArgentina Energy 2008 > $ 3.7M During project • Comprehensive program for energy-efficiency standardsEfficiency Project a ($15.2M) and labeling of key equipment, including appliances, industrialequipment, and building materials• Modernization of certification laboratories• Strengthening of capacity of standardization bureaus• Regulatory and enforcement activitiesSri Lanka Energy 1997 > $ 1.9M During project • Design Code of Practice for Energy Efficient CommercialServices Delivery ($5.9M Buildings (mandatory code, written and adopted during project)Project a grant + • Development of institutional capacity in the energy-$13.7Mrelated public and private sectors to incorporate the Code ofloan)Practice into building design and operations and to monitor theenergy savingChina Heat 2005 > 0.8M Before project, • Technical studies on developing more stringent codeReform and ($18M) strengthened during • Development of code compliance enforcementBuilding Energy project capacityEfficiency ProjectSource: 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 projectcomponents 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 orstandards component is less than half of the figure given.a. Project was also reviewed in the DSM chapter.70

EFFICIENCY POLICIEShighlights projects with appliance standard orbuilding energy code components. No projectsfocus exclusively on these issues, and evenamong the projects in the table, there are severalwhere the code and standard component wasnot actually funded directly by the Bank or GEF,but rather with local resources.Overall, the World Bank and GEF work onappliance standards and building codes is verysuccessful in adopting new codes and standards,and somewhat less successful in establishing thenecessary infrastructure to implement the codes.Funding is the key limiting factor, both withassistance on code adoptions and with capacitybuilding for enforcement. In evaluating theBank’s experience in more detail, it is helpful tolook at it from three perspectives:1. Results in assisting countries in adopting newcodes and standards2. Experience in helping countries developstronger enforcement systems to make thecodes work in practice3. Monitoring and learning from experience.Table 5.3 indicates that the Bank has had muchsuccess in its work to assist countries in adoptingnew codes and standards. In almost every case,the countries have adopted new regulations orstrengthened existing code and standardsystems. This is an extremely high success ratefor engagement on any policy, and it is particularlynoteworthy given the Bank’s low level offunding for code and standard development. By2004, 74 countries had adopted codes orstandards of some kind. 5 The challenge for thesecountries, and for the Bank, is to create theinstitutions that will oversee the effectiveimplementation of these standards.However, regardless of how large or small acountry’s codes and standards programs are, thelargest costs associated with the programs arefor implementation.Codes and standards components of Bankprojects are often envisioned as a tool that canenhance the ability of utilities to implement DSMprograms (all but one of the projectsdescribed in table 5.3 have a majorDSM component). This can be usefuland effective, in that the DSM organizationcan help ensure that there is a widemarket— for compliant appliances, for example.The Thai project provides an excellent exampleof this. However, this approach can also belimiting if the codes and standards are written byor for the DSM program instead of for thecountry as a whole. When codes andstandards are written for a DSMprogram, compliance systems outsidethe program are often weak ornonexistent. So while this situation isbetter than having no code at all and itmay eventually lead to a broadernational compliance system, it mayalso create vulnerabilities by linking somuch to a single DSM entity.Aside from voluntary efforts to use standards andlabeling as DSM tools, the Bank’s main engagementon code and standard implementation hasbeen in partially funding testing laboratories. All ofthe projects with appliance standard componentshave worked to develop testing laboratory capabilities.Except for the China Heat Reform andBuilding Efficiency Project, there is little evidenceof project- based work to enhance other types ofinspection and enforcement systems or to buildgovernment capacity for disseminating the code.In other words, the Bank’s efforts have donerelatively little to create capacity for enforcementof mandatory codes and standards. Interestingly,one of the concerns that Bank staff have expressedabout work on mandatory codes and standards ingeneral is that codes and standards are difficult toenforce. Yet one could argue that this is a selffulfillingprophesy if enforcement systems are notincluded in the program design from thebeginning. One of the problems in this regard isthe level of funding. At current levels, it is notenough to engage on both the development ofregulations and the capacity building to enforcethem.Monitoring and learning from experience is alsovery important, particularly in a developing areaThe Bank’s work on codesand standards is not asbroad or robust as thaton DSM or tariff policy.Bank and GEF effortshave generally succeededin the adoption of newappliance standards andbuilding codes, but havebeen less successful inestablishing theinfrastructure needed toimplement them.71

CLIMATE CHANGE AND THE WORLD BANK GROUPsuch as codes and standards. While programs inthe West have been extensively evaluated andmodified based on these evaluations, there hasbeen much less monitoring and evaluation ofcodes and standards programs in developingcountries. This is in part because these programsare younger, but also because the programs arestretched to deal with enforcement, andmonitoring may drop in the list of priorities of apoor country.There is very little World Bank documentaryevidence on the success or failure of the codesand standards components of Bank projects.Monitoring and evaluation of this kind of effortcannot end with project closure, but requirestracking of standard adoption and implementation.Aside from the Thai project, there is very littleevaluation of the energy and emissionThere is little results of the codes and standards. Thedocumentary evidence Thai labels, for example, have reducedregarding the success of annual electricity consumption bythe codes and standards 1,200 GWh. For most projects, there iscomponents in Bank no information on the estimated CO 2projects. emission reductions from the stan -dards, labeling, and/or building energy codecomponents. Calculating these emission re -ductions is relatively easy once the energy savingsare determined, given information about thesource of electric power.In several cases, fundingfor the components wasreduced.The lack of documentary evidence is most likelylinked to financing: the codes and standards workreceived only a fraction of the financing in anygiven project, and was thus not the priority ofassessments at project close. The lack of evidenceon the results of these project components alsomakes it difficult to learn from them.One point that does come through from thedocumentary evidence is that funding for thecodes and standards components was reducedin several cases. This is true in both Uruguay and,to a certain extent, Brazil. There is no reasongiven for the funding reduction in the Uruguayproject. In Brazil, overall, the testing,certification, and labeling componentof the project was given greateremphasis when the project wasrestructured. However, a subcomponent mostclosely linked to code and standard developmentwas canceled: the problem was a poor- qualityreport prepared by a consultant.In the case of the Jamaica DSM project, theJamaica Bureau of Standards had initiallyrequested a higher level of funding for testingand building capability to handle the country’snew appliance standard program, but ultimatelythis was not considered a priority for DSM. TheProject Appraisal Document also mentions aconcern that the Jamaica Bureau of Standardsmight not be able to test equipment for the DSMprogram fast enough; the project contingencyplan for handling this risk was to test equipmentin the United States. The Jamaica DSM projectdid build some lasting capacity and testingcapabilities at the Jamaica Bureau of Standards,but the country was clearly willing to go fartherduring the project.The designers of the Vietnam DSM projectactually considered including a component oncodes and standards, but this was not part of thefinal project design. The Project AppraisalDocument notes:The project considered additional efforts tosupport the codes and standards workinitiated under the SIDA-supported firstphase. However, given the very lowdemand for energy efficiency equipment atpresent, combined with the limited governmentcapacity to test and enforce nationalstandards, it was determined that aninitial focus on creating greater marketdemand for energy efficiency equipmentwould be a more appropriate priority atthis stage. As the program and marketsdevelop further, the appropriateness fornational standards and codes wouldimprove as well as the prospects for successfulintroduction and implementation.This excerpt reflects the view that codes andstandards are unlikely to transform markets.Experience from around the world indicates thatthis is not the case.72

EFFICIENCY POLICIESClearly, the engagement on codes and standardsto date has been very small, and such smallprojects can be difficult to implement at theWorld Bank. The question, then, is: are thereways to structure projects that involve buildingenergy codes and appliance standards that mightbe better suited to the World Bank’s structure? Ifimplementation is a greater focus, projects orproject components related to codes andstandards will necessarily become larger.The Heat Reform and Building Energy EfficiencyProject in China (see box 5.3) can provideinsights into how projects might addressimplementation needs. This project involvesworking with local authorities to design betterbuilding inspection procedures and capacity; italso involves a significant investment componentrelated to improving energy efficiency in existingbuildings. Working with local builders andhelping them to improve new buildings to meetthe code may also be a useful approach toenhancing understanding and enforcement ofthe code, and for ensuring that the code takesbuilders into account.Public BuildingsThe World Bank is also considering expanding itswork on energy efficiency in public buildings. Todate, the Bank has engaged in two or three suchprojects. The largest (in funding) was the KievPublic Building Energy Efficiency Project,approved in 2000 with an $18 million World Bankloan. This project was rated as satisfactory. TheBank is also investing $12 million in energyefficiency upgrades in state hospitals and schoolsunder the Serbia Energy Efficiency Project,approved in 2004. In addition, Argentina has anascent government program to promoteenergy efficiency in public buildings. While theGEF’s Energy Efficiency Project devotes sometechnical assistance to that program, theproject’s efficiency fund targets small andmedium- size enterprises. This focus was ques -tioned in a project design (or STAP) review,which suggested:Devoting some funds to developing thedemand for ESCO services in a few keysectors such as in large office buildings andin the public sector. These sectors are typicalBox 5.3: Heat Reform and Building Efficiency in ChinaHeating efficiency in China’s colder northern areas is a matterof national economic concern with global implications. Housingis expanding rapidly. It is expected that 6 billion square metersof new space will be erected over the next 20 years. Heating thesebuildings consumes an inordinately large quantity of energy,most of it from carbon- intensive coal consumption.There are interlocking reasons for this inefficiency. On the demandside, incentives are askew. Heating costs are paid by employers,so households have no incentive to control heat. Heat isbilled at a flat rate, so no one has an incentive to reduce heat atthe margin. Even if they wanted to do so, heat is generally not controllableat the household level. On the supply side, materials andtechniques fall short of what is technically and economically feasible,and existing building codes are imperfectly enforced. Progressrequires advances on all fronts, since there will be little demandfor better insulation without price incentives, and little appetite forassuming price responsibility without improved heating efficiency.The Bank has had a long interaction on these issues with Chineseauthorities, dating back at least to 1990. Energy efficiency, includingresidential heat efficiency, was stressed in the 1994 study China: Issuesand Options in Greenhouse Gas Emissions Control, undertakenjointly by the Bank, the United Nations Development Programme, andthe Chinese government (National Environmental Protection Agencyof China and others 1994). The World Bank has been involved in projectsfor the promotion of energy-efficiency finance and the introductionand diffusion of efficient boilers. Dialogue on efficiencyissues continued, and two studies on building efficiency (in 2000and 2002) provided inputs for policy setting. Trust fund support, includingthat of ESMAP and the Asia Sustainable Alternative EnergyProgram (ASTAE), was crucial to maintaining a stream of formaland informal studies and dialogue. With these inputs, Tianjin emergedas a city interested in innovating in heat policy and building standards.The GEF/World Bank China Heat Reform and Building EfficiencyProject, initiated in 2005, supports Tianjin as a demonstration centerfor these reforms, with components to support replication in othercities and to support capacity for national policy making in this area.73

CLIMATE CHANGE AND THE WORLD BANK GROUPThe potential for energysavings in the publicsector is great in mostcountries, but there aresignificant challenges torealizing that for ESCO services in othercountries. Some funds could be used topromote use of ESCOs in these sectors,publicize the results of demonstrationprojects, and if necessary reform governmentprocurement rules to enable performancecontracting and use of ESCOs by thefederal, state, and local governments. Thepublic sector often lacks the capital to makeenergy-efficiency investments on its own,and thus is an excellent market for ESCOs ifthird-party financing is available.The response to this review defended theproject’s main focus on small and medium- sizeenterprises as a lower- risk area for ESCOs. Butfrom a policy perspective, what is important isfinding where market failures are greatest andaddressing them in a sustainable way.The potential for energy savings (and thus lowerGHG emissions) in the public sector is great inmost countries. Governments havemore control over their own energyuse than they do over energy use inthe broader economy, and governmentsare often among the largestenergy consumers in a country, giventhe scope of their activities.Still, the public sector presents unique challenges.For example, public entities may not have thepower to reallocate their budget to energyefficiencyinvestments, so financing is essential.ESCOs can often play a positive role in this area.Public entities may not be allowed to use futureenergy savings: their budgets may be reduced tocover only actual energy costs, which reducesincentives (and creates challenges for repay -ment). Procurement rules may force governmentagencies to award contracts to the lowest bidder,without considering life- cycle costs.Many developing countries have begun toaddress these issues. For example, China hasdeveloped an energy-efficiency procurementprogram, with a list of qualifying energy- efficientproducts that receive preferential treatment inprocurements. Russia and Ukraine have bothadopted programs to help finance energyefficiencyimprovements in state- owned facilities,based largely on the U.S. Federal EnergyManagement Program. India is trying to promoteenergy efficiency in new government buildingsby ensuring that these buildings meet or exceedthe new voluntary energy code for commercialbuildings. The plan is to use this effort tospearhead nationwide implementation of thenew code (APP 2007; PNNL /ARENA- ECO 2003).This growing interest among developingcountries creates an excellent opportunity forthe Bank to engage constructively in this area.District HeatingDistrict heating has also been an important areaof engagement for the World Bank, with totalcommitments of $1.8 billion. Much of this investmenthas gone to supply- side efficiency: thereplacement of inefficient, polluting boilers.The Bank began working on district heating in theearly 1990s, after the fall of the Berlin Wall creatednew opportunities for engagement in the formerEastern Bloc. District heating is a very importantform of energy in Eastern Europe and the formerSoviet Union. It provides up to 70 percent ofresidential space heating, with the more northerncountries typically seeing the largest shares of heatfrom district heating. The Soviet- designed systemswere inefficient compared with the districtheating systems in the West. They did not haveadequate controls and were often oversized. Theyalso relied less on combined heat and powerproduction, which is typically very efficient, thanwas rational given the concentration of heatingdemand that the systems created.The Bank has undertaken 41 district heatingprojects since 1991. Some of the projectsinvolved policy elements, either at the local ornational level. For example, the Bank encouragedtariff increases and reform and restructuringof systems to make them more commerciallyoriented. In some cases, as in Poland andRomania, policy engagement encouraged gov -ernments to take a broad look at integratingdistrict heating in the overall energy policy andstrategy. These were all positive steps.74

EFFICIENCY POLICIESHowever, there were also cases where the Bank’spolicy advice and focus may have been toonarrow, which created problems in the longterm. One of the most important examples ofthis related to demand. Demand for districtheating sometimes dropped dramatically followingthe introduction of reforms. To some extent,this shift was a natural decline linked tostructural shifts (industrial demand droppedparticularly fast). However, the extent of declinewent beyond this in many countries. There weremany factors behind this, including the poorquality of the service during interim years andrising heat tariffs, which encouraged efficiency.Rising district heating prices relative to the pricesof other heat alternatives, such as natural gas,were also a major issue. This created a marketimbalance and encouraged customers to disconnectfrom district heating. This illustrates theimportance of coordinating price reforms acrosscompeting fuels.Clearly, district heating in transition economieswent through major changes from 1989 to thepresent, most for the better. Demand has begunto increase again in most countries andcustomers are starting to return. At the sametime, an overly narrow focus on reducingsubsidies and improving supply may have missedopportunities to help systems adjust during thetransition with less destructive declines indemand.Today, many of the customers who switchedaway from district heating are finding that theirnatural gas bills are very high. The poorestcustomers have struggled to find alternativeswhen district heating systems have collapsed—for example, in Romania.In its more recent engagements, the Bank hastaken a broader approach— for example, en -suring that natural gas reforms take districtheating into account and vice versa. A recentproject in Kazan, Russia, included comprehensivecollaboration with the city in improvingcommunal and housing services; the Bankcollaborated closely with the city on fiscal,administrative, and pricing reforms. As a result,the city has reduced its heat subsidies, In some cases the Bank’screated a targeted poverty benefit for policy advice and focusthe poor, improved the fiscal position may have been tooof both the city and the district narrow.heating company, and improveddistrict heating services (IEG 2008c; World Bank2008d).The other place where the Bank has investedsignificantly in district heating is China. China hasthe second- largest district heating sector in theworld, and, unlike in Russia, where demand isgrowing moderately now, demand is growingquite quickly in China. In response to Chineseinterest, the Bank has had a deep and broaddistrict heating policy dialogue with China formost of the past decade. Major policy reformshave grown out of this dialogue. The reformsconsider the need to raise tariffs to cost- recoverylevels; to ensure that consumers are responsiblefor their own bills (and not their employers); andto provide better controls and metering, pairedwith consumption- based billing (instead of billingbased on apartment size).A large share of district heating investment islinked to consolidating small, inefficient (andpolluting) municipal boilers. Such consolidationmakes sense, but from an efficiency perspective,it would make even more sense if the new supplycame from combined heat and power plants andnot heat- only boilers. Only one of the Bank’s sixdistrict heating investments in China hasinvolved new combined heat and power plants.Such production is more efficient than separatepower and heat production, and it reducesemissions by half because the heat (in the formof steam) is first used to generate power, andthen the exhaust heat is used as heat supply fordistrict heating or industry, rather than beingwasted (as in a single- purpose plant).ConclusionEnergy- efficiency efforts— at the Bank, andarguably in the world at large— consistently fallshort of the level suggested by rhetoric andanalysis. At the Bank, a small group of dedicatedenthusiasts has pursued energy-efficiencyprojects, despite an incentive structure that does75

CLIMATE CHANGE AND THE WORLD BANK GROUPnot favor small, staff- intensive projects thatrequire sustained, long- term engagement withclients. In this they have been supported by trustfund sources such as the Asia Sustainable andAlternative Energy Program and ESMAP. Projectshave relied heavily on GEF support, suggestingthat concessional resources were importantin securing client interest. At the same time,few energy projects have had strong policycomponents. Among the projects with policycomponents, many involved partnerships withutilities that had sharply constrained interest inpromoting efficiency.Discussions with staff and other stakeholders areconsistent, with some standard diagnoses aboutthe neglect of energy-efficiency oppor tunities.Energy efficiency is simply not asInternal and external visible as energy generation. It is dif -incentives favor supply ficult to spend large sums of money onover efficiency. energy efficiency quickly (except withthe mass distribution of CFLs or insome supply- side projects), and yet energyefficiencyprojects are often complex or difficult.This makes them less attractive to managers andagencies that use disbursements as a measure ofaction and large turbines as a visible symbol ofachievement. Energy efficiency is viewed by someas being less real than generation, althoughnumerous analyses show that much of thedemand for energy services over the next 30 yearscan be provided more cheaply through increasedefficiency than through increased generation. Alack of rigorous monitoring and evaluationreinforces skepticism about the true magnitudeor cost of achieving efficiency gains. IEA (2008b)notes the large gaps in energy efficiency indicatorsthat countries could use to diagnose areas ofopportunity and to track progress.Yet it is worth stressing that there is client willingnessto engage on the issue of efficiency policy.As noted, the country strategies for many of theBank’s clients with large or inefficient energysectors include efficiency objectives. Manycountries have adopted national energy effi -ciency policies. Prominent examples includeIndia’s Energy Efficiency Act (2001) and China’sgoal of reducing energy/GDP by 20 percentbetween 2005 and 2010.76

Chapter 6Evaluation Highlights• Gas generation is more flexible, haslower environmental cost, and iseasy to install, so the main barrier tothe use of natural gas is its availability.• The flaring of gas associated with oilproduction wastes energy and releaseslarge amounts of CO 2intothe atmosphere.• In many cases it makes economicsense to recover the associatedgas.• The Global Gas Flaring ReductionPartnership has had some successin promoting dialogue, raisingawareness, and developing and disseminatingknowledge, but flaringremains at high levels.• The ERR to the use of associatedgas is high, but financial rates of returnare strongly affected by pricingpolicies.

Gas flaring and pipeline equipment, SASOL Pipeline, Sub-Saharan Africa. Photo courtesy of SASOL/IFC.

Natural Gas FlaringWhen it comes to generating power, natural gas is more appealing thanits main competitor, coal. Gas burns cleaner, without spewing lungdamagingparticulates and contributing to acid rain.Gas plants are much cheaper and faster toconstruct than coal- burning plants— importantconsiderations for private investors— and can beused for baseload or peak power. And, of crucialimportance to the topic at hand, a modern gascombined- cycle turbine power plant emits onlyabout half as much CO 2per kilowatt- hour as acoal plant.Promotion of natural gas for power would seemto be an attractive win- win policy for climatemitigation. The technology is proven, and thepotential scale is large. What are the barriers? Inbrief: geography, which has scattered gasdeposits quite unevenly across the planet; lack ofinfrastructure to transport the gas from its oftenremote origins; and policy that shapes theincentives for extraction, transmission, and use.We focus here on policy, with particular attentionto the problem of gas flaring. Associated gas, aby- product of oil production, is often vented orflared (burned at the wellhead) instead of beingcaptured and transmitted. The scale of flaring isimmense: about 160 cubic kilometers per year,containing enough energy to power Sub- SaharanAfrica twice over. The annual flux to theatmosphere could be more than 400 million tonsof CO 2e— about 1 percent of the global total. Thelogistical and incentive problems of capturingand tapping this energy are illustrative of widerpolicy issues.ContextUtilities continue to opt for gas- powered plantswhere gas is available, even though some calculationsshow coal plants to have lower averagegeneration costs. Figure 6.1 shows a breakdown ofrecent, current, and planned power plant capacityfor two groups of countries: those with gas accessbut no coal reserves, and those withaccess to both. Countries with gas but Where gas is available—no coal continue to opt for gas and even in some countrieshydropower, even though coal is with coal reserves— it istransportable. More surprising, even often the fuel of choice tocountries with coal reserves are putting generate electricity.29 percent of new capacity into gasversus 21 percent for coal. There are large disparitieswithin this group: China, Indonesia, and Indiacontinue to rely on coal, while Russia andKazakhstan emphasize gas. The numerous, butmostly small, countries with neither coal nor gasopt mostly for oil- fired power plants. (Only sevencountries had coal reserves but no gas access.)79

CLIMATE CHANGE AND THE WORLD BANK GROUPFigure 6.1: Recent and Planned Generation Capacity Additions by Fuel Typea. Positive coal–positive gas reserves/imports1.–2006 2006–111.0b. Zero coal–positive gas reserves/imports0.–2006 2006–11Coal Gas Oil + other fossil fuels Hydro + renewablesSource: Meisner (2008) based on Platts World Electric Power Plant database.Costs of gas generation are slightly higher thancosts of coal generation. A detailed study by theNational Energy Technology Laboratory (NETL2007) shows capital costs for gas to be about 35percent of those for a comparable subcritical orsupercritical coal plant, with total levelizedelectricity cost about 6 percent higher. ESMAP(2007), however, reports a 24 percent differentialin levelized cost. These 2007 calculations arealready out of date because of changes in energyand capital costs, but coal prices are rising morequickly than gas prices at this writing. And Blythand others (2007) reckon that gas is preferredeven when the price per energy unit is twice thatof coal.And compared with coal, gas also offers local andglobal environmental benefits. The NationalEnergy Technology Laboratory study estimatedthat a 600 MW coal plant would emit 211 tons ofparticulates and 1,400 tons of SO 2annually, withemissions controls in place. However, manyplants in developing countries do not have suchcontrols. In contrast, particulate and SO 2emissions from gas plants are negligible, and NO xemissions are only about 10 percent of thosefrom coal.The CO 2differential is very large. For the 600 MWplant, emissions would be 1.5 million tons fromgas, but 3.3 to 3.5 million from coal. The differentialremains even when life- cycle emissions arefactored in for LNG (liquefied natural gas), whichrequires energy- consuming liquefaction. Hondo80

NATURAL GAS FLARING(2005) considers coal transport, LNG liquefaction,transportation, and leakage, and finds thatlife- cycle emissions per kilowatt- hour are still 47percent lower for gas than for coal.Given the superior flexibility of gas, lower localenvironmental costs, and ease of installation, amajor barrier to its use is physical availability. Gasdeposits are highly concentrated in a fewcountries, and transport requires expensivepipelines or liquefaction facilities. From anenergy security standpoint, consuming nationsare concerned about reliability of supply in a thinmarket. So increasing the supply of gas in areasthat would otherwise depend on coal or oil isa win- win approach to increasing electricityavailability while reducing GHGs.Gas supply depends on exploration and fielddevelopment, infrastructure construction, andpolicies that regulate and motivate gas development,transportation, and use. While the Bankhas had a role in pipeline construction, here wefocus on its involvement at the policy level,particularly with regard to gas pricing andregulation.The Paradox of Gas FlaringOil wells sometimes spout dissolved gas. Someof this associated gas is captured and usedproductively— burned for power or reinjectedinto the earth to prime more oil production. Butover the period 1995–2006, an estimated 160billion cubic meters (bcm) per year were flared(Elvidge and others 2007). If used for powergeneration, this gas could have produced about6.75 TWh of electricity annually, nearly twice thecurrent output of Sub- Saharan Africa. If deliveredto markets at current world prices, the value ofthis gas would be about $60 billion per year. Butinstead, flaring releases the equivalent of morethan 400 million tons of CO 2into the atmosphereeach year, and soot from incomplete combustionadds an additional warming load. In addition, anunmeasured amount of gas is simply vented,with 25 times the warming effect of CO 2.Based on satellite observation (Elvidge and others2007), 1 the largest source of this flared gas isRussia, with an estimated 51 bcm 2 in2004, followed by Nigeria (23), Iran(11), and Iraq (8). Another 18 countrieseach flared more than 1 bcm (enoughto power an 850 MW power plant).Why waste valuable fuel? A basic question iswhether it makes economic sense to collect,compress, and transport the gas. For wells thatare scattered, small, and far from pipelinesor electricity consumers, it will not. Nonetheless,governments may restrict orprohibit such flaring on environmentalgrounds. These restrictions imposecosts on the oil producer and ownerand require the will and capacity toenforce them on the part of the en -vironmental authorities.However, in many cases, economic fundamentalswould support the recovery of associatedgas— if gas were valued at world market levels orat the cost of the alternatives available to localgas users. So the persistence of gas flaringsuggests a combination of technical, regulatory,market, and policy failures.The Global Gas Flaring ReductionPartnershipThe Bank- led Global Gas Flaring ReductionPartnership (GGFR) was initiated in 2001 to“support national efforts to usecurrently flared gas by promoting In many cases, economiceffective regulatory frameworks and fundamentals suggesttackling the constraints on gas utilization.”A public- private partnership, its associated gas wouldthat recovery of themembers include governments of 14 make sense.gas- producing countries and regions,10 oil companies, the World Bank Group, andOPEC. Its budget was $1.5 million in 2007, risingto $3.5 million in 2008, and it is supported by anumber of national donors.Some initial studies (Gerner, Svensson, andDjumena 2004) diagnosed several genericproblems:• Inadequate technical practices and regulation offlaring operations— Some operators may lackThe cost of gas generationis slightly higher than forcoal, but it offersenvironmental benefitsover coal.Significant amounts ofgas associated with oilare simply burned off,wasting the energy andreleasing large amountsof CO 2to the atmosphere.81

CLIMATE CHANGE AND THE WORLD BANK GROUPtechnical expertise in handling flares. Regulatoryagencies may lack the knowledge and resourcesto set and enforce rules.• Poor contractual arrangements— For instance,production- sharing contracts (between governmentsand oil producers) may not allow producersto recover the costs of collecting andtransporting associated gas. Or governmentsmay have legal rights to associated gas, but noability to use it.• Inadequate pricing or access policies— Legal orregulatory caps on gas or electricity prices maydampen incentives to recover flared gas. Subsidiesfor alternative fuels could have the sameeffect.To address these barriers, the GGFR set up thefollowing objectives and lines of action: 3• Develop and promote voluntary standards onflaring practice.• “Survey and establish regulations followed bydisseminating upstream regulatory best practice,”where “regulation” refers narrowly toflaring and venting practice rather than broadsectoral policies.• Help to “realize gas flaring reductionprojects by establishing appro-The GGFR has promoteddialogue, raised priate incentives mechanismsawareness, and (carbon credits for lowered emission,establishment of methodolo-developed anddisseminated knowledge. gies) leading to a reduction offinancial barriers. Carbon credits willbe utilized, where feasible, as a possible incentiveto develop, especially, marginal fields.”• “Facilitate commercialization of otherwiseflared gas in GGFR focus countries throughidentification of projects and reduction ofbarriers. This includes achieving accessto international markets, local/domestic marketdevelopment, and small-scale gas use, especiallyfor remote areas and marginaldevelopments.”But endorsement of andadherence to the flaringstandard that it helped todevelop have been belowexpectations.The GGFR has promoted dialogue,raised awareness, and developed anddis seminated knowledge. With a dir ectmembership of 14 countries, the part -nership now comprises territoriesresponsible for about 50 percent of flaring. It hassponsored stakeholder dialogue in a number ofcountries. It has produced informative studies onthe state of gas flaring regulation, the causes ofgas flaring, and methodologies for assessing thepotential of flaring projects to use carbon finance.The GGFR, working in consultation with part -ners, published a Voluntary Standard in 2004. Atits core is a commitment to eliminate “continuousflaring and venting of associated gas, unlessthere are no feasible alternatives.” Those endorsingthe standard commit themselves to developand implement action plans and to “regularreporting of flaring and venting levels andprogress on implementation,” with public reportingrequired within two years after adoption.GGFR regards the consensus- creation of thestandard to be a significant accomplishment.However, endorsement of and adherence to thestandard have been below expectations. Thestandard has been officially endorsed by all theGGFR’s international oil company partners,but by only four national partners: Algeria, Cam -eroon, Chad, and Nigeria. However, four coun -tries (Equatorial Guinea, Kazakhstan, Nigeria,and Qatar) have deadlines for zero flaring. Onlyone company and one country have adoptedformal implementation plans for gas flaringreductions that are consistent with the VoluntaryStandard, although additional partners havesimilar programs in place. While all companiesare reporting flaring and venting data to theGGFR, only four countries (Cameroon, Canada,Norway, and the United States) have reportedflaring data for 2006, and venting has beenreported only by Canada and Norway. Thesereports are not publicly disseminated by theGGFR.Slow progress on reporting undermines theflaring reduction agenda and points to deepseatedissues. Reporting has been shown to be akey feature of other voluntary environmentalstandards, and accurate data are essential fortracking progress toward reduction goals.Measuring flaring and venting at the wellhead istechnically difficult and expensive, and compila-82

NATURAL GAS FLARINGtion of data across many producing locationsrequires standardized procedures. Recognizingthis, the GGFR developed and tried to popularizea data tool for reporting. The failure of thistool to find takers suggests nontechnical barriersto reporting. Given the legal penalties and socialdisapproval associated with flaring, the costs ofreduction (which may include reduced oilproduction in some cases), the expense ofmeasurement equipment, and the weak capacityof regulatory agencies for monitoring andenforcement, some oil producers do not havestrong incentives for accurate reporting of flaresand vents.Against this context, the GGFR has invested in aninnovative alternative for monitoring flarevolumes and locations: the use of remotesensing. A GGFR- sponsored study used night -time satellite imagery to detect global flaringactivity over 1995–2006 (Elvidge and others2007), with updates in progress. While theseestimates are themselves subject to measurementerrors, they provide a useful cross- checkon reported volumes, and for some areas mayconstitute the only available data. The greatestdisparity between official reports and the satellitedata is for Russia, where the satellite observationssuggest a much larger volume thanreported. The publication of these reports inMay 2007 followed closely on then- PresidentPutin’s state of the union address, whichdeclared flaring to be an “unacceptable waste”and cited a flaring volume higher than previousofficial reports.The GGFR has worked with partners to facilitatecommercialization of currently flared gas. It hasencouraged multilateral discussions on commercializingflared gas in the Gulf of Guinea and hassupported economic analyses of commercializationconstraints and possibilities in Nigeria,Russia, and elsewhere.The GGFR has devoted considerable effort topromoting the use of carbon markets to reduceflaring. The underlying idea is that use of associatedgas may, by itself, provide only marginalreturns and may therefore not attract investmentby oil producers with more remunerativeopportunities. But use of associated gas can alsoreduce GHG emissions. These reductions, worthmoney on carbon markets, could tip the financialbalance toward gas recovery. For instance, theKwale oil- gas processing plant, a GGFRsupportedproject, uses associated gas for powergeneration at an independent power producer.The stated rationale for emissions reductions isthat, in the absence of carbon finance, thereturns to establishing the power plant wouldhave been on the order of 13 to 15 percent, aninadequate inducement given the risky investmentclimate, including the risk of nonpaymentby the electricity off- taker. (The data and assumptionsunderpinning this estimate were not madepublic. 4 ) The estimated emissions reductions of1.5 million tons CO 2e 5 will provide additionalrevenue, with security of payments guaranteedas long as the plant is running and producingelectricity.To jump- start the carbon market, theGGFR has supported studies, technical The program has devotedassistance, project preparation, and effort to developingdemonstration projects. One line of carbon markets to helpeffort has been to develop and disseminatethe methodologies needed toreduce flaring.demonstrate emissions reductions. The CleanDevelopment Mechanism (CDM) works by caselaw: once a methodology has been developed for aparticular technology, subsequent similar projectscan apply this methodology, substantially diminishingtheir development costs and reducinguncertainty about whether the project will beapproved. The GGFR is developing two suchmethodologies for distinct approaches to flarereduction. The GGFR has also sponsored detailedscreening exercises for Algeria and Indonesia toidentify carbon investment op portunities. And it isinvolved in four CDM projects, two of which havebeen registered with the CDM, including theKwale project, the largest CDM project in Africa.But uptake has been very slow: there are only 26flaring-reduction projects in the CDM’s pipeline ofmore than 3, 000.Divergent country outcomes defy easy generalizationon the impacts of GGFR on flaring. In its83

CLIMATE CHANGE AND THE WORLD BANK GROUPFlaring has stayed aboutthe same among theGGFR partners andincreased amongnonpartners.early phases, the GGFR envisioned a goal ofsubstantial absolute global reductions in flaringover 2005–2010 in a context of higher production.6 Figure 6.2 shows total flaring by longstandingpartner countries versus others overthe past 12 years, using the remote sensingdataset. The graph compares the ratio of flaringin the two groups before and after the advent ofthe GGFR (2002); this provides a rough controlfor market changes that affect the production ofoil or demand for gas.Since that time, aggregate flaring by the GGFRpartners has stayed roughly constant, while totalflaring by nonpartners has increased. Much ofthe increase took place in Russia, outside partnerregion Khanty- Mansijsysk. Because flaringis related to oil production, it is interesting totrack changes in flaring volume/barrels of oilproduced. Cameroon’s ratio was high andincreasing until the advent of theGGFR, after which it declined. Fourother GGFR members showed post-2002 declines in this ratio. In anotherthree partners, a downward trendbegan before the GGFR and continued,while there was no trend or no change infour others. On balance, aggregate flaring byGGFR members stayed about the same inabsolute terms but decreased relative tononmembers, continuing a trend that wasongoing before the GGFR. Some flare reductionactivities take years to implement. The expectedrelease of remote sensing data for 2007 willprovide an update on progress. 7Economics of Gas FlaringOur review of GGFR studies and other analysescalls into question whether carbon marketsaddress the root causes of much flaring, andwhether carbon credits are necessary orsufficient to motivate flare reductions. Theanalysis for Indonesia (PA Consulting Group2006), for instance, found that, in 10 of 26 fieldsanalyzed, flared gas recovery projects offeredsubstantial economic and financial returns evenwithout carbon credits. If carbon finance wereavailable at $15 per ton, it would boost thefinancial net present value of these potentialprojects by 6 to 13 percent. The report concludesthat “the use of CDM adds value for projectsponsors, but does not significantly change theFigure 6.2: Global Flaring: Comparison of GGFR Partner and Nonpartner Countries1401201.5Flares, BCM10080604010.5Ratio2001995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006GGFR partners Other countries Flaring ratio: GGFR members to nonmember countries0Source: IEG computations based on flaring data from gas_flares.html (downloaded 9 June2008), described by Elvidge and others 2007.84

NATURAL GAS FLARINGranking of projects or make marginal projectshighly attractive.”A reanalysis of the data by IEG shows that theeconomic rate of return (ERR) to associated gasuse is large, even without carbon credits. Whengas at one of these fields is used to generateelectricity, and electricity is valued at long- runmarginal cost, the ERR to capturing the otherwisewasted gas stream is an astounding 163 percent.That calculation assumes an oil price (the alternativefuel for power generation) of $70 per barrel.At $100 per barrel, the ERR soars to 223 percent.Even at $40 per barrel, the ERR is above 100percent. In sum, economic fundamentals stronglysupport gas recovery in this case, even if globalexternalities are ignored.However, financial rates of return, and the role ofcarbon, will be strongly affected by pricingpolicies. This is evident, for instance, in the IEA(2006) analysis of a typical potential flaringproject in Russia. The internal rate of return(IRR) is 10 percent without carbon, but +5percent with carbon, when gas is purchased at$22 per thousand cubic meters, which IEAviewed at the time as an institutionallydetermined price. But the returns rise to 23percent (without carbon) and 32 percent (with)when the gas price is assumed to be $60—stillsubstantially below the netback price that mightbe obtained if transmission to export marketswere possible. Similar analyses were undertakenin a GGFR- commissioned study (PFC Energy2007), suggesting that essentially all currentlyflared Russian gas could profitably be recoveredat a gas price of $87, which is well below potentialexport values. Controlled prices may account forthe low without- carbon internal rates of returnthat Kwale noted earlier.Gas and energy pricing and regulatory policiesare thus crucial considerations in increasing theavailability of both associated and nonassociatedgas. Policy issues stem from two dilemmas.First, gas markets are not globally integrated witha market- determined price. Because gas trans -port is expensive, a gas producer may have justone potential buyer. The value to thebuyer, at most, is the cost of using analternative fuel or feedstock— forinstance, the cost of fueling a generatingplant with diesel rather than gas.This value may be considerably higherthan the cost to the producer of capturing andtransporting the gas. The gap between lowsupply price and high demand price representseconomic rent, to be divvied up between buyerand seller, and can be a source of contention,especially when the true supply anddemand prices are private information.(The same problem arises indetermining the degree to which oilproducers can afford to pay for flaringcontrol out of oil profits.)Second, the demand price may itselfreflect distortions in downstreammarkets. When electricity or heat tariffs are keptartificially low, or when alternative fuels aresubsidized, users’ willingness to pay for gas isdiminished. At economic prices for electricity, itwould generally be economically and environmentallypreferable to use associated gas for localelectricity production rather than bear the costs(and incur the emissions) of transforming the gasto LNG for export.Consequently, there can be tension among thegoals of maximizing public revenues from gasexploitation, subsidizing the cost of downstreamgoods such as electricity and fertilizer, and providingadequate incentives and finance for extractionor recovery of gas. One danger is that regulators,not knowing producers’ actual costs, may set gasprices too low to allow recovery or control offlaring, restricting the supply of gas (and possiblyof oil as well). Another is that price controls, orrestrictions on accessing export markets throughpipelines or LNG, divert gas to lower- value orinefficient use, with the consequence thatrelatively clean and efficient sources of power areforgone. Policies with these outcomes could hurtthe domestic economy while contributing toexcessive CO 2emissions. But full analysis of thesepolicies would also entail looking at their distributionalconsequences.Carbon markets may notaddress the root causes offlaring and may not benecessary or sufficient tomotivate flaringreductions.The economic rate ofreturn to the use ofassociated gas is high,but financial rates ofreturn are stronglyaffected by pricingpolicies.85

CLIMATE CHANGE AND THE WORLD BANK GROUPThe Bank has had long- standing engagement ongas policy (focusing on nonassociated gas) insome countries. Engagement was stronger in the1980s when the Bank lent for gas development,declined as investment attention focused moreon transmission and distribution networks, andmay now be increasing. Analytic work, includinganalysis of the economic value of gas in alternativeuses, has been a frequent feature of thisengagement.The impact of the Bank’s engagement in gasreform is mixed, and it can be difficult to attributeresults to a given intervention. In Egypt, Bankengagement traces back at least to theThe impact of the Bank’s early 1980s when it supported aengagement on gas number of gas investment projects. Itreform is mixed, and continued through a 1990s investmentattibution can be project to a recently initiated projectdifficult. that seeks to promote use of LNG overheavily subsidized liquified petroleumgas. That engagement has had some positiveoutcomes. While gas has been sub sidized, it hasbeen explicitly subsidized at the consumer levelrather than imposed through price caps onproducer payments. Prices paid to producers(currently $2.65/mmbtu) are lower than theeconomic value (estimated at $3.65/mmbtu), buthave still been sufficient to stimulate massiveexpansion in gas production and to switch Egypt’sexpanding power sector, at the margin, to gas frommore polluting and carbon- intensive petroleumproducts. Recently announced reforms haveboosted the price of gas to energy- intensiveconsuming industries from $1.10 to $2.65, whichshould encourage greater energy efficiency whilereducing expenditures on subsidies.The experience in Indonesia, which dates at leastto pipeline projects of the early 1990s, has beenless successful. Gas is purchased at low prices formany uses. For instance, although the potentialnetback price of LNG sales is $11 per thousandstandard cubic feet, much gas is sold topetrochemical or fertilizer producers at $6. Gastransport policies may inhibit the ability ofproducers to find remunerative markets. Oneconsequence is that although Indonesia flaresabout 3 bcm of gas per year, and much of that gaswould be readily recoverable at economic prices,3,500 MW of gas turbines are being run on morepolluting, more carbon- intensive, more expensivediesel (World Bank 2007e). And because electricitytariffs are held below the long- run marginalcost, the government is forced to subsidize theconsumption of this diesel. However, Bankengagement continues, and the Bank has recentlysupported studies of gas pricing and pipelinepolicy.Nigeria, the world’s second- largest flarer, hasreduced flares significantly over the past twodecades through increased LNG exports, but itstill has far to go to reach its long- standing goal ofending flaring in 2008. An ESMAP (2004) studyoutlined the scale of the problem: flaringconsumes gas potentially worth $2.5 billion peryear, while producing 70 million tons CO 2e ofGHGs. The study found that prices of $0.75/mscfwould be necessary to elicit supply of associatedgas and $1.00/mscf for nonassociated gas. Thestudy focused attention on supplying gas fordomestic power generation, noting the im -portance of maintaining gas prices sufficient toelicit demand. A country review by IEG foundlittle indication that the ESMAP study had beenused until recently, and found inadequateattention by the Bank to these issues over thepast eight years. However, the government ofNigeria announced a Gas Master Plan and pricingstrategy in early 2008. The extent to which itdraws on the ESMAP study or Bank advice isunclear.ConclusionWhile gas flaring is a complex phenomenon,economic fundamentals would often supportthe recovery and productive use of currentlyflared gas. Continued flaring thus reflects— inpart— regulatory and policy failures, particularlyin gas pricing. Where this is the case, the use ofcarbon finance as an instrument to reduce flaringis problematic. First, carbon payments may notchange incentives significantly, even undercurrent pricing policies. This would mean thatsuch carbon projects are not additional, and thatthe carbon payments merely add to producer (orgas owner) profits. Second, policy or regulatory86

NATURAL GAS FLARINGreform, though difficult, may offer greater andmore widely shared domestic economic benefits.Finally, the option of carbon finance may reducepressures for reform. Reforms, such as moreeffective enforcement of regulations againstflaring and higher prices for associated gas, makerecovery of associated gas more attractive, andthus undercut arguments for the additionality ofcarbon projects.Carbon finance may nonetheless be justified foractivities that are on the edge of economic viability,such as collection of associated gas from smallsources and use for local poverty reduction.Gas policy reform is not easy. National gasmonopolies and other groups benefiting fromthe status quo may resist change. Where there isno financial need for Bank investment loans,opportunities for dialogue may be limited.Nonetheless, there are examples of success.World Bank experience shows that policy reformrequires sustained engagement over longperiods, detailed analytic underpinnings, andfavorable political conditions. The GGFR cancontinue to contribute to this process by encouragingdialogue among stakeholders, by serving asan honest broker in discussions between governmentsand oil companies. Efforts to popularizethe issue and to encourage independentmonitoring of flare locations, volumes, and actorscould help to create conditions for progress.These measures need to be complemented withcontinued cross- sector efforts, focused on thelarge flaring countries, to put flaring and gaspolicy into a broader cross- sectoral perspective.87

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 andRecommendationsOver the years, the World Bank’s strategic documents have pointedto three approaches to the promotion of climate mitigation activitiesthat are consistent with developing countries’ “common but differentiatedresponsibilities.”One approach involves assembling global fundsto compensate nations for the added expenseof undertaking low- carbon development proj -ects. A second, related approach is to supporttechnology research, development, anddiffusion. These approaches are covered hereonly tangentially and will be a topic for the nextphase of the climate evaluation. (See box 7.1 fora discussion of the challenges related to technologyadoption.) A third approach is to pursue winwinor no- regrets policies and investments thatoffer both attractive domestic benefits and globalgains.Strategy documents dating to 1993 emphasizeenergy efficiency and removal of energy sub -sidies as important win- win approaches. Thisevaluation has mainly looked at policies in thesetwo areas, which the IEA and others stress as keyapproaches to emissions reductions over thenext 20 to 50 years. The evaluation has alsodiscussed the specific issue of gas flaring, whichcan be seen as an example of both a pricing andan efficiency problem. Finally, the report hasexamined the potential trade- offs among growth,energy access for the poor, and emissions.FindingsDevelopment spurs emissions.A 1 percent increase in income induces— onaverage, and with exceptions— a 1 percentincrease in emissions. To the extent that theWorld Bank Group is successful in supportingbroad- based growth, it will put pressure onclimate change. This is the fundamental challengeof development in a carbon- constrained worldand underlines the need to find countervailingstrategies, especially for middle- incomecountries.But there is no significant trade- off between climatechange mitigation and energy access for the poorest.The poorest people and the poorest countriescurrently emit only tiny amounts of GHGs, sogrowth for them puts no real pressure on theworld’s carbon budget. Basic electricity accessfor the world’s unconnected households, underthe most unfavorable assumptions, would addonly a third of a percent to global GHGemissions, and much less if renewable energy91

CLIMATE CHANGE AND THE WORLD BANK GROUPand efficient light bulbs could be deployed. Thewelfare benefits of electricity access have beenestimated in the range of $0.50 to $1 per kWh(IEG 2008e), while a stringent valuation of thecorresponding carbon damages, in a worst- casescenario, is a few cents per kWh.Policies can shape a low- carbon growth path.The link between growth and emissions is strongbut malleable. It is strong because income percapita and heating needs explain most of the 600-fold variation between countries in energyemissions per capita. It is malleable becausethere is still great potential for reductions.Although most countries follow a tight linkage ofincome to emissions, there is still a sevenfoldvariation between the most and the leastemissions- intensive countries at a given incomelevel.Part of that variation is luck— including naturalendowments of coal, gas, and hydropower— butit is also the product of policies that shape theuse of those resources. So, in the relationbetween income per capita and emissions frompower and heat generation, the share of electricityfrom hydropower accounts for half of thevariation among countries not linked to incomeand heat needs.Fuel pricing is a key policy affecting emissions.This is especially clear for vehicle fuels, wherehigh subsidizers— those whose diesel prices areless than half the world market rate— emit abouttwice as much per capita as other countries atsimilar income levels. Within the OECD, thecountries that have maintained high fuel pricesfor decades (through taxation) have evolvedmore efficient transport systems. If all themember countries had maintained these levels,the OECD’s emissions would be 36 percentlower (Sterner 2007).Energy subsidies are large, burdensome, regressive,and damage the climate.IEA (2006) estimates that energy subsidiesoutside the OECD cost a quarter- trillion dollarsyearly. Subsidies also promote excessive GHGemissions. In many developing countries, thesesubsidies exceed the public expenditure onhealth, yet they are not well- targeted to the mostvulnerable. Removal of these subsidies wouldbring domestic fiscal and economic dividendsand could reduce global emissions by severalpercentage points.The World Bank has been very active in supportingrationalization of energy pricing and increasedcollection.The Bank has been a mainstay of power sectorreform. While attribution is difficult, Banksupportedpricing reforms have often helped toboost tariffs and collection rates. Policy dialogueand analytic work have been associated withsuccessful reforms. Success is noteworthy inmany transition economies, which also recordedreductions in emissions per capita and emissionsper dollar of GDP.Country ownership of reforms is key. Theprospect of EU accession has been a motivationfor reform, and severe fiscal pressure hassometimes, but not always, facilitated reform.But tariff reform has been difficult where itthreatens entrenched interests, such as agriculturalusers in India. Countries that are not underfiscal stress— such as those with ample oilrevenues— are less likely to seek or accept WorldBank advice on subsidy removal, especially withregard to implicit (off- budget) subsidies.Although poorer groups often get a small share ofenergy subsidies, subsidy removal can threaten theirwelfare.While some subsidies scarcely reach poorpeople, energy subsidies constitute 5 to 10percent of household budgets of the lowestquintile in some countries. Removal of thesesubsidies can be painful to all, but especiallydangerous for the poorest. Sharp increases inenergy prices can be politically perilous, and areperceived as having sparked deadly riots and thefall of governments. The political feasibility of92

FINDINGS AND RECOMMENDATIONSprice rises, therefore, can depend on thepresence of mechanisms that protect bothvulnerable and influential groups.One way to facilitate energy price adjustments is tocouple them with social protection measures fundedfrom the savings from reduced subsidies.In Ghana, the government removed school feesand boosted funding of clinics in poor areas ascompensation for gasoline and kerosene pricerises. In Indonesia, an unconditional cashtransfer, targeted to the bottom two incomequintiles, was put in place to complement a steepfuel price rise. In both cases, ex ante analysisshowed that lower- income groups would bebetter off, on average. In Armenia, a socialtransfer payment, designed to offset an electricityprice hike, initially reached only 55 percent ofpoor people, but coverage is thought to haveimproved. But such compensatory programsmay not be sufficient to secure the acquiescenceof wealthier interests who benefit from subsidies.Another potentially important way to ease the adjustmentto higher energy prices is to couple price hikeswith efficiency measures, so that net outlays onenergy increase less steeply than prices.In principle, subsidy savings could fund suchefficiency investments. This adjustment tech -nique has been little used to date (though seethe discussion of the China Heat Reform Project,below). While several Bank projects promotemass distribution of compact fluorescent lightbulbs, these have not been linked to tariffreforms.End- user energy efficiency has been relativelyneglected.Efforts on energy efficiency, especially on thedemand side, have been modest compared withits potential and its stated priorities. Whilecountry strategies for 20 of the 33 top emitterscontained general references to energy effi -ciency, only 10 had specific objectives. About 5percent of energy lending by volume since 1990has been for components specifically related toenergy efficiency and district heating. (Efficiencygains may also accrue from improvementsin transmission and distribution.) However, thelimited evidence suggests that efficiency projectshave had high rates of return compared withother energy sector projects, even withoutaccounting for GHG benefits.Policy engagement on efficiency has been even morelimited.Only 34 energy-efficiency projects supported bythe World Bank during 1996–2007 includedactivities related to public policies, broadlyconstrued. Among these, DSM projects havebeen limited in scope and sustainability becauseof a tendency to partner with utilities, whichmake money by selling electricity, and only inspecial cases by conserving it. Projects instandards and codes have succeeded in stimulatingpolicy or regulatory change, but oftendevoted inadequate attention to institutions andimplementation.However, there have been some innovative efforts.The China Heat Reform and Building Project ispursuing a difficult—but potentially very highpay- off—comprehensive policy and investmentapproach that promotes demand for and supplyof efficiency. And there has been a spate ofinnovative projects in energy finance, includingESCOs, that seek to overcome credit marketfailures and transactions cost barriers. Althoughthese contract- intensive institutions face chal -lenges in weak institutional and legal environments,they appear to be expanding and will beassessed at greater length in Phase II of thisevaluation. The availability of grant funds fromGEF, ESMAP, and the Asia Sustainable andAlternative Energy Program has been critical inallowing staff to pursue innovative efficiency andrenewables projects.There are several reasons why energy- efficiencyprojects, and especially policy- oriented projects,appear to be underemphasized in Bank lending.Internal Bank incentives work against these93

CLIMATE CHANGE AND THE WORLD BANK GROUPprojects because they are often small in scale anddemanding of staff time and preparation funds.There is a general tendency (including amongborrowers) to prefer investments in generation,which are highly visible and easily understood, toinvestments in efficiency, which are less visible,involve human behavior rather than electricalengineering, and whose efficacy is harder tomeasure. A neglect of rigorous monitoring andevaluation reinforces the negative view ofefficiency. And investments often take place inthe absence of an integrated resource plan (forpower system expansion) that takes efficiencyoptions into account. A paucity of Bank staff withexpertise in efficiency (now being remedied) hasboth reflected and contributed to the neglect ofthe issue.The Bank, through the GGFR, has fostered dialogueon gas flaring, but flaring activity has not yet beenreduced.Flaring of associated gas contributes more than400 million tons of CO 2to the atmosphere eachyear; if used for power, it would produce twicethe amount consumed in Sub- Saharan Africa.Using flared gas is in many cases a clear win- winproposition. The Bank- hosted GGFR Partnershiprepresents a modest but innovative effort totackle this large problem. The GGFR has fostereddialogue on the issue among countries and oilcompanies, raised the issue’s profile, andsponsored useful diagnostic analyses and datacollection. The GGFR’s global remote sensingsurvey of gas flaring provides objective and verifiabledata in an area that is difficult to monitorand where some participants may have lowincentives for accurate reporting. However, by2006 there had not yet been any aggregatereduction in flaring among GGFR partners,although flaring per barrel of oil has decreased inmost partner countries.Carbon finance does not address the fundamentalpolicy and institutional failures that cause gasflaring.The GGFR has devoted attention to carbonfinance as a means of flaring reduction, which isappropriate only where the economics ofreduction are marginal. However, the GGFR’sdiagnostic work suggests that flaring oftenresults from lose- lose policy- level natural gaspricing decisions rather than inherently marginaleconomics. Where this is so, the use of projectlevelcarbon finance is a mere bandage for policyailments that require a more fundamental cure.Important information for the design and managementof emissions- related policies is missing.At the international level, there is no timely,comprehensive, and consistent monitoring ofenergy subsidies or prices. At the national level,there is a lack of basic data on key factors relatedto energy efficiency, such as technical losses intransmission and the extent and emissions ofcaptive power plants. Lacking also are timely andaccurate data on household, commercial,municipal, and industrial consumption andexpenditures on energy. This makes it difficult todesign and monitor the impact of price reformand efficiency policies. And monitoring andevaluation remain inadequate at the projectlevel. For instance, only one of many compactfluorescent light distribution projects has built ina rigorous impact analysis.The World Bank has a significant history of involvementwith carbon accounting.A pilot study on carbon shadow pricing wascarried out 10 years ago, and carbon pricing isintegral to the activities of the Bank’s carbonfunds. Carbon shadow pricing has been systematicallyincorporated in long- term planning of theexpansion of Southeast Europe’s power system.And the IFC has already adopted a PerformanceStandard that requires projects with significantGHG emissions to quantify them annually and toseek avenues for reducing them, including offsets.While there are important technical issues infootprinting and shadow pricing, these prec -edents suggest that they can be overcome andcould be informative. However, quantifying theBank’s indirect and policy impacts on GHGs ismore difficult, though these impacts may be largerthan those of the direct, project- level effects.94

FINDINGS AND RECOMMENDATIONSBox 7.1: The Challenge of Catalyzing Technology AdoptionThe next phase of the climate change evaluation will look in depthat the Bank Group’s experience related to technology. The frameworkis presented here and may be helpful in exploring uses forthe recently established Clean Technology Fund.The public policy rationale for supporting renewable energy andenergy efficiency revolves around barriers or market failures, includingregulatory barriers, information and transactions costs, andspillover or demonstration effects that are not captured byinnovators.GEF climate projects and CDM projects are required to predicatetheir financial support for a project on a barrier-removal argumentof this kind. IFC and IBRD/IDA support may do so implicitly.The next phase of the evaluation will examine a set of low- carbontechnologies through this barrier-removal lens. Three evaluativequestions stand out:• Are the barriers as severe as they are represented to be? Inthe project context, could the project have been undertakenin the absence of concessional finance (known as the additionalitytest)?• What are the spillover impacts of particular technologychoices?• What is the Bank’s comparative advantage and how does thatfind expression in the strategic choices it makes among instrumentsand technologies?On the additionality question, the experience of the CDM willbe instructive, both for the Bank’s expanded use of carbon finance(through the Carbon Prototype Fund) and for the deployment of theClean Technology Fund. The CDM has built an elaborate apparatusto try to ensure additionality, project by project. Contentious fromthe start, the additionality tests are perceived as onerous red tapeby some investors. At the same time, serious questions have beenraised about whether these tests truly screen out projects that couldhave succeeded without carbon finance (Michaelowa and Purohit2007; Schneider 2007; Wara 2008).For instance, some observers cite a proliferation of CDMfinancedhydropower plants in places where similar plants werealready widespread. Analysis by the Bank’s Carbon Finance Unithas shown that in many cases the sale of carbon offsets makesonly a very small difference in the project’s financial bottom line—a percentage point or less in the internal rate of return. For theseprojects, it is not plausible that carbon revenues alone wereenough to push the project over the threshold from unprofitableto profitable. However, the carbon finance transaction may haveprovided some other catalytic benefits. For instance, the due diligenceassociated with carbon finance may have crowded- ininvestors and financiers.These additionality concerns are not unique to CDM projects.They also apply to pricing policies (such as feed- in tariffs or renewableportfolio standards) that promote renewable energy. Asthe level of support increases, to what extent is there a supply response,and to what extent do incumbents simply receive higherprofits? This is a fundamental question to ask with regard to choosingmechanisms, technologies, and locations to support.With regard to spillover effects, the technology projects withthe most leverage are those that trigger spontaneous diffusion orreplication. One well- known mechanism for spillovers is the learningcurve. Technology costs decline with cumulative productionvolume, as has been well documented for solar photovoltaics andwind power. Taking advantage of these learning curves is inevitablyan exercise in “picking winners,” or at least short- listingthem. Success is achieved when cumulative production of a particulartechnology is enough to push costs below the threshold ofcompetitiveness.Another mechanism is to reduce uncertainty among technologyinvestors or users. For instance, the first wind or minihydro plantin a country or region may be viewed with skepticism. Risk- averseinvestors may demand a premium; lenders may simply be unwillingto lend. Successful demonstration of the technology in localcircumstances could reduce the risk premium, making it easier forfollow- on projects to get financing.Finally, public policies can deter or enable investment. Subsidiesto fossil fuels or red tape for small power producers are examplesof deterrents. Building and appliance codes, in contrast,increase the salability of efficient building material and machinery.A starting place for the discussion of the Bank’s comparativeadvantage is to look at activities that are unattractive to the privatesector, or the public sector in the developed world. Within thatset, the Bank could focus on those that have the highest spillovereffects.These considerations suggest concentrating Clean TechnologyFund and other new resources on technologies and activities that:• Are not the subject of research and development in the developedworld(Box continues on the next page.)95

CLIMATE CHANGE AND THE WORLD BANK GROUPBox 7.1: The Challenge of Catalyzing Technology Adoption (continued)• Are easy to replicate and therefore difficult to protect bypatent or other means• Could be rapidly pushed down the learning curve• Facilitate public sector activities that encourage investmentsin efficiency and renewables• Cannot be financed through existing Bank instruments.Examples include:• Improved procedures for targeting social safety net paymentsto poor and vulnerable people, as a means to reduceenergy subsidies• Institutions, procedures, and technologies for ex ante assessmentof energy consumption by buildings, and for implementingbuilding code inspections• Lower- cost technologies for delivering and installing (as opposedto manufacturing) efficiency measures and decentralizedrenewable power sources• Low- cost technologies for DSM of traffic in high- densitycities• Detailed wind resource surveys for windpower site identificationand investment decisions• Geological surveys on the availability and integrity of carboncapture and storage sites• Capacity building for regulators on integrated resource planningand on technology and regulatory issues for nuclear andcarbon capture and storage technologies• Land management techniques that reduce demand forenergy- intensive fertilizer production• Solar technologies of all kinds, given higher average insolationin developing regions.Strategic consideration of these options will force some difficultchoices. For instance, pursuing the learning curve route to technologycommercialization requires focusing on a limited set oftechnologies and coordinating these investments across countries,while an emphasis on removing uncertainty as a barrier to investmentwould argue for a very diffuse set of investments acrossa wide range of countries.Source: IEG.Conclusion and RecommendationsThe Bank is just one contributor toward the longtermgoal of mitigating and adapting to climatechange. The long- run solution to mitigation entailsthe invention and wide- scale deployment of zerocarbontechnologies. Developing and deployingthese technologies will require massive near- termincreases in research and development expenditurein the developed countries, and trillions ofdollars of investment— far beyond the Bank’s directfinancial resources— in developing countries.Still, the Bank can aspire to play a catalytic rolein this global transformation. Based on the anal -ysis in this report, IEG makes the followingrecommendations.Focus World Bank efforts more strategically on areasof its comparative advantage, which include sup -porting the provision of public goods and, at thecountry level, promoting policy and institutionalreform.The Bank has the potential to help its clientspursue nationally appropriate actions that meetpressing development objectives, while positioningthem on a lower- emissions growth path. Itcan best do so by seeking maximum leverage inits actions. This entails a strategic focus on itscomparative advantage in supporting policyreforms, public goods, and institutional innovationsthat transform markets. There is amplescope for clients to pursue win- win policies— butif these were easy, they would have beenundertaken long ago. Reform will require asystems view: looking at the power system as awhole; looking at energy subsidies as justone, dysfunctional, part of a social protection sys -tem; and looking at the connections betweenwater and power management. And it will re -quire big investments in real- time monitoringand learning.Systematically promote the removal of energysubsidies, easing social and political economyconcerns by providing technical assistance andpolicy advice to help reforming client countries findeffective solutions, and analytical work demonstrat-96

FINDINGS AND RECOMMENDATIONSing the cost and distributional impact of removal ofsuch subsidies and of building effective, broadbasedsafety nets.The mid-2008 level of energy prices, whileburdensome for many countries, nonethelessprompts a fresh look at policies on energysubsidies, energy efficiency, and renewable energysources. The recent experience of these pricesmay open doors for policy and regulatory reform.The Bank can provide analytic support forcountries to explore the potential for gains fromreform, and financial and technical support forcarrying out reforms if desired.Energy price reform is never easy or painless. Itcan endanger poor people, arouse the oppositionof groups used to low prices, and triggerinflation, thereby posing political risks. Butfailure to reform can be worse, diverting publicfunds from investments that fight poverty andfostering an inefficient economy that is increasinglyexposed to energy shocks. And reformneed not be undertaken overnight. The Bank canprovide assistance in charting and financingadjustment paths that are politically, socially, andenvironmentally sustainable.One way to do this is for the Bank to continue todevelop and share knowledge on the use of cashtransfersystems or other social protectionprograms as potentially superior alternatives tofuel subsidies in assisting the poor. To assistcountries in dismantling subsidies that benefitspecial interest groups, the Bank should fostercross- sectoral cooperation and greater use ofpolitical economic analysis. Timely monitoringand analysis of energy use and expenditure, atthe household and firm levels, will be importantin policy design, in securing public support, andin detecting and repairing holes in the safety net.Emphasize policies that induce improvement inenergy efficiency as a way of reducing the burden oftransition to market- based energy prices.Cost- reflective prices for energy boost thereturns to efficiency, but policies may need tobe put in place to allow households and firms toexploit efficiency opportunities. Conversely, thedeployment of energy- efficient equipment suchas compact fluorescent lights can be used as adevice for cushioning the impact of priceincreases. The Bank should explore innovativeways to finance efficiency (and renewable en -ergy) investments in the face of fuel pricevolatility.This report calls for much greater emphasis onpromotion of energy efficiency. But similar callsin the past have not evoked a strong response. Ifa real reorientation to energy efficiency andrenewable energy is to occur, the Bank’s internalincentive system needs to be reshaped. Insteadof targeting dollar growth in lending for energyefficiency (which may distort effort away fromthe high- leverage, low- cost interventions), itneeds to find indicators that more directly reflectenergy savings and harness them to countrystrategies and project decisions. It also needs topatiently support longer, more staff- intensiveanalysis and technical assistance activities.Increased funding for preparation, policydialogue, analysis, and technical assistance isrequired. Trust fund resources have been helpfulfor this in the past; the Clean Technology Fundmay provide additional, near- term funds.Promote a systems approach by providing incentivesto address climate change issues through crosssectoralapproaches and teams at the country level,and structured interaction between the Energy andEnvironment Sector Boards.To tackle problems of climate change mitigationand adaptation, the Bank and its clients need tothink beyond the facility level, beyond subsectors,and beyond sectors. The value of a windmilldepends on the load patterns of the grid to whichit is connected. Removing electricity subsidies forfarmers requires an understanding of agriculturalpolicies and conditions. Promoting municipalelectricity efficiency is closely bound up withreducing distribution losses in water systems.Traffic congestion and air pollution are aconsequence of fuel subsidies. Urban forestrypromotes mitigation by cooling cities and fostersadaptation by reducing flooding.97

CLIMATE CHANGE AND THE WORLD BANK GROUPTo be effective, the Bank needs to break downsectoral stovepipes and encourage cross- sectorapproaches and teams. This will require championshipby country directors and vice presidents.The unfulfilled promise of mainstreamingsustainable development needs to be realizedthrough structured interaction of the Energy andEnvironment Sector Boards. This could beinitiated with ad hoc groups to address specificcross- sectoral challenges.At the country level, the Bank should supportcapacity building for a systems approach— forinstance, for power system regulators in the area ofintegrated resource planning. And it should thinkabout using the Clean Technology Fund to supportpublic systems that will catalyze widespread investments.For instance, capacity building for buildinginspectors and for the construction industry couldtransform that industry.Invest more in improving metrics and monitoring formotivation and learning—at the global, country, andproject levels.Good information can motivate and guideaction. Building on the Bank’s current collaborationwith the IEA or other partners on energyefficiencyindicators, the Bank should set up anEnergy Scoreboard that will regularly compileup- to- date standardized information on energyprices, collection rates, subsidies, policies, andperformance data at the national, subnational,and project levels. Indicators could be used byborrowers for benchmarking; in the design andimplementation of country strategies, includingsectoral and cross- sectoral policies; and in assessingBank performance. The Bank could look forinspiration to India, which already publishesdetailed data on power plant CO 2emissions,state- level utility performance, and fuel subsidylevels, or to China, which is aggressively pursuinga goal of energy-efficiency improvement.At the national level, the Bank should supportintegration of household and firm surveys withenergy consumption and access information tolay the foundation for assessing impacts of pricerises and mitigatory measures, as well as planningfor improved access. The Bank could explore theuse of advances in information technology (suchas meters with automated, wireless reporting),together with statistical sampling, to undertakereal- time monitoring of energy use and patterns.Affordable monitoring systems could pay bigdividends in improved energy management atthe sectoral and national levels.More rigorous economic and environmentalassessment is needed for energy investments andthose which release or prevent carbon emissions.These assessments should draw on energy pricescollected for the Energy Scoreboard and accountfor price volatility. In addition, they could undertakecarbon accounting at the project level, computingswitching values for high- and low- carbon alternatives.Investment projects should also be assessed,qualitatively, on a diffusion index, which wouldindicate the expected catalytic effect of the investmenton subsequent similar projects. Whereproprietary information is not involved, theseassessments should be made public for informationand comment. Public disclosure will provideincentives for accurate assessment and will alsoinform global technology and investment planning.Ideally, investments should fund projects identifiedunder an active integrated resource plan forsystem expansion. Such plans should allow forenergy efficiency as a source of increasedcapacity and take account of the value ofrenewables in reducing pollution and exposureto external price shocks. The Bank should assistcountries in preparing and implementing theseplans. Countries may wish to compare expansionplans under different shadow prices for carbon.It is desirable to complement project- basedanalysis with assessment of indirect and policyrelatedimpacts, which could be much larger.Monitoring and evaluation of energy efficiencyinterventions continues to need more attention.Large- scale distribution of compact fluorescentlight bulbs is one example of an intervention thatis well suited to impact analysis and where atimely analysis could be important in informingpossibly massive scale- up activities.98


APPENDIX A: BANK ATTENTION TO SUBSIDIES IN THELARGE SUBSIDIZING COUNTRIESSubsidyPERCountry Total subsidies Electricity Fuel Gas attentionArgentina 1990–91: $0.6 bln a $1.5 bln b $1.0 bln b $4.0 bln b 2003 +1995–96: $0.15 bln aChina 1990–91: $24.5 bln a $5.0 bln b $7.0 bln b $4.0 bln b No PER1995–96: $10.3 bln aEgypt, Arab 11.9% of GDP c $2.0 bln b $9.5 bln b $1.0 bln b No PERRep. ofIndonesia 1990–91: $2 bln a $2.0 bln b $15.5 bln b 2007 ++1995–96: $1.3 bln a PER $3.8 bln. PER: 1.5%PER: 2006–$12 bln =1.4% of GDP, GDPincludes explicit 2004–3%and implicit (2005) 2005–3.5%India 1990–91: $4.2 bln a $10.0 bln b $7.0 bln b $2.0 bln b No PER1995–96: $2.7 bln aIran, Islamic 17.5% of GDP c $2.5 bln b $24.0 bln b $9.5 bln b No PERRep. of100

APPENDIX A: BANK ATTENTION TO SUBSIDIES IN THE LARGE SUBSIDIZING COUNTRIESCAS objectives relatedto energy pricing or subsidiesOutcomes and status2004: Social tariff to be targeted to the poor. Sanction 2006: Social tariff: draft law before Congress, but government istemporary seasonal price adjustment mechanisms inunreceptive.the energy sector.2007: Electricity tariffs raised but still substantially below long-run marginalcost; gas subsidies in place.1995: Average power tariffs should approach long-run marginal 2003: Average power prices cover cost; higher than long-run marginalcost countrywide, but especially in the interior provinces.cost in coastal provinces.1997: Enact price reforms and user fees to increase retainedearnings of infrastructure companies.No energy pricing/subsidy target in CASs.2007: GoE announced plans to eliminate gas and electricity subsidies forenergy- intensive industries over the coming three years. Bank provided inputon energy prices and subsidies.2008: Increases in electricity, natural gas, and fuel prices, but still low by internationaland regional standards. The Ministry of Finance started to recordenergy 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 atelectrificationratio; 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 adjustmentstariff adjustment mechanisms for power. saved $15 bln in public funds over 2005–06.2006: Electricity and petroleum prices remain below cost levels as worldprices 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 topricing 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; kerosenepower sector. Better cost recovery for power through appropriate heavily subsidized.tariff schedules, lower subsidies, and reversal in cultureof nonpayment.2005: Tariffs should cover the cost of service provision.Progressively reduce the primary deficit at the center and instates by reducing power sector losses and phasing outpetroleum subsidies.2001: Interim Assistance Strategy 2001: Study on the reform of the energy pricing system finalized. SubsidiesCountry Economic Reform agenda addresses subsidies. Bank continue.will intensify economic and sector work, including a study onthe reform of the energy pricing system.(Continues on the next page.)101

CLIMATE CHANGE AND THE WORLD BANK GROUPBank Attention to Subsidies in the Large Subsidizing Countries (continued)SubsidyPERCountry Total subsidies Electricity Fuel Gas attentionKazakhstan $0.5 bln b $1.0 bln b $4.0 bln b No PERMalaysia $0.4 bln b $3.5 bln b — 1999 +Nigeria 1990–91: $0.9 bln a $0.4 bln b $2.0 bln b 2001 +1995–96: $0.5 bln aPER: power and steel sectors(% of total budget):1998—2.6%2000—7.9%Implicit fuel subsidies:2003—1.6% of GDP c2005 estimate:2.2% of GDP cPakistan Explicit fuel subsidies: $2.0 bln b $3.0 bln b —2003—0.1% of GDP c2005 estimated:0.2% of GDP cRussian 2003 (PER): $14.0 bln b $26.0 bln b 2005 ++Federation 3.3% of GDP inhousing and utilitysubsidies, directbudget support,quasi-fiscalfinancing102

APPENDIX A: BANK ATTENTION TO SUBSIDIES IN THE LARGE SUBSIDIZING COUNTRIESCAS objectives relatedto energy pricing or subsidies1998: Liberalization of pricing and regulations in energy.2002: Government will introduce a new tariff policy that willfully cover the cost and will be aimed at reducing theindependence of the tariff on electricity transmission distance.No energy pricing/subsidy target in CAS.No energy pricing/subsidy target in CAS.Outcomes and status2000: Government implemented the replacement of the petroleum subsidyby a consumption tax resulting in a doubling of the gasoline price.2004: Nigeria successfully implemented a fiscal rule de- linking the budgetfrom current oil prices.1995: Improve structure of energy prices. Increase gas, 1998: Electricity tariffs increased by 21%.petroleum, and electricity prices. Introduce an automatic2001: 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 when1998: 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 sectorto international crude price), with possible delay inarrears. Petroleum prices adjusted partially to reflect international oil prices.petroleum prices adjustment.2005: Government temporarily suspended policy of automatic petroleum2006: Oil and gas prices should fully reflect world price adjustment. Reduction in petroleum taxes, to reduce the impact ofmarket conditions.rising international prices. Gas tariff collections met policy goals but priceadjustment mechanism is not consistent. Gas tariffs are priced close to longruncosts on average but are still below opportunity costs for householdsand for the fertilizer industry.2006 Inability of government to adjust petroleum consumer prices as foreseenin the CAS. Good progress made in the pricing of natural gas, but gastariffs continue to be distorted by cross- subsidies among different classes ofconsumer, and implementation of the gas price adjustment mechanism hasbeen 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—elecinvestmentand 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 tocollection. Coal— improve subsidy management system, social many OECD 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 beingheating, power tariffs).gradually increased toward long- run marginal costs, price subsidies remainsubstantial. Domestic prices of gas still well below export levels.(Continues on the next page.)103

CLIMATE CHANGE AND THE WORLD BANK GROUPBank Attention to Subsidies in the Large Subsidizing Countries (continued)SubsidyPERCountry Total subsidies Electricity Fuel Gas attentionSouth Africa 1990–91: $0.9 bln a $4.0 bln b No PER1995–96: $0.4 bln aThailand 1990–91: $0.5 bln a $1.0 bln b $2.0 bln b $0.3 bln b No PER1995–96: $0.4 bln aUkrainePER: $2.5 bln b $0.3 bln b $13.0 bln b 2006 ++Quasi- fiscal activities inthe energy sector (% GDP):2001: 7.4; 2005: 4.3Venezuela, 1990–91: $3.4 bln a $1.5 bln b $8.5 bln b No PERR. B. de 1995–96: $2.4 bln aVietnam $0.7 bln b $0.7 bln b No PERMexico 1990–91: $5.4 bln a PER: 1% of GDP 2005 ++1995–96: $2.2 bln a in 2003Sources 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.104

APPENDIX A: BANK ATTENTION TO SUBSIDIES IN THE LARGE SUBSIDIZING COUNTRIESCAS objectives relatedto energy pricing or subsidies2007: Assess competition and regulation in the energy sector.Outcomes and status1995: Assessment of impact of power tariff and connection charges. Fuel subsidies phased out over 2004–05.2000: Improve financial discipline across the economy (including 1999–2006: 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 CO 2emissions/$ 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 economicSet tariffs sets close to cost recovery (coal, gas, electricity). costs.1997: Maintain domestic petroleum prices at export parity.1996–2002: 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 differentconsumer categories.1997: Reduce price distortions in infrastructure, technicalassistance on tariff policies in power sector.1999: New approach to pricing and subsidization needed atboth the national and subnational levels.1997: “On the top of environmental agenda is efficient energypricing.”2002: “Revise pricing policies and subsidies (including energy)that claim to assist the poor, actually convey perverse signalsand induce overuse, misallocation, and waste of environmentalassets.”2004: Better targeting of subsidies.2008: Electricity subsidies study.105

APPENDIX B: ENERGY-EFFICIENCY PROJECTS WITH POLICY COMPONENTSProjects with Energy-Efficiency Policy Component, 1996–2007IBRD/IDAIEGFiscal Project Project and status grant amount outcome Type ofyear ID (closed [C]/active [A]) (US$ million) rating efficiency measures1996 P034491 Albania Power Transmission C 29.50 Unsatisfactory Appliances and buildingsand Distribution—IBRD/IDAstandards1996 P034617 Mali Selingue Power C 27.30 Highly DSM studyRehabilitation Project—satisfactoryIBRD/IDA1997 P035693 China Efficient Industrial C 32.80 Satisfactory Technology diffusionBoilers—GEF1997 P035163 Lithuania Energy Efficiency/ C 10.00 Moderately Efficiency finance fundHousing Pilot Project—satisfactoryIBRD/IDA1997 P042056 Senegal SN-GEF Energy C 4.70 Not rated Technology diffusionMgmt Sust Prtn SIL—GEF1997 P010498 Sri Lanka Energy Services C 24.20 Satisfactory Voluntary building standards;Delivery—IBRD/IDAcapacity building for DSM1998 P000532 Chad Household Energy C 5.30 Moderately Household energy DSM/Project—IBRD/IDA satisfactory technology diffusion1998 P003606 China Energy Conservation— C 63.00 Satisfactory ESCO demonstration andIBRD/IDAmarket information1998 P037859 China Energy Conservation— C 22.00 Satisfactory Energy conservationGEFinformation center1998 P000736 Ethiopia Energy 2—IBRD/IDA C 200.00 Moderately Electric Standards andsatisfactoryTechnical Regulation study106

APPENDIX B: ENERGY-EFFICIENCY PROJECTS WITH POLICY COMPONENTSEnergyefficiencycomponent,(US$ million) Efficiency measures detail Outcome8.7 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 toenergy conservation in buildings.prescribe insulation standards. The study on applianceefficiency was not done.Not identified Purchase and installation of equipment for reducing Never implementeddistribution network technical losses and the designand promotion of end-use efficiency programs.31.49 Development, production, marketing of energy-efficient Achievedand cleaner industrial boiler designs.9.80 Loan finance for energy-efficient rehabilitation of The investments introduced controllable heatresidential buildings.consumption.0.33 Demand management and fuel substitution component to Achievedpromote substitution of kerosene and liquid petroleum gasfor charcoal, and will disseminate efficient charcoal stoves.1.9 Energy-efficiency objectives within the capacity-building The project launched DSM programs, including: a code ofcomponent.practice for energy-efficient commercial buildings;increased technical capacity to carry out energy audits andprovide advice on energy efficiency measures; and anappliance energy-labeling program.0.53 actual Improve the efficiency of household fuel use: DSM to Not achieved, subcomponent was discontinued—producreducewood 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 keroseneand liquefied petroleum gas stoves.57.96 Adapting the EPC (energy performance contract) model; Energy management company demonstration. By 2007, theenergy management company demonstration; energy efficiency achieved total energy savings of 5.92information dissemination.mmtce, and associated reductions in carbon dioxide emissionsof 5.06 million tons of carbon equivalent versus thetarget 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.)107

CLIMATE CHANGE AND THE WORLD BANK GROUPProjects with Energy-Efficiency Policy Component, 1996–2007 (continued)IBRD/IDAIEGFiscal Project Project and status grant amount outcome Type ofyear ID (closed [C]/active [A]) (US$ million) rating efficiency measures2000 P047309 Brazil Energy Efficiency—GEF C 15.00 Moderately Standards, testing,satisfactorycapacity building2000 P066345 Mauritania Energy, Water, C 9.90 Unsatisfactory Energy-saving action planand Sanitation Sector ReformTechnical Assistance Project—IBRD/IDA2002 P074040 Bangladesh Renewable A 8.20 Not rated DSM and master planEnergy Development—GEF2002 P063644 Ecuador Power and A 23.00 Not rated Standards, tariffs incentivesCommunications Sectorsfor energy conservation inModernization and Ruralelectricity; efficiency financeServices— IBRD/IDA2002 P072527 Ecuador Power and A 2.80 Not rated Building standards andCommunications SectorsefficiencyModernization and RuralServices—GEF2002 P076702 Sri Lanka Renewable Energy A 75.00 Not rated DSM technical assistance,for Rural Economicincluding efficiency financeDevelopment—IBRD/IDA2002 P066396 Vietnam System Efficiency A 225.00 Not rated Utility-based DSMImprovement, Equitization,and Renewables Project—IBRD/IDA2003 P076977 Brazil Energy Sector A 12.10 Not rated Expansion planning, tariffTechnical Assistancereform with targeted smartProject—IBRD/IDAsubsidies2003 P049395 Ethiopia Energy Access SIL— A 132.70 Not rated Technology diffusionIBRD/IDA108

APPENDIX B: ENERGY-EFFICIENCY PROJECTS WITH POLICY COMPONENTSEnergyefficiencycomponent,(US$ million) Efficiency measures detail Outcome11.9 Capacity building for improving the efficiency of electricity GEF project implemented, IBRD loan canceled. Energy Efuseby the residential and commercial sectors in Brazil. ficiency Reference Center is fully operational. MarketingRemoval of barriers to energy efficiency and energy Plan and Publicity Campaign implemented. National Elecconservation.tric Laboratory is fully operative—testing and labelingprograms in place. Testing, Certification, and Labeling Programsupported the implementation of the Law on EnergyEfficiency (approved October 2001). Research on acceptanceof efficiency equipment by market. Training on energy-efficiencymanagement and capacity-building program.Not identified The preparation of an energy-saving action plan Studies deemed of limited utility. Complementary tarifffor public services.reforms not enacted.Not identified Introducing standards and programs for testingand certification.1.74 Develop strategies and policies to remove barriers;standards for efficient design and use of buildingsand electrical appliances, public information, andsupport to the establishment of ESCOs.Not identified Design of energy-efficiency standards for buildings andenergy equipment.0.75 Energy efficiency and DSM. Technical assistance andcredit 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 includingthrough tariff reform with targeted, smart subsidies.Demand- and supply-side possibilities—throughtraining and capacity building.Not identified Promotion of commercially based production anddissemination of approximately 320,000 improvedbaking stoves.(Continues on the next page.)109

CLIMATE CHANGE AND THE WORLD BANK GROUPProjects with Energy-Efficiency Policy Component, 1996–2007 (continued)IBRD/IDAIEGFiscal Project Project and status grant amount outcome Type ofyear ID (closed [C]/active [A]) (US$ million) rating efficiency measures2003 P071019 Vietnam Demand-Side A 5.50 Not rated Utility-based DSMManagement and Energy—GEF2004 P073036 Mali Household Energy and A 35.70 Not rated Energy services, charcoal-Universal Access Project—efficiency promotionIBRD/IDA2004 P074686 Morocco Energy and C 0.80 Not rated Capacity building forEnvironment Upgrading—efficiency financeGEF Medium Size2004 P068124 Uruguay Energy Efficiency A 6.90 Not rated Utility-based efficiencyProject—GEFservices2005 P077575 Bulgaria District Heating— A 4.30 Not rated DSM public awarenessCarbon Offset2005 P069126 Burkina Faso Power Sector A 63.60 Not rated DSM institutionalDevelopment—IBRD/IDAstrengthening2005 P072721 China Heat Reform and A 18.00 Not rated Codes and standards;Building Energy EfficiencymeteringProject—GEF2005 P070246 Poland Energy Efficiency— A 11.00 Not rated Efficiency finance, capacityGEFbuilding, and demonstration110

APPENDIX B: ENERGY-EFFICIENCY PROJECTS WITH POLICY COMPONENTSEnergyefficiencycomponent,(US$ million) Efficiency measures detail Outcome5.5 1. Electricity of Vietnam’s DSM Program: expanded time-of-usemetering, pilot direct-load control program, CFL promotion,fluorescent tube lamp market transformation; 2. Ministry ofIndustry 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 parkin Casablanca by facilitating local ESCO businesses andstrengthening the local executing agency.6.48 Improved efficiency of energy use: energy-efficiencymarket development (implemented by the Ministry ofIndustry, Energy, and Mining); utility-based energyefficiencyservices.4.34 Rehabilitation of pipeline and district heating substations.The technical assistance supported by theKIDS component of the project will support a publicawareness campaign to promote DSM.3.38 1. Design a DSM policy framework and implement DSMprograms, including capacity building in Energy ManagementUnit, to build a base for building code andappliance standards. 2. Purchase of efficientair-conditioning and lighting system. 3. Informationawareness campaign.18 Promote simultaneous development of both heatingsector reforms and building energy-efficiency improvementsin 4-6 northern Chinese municipalities, achievingbroad national impact.12.37 Components: 1. A partial guarantee. 2. Investments inbundled energy efficiency projects in the Krakow region.3. Technical assistance for: deployment of guaranteemechanism; ESCO subsidiary in the development of theperformance contracting model; training to local banks;awareness and demand for efficiency investments;project monitoring data and dissemination of results.(Continues on the next page.)111

CLIMATE CHANGE AND THE WORLD BANK GROUPProjects with Energy-Efficiency Policy Component, 1996–2007 (continued)IBRD/IDAIEGFiscal Project Project and status grant amount outcome Type ofyear ID (closed [C]/active [A]) (US$ million) rating efficiency measures2006 P086379 Djibouti Power Access and A 7.00 Not rated Studies on sector efficiencyDiversification—IBRD/IDA2007 P097635 Kosovo Lignite Power TA— A 8.50 Not rated Technical assistance policiesIBRD/IDAand strategies on energyefficiency2007 P099618 Morocco Energy Sector C 100.00 Not rated Standards, energy-efficiencyDPL—IBRD/IDAaudits, public policy,efficiency finance1996 P091074 Philippines Public and C Not rated Capacity building for DSMPrivate Sectors Capacitypolicy developmentBuilding Project(TF028553)—IDF1997 P039965 Sri Lanka Energy Services C 5.90 Not rated DSM policy; efficiencyDelivery—GEFfinance2004 P066532 Philippines Electric A 12.00 Not rated Capacity building forCooperative System Lossefficiency financeReduction Project—GEFSource: IEG based on project appraisals, Implementation Completion Reports, Implementation Completion Report reviews, and Project Performance Assessment Reports.112

APPENDIX B: ENERGY-EFFICIENCY PROJECTS WITH POLICY COMPONENTSEnergyefficiencycomponent,(US$ million) Efficiency measures detail Outcome< 0.5 Technical assistance directed on tariffs and losses study.Not identifiedPolicies 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, andpublic buildings. 2. Organize the execution and monitoringof mandatory energy-efficiency audits in large andmedium-size industries. 3. Government support forfinancing of energy efficiency programs. Conditionality:Adoption of implementing decrees on Energy Efficiencyand Renewable Energy.Not identified Support to the process of public consultation to designa DSM strategic plan and foster ownership of DSMprograms through shared energy efficiency and energyconservation objectives.1.06 Strengthen the environment for DSM implementation,and improve the public and private sector performanceto deliver energy services through renewable energyand DSM.12.00 Partial Credit Guarantee Program. Capacity building:1. Provide technical assistance and training to financialintermediaries, electric cooperatives (ECs), and ECs’investors, in power distribution systems; 2. Technicalassistance to the Department of Energy for energyefficiencygains of ECs from improved access tocommercial lending.113

APPENDIX C: DISTRIBUTIONAL INCIDENCE OF SUBSIDIESEnergy expenditure as aEnergyshare of household expenditureCountry subsector Source Poor Non-poorAlbania No subsidy PSIA, 2003 >20% on electricity ofthe cash income of thecore poor (bottom 12%)Argentina Patagonian gas PER, Sept. 2003 … …Armenia Utilities PSIA, 2001 18% on utilities such 11% on utilities such asas telephone, gas,telephone, gas, central heat,central heat, and water and water for the non-poorfor the poorElectricity Tajikistan PSIA, 2006 13.9% for bottom quintile 6.5% for top quintileBangladesh 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 lubricantsTransportation PSIA, 2004 5.4% on transportation 5.9% on transportationFuels and lubri- PSIA, 2004 0.6% on fuels for vehicles 2.2% on fuels for vehiclescants for vehiclesFuels and lubri- PSIA, 2004 1.9% on fuels for cooking 1.2% on fuels for cookingcants to cookLPG Coady, Grosh, and Hoddinott 2006 2.6% for bottom quintile 1.1% for top quintileGasoline and Coady, Grosh, and Hoddinott 2006 0.0% for bottom quintile 2.5% for top quintiledieselDjibouti 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 energysources in bottom quintile sources in top quintileEcuador Cooking gas PER, Nov. 2004 … …Electricity, cooking PER, Nov. 2004 … …gas and fuelEgypt, Arab Kerosene PSIA, 2005 … …Rep. ofNatural gas PSIA, 2005 … …114

APPENDIX C: DISTRIBUTIONAL INCIDENCE OF SUBSIDIESIncome impact of subsidyShare of benefit fromremoval/price increasethe energy subsidyPoor Non-poor Poor Non-poor… … … …… … Subsidy excludes 95% of poor gas consumers, while 63% of its beneficiariesare 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 forin expenditure for thethe poornon-poor… … … …… … The 4% of households with gas access receive Tk1.6 billion in implicitsubsidies5.8% 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 deciles2.2 percentage point reduction 0.1 percentage point reduction … …of income for bottom quintile of income for top quintile0.1 percentage point reduction 0.6 percentage point reduction … …of income for bottom quintile of income for top quintile(Continues on the next page.)115

CLIMATE CHANGE AND THE WORLD BANK GROUPDistributional Incidence of Subsidies (continued)Energy expenditure as aEnergyshare of household expenditureCountry subsector Source Poor Non-poorEgypt, Arab Gasoline PSIA, 2005 … …Rep. of(continued) LPG PSIA, 2005 … …Above four PSIA, 2005 … …productsGeorgia Electricity Tajikistan PSIA, 2006 6.3% for bottom quintile 2.0% for top quintileGhana Petrol Coady and Newhouse 0.1% for bottom quintile 2.1% for top quintile2006Kerosene Coady and Newhouse 5.9% for bottom quintile 1.6% for top quintile2006LPG Coady and Newhouse 0.0% for bottom quintile 0.2% for top quintile2006Above three Coady and Newhouse … …products 2006; Coady and others2006Electricity PSIA, 2004 … …Hungary Electricity Tajikistan PSIA, 2006 6.5% for bottom quintile 3.7% for top quintileIndonesia Fuel DPL-II Program 3.6% for the bottom twoDocument, 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 quintileKerosene Coady and others 2006 1.0% for bottom quintile 0.3% for top quintileLPG Coady and others 2006 1.8% for bottom quintile 0.7% for top quintileGas, regular Coady and others 2006 0.9% for bottom quintile 2.3% for top quintileGas, premium Coady and others 2006 0.0% for bottom quintile 1.1% for top quintileDiesel Coady and others 2006 0.3% for bottom quintile 0.9% for top quintileElectricity Coady and others 2006 3.1% for bottom quintile 1.8% for top quintileKazakhstan Electricity Tajikistan PSIA, 2006 0.9% for bottom quintile 0.6% for top quintileMali Fuel Coady and others 2006 … …116

APPENDIX C: DISTRIBUTIONAL INCIDENCE OF SUBSIDIESIncome impact of subsidyShare of benefit fromremoval/price increasethe energy subsidyPoor Non-poor Poor Non-poor0.04 percentage point reduction 1.4 percentage point reduction … …of income for bottom quintile of income for top quintile5.4 percentage point reduction 2.0 percentage point reduction … …of income for bottom quintile of income for top quintile7.7 percentage point reduction 4.1 percentage point reduction 13% for LPG, kerosene, 34% for LPG, kerosene, gasoline, andof income for bottom quintile of income for top quintile gasoline, and natural gas natural gas for top quintilefor 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 connectedhouseholds… … … …The fuel price hike corresponded The fuel price hike corre- The subsidies accruing to the top decile from fuel subsidies were 5 timesto 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 decilecapita expenditure forthe top decileProgressive within the 450VA subsidy category but regressive 8% for bottom decile 12% for top decilewithin the 900–6600VA subsidy range.5.4% reduction in real income 4.1% reduction in real 21.2% for bottom four deciles …for bottom quintileincome for top quintile… … … …… … … …… … … …… … … …… … … …… … … …… … … …Regressive 23.9% for bottom four deciles …(Continues on the next page.)117

CLIMATE CHANGE AND THE WORLD BANK GROUPDistributional Incidence of Subsidies (continued)Energy expenditure as aEnergyshare of household expenditureCountry subsector Source Poor Non-poorMexico 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-poorCentral heat PSIA, 2006 0.1% for bottom quintile 1.8% for top quintileCentral gas PSIA, 2006 1.0% for bottom quintile 1.9% for top quintileLPG PSIA, 2006 0.4% for bottom quintile 0.4% for top quintileMongolia Heating PSIA, 2003 10.8% for the poor on 5.7% for the poor onheating (18% in winter heating (10.1% in wintermonths) bmonths) bMorocco Diesel and fuel Coady and others 2006 … …Energy Program document for 8.7% for bottom quintile 9.3% for top quintileDPL-II, 2007Poland Electricity Tajikistan PSIA, 2006 5.8% for bottom quintile 2.9% for top quintileSri 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.118

APPENDIX C: DISTRIBUTIONAL INCIDENCE OF SUBSIDIESIncome impact of subsidyShare of benefit fromremoval/price increasethe energy subsidyPoor Non-poor Poor Non-poor… … Majority of subsidy goes to upper-middle-income households (deciles 6-8)1.6–5.4% increase in household 1.1–3.6% increase in household … …expenditure for bottom quintile expenditure for top quintile0.0–0.1% increase in household 0.7–1.8% increase in household … …expenditure for bottom quintile expenditure for top quintile0.4–1.0% increase in household 0.7–1.9% increase in household … …expenditure for bottom quintile expenditure for top quintile0.2–0.4% increase in household 0.1–0.4% 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… …

ENDNOTESManagement Response1. The Bank’s energy-efficiency work in the 1990swas guided by the 1993 policy paper, Energy Efficiencyand Conservation in the Developing World: The WorldBank’s Role, and by the companion “Power and EnergyEfficiency—Status Report on the Bank’s Policy and IFCActivities.”2. Management notes that the definitions underlyingthe figures it shared with IEG reflect, as well as energyefficiency captured by IEG, all World Bank lendingfor (i) supply-side energy-efficiency measures, includingpower generation plant rehabilitation, transmissionand distribution loss reduction, and energy sector technicalassistance with pricing covenants, and (ii) developmentpolicy lending with energy price reform.On this basis, IEG observes that it may need to revisethe language in order to describe more precisely themeasures cited in the report and the differences betweenthem. IEG acknowledges that alternative definitionsof energy efficiency are possible. IEG has reportedthe proportion of energy efficiency projects using bothstricter and broader definitions. The latter used themanagement-supplied information to calculate the proportionof projects incorporating plant rehabilitationand transmission and distribution measures. IEG has reported,separately, the proportion of projects involvingprice reform.Chapter 11. A detailed exposition is beyond the scope of thisreport, and unnecessary given a proliferation of reviewson the subject. These include IPCC (2007b), Stern(2007), UNDP (2007), and the Global Monitoring Report2008 (World Bank 2008c).Chapter 21. Climate Analysis Indicators Tool Version 5.0. (Washington,DC: World Resources Institute, 2008; Data for 2000 includes 6 GHGs and land usechange. Based on G77+ China.2. Emissions per capita as shown in figure 2.1 can bedecomposed into power-related emissions and other energyemissions. The extent of hydropower explainsabout half the variance in power-related emissions percapita that is not accounted for by income per capita andheating needs (Meisner 2008).3. The negative relationship between diesel price andemissions may in part be due to subsidy-induced measurementerror—but only in part. Explicit and implicitfuel subsidies do not show up as added value in GDP. Inother words, the true GDP of large energy subsidizers islarger than measured. However, this does not explainthe negative relationship. The largest subsidizer, Iran,would have a 20 percent higher GDP per capita if energywere priced at economic levels (ignoring general equilibriumeffects). According to our regression, this meansthat the reference level of emissions/capita should be 20percent higher than we have imputed. But, in fact, Iran’srelative emissions are about 67 percent higher than peersat the same measured GDP. Other diesel subsidizers havelower proportions of subsidy and higher relative emissions,so this result is not being driven by measurement error.4. The IEG review identified errors in some of theseappraisals that often tend to bias results upwards, butsometimes downward. However, the figure of $1.11/kWh,from Peru, was deemed the result of best practice in analysis.Also, willingness to pay estimates do not includevarious ancillary benefits, including improvements inindoor air quality and facilitation of small-scale enterprise.Moreover, reported estimates for the value of off-grid electricitywere much higher than for on-grid. On balance,the figures quoted here are likely to be conservative estimatesof the value of electricity to the unconnected.5. Climate Analysis Indicators Tool Version 5.0. (Washington,DC: World Resources Institute, 2008;

CLIMATE CHANGE AND THE WORLD BANK GROUPChapter 31. Indirect emissions are those “associated with offsiteproduction of power used by the project.”2. IFC, “Lanco Amarkantak Thermal Power Plant,Environmental and Social Review Summary.”3. CO 2Baseline Database, version 2.0 4. See Chapter 41. These figures are now out of date because ofchanges in world energy prices. In many cases the effectivesubsidy has risen.2. Most recent data available in World DevelopmentIndicators 2008, except India: proportion lost in transmissionor distribution or unaccounted in 2004–05,from Central Electricity Authority (Government of India,Ministry of Power, Central Electricity Authority 2006).3. IEG is currently undertaking a comprehensive reviewof PSIAs.Chapter 51. World Bank Progress Reports on Renewables for2004 (retrospective to 1991), 2005, 2006, 2007 (WorldBank 2005c, 2005e, 2006b; World Bank and IFC 2007). The2004 report included project components that improvedthe efficiency by which energy is produced, transformed,and used; production, transportation, and distribution ofsteam or hot water (heat) through an interconnected network;electrical energy-efficiency improvements; andspecialized entities providing energy-efficiency services.The 2005 report included end-use thermal and electricefficiency activities, power sector rehabilitation, loss reductionin transmission and distribution, and improvementsin the efficiency of district heating systems. The2006 and 2007 reports exclude transmission and distributionrehabilitation if the share of such investmentscannot be clearly disaggregated from other objectives.These two reports similarly exclude Development PolicyLoans unless the efficiency share can be clearly determined.2. While this figure includes refurbishment and replacementof some district heating plants, it may excludesupply-side investments in generation. Some BankGroup–supported thermal plants might have beenmore efficient than plants that would otherwise havebeen built. It excludes lending activity related to pricing,discussed at length in the previous chapter. It is possiblealso that power sector unbundling or districtheating privatization activities would promote supplysideefficiency not included here.3. Efficiency Vermont 2006 Report 4. Based on $1.50 for a 15W CFL with a 6,000-hourlifetime; Ashok Sarkar (World Bank), presentation on“Large Scale CFL Deployment Programs,” Shanghai,May 13, 2008. 5. Energy-efficiency standards and labeling InformationClearinghouse. Chapter 61. The U.S. mainland was not included in the survey.2. Flaring levels in Russia are disputed. The officiallyreported level for 2004 was 15 bcm. The 2007 RussianState of the Union address quoted a figure of 20 bcm.PFC Energy (2007) used a physical model of oil production,incorporating assumptions about gas-to-oil ratios,to estimate 38 bcm of flaring; they also noteanecdotal accounts that some gas is vented, whichhas 22 times greater GHG impact than if the gas wereflared.3. Global Gas Flaring Reduction Public-Private Partnership—ExpandedUpdate, October 2004.4. This is consistent with CDM rules on proprietaryinformation, but hinders external assessment of additionalitydetermination.5. Reported actual reductions for the first 11months of operation were 791,325 tons CO 2e, accordingto monitoring report CDM0553-MR01 filedwith the CDM.6. GGFR Status Report, October 2003 7. As this volume goes to press, the GGFR reportsthat estimates based on remote sensing data show a 6percent reduction in global flaring from 2006 to 2007.122

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