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Phase II: The Challenge of Low-Carbon DevelopmentClimate Change and theWorld Bank GroupIEG Study Series

Cover 2 – IEG Study Series BooksThe World Bank GroupThe World Bank Group consists of five institutions—theInternational Bank for Reconstruction and Development(IBRD), the International Finance Corporation (IFC), theInternational Development Association (IDA), the MultilateralInvestment Guarantee Agency (MIGA), and the InternationalCentre for the Settlement of Investment Disputes (ICSID).Its mission is to fight poverty for lasting results and to helppeople help themselves and their environment by providingresources, sharing knowledge, building capacity, and forgingpartnerships in the public and private sectors.The Independent Evaluation GroupIMPROVING DEVELOPMENT RESULTS THROUGHEXCELLENCE IN EVALUATIONThe Independent Evaluation Group (IEG) is an independent, three-partunit within the World Bank Group. IEG-World Bank is charged withevaluating the activities of the IBRD (the World Bank) and IDA, IEG-IFCfocuses on assessment of IFC’s work toward private sector development,and IEG-MIGA evaluates the contributions of MIGA guarantee projectsand services. IEG reports directly to the Bank’s Board of Directors throughthe Director-General, Evaluation.The goals of evaluation are to learn from experience, to provide anobjective basis for assessing the results of the Bank Group’s work, andto provide accountability in the achievement of its objectives. It alsoimproves Bank Group work by identifying and disseminating the lessonslearned from experience and by framing recommendations drawn fromevaluation findings.

CLIMATE CHANGE AND THE WORLD BANK GROUPP h a s e I I : T h e C h a l l e n g e o fLow-Carbon Development2010The World BankWashington, D.C.

Copyright © 2010 The International Bank for Reconstruction and Development/The World Bank1818 H Street, N.W.Washington, D.C. 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: feedback@worldbank.orgAll rights reserved1 2 3 4 13 12 11 10This volume, except the “Management Response” and “Chairman’s Summary,” is a product of the staff of the Independent EvaluationGroup of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarilyreflect the views of the Executive Directors of The World Bank or the governments they represent. This volume does not supportany 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 other information shown on any map in this work do not imply any judgment on the part of The World Bank concerningthe legal status of any territory 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 bea violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages disseminationof its work and will normally grant permission to reproduce portions of the work promptly.For permission to photocopy or reprint any part of this work, please send a request with complete information to the CopyrightClearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The WorldBank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.Cover: Photo by Martin Wright/Ashden Awards for Sustainable Energy. Used with permission. http://www.ashdenawards.org.ISBN-13:978-0-8213-8653-8e-ISBN-13:978-0-8213-8654-5DOI:1596/978-0-8213-8653-8Library of Congress Cataloging-in-Publication Data have been applied for.World Bank InfoShopIndependent Evaluation GroupE-mail: pic@worldbank.orgCommunication, Strategy, and LearningTelephone: 202-458-5454E-mail: eline@worldbank.orgFacsimile: 202-522-1500 Telephone: 202-458-4497Printed on Recycled Paper Facsimile: 202-522-3125Printed on Recycled Paper

Table of ContentsAbbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viAcknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viiForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .viiiExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ixManagement Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xviChairman’s Summary: Committee on Development Effectiveness (CODE) . . .xxiiiStatement of the External High-Level Review Panel . . . . . . . . . . . . . . . . . . . . . . . .xxivGlossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxxi1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Climate Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Global Mitigation Context and the WBG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Evaluation Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Evaluation Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Evaluation Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Distri2. Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Low-Carbon Energy Projects and Their Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Overcoming Barriers to On-Grid Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18On-Grid Renewable Energy: Hydropower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Energy Access and Low-Carbon Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Off-Grid Renewable Energy: Solar Photovoltaics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27DistriThe Way Forward for Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303. Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Energy Efficiency in the First Phase Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Using Financial Intermediaries to Overcome Barriers to Energy Efficiency Investments . . . . . . . . . . . . . . . . . . . 34Direct Investments in Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Transmission and Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Efficient Light Bulbs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41The Way Forward for Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444. Beyond Energy: Low-Carbon Paths in Cities and Forests . . . . . . . . . . . . . . . . . 47Urban Transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48Forests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52XYZ | iii

5. Special Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Efficiency in Coal-Fired Generation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Technology Promotion and Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Carbon Finance at the WBG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7istri16. Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79The Congruence of Mitigation and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80A Systems View Is Essential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81AppendixesA. Renewable Energy Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89The FaB. World Bank Experience with Renewable Energy Surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9The Fa7DistriC. Energy Efficiency Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9The Fa8D. Lessons from Completed Transmission and Distribution Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102E. Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104F. Transport Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106G. Energy Project Portfolio Databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108H. Pilot and Demonstration Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110I. Carbon and Economic Returns of Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113J. Recent WBG Developments in Emission Mitigation Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115K. Executive Summary: Climate Change and the World Bank Group Phase I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124Photographs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128Boxes1.1 The Strategic Framework on Development and Climate Change . . . . . . . . . . . . . . . . . . . . . . . 22.1 The Economics of Grid-Connected Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19The Fa2.2 Monitoring and Evaluation Provides Rapid Feedback on the Performanceof Landfill Gas Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202.3 Mitigating Political Risks in Renewables: a MIGA case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.4 Gender and Low-Carbon Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262.5 On-Grid and Off-Grid Renewable Energy in Sri Lanka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313.1 Energy Service Companies and Energy Performance Contracting . . . . . . . . . . . . . . . . . . . . . . 364.1 The TransMilenio Bus Rapid Transit System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50–514.2 The Silvopastoral Project: A Successful Example of Demonstration . . . . . . . . . . . . . . . . . . . . . 555.1 Technology Learning (or Experience) Curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655.2 Carbon Offsets, a Peculiar Commodity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7istri2iv | Climate Change and the World Bank Group

Figures1.1 GHG Emissions by Sector and Country Group, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.2 Low-Cost GHG Abatement Potential, Non-OECD Countries, in 2030 . . . . . . . . . . . . . . . . . . . . . 41.3 WBG Investments in Renewable Energy 2003-8: Evaluation Coverage .................. 101.4 WBG Investments in Low Carbon Energy Efficiency 2003-8: Evaluation Coverage . . . . . . . 101.5 WBG Investments in Urban Transport 2003-8: Evaluation Coverage ..................... 102.1 Location of 2003-08 Low-Carbon Portfolio, by Groups of RenewableEnergy-Energy Efficiency ............................................................... 142.2 Breakdown of 2003-08 Low-Carbon Portfolio by Country Income Group . . . . . . . . . . . . . . . 152.3 Growth in Low-Carbon Portfolio by Project Type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152.4 Growth in Low-Carbon Portfolio by Country Income Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162.5 Breakdown of non-low carbon WBG Energy Investments ............................... 162.6 WBG-Supported Grid-Connected Generation Capacity by Technology, 2003-08 . . . . . . . . 162.7 Distribution of Capacity Factors of Hydropower CDM Projects .......................... 202.8 Impact of Carbon Payments on Return on Equity ....................................... 212.9 The Fall and Rise of WBG Hydropower Commitments, 1990-2008 ....................... 244.1 Average Annual Forest Commitments, $ millions ....................................... 545.1 Spectrum of Technology Support ...................................................... 665.2 World Bank Share of CDM Projects and Tons Registered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 756.1 Economic and Carbon Returns to InvestmentsTables ................................... 81Tables1.1 Map of the Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92.1 IEA Projections of Power Production, 2007-30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122.2 Evaluated World Bank Renewable Energy and Energy Efficiency Projectsby Rating, Projects Initiated 1990-2007 ................................................. 132.3 WBG Low-Carbon Energy Commitments ($ millions) by Product Line andInvestment Category, 2003-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142.4 Commitments to Grid-Connected Renewable Energy by Technology andFunding, $ million, 2003-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172.5 Off-Grid Investment Projects, $ million, 2003-08 ........................................ 172.6 Hydropower Investments by Size, Storage, and Funding. $ millions, 2003-8 ............. 252.7 Outcome Ratings of World Bank Hydropower Projects .................................. 252.8 Rated Outcomes of Completed Projects with Large SHS Components .................. 283.1 Energy Efficiency Interventions by Type in the Low-Carbon InvestmentPortfolio 2003-08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353.2 IFC and World Bank Approaches to Energy Efficiency Financial Intermediationin China and Eastern Europe. ........................................................... 354.1 Impact of Protected Areas in Tropical Forests on Forest Fire Incidence . . . . . . . . . . . . . . . . . . 575.1 Carbon Funds at the World Bank ....................................................... 735.2 Comparative Success at Registration of CDM Projects, WBG versus OtherSponsors and Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765.3 Carbon Projects with Signed Purchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766.1 Summary of Sectoral Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Table of Contents | v

AbbreviationsASTAEBRTBRTSCDMCEIFCERCFLCFUCHUEECO 2CO 2eCPFCSPELIEMCERRESCOESMAPGEFGHGIBRDICRIDAIEGIFCIPPIPRIRRMIGAOECDPCFPESREDDREDPROESFDCCSHSSMET&DTWhUNFCCCWBGWpAsia Sustainable and Alternative Energy ProgramBus Rapid TransitBus Rapid Transit SystemClean Development MechanismClean Energy Investment FrameworkCertified emission reductionCompact fluorescent light bulbCarbon Finance Unit of the World BankChina Utility-Based Energy Efficiency projectCarbon dioxideCarbon dioxide equivalentCarbon Partnership FacilityConcentrated solar powerEfficient lighting initiativeEnergy management companyEconomic rate of returnEnergy service companyEnergy Sector Management Assistance ProgramGlobal Environment FacilityGreenhouse gasInternational Bank for Reconstruction and DevelopmentImplementation and Completion Results ReportInternational Development AssociationIndependent Evaluation GroupInternational Finance CorporationIndependent power producerintellectual property rightsInternal rate of returnMultilateral Investment Guarantee AgencyOrganization for Economic Cooperation and DevelopmentPrototype Carbon FundPayment for environmental servicesReduced Emissions from Deforestation and DegradationRenewable energy development projectReturn on equityStrategic Framework on Development and Climate ChangeSolar photovoltaic home systemSmall and medium enterpriseTransmission and distributionTerawatt hourUnited Nations Framework Convention on Climate ChangeWorld Bank GroupPeak wattsvi | Climate Change and the World Bank Group

AcknowledgmentsThe report was prepared by a team led by Kenneth Chomitz,the principal author. Dinara Akhmetova and StephenHutton provided overall research, analytic, and productionsupport and contributed to the energy chapters. The InternationalFinance Corporation (IFC) effort was led by JouniEerikainen, with the assistance of Unurjargal Dembereland Maria Elena Pinglo. Zmarak Shalizi provided generalguidance. The team was supervised by Cheryl Gray, MarvinTaylor-Dormond, Christine Wallich, and Stoyan Tenev,under the overall direction of Vinod Thomas, Director-General of Evaluation.Substantial inputs were provided by Ananth Chikkatur(coal power), Lauren Kelly and Diana Salvemini (forestry),Andres Liebenthal (Chinese renewable energy), JacquelinLigot (energy efficiency financial intermediation in EasternEurope), Clive Mason (industrial energy efficiency), CraigMeisner (small power purchase agreements), Andrew Nelsonand Kenneth Chomitz (protected area effectiveness),Aygul Ozen (Turkey), Fabio Rossi (economics of renewableenergy), Robert Schenck (energy in Sri Lanka, Uganda,and Vietnam), Robert Schneider (agribusiness at the forestfrontier), Zmarak Shalizi with the assistance of CheikhM’Backe Fall (urban transport), James Wolf (concentratedsolar power projects), Fan Zhang (solar home systems, energyefficiency and renewable energy in China), and FuqiuZhou (Chinese efficient boiler project). Valuable advicewas provided by peer reviewers Gunnar Eskeland, MichaelToman, David Victor, and Claudio Volonte. Tireless administrativesupport was provided by Nischint Bhatnagar andViktoriya Yevsyeyeva. William Hurlbut provided editorialassistance and Heather Dittbrenner edited the final report.Yvette Jarencio-Lukban assisted with manuscript preparation.Nik Andre Harvey prepared the Web site.Financial support from the Swiss Agency for Developmentand Cooperation, and the Evaluation Department of theNorwegian Agency for Development Cooperation is gratefullyacknowledged, as is InWEnt’s cosponsorship of an initiatingworkshop.The team is grateful for the cooperation of the many peopleinside and outside the World Bank Group who were interviewed.Director-General, Evaluation: Vinod ThomasDirector, Independent Evaluation Group-World Bank: Cheryl W. GrayDirector, Independent Evaluation Group-IFC: Ma rvin Taylor-DormondDirector, Independent Evaluation Group-MIGA: Christine WallichOverall Evaluation Leader: Kenneth M. ChomitzHead, Macro-Evaluation, IEG-IFC: Stoyan TenevTask Team Leader, IEG-IFC: Jouni EerikainenAcknowledgments | vii

ForewordClimate change is one of the biggest long-term risks toglobal development. That threat has originated largely owingto the greenhouse gas emissions of developed countries,which continue to emit far more per capita than developingcountries and which are obliged by the Climate Conventionto take the lead in fighting climate change. But developingeconomies also add to pressure on the limited remainingspace for atmospheric carbon dioxide, and their actions,too, matter importantly.No comprehensive global agreement yet spells out howthe Climate Convention’s goal of stabilizing atmosphericgreenhouse gas levels will be accomplished and financed.Clearly, developed countries will need to throttle backtheir emissions. The challenge for developing countriesis to create a cleaner path to rapid growth than has prevailedin earlier growth episodes, avoiding needless localenvironmental damage and taking advantage of emergingtechnologies and financing opportunities. In the absenceof a global agreement, the World Bank Group (WBG) hasto chart its course, focused on today’s urgent developmentneeds yet mindful of long-term risks.The Strategic Framework on Development and ClimateChange walks this tightrope. While putting developmentfirst, it urges the WBG to seek “no regrets” actions thatadvance development with cobenefits in climate changemitigation, while mobilizing funds to defray the added costsof low-carbon growth. The Framework has accelerated aproliferation of innovative efforts in energy, forestry, transport,and other fields. This evaluation, which focuses mostlyon the pre-Framework period, begins the work of sortingout the results of those efforts.Because the WBG is a small player in the climate arena, ina world of immense needs, it must be as efficient as possiblein catalyzing development and greenhouse gas mitigation.It must first be cognizant of where the “no regrets” optionslie. If hoped-for climate finance materializes on a large scale,clients and funders will want hard, reliable information onthe most effective ways to fund low-carbon development.They will also want to understand the trade-offs and complementaritiesamong social, economic, and climate goals.So a sound, evidence-based results framework—focused onmeasures of economic and carbon outcomes—is critical.The WBG has the potential to make a difference greaterthan its size suggests. It can provide support for policies thatenable low-carbon growth. It can contribute to transferringand adapting innovations in technology, finance, and institutions,developing a portfolio of high-return options thatcan be scaled up and widely deployed. And it can financeand deploy the innovations it has incubated. To do so, itwill need to tap the immense value of its experience withcountries and partners across the World Bank, the InternationalFinance Corporation, and the Multilateral InvestmentGuarantee Agency, learning rapidly from its successesand failures and constantly improving its efforts.Vinod ThomasDirector-General, Evaluationviii | Climate Change and the World Bank Group

Executive SummaryUnabated, climate change could derail development, with aone in four chance of a six-degree Celsius hike in temperaturethis century. Although industrialized countries are historicallyresponsible for the build-up of heat-trapping greenhousegases (GHGs), the United Nations’ goal of stabilizing atmosphericGHG levels requires urgent and concerted worldwideefforts. Choices and investments made in the next twodecades—in buildings, power plants, transport systems, andforest use—will irreversibly shape the global climate’s future.This evaluation seeks lessons for development and climatechange mitigation from the World Bank Group’s (WBG)far-reaching portfolio in energy, forestry, and transport.The assessment is not exhaustive but covers subsectors thatrepresent the great bulk of evaluable WBG activity withpotential GHG cobenefits. Over the period 2003–08 theWBG scaled up annual investments in renewable energyand energy efficiency from $200 million to $2 billion andhelped mobilize more than $5 billion in concessional fundsfor GHG reduction. In 2008 it adopted the Strategic Frameworkon Development and Climate Change (SFDCC),which triggered a spate of investment and analytic activity,too new to assess. Yet the WBG’s resources are smallcompared with the multitrillion dollar investments neededfor low-carbon growth. How can the Bank have the greatestimpact, both for development and for GHG mitigation?One important way the WBG can achieve leverage isthrough advice and support for favorable policies: removalof energy subsidies and of other biases against renewableenergy and energy efficiency. This topic was covered inPhase I of this evaluation series (IEG 2009).A second way is to act more like a venture capitalist—inthe public sphere as well as for private investments—by supportingthe transfer and adaptation to local conditions ofexisting technologies, policies, and financial practices. Bytaking modest risks in pilot projects, the WBG can identifya high-return portfolio of development solutions that canbe deployed on a large scale, as climate finance expands.The WBG has been successful in this kind of technologytransfer—but only when demonstration and diffusionmechanisms were well thought out. Global EnvironmentFacility (GEF) support has been crucial in mitigating clients’perceived risk, and expanded concessional funds willbe needed for larger-scale demonstrations. Support formore advanced technologies has usually been unsuccessful,though there could be niches such as land use where theWBG has a role.Third, the WBG can refocus on high-impact sectors andinstruments. Energy efficiency stands out among areas forintervention. Early results suggest, for instance, that distributionof compact fluorescent lightbulbs offers economicreturns that dwarf those of most WBG investments whileproviding significant cobenefits in carbon dioxide (CO 2)reduction, exemplifying the Strategic Framework’s call for“no-regrets” investments. To meet power demands, theWBG’s scarce human and financial resources will be bestspent helping clients find domestically preferable alternativesto coal power, such as through increased energy efficiency.Coal support should be a last resort used only whenlower cost and concessionally financed alternatives havebeen exhausted and when there is a compelling case thatWBG support would reduce poverty or emissions.Among forest interventions, indigenous and protected areasthat permit sustainable use have reduced tropical deforestationby up to two percentage points a year (compared withunprotected areas), thus promoting social, environmental,and climate goals. Among instruments, carbon financeneeds to be redirected away from hydropower, where ithas minimal impact on project bankability, to applicationswhere it can have more leverage. Long-duration loans arecritical for support of renewable energy. Guarantees havenot transformed the market for energy efficiency lendingbut could be increasingly important for renewable energyas investors seek reassurance that favorable policies will bemaintained over the long run.To pursue this agenda, the WBG should orient itself stronglytoward results and closely monitor performance. In this fastchangingarea, being able to understand what is working,what’s not, and why is a source of value for the institution,for its clients, and for the world.Evaluation FrameworkThis evaluation reviews a broad range of WBG activity inthe adoption and diffusion of emissions-reducing technologiesand practices. It addresses three main concerns:• What actions will deliver the greatest overlap betweenGHG mitigation and local development?• Where and how does the WBG have the highest leveragein promoting those actions?• How can the WBG best use feedback from ongoing experienceto improve performance?Executive Summary | ix

Because the range of activities is great, because most have notyet been subject to a final evaluation, and because most donot generate consistent and accessible data on impacts, theevaluation is selective, though it covers the bulk of evaluableWBG experience. Within each of the main GHG-emittingsectors—energy, transport, and forestry—it examines specificissues that capture a large part of the relevant WBGportfolio (such as support for energy efficiency via financialintermediaries), illuminate sectorwide issues (such as therole of finance for grid-connected renewables), or pioneernovel approaches (such as payment for ecosystem services).It also addresses three special issues: technology transfer, theWBG’s carbon funds, and the role of the WBG in coal power.The evaluation looks at how the WBG has diagnosed barriersto technology adoption, the effectiveness of prescribedinterventions, and likely economic and mitigation impacts.The first volume of this climate change evaluation (IEG2009) looked at WBG support for key areas of policy reform.This second volume focuses on two other areas ofintervention: (i) development, transfer, and demonstrationof technical and financial innovations and (ii) finance andimplementation.FindingsWBG-supported interventions vary widely in nature andeffectiveness. This evaluation first looks at sectoral findingsand then at cross-cutting lessons and recommendations.Congruence of mitigation and developmentThere is ample scope for projects that promote local developmentgoals while also mitigating GHGs. (See figure 6.1,which illustrates economic and carbon returns for a range ofenergy projects.) Energy efficiency, more than other investments,offers a combination of high economic returns andGHG benefits. Other projects may individually have highcarbon returns (forestry) or economic returns (solar homephotovoltaic systems). To optimize carbon and economicgains, it may often be necessary to construct portfolios ofprojects, rather than pursue multiple goals with a single instrument.Renewable energyGrid-connected renewable energy reduces CO 2emissions,offers the additional domestic advantages of local air pollutionreduction and energy security, and could potentiallystimulate industrial development. But investors may nottake account of the national or global benefits. Lenders mayshy away from capital-intensive investments in less-proventechnologies. Utilities may not know how to deal with intermittentenergy sources.Technical assistance can help overcome these barriers. TheWorld Bank helped Sri Lanka institute standardized smallpower purchase agreements that facilitated access to thepower grid. Analytic work, capacity building, and demonstrationhave contributed to Mexican and Chinese adoptionof favorable renewable energy payment schemes, which inturn have stimulated more than 20 gigawatts of installedwind capacity in China and hundreds of megawatts underconstruction in Mexico.Provision of long-duration loans (as in lending by the InternationalFinance Corporation [IFC] and World Bankon-lending projects) has a much bigger impact on projectbankability than the purchase of carbon credits, at currentcarbon prices. As countries increasingly rely on payingprice premiums for renewable energy, World Bank andMultilateral Investment Guarantee Agency (MIGA) guaranteesagainst breach of contract and other political riskscould be catalytic.The WBG’s direct lending for renewable energy is dominatedby hydropower, the only grid technology for whichthere is a substantial evaluable record at the WBG. Amongevaluated hydropower plants, 76 percent had outcomesrated as moderately satisfactory or better, with better ratingsin recently initiated projects. Unsuccessful projects areoften those for which preparation or implementation ofx | Climate Change and the World Bank Group

esettlement plans has been ineffective. About two-thirds ofhydropower investment volume now goes to run-of-riverhydropower (that is, without substantial reservoirs), whichhas less potential for local social and environmental damagebut is more vulnerable to climate change.Direct WBG investments in wind power have been modest.On average, wind power offers significantly lower economicand carbon returns than hydropower because ofhigh capital costs and often low capacity utilization. Manufacturingcost reductions at the global level, together withbetter siting and maintenance, are crucial to increasing thecompetitiveness of wind and other new renewable energytechnologies.The largest single area of off-grid renewable energy investmenthas been in solar photovoltaics, mostly for home use.Since 1992, the WBG has contributed $790 million to solarhome system (SHS) components in 34 countries, almostall using GEF-funded subsidies. World Bank efforts, usingquality-contingent producer subsidies and relying onmicrofinance for consumers, have been more successfulthan those of IFC. These projects can have economic ratesof return of 30–90 percent but have little impact on GHGreductions because off-grid households use so little energy.At current prices, SHSs have been successful in a narrowniche market: the off-grid household that is either relativelywell-off by rural standards or can access good microfinanceservices.Energy efficiencyPhase I of this evaluation (IEG 2009) assessed the most importantbarrier-removing policies: energy price reform andpromotion of energy efficiency policies such as building andappliance standards. It noted that the Bank had pursuedprice reforms in energy but had relatively few—and modestlyfunded—projects dealing with energy efficiency. Sincethen, there has been increased attention to policy-efficiencylinkages, including Bank-IFC support for a recently adoptedenergy efficiency law in the Russian Federation, supportfor a G20 study of energy subsidies, and a recently approvedVietnam power sector development policy operation.Owners of factories and buildings often fail to borrow forapparently highly profitable energy efficiency opportunities.The WBG’s diagnosis: Borrowers lack information, andlenders lack experience and comfort with energy efficiencyproject finance. The largest WBG response has been tosupport financial intermediaries—banks, special-purposefunds, and energy service companies—with guarantees andtechnical assistance. These programs have appropriatelybeen directed to China and Eastern Europe, where energyinefficiency has been high.Parallel programs have been implemented by the WorldBank and IFC, both supported by the GEF, and withoutmuch communication between them. Yet, contrary to expectations,loan guarantees have turned out not to be atemporary, market-transforming measure that could bediscontinued once the banks gained familiarity with energyefficiency lending. Inadequate lending for energy efficiencyoften reflects wider credit market failures, including onerousrequirements for collateral.Guarantees have triggered energy efficiency lending tocredit-strapped small and medium enterprises. Becauseborrowers achieved high rates of return, guarantee programscould achieve higher impact through tighter targetingon less creditworthy companies.World Bank-supported projects have been successful inintroducing energy service companies (ESCOs) to China,with high returns, significant GHG impacts, and spontaneousreplication. However, further replication and scaleupmust address the ESCOs’ own credit problems andrecognize that energy performance contracting, the standardparadigm for ESCOs, may require major adaptationsin many developing countries.IFC also lends directly to industry for energy efficiency.IFC’s program of screening its clients for energy efficiencyopportunities supports mostly small loans with low GHGimpacts.Three areas of existing activity stand out as having highimpact and high potential for scale-up: first, proactive IFCsupport for energy efficiency in the atypical but importantcases of large, carbon-intensive factories that face credit orinformation barriers; second, increased support for transmissionand distribution loss reduction, which offers economicrates of return of 16–60+ percent and lifetime carbonreturns of 7–15 kilograms per dollar. Third, substitution ofcompact fluorescent lamps (CFLs) for incandescent lampsoffers estimated direct economic returns (in saved energy)of 50–700 percent, together with deferred construction ofpower plants and emissions reductions of 27–134 kilogramsof CO 2per dollar. These returns would be further magnifiedif initial projects catalyzed spontaneous diffusion of CFLs.However, rigorous evaluation of CFLs is lacking.ForestryForest loss, especially in the tropics, generates a quarter of developingcountries’ emissions. The local and global values ofstanding forests often greatly exceed the gains from destroyingthose forests. Tapping this value could therefore offerlarge economic and GHG gains. The Forest Carbon PartnershipFacility is a pilot that explores options to monetize thevalue of standing forests. However, the mechanisms to usethe funds to conserve forests are still being planned. WorldBank experience provides some models for scaling up.Payment for Environmental Services programs also seekto reward property owners who maintain forests. WorldExecutive Summary | xi

Bank-supported programs in Costa Rica and Mexicohave demonstrated the logistics of paying for services andhave helped to globally popularize this approach. However,a substantial proportion of payments has gone to areasthat are not at high risk for deforestation, diluting carbonand environmental benefits and prompting attention totargeting.The most prominent line of action associated with forestconservation is support for protected areas. These nowcover more than a quarter of the tropical forest estate, anarea equivalent to Argentina and Bolivia combined, muchof it with World Bank support. A global analysis showsthat these areas are on average effective in reducing deforestation.Areas that allow sustainable use are more effectivethan strictly protected areas, and indigenous areas aremost effective of all. They also offer precious biodiversitybenefits. These findings support the feasibility of the ReducedEmissions from Deforestation and Degradation initiative(REDD) in combining sustainable development andforest conservation.Urban transitGrowing transport demand clogs limited roadway spacein the developing world, resulting in severe congestion, airpollution, and GHG emissions. The single largest WBG responsehas been to support the deployment of bus rapidtransit systems, which cost much less than tramways orsubways. Key barriers have been the lack of intermunicipalitycoordination, and opposition by displaced minibusdrivers. However, systems have been successfully initiatedin Bogota and Mexico City and are being expanded thereand replicated elsewhere.The immediate economic benefits in Mexico City providean estimated 81 percent economic return and a GHG returnof 10 kilograms per dollar. Larger, sustainable longrungains will require demand-side management of trafficand rational land use planning.Coal powerCoal is a cheap source of power for a power-hungry world,but coal is a major source of GHG emissions. How does theWBG maximize development returns for clients with noGHG reduction obligations, while protecting other clientsthreatened by GHG emissions regardless of their source?SFDCC criteria restrict WBG support to instances wherecoal has the lowest cost after environmental externalitieshave been considered, there is optimal use of energy efficiency,and no concessional funds are available to financethe incremental cost of low-carbon alternatives.The Independent Evaluation Group (IEG) examined fivepre-SFDCC coal power projects to determine whetherWBG involvement contributed to greater efficiency andwhether lower-carbon alternatives had been considered.IEG found that none of the investment cases would havemet the SFDCC criteria, either because they were notleast-cost for generation after accounting for local air pollutionburdens or because they did not fully explore efficiencyalternatives. The complexity of the issues, however,is illustrated by IFC’s support for a supercritical coal plantin India. On one hand, it will be one of the largest pointsources of CO 2on the planet, adding to the atmosphere’spre-existing burden as GHG concentrations climb towarddangerous levels. On the other hand, it may neverthelesshave reduced emissions by about 10 percent compared witha scenario without IFC involvement, and indirectly acceleratedthe diffusion of this higher-efficiency technology ina country that will continue to rely on coal for decades tomeet urgent power needs. More than a quarter of India’spower is lost in transmission and distribution. Nationwide,reduction in distribution losses and other efficiency measurescan offer higher returns in power availability, localenvironmental improvement, and GHG reductions thannew construction.The WBG’s highest leverage for promoting low-carbongrowth is at the level of the power system. The World Bank’stechnical assistance to Kosovo points to a way of resolvingthe tensions surrounding coal. A study (World Bank 2005)assessed options for power system expansion using a systemwidepower model that accounted for local health costsfrom pollution. It showed if CO 2abatement was valued at€10 per ton, it would be optimal to retire small, inefficientcoal plants but also to construct a large, efficient one. (Theimpact of higher carbon prices was not explored.) Modelslike this, if extended to include energy efficiency as an alternativeto expanded generation, can serve as a basis ofdiscussion for identifying technical and financial optionsfor pursuing low-carbon growth at a national level.Carbon financeAs an institutional innovation, the World Bank’s CarbonFinance Unit (CFU) has played an important demonstrationrole in helping open an entirely new field of environmentalfinance, popularizing the idea of carbon markets, and contributingto the institutional infrastructure of the market.The Bank’s carbon business exit strategy called for the CFUto relinquish its role as carbon offset buyer as the privatemarket began to flourish. But although the Bank indeedmoved into higher-risk, pilot areas of the carbon market(the Forest Carbon Partnership Facility and the CarbonPartnership Facility), it continued to build up its lowerriskKyoto-oriented business after that market was alreadythriving. It also failed to mainstream carbon finance withinthe Bank.As a vehicle for catalytic finance and technology transfer, theCFU’s record is mixed. It has contributed to the diffusionxii | Climate Change and the World Bank Group

of some technologies, such as landfill gas, and supportedfirst-of-kind technology investments in some countries.The BioCarbon Fund and the Community DevelopmentCarbon Fund have supported small-scale, rural, and forestryprojects—and learned in the process that this is difficultto do.In contrast, much of the CFU’s support for energytechnologies has gone to projects where its financialleverage—and hence its catalytic impact—was relativelysmall. In addition, two-thirds of carbon fund purchasecommitments have been for projects that destroy HFC-23,a highly potent, industrially generated GHG. The projectstapped a Chinese low-cost GHG abatement opportunityand gave participating companies high profits, 65 percentof which were then taxed for development purposes. Althoughthis was an allowable use of the carbon market, analternative would have been to use international funding topay only for the low marginal costs of destroying the gas,deploying carbon funds with higher leverage elsewhere.Technology transferTechnology transfer is one of the pillars of the Bali ActionPlan (under the United Nations Framework Convention onClimate) and of the SFDCC. The WBG has contributed tothe transfer of existing clean technologies through projectsthat pilot, debug, demonstrate, and diffuse innovations inengineering and finance. These have been successful whenthe logic of demonstration and diffusion has been wellthought out.The Renewable Energy Development Project (China),for instance, used a combination of quality-contingentsubsidies, research and development grants, and technicalassistance to foster the growth of a competitive solarphotovoltaic industry. The Energy Conservation Projectsupported China’s first ESCOs, with strong emphasis onknowledge sharing and diffusion. The Regional SilvopastoralProject in Latin America piloted different approachesto integrating trees with pasture, rigorously documentingthat some techniques were highly profitable even withoutreckoning carbon and biodiversity benefits, and was ableto convince the Colombian government to scale up theproject. In all these cases, GEF support was essential tomitigate up-front risk and to pay for global benefits ofknowledge created.Conversely, technology transfer has foundered in theabsence of a solid logical framework that links interventionsto technological diffusion, especially in the case ofadvanced technologies. Early efforts to support concentratedsolar power, for instance, incorrectly assumed thata few scattered projects would spur cost reductions at theglobal level. (A new concentrated solar power initiativeunder the Clean Technology Fund is more appropriatelyscaled.) Projects incorrectly assumed that private beneficiariesof technology (such as recipients of technology licensesin the China Efficient Boilers Project) would shareproprietary technology with competitors. Several IFC investments,pursuing multiple but conflicting objectives,tackled an insurmountable combination of inexperiencedentrepreneurs, unfamiliar technology, and an uninterestedtarget market. Finally, both the concentrated solarpower and efficient boiler projects underestimated the difficultyof procurement when technology suppliers are fewand costs are poorly known—an inherent feature of newertechnologies.Learning and incentivesRapid feedback and learning is essential for adapting technologyto new sites, for deciding which technologies toscale up, and for ensuring that they are working as planned.Technology demonstration projects work best when itis clear what is being demonstrated, how, and to whom.Although recent demonstration projects have good plansPhoto by Kenneth M. Chomitz. Used with permission.Executive Summary | xiii

for monitoring their direct results, they do not yet trackhow effectively these results are reaching their intended audience.As other IEG reports have noted, cost-benefit analysis hasfallen out of fashion, impeding the WBG’s ability to identifyhigh-return investments. The estimates quoted here remainan unvalidated and possibly overoptimistic guide. The lackof good impact evaluations of forest projects, for instance,has deprived the REDD agenda of urgently needed guidanceon how best to combine forest protection with economicdevelopment.Publicly disclosed monitoring of carbon projects shows thegains from feedback. Landfill gas projects proliferated withthe advent of the carbon market, but monitoring reportssoon showed that these projects were systematically underperforming,relative to their design expectations. Thisfeedback revealed that the appraisal models were based onUS experience, which is inapplicable to the waste streamsof developing countries. The WBG helped to publicize thisdiscovery.Newer projects have incorporated design and operationallessons. This kind of systematic feedback is missing frommost projects, though IFC’s monitoring system is beginningto cover it. Feedback is especially needed for renewableenergy projects, where economic and carbon impactsare proportional to capacity utilization. Many hydropowerand wind projects are underperforming for reasons that arenot clear.At the organizational level, the WBG has framed SFDCCgoals in terms of dollars committed, rather than outcomesor impacts. This sets up poor incentives. For instance, energyefficiency projects are expensive in staff time and leadto relatively modest volumes of lending, yet can benefit clientsmore than cheaper-to-prepare, larger-volume generationprojects.RecommendationsThe WBG should maximize its leverage in promoting lowcarbondevelopment. This will require a strategic approachto portfolio choice, instruments deployed, and technologypolicy. And it means scaling up what works and redesigningwhat does not, using learning to unlock value for clientsand for the world. Key aspects are as follows.Act like a venture capitalistIn both the public and private spheres, the WBG can supportthe transfer, adaptation, piloting, and demonstrationof innovative technologies, policies, and financialpractices—as it has, for instance, with ESCOs, bus rapidtransit, solar home systems, and agroforestry. These demonstrationscarry risks but can offer high returns. Whatcounts for clients, the WBG, and the world, however, is thereturn on the portfolio in development, poverty reduction,and GHG mitigation.A first challenge is to mitigate risks. This means using GEFor other concessional funds (grants or low-interest loans)to support the earliest and riskiest ventures, so that failuresare less costly to borrowers. Because of the potential forhigh returns, this could be a much higher-leverage use ofclimate finance than the purchase of carbon offsets frommarginally profitable renewable energy projects. Risk isfurther mitigated by staging successively larger pilots anddemonstrations, from test site to province to nation. Withincreasing experience and comfort, scale expands and riskdeclines. Changes are necessary, too, in internal WBG incentivesto reward staff and managers for conducting informativepilots and for producing results at the portfoliorather than the project level.A second challenge is to design projects effectively for learningand diffusion. Pilot or demonstration projects musthave a clear, logical framework showing how they will promotediffusion the knowledge gained through experience.Pilot, demonstration, and technology transfer projects requireadditional support for preparation and supervision infunding and on-call expertise.Though there is a clear case and large scope for WBG involvementin technology transfer at the national level, thecase is less clear for WBG involvement in new technologydevelopment at the global level. Candidate technologieswould be those where WBG support could make an appreciabledifference to the global market, helping to pushcosts down. Of special interest are technologies that benefitpoor people and are difficult to protect from copying(and therefore attract little private R&D)—for instance, inagriculture and land use. The proposed new WBG effortto support concentrated solar power is a plausible area ofsupport because a large proportion of the suitable resourceis located in client countries, the technology is suitable formanufacture in client countries, and the proposed effortis sufficiently large to globally push the industry down thecost curve.The World Bank and IFC should—• Create incentives and mobilize resources to supporteffective pilot, demonstration, and technologytransfer projects that have a clear logic of demonstrationand diffusion. This will include mobilizingGEF and other concessional funds to mitigate WorldBank borrower risk, reshaping incentives for staff andmanagers, providing adequate resources for the designand supervision of complex projects, and makingavailable specialized expertise in technology transferand procurement through a real or virtual technologyunit.xiv | Climate Change and the World Bank Group

Scale up high-impact investmentsEnergy efficiency offers high economic and carbon returns.The WBG should—• Place greater emphasis on large-scale energy efficiencyscale-up, as measured by savings in energyand reduced need for new power plants. This includessupport for efficient lighting and for exploringthe scope for accelerating the global phase-out of incandescentlight bulbs. It also includes continued andexpanded support for reductions in transmission anddistribution losses. And it includes a proactive searchby IFC for large-scale, catalytic investments in energyefficiency. There is scope to coordinate World Banksupport for demand-side energy efficiency policieswith IFC support for more efficient manufacturing andmore efficient products.The WBG should, wherever possible, help clients findcleaner, domestically preferable alternatives to coal power.Moreover, the WBG faces strategic choices in staffing andprogramming between building up expertise in “sunrise”sectors of broad applicability and limited private sectorcompetition (energy efficiency, land use management forcarbon, energy systems planning) versus “sunset” sectorssuch as coal power. The WBG should—• Help countries find alternatives to coal power whileretaining a rarely used option to support it, strictlyfollowing existing guidelines (including optimal use ofenergy efficiency opportunities) and being restrictedto cases where there is a compelling argument for povertyor emissions reductions impacts that would not beachieved without WBG support for coal power.The WBG cannot tackle this issue alone. Complementaryfinancing for renewable energy and investments in technologyR&D are needed from the developed world to providebetter options for the WBG’s clients.Protected areas—especially those permitting sustainableuse—reduce tropical deforestation, providing local environmentalbenefits as well as carbon emissions reductions.The WBG should—• Continue to explore, in the REDD context, ways tofinance and promote forest conservation and sustainableuse, including support for indigenous forestareas and maintenance of existing protected areas.In terms of its instruments—• MIGA’s upcoming FY 2012–15 Strategy should outlinethe role and scope for MIGA to provide politicalrisk insurance to catalyze long-term financing forrenewable energy projects, building on its expertiseand existing portfolio of climate-friendly guaranteeprojects.• The World Bank should enhance the delivery of itsguarantee products by taking actions to improve policiesand procedures, eliminate disincentives, increaseflexibility, and strengthen skills for the deployment ofthe products. It should assess the potential for greateruse of partial risk guarantees to mobilize long-term financingfor renewable energy projects, particularly inthe context of feed-in tariffs or other premiums to supportinvestment in renewable energy.• The Carbon Partnership Facility and other post-Kyoto carbon finance efforts should focus on demonstratingeffective technical and financial approachesto boosting low-carbon investments. Funds and facilitiesshould have clear exit strategies.Reorient incentives toward learning and impactThere is an urgent need to better understand the economic,social, and GHG impacts of a wide variety of scalable interventions.How can REDD programs incorporate the lessonsof protected areas, environmental services payments,and community forestry? What is the best way to encourageenergy efficiency in the building sector?Traditional evaluation cycles are too slow when tens ofbillions of dollars may be deployed annually for climatefinance and where there is a danger of lock-in to highcarbongrowth. At the same time, information costs areplummeting, remote sensing resources are multiplying, andcell phone access is nearly universal. By wiring up projectsto return early information on impacts, global innovationcan be accelerated and the WBG can optimize project supervisionand new project design.The WBG’s extensive project portfolio and support forcountry strategies makes it a natural nexus for this globalpublic good. The WBG should—• Measure projects’ economic and environmental impactboth during execution and after closure and aggregatethis information for analysis. For instance,renewable energy projects should monitor capacityutilization, and energy efficiency projects should monitorenergy savings. This may require the use of concessionalfunds to defray additional costs of monitoring bystaff, clients, and project proponents.• Link these measures to a results framework that shiftsthe SFDCC toward a focus on outputs such as powerproduced, power access, forest cover, and transitshare of urban trips, rather than on money spent.Executive Summary | xv

Management ResponseI. IntroductionManagement welcomes the second phase evaluation by theIndependent Evaluation Group (IEG) of lessons-learnedfor development and climate change mitigation from theWorld Bank Group’s (WBG) portfolio in energy, forestry,and transport. As noted in the first phase evaluation (IEG2009), IEG’s evaluation covering the expanding projectlevelexperience of the Bank and the International FinanceCorporation (IFC) in promoting renewable energy, energyefficiency, and carbon finance enables a comprehensive assessmentof the focus and success of the WBG’s efforts onlow carbon development. Management appreciates the factthat this report covers activities across the entire WBG,including IFC and the Multilateral Investment GuaranteeAgency (MIGA).The report addresses a very important topic and summarizesa major exercise to review how the WBG portfoliohas been contributing to low-carbon growth objectives. Itapproaches this exercise from an appropriate and constructiveangle: not to be the “judge” of the past WBG performancein promoting low-carbon growth, since, until veryrecently, it was not a stated WBG objective, but rather touse available experiences and lessons to inform future actions.It correctly recognizes that projects can contribute tolow-carbon growth even if they do not necessarily includeit in development objectives, and thus assesses a wide poolof projects with and without explicitly stated mitigationrelated objectives. While the report does not look at everysector and subsector where significant mitigation cobenefitscan be obtained, its selection of sectors is reasonable.Management appreciates the many useful observations andsuggestions provided in the report and concurs with aspectsof IEG’s main findings. Many of these comments reinforcethe messages expressed in the WBG Strategic Frameworkon Development and Climate Change (SFDCC) and arecomplemented by emerging lessons from analytical studies,sector strategies, and relevant project level experiencesacross the WBG. At the same time, management differswith some of IEG’s findings and recommendations.II. Key Issues of Agreement and DivergenceOverview of responseThis Management Response first outlines the areas in whichmanagement broadly agrees with the analysis in the review,noting, however, areas where IEG could have given a fulleraccount of efforts the WBG has made or is making. It thendiscusses areas in which Management believes that IEGhas drawn conclusions from an analysis based on limitedcoverage, without fully taking into account the significantongoing changes that have been facilitated by the adoptionof the SFDCC.A. Areas of agreementLow-Carbon Studies. Appendix J, referring to the lowcarbonpilot program, provides a useful summary of theavailable work. It also includes the comment that access toenergy is generally not considered. Management would liketo emphasize that this statement should not be generalizedabout all work on low-carbon studies, since the observationis based only on work presently in the public domain (forexample, Brazil and Mexico and the review of renewableenergy targets and power dispatch efficiency for China).The low-carbon study for India has paid attention to theaccess issue.In addition, the appendix does not address the issue of longtermplanning (20 years+) and demand for capacity buildingin this area, which has been integral to the low-carbonwork along with the need to engage and build consensusacross broad stakeholder groups. These are the emergingkey lessons, and as such should be incorporated in the lowcarbonwork to be pursued in the future.Development cobenefits. With respect to the issue ofenergy access, IEG correctly notes that monitoring andevaluation data are rarely available to quantify cobenefitsof low-carbon interventions in terms of poverty reduction,energy/transport access, and gender equity. In this regard,management believes that it is worth noting the priority beinggiven to developing results frameworks for the SFDCCand the Climate Investment Funds (CIF). This ongoingwork aims to identify indicators which would allow for abetter tracking of distributional and gender dimensions,with a view to assessing the extent to which developmentcobenefits actually result from low-carbon interventions.A new set of International Development Association (IDA)core indicators has also been prepared to better capture thedevelopment impacts of energy projects. Also, the forthcomingreport on transport and climate underscores theimpact of development cobenefits in moving toward a lowcarbontransport sector.Finally, since the issue of development cobenefits is ofcentral importance to the WBG, management feels that itxvi | Climate Change and the World Bank Group

should have been strengthened in the report. This wouldhave helped identify a set of concrete suggestions on howbest to capture and measure the potential developmentdividend of low-carbon growth.B. Areas of divergenceStrategic direction. Management is of the view that severalmajor policy decisions made by the WBG on climatechange needed to be better reflected in the IEG report. Specifically,the report tends to imply that the SFDCC requires“optimizing” both local and global benefits and outcomes.However, this premise is not the message of the StrategicFramework; the SFDCC very clearly states that the WBG isto help clients “maximize” national and local developmentoutcomes, taking advantage of low-carbon growth opportunitiesto achieve these outcomes whenever possible. Itwould have been better if the IEG report had correctly presentedcurrent WBG policies as articulated in the SFDCC.While the IEG report makes selective references to specificrecent initiatives that draw on lessons from experiencesover the study period, it does not recognize the significanceof ongoing changes that have been facilitated by theadoption of the SFDCC. These changes cut across projectdesign and implementation, corporate targets, and new financialinstruments and are also reflected in organizationalrestructuring as well as addition of new staff with specializedexpertise. While it is too soon to evaluate their impact,these actions are indicative of greater corporate commitmentto addressing climate change. For example, climatechange work has become a major focus of IFC’s business.The IEG report should also have emphasized more stronglythat the “debate” has moved beyond “low-carbon” developmentto “climate smart” development as noted in the WorldDevelopment Report 2010, taking into account synergiesthat exist between climate resilience and low-carbongrowth.Cleaner production. An area of difference in views concernsIFC’s Cleaner Production (CP) program, which IEGsummarizes as dedicating “significant resources … to smallloans” and largely dependent for impact on concessionallending. In contrast, management perceives cleaner productionmore broadly as part of a systematic approach tohelping clients identify opportunities for resource and energyefficiency which can be implemented at low cost andwith continuing benefits. Management would like to stressthat the CP program is one initiative among others that aimto improve resource-use efficiency in IFC operations.Coal power. Management would like to emphasize that theapplication of the system analysis suggested for evaluatinginvestment decisions for coal power projects should takeinto account differences across power markets. The IEGreport’s conclusion that investment in transmission anddistribution (T&D) loss reduction would avert the neededcapacity addition from the Tata Mundra project in India isoversimplified. This conclusion does not account for differencesin power supply-demand balances or the level of T&Dlosses within India’s regional networks (the 27 percent T&Dlosses cited in the report is an average across five regionalnetworks). An investment decision on capacity additionsis always linked to a prospective service market, not to theentire country. The analogy of using the same system wideapproach as for the Kosovo electricity system analysis is aninappropriate extrapolation, since the total system capacityis only about 1,000 MW linked through a single nationaltransmission network. For Kosovo, any investment in T&Dloss reduction will result in capacity availability in any regionof the country; whereas in India, the power market is muchlarger, and the supply-demand situation varies locally.Energy efficiency. Management is of the view that thereport’s evaluation of energy efficiency is somewhatoversimplified in that it does not include a discussion ofoperationally-relevant nuances vis-à-vis energy efficiencybarriers. By limiting the discussion to specific financingtools such as credit lines, the analysis does not fully appreciatethe broader challenges in dealing with energy efficiencyimplementation through key delivery mechanisms(for example, incentive systems, market-based approaches,and regulatory policies to implement energy efficiency subprojects)which are required to overcome energy efficiencysector constraints and address transaction risks. Furthermore,by focusing on only a few types of interventions, thediscussion does not mention some of the barriers addressedthrough other operations (technical assistance, policy work,and so forth), which are meant to create additional driversfor energy efficiency (mostly through incentives or throughnew policy drivers). As a result, the evaluation depicts anincomplete picture of World Bank programs in some countries,most notably in China.Management also believes that barriers to investment inenergy efficiency, particularly within many large energy-intensiveindustries, remain significant and justify continuedtargeted efforts to work with banks and commercial lenders.This conclusion is underscored by recent announcementsof setbacks in achieving Chinese targets for energyefficiency improvements in key industrial sectors. IEG’smethodology, which relies primarily on self-reporting byindustrial enterprises already under government mandate,needs to be reassessed, with more attention given to commercialrealities and constraints on clean energy lending.Outstanding data issues. Management finds that the datafile provided in the report is difficult to reconcile with theenergy database, and as such, does not allow for verificationof IEG’s numbers. Further efforts to ensure consistency ofdata would be desirable.Management Response | xvii

Technology. As a general observation, in recent years theWBG has been becoming much more involved in the promotionof efforts to develop and transfer new energy technologies.These efforts build on donor-funded programs,particularly the Global Environmental Facility (GEF) andmore recently the Clean Technology Fund (CTF), but alsoinclude significant on balance sheet investments by IFC’sclean tech unit and funds department. The combined resourcesof the WBG, GEF and CTF, if leveraged, can helpscale up advanced technologies including concentratingsolar power (CSP) and carbon capture and storage (CCS)in developing countries. IEG should have recognized theWBG’s efforts in this regard, including the establishment ofthe CCS Capacity Building Trust Fund in 2009. The WBG’sproactive approach to CSP and CCS is helping to considerablychange the Bank’s role in supporting advanced technologytransfer.Carbon finance. There are significant differences betweenthe views of management and the IEG report with regardto the exit strategy, knowledge transfer, and technical assistanceprovided through the Bank’s involvement in carbonfinance. The report does not differentiate between carbonmarkets (e.g., the market for allowances in Europe and theClean Development Mechanism market), and fails to understandthat withdrawal by the Bank in 2005 from the carbonmarkets where its Carbon Finance Unit operates wouldhave been catastrophic to the long-term stability of thesemarkets. Management also believes that the report shouldhave acknowledged that a major goal of carbon marketswas to bring in private capital as per United Nations negotiations,and that the unpredictable nature of carbon flowsposes a fundamental problem in using carbon financing inthe Bank and elsewhere. Management feels that the reportmisses the knowledge transfer and technical assistanceprovided through instruments such as the Prototype CarbonFund Plus, Community Development Carbon Fund(CDCF) Plus, or Forest Carbon Partnership Facility (FCPF)Readiness Fund, and by the World Bank Institute’s CF Assistprogram, all of which help increase the availability ofcarbon finance to potential projects inside and outside theBank. Finally, the report argues that “carbon finance needsto be redirected away from hydropower, where it has minimalimpact on project bankability.” Here, management believesthe report should have discussed alternative financingavenues, in particular for Africa, where hydro remains avast and largely untapped reservoir of clean energy.Management would have liked to see a stronger emphasisin the report on the potential role the Bank may play in promotingcarbon finance reform, so as to facilitate transitiontoward programmatic and ecosystem based approaches,and speedier and simplified administrative processes.Agriculture. IEG’s review made the decision to exclude theagriculture sector, while acknowledging its contribution togreenhouse gas (GHG) emissions. Management believes,however, that given this sector’s importance (together withForestry it accounts for 30 percent of GHG emissions andmore in many developing countries), the report shouldhave recommended that management pay more attentionto the role of agriculture, including livestock and land andwater management, in low-carbon growth in the future.In this regard, the report and its recommendations wouldhave benefited from using a broader perspective. The evidenceis that many of the “causes of deforestation” lie outsidethe forestry sector (for example, forest fires related toland clearing for agricultural intensification), and in theuse of biomass energy (for example, wood and charcoal)for cooking and heating.III. IEG RecommendationsManagement welcomes and in general agrees with the IEGrecommendations. These recommendations largely fit withwhat the WBG is doing at present, and are relevant to theEnergy and the Environment Strategies currently underpreparation. Management’s specific responses to IEG recommendationsare outlined in the attached draft ManagementAction Record.xviii |Climate Change and the World Bank Group

Major monitorable IEGrecommendations requiring a responseThe World Bank and IFC should—Create incentives and mobilize resources tosupport effective pilot, demonstration, andtechnology transfer projects that have a clearlogic of demonstration and diffusion. This willinclude mobilizing Global Environment Fund andother concessional funds to mitigate World Bankborrower risk; reshaping incentives for staff andmanagers; providing adequate resources for thedesign and supervision of complex projects; andmaking available specialized expertise in technologytransfer and procurement through a real orvirtual technology unit.The WBG should—Place greater emphasis on large-scale energyefficiency scale-up, as measured by energy savedand generating capacity avoided. This includessupport for efficient lighting and exploring thescope for accelerating the global phase-out of incandescentlight bulbs. It includes continued andexpanded support for reductions in transmissionand distribution losses. And it includes proactivesearch by IFC for large-scale, catalytic investmentsin energy efficiency. There is scope tocoordinate World Bank support for demand-sideenergy efficiency policies with IFC support formore efficient manufacturing and more efficientproducts.Management Action RecordManagement responseOngoing/AgreeThis recommendation is consistent with the SFDCC. Key ongoing work consistentwith the recommendation includes—• WBG expects to expand its partnership with GEF, which is well positioned to takeon early research and development risks, through the recently established TechnologyTransfer Program and GEF/IFC Earth Fund.• Through the Clean Technology Fund (CTF), Scaling-up Renewable Energy Partnership(SREP) and Forest Investment Partnership (FIP), WBG is supporting technologyscale-up with the help of innovative financing.• A climate technology program, launched in September 2009, is exploring thefeasibility of climate technology innovation centers in developing countries asa way to stimulate locally relevant climate technologies and harness economicopportunities at the small and medium enterprise (SME) level (first centers alreadyunder development in Brazil, India, and Kenya).• A new MDTF has been established for supporting the introduction of CCStechnologies and providing technical assistance to clients.• IFC’s clean-tech investment practice will be housed in the newly-created ClimateBusiness Group. CLEANTECHNET is a practice group that meets virtually and inperson to share knowledge and issues in the technology space.• The potential for additional initiatives to support these objectives will also beexplored in the Energy Strategy.Partially AgreeWBG agrees with the general emphasis proposed, but does not agree with thespecific action areas proposed. WBG does focus on large-scale or bundled energyefficiency projects to avoid high transaction costs associated with small-scale investments.Estimates of energy saved are computed as part of the appraisal of projectswith energy efficiency components.However, World Bank finds the recommendations on efficient lighting and T&D to berather prescriptive and limited in terms of scope and impacts. They do not accountfor a variety of untapped energy efficiency scale up opportunities and available longtermEE potential in other sectors, on both the supply and demand sides, which couldhave much larger impacts, such as in district heating, industry, and municipalities.IFC intends to increase its climate-related lending from 10 percent of annualcommitments in fiscal 2009 to 20–25 percent in fiscal 2013, and will undertakea proactive search for suitable investments. Energy efficiency is expected to bea significant contributor to meeting this target. IFC will define an approach toestimating avoided emissions associated with its climate-related activity. IFC agreeswith the potential for investments in manufacturing of more efficient products and isactively seeking such opportunities, having made several such investments in fiscal2010.(continued)Management Response | xix

Major monitorable IEGrecommendations requiring a responseThe WBG should—Help countries find alternatives to coal powerwhile retaining a rarely used option to supportcoal power, strictly following existing guidelines(including optimal use of energy efficiency opportunities)and being restricted to cases wherethere is a compelling argument for poverty oremissions reductions impacts that would not beachieved without WBG support for coal power.The WBG should—Continue to explore, in the REDD context, waysto finance and promote forest conservation andsustainable use, including support for indigenousforest areas and maintenance of existingprotected areas.MIGA’s upcoming FY 2012–15 Strategy shouldoutline the role and scope for MIGA to providepolitical risk insurance to catalyze long-termfinancing for renewable energy projects, buildingon its expertise and existing portfolio of climatefriendlyguarantee projects.Management Action Record (continued)Management responseOngoing/AgreeThe policy proposed is consistent with SFDCC criteria for coal investments.SFDCC criteria for coal investments have been clarified in the “Operational Guidancefor the World Bank Group Staff: Criteria for Screening Coal Projects Framework forDevelopment and Climate Change,” which took effect on April 15, 2010. The specificstress on “optimal use of energy efficiency opportunities” presented in the IEG recommendationseems unnecessary, as there are no priority criteria either in SFDCC orthe Operational Guidance and all required criteria must be adequately addressed.The Operational Guidance makes clear that coal investments should focus on caseswhere there is a compelling argument for poverty reduction and a clear need for WBGsupport.Ongoing/AgreeBy definition, REDD+ includes reducing emissions from deforestation and forest degradationand addressing the role of conservation, sustainable management of forestsand enhancement of forest carbon stocks. The World Bank is assisting countries toengage in REDD+ activities through two programs: FCPF and FIP. Both of these willcontribute to financing and promoting forest conservation and sustainable use,including support for indigenous forest areas and forest conservation. FCPF involves37 countries, and has mobilized $160 million for capacity building and performancebasedpayments to pilot projects which aim to open financial flows for sustainablemanagement of forests and land. FIP, funded at approximately $600 million, will pilotprogrammatic investments to reduce deforestation and forest degradation, promotesustainable forest management, and conserve forests in Brazil, Burkina Faso, theDemocratic Republic of Congo, Ghana, Indonesia, Lao PDR, Mexico, and Peru.Partially AgreeMIGA intends to address these issues in its annual business plan/budgeting process,but will not do so in the upcoming FY 2012–15 Strategy.MIGA will consider a set of actions aimed at supporting eligible renewable energyand energy efficiency projects. These actions are subject to the willingness of privatesponsors to invest in renewable energy and energy efficiency projects and the needfor political risk insurance as a risk mitigation tool and/or a facilitation mechanismfor funding and operations of those projects. MIGA understands that decisions toinvest by project sponsors are subject to the uncertainties of future carbon marketstructures and prices. These markets have been actively pursued by sponsors as acomplementary source of funds for renewable energy and energy efficiency projects.MIGA’s current portfolio and expertise can serve as an initial step in supportingrenewable energy and energy efficiency projects, however MIGA’s actions will need toevolve and adapt to changing conditions in the carbon markets.As MIGA’s upcoming FY 2012–15 Strategy will primarily be focused on MIGA’s riskreturndynamics, including the agency’s overall appetite for risk, it may not focuson specific subsectors such as renewable energy and therefore may not be the appropriatevehicle to address this issue. This subsector focus will therefore need to beaddressed through a more appropriate mechanism such as MIGA’s annual businessplan/budgeting process.xx | Climate Change and the World Bank Group

Major monitorable IEGrecommendations requiring a responseThe World Bank should take the necessary stepsto enhance the delivery of its guarantee productsby taking actions to improve policies and procedures,eliminate disincentives, increase flexibility,and strengthen skills for the deployment ofthe products. It should assess the potential forgreater use of partial risk guarantees to mobilizelong-term financing for renewable energy projects,particularly in the context of feed-in tariffsor other premiums to support investment inrenewable energy.The Carbon Partnership Facility and other post-Kyoto carbon finance efforts should focus ondemonstrating effective technical and financialapproaches to boosting low-carbon investments.Funds and facilities should have clear exitstrategies.The WBG should—Measure projects’ economic and environmentalimpact during execution and after closure andaggregate this information for analysis. For instance,renewable energy projects should monitorcapacity utilization, and energy efficiencyprojects should monitor energy savings. This mayrequire the use of concessional funds to defrayadditional costs of monitoring by staff, clients,and project proponents.Management Action Record (continued)Management responsePartially AgreeIn response to IEG’s evaluation of WBG guarantees, Management has been engagedin ongoing discussions on opportunities to optimize the delivery of WBG guaranteeinstruments and has taken action to introduce greater flexibility in the use of Bankguarantee instruments in response to dynamic country and client needs and marketdevelopments. A Memorandum of Understanding was recently signed betweenthe World Bank and MIGA to provide incentives to staff to collaborate and a similaragreement is being worked on with IFC. The Bank is working to increase potential forgreater use of partial risk guarantees for renewable energy projects and is allocatingmore staff and resources accordingly. The World Bank feels that the delivery of renewableenergy guarantee products should not single out the feed-in-tariff instrument, asthe effectiveness and efficiency of its application varies across market structures andvaries across countries depending on their energy access levels, with the potential toresult in high energy costs that will need to be borne by consumers.Ongoing/AgreeCPF and FCPF were clearly established for the purposes described. Beyond thesefacilities, the World Bank is invited to explore how to facilitate developing countries’further access to the carbon market and expand the reach of market mechanisms inland use, including in agriculture. Work is under way to develop successor facilities toCDCF and the BioCarbon Fund.Each fund and facility has its own clear exit strategy corresponding to when its capitalhas been fully committed. Regarding CPF, each tranche is to be established based onan assessment of the needs for further methodology development and piloting ofnew approaches to scale up the use of market mechanisms.DisagreeWhile WBG assesses projects’ environmental impacts before, during, and after implementation,there are methodological difficulties in aggregating these.There is not a clear source of concessional funding to defray the additional cost ofmonitoring by staff and project proponents, apart from climate-related trust funds,such as the CIF. Under the CIF, results frameworks are currently under development.Each multilateral development bank partner and client will be responsible formonitoring results in accordance with the frameworks. Under the CTF and the SREP,indicators for renewable energy and energy efficiency investments will be tested inCIF-funded operations.Measurement is being strengthened with respect to climate change mitigation. Asoutlined in SFDCC, a methodology for “carbon tagging” has been developed andprototyped. Once this methodology is adopted, this will help aggregate the projectcommitments coded as GHG mitigation (CO 2emission reduction). In addition, a newset of core indicators for IDA investment lending operations was approved by the Energyand Mining Sector Board in 2009, to better capture impacts of the implementationof renewable energy projects. For energy efficiency projects in the IDA portfolio,a similar set of indicators, including project energy savings, is currently under review.The formulation of new core indicators for energy projects is also proposed for IBRDfinancedoperations.IFC feels that collecting information on project performance may be complex andunrealistic for some financial intermediation-based lending instruments (for example,small loan programs for SMEs). Nevertheless, more efforts could be made in termsof monitoring, if additional resources were available to cover the extra costs of staff,clients, and project proponents.(continued)Management Response | xxi

Major monitorable IEGrecommendations requiring a responseThe WBG should—Link these measures to a results framework thatshifts the SFDCC toward a focus on outputs suchas power produced, power access, forest cover,transit share of urban trips, rather than moneyspent.Management Action Record (continued)Management responseOngoing/AgreeA long-term results framework for SFDCC is under development, as stated in theInterim Progress Report for SFDCC, May 2010.The SFDCC results framework will be outcome-oriented and is currently beingdeveloped in a consultative manner as envisioned in SFDCC. In addition to trackingWBG actions at the input level, the new results framework is being designed to trackoutputs, outcomes, and impacts related to WBG actions. Potential indicators at allof these levels (including the suggested output indicators: power produced, poweraccess, forest cover, transit share of urban trips) are currently being assessed for theirfeasibility, simplicity, and suitability in communicating results at different levels andscales.Separate results frameworks are under development for the CIF with an emphasison impact, outcome and output indicators. Results chains link projects to the CIFfinal outcomes through pilot country outputs and outcomes, program replicationoutcomes, and transformative impact. The multilateral development banks arecurrently in a process to identify reliable indicators to measure results and achievementsat each level.xxii | Climate Change and the World Bank Group

Chairman’s Summary: Committee onDevelopment Effectiveness (CODE)On September 15, 2010, the Committee on DevelopmentEffectiveness (CODE) considered the report ClimateChange and the World Bank Group—Phase II: The Challengeof Low-Carbon Development, prepared by the IndependentEvaluation Group (IEG), and the draft managementresp ons e.SummaryThe Committee welcomed the timely discussion of the IEGreport which, as noted by management, highlighted importantareas that are currently considered in the updates ofthe World Bank Group (WBG) Energy and EnvironmentSector Strategies. In this regard, members cautioned that,given the ongoing consultations, the IEG findings and recommendationsshould not be perceived as preempting thenew strategies but inform the ongoing process. They welcomedthe report’s emphasis on energy efficiency and itsperspective on a “venture capital” approach and endorsedthe call for a greater focus on results to complement thefocus on mobilization and transfer of resources. There wasappreciation for the report’s findings that many types of renewableenergy require concessional finance.The IEG evaluation sought to draw lessons from recentWBG experience (2003–08) with promoting the adoptionand diffusion of technologies and practices that reduceGHG emissions. Members noted that since the StrategicFramework for Development and Climate Change (SFDCC)was launched in 2008, it would be premature to evaluate theexperience with the SFDCC. IEG clarified that the report isnot an evaluation of the SFDCC but rather an assessmentof earlier activities to inform the implementation of theSFDCC. In addition, members agreed with managementthat addressing climate change as a development issue raisesthe questions of how to address the access agenda whiletaking into account low-carbon development. IEG clarifiedthat Phase I of the report considered this important aspect.Some members felt that the IEG evaluation should haveaddressed the World Bank commitments at the countrylevel rather than project-by-project, suggested guidance toemerging countries on how to support low-carbon growth,and looked at geothermal, biofuel, and biomass energy.There were also comments on global vis-à-vis nationalefforts; trade-offs of having a climate change agenda, energyaccess, and social development; the role of carbon funds;and shortcomings of current staff incentives and resourceconstraints. Different views were expressed on the WBG’sinvolvement in coal plant projects.Chairman’s Summary: Committee on Development Effectiveness (CODE) | xxiii

Statement of the External High-LevelReview PanelThe High-Level Review Panel (Panel) has been asked tocomment on the Phase II report of the Independent EvaluationGroup’s (IEG) evaluation Climate Change and theWorld Bank Group. The Phase I evaluation was devoted toassessing the role of policy actions in support of low-carbongrowth and stressed the importance of energy price rationalization.Like the Phase I report, this report places specialstress on the need for systems thinking in key sectors suchas energy, transport, and forestry. The Panel appreciatesboth the extensive amount of work and the scope of the assessmentassembled by the two reports together and separately.Summarizing World Bank Group (WBG) activitiesand giving a comprehensive review of the changing role ofthe Bank and future options is difficult because of the sizeand diversity of the Bank. The challenge of preparing such areport is compounded by the decline in the use of cost benefitanalysis over recent decades that has been documentedin another recent IEG report (IEG 2010a).We find the current report to be written with exemplaryclarity. As far as we have been able to ascertain, it gives bothan even-handed overview of the changing WBG practicein this area and a level-headed analysis of the options andalternatives ahead.The report is at once supportive and critical of the variousdimensions of the WBG activities and represents an elementof an ongoing evolution of the thinking about the work alreadyunder way, or in need of further implementation,in the multiple activities of the WBG. The Panel also bothsupports and criticizes the reviewed practices of the WBGand equally recommends a continuing evolution of WBGperspectives in its adaptation to the pressing needs for climatefinance. In this comment, we want to reinforce the keymessages in the report: that the WBG can and should play acentral role in the multilateral and national responses to theworldwide development/climate problems before us.We believe that the tensions between development andclimate are a chimera: the damages from climate changewill counteract the development aspirations of low-incomecountries. To mitigate climate damages is a vital developmentgoal. Again, in agreement with the report, we believethat the newer and integrated strategies for low-carbongrowth can, if well and consistently pursued, minimize orovercome these tensions. Finally, we emphasize that theWBG, as other institutions that grew up before the challengesof climate resilient development were apparent,must alter its practices of investment and capacity buildingto adapt to the different politics and technologies that noware present. We hope our comment will be read in the samespirit as the IEG report, reinforcing and extending the workwe are charged to review.The Challenge of Climate Change andLow-Carbon (Green) GrowthA number of features set the management of climate risksapart from most developmental and environmental problems.It spans centuries, forcing us to rethink intergenerationalequity issues between and within countries. Ifunchecked, climate change might threaten the developmentaspirations of the poor. If approached creatively, it opensdevelopment opportunities. Rapid economic growth inthe last decades has substantially reduced poverty in somecountries, but now the very sustainability of this growth isseriously threatened by climate change unless we changeour growth strategies. Some implications of the long-runlow-carbon strategy are clear, such as the virtual phase-outin this century of fossil fuel use. This will require a highprice on carbon emissions or other aggressive policy measuresand incentives, with inclusive participation acrossthe world. Others aspects of these alternative developmentstrategies in the areas of forestry and innovation suggestquite immediate interventions to preserve depletable assetsor lay the foundations for the commercialization and diffusionof newer technologies that cannot be deferred.Although the short-run capital, operational, and transitioncosts of managing climate change risks are sizable, they arestill dwarfed both by the benefits of and by the resourcesavailable from a century of growth. Green growth and winwinopportunities are increasingly recognized by nationalleaders as real options, but coal is often the cheapest currentinvestment and the (shadow) carbon prices currentlydiscussed are, as shown by the IEG report, inconsequential.In the multilateral climate negotiations, the distribution ofthese costs is deeply contentious and it will take some timeto resolve. Eventually we will live in a world where all productiveresources, including the climate regulating functionsof the atmosphere have a price—just like land does today inxxiv |Climate Change and the World Bank Group

most places. Before we get there, we are in an interregnumwhen policy making is quite complex. What the situationneeds are credible agents that provide the vision to bridge thegap, leadership in this crucial task, and the capacity to mobilizeand channel resources responsibly. As suggested in thisreport, the WBG can and must contribute to this leadership.The WBG RoleThe report finds that there are multiple and overlappingreasons for WBG involvement and action. First, it is evidentthat when environmental externalities are taken intoaccount, unregulated markets will not optimize socialwell-being. Second, given past regulatory practices and therising costs of sustainable energy services associated withclimate change and with other environmental and resourceproblems, there is good reason to believe that greenergrowth built on less extensive exploitation of this resourcebase can increase productivity and development. Third, thehistorically low resource prices associated with prior industrialgrowth have failed to motivate innovation of systemsthat use resources in smarter ways. Looking systematicallyat these opportunities through integrated planning is theresponsibility of agencies such as the WBG, which makeinvestment capital available, especially in poorer countrieswith less institutional capacity to perform this analysis.The IEG report highlights that the problem of responsibleleadership in this field is compounded by the inability ofthe multilateral system over the past years to agree on aregime for giving meaningful price signals and complementaryincentives for managing carbon risks. It has beenrecognized in principle that climate change is a true threatto development and poverty alleviation, and there is agrowing (although not yet sufficiently large) willingness topay for global mitigation services. Yet there are not inclusivesanctions imposed on greenhouse gas emissions thatwould signal to all nations that resource use must changeor provide the funds for climate-specific transfers to put asignificant positive incentive behind cleaner technologiesin less developed countries. In the absence of such agreedinternational policy guidance to markets, it is especiallyimportant that established global coordinating agents usefinancial markets to internalize the shadow costs of carbonand the prospective returns of green investment into theirinvestment portfolios. We believe that the WBG—with itsaccess to world capital markets, the ears of policy makersin all countries, and a credible engagement in both developmentand environmental issues—is a strong candidatefor this position. There are many other important agents,including governments, industry, and the United Nations.However, in the current situation, there is a particularneed for the WBG to consider its exceptional position toarticulate and promote the long-run investment horizon,the production of global public goods and services, and thesystemic planning perspective that few other financial bodiesare able to define and pursue.Although the report does not make the overall portfolio ofWBG energy investments a principal subject of criticism,we urge that this question of WBG perspective receivemore direct attention. The bottom line is that virtuallyall forms of energy supply entail some serious issues, andhence optimization of demand through effective management,overview of tariff structures, reduction of grid losses,and other methods of increasing energy productivity should@ CorbisStatement of the External High-Level Review Panel | xxv

e WBG priorities. The WBG has made significant gains inrecent years through its Clean Energy Investment Framework,and it reports that it achieved a 40 percent share of itstotal energy commitments for renewable energy and energyefficiency for fiscal 2009. This total commitment figure caninclude funds for energy efficiency in fossil energy, hydropowerfacilities, new renewable energy technologies, andboth specific donor funds and structural lending. Thesealternative types of climate finance should be clearly andseparately reported to facilitate transparent understandingof the changing composition of WBG activities. The Panelalso makes specific remarks about continuing WBG lendingto coal fired power below. However, given the strongfindings of the IEG report on the economic viability of increasingnumbers of renewable energy or clean transportinvestment and the social value of the WBG acting to lowercapital and operational costs of newer technologies andsystems, the Panel urges the WBG to move more quicklyin its structural energy lending to assume the coordinatingrole of a strategic renewable energy investor.As does the IEG report, the Panel realizes that a change inWBG investing stance is not a simple or politically easy task.Our position, like that of the evaluation, is more forceful thanthe WBG Strategic Framework on Development and Climate.We recognize that various WBG stakeholders contest its abilityto lead on climate finance, that the WBG operates in apartial policy vacuum, and that it has neither a clear mandatenor control over many of the necessary international policiesto complement its investments. In spite of these factors, thePanel would go beyond even the IEG evaluations and reiterateby consensus that the Bank Group is uniquely positionedto take on roles that would as an investor and trustee be internallyinnovative and politically opportune in showing theway toward a comprehensive multilateral system in whichthe financing of low-carbon growth is the essential reform.General FindingsIt certainly is true in the short run that low-carbon growthcosts more (ignoring externalities) than business as usualgrowth (the evaluation emphasizes that renewable energy,aside from medium to large hydropower, does have highercosts or lower returns than other kinds of power generation);but the Panel, like the report, puts great stress on thepotential for a congruence of mitigation and development.The report shows there is ample scope for projects thatpromote local development goals while also mitigatinggreenhouse gases (see figure 6.1 of the report). In additionto energy efficiency investments, other projects may individuallyhave high carbon returns (forestry) or economicreturns (solar home photovoltaic systems). To optimizecarbon and economic gains, it may often be necessary toconstruct portfolios of projects, rather than pursue multiplegoals with a single instrument.The IEG report directs attention to energy efficiency, whichoffers low-cost or negative-cost opportunities to reducecarbon emissions. It finds that many people, inside andoutside the WBG, do not appear to take energy efficiencyseriously. However, especially noting that hoped-for largescaleclimate funding may not appear soon and that manycountries simply do not have good immediate alternativesto fossil power, many kinds of energy efficiency offer bothhigh economic returns to the borrowing country and highabatement returns to the world. Some types of energy efficiencyinvestments can be undertaken immediately, withconcurrent huge economic benefits and significant climatebenefits. At the same time, aggressive pursuit of energyefficiency today can defer the locking in of new carbonintensivepower construction like diesel or coal plants fora few years, allowing time both for technical progress toreduce the cost of renewable alternatives and for the internationalpolitical process to muster more climate finance.Although the Panel insists that it is necessary to reinforcethe effects of such investments by anticipating with complementarypolicies—such as tariff and tax reform—therebound effects of falling energy prices, it emphasizes theconclusion of the IEG report that the WBG should givevery high priority to energy efficiency.The Panel also underscores the evaluation’s finding that theWBG can emulate a role played by venture funding in theprivate sector. With current carbon prices, the power ofconcessional finance is often limited in mitigating the riskof high-risk projects. At $10/ton for CO 2, carbon financesimply doesn’t constitute a make-or-break factor in lowcarboninvestments. Yet there is a whole class of projectsthat offer high economic returns (to the adopting country)together with carbon benefits, but that present some apriori risks. Bus rapid transit and silvopastoral systems areexamples given in the text. Although risk-averse borrowingcountries will shy away from these until they are proven,concessional funds can mitigate this risk. WBG clean technologyfunds or other WBG climate finance could be usedto support a number of individual “start-up” projects, scalingup the ones that work, and produce an overall portfoliowith very attractive rates of return. The difference betweenthis and private venture capital is that the benefits accrueto the Bank’s client countries rather than the Bank itself—hence the need for concessional capital.Although the IEG report demonstrates a record of considerablesuccess in many WBG projects in the energyefficiency and off-grid photovoltaics (renewable energy),the WBG’s record in renewable energy more generally hasbeen more mixed and modest. Many hydropower and windprojects have underperformed relative to expectations. Stillgreater caution about the value of WBG programs shouldbe attached to the Group’s extensive efforts in pilotinginternational carbon markets between Annex I andxxvi |Climate Change and the World Bank Group

non-Annex I countries. The World Bank’s Carbon FinanceUnit (CFU) has led, through its extensive activities in CleanDevelopment Mechanism markets, to expanding the roleof, and the infrastructure for, carbon trading between developedand developing nations. However, there has beencriticism of the environmental quality of many projects thatthe WBG has supported, including industrial gases, hydropower,and fossil (gas and coal) power plants, which maywell have been either profitable in themselves or were pursuedprimarily for the purpose of national energy diversificationand security policies. In addition, although the CFUwas promoted as a market maker that could act as a carbonoffset buyer until the private market flourished, the WBGcontinued to build up its trading after that private marketwas fully established. Finally, as a vehicle for catalytic financeand technology transfer, the IEG finds the CFU’s recordis at best mixed. The Panel suggests that the WBG hasa public responsibility to ensure that its behavior advancesprograms have been valuable in exposing that inadequatelending for energy efficiency often reflects wider credit marketfailures, including onerous requirements for collateral.However, it is important to note that, contrary to expectations,although market transformation programs were oftenconceived as temporary, WBG experience indicates thatthese actions proved difficult to discontinue even as banksor firms gained familiarity with energy efficiency lending.The Panel finds that the WBG could focus even more extensivelyon these less usual categories of transition financing,but needs to pay careful attention to the incentives that willhelp convert such demonstrations of market potential intocommercial local finance as rapidly as possible.The Panel also applauds the report’s attention to the importanceof technology development or promotion andits transfer or diffusion. Technological innovation requiresspecial conditions to be successful. The report argues thatinnovations are more apt for WBG support when thePhoto by Dana Smillie, courtesy of the World Bank Photo Library.the quality of international institutions that regulate carbonfinance markets, rather than acting principally as a puremarket player profiting from expanding market scale.Both the report and the Panel underline the importanceof market transforming measures. The Panel confirms theview in the report that loan guarantees, innovative forms ofinsurance for joint ventures and other types of commercialorganizations that encourage the international transfer oftechnologies, can be valuable. Likewise, investment in newservice providers such as energy service companies (ESCOs)or transmission and distribution loss reduction programsare especially valuable in climate-related activities. WBGBank can help defray risks that are peculiar to a certainenvironment or when the supported innovations are particularlyadapted to conditions, inputs, or skills found indeveloping countries. The barriers to technology diffusionare very often related to institutional factors such asthe character of competition and industrial structure. Dependingon market structure, competitors may resist thediffusion of technology and the WBG must have a realisticstrategy and realistic goals that take this into account. Thereport argues that in numerous cases international supportwas essential to mitigate up-front risk and to pay for globalbenefits of knowledge created.Statement of the External High-Level Review Panel| xxvii

Yet WBG experience shows that the returns from investmentin technology development may often be lost withoutassociated programs to encourage and facilitate widetechnological diffusion. Some projects have incorrectly assumedthat private beneficiaries of technology would shareproprietary technology with competitors. As discussed inthe IEG report, other lessons on fomenting technology innovationand diffusion can be garnered from projects thatfail because of multiple, conflicting objectives, inexperiencedentrepreneurs, unfamiliar technology, an uninterestedtarget market, and the difficulty of procurement whentechnology suppliers are few and costs are poorly known.The Panel suggests that the WBG devote particular attentionto the analysis and selection criteria for programs tocompensate private actors for technology and diffusionrisks in its future climate finance portfolio. Analytical clarityby the Bank may also help dispel confusion about theseissues, often found in the multilateral climate negotiations.We believe that the role of capacity building, though mentionedin the report, could be given even more emphasisas an integrated part of WBG programs and as a separatestandalone activity.The WBG needs to demonstrate a comprehensive lowcarbondevelopment pathway for developing countries.In promoting low-carbon development, it should applya strategic approach, rather than simply supporting projectsbased on sector-specific priorities. The IEG correctlyhighlights how difficult this is, in the absence of a globaldeal that requires governments to account for the externalcosts of climate risk. Naturally, one can focus on combatingperverse subsidies and on pursuing currently availablewin-win options, but these will not be enough. The climatedevelopmentdilemma is that many green options are noteconomically profitable, especially in the short term, orthey threaten governments with substantial transitional orpolitical costs.However, the report also suggests that a portfolio of lowercarbon actions across many sectors—including energy, industry,transport and forestry—can mitigate overall developmentcosts and bring ancillary benefits from improvedlocal environmental services and energy security. And overthe long term, technical progress will reduce the costs ofcurrently noncommercial technologies, yielding systematicproductivity gains. Prospective economic gains from innovationimply that it is most important to avoid land usepatterns and technology investments that have almost irreversiblelock in. Cases illustrated in the report include optionsto use energy efficiency savings to increase electricitysupply and forestall the need for more current investmentin power plants with 50 years useful life, and to avoid urbanarchitectures (buildings, roads, and so forth) that “require”(or at least promote strongly) heating, cooling, or passengercar transport. As many nations currently lack the capacityto implement more systemic and forward-looking developmentplanning, there can be a particularly high return toWBG support in building and institutionalizing intellectualand political capacity in climate science, climate economics,and technology strategy.Specific FindingsIn addition to the main points raised above, the Panel agreeswith many of the recommendations of the IEG report. Wecannot comment on all sectors or recommendations, butwe would particularly like to emphasize a number of specificadditional issues.Energy efficiencyAlthough the emphasis on large-scale energy efficiencyscale-up goes in the right direction, further study is neededon the relative importance of efficient lighting and reducingpower losses in transmission, for WBG intervention.Incandescent bulbs and power loss are problems for bothdeveloped and developing countries. The potential scopefor WBG intervention in developing countries, particularlyin household and building sectors or other areas where opportunitiesfor decentralized actions are needed but substantial,needs to be systematically analyzed. In addition,many ESCOs are already playing a role in implementingprofitable efficiency opportunities, such as phasing out incandescentbulbs. The WBG needs to explore how better tocomplement and leverage the role of ESCOs by providingthem concessional funds. Likewise, the potential for WBGintervention to reduce power loss in developing countriesneeds to be measured, and the carbon saved per dollar byreducing power loss needs to be compared with that of otherprojects. Large-scale gains are also available in the industryand transport sectors. These gains are often more simple toorganize because the scale of savings offers reduced transactioncosts, and so they may deserve top priority in manydeveloping countries.Finally, the Panel emphasizes its particular appreciationthat the IEG report consistently highlights and analyzesthe separate roles of renewable and energy efficiency. Weagree both with the importance of the scale-up of energyefficiency programs and with the practice of measuring andevaluating results by energy saved and generating capacityavoided rather than by funds dispersed, which can easilylead to inefficient effort.Transportation and urban designAnother major field covered is urban architecture. The focuswhen it comes to urban issues is rightly and well placedon transit, although rising demands for local indoor climatization(cooling and heating as well as other demands forurban energy) could perhaps have been given some morexxviii |Climate Change and the World Bank Group

attention. In a couple of decades, countries that spent largesums on urban infrastructure—such as big roads, sparselypopulated cities, and homes with high heating or cooling requirements—willfeel that they wasted resources—just likethose who spent their money on copper telephone lines. TheWBG should help tilt the building of long-run infrastructurein a carbon-lean direction: shipping rather than airfreight, rail rather than road, virtual communication ratherthan physical, and so forth. Thus, urban planning, buildingdesign, modern and climate-adapted systems for transport,forestry, energy portfolio, and infrastructure could be thecritical structural factors in pursuing low- carbon developmentpathways by developing countries. The WBG shouldaim to incorporate a low-carbon paradigm shift in thosestructural areas.Though reliable data are not readily available, economicloss caused by traffic congestion in most developing countrieswould range from three percent to six percent of GDP,particularly in urban areas. Thus, investment in mass transitcould not only save carbon but could also reduce economiclosses in developing countries. The WBG should aim to incorporatea low-carbon paradigm shift in these structuralareas.In almost all developing countries, the transport sector, inparticular mass urban transit, chronically suffers from underinvestment.The historical trend of developed countriesclearly shows that it is the transport sector that will be themost difficult in which to curb the soaring increase of carbonemissions. The bulk of future emissions from developingcountries will come from the transport sector. Thismust be forestalled by massive investment in infrastructure,rapidly and through a paradigm shift toward comfortableand accessible low-carbon mass transit, which willbe a critical component of low-carbon development. TheWBG, in particular the International Finance Corporation,should engage in mapping out an ambitious strategy ofpromoting low-carbon mass transport systems in developingcountries. This is consistent with the large-scale energyefficiency scale-up recommendation. As with other energysectors, it is crucial to complement these investments witha sound price and tariff policy. In this case we recommendtax reform, shifting more of the burden of taxation awayfrom goods used by the poor and onto environmentallyunsustainable goods such as fossil fuels. Without high fuelprices, grand schemes for urban transit cannot competeand will merely fall into disrepute.Coal-fired powerWe appreciate the care that the IEG report has taken indiscussing the thorny issue of support to coal-fired powerplants. The report recommends assistance to countriesto find alternatives to coal power and raises fairly formidablebarriers to coal projects by requiring adherence toguidelines that include optimal use of energy efficiencyopportunities as well as restricting coal projects to caseswhere there is a compelling argument for poverty or emissionsreductions impacts that would not be achieved withoutWBG support.However, the report stops short of fully banning engagementin the sector for fear that the Bank would lose influence overand contact with the sector where such investments will goahead without even the advantage of the WBG guidelines.The report gives an example of a country that urgently needsbase load power and where a new efficient coal-fired plant replacesa number of older and highly inefficient plants— alsowithin a context of overall system optimization. Althoughit appreciates the latter argument, this panel would want toemphasize the signaling value that the WBG has both whenit chooses to finance and when it chooses not to. It is hardto envisage situations where the arguments in favor of WBGsupport to coal power outweigh the arguments against. Thisapplies particularly if sufficient concessional carbon fundingcan be leveraged. The argument against a complete ban may,however, have some validity.It is necessary to make sure that coal is used in a most prudentmanner, but it is better to focus on improving the energyportfolio as a whole rather than focusing only on coalat the project level. The WBG should be able to advise andoffer a strategy of diversifying and scaling up renewable energysources in order to shift toward a low-carbon energyportfolio.Forestry, land, and other resource useIn addition to access to carbon finance in energy-related investment,one of the potential advantages of the WBG is itssuperior overview of such issues as global externalities andthe related politics of negotiations. In the shorter run, therapid depletion of forests and other land-based carbon storagesystems (for example, peat lands and agricultural soils)represents a stock of assets that can rapidly be exhausted. Immediateopportunities to prevent the continuation of longstandingresource exploitation practices in these sectors areabundant. Substituting degraded lands, themselves the consequencesof inefficient resource use, for the further loss ofprimary stocks can allow national development of timber,pulp and paper, oil palm, agroforestry, agropastoral, andfishery economies that are currently promoted in an unsustainablemanner by exploitation of natural areas. Food securityconcerns in many developing countries are equally opento better management through productivity increases usingintensive techniques instead of simply extending traditionalproduction by plowing under more forests or throwingout more nets. Because these newer techniques are usuallymore capital and knowledge intensive than what has beendone under business as usual, the WBG is in a particularlystrong position to support national agricultural and forestryStatement of the External High-Level Review Panel| xxix

services with increased loan capital and concessional fundsto cover the added costs of transition to new practices.Because forestry, agriculture, and fishing are often criticalareas for many poorer developing countries in pursuinglow-carbon development, the WBG should not only “explore”these mitigation opportunities, but should be ableto prioritize immediate support. This support may demandthe use of public funding to supplement the privately availableincome flows that firms, families, or communities canreap from less-sustainable resource uses and the deliveryof these public funds through innovative measures likeeasements or contracts for ecosystem services. Moreover,as the WBG expands its activities in these sectors, it needsto carefully synchronize its approaches with the ReducedEmission from Deforestation and Degradation negotiationsand other elements of the United Nations process inorder to complement and encourage political progress inthis priority negotiation field.RecommendationsThe panel agrees with most of the excellent IEG report. Ourown statement is short enough to not require any summary.We close by reiterating only four key points that have beenemphasized both in the IEG report and our statement:• Climate damage is a serious threat to development,especially for the poor.• It is essential that the WBG as a development institutionlead in building capacity, understanding, and practicalstandards to support governments’ implemention oflow-carbon growth strategies.• The WBG can and should expand its structural lendingand grant programs for energy efficiency, renewable energy,and market transformation programs that createcorrect incentives consistent with these strategies.• Finally, the WBG is well placed to take on a missionto encourage and leverage financing for low carbongrowth. To do so, it must continue to reform its organizationalgoals, operational practices, internal incentives,and performance management criteria to valueand reward results at the systemic, rather than at theproject level.Han Seung-sooChairman, Global Green Growth InstituteFormer Prime Minister, Republic of KoreaThomas C. HellerExecutive Director, Climate Policy InitiativeLewis Talbot and Nadine Hearn Shelton Professor of International Legal Studies, Emeritus, Stanford UniversityThomas SternerProfessor of Environmental Economics, Gothenburg UniversityPast President, European Association of Environmental Economistsxxx | Climate Change and the World Bank Group

GlossaryAdditionalityBankabilityBase loadBus rapid transit (BRT)Bus rapid transit system (BRTS)Carbon dioxide equivalent(CO 2e)Carbon finance unit (CFU)Carbon fundCarbon offset (or credit)Carbon returnCertified emission reductionClean DevelopmentMechanism (CDM)Combined heat and power (orcogeneration)Combined-cycle turbineTo generate carbon offsets recognized under the Clean DevelopmentMechanism or Joint Implementation, projects must show that their emissionreductions would be in addition to those that would occur in theabsence of carbon finance.The ability of a project to attract sufficient financing to be viable. A projectmight not be bankable if its profits are not high enough in early yearsto cover the needed debt payments.The amount of power required to supply minimum customer demands(as power demand fluctuates throughout the day, or seasonally).An efficient urban transit form using priority or dedicated bus lanes.An integrated system of multiple bus rapid transit lines.Number of tons of carbon dioxide considered to have the same impact onglobal warming as a ton of a specified gas. For instance, one ton of methaneis considered equivalent in warming to 25 tons of CO 2.The World Bank unit that manages carbon funds and purchases carbonoffsets.A trust fund established to purchase carbon offsets.A commodity representing a reduction in greenhouse gas emissions (includinggases other than carbon dioxide), used by purchasers to meetregulatory or voluntary limits on emissions. Certified emission reductionsare one type of carbon offset.The effectiveness of a project in reducing carbon dioxide emissions (asopposed to the economic return, or other environmental benefits). Measuredin lifetime kilograms of CO 2e emissions reduced per dollar of investmentcost.A carbon credit (measured in tons CO 2e) for an emissions reduction associatedwith a Clean Development Mechanism project.A mechanism under the Kyoto Protocol by which developed countriescan finance greenhouse gas emission reductions or removal projects indeveloping countries. In turn, the developed countries receive credits fordoing this, which they may apply toward meeting mandatory limits ontheir own emissions.The production of both electricity and economically valuable heat (forindustrial processes or space heating), for example, from a steam boiler.A relatively efficient technology for power generation from combustion,usually of natural gas.Glossary | xxxi

Compact Fluorescent Lamp(CFL)Concentrated solar powerConcessional fundsDemand-side management(DSM)Debt service coverage ratioDevelopment Policy Loan(DPL)District heatingEconomic Rate of Return (ERR)End user energy efficiency(or demand-side energyefficiency)Energy services company(ESCO)Financial intermediariesGlobal Environment Facility(GEF)Greenhouse gas (GHG)HFC-23Hydropower with storageIncandescent LampIncremental costAn efficient light bulb that uses only 20%–30% as much power as a standardincandescent bulb.A solar power technology that uses focused sunlight to drive a steam turbineor heat engine in order to produce electricity.Donor-provided grants and subsidized loans.Actions or incentives, often directed by energy utilities to their customers,to reduce the level of energy demands (typically through efficiencymeasures) or change the timing of those demands. Can also apply to measuresto reduce demand for transport, such as road or parking pricing.The ratio of net operating income to debt repayment obligations (interestand principal).A World Bank lending instrument used to support structural reforms inan economic sector or in an economy as a whole.Centralized system for the provision of steam heat to an urban neighborhoodor district.The annual percentage rate of return on a project, considering all costsand benefits to society. In this evaluation, ERRs are computed using onlydomestic costs and benefits; carbon benefits are reckoned separately.Energy efficiency improvements carried out by power consumers, such asthrough appliances or industrial equipment that consumes less energy.A company that provides clients with some combination of assessment,financing and implementation of options for increased efficiency of useand reduced expenditure on energy.Financial institutions such as banks that borrow money and then lend iton to other institutions.An independent, international financial organization that provides grants todeveloping and countries with economies in transition for projects that supportenvironmental objectives, including those related to climate change.Gases whose atmospheric buildup contributes to global warming and climatechange. Greenhouse gases regulated under the Kyoto Protocol areCO 2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, andsulphur hexafluoride.A potent greenhouse gas (with a global warming impact 11,700 timesthat of CO 2) generated as a byproduct of the manufacture of the refrigerantHCFC-22.Hydropower plants that have substantial reservoirs (as opposed to runof-riverhydropower).The “standard” lightbulb technology, in use since the 19th century.The additional cost of substituting a low-carbon for a high-carboninvestment.xxxii |Climate Change and the World Bank Group

Joint ImplementationA mechanism under the Kyoto Protocol through which a developed countrycan receive “emissions reduction units” when it helps finance projectsthat reduce net greenhouse gas emissions in another developed country.Low-carbon Term applied to activities that provide outputs while producing less CO 2(or other greenhouse gases) than alternative “standard” methods.MitigationNo regrets/win-win actionsNontechnical lossesOff-gridOn-gridParts per million (ppm)Payment for EnvironmentalServices (PES)Peak load (or peak demand)Protected areaRenewable energyReturn on equityRun-of-river hydropowerSilvopastoral systemsSolar home systems (SHS)Strategic Framework onDevelopment and ClimateChange (SFDCC)Supercritical coalAbatement of greenhouse gas (or other pollutant) emissions.An action that provides net benefits both to the nation that adopts it andto the world at large. Individuals or groups may suffer losses under winwinpolicies, though in principle they could be compensated from thebenefits. Also, actions that would be valuable even without consideringclimate change mitigation benefits.In a power system, power that is consumed but is not billed to customers,because of power theft, meter failure or utility employee collusion. Alsocalled commercial losses.Power generation not connected to the main power grid, such as solarhome systems, mini-grids, or small portable diesel generators.Power generation connected to the main power transmission grid.A measure of concentrations of greenhouse gases in the atmosphere.A mechanism for rewarding landholders for providing environmentalservices (for example, watershed protection or carbon storage), such asby growing or conserving forests.The amount of power needed to supply consumers when demand is atits greatest. Peak demand typically occurs in early evening hours, whenelectric lights and household appliances are turned on.A clearly defined geographical area, recognized, dedicated, and managed—throughlegal or other effective means—to achieve long-term conservationwith associated ecosystem services and cultural values.Energy produced sustainably without net carbon emissions and withoutconsumption of fossil or nuclear fuels. Includes hydropower, wind power,solar power, geothermal power and biomass power.The rate of return realized by shareholders in a project.Hydropower plants without significant storage capacity. These usuallystill have a small dam but do not create a large reservoir.The practice of combining agroforestry and pastoral animal grazing.A small solar photovoltaic powered system (with battery storage) for useby off-grid households.A strategic framework adopted by the World Bank in 2008.A technology that burns coal at high temperature and pressure (as opposedto subcritical coal.)Glossary | xxxiii

Supply-side energy efficiencyTechnical lossesTechnology transferTenorTraditional financingEnergy efficiency improvements carried out by energy suppliers, such asreducing the amount of fuel needed to be consumed to generate a givenamount of power from a power plant.The difference between electric power that is generated and power that isconsumed. As power passes through transmission/distribution lines andtransformers, some energy is converted to heat and lost.Transfer of technical hardware or know-how, or financial and institutionalinnovations, between countries.The total length of time for a loan to be repaid, including grace periods.The principal financial instruments used by the World Bank Group (IDAcredits and grants, IBRD loans, IFC loans and equity financing, MIGAguarantees), as opposed to new financing sources with environmentalaims such as carbon finance and GEF grants.xxxiv |Climate Change and the World Bank Group

Chapter 1evALuAtiOn HiGHLiGHts• The World Bank Group’s Strategic Frameworkon Development and Climate Change promotesnational sustainable development andglobal action.• Prior to the Strategic Framework, the WorldBank Group had limited objectives specificallyrelated to climate change, but many of itsactivities have potential mitigation benefits.• The evaluation draws lessons from that experience,seeking ways for the World Bank Groupto maximize its impact on development andclimate change mitigation.• Within the areas of energy, forestry, andtransport, this evaluation looks at specificsubsectors that illustrate the challengesto overcoming barriers to the adoption oflow-carbon technologies and practices.Photo by Kenneth M. Chomitz. Used with permission.

IntroductionIn 2008, the World Bank Group (WBG) adopted a Strategic Framework on Developmentand Climate Change (SFDCC). This framework addresses the challenges of promotingdevelopment in a changing climate. The Independent Evaluation Group’s (IEG) climateevaluation series does not directly assess the performance of this new framework.Rather, it recognizes that the WBG has for some years been deeply involved in renewableenergy, energy efficiency, forest conservation, and other activities at the cusp ofdevelopment and climate change. An early assessment of that experience can helpinform the implementation of the SFDCC.The first volume of IEG’s series (IEG 2009) examinedWorld Bank experience with the promotion of the mostimportant win-win (no regrets) energy policies—policiesthat combine domestic gains with global greenhouse gas(GHG) reductions. These included energy pricing reformand policies to promote energy efficiency (see appendix K,Executive Summary of Phase I).This second phase covers the entire WBG, including theInternational Finance Corporation (IFC) and the MultilateralInvestment Guarantee Agency (MIGA). It assessesHow can the WBG increase its impacton development and climate changemitigation?recent experience with promoting the adoption and diffusionof technologies and practices that reduce GHGemissions while advancing other development goals. Itencompasses a diverse range of activities, including renewableenergy, energy efficiency, urban transport, andforest management. And it encompasses a broad repertoryBox 1.1The Strategic Framework on Development and Climate ChangeObjectives• To enable the WBG to effectively support sustainable development and poverty reduction at the national,regional, and local levels, as additional climate risks and climate-related economic opportunities arise.• To use the WBG’s potential to facilitate global action and interactions by all countries.Action Areas• Support climate action in country-led development processes.• Mobilize additional concessional and innovative finance.• Facilitate the development of market-based financing mechanisms.• Leverage private sector resources.• Support accelerated development and deployment of new technologies.• Step up policy research, knowledge, and capacity building.Source: World Bank 2008.2 | Climate Change and the World Bank Group

of interventions, from technical assistance to financing toregulatory reform. This project-eye view of activities pertainsto all the action areas of the SFDCC (see box 1.1).The third phase will look at the challenge of adaptation toclimate change.The WBG’s resources—human and financial—are smallcompared to the task at hand. The International EnergyAgency estimates that developing and transition countriesneed $16 trillion of energy sector investments over2008–30 under “business as usual” operations—plus anadditional $5 trillion to shift to an ambitiously low-carbonpath (IEA 2009). Much more is needed for sustainableland and forest management and for urban transport. So aprime focus of this evaluation is how the WBG can get themost leverage—the widest positive impact on both developmentand climate change mitigation—from its limitedresources.Climate ContextClimate change is a threat to developmentClimate change threatens development (Parry and others2007; World Bank 2010). Most of this burden falls on developingcountries. Coastal areas will be exposed to inundation,flooding, and brackish water supplies. Snowmelt-fedwatersheds will face winter floods and summer droughts.Crop yields will fall in many areas. Infrastructure, designedto cope with an increasingly unpredictable climate, willbecome more expensive.Most of the climate change burden falls ondeveloping countries.Uncertainty about the magnitude of these impactsstrengthens rather than weakens the case for urgent action.To quantify this uncertainty, researchers (Sokolov and others2009) ran a climate change model under hundreds ofdifferent assumptions about economic growth, technicalchange, and climate response. The range of outcomesrepresents, in their view, the gamble that the world takesfrom inaction. They found that, absent climate mitigation,there is a 24 percent chance that average global temperatureswill rise this century by more than 6 degrees Celsius(13 degrees Fahrenheit). 1 A change of this magnitude,during the lifetime of many alive today, would be broadlycatastrophic.Managing climate risk requires urgent, globallycooperative actionTo mitigate these risks, the United Nations Framework Conventionon Climate Change (UNFCCC), to which virtuallyall countries subscribe, sets a goal of stabilizing the quantityof heat-trapping GHG in the atmosphere. Although preciselimits have not been agreed on, the 2009 CopenhagenAccord called for limiting the global increase in temperature(relative to preindustrial times) to 2 degrees Celsius, oftenequated with an atmospheric GHG concentration limit of450 CO 2-equivalent (CO 2e) parts per million. 2It will be difficult or impossible to achieve this goal withoutimmediate mitigation actions in all major emitting nations,according to 14 climate modeling exercises undertaken by10 independent research groups (Clarke and others 2009).(Mitigation refers to where action takes place rather than whofunds it.) Although developed countries have contributedmost of the atmospheric stock of GHGs and emit far moreper capita, developing countries account for about half thecurrent flow (see figure 1.1), and these emissions are growingrapidly. Even for less-ambitious stabilization targets,participation of middle-income countries is key to keepingFigure 1.1GHG emissions (including CO 2 ,CH 4 , N 2 O, PFCs, HFCs, SF 6 ), MtCO 2 e14,00012,00010,0008,0006,0004,0002,0000GHG Emissions by Sector andcountry Group, 2005PowerIndustrial energyand emissionsTransportationSectorNon-Annex ILand-use changeand forestryAgriculture andwasteAnnex ISource: WRI CAIT (version 7.0).Note: Annex I countries are the industrialized countries assignedemissions limits under the Kyoto Protocol. GHG = greenhouse gas.Introduction | 3

Figure 1.2Agriculture14%Industry8%Low-Cost GHG Abatement Potential,Non-OECD Countries, 2030Forestry11%Waste5%Energy supply11%Buildings38%Transport13%Source: Metz and others 2007.Note: Cost< $20/ton of CO 2. Estimated economic potentials for GHGmitigation at a sectoral level in 2030 for different cost categoriesusing the SRES B2 and International Energy Agency World EnergyOutlook (2004) baselines. Total abatement potential is 9.2 Gt CO 2e.GHG = greenhouse gas; OECD = Organisation for EconomicCo-Operation and Development.global mitigation costs affordable. (There is, however, noagreement yet on how those costs might be apportioned.)The long-run goal of stabilizing the levelof atmospheric GHGs cannot be achievedwithout mitigating actions in all majoremitting nations.The need for action is urgent. If installed today, inefficientcoal-fired power plants, poorly insulated buildings, andpoorly targeted energy subsidies will be needlessly pumpingGHGs into the atmosphere through mid-century. ThoseGHGs will linger in the atmosphere for many decades longer,intensifying warming and increasing the chance that theclimate will pass a critical threshold—leading to acceleratedwarming, dieback of the Amazon forest, or other climaticdisruptions.There are many routes to mitigationHow might mitigation take place? GHG emissions arise inmany ways, in many sectors. To motivate the sectors coveredin this evaluation, consider first the current patternsof emissions.In the developing world, 83 percent of emissions come, inroughly equal proportions, from power generation; industrialprocesses (including steel manufacture, cement production,oil refining); deforestation; and agriculture (largely methanefrom rice paddies and livestock). Transportation accountsfor another 7 percent. However, energy and transport emissionsare expected to grow rapidly as economies expand.Emphasis on energy efficiency now buys timefor renewable energy costs to fall and for developmentof advanced energy technologies.Costs and benefits of mitigation differ by sector and are thesubject of intense investigation. The consensus estimate ofthe Intergovernmental Panel on Climate Change is summarizedin figure 1.2, which shows low-cost abatementopportunities. Like many other analyses, this one pointsto increased energy efficiency (in buildings and industry)as the largest and most economically attractive option formitigation over the next few decades.An emphasis on energy efficiency in the next few decadesbuys time for solar and wind power to become more costcompetitive with fossil fuels and to develop and deploy advancedlow-carbon energy technologies (such as carboncapture and storage and nuclear fusion) in the second halfof the century. Energy efficiency helps preclude constructionof coal power plants that might otherwise stay in servicefor 40 years or more.Because mitigation is a global public good, it makes economicsense to compensate countries, firms, farms, andother actors for their contribution to mitigation. The questto use global demand for climate stability as a means offinancing climate-friendly development has shaped bothUnited Nations and WBG approaches to climate change.Global Mitigation Context and the WBGThe WBG’s approach to climate change has coevolvedwith the international climate regime. One line of coevolutionwas with the Global Environment Facility (GEF),which was established in 1991 as a pilot program withinthe Bank. The GEF mobilized donor funds to addressclimate change, biodiversity loss, and other global environmentalproblems. Recognizing that climate and biodiversityare global public goods, the GEF’s approach wasto pay countries for the incremental costs of supplyingthese goods.The GEF rapidly realized that its funds were too limited toplug the funding gap (project by project) and shifted to activitiesaimed at catalyzing replicable win-win actions. TheGEF became an independent agency in 1994, but the Bankremained its trustee and largest implementing agency. Thishas been an important avenue for fostering attention to climatechange inside the Bank and to developing a cadre ofstaff and managers with climate expertise.The WBG’s approach to climate change hascoevolved with the international climateregime and carbon market development.Another line of coevolution was with the carbon market.The UNFCCC, which became effective in 1994, didnot specify how its mitigation goals would be accomplished.Attention turned to an economic approach that4 | Climate Change and the World Bank Group

would allow industrialized countries to seek cost-effectiveopportunities for GHG reduction in developed or transitioncountries. This was in line with the UNFCCC’s principleof “common but differentiated responsibilities andrespective capacities.” It would take advantage of low-costoptions to retrofit aging infrastructure in transition countriesand to install cleaner greenfield equipment in rapidlygrowing developing countries.This approach was piloted in the Activities ImplementedJointly Program, in which the World Bank participated.It evolved into the Kyoto Protocol, which was adopted in1997 (but did not enter into force until 2005).The Kyoto Protocol assigned GHG emissions allowancesto industrialized countries. To exceed its emissions limit,a country was obliged either to purchase allowances fromanother industrialized country or to purchase a carbonoffset from a developing or transition country (see box5.2). The World Bank’s Prototype Carbon Fund (PCF;whose staff had been involved in GEF and the ActivitiesImplemented Jointly Program), put in place after Kyotoand launched in 1999, was intended to pilot the concept ofcarbon offsets and help catalyze this avenue for investmentin GHG mitigation.The 2001 WBG Environment Strategyincluded win-win approaches andmobilization of concessional funds.The dual-track approach—win-win opportunities complementedby mobilization of concessional funds—was includedin the 2001 WBG Environment Strategy and hasbeen pursued since. An independent review (Nakhooda2008) assessed 54 Country Assistance Strategies issuedover 2004–07 and found that 32 discussed GHG mitigationin a sectoral context. At the 2004 Bonn InternationalConference on Renewable Energies, the WBG committedto expand its lending for renewable energy (excluding largehydropower) and energy efficiency by 20 percent per yearover 2005–09 from a baseline of $209 million. The Banksurpassed its commitment by a large margin (see chapter2). In 2007, the Bank endorsed an Investment Frameworkfor Clean Energy and Development. The frameworkhad a broader scope than its name suggests, emphasizingelectricity access and including climate adaptation as wellas mitigation. The mitigation component focused on mobilizationof concessional funds for investments in cleantechnologies and promotion of carbon trading.Meanwhile, the UNFCCC process began to focus on the eraafter 2012, when the Kyoto provisions expire. The 2007 BaliAction Plan emphasized mitigation, adaptation, and financialand technological support for developing countries.It opened the negotiations to include reducing emissionsfrom deforestation and forest degradation (REDD), a majorsource of emissions not addressed in the Kyoto Protocol.And it called for setting a long-term global goal for emissionsreductions. The Bali Action Plan was widely expectedto culminate in a new international agreement at the 2009Copenhagen climate meetings.Development and Climate Change: A Strategic Frameworkfor the World Bank Group was adopted in 2008. Althoughthe SFDCC recognizes the primacy of the UNFCCC in theclimate area, its goals are to support sustainable development,including “climate-related economic opportunities,”and to “facilitate global action.”The SFDCC emphasizes six action areas (box 1.1), alignedwith the Bali Action Plan. Four of these areas are concernedwith mobilizing finance, from traditional and novel sources,and with supporting technology investments. The frameworkcommits the WBG to increase the share of energylending devoted to low-carbon projects (including largehydro) from 40 percent in 2009 to 50 percent in 2011, byincreasing financing of energy efficiency and new renewableenergy by 30 percent per year. It coincides with the mobilizationof the $6.2 billion Climate Investment Funds, a newsource of financing for pilot projects aimed at initiatingtransformational changes. The core of the Climate InvestmentFunds is the $5.1 billion Clean Technology Fund, providingfinancing for demonstration, large-scale deployment,and transfer of low-carbon technologies. These funds wereseen as transitional devices, pending mobilization of muchlarger-scale financing as part of a new climate agreement.The 2008 strategic framework emphasizessix action areas, four of which concernfinance and investment.However, the 2009 meeting in Copenhagen did not resultin a comprehensive, binding climate agreement. This leavesthe WBG to operate in a partial vacuum.If there were an agreed, funded operationalization of theUNFCCC goal of GHG stabilization that spelled out roles,responsibilities, and funding sources, the WBG and itsclients would be better able to make development choicesconsistent with a low-carbon growth path. Absent suchan agreement, each development choice is fraught withambiguity, as in the controversy over coal-fired power generation(see chapter 4). And it is not clear when, if ever,anticipated multibillion dollar per year climate financingsources may come into being.Evaluation QuestionsBefore the SFDCC, the WBG had limited objectives explicitlyrelated to climate change. Where such objectives exist,IEG can assess performance against them. Activities withIntroduction | 5

elevant goals include GEF projects with goals to reduceGHGs, the Bonn Commitment to scale up renewableenergy and energy efficiency, and the carbon funds.But because development and climate change are so closelylinked, many development activities look like mitigationprojects, even if they were not so labeled. These offera wealth of lessons for a more climate-conscious future.In particular, they may hold lessons for the implementationand follow-up of the SFDCC and for the use of hoped-foradditional climate financing.The WBG has had limited objectives specificallyrelated to climate change, but manyof its activities look like mitigation projects.The SFDCC addresses national goals of sustainable developmentand global goals of climate mitigation. It putsparticular emphasis on the pursuit of no-regrets (win-win)actions that promote both goals and on the use of concessionalfunds (additional to development finance) thatpromote GHG reduction in a development context. TheSFDCC is an evolving, adaptive framework that stresseslearning. To increase its effectiveness, it is important tounderstand how development options compare alongdifferent dimensions of impact. To what extent are thereuntapped no-regrets options? If concessional finance islimited, which are the most attractive “climate-related economicopportunities”?The principal evaluation questions can be organized underthree themes. First, to what extent do GHG mitigation goalsoverlap with other development goals?Second, how and in what areas does the WBG have the largestimpact in promoting low-carbon development?• What instruments, in what contexts, have been mosteffective in promoting the development, adoption, anddiffusion of clean(er) technologies (looking across energy,transport, forestry, and carbon finance)?• What, in turn, is the impact of technology adoption onGHG emission and development outcomes?• What internal and external factors affect project outcomesand project mix?• To what extent and with what impact has the Bank’sCarbon Finance Unit (CFU) catalyzed the developmentof the carbon market and its institutions?A third emerging theme is the role of learning, feedback, andincentives:• To what extent, and with what rapidity, is the WBG ableto monitor the outcomes of its climate-related activities?• To what extent is feedback used to improve the design,mix, and targeting of interventions?Though it addresses related issues, thisevaluation does not assess the WBG’soverall impact on GHG emissions.Because of its focus on mitigation activities, the evaluationdoes not address the WBG’s overall impact on GHGemissions. It does, however, examine in detail the impactof WBG support for coal-fired power plants, which is emblematicof the wider issue.Evaluation FrameworkBarriers block adoption of low-carbon pathsWhy don’t people choose lower-carbon paths: wind powerinstead of gas, agroforestry instead of pasture, fluorescentlight bulbs instead of incandescents? Standard explanationscite barriers such as:• Cost-competitiveness: The low-carbon alternative isworthwhile from a social viewpoint that takes climateand other benefits into account, but it is not competitivewith high-carbon alternatives from the household,firm, or country viewpoint.• Credit bottlenecks: Renewable energy and energy efficiencyhave a big up-front capital component, so lendersand investors need confidence that they will be repaid.• Lack of information or attention: People don’t perceivethe opportunities, don’t know what to do about them,or overestimate the risks of action.• Unfavorable policies: Laws or regulations (for instance,fossil fuel subsidies) favor the higher-carbonalternative.The WBG seeks to overcome barriersthrough analytic and lending support forpolicy reform, technology transfer, andproject finance and implementation.Interventions can overcome barriers to technologyadoption• The WBG can deploy interventions that address thesebarriers at the site or sectoral level, unlocking carbonand economic benefits.• These interventions include analytic or lending supportfor policy reform; transfer, adaptation, and disseminationof technical and financial innovations (technologytransfer); and project finance and implementation.Adopted technologies yield economic, social, andcarbon returnsLow-carbon investments can promote development alongmany dimensions, in addition to mitigating GHGs. Ideally,one would want to assess each intervention’s impact on6 | Climate Change and the World Bank Group

growth, poverty reduction (including access to energy andtransport), gender equity, and GHG emissions. Unfortunately,monitoring and evaluation data rarely exist for mostof these dimensions. This evaluation tries where possible tocharacterize an investment’s economic rate of return (ERR)as a summary measure of development impact. In addition,it tries to quantify as cobenefits the investments’ carbonrate of return: the net reduction in carbon dioxide (CO 2)emissions per dollar of investment.Evaluation findings are illustrated in figure 6.1. (Estimatesare based mostly on appraisal and should be taken withcaution.) In this figure, any project with emissions savingsand a high ERR (say, higher than 15 percent) is likely tobe a clear no-regrets investment. Projects with somewhatlower ERRs may still be no-regrets from a local viewpoint,because they confer large but hard-to-monetize benefitssuch as energy security. Some projects, including some forestconservation projects, may have low measured ERRsbut nonetheless contribute to local development objectivesagain in difficult-to-quantify ways. These would be strongcandidates for global financial support.Leverage and catalytic impactsThis figure points to several avenues by which the WBG canincrease its impact. Working at “retail” level, it can assembleportfolios of projects with high returns. It can also aspire tocatalytic, widespread impacts (GEF 2008). One way to dothis is through financial leverage, attracting capital fromlower to higher return activities, along both dimensions.A second way is to increase the returns to equity, for instance,by removing regulatory barriers that discourage investment.A third avenue is to boost the returns to an entireclass of activities, such as by supporting technical progressthat reduces investment costs.An important way of boosting returns (public and private)is through provision of information, especially through pilotand demonstration projects. These projects can work outtechnical and regulatory problems and hence reduce costand risk for all similar projects that follow. This evaluationpays close attention to piloting and demonstration projects.The relevant evaluation questions are: What, exactly, is beingdemonstrated? How is it being demonstrated, and towhom? How will the results of the demonstration changethe behavior of the target audience?For instance, an innovation that substantially and costeffectivelyincreased the efficiency of coal-fired powergeneration would reduce plant-level CO 2emissions. But itcould result in greater global emissions if it triggered substitutionof coal for hydropower or gas power. Improvementsin agricultural productivity could increase the incentivesfor deforestation, rather than lessening pressure on the forest.These system-level issues pervade climate mitigation.SummaryIn looking across a diverse variety of sectors, the evaluationasks—• What are the barriers to technology adoption and diffusion?• How appropriate were the WBG’s diagnosis of the barriersand prescription of interventions?• What was the impact of the interventions on technologyadoption and diffusion?• What are the economic and carbon returns to adoption?• Looking at the chain from intervention to impacts, whatis the WBG’s leverage in this area?• How well measured are these impacts?Evaluation ScopeThis evaluation faces two big challenges. First is the trade-offbetween depth and breadth. The range of relevant activitiesis dazzling, from geothermal power to community forestryto biogas digesters to school insulation. Any attempt to dealwith the idiosyncratic features of each of these endeavorsis doomed to be shallow. So this evaluation chooses to undertakedetailed analyses of specific subsectors that are importantin themselves but that also hold general lessons foromitted subsectors. This is done against a comprehensivedescription of the overall portfolio.The provision of information through pilotand demonstration projects is an importantway to boost returns to relevant WBGactivities.As a result of these catalytic interventions, prices maychange, with far-reaching effects that could vitiate leverage.© Frans Lanting/Corbis.Introduction | 7

The second challenge is the need to be current. IEG’s evaluationsoften build heavily on completion reviews of closedprojects. That is not feasible in this case. On one hand, thenumber of projects has increased dramatically over the pastdecade, technology and financial engineering are changingrapidly, and the national and international policy contextis in flux. On the other hand, IFC projects are typically notevaluated until five years after approval, and Bank projectsare not evaluated until closure, often eight years or moreafter approval. Consequently, of the renewable energy andenergy efficiency projects initiated since 1990, IEG has evaluatedonly about 100; and though more than 450 projectswere initiated between 2003 and 2008, IEG has evaluatedonly 3 of them.These considerations lead to the following definitions ofscope.Temporal scopeFor background, the evaluation relies on a detailed andcomprehensive review of the low-carbon energy and urbantransportation portfolios from 2003 to 2008 and a comprehensivebut less-detailed review of the forest portfolio for2002–08. The post-2008 increase in climate-related activitiescould not be covered in detail, but is briefly describedin appendix J. For subsectoral analyses, however (such assolar photovoltaics or hydropower), the evaluation rangesback as far as 1990 to take advantage of information fromclosed and evaluated projects. It may also report on currentactivities.This evaluation looks at attempts toovercome the barriers that inhibit adoptionand diffusion of favorable technologies andpractices.Topical scopeThe evaluation is concerned with evidence of attempts tosurmount the barriers that inhibit the adoption and diffusionof low-carbon technologies and practices. Henceit excludes most attention to the WBG’s “high-carbon”activities, such as oil exploration, road construction, andthermal power. Indeed, as pointed out in the Phase I evaluation(IEG 2009), anything the WBG does to promoteeconomic growth will tend to put upward pressure on GHGemissions.Instead, the evaluation focuses on projects that potentiallypromote development and reduce GHG emissions, regardlessof whether they had a GHG goal. Where such a goalexists, it is appropriate to evaluate the WBG’s success inachieving it. Even where there was no explicit goal, it isuseful to try to understand the determinants of success orfailure.Pragmatically, these low-carbon sectors are renewableenergy, energy efficiency, urban transit, and forest projectsrelated to afforestation or reduced deforestation. The choiceof, and emphasis on, these broad sectors (energy efficiency,renewable energy, forestry, and transport) was informedby consideration of current overall emissions levels(figure 1.1), prospects for emission reductions (figure 1.2),emphasis in the Climate Investment Funds, and the scale ofWBG commitments.An important but unavoidable omission was a detailedtreatment of agriculture. Agriculture is a large source ofemissions from developing countries. Rice paddies andcattle, in particular, emit large quantities of methane. However,understanding of agricultural abatement options andtheir impacts is far less advanced than for energy, transport,and forestry. The evaluative base is small. So although thisis a crucial area for research and piloting, this evaluationlimits discussion to an agroforestry project that illustratesthe potential for climate cobenefits from agriculturaldevelopment.The core of the evaluation is an in-depth discussion ofspecific subsectors that are important areas in their ownright but that also illustrate the challenges affecting thebroader sectors to which they belong. For instance, thechallenge of promoting low-emissions urban transportationis illustrated through a detailed examination of busrapid transit, which is the single largest line of WBG actionin urban transit and ties together the issues of modalshift, fuel shift, and land use that are central to a city’stransport footprint.Table 1.1 presents a topical map of the evaluation.The choice of subsectors was informed by considerations ofevaluability (track record and data), current overall emissionlevels (figure 1.1), potential for generalizable lessons,and scale of 2003–08 WBG commitments.Within renewable energy there are in-depth discussionsof hydropower and solar home photovoltaic systems, thelargest and most longstanding areas of on-grid and offgridinvestment, respectively. There is also a discussionof the economics of on-grid renewable power that appliesto all technologies. A significant omission is biomasstechnology, itself a very heterogeneous category. Figure1.3 compares renewable energy coverage to the 2003–08portfolio.Within energy efficiency there is extensive discussion ofinvestments via financial intermediaries and of projectsthat reduce transmission and distribution losses. Togetherthese comprise about half the 2003–08 portfolio(figure 1.4). Also discussed at length are projects involvingcompact fluorescent light bulbs (CFLs), a tiny part of theportfolio, but, it is argued, one worthy of scaling up. The8 | Climate Change and the World Bank Group

Table 1.1 Map of the EvaluationSectorSpecific technologies and practicesOn-grid renewable energySubsectorHydropowerWindLandfill gasGeothermalBiomass, biogasOff-grid renewable energySolar photovoltaicOff-grid hydropowerBiomassEnergy efficiencyEnergy efficiency via financial intermediariesDirect investment in industrial energy efficiencyEfficient lightingTransmission and distribution loss reductionIncreased efficiency in coal-fired power generationDistrict heating (discussed in Phase I)Demand side management (discussed in Phase I)Building and appliance codes (discussed in Phase I)Efficient cookstovesTransportBus rapid transitDemand managementCommuter railIntercity railAircraft and truck fuel efficiencyLand use and land use changeProtected areasPayments for environmental servicesCommunity forestryPlantation forestryAgricultural carbonTechnology transferAdvanced technologiesIntellectual property rightsCarbon financeThermal powerCarbon financeCoal powerNatural gas (discussed in Phase I)Source: IEG.Note: Areas discussed are in bold type; areas not discussed are in regular type. For Phase I, see IEG 2009.discussions of the Afsin-Elbistan coal power rehabilitationand of IFC’s direct energy efficiency investments covermost of the supply-side and much of the end-user portfoliofor this period. The remaining topics, including districtheating, were covered at length in Phase I and are brieflysynopsized in this volume.Much of the WBG’s transportation investments go tointercity and rural road construction, an emissionsincreasingactivity (though with important growth andpoverty- reducing benefits), and are not considered here.Attention focuses instead on urban transit, where there ispotential scope for shifting away from carbon-intensiveauto traffic. Here, bus rapid transit and its variants constitutehalf of the overall portfolio (see figure 1.5) and 80 percentof the operations (by number) where GHG reductionis an explicit goal.Introduction | 9

Figure 1.3WBG Investments in RenewableEnergy 2003–08: EvaluationCoverage (by $ commitments)Figure 1.5WBG Investments in UrbanTransport 2003–08: EvaluationCoverage (by $ commitments)Solar CSPOff-grid solarBiomassLandfill gasGeothermalWindOtherUrban roadsand trafficmanagementTraditionalpublictransportLargehydropowerSmallhydropowerSource: IEG.Note: Black = detailed analysis with portfolio review.; grey = partialcoverage/discussion of key issues; pattern = no explicit coverage.CSP = concentrated solar power; WBG = World Bank Group.Bus lanes/BRTsUrban rail,light and heavySource: IEG.Note: Black = detailed analysis with portfolio review; grey = noexplicit coverage. BRT = bus rapid transit; WBG = World Bank Group.Figure 1.4End userenergyefficiencyWBG Investments in Low-CarbonEnergy Efficiency 2003–08:Evaluation Coverage (by $commitments)Combined heatand power—district heatingEnergyefficiencyinvestments viafinancialintermediariesfinance to retard deforestation): establishment of protectedand indigenous areas; pilots of payment for environmentalservices projects, including BioCarbon Fund projects;and attempts to foster sustainable agriculture at the forestfrontier. Omitted are large plantation projects, which canbe carbon sequestering, and community forest projects.The latter, though concerned with impoverished populationsand important natural resources, have in general hadinadequate monitoring components and hence are difficultto evaluate.Supply-sideenergyefficiencyCFLT&D lossreductionSource: IEG.Note: Black = detailed analysis with portfolio review; grey = partialcoverage/discussion of key issues. Note that Phase I of this seriesdiscussed district heating and end user energy efficiency in detail.CFL = compact fluorescent light bulb; T&D = transmission anddistribution.The coverage of forestry is the most selective of the sectors.The focus is on three types of activities with strong implicationsfor REDD (an initiative that seeks to harness carbonThe evaluation also looks at WBG experiencein coal power, technology transfer, andcarbon finance.In addition to sectoral discussions, the evaluation addressesthree areas of intense current interest. Two are cross cutting:the experience of the WBG in technology transfer and theexperience of the WBG’s carbon funds, both as institutionalinnovations and as financial instruments. The third is anexamination of the WBG’s controversial role in supportingcoal-fired power plants. This will illuminate some ofthe general issues regarding the WBG’s role in other highcarbonsectors such as cement and steel production.10 | Climate Change and the World Bank Group

Chapter 2eValuaTION HIGHlIGHTS• WBG financing of low-carbon energy hasincreased considerably.• About two-thirds of closed renewable energyand energy efficiency projects had outcomesthat were moderately satisfactory or better.• Policy advice and piloting have been helpful incatalyzing diffusion of wind power.• Carbon finance has little impact on the bankabilityof wind power and hydropower, butsignificant impact for landfill gas projects.• Long loan tenors (time to repay) are an importantstimulus to project bankability.• Guarantees and political risk insurance mayplay an increasingly important role for renewableenergy.• Quality-contingent producer subsidies plusmicrofinance have been successful in promotingthe diffusion of solar home photovoltaicsystems.• Capacity utilization is a key determinant ofeconomic and carbon impacts.• Better monitoring of costs and impacts isneeded to guide future investments.Photo by Martin Wright/Ashden Awards for Sustainable Energy. Used with permission http://www.Ashden Awards.org.

Renewable EnergyThis evaluation devotes special attention to energy because it is by far the largestpart of the mitigation-relevant WBG portfolio, is the focus of most existing mitigationorientedprojects and funds, and will play the dominant role in long-term mitigationefforts. As an introduction to both chapters on energy, this section begins by reviewingthe outcomes of evaluated renewable energy and energy efficiency projects and thencomprehensively describes the recent pattern of low-carbon energy investments.The chapter goes on to discuss the impact of interventions to overcome barriersto on-grid renewable energy investment. It then discusses the experience withhydropower and with solar photovoltaics, the on-grid and off-grid renewable energytechnologies, respectively, with the longest evaluable record at the WBG.Low-Carbon Energy Projects and TheirPerformanceAs a backdrop it is useful to consider the International EnergyAgency’s projections of how future power needs willbe met over the coming two decades, in two scenarios:reference and ambitious mitigation (450 parts per million;table 2.1). While some energy efficiency is includedin the reference scenario, additional efficiency is the mainway to satisfy demand while reducing emissions. In bothscenarios, increases in hydropower far outpace growth inother types of renewable energy outside the Organisationfor Economic Co-operation and Development (OECD).Performance of closed World Bank projectsInvestments in low-carbon energy have increased considerablyover the past five years, so most are still ongoing andunevaluated. 1 Of World Bank renewable energy and energyefficiency projects 2 initiated between 1990 and 2007, 91 hadclosed and been evaluated by 2009. Table 2.2 shows the outcomeof these projects as rated by IEG.Two-thirds of evaluated renewable energyand energy efficiency projects since1990 had outcome ratings of moderatelysatisfactory or better.Table 2.1 International Energy Agency Projections of Power Production, 2007–30Increase in electricity generation 2007–30: baseline versus 450 ppm CO2 scenarios (terawatt hours per year)2007–30 increase under baseline 2007–30 increase under 450 ppmPower source OECD+ Rest of world OECD+ Rest of worldHydro 164 1,437 384 2,196Wind 918 443 1,425 1,180Solar 215 182 376 554Other renewable energy 330 414 536 957Fossil and nuclear power 790 9,644 –1,175 3,751Total electricity generation 2,417 12,120 1,546 8,638Incremental energy efficiency 871 3,482Source: OECD/IEA 2009.Note: Energy efficiency includes price-induced demand reduction. OECD+ = Organisation for EconomicCo-operation and Development + non-OECD European Union members; ppm = parts per million.12 | Climate Change and the World Bank Group

Table 2.2Evaluated World Bank Renewable Energy and Energy Efficiency Projects by Rating, ProjectsInitiated 1990–2007Rating Energy efficiency New renewable energy Large hydro (>10 MW)Highly satisfactory 2 1 2Satisfactory 21 14 3Moderately satisfactory 10 4 2Marginally satisfactory 0 1 1Marginally unsatisfactory 1 0 0Moderately unsatisfactory 7 2 3Unsatisfactory 5 8 2Highly unsatisfactory 1 1 0Total number 47 31 13Percent moderately satisfactory or better 70 65 62Source: IEG based on ICR reviews.Note: MW = megawatts.Two-thirds of these projects were rated moderately satisfactoryor better, versus 72 percent of all energy projects.Energy efficiency projects fared slightly better thanrenewable energy projects. Just over half of such projectsin low-income countries 3 were marginally satisfactory orbetter, compared to 70 percent in higher-income countries.China had 13 projects, the largest number of any country,and all were rated marginally satisfactory or better. Aboutone-third of this portfolio was in energy efficiency projectsin transition countries, with a 64 percent success rate.Performance of evaluated IFC investment projectsDuring the period of fiscal 1990–2008, IFC made commitmentsto 102 investment projects in support of renewableenergy or energy efficiency, of which 81 were committedduring fiscal 2005–08. Because IFC projects are evaluatedon a sample basis after five years of operation, onlyeight projects have been evaluated, all committed betweenfiscal 1992 and 1999. Five received satisfactory ratings.Twenty-six ongoing projects, committed during fiscal1992–2008, have internal monitoring data available. 4 Ofthese ongoing projects, 22 were reported as progressingsuccessfully.The 2003–08 portfolio of WBG investment projectsTo assess the portfolio of recently initiated (2003–08) projects,IEG reviewed and validated a database of low- carbonproject components assembled by the Bank’s energyanchor (appendix G). In some cases, IEG revised the classificationor funding amount of a component designatedas “low carbon.”The WBG has three arms with different products. Two ofthose arms (the World Bank and IFC) can use both traditionalfinance and new, environmentally oriented finance:GEF grants and carbon payments.Table 2.3 breaks down commitments by technology and bywhether financed traditionally or together with environmentalfinance. Off-grid investments are about 11 percentof this $8 billion low-carbon portfolio and roughly one-fifthof all rural energy access commitments. Grid-connectedrenewable energy accounts for $3.3 billion, compared with$2.9 billion for energy efficiency. Projects that use financialor other intermediaries account for about 20 percent of thisportfolio.Projects with exclusively traditional financing (InternationalBank for Reconstruction and Development [IBRD],International Development Association [IDA], and IFC)—that is, without even small amounts of GEF or carboncofinancing—comprise 70 percent of the 2003–08 portfolioand more than three-quarters of the grid-connectedrenewable energy portion. Nontraditional finance is mostimportant in financial intermediation for energy efficiency,reflecting a perception that risk aversion is deterring profitableefficiency loans.Renewable Energy | 13

Table 2.3WBG Low-Carbon Energy Commitments ($ millions) by Product Line and Investment Category,2003–08Type of projectTraditionalfinancing (IBRD,IDA, IFC, MIGA)Blended financing(traditional + GEFor carbon finance)Stand- aloneGEF andcarbon financeTotalOff-grid and mini-grid renewablesDirect investments, including cookstoves and household biomass/biogas228 224 64 515Indirect, with funds that support subprojects 101 124 10 235On-grid renewable energyDirect investments in renewable energy (may include some ancillarytransmission and distribution loss reduction)2,277 282 496 3,055Indirect, with financial intermediaries 202 0 11 213Energy efficiencyTransmission and distribution loss reduction 529 104 0 633End user energy efficiency 338 21 63 422Combined heat and power and/or district heating 344 77 56 477Supply-side energy efficiency 460 2 66 528Energy efficiency via financial intermediaries 200 514 98 812OtherBoth renewable energy and energy efficiency, or unspecified, viafinancial intermediariesDevelopment program lending, other investment programs, andtechnical assistance227 85 23 335646 14 93 753Total 5,553 1,446 980 7,978Source: IEG calculations, low-carbon component database.Note: Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and special financing. Note that these data excludetransmission and distribution projects that may reduce technical losses but were not classified by the WBG as low-carbon activities.IBRD = International Bank for Reconstruction and Development; IDA = International Development Association; IFC = International FinanceCorporation; GEF = Global Environment Facility; MIGA = Multilateral Investment Guarantee Agency.Figure 2.1RegionSARMENALCRECAEAPAFRLocation of 2003–08 Low-CarbonPortfolio, by Type0 500 1,000 1,500 2,000 2,500Off-grid renewableEnergy efficiency$ (millions)Grid renewable energyOtherSource: IEG.Note: Unit of analysis is the project component. Excludes freestandingWBG analytic and advisory activities, IFC advisory services, andspecial financing. Regions: SAR = South Asia, MENA = Middle Eastand North Africa, LCR = Latin America Caribbean, ECA = Europe andCentral Asia, EAP = East Asia and Pacific, AFR = Sub-Saharan Africa.WBG = World Bank Group.Figure 2.1 shows the location of these projects. Africa’sshare is large relative to its population; its 30 percent shareof grid-connected renewable energy reflects investments inlarge hydropower. The Europe and Central Asia Region hasa large relative and absolute investment in energy efficiency,reflecting a legacy of inefficient equipment and underpricedenergy in the transition countries. In contrast, energyefficiency investments in South Asia are small relative toinvestments in hydropower and coal; this is striking in viewof large transmission and distribution losses. (Efficiencyand transmission investments increased in fiscal 2009,however.) The Middle East and North African portfolio forthis period is very small; the amount counted as renewableenergy includes hybrid solar thermal plants that are mostlygas fired.Seventy percent of the low-carbon energyportfolio was financed purely throughtraditional instruments.14 | Climate Change and the World Bank Group

Figure 2.2Breakdown of 2003–08 Low-Carbon Portfolio by Country Income Group and Type3,5003,000Amount ($ millions)2,5002,0001,5001,0005000Low incomeLower middleincomeUpper middleincomeIncome groupHigh incomeRegionalOff-grid renewable Grid energy renewable Energy and efficiency OtherSource: IEG.Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and specialfinancing.Figure 2.2 show the breakdown of this portfolio by countryincome group. About 60 percent goes to low- andlower-middle-income countries; China, the single largestrecipient, accounts for 16 percent. Energy efficiency is moreprominent in the wealthier countries.Meeting the Bonn commitmentAt the Bonn Conference on Renewable Energy, the WBGpromised that with the aim of ensuring an institutionalfocus on the transition toward cleaner energy sources,it would commit to a target of at least 20 percent averagegrowth annually—in both energy efficiency and new renewableenergy commitments—over the next five years(fiscal 2005–09).IEG’s reckoning of funds committed to energy efficiencyand new renewable energy exceeds that of the WBG. TheBonn Commitment was surpassed, with commitmentsgrowing from a base of $209 million to $2,061 million in2008 (IEG calculation) and $3,128 in 2009 (managementcalculation). 5 Figures 2.3 and 2.4 show the growth in totallow-carbon commitments, indicating a sizeable boom ingrid-connected renewable energy, much of it large hydropowernot counted under the Bonn Commitment.Energy efficiency grew with large spurts in 2006 and 2008,with financial intermediaries assuming more prominencein the latter period. The growth was mostly in projects thatwere purely traditionally financed, with a rapid expansionof IFC and IBRD funds, and it occurred disproportionatelyin the lower-middle-income countries.The WBG funds committed to energyefficiency and new renewable energy greatlyexceed the amounts agreed under the BonnCommitment.Based on data reported by the Investment Framework forClean Energy and Development (management), low- carbonFigure 2.3Amount ($ millions)3,0002,0001,000Growth in Low-Carbon Portfolio byProject TypeLow carbon: Groups of technologiesversus FI, by financing amount02003 2004 2005 2006 2007 2008YearOff-grid renewable, no FIEnergy efficiency, no FIFI, totalGrid renewableenergy, no FIOther, no FISource: IEG.Note: Unit of analysis is the project component. Excludes freestandingWBG analytic and advisory activities, IFC advisory services, andspecial financing. FI = financial intermediation.Renewable Energy | 15

Figure 2.4Amount ($ millions)Figure 2.5Amount ($ millions)3,5003,0002,5002,0001,5001,0005005,0004,0003,0002,0001,000Growth in Low-Carbon Portfolio byCountry Income Class02003 2004 2005 2006 2007 2008YearHigh incomeLower middle incomeRegionalBreakdown of Non-Low-CarbonWBG Energy Investments02003 2004 2005 2006YearTransmission anddistributionOil, gas, and coalLow incomeUpper middle incomeSource: IEG.Note: Unit of analysis is the project component. Excludes freestandingWBG analytic and advisory activities, IFC advisory services, andspecial financing.and blended low-carbon and access projects account for37 percent of all energy portfolio financing in 2003–09.Figure 2.5 shows the growth of the remainder.Hydropower is by far the largest subcomponentof the recent renewable energy portfolio.Figure 2.6 shows how total new energy generation capacitywas divided between fossil fuels and renewable sources.Large hydropower dominated power investments in IDAcountries. In IBRD and blend countries, coal accounted fora third of new capacity, gas 28 percent, and large hydropower18 percent.2007 2008Thermal generationOther energyAccessSource: Investment Framework for Clean Energy and Development,2003–08.Note: WBG = World Bank Group.Coal accounted for one-third of new generatingcapacity supported in IBRD countries.The WBG’s on-grid renewable energy portfolioHydropower is the renewable energy technology with thelongest and largest record within the WBG and the onewith the greatest predicted potential scale-up over comingdecades. However, there has been a rapid increase in “newrenewable energy”: wind, geothermal, biomass/ biogas/landfillgas, and solar (table 2.4) Although this chapter devotesspecial attention to hydropower, a discussion of barriers andinterventions in this chapter also draws on recent experiencewith wind projects, and lessons from these barriersand interventions apply to other forms of renewable energy.Grid-connected solar power is discussed in chapter 6.The WBG’s off-grid renewable energy portfolioIn remote areas with low population densities, it can becheaper to provide decentralized renewable power throughhome systems or mini-grids than to extend the main electricgrid. 6 This has raised hopes of fighting both climatechange and poverty with a single instrument, or using climatefinance to promote rural access.Those hopes are manifest in the large investments in solarhome photovoltaic systems (SHS), the off-grid technologywith which the WBG has the longest record and thefocus of the discussion of off-grid renewable energy in thischapter. However, in the recent portfolio, SHS projects havebeen overtaken by small hydro and biomass (see table 2.5).Biomass projects include efficient cookstove projects as wellas power projects.Among off-grid renewable energy technologies,solar home photovoltaic systems havethe longest record at the WBGFigure 2.6Power sourceWBG-Supported Grid-ConnectedGeneration Capacity by Technology,2003–08GasOilCoalGeothermalWind and solarLarge hydropowerSmall hydropower0 2,000 4,000 6,000 8,000 10,000MegawattsIDA countriesIBRD/Blend countriesSource: IEG component database.Note: Includes privatization and asset purchase in addition togreenfield investments.16 | Climate Change and the World Bank Group

Table 2.4 Commitments to Grid-Connected Renewable Energy by Technology and Funding 2003–08($ millions)Technology IBRD IDA IFC MIGA GEF Carbon Finance, World Bank & IFC TotalWind 335.7 32.9 38.5 71.2 42.8 521.1Hydropower 849.4 825.8 358.7 225.5 0.4 182.3 2,442.2Geothermal 202.0 31.5 57.3 88.3 8.5 18.6 406.3Biomass 20.0 28.0 32.7 40.2 108.1 229.1Solar 142.4 142.4Source: IEG.Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and specialfinancing. Components that support multiple technologies are included in each relevant row, so column totals should not be used. GEF =Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association;IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency.Analytic, advisory, and technical assistance projectsThe WBG also conducts analytic, advisory, and technicalassistance outside of investment projects. Within theWorld Bank, many of these activities have been funded bytwo donor-supported programs resident in the Bank: theEnergy Sector Management Assistance Program (ESMAP)and the Asia Sustainable and Alternative Energy Program(ASTAE).Many of the WBG analytic, advisory, andtechnical assistance activities have beenfunded by separate donor-funded programswithin the Bank.ASTAE is focused on energy efficiency, scaling up useof renewable energy, and increasing access to energy; itspecifically aims for high leverage. In contrast to otheranalytic and advisory assistance and investment units,ASTAE tracks specific indicators on its projects andsets impact-based (rather than expenditure-based) targets,though tracking and attribution is difficult. With$6.2 million of disbursements for fiscal 2007–09, ASTAEclamied support for new renewable energy capacity (withinvolvement in 1.03 GW of capacity from direct projectsand 12.4 GW from framework, regulation, and investmentmechanisms), energy efficiency savings (1.6 terawatt-hoursdirect, 26.2 terawatt-hours indirect 2007–09), householdaccess (611,000 new households direct, 200,000 indirect),and avoided CO 2emissions (99 million tons direct, 1,003million tons indirect).IFC advisory services cover a diverse rangeof activities related to renewable energy andenergy efficiency.IFC’s advisory services cover a diverse range of activity,including some investments. In the 2005–08 renewableenergy/energy efficiency portfolio of $40 million, $25 millionwas in GEF-supported projects with explicit climate goals.The largest, comprising about one-third of total value, waslinked to an IFC investment project; 19 of the remaining 20were not. Some projects included broad-based training andcapacity building. The non-GEF projects were mostly small(median size of $130,000) and involved technical assistanceto a specific firm; almost half were linked to an existing orprospective investment.Table 2.5 Off-Grid Investment Projects ($ millions), 2003–08IBRD IDA IFC MIGA GEF Carbon finance World Bank & IFC TotalWind 4.1 23.9 35.0 18.4 0.0 81.4Hydropower, all 84.0 222.8 0.0 64.0 6.8 377.6Biomass, all types 0.0 71.5 140.4 1.8 30.8 35.0 279.5Solar 50.5 171.9 10.0 73.2 7.1 312.7Unknown off-grid 7.1 67.3 0.0 25.3 0.0 99.6Source: IEG.Note: Unit of analysis is the project component. Excludes freestanding WBG analytic and advisory activities, IFC advisory services, and specialfinancing. Individual components may appear in multiple rows if they support more than one technology, so column totals should not be used.GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International Development Association;IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency.Renewable Energy | 17

Overcoming Barriers to On-GridRenewable EnergyRenewable energy has strong local advantages in additionto its global benefits. The electricity it provides can drivedevelopment and satisfy consumer aspirations. A switchfrom fossil fuels to renewable power abates acid rain andnoxious air pollution. Renewable power also enhances domesticenergy security and buffers a country’s economyagainst the gyrations of international prices for oil, coal,and gas.On-grid renewable energy faces barriers to investment:• Renewable power is usually more expensive to producethan coal or diesel power, so it can compete only if producersare rewarded for its local or global benefits.• More of the cost is up-front capital than is the casewith fossil-fueled power. So developers need affordableloans, and bankers need reassurance that a stream ofrepayment will continue for many years.• Power sector laws, regulations, and operations may bepoorly adapted to the peculiarities of renewable energyand often discriminate against small producers.• In many countries, technical capacity for building,maintaining, and integrating renewable energy may beweak.• Renewable energy, especially large hydropower, canpresent environmental and social risks.• Many kinds of renewable energy are intermittent andthus less convenient than plants that produce assuredbaseload or peak power.Among the barriers to on-grid renewableenergy are costs relative to coal, oil, or gas;up-front capital needs; lack of adequateregulations and technical capacity; andenvironmental and social risks.This analysis of grid renewable energy uses a spreadsheetbasedfinancial model to assess how interventions availableto the WBG can boost project bankability, overcoming thesebarriers. The model, inspired by de Jager and Rathmann(2008), is based on detailed financial appraisals of 20 hydropower,wind, gas, and coal projects financed by IFC andthe Bank’s Carbon Finance Unit. The projects, chosen forthe depth of their documentation, are not a random samplebut do illustrate a range of project costs, performance, andeconomic and fiscal environments. Although the financialmodel can involve baroque complexities of loans and taxes,a simple approximation (box 2.1) provides powerful insights.(Box 2.5 illustrates how some of these interventionswere applied in Sri Lanka.)Support more profitable technologiesSome technologies are inherently more profitable thanothers and are thus easier to finance and more competitivewith fossil fuels. The key determinants of returns, asshown in box 2.1, are construction cost and capacity utilization.Both can vary substantially. For instance, cost forsmall hydropower plants has varied from $1,400 to $3,000per KW. Overall, hydropower economics are generallymuch more favorable than for wind power. IFC experience(on a small sample) shows that large hydropowerplants have an appraised average financial rate of returnof 17 percent, small plants have a 13 percent rate of return,and wind a 9 percent rate. IEG analysis of projectfinance confirms this relationship, holding constant variationin taxes and power tariffs, and shows that returns onequity increase sharply as financial rates of return grow(figure A.1 in appendix A).The key determinants of returns for gridconnectedrenewable energy are unit cost ofcapacity, capacity utilization rate, and tariff.Boost capacity utilizationThe economic and carbon returns of a renewable energyplant are directly proportional to capacity utilization (theratio of actual to potential power production). So bankabilitycan be strongly improved by favorable siting of plants(for example, where winds or river flows are more reliable)and by ensuring better maintenance and operations.The economic and carbon returns of arenewable energy plant can be boostedsignificantly by improvements in capacityutilization.Capacity utilization varies greatly and is not strongly correlatedwith the size of the facility (see figure A.2). Figure 2.7shows the distribution of imputed 7 capacity utilizationamong hydropower plants registered with the CleanDevelopment Mechanism (CDM), most of which are runof-river.The capacity factor among all plants varied fromless than 10 percent to more than 90 percent. No WBGcarbon-funded plant achieved greater than 60 percent.In China, CDM-registered wind plants have an averagecapacity factor of just 23 percent (for comparison, the USaverage is 34 percent). The low utilization rate has been attributedto poor siting, inadequate grid integration, andlow-quality turbines (Lewis 2010).Detailed resource maps, such as wind atlases, could in principlehelp governments and private developers ensure that renewableenergy facilities are well utilized, taking into accountenvironmental constraints and availability of transmission18 | Climate Change and the World Bank Group

Box 2.1The Economics of Grid-Connected Renewable EnergyA stylized model provides useful insight into what financial and policy levers can boost the economic attractivenessof a renewable energy project. The economics depend on four factors: unit cost, capacity utilization, tariff, andcarbon credit rate.A developer needs to finance a power plant with a unit cost of $1,000–$4,000 per kW. The plant will produce a flowof electricity. But most renewable energy plants do not operate at full capacity. Wind plants, for instance, may onlyproduce 25–40 percent of their theoretical full output. This ratio is the capacity utilization. The electricity is soldat a net tariff of, say, 5–15 cents per kWh after transmission costs. This renewably generated electricity may alsodisplace fossil-generated electricity, generating a carbon credit rate of, say, 0.2–1.2 cents per kWh, depending onthe price of carbon and the kind of fuel displaced. Then (with some simplifying assumptions, such as negligiblecosts of operations and maintenance, no peak-period tariffs, and no payments for capacity or penalties forintermittency) the pretax financial rate of return to the project isFinancialrateofreturn=(Tariff +Carbon Credit Rate)8,760 *Capaci ty Utilization.Unit Cost(To get the ERR, use economic rather than market values for electricity and carbon, and account for local environmentalbenefits.)This shows that if electricity sells for $.06 per kWh, then the following actions would have equivalent impacts onthe rate of return:• Adding carbon credits at $10 per ton CO (assuming displacement of .6 kilograms per kWh)2• Adding a renewable energy premium of $0.006 to the tariff• Boosting capacity utilization from 30 to 33 percent through better siting, better design, or improved maintenance• Reducing construction costs from $1,100 to $1,000 per KW.The developer cares about the return on equity, not the overall return, and therefore leverages its equity byborrowing, ideally, 60–80 percent of the capital cost. This works as long as the returns are greater than the interestrate on the loan. The prospective returns have to be high enough to outweigh the risks. These include the risk thatthe buyer will renege on the promised tariff, which must be sustained over many years to pay back the large initialcapital investment.Meanwhile, the lender wants to make sure that the investment is sufficiently lucrative that the developer canreadily afford the loan repayments. So lenders insist that the project’s revenue be sufficient to easily cover theloan repayments—that is, that the debt service coverage ratio be significantly greater than one. This ratio can beenhanced through longer loan lengths and lower interest rates.Source: IEG.Note: 8,760 is the approximate number of hours in a year.lines. The WBG has funded a number of mapping exercises(appendix B). Most of these modestly funded exercises arestill under way, and impact evaluation is not possible.The WBG has financed development of anumber of renewable energy resource mapsthat might assist in siting decisions andthus improve capacity utilization.The WBG could also help, through technical assistance, toensure that projects’ design plans for capacity utilizationare realistic. Hydropower, wind, and landfill gas plants haveundershot their planned production levels; in many casesthis is because of inadequate assessment of resources at thesite. Box 2.2 explains why this has happened for landfill gasprojects and what is being done in response.Operations and maintenance can affect capacity utilization.Unavailability of spare parts can put turbines out of commission,for instance. Technical assistance for maintenance andmanufacturing could reduce downtime. As a crude measureof WBG support in this area, IEG’s review of the 2003–08portfolio found that about one-third of minihydro and onequarterof wind investment components included trainingand capacity building for installation or maintenance.Renewable Energy | 19

Figure 2.7Number of projects2016128405 15Distribution of Capacity Factors ofHydropower CDM Projects253545556575Capacity factor group (mid point %)WBGNon-WBGSource: IEG calculations based on UNEP Risoe 2009.Note: CDM = Clean Development Mechanism; WBG = World BankGroup.Landfill gas projects have produced muchless gas than expected, but good monitoringand rapid feedback have prompted morerealistic appraisal.Provide carbon financeFrom an economic viewpoint, carbon payments rewardrenewable energy sources for reduced emissions. In theidealized world of the CDM, such a payment is supposedto nudge an investment project over the threshold offinancial viability. In reality, a carbon payment, like a8595feed-in tariff, will be one of many factors that elicits aresponse from investors.CDM projects must explain the barriers faced by the projectand how carbon finance will help overcome them. A reviewof Bank-financed hydropower plants found that many projects(in China, Guatemala, Honduras, India, Nigeria, andUkraine) claim barriers related to insecure or short-termpower purchase agreements. If these are in fact the barriers,then the use of carbon finance is a project-specific bandagefor a sectorwide problem. A higher leverage interventionwould be to work at the policy level to correct the problem,potentially catalyzing the entry of many plants.Carbon finance has had modest impactson investor returns for CO 2-reducingrenewable energy projects.Figure 2.8 shows the impact of carbon finance in a sampleof WBG projects, based on financial data presented forappraisal. The figure shows the return on equity (ROE) computedwith and without the contracted carbon payments.The degree to which carbon may have affected investors’ incentivesclearly differs among the cases. A strong nudge towardinvestment is plausible in the case of one project witha base ROE of about 13 percent, which received a boost of2.5 percentage points from carbon. It is less plausible forprojects that started with a return of 20 percent or aboveand received only 0.5 percent additional from carbon.The relatively modest impacts on ROE reflect the basic economicsof carbon. Renewable energy projects that substitutefor fossil fuels reduce CO 2emissions by 0.8 kilograms/kWh,Box 2.2Monitoring and Evaluation Provides Rapid Feedback on the Performance of Landfill Gas Projects“Sanitary” landfills, as the name suggests, are a big improvement over open dumps and are an essential part ofmodern urban development. But when waste rots anaerobically in these landfills, it produces methane, a GHG25 times more potent than the CO 2produced in open dumps.With the advent of the CDM, landfill gas projects can claim credit for destroying methane at 25 times the rate, perton, of CO 2reduction. This could make them bankable, even in the absence of electricity sales.Consequently, 136 landfill gas projects were registered under the CDM between 2001 and 2009, and the WorldBank’s CFU has purchase agreements with 21. Like all carbon projects, landfill gas projects must report and verifytheir production annually. This mandatory monitoring soon revealed that many of these projects were grosslyunderperforming relative to design expectations, producing on average only about half the planned credits.In 2007, the World Bank’s carbon fund sponsored an analysis of the reasons for underperformance. This and otherstudies showed that project appraisers had estimated the landfill’s methane yield based on models of US landfills.But developing country garbage is different from US garbage—it is richer in food waste and moisture content,generates less methane per ton, and decays faster. Investigation showed specific ways in which poor operationand construction of the landfill can also depress yields. Feedback on these factors has improved the appraisal anddesign of subsequent landfill projects, for instance, leading to more conservative estimates of production.Sources: IEG; SCS Engineers 2007.20 | Climate Change and the World Bank Group

on average (Iyadomi 2010). (Reductions are smaller in hydropower-dominatedcountries such as Brazil.) Thus, carbon paymentsat $10 per ton (World Bank 2009) 8 would add roughly0.8 cents/kWh to the investor’s revenue—a relatively small incrementin many competitively priced power markets. Thesecarbon flows may offer greater security and less exchange raterisk than domestic payments from an uncreditworthy electricityoff-taker, and thus serve a kind of guarantee functionin some cases. However, as the formulas in box 2.1 show, theimpact of carbon on ROE and ERR is proportional to the capacityutilization factor. Thus, ironically, carbon payments areless helpful to economically mediocre projects than to goodones. Of course, the impact would be much stronger if CO 2were priced at the $30–$60 levels that many analysts suggestis necessary for effective global climate change mitigation.Figure 2.8Addition to ROE (%)3.02.52.01.51.00.5Impact of Carbon Payments onReturn on Equity0.00.0 5.0 10.0 15.0 20.0 25.0 30.0Initial ROE (%)Source: IEG.Note: ROE = return on equity.Carbon sales have not catalyzed wind andhydropower investments.Carbon market participants acknowledge that carbon saleshave generally not been catalytic in triggering wind andhydropower investments. But carbon can make a big differencefor projects that capture methane emissions anddestroy them or use them for energy, as noted earlier.Provide better loan termsLower interest rates and longer repayment periods makeprojects more bankable, though they do not affect the ERR.The financial model suggests that a change from a 5-year toa 10-year tenor could boost the debt service coverage ratiofrom 1 to 1.4. This is a very significant difference, whichmight well be sufficient to make a project bankable.Longer repayment periods make projectsmuch more bankable.Although IFC does not compete with commercial lenderson interest rates, it can and does offer longer tenors, oftenaround 10 years as opposed to 5 for commercial loans(with much variation). In syndicated loans, IFC terms areusually matched by other lenders. The IBRD can offer bothlower interest rates and longer tenors than commerciallenders.IBRD’s Turkey Renewable Energy Project (2004) is an exampleof the catalytic effect of longer loan repayment periods.This project loaned about $200 million to a state bankand a private bank. The funds were on-lent to 22 renewableenergy investments (mostly hydropower, with wind andgeothermal power plants as well) with total value of $774million and a capacity of 605 MW; claimed lifetime CO 2reductions are about 1 million tons. 9 One success factor wasthat the Turkish banks offered loans of 10 years’ duration ormore, compared to prior norms of 4 years. This precedentalso convinced other banks to offer lengthier repaymentperiods for renewable energy projects.Political risk insurance could be importantin catalyzing renewable energy investment.Mitigate risksRenewable energy investments can be risky. The investorputs a large sum into an expensive, immovable installationand must trust a utility to keep paying an agreed tarifffor many years. This risk is more acute than for fossil fuelplants, because renewable energy plants cost more per MW.In many countries, the off-taker is in poor financial healthor subject to external pressures.The use of feed-in tariffs (a producer subsidy) poses anotherrisk. Governments may promise 10 or 15 years ofthese premium payments for renewable power to makethe initial investment worthwhile for investors. But if a financialcrisis were to hit, governments might be temptedto eliminate these subsidies, because the marginal costs ofcontinued operation are low. Governments might also betempted to renege on feed-in tariffs if prices of coal, oil, orgas declined.These considerations suggest that guarantees and politicalrisk insurance could be important in catalyzing renewableenergy investment. In principle, MIGA can providepolitical risk insurance at lower cost than private agencies,because the WBG’s special relationship with client governmentslowers its risk. Both the World Bank and MIGA havein fact provided such insurance. Box 2.3 describes a MIGAexample. Mostert, Johnson, and MacLean (2010) explainhow WBG partial credit guarantees facilitated longer loanterms for a Philippine geothermal and a Chinese hydropowerplant, making them both bankable.Renewable Energy | 21

Box 2.3Mitigating Political Risks in Renewables: A MIGA caseIn 2000, an energy company was awarded a build-own-operate contract for a geothermal power plant in Africa,with rights to develop additional geothermal fields and expand capacity. The company signed a 20-year powerpurchase agreement with the national power utility, a parastatal. The average base generation tariff was slightlyhigher than the average cost for domestically produced electricity but lower than the cost of imported hydropowerfrom neighboring countries. The country has long suffered from power shortages, and in 2000, only 10 percentof the population had access to electricity.Major risks for the investor included currency transfer restrictions, government breach of obligations underthe power purchase agreement, and civil disturbances. MIGA provided the company (a repeat client) coverageagainst currency transfer restrictions, war and civil disturbance, and expropriation. Expropriation coverage insuresbroadly not only against the risk of outright seizure but also against breach of contract and other forms of de factoexpropriation.Shortly after MIGA issued the guarantee for Phase 1 of the project, the government attempted to renegotiatethe tariffs because the off-taker’s power purchase price from the company, as agreed under the power purchaseagreement, was higher than the tariff it charged to end users. The government also refused to honor some of itscontractual obligations under the power purchase agreement. The dispute resulted in additional costs and delayedcompletion of the first phase of the project.MIGA worked with both parties over five years and played a crucial part in reaching a resolution. The World Bank’slong involvement in the sector—it had financed two adjacent geothermal plants—provided a foundation for thesediscussions. The disputes were resolved when the utility agreed to honor the existing power purchase agreementwithout price renegotiation. The investor considered MIGA’s guarantee as critical for the implementation of Phase1 of the project and, on resolving the dispute, obtained additional MIGA political risk insurance to cover expansionof the geothermal plant’s installed capacity.Source: IEG-MIGA.Over 2003–08, guarantees for grid-connected renewableenergy were $541 million, about 15 percent of WBGcommitments for grid-renewable energy. During this period,MIGA issued six guarantees for renewable energy projects.By far the largest guarantee was for the 1-GW Nam Thuen2 hydropower project in Lao PDR, which benefited from$91 million in MIGA political risk insurance and $50 millionin an IDA partial risk guarantee. These guarantees were essentialfor the participation of private lenders in the $1 billionloan consortium, which also included public agencies.Is there scope for greatly expanded use of the World Bank’spartial risk guarantees or MIGA’s political risk insurancein promoting renewable energy? IEG’s evaluation of WBGguarantees found that guarantees had been underutilizedand that high processing and transaction costs and—inMIGA’s case—eligibility restrictions on the type of risks thatcan be covered limited the WBG’s ability to expand guarantees.With a change in the MIGA Convention, MIGA’scoverage is now expanded, but its institutional constraintswould still need to be overcome.For the World Bank, supporting national guarantee facilitiesis one approach. 10 The World Bank could, for instance,help countries assess the fiscally prudent opportunities forfeed-in tariffs or renewable portfolio standards and supportguarantees for countries with sustainable plans.Guarantees have benefits, but add to the cost of finance.It may be possible to use carbon finance to offset someof this cost. As noted, at current carbon prices, annualrevenues from carbon credit sales provides little helpwith debt finance and little impetus for investment. Muchgreater leverage could be achieved, however, if carbonsales revenue were used to finance guarantee or insurancepayments, which in turn permitted lenders to offer longerloan durations.Promote renewable energy -friendly pricing regulationA renewable energy plant’s ROE is very sensitive to pricingof power. Appendix figure A.3 shows the ROE for three differentplants, evaluated at a range of different tariffs. As inthe case of carbon revenue, higher tariffs have a bigger effecton plants with higher capacity utilization, other thingsbeing equal. Under the assumptions shown, wind doesnot become commercially attractive until tariffs exceed10 cents/kWh.The returns to a renewable energy plant arevery sensitive to power tariffs.Countries have purely domestic rationales for paying a premiumfor renewable energy, including local pollution reduction,insurance against fuel price shocks (Hertzmark 2007),22 | Climate Change and the World Bank Group

and industrial policy. An increasing number of countries,both developed and developing, have adopted policies thataward premium prices to generators of renewable power,for instance, through feed-in tariffs. By early 2009, 43 developingand transition countries or subnational regionshad adopted feed-in tariffs for renewable (REEEP 2009).However, pricing policies are often unfavorable to renewableenergy. Fossil fuel subsidies and artificially lowelectricity tariffs place renewable energy at a disadvantage.(World Bank responses, in promoting rationalized fueland electricity pricing, were described in Phase I of thisevaluation.)In many countries, small power producers, including hydropowerand biomass plants, face unclear or discriminatoryregulations on access to the grid. Producers may facedaunting years-long negotiations with utilities. In contrast,utilities face difficulties in accommodating intermittent,nondispatchable power sources.Starting in the 1990s, the World Bank assisted a numberof Asian countries in drawing up and implementing smallpower purchase agreements that reduced transaction costsand risks for independent small power producers whileproviding incentives to serve peak loads. Ferry and Cabraal(2006) describe the experience in India, Sri Lanka, andThailand as being generally successful, with less success inIndonesia and Vietnam. IEG’s tally of the timing of smallpower investments (figure A.4) supports a catalytic role inAndhra Pradesh (India), Sri Lanka, and Thailand (wherethe emphasis was on small combined-cycle gas turbineplants); additional factors may be at work in Tamil Nadu,India.Several WBG client countries have drafted or implementedrenewable energy legislation. These legislative and regulatoryinitiatives were complex, country-driven processesoften involving many external counterparts, so attributionof impact is difficult. Nonetheless, it appears that relativelylow-cost analytic assistance and capacity building from theWorld Bank has helped countries craft domestically acceptablepolicies to promote renewable energy. In many cases,receptivity to this advice is heightened by associated investments.However, counterparts view the World Bank as atrustworthy source of advice and analysis.Relatively low-cost analytic assistance andcapacity building have helped countriescraft policies to promote renewable energy.This was true in China, where there is a history of analyticwork dating back to the early 1990s. World Bank-fundedseminars, study tours, and analyses helped lay out the designchoices for renewable energy pricing and funding,contributing to the renewable energy law of 2006. The lawenabled a systemwide levy to fund renewable energy, triggeringgrowth of wind power capacity from 3 GW in 2006to 26 GW at the end of 2009.Dialogue in Mexico, together with demonstration windprojects, contributed to a renewable energy law that overcomesprevious policy biases against renewable power. GEFfunding was used to simulate a feed-in tariff, allowing constructionof the first independent wind power producer.A sequence of dialogue and lending in Morocco culminatedin a 2010 renewable energy law, but implementingregulations are not in place. In Egypt, there has been inputinto a proposed new electricity law.Financing such advisory work can bedifficult within the Bank’s administrativebudget.Financing this high-leverage advisory work can be difficultwithin the Bank’s administrative budget, even thoughthe costs are relatively low. Some clients, such as Brazil,have borrowed for technical assistance. The World Bank’sMexico team has developed a strategy of concentratinglending in a single large Development Policy Loan andusing the (proportional) preparation budget. Elsewhere,teams have relied on donor funding through ASTAE,ESMAP, and GEF. ASTAE provided important inputs inChina.An unusual IFC foray into policy was unsuccessful. AlthoughIFC routinely provides advice to governments onissues related to utility contracting and privatization, aGEF-funded advisory project in the Russian Federationsought to provide broad regulatory advice to complementan IFC wind farm investment. Even under the proposedrules, however, wind prices were not competitive with existing,subsidized fossil-fuel energy prices. The project wasnot implemented, and wind power capacity in Russia stoodat just 16.5 MW at the end of 2009.On-Grid Renewable Energy: HydropowerHydropower is by far the largest source of renewable energyand according to most predictions will retain that positionfor decades to come. Hydropower with storage reservoirs isthe main form of renewable energy that can provide reliablebaseload power.Hydropower has been controversial because of its potentialfor environmental and social damage. These risks are greaterfor storage dams, which have sizable reservoirs, than forrun-of-river facilities, which have little or no reservoir storage.Risks and damages can be mitigated by considerationof siting; for instance, there may be less risk in favoringRenewable Energy | 23

deep, narrow reservoirs in less populated and sensitive areas.Strategic environmental assessment provides a vehiclefor optimizing siting, as in the case of the one undertakenfor the Nile Equatorial Lakes region.Depending on location, reservoirs intropical forest areas can have disparatelevels of GHG emissions.Hydropower reservoirs can produce methane, a powerfulGHG, if drowned forests or vegetation inflows decay anaerobically.Complex biophysical processes determine the rate ofmethane production, which is thought to be highest in shallowtropical reservoirs (Metz and others, 2007). A study of9 Brazilian hydropower plants (dos Santos and others 2006)found 3 that produced less than 3 percent of the GHGs of acomparable combined-cycle gas plant and 5 that produced100–400 percent as much. The study did not measure outgassingat the turbines, which may be significant.The fall and rise of WBG involvement in hydropower1990–2008Hydropower comprises the largest share of the currentWBG renewable energy portfolio and has the longest recordwithin the WBG. Hydropower has been supported byevery unit of the WBG.Figure 2.9 documents the decline and rise of hydropowerin the WBG portfolio. During the 1990s, criticism of theenvironmental and social impacts of dams and hydropowerled to the convening of the World Commission onDams and a slowdown in related WBG commitments. TheWBG endorsed most of the World Commission’s recommendations,and commitments rebounded after 2000. TheWBG recently released a document outlining a vision ofincreased investment in hydropower, especially in Africa(World Bank 2009).Table 2.6 shows the breakdown of recent investments bysize and presence of storage. Large hydropower with storage(the most environmentally and socially sensitive category)constitutes about one-third of these commitmentsin volume; some of this is rehabilitation.Regionally, Sub-Saharan Africa accounts for one-third ofcommitments overall, a quarter of the large hydropowerprojects with reservoirs, and about half of the micro andpico (ultra small) hydropower projects. Half of large hydrowith reservoirs is in Europe and Central Asia.Large hydropower with storage constitutesabout one-third of World Bank hydropowercommitments.Figure 2.9The Fall and Rise of WBG Hydropower Commitments, 1990–20081,4001,2001,000Commitment ($ millions)80060040020001991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2000 2002 2003 2004 2005 2006 2007 2008YearHydro > 10 MW Hydro < 10 MW and other renewable energy Hydro < 10 MWSources: IEG portfolio review and WBG renewable energy and energy efficiency progress reports, 1990–2008.Note: WBG = World Bank Group; MW = megawatts.24 | Climate Change and the World Bank Group

Table 2.6Hydropower Investments by Size, Storage, and Funding, 2003–08 ($ millions)Hydropower by size All hydropower >10 MW, with storage >10 MW, run-of-river 1–10 MW

small-scale hydropower projects had yields of less than60 percent, compared with 18 percent of non-WBG projects.IFC’s Development Outcome Tracking System showedthat four of six reporting projects exceeded planned productionon average. One did not report a baseline.A review of project evaluations points to several recurrentfactors that affect project success (table C.4). Planning andexecution of resettlement is a key factor for success or failure.Planning for water rights has been critical. In the TanzaniaPower IV Project, failure to define water rights up front ledto environmental problems and implementation delays; anArmenian project, in contrast, was able to extend water rightsvalidity to a 40-year term. In several cases, lack of a regulatoryframework or failure of the borrower to implement expectedreforms was a factor in performance. In sum, and not surprisingly,thorough project preparation is critical to success.Energy Access and Low-CarbonDevelopmentA billion and a half people lack electricity. An IEG review(IEG 2008) showed that poor people place an extraordinarilyhigh value on electricity. Even with their extremelylimited income, people are willing to pay up to $1/kWh topower lights, televisions, and cell phone chargers. Improvingaccess to household electricity is particularly importantfor women, who often have the greater work burden for domestictasks (box 2.4). Access is a critical development goalfor both reducing poverty and fostering growth. How canlow-carbon activities support energy access?Box 2.4An IEG evaluation of gender issues in World Bankinvestment projects from 2002 to 2008 (IEG 2010c)identified 890 (of 1,183) projects where genderwas relevant. Nineteen of these were energyprojects containing low-carbon components,primarily energy access expansion through gridpower extension, off-grid hydropower, or SHS.These projects had a range of differential genderimpacts, including labor savings for women fromaccess to electric appliances, health benefits forwomen and girls from substituting electrical powerfor kerosene or wood fuel, and high vulnerabilityfor female-headed households from reservoirhydropower resettlement policies. Project designdocuments were rated by degree of gender analysis,consultation, activities, and monitoring. Of thelow-carbon energy projects, seven were rated low,five moderate, eight substantial, and none highfor their treatment of these criteria.Source: IEG.Gender and Low-Carbon EnergyMost increases in energy access will happen through expansionof the grid, rather than expansion of off-grid power.A World Bank study (World Bank 2010) notes that in mostcountries 80–95 percent of unserved communities are targetedto receive electricity supply through grid extension.Cost estimates of grid expansion vary widely; however, forall but the lowest density or most remote areas, the lowercost of grid-based generation tends to outweigh the highcost of transmission and distribution extension.Though there are many barriers to electrification, key issuesinclude the high costs of supplying rural and peri-urbanhouseholds, a lack of appropriate incentives or financial capabilityfor utilities, and a shortage of electricity generationrelative to demand from existing customers (World Bank2010). Some actions can address these barriers while alsoreducing carbon emissions.Supply constraints can be alleviated through either generationincrease (renewable or not) or energy efficiency. Efficiencyimprovements can be cheaper. Moreover, to meet anend user’s demand, new generation has to allow for transmissionlosses. With technical losses of 11 percent, 12 a kWhsaved is worth 1.11 kWh generated.Though energy shortages have traditionally been alleviatedlargely through generation increases, energy efficiency canplay a key role. For example, Bank projects in Vietnam havereduced supply shortages through a mix of transmissionand distribution (T&D) capacity expansion and efficiencyimprovements, demand side management, and on-gridand off-grid renewable energy. Energy efficiency and demand-sidemanagement projects have led to a combinedreduction in peak load of 1,997 MW at far lower cost thanconstruction of new generation; at the same time this leadsto lifetime emission reductions of 130 million tons.Technicallosses fell from 15 percent in 2000 to 9 percent in 2009because of Bank projects and other Vietnamese investments,easing the need for new power generation. In addition,distribution of CFLs has proved to be a highly effectivetool in reducing peak demand to alleviate urgent supplyconstraints both in Vietnam and in Sub-Saharan Africa.Energy efficiency can play a key role inalleviating power supply shortages and thusexpanding access.Most access improvements have been accomplished throughgrid expansion. Early pilot projects in Vietnam with rehabilitatingmicro-hydropower to increase off-grid accesswere initially successful and connected 5,000 households.But these projects were not expanded, in part because ofgreater-than-expected success in rapid grid expansion. Incontrast, grid-expansion projects have provided access topower for roughly 2.5 million people. But with connection26 | Climate Change and the World Bank Group

costs for remaining unelectrified areas exceeding $0.50/kWh because of small loads, off-grid supply may be theleast cost alternative.Off-Grid Renewable Energy: SolarPhotovoltaicsThis section focuses on SHS—historically the biggestrecipient of WBG support for off-grid renewable energyand still prominent in the portfolio (table 2.5). SHSsprovide individual rural households with modest levelsof power primarily for lighting and television. SHSs canr educe carbon emissions by substituting for kerosenelamps and grid-charged batteries. Because they promiseboth rural access and GHG reductions, they have attractedsubstantial funding.Since 1992, the WBG has contributed$790 million to SHS components.Barriers and interventionsThe barriers to SHS are well established:• Cost and financing for consumers: The cost of a 20-peakwatt (Wp) system ranged from $150 to $490 in the portfolio.Although the operating cost per lumen (unit of illumination)is theoretically less than that of a kerosene lamp,the up-front cost is prohibitive for most rural poor withoutfinancing. And rural finance poses its own problems.• Financing for manufacturers and dealers: SHS systemsare assembled by small manufacturers that find it difficultto get capital.• Biased pricing policies: In Sri Lanka, for instance, solarphotovoltaic modules were initially subject to 35 percentimport duties. In Indonesia, when the price ofphotovoltaic systems increased by 400 percent due tocurrency depreciation, the import price of keroseneand diesel only increased by 40 percent and 58 percent,respectively, thanks to government subsidies. InUganda, solar purchases were subject to extra dutiesaimed at protecting a local battery company.Photo by Dana Smillie, courtesy of the World Bank Photo Library.Since 1992, the WBG has contributed $790 million to SHScomponents in 33 Bank and 4 IFC projects in 34 countries.Virtually all had some degree of GEF support. The portfoliois concentrated in East Asia and the Pacific and Africa.The Middle East and North Africa is represented only bya $1 million project in Morocco, despite the region’s solarresource.This section draws on a review of the 12 World Bank projectsthat contain an off-grid solar photovoltaic component andwere closed or open and well documented, and that have aninstallation target greater than 10,000 SHSs (see table A.7).• Anticipation of grid connection: Households much preferthe convenience and reliability of grid connections andwill not invest large sums in SHS if connection to the gridis imminent. Ambiguous plans or too-optimistic promiseson grid integration can discourage demand for SHS.• Poor quality—actual or perceived: Uncertainty aboutSHS quality and reliability dampens consumer demandfor these expensive investments; uncertainty about consumerdemand dampens industry supply.Geographic barriers• : Off-grid populations tend to be inareas of low population density with difficult terrain.Renewable Energy | 27

Sellers and microfinanciers find it costly to service thesepopulations.Against these barriers the WBG has deployed a number ofinstruments:• Most projects employed subsidies. These subsidieswere to buyers or renters, dealers or manufacturers, orwinning concessionaires under a fee–for-service model.Subsidies were often 10–20 percent of cost, but rangedup to 60 percent. They aimed at making the systemsmore affordable and at expanding overall productionand thus pushing the entire industry down the learningcurve, resulting in sustained cost reductions. In Boliviaand China, dealer/manufacturer subsidies were contingenton meeting quality standards.• Consumer credits addressed the financing barrier andwere provided through three primary mechanisms:dealer extended credit, credit through local banks, andcredit through microfinance institutions.• Investor financing (beyond subsidies) was provided insome projects.• Technical assistance and support for standards and certificationaddressed the quality barrier.WBG-supported projects deployedsubsidies and consumer credit.Project outcomesActive promotion of SHS now dates back two decades, toa time when solar modules (the main component of SHS)were much more expensive than they are now. Reviewslooking over the first decade of that experience pointed tothe persistence of price and credit as barriers (Martinot,Ramankutty, and Frank 2000; GEF 2004a; GEF 2004b).Disappointment in these outcomes has led the GEF—themain financier of these projects—to deemphasize them.An IFC self-assessment (IFC 2007) was pessimistic also,concluding that without some level of subsidies, solarphotovoltaic power in developing countries is often tooexpensive for the average rural consumer; that “the rural,off-grid, solar photovoltaic industry in emerging markets isa low-margin, high-risk business”; and that IFC has “beenunable to significantly transform markets and create sustainablebusiness as originally anticipated.”However, emerging evidence from evolving World Bankexperience paints a more positive picture—though stillwith the qualifications that SHS appears to be a small nichemarket rather than a rural panacea and is largely still dependenton subsidies.All projects in the evaluation portfolio had the developmentobjectives of (i) increasing access to electricity in rural areasin an environmentally sustainable manner and (ii) facilitatinggreater participation by the private sector in advancingthe commercialization of photovoltaic technology. In addition,4 of the 12 projects specifically spelled out the goal offostering economic growth or improving the delivery of socialservices such as health and education through the provisionof electricity services. The global environmental objectiveof the solar photovoltaic projects was to remove barriersto the adoption of emissions-reducing energy technologies.Outcomes for four of the five evaluatedprojects with large SHS components wererated satisfactory.Table 2.8 reports the rated outcomes of the five completedprojects in the evaluation sample with large SHS components.With the exception of Indonesia—where the 1997macroeconomic crisis crippled consumer demand—all theprojects performed well against targets. But good measuresof SHS longevity are lacking. 13Table 2.8 Rated Outcomes of Completed Projects with Large SHS ComponentsProject Number of installed SHS Total capacity of installed SHS (MWp)Targets Actual Targets ActualChina Renewable Energy Development Project 350,000 400,000 11 10India Renewable Resources DevelopmentProjectNA 2.5 – 3 2.145IndonesiaSHSs200,000 (appraisal)70,000 (revised)8,054 NASri LankaEnergy Services Delivery30,000 (appraisal)15,000 (revised)21,000 NASri Lanka Renewable Energy for Rural economicDevelopment (RERED)87,000 by 2009 (appraisal)155,000 by 2011 (revised)105,398 (as ofJune 30, 2009)4.622Sources: Implementation and Completion Reports and Sri Lanka RERED Statistics and Reports (http://www.energyservices.lk/statistics/index.htm).Note: MWp = peak megawatts; SHS = solar home systems.28 | Climate Change and the World Bank Group

World Bank experienceTwo factors accounted for the success of the projects inBangladesh, Sri Lanka, and China. Consumer finance wascrucial. In Sri Lanka’s energy services delivery project, theSHS vendors and commercial banks were expected to providefinancing but proved ill suited to deal with collectingpayments from the highly decentralized off-grid customers,and the project languished. The project took off aftershifting to a microfinance model.The Bangladesh Renewable Energy for Rural EconomicDevelopment project also relied on well-functioning microfinanceinstitutions. China’s Renewable Energy DevelopmentProject (REDP) achieved success despite lack offinancing arrangements in provinces where many clientswere yak herders who could self-finance a system throughsales of their animals.Microfinance was a critical input forsuccess in several projects.The second factor was the use of output-based producersubsidies. The development of the Chinese industry isnoteworthy, as it illustrates an effective set of mechanismsto promote manufacturing quality and capabilities.Demand-driven grants enabled companies to improve theirtechnologies and financial management systems. Technology-neutralsubsidies—contingent on achieving qualitystandards—served as an incentive to improve quality, providedsmall firms with capital for expansion, and were tosome degree passed on to consumers, boosting demand.As a result, the SHS companies doubled their employment,tripled sales and service outlets from 266 to 721, and morethan tripled sales. The inland city of Xining emerged as amanufacturing center and began to export products.Quality-contingent output-based producersubsidies were important.It is difficult to discern the impact of certification or labelingon consumer perception of quality and therefore ondemand. China REDP supported the development of a“Golden Sun” quality label, but rural familiarity with thelabel appears to be low, and exporters seek internationallyrecognized certification.Projects in Argentina, Bolivia, Indonesia, Mongolia, andSri Lanka aimed to support the development of policyframeworks for off-grid electrification. The Sri Lanka effortwas most clearly successful. In Sri Lanka, the energyservice delivery project indirectly influenced the governmentto rationalize a photovoltaic module import tariff,which was reduced from 35 to 10 percent. Toward the endof the project, the government also introduced its newrural electrification policy, which aims to promote sustainablemarket-based provision of rural service. In contrast,in China, India, and the Philippines, multiple competingprograms for SHS promotion sometimes worked at crosspurposes, with heavily subsidized programs undercuttingthe progress of more market-oriented ones.IFC experienceIFC’s attempts at promoting private sector developmentin the SHS market were generally less successful than theBank’s. A candid IFC review (IFC 2007) points to a lack offlexibility; this is consistent with internal evaluations andwith the views of an industry participant and former client(Miller 2009). A $41 million effort initiated in 2000, the SolarDevelopment Group, comprised for-profit private equity financeand nonprofit technical assistance—in two arms thatwere intended to cooperate but failed to do so. The equityfinance arm collapsed having disbursed only $650,000, avictim of unrealistic expectations about industry profitabilityand rigid procedures. The technical assistance arm, moreflexible and less demanding of returns, disbursed about$2.2 million to 53 small companies spread across manycountries, so that the overall impact was highly diluted. IFCnoted also a failure to coordinate IFC activities with WorldBank support for favorable renewable energy policies.IFC’s approach has been less flexible thanthe Bank’s and has had less success.A more recent IFC-GEF effort, the Photovoltaic MarketTransformation Initiative, provided $30 million to supportphotovoltaic enterprises in India, Kenya, and Morocco.Initially overly bureaucratic, it was restructured for moreflexibility. It has been successful in India, where it hassupported performance guarantees and higher-qualityproducts, though initially it was poorly coordinated with theWorld Bank project. The Initiative has been less successfulin Morocco and Kenya.ImpactsA goal of these projects was to sustainably reduce the price ofSHS and thereby increase access. In general, closed projectsall observed reduction in the cost of photovoltaic systems.Under China REDP, photovoltaic system costs declinedfrom about $16/Wp to $9/Wp. In Uganda, the photovoltaicsystem cost declined from $20/Wp to $12–17/Wp by the endof 2008. These declines probably reflect increased domesticcompetition. The programs are too small to have affected theglobal market for solar modules, where increased Europeandemand drove down prices over the decade.Projects have generally reduced the localcost of photovoltaic systems.Renewable Energy | 29

Overall, the closed projects have not made a significantcontribution to the reduction of GHG emissions. This isa consequence of the target users’ poverty and low energyconsumption. In India, the avoided carbon emissions wereestimated to be 94,000 tons over the lifetime of the photovoltaicsubproject. In China, a rough extrapolation impliestotal CO 2reductions on the order of 7,000 tons per year.Evidence on these projects’ poverty reduction impacts isspotty because of the lack of monitoring. In India, sometraders reported a 50 percent increase in net income byusing solar instead of kerosene lighting; income of somerural households increased by about 15–30 percent becauseof increased home industry output. SHSs alsoallowed longer study hours for children under better lightingconditions. In China, a 2007 end-user survey covering1,203 households in 6 villages reported that 95 percent ofSHS users claimed that the use of a photovoltaic system increasedtheir incomes; 15 percent claimed that the increasewas significant.Project monitoring and evaluation needsto be strengthened, particularly regardingcost data, performance of installed systems,poverty impacts, and CO 2savings.Calculation of ERRs depends on technical assumptionsabout consumers’ benefit from lighting and may not becomparable between projects. In Bolivia, Indonesia, thePhilippines, and Sri Lanka, ERRs for the consumers’ investmentin SHS were calculated in the 27–47 percent range.For China, IEG estimated a phenomenal 115 percent ERR(World Bank 2010). These very high numbers are consistentwith studies that show huge gains to rural electrification(IEG 2008) and could be higher in areas where grid connectionis possible. However, the ERRs do not include thedynamic gains of industry technical progress and cost reductionsfor future consumers.Overall, projects monitoring and evaluation needs to befurther strengthened:• Disaggregated cost data, such as assembly cost, installationcost, and financing cost were usually not monitoredand reported, preventing assessment of the impact ofindustrial development on price.• Performance of installed photovoltaic systems wasnot always monitored and reported. Monitoring systemsare shut down when the project closes, inhibitingevaluation of the program’s sustainability—the crucialquestion of whether consumers continue to purchasesystems after the subsidy ends.• Baseline and comparison group data are lacking, so it isdifficult to assess impacts on poverty.• Although reducing CO emissions is a critical goal of2most of the projects, actual CO 2savings was not carefullymonitored.The Way Forward for Renewable EnergyEconomic and GHG returns to renewable energyinvestmentHydropower projects with high capacity factors and lowcosts per KW can be cost competitive with fossil fuel plantsand also offer GHG reductions and other environmentalbenefits. Wind and other renewable energy typically offersignificantly lower returns per dollar on both dimensions.But capacity factors make a large difference in returns. Renewableenergy offers additional benefits of energy security(for fuel importing countries) and a possible basis for stimulatingdomestic manufacturing. But low-capacity-factor,high-cost renewable energy may not be advantageous forlow-income countries.SHSs can have extremely high economicreturns, but they have relatively low carbonbenefits.SHSs supply power at high cost yet offer extremely higheconomic returns to off-grid households because of thehouseholds’ large benefits from electricity access. However,the systems have relatively low carbon benefits. The economicsof other kinds of off-grid renewables will be similar,because of low capacity factors and low usage of energy bypoor rural people.Overcoming barriers to adoption and diffusionMiddle-income countries are increasingly willing to paypremium prices for renewable energy because of its environmentaland energy security benefits. World Bank policyadvice and piloting has been helpful in China and Mexicoin catalyzing large-scale installation of wind facilities. Thisis a relatively low-cost, potentially high-leverage, but uncertainline of intervention that may take years to bearfruit. It is through this kind of indirect catalysis, rather thaninvestment in individual power plants, that the WBG canaffect a large enough volume of investment to help thesetechnologies make globally relevant advances in cost competitiveness.WBG support has helped develop SHSmanufacturing capacity.World Bank support has helped develop manufacturing capacityfor SHSs and reduce local prices in China, Sri Lanka,and Uganda. Markets are still reliant on subsidies, however,and are limited by the still-high prices of solar modules.Sustained declines in module cost, together with promotion30 | Climate Change and the World Bank Group

Box 2.5On-Grid and Off-Grid Renewable Energy in Sri LankaThe World Bank has helped promote significant growth in renewable energy in Sri Lanka, through two IDA-GEFprojects, beginning in 1997.The largest impact was through catalyzing the growth of grid-connected, independently operated smallhydropower plants. This was done by facilitating finance. A small power purchase agreement eliminatedtime- consuming, asymmetric negotiations between small companies and the electricity board. A market-basedfeed-in tariff, with a floor, ensured a minimum income. IDA funds were on-lent by private banks for durations of7–9 years, as opposed to the usual 4. The government assumed the foreign exchange risk (and has borne the costof a devaluation).As a result, 153 MW of minihydro have been installed, generating 4.4 percent of grid-connected power (2008)and saving a claimed 550,000 tons of CO 2per year. Sri Lanka has gained technical manufacturing expertise in theprocess and is now exporting turbines and engineering services.The projects also supported the rapid growth of solar photovoltaic home systems, from near zero to 125,000systems totaling 5.5 peak MW of capacity. Output-based subsidies (as in China’s REDP) and specialized microfinancewere key. Success was more modest for village hydro systems, supported through grants and loans, whichinstalled 1.3 MW serving 4,696 households. And a wind project, designed to demonstration commercial feasibility,performed below expectations and was not replicated. Recently, a new IFC project, PADGO, has begun to promotedecentralized energy, including combined heat and power fueled by biomass.Challenges for further expansion of renewable electricity include an inadequate grid; decreasing quality ofremaining hydropower sites; wind sites that are remote and can support only small turbines; and an increasinglybureaucratic plant licensing process that now requires two years. Demand-side management and energyefficiency have also been less successful than hoped. However, a 30 percent increase in electricity tariffs in 2009(that preserved lifeline tariffs) should increase the attractiveness of both renewable energy and energy efficiency.Source: IEG background study.of smaller systems (as in the Lighting Africa Project), couldhelp with diffusion.Long loan durations are an important stimulusto project bankability and are featuredin IFC lending and Bank on-lending.Long loan tenors are an important stimulus to projectbankability and are a feature of IFC direct lending andon-lending by the World Bank. At current carbon prices,carbon finance has a very modest leverage on the financialviability of hydropower, wind, or geothermal projects buta profound effect on projects that involve the capture ofmethane.Systems issuesAs renewable energy expands, systems integration issuesbecome critical. There is increasing use of strategicenvironmental assessments to aid in optimizing hydropowersites, taking account of economics, environmental impacts,transmission needs, and integration of intermittent powersources. Spatial planning of this kind will become increasinglyimportant to aid in integration of wind, biomass, solar,and other site-specific resources, especially as climateadaptation needs are factored in.Learning and feedbackSystematic monitoring of output of grid-connected renewableenergy can help explain why new types of projects areunderperforming, so that design and operations of repeaterprojects can be improved.Better monitoring of costs and impacts is needed to guidefuture investment portfolios. Actual long-term impacts ofsolar home systems are poorly measured—including howlong they last.Renewable Energy | 31

Chapter 3eValUaTIoN HIGHlIGHTS• Efficient lighting may offer very high economicreturns and significant GHG reductions.• Reducing technical losses in transmissionand distribution offers high returns and largescope for investment.• There are large energy efficiency opportunitiesin the building sector, where market failuresabound; this represents a largely untappedarea for WBG intervention.• Guarantees have stimulated lending by banksto enterprises with poor collateral but havenot been transformative in reducing banks’ riskaversion.• By screening existing clients for cleaner productionopportunities, IFC found projects withgood projected returns but small absolutelevels of energy and CO 2savings.• There remains a tremendous need to understandwhat works and what does not in thisstill-evolving field.Photo by Martin Wright/Ashden Awards for Sustainable Energy. Used with permission. http://www.Ashden Awards.org.

Energy EfficiencyThe first phase in this evaluation series (IEG 2009) assessed projects related todemand-side efficiency policy and to energy pricing. It highlighted the importanceof removing poorly targeted energy subsidies as a win-win policy that can promoteenergy efficiency, poverty reduction, fiscal balance, and GHG reductions.Since then, the Bank has codirected a G20 study to examinepolicies to reduce energy subsidies (IEA and others 2010).The previous evaluation also urged increased attention forthe intersection between efficiency investments and pricingreform. Such attention is now evident in the VietnamPower Sector Development Policy Operation (2010).Energy Efficiency in the First PhaseEvaluationDistrict heating was one area of World Bank activity reviewedin the Phase I report. Concentrated mostly inEastern Europe, this has been a large area of energy efficiencyemphasis. Over the period 1991–2008, there were41 projects with $2.1 billion in commitments. Of the 25closed projects, about three-quarters had outcomes thatIEG rated moderately satisfactory or better. To a largeextent these were “engineering” projects focusing on supply-sideefficiency improvements. However, some includedpolicy elements such as tariff reform. Some ongoingChinese projects are combining supply-side interventionswith promotion of far-reaching reforms that provide consumerswith the means and incentive to reduce excessiveenergy use.In its review, IEG found 34 projects initiated over 1996–2007 that had policy content that related (under a broaddefinition) to end-user efficiency. These included nine thatsupported the creation of appliance or building standards.Although the projects were successful in supporting adoptionof codes, there was been less attention over this periodto sustained support for implementation and enforcement,and very little monitoring and evaluation of impacts. Therewere about a dozen projects that supported demand-sidemanagement, usually through a utility.Complementing the earlier volume, this chapter reviewsseveral energy efficiency business lines that are large involume or have potential for scale-up: transmission anddistribution (T&D) loss reduction, financial intermediaries,direct IFC investments in industrial energy efficiency,and promotion of efficient light bulbs (table 3.1 puts this inthe context of all low-carbon investments from 2003–08).Using Financial Intermediaries to OvercomeBarriers to Energy Efficiency InvestmentsIn China, Eastern Europe, and Russia, a history of commandeconomies and low energy prices had fosteredindustries and housing that were wasteful of energy. Startingin the 1990s, the World Bank and IFC moved in parallelto equip financial intermediaries to promote energyefficiency in these regions. These efforts were mostly supportedby GEF and had GHG reduction as a goal. This sectionreviews 11 such projects (table C.4, which includesall but two of the energy efficiency financial intermediaryprojects initiated by 2005). 1Diagnosis of barriersThe projects had similar diagnoses of energy efficiencybarriers:• Banks do not understand energy efficiency financing. Inthis view, banks either did not understand that the savingsflow from energy efficiency improvements couldback a loan or did not know how to appraise that flowor the exaggerated the risk of these loans.• End users—factory or housing owners—do not understandtheir energy efficiency savings potential or howto realize it.Although the World Bank and IFC hadsimilar diagnoses of barriers to energyefficiency, they arrived at differentprescriptions.34 | Climate Change and the World Bank Group

Table 3.1 Energy Efficiency Interventions by Type in the Low-Carbon Investment Portfolio 2003–08(with overlap)Type of energy efficiencyComponent cost(millions)Percent oflow carbonNumber ofcomponentsDistrict heating and combined heat and power $573 7.2 25End user energy efficiency, government and municipal $484 6.1 22End user efficiency: industrial energy efficiency $1,128 14.1 47End user energy efficiency residential and commercial $572 7.2 40End user efficiency: multiple or unspecified user types $370 4.6 19Supply side efficiency: thermal power rehabilitation $656 8.2 15Supply side efficiency: Reduced transmission, distribution or system losses $916 11.5 37Supply side efficiency: other or unspecified $340 4.3 12Energy efficiency in transport $23 0.3 2Energy efficiency multiple, unspecified, or unknown $449 5.6 24Source: World Bank.Note: Individual components may appear in multiple categories, so column totals are not meaningful.IFC and the World Bank arrived at different prescriptions.Both hoped for a transformative impact (see table 3.2). IFCfocused on the presumed risk aversion and inexperience ofcommercial banks and therefore prescribed a combinationof technical assistance and loan guarantees. Technical assistancewould train banks to appraise and structure energyefficiency loans and to fill a pipeline of future projects.GEF-subsidized loan guarantees would act like trainingwheels. Once the banks realized that risks were low, theguarantees could be removed. Success of the participatingbanks would spark emulation, and energy efficiency lendingwould spread.In China, the World Bank prescribed energy servicecompanies (ESCOs) to overcome these barriers. ESCOswould provide both finance and technical know-how totheir clients (box 3.1). Because ESCOs were unknownin China and therefore highly risky, the Energy ConservationProject used GEF funds to help capitalize threecompanies to test and popularize the idea, which wasexpected to provoke spontaneous replication. Later, theBank used GEF- supported loan guarantees to back ESCOfinancing, again with the presumption that this would bea temporary measure to overcome banks’ unfamiliaritywith energy efficiency finance. In Romania and Bulgaria,the Bank used GEF grants to set up dedicated, revolvingenergy efficiency funds as an alternative to banks anda complement to ESCOs, which had already arrived inEurope.Table 3.2IFC and World Bank Approaches to Energy Efficiency FinancialIntermediation in China and Eastern EuropeIFCWorld BankChina GuaranteesTechnical assistance for banksESCO demonstrationTechnical assistance for ESCOsGuarantees for ESCOsEastern EuropeGuaranteesTechnical assistance for banksOn-lending (Russia)Dedicated energy fundsTechnical assistance for fundsSource: IEG.Note: ESCO = energy service company.Energy Efficiency | 35

Box 3.1ESCOs and Energy Performance ContractingPity the poor small factory owner. Busy running her business, she thinks there may be opportunities to save onenergy expenses, but does not think it a good gamble to invest time and money in an energy audit. What if thereare no savings? Or suppose the auditor recommends replacing old motors or boilers. Where will the proprietor,already at her borrowing limit, find funds? And how can she be sure that the investment will pay off?Enter the ESCO. Part consultant and part banker, the ESCO offers to reduce the factory’s energy costs by a specifiedamount, splitting the gains with the owner. To do this, the ESCO will finance, purchase, and install any requiredequipment, carrying the loan on its own balance sheet. The owner need merely collect the savings.This arrangement is called energy performance contracting and is the canonical form of ESCO. It requires reliableenforcement of contracts in order to work, given the complicated interdependence of lender, ESCO, and client.Other, simpler, arrangements are also possible.Source: IEG, based on Taylor and others 2008.Prescription: GuaranteesThe barrier diagnosis was partially flawed, so the guaranteeswere less transformative than hoped. The assumptionwas that banks practice project finance—in other words,they will finance a factory to set up a new assembly line,weighing the cost of the equipment against the return itprovides. But, the diagnosis continued, the banks don’tknow how to appraise energy efficiency projects, whichgenerate a cash flow from energy savings rather than fromincreased sales.In reality, most banks in these countries simply do not dopractice project finance, because there is no way to ensurethat they will get returns from that particular pieceof equipment. They are concerned with getting repaid andtherefore look beyond the project at borrowers’ overallbalance sheets and collateral. So for many banks the coreconstraint is their borrowers’ lack of creditworthiness, notthe novelty of energy efficiency. However, a better understandingof energy efficiency did help banks market loansto their more creditworthy customers. And the ChinaUtility-Based Energy Efficiency project (CHUEE) hashelped banks structure efficiency loans as project finance,putting savings into escrow accounts which substitute forfixed collateral.In China, collateral requirements are onerous. Hence, guaranteeswere important for credit access by cash-strappedESCOs and small and medium enterprises. AlthoughChinese banks welcomed the guarantees, they were notobviously critical to improved credit access by larger enterprises.In CHUEE, which catered to larger firms, 91 percentof a sample of borrowers said they could have financedtheir energy efficiency investment without the project andits guarantee, though perhaps more slowly (IEG 2010b).In IFC’s European projects, the guarantees, although attractivelypriced, were generally not appealing to banks fortheir small and medium enterprise (SME) or municipallending. These were familiar markets, and the banks werecomfortable bearing the risk of lending to these clients.Guarantees were more successful with new or unconventionaltypes of projects and borrowers, such as retrofittingapartment blocks by homeowner associations in Hungaryand renewable energy projects in the Czech Republic, whenthe regulatory framework and feed-in tariffs were still untestedand uncertain.It is noteworthy that almost none of the guarantees havebeen called. This experience may convince IFC to becomeless risk averse. In the CHUEE project, the IFC’s $207 millionguarantee was not at serious risk, buffered by a GEF-fundedfirst loss guarantee. The first loss was much smaller in thecase of Hungary’s OTP Schools Energy Efficiency project(see next page).Guarantees helped less creditworthyborrowers but did not trigger markettransformation.In sum, the guarantees were useful for less-creditworthyborrowers in underdeveloped financial markets. But theydid not have a large transformative effect on reducing commercialbanks’ risk aversion and are likely to be a permanentrather than temporary measure.Prescription: ESCOsThe Energy Conservation Project’s introduction of ESCOs(called energy management companies, or EMCs, in China)had significant direct effects. The three pilot companies realizedan average financial rate of return of 18 percent, withassets growing from $20 million in 1999 to $91 million in2006. The total ERR (including benefits to the EMC’s clients)was calculated by IEG at 50 percent without CO 2benefits,or 58 percent with CO 2at $6/ton of CO 2. Total claimedenergy and CO 2savings were 6 million tons of coal equivalentand 18.6 million tons through 2006—below appraisal36 | Climate Change and the World Bank Group

estimates but still substantial. Note that these are unverifiedex ante estimates.The introduction of ESCOs had significantdirect effects in China and spurreddevelopment of an energy managementindustry.The project also spurred the development of an EMC industry.As pilots, the EMCs immediately encountered aregulatory obstacle: Should they be regulated as financialinstitutions, leasing companies, or sales outlets? The Bankand the government worked to address the ambiguities, facilitatingentry of other EMCs. This is a good example ofhow pilot projects can reduce the costs of followers.In addition, the EMCs participated in training programsand opened their doors to would-be domestic and foreigninvestors. GEF funding was crucial in motivating this opennessto dissemination. In part because of these efforts andin part to an ASTAE training program, an industry associationof EMCs was formed and grew to at least 400 membercompanies by 2007, with a core of 40–50 practicing energyperformance contracting.However, the ESCO prescription required adaptation inChina, and it has limits. First, the Chinese ESCOs did notwrite contracts based on measured savings, a practice thatrequires a high degree of reliance on contract enforcementand on sophisticated measurement of outcomes (box 3.1).The three original EMCs have largely relied on agreed exante estimates of energy savings, or they simply becameequipment leasing companies. Few of the emerging EMCstake a systemic approach to improving process efficiency,but rely instead on promoting specific kinds of energyefficiency equipment. Second, there are limits to the abilityof ESCOs to provide financing. The original EMCs hadthe advantage of substantial capital at concessional terms.The new ones are generally small and even more creditconstrainedthan their clients.Chinese ESCOs adopted a basic model ofoperation akin to equipment leasing.In Hungary, the OTP Schools Project (OTP being the Hungarianbank involved) supports Caminus, an ESCO thatwon an umbrella contract for school heating and lightingupgrades. The umbrella contract is a noteworthy policyinnovation, because it drastically reduced the transactioncosts for small municipalities (they do not have to organizeindividual tenders) and engages economies of scale for thewinning ESCO. Caminus finances all the investments exceptfor the 20–25 percent paid from European Union grantsand is therefore taking the credit risk for municipalities.However, the scope of work does not include insulation,which means that potential cost and CO 2savings may beuntapped.Prescription: Technical assistanceIn Central Europe (Commercializing Energy EfficiencyFinance Program) and Russia (Sustainable Energy FinanceProgram), IFC used donor funding to hire a largein-house team that provided free services to local banks;there is a move now to increase cost recovery. Banks thatIEG interviewed confirmed that they benefited significantlyfrom the technical assistance program, especially trainingon technologies and appraisal of energy efficiency projects.It is difficult to assess whether the services provided werecost-effective. (In some cases, projects are unable to trackprecisely the use of technical assistance resources.) Somebanks have decided to build on and consolidate this learningby creating dedicated in-house units for energy efficiencyprojects. Staff cuts as a result of the financial crisisthreaten the sustainability of these changes but may aid indiffusion of knowledge through the industry if staff are rehiredelsewhere.Banks benefited from IFC technicalassistance.Prescription: Information disseminationThe China Energy Conservation Project also sponsored aninformation center, developing energy efficiency case studyexamples and technical guidelines and building outreachnetworks. An internal evaluation found that 6.2 percent ofa random sample of 10,000 enterprises attributed energy efficiencyinvestment to the information center’s influence.The claimed impact was 27 million tons of coal equivalentof energy and 71 million tons of CO 2. These are extraordinarynumbers, dwarfing the Energy Management CompanyAssociation’s direct impact. Likely, other factors wereat work, including policy pressure for energy efficiencyimprovements. However, even if overestimated by a factorof 10, these impacts would represent a good return on the$10 million invested in the centers.OutcomesEconomic returns, energy savings, and emissionsreductions. Impacts have varied substantially acrossprojects. As noted, the Energy Conservation Project inChina racked up high economic and carbon returns atthe subproject and project level. For CHUEE, which hasbeen analyzed in more depth, subproject and project levelreturns diverge. By June 2009, the guarantee programhad supported $512 million in loans for $936 million inprojects, associated with a claimed GHG reduction of14 million tons. However, as noted earlier, CHUEE mayEnergy Efficiency | 37

have had limited causal impact on these reductions. Thelarge client firms enjoyed good credit and were respondingin part to China’s vigorous pursuit of energy efficiencygoals in the Five-Year Plan. Still, if CHUEE countedall its project costs, but counted as beneficiaries only theminority of clients who said they had no other potentiallender, CHUEE’s overall ERR was 38 percent (about halfof which was carbon emission reductions, valued at $19/ton of CO 2).Economic and financial returns fromsubprojects are not consistently monitored.Economic and financial returns from subprojects are notconsistently monitored across projects. The energy efficiencyprojects in Bulgaria and Romania, unlike the others, monitorex post results. In Romania, where most projects wereindustrial, financial returns ranged from 15 to 87 percent. InBulgaria, which had a more diverse portfolio, returns rangedfrom 13 to 37 percent. The Russian project (still in progress)reports a mean ratio of annual energy cost savings to projectcost of 20 percent, but this value is problematic, reflecting anabstruse but crucial methodological issue. 2Projects with energy savings targets arefalling short of those targets.All the projects with energy savings targets are falling shortof those targets, often by a large margin. Croatia stands at3 percent, Bulgaria energy efficiency at 6 percent, and OTPat 19 percent. (Note, however, that these projects are stillongoing through 2010 or 2011, and final outcomes may differas experience progresses and data are reexamined.) Theshortfall is evident even after allowing for the low disbursementrate of some projects.Appraisal of potential GHG savings appears to have usedinconsistent and, in some cases, erroneous values relatingCO 2to energy. Reported achievements of CO 2savings areroughly commensurate with actual energy savings, exceptfor the Bulgaria project. There the implied CO 2saving/energysaving ratio appears to be unusually high. Overall itis difficult to reconcile high financial rates of return withunderachievement of energy targets. Further investigationinto monitoring and appraisal methodologies is needed.Post-project sustainability and catalytic impacts. Theclearest case of sustainability is in Russia, where someparticipating banks have begun to make loans withoutIFC resources, using IFC’s energy efficiency CalculatorTool. For Central Europe the case is less clear. BeforeIFC’s Commercializing Energy Efficiency Finance Programstarted operation in 2003, there was no bank inmarkets like the Czech Republic, Hungary, or Slovakiathat specifically targeted energy efficiency or renewableenergy financing. With significant input from the financeprogram’s technical assistance team, two banks have createddedicated internal units and developed productsspecifically for the energy efficiency/renewable energymarkets. With the expiration of the subsidized guaranteeprograms, however, some of the banks involved in theenergy finance program have discontinued lending forstreet lighting and residential energy efficiency or havereverted to previous collateral requirements.The catalytic impact of the WBG projects on the broaderenergy efficiency finance market is difficult to evaluate becauseof the impact of the financial crisis, because monitoringand evaluation was not generally set up to track diffusion,and because rising energy prices throughout theregion (figure C.1) would be expected to encourage energyconservation regardless of WBG intervention. The RussiaSustainable Energy Finance Program does have as an indicatoradoption of energy efficiency lending by nonpartnerbanks and reports three instances. Observers of Hungarianbanking find it difficult to pinpoint diffusion impacts of theIFC projects.In Russia, joint IFC-IBRD technical assistance and analyticwork, including an enterprise survey, highlighted thetremendous scope for profitable energy efficiency in theRussian economy. This work estimated that up to 40 percentof energy consumption could be cost-effectively reduced.WBG analytic efforts provided key inputs to theRussian government as it drafted a new energy efficiencylaw, recently adopted. The impacts of the law will dependon yet-to-be-adopted implementation regulations.Direct Investments in Energy EfficiencyIFC’s energy efficiency emphasis has been on the use of financialintermediaries, but it also makes direct investmentsassociated with energy efficiency. Often energy efficiency isincidental to plant modernization or expansion. In othercases, energy efficiency is the main goal, as in installation ofwaste-heat recovery equipment.Mainstream investmentsIn 2005, IFC began to review projects to determine whetherthey could be claimed as having energy efficiency content.Over the period fiscal 2005–08, 48 such projects were identified.IFC assigned a notional proportion of each investmentto energy efficiency. In total, $392 million of IFC’s$1.96 billion investment (in projects valued at $3.96 billion)was considered to be energy efficiency. Ten projectsaccounted for more than 80 percent of the notional energyefficiency investments.IFC has supported some CO 2-intensive cement and steelcompanies in replacing obsolete, inefficient production38 | Climate Change and the World Bank Group

lines. Some of the companies involved emit more than10 million tons of CO 2annually—more than some countries—soefficiency gains could have global significance.Four cement projects replaced old wet process equipmentwith more efficient dry process production lines. Governmentpolicies, together with cost savings, motivated thephase-out of old facilities, and these companies likely hadgood access to credit, so IFC’s additionality is not clear.Two investments in an Eastern European steel companysupported replacement of open-hearth furnaces with modernblast furnaces. In this case, the combination of difficultcredit, low energy prices, and an IFC environmental andsocial action plan makes it plausible to attribute the efficiencygains to IFC’s intervention.In other cases, the basis for allocating investment amountsto energy is unclear. Two investments, totaling $55 million,supported airlines in modernizing their fleets. These investmentswere entirely classified as energy efficiency, althoughthey conferred other benefits, such as safety, comfort, andreliability.In many cases, it is not clear if IFC’s directinvestments have led to improvements inenergy efficiency.and CO 2emissions, so it is impossible to quantify energyor GHG savings. Some of the projects were initiated beforeGHG monitoring was required. But even where required,compliance with monitoring is imperfect.The cleaner production initiativeApproved in January 2007, the three-year, $20 million CleanerProduction Lending Pilot is a proactive initiative to seekand promote energy, water, and materials efficiency opportunitieswithin IFC’s existing clientele. The program focusedon clients with good credit standings and environmental performance,enabling IFC to significantly reduce loan preparationtime and effort. Projects were identified either directlywith clients or via optional donor-funded energy audits.In 2009, the pilot was scaled up to a $125 million, threeyearCleaner Production Lending Facility, covering all realsector investments. To complement the loan funds, a$5 million Global Cleaner Production Facility (GEF-fundedvia the Earth Fund) will cofinance Cleaner Productionaudits. Clients will bear half the audit costs.The $20 million Cleaner Production Lending Pilot was fullycommitted to eight projects, with an average loan size muchsmaller than the IFC norm. Three of the projects employedthe donor-funded energy audits; in other cases, the clientsidentified energy efficiency savings. The projects’ projectedPhoto by Gennadiy Ratushenko, courtesy of theWorld Bank Photo Library.In one case, IFC invested in an American-owned distributionutility in an Eastern European country, with an explicitgoal of reducing technical losses, which stood at 12.6 percent.Five years after the initial investment, the goal had notbeen achieved: technical losses had actually increased to15 percent. Had the company reduced losses to 8 percent(a conservative target), it could have cut CO 2emissions by180 thousand tons per year.Most of these ex post identified energy efficiency projectslack baseline and monitoring data on energy efficiencyreturns to investment were 22–117 percent (with a medianof 36 percent) and are projected to yield 1–19 kilogramsof CO 2per year per dollar invested (or roughly an additional1–19 percent to the return on investment if carbonis valued at $10/ton of CO 2), with carbon returns mostlyproportional to financial ones.Total annual CO 2savings are estimated at 136,613 tons. Buta single company accounted for half those savings. Thus, significantresources are devoted to small loans that yield CO 2savings of just a few thousand tons of CO 2per year. Ex postEnergy Efficiency | 39

measurement of achieved economic returns is lacking, undercuttingthe Lending Pilot’s ambition to use program results toconvince other clients to invest in cleaner production.The Cleaner Production Lending Facilityfunded small loans with a median projectedrate of return of 36 percent, but most hadCO 2savings of just a few thousand tonsper year.An early lesson from the audits was the necessity of costsharing.Initially, clients were only required to cover 10 percentof the cost but committed to reimburse the grant ifaudit recommendations were implemented. This created anincentive not to disclose implementation plans and not toborrow from IFC. After full cost sharing was implemented,the three sponsored audits successfully identified costsavingmeasures with one- to four-year paybacks.The audit costs were small relative to the client’s projectedreturns. But the audit costs were relatively large compared toIFC’s potential returns from lending. Hence, IFC-fundedaudits are not likely to be sustainable for small-scale projectsin the absence of concessional funding, though theaudits themselves are potentially cost-effective.Transmission and DistributionElectricity T&D projects provide a potentially cheaper alternativeto construction of new generation in countrieswith high technical losses. They also offer major potentialfor reducing carbon emissions. Such projects can increasesupply security and reduce outages and can be important forimproving access. They can reduce carbon emissions by—• Connecting renewable power to the grid• Reducing technical losses (dissipation of electricity aswaste heat)© Moodboard/Corbis.• Reducing the illegal or unpaid consumption known asnontechnical losses (emissions are reduced if consumers,confronted with a bill for electricity, reduce theirconsumption).Reducing lossesLosses vary widely across regions and countries becauseof utility performance. A survey of 12 African utilitiesfound total loss rates ranging from 6 to 35.3 percent(Pinto 2010). In these utilities, transmission losses rangedfrom 3 to 6.6 percent, distribution losses ranged from2.4 to 20.5 percent, and nontechnical losses ranged from3.6 to 17.5 percent.Technical losses in transmission anddistribution remain high in many regions.Technical losses can be reduced through direct investmentin hardware and network management and by increasingthe institutional capacity of utilities to plan, finance, andmaintain their networks. Opportunities for very large economicreturns from T&D projects exist largely becausemany power utilities have lacked the capacity, funds, andincentives to undertake optimal network management. Unlessperformance of utilities is improved, there is a risk thatT&D projects may not yield their expected economic andemission reduction benefits.Nontechnical losses are usually caused by a combinationof faulty or inadequate metering, collusion between utilityemployees and power consumers, and theft. Nontechnicalloss reduction entails collecting money from customerswho were previously receiving power at no cost, provokingopposition from entrenched interest groups.Advanced metering infrastructure technology allowsmeters to be read remotely (using mobile phone networks),which reduces much of the scope for collusion and theft.Significant reductions in the price of advanced meteringinfrastructure components has made their widespreadadoption economically feasible (Antmann 2009). Preliminaryevidence from Brazil, the Dominican Republic, andHonduras demonstrates their effectiveness in reducingnontechnical losses.Advanced metering infrastructuretechnology has demonstrated effectivenessin reducing nontechnical losses.Nontechnical losses are often ascribed to poor people, buta significant portion of those losses comes from majorusers, and targeting these users is often key to reducinglosses. For example, a loss-reduction effort in North Delhisuccessfully reduced total losses from 53 percent in 2002 to40 | Climate Change and the World Bank Group

18.5 percent in 2008. This was done primarily by usingadvanced metering infrastructure for the 30,000 majorconsumers, who collectively represent 3 percent of the customersbut 60 percent of the power sales (Antmann 2009).WBG portfolio, 2003–08The Bank has a long history of investment in T&D projects.Over 2003–08, the WBG committed $3.45 billion to44 T&D projects that are expected to lead to significant carbonreduction benefits or technical loss reductions, thoughemission reduction was not an explicit goal for many ofthem. (Table C.2 summarizes impacts and appendix Dpresents lessons from completed projects).The Bank’s portfolio demonstrates recognition of the importanceof improving the financial state of utilities in orderto improve long-term impacts. Among the low-carbonT&D projects, 60 percent addressed nontechnical losses,and 82 percent of projects that specifically aimed at lossreduction included nontechnical loss-reduction measures.Projects have been aimed at the regions with the highestpower losses (particularly Europe and Central Asia andSouth Asia).Projected economic gains from these projects are oftenlarge. Many projects calculate high ERRs on a large investmentbase (often 20–60 percent; see tables C.1 and C2).Projected benefits are even higher if the project is expectedto boost access or reduce outages. One project in theDominican Republic projects a net present value of $428million on a $122 million investment.The projected economic gains from theseprojects are often very large, but thedisparate methodologies used make itdifficult to validate or compare projections.Unfortunately, it is difficult to validate or compare theseex ante projections, because Bank projects do not use acommon methodology when valuing loss reduction, outagereduction, or other benefits. It is not always apparentwhether loss reduction forecasts come from formal engineeringstudies or are rough estimates. Many projectionsare contingent on assumptions that loss reductions willbe sustained across many years after project completion,presuming successfully institutionalized change in maintenanceand operations.Efficient Light BulbsElectric lighting represents 19 percent of global electricityconsumption (IEA 2006). In many developing countries,lighting is the largest use of power in the residential sector,particularly in the poorest countries, where householdshave few electrical appliances. For example, in Ethiopia,lighting constitutes 74 percent of power consumption fora typical household that has electricity access (Maurer andNonay 2009). Because lighting demand is concentrated inthe early evening hours, utilities must build additional generationcapacity that is only used during this period.Switching from standard incandescent lamps to CFLs reducesenergy consumption (saving fuel costs) and capacitycosts while mitigating CO 2emissions. CFLs draw only20–30 percent as much power as equally bright incandescentlights and last much longer. Households benefit fromlower energy consumption, and CFL adoption can pay foritself in 2–14 months. Utilities benefit from lower powersales (when generation cost exceeds supply cost) and fromreduced capacity costs.Replacement of all of Sub-Saharan Africa’sincandescent lights would effectivelyboost power availability by 23 percent,at a fraction of the cost of peaking dieselgenerators.A recent ESMAP review (ESMAP 2009) finds that a “representative”CFL program, under optimistic assumptions,would have a benefit-cost ratio of nearly 28:1, based on energyand capacity savings, or nearly 30:1 if CO 2abatementwere valued at $10/ton. A Bank study for Sub-SaharanAfrica (de Gouvello, Dayo, and Thioye 2008) estimated thatregionwide replacement of all 476 million inefficient lights(60 percent of these are in South Africa) with CFLs wouldreduce peak power demand by 15,200 MW, representingabout 23 percent of installed capacity for the region.Recent estimates of CFL bulk purchase projects (ESMAP2009) suggest that one-shot replacement can be achievedat roughly $2 per bulb. Although full phase-out for Africacould cost $950 million, significant gains could be achievedwith a much smaller investment targeting residential usersor countries with high emission factors, expensive power,or supply shortages.Barriers and interventionsDespite the large benefits, private households have beenslow to adopt CFL technology. Where electricity prices areartificially low due to subsidies, consumers have low incentiveto adopt. Other adoption barriers include the higherupfront price of CFL bulbs, distaste for the color or qualityof the illumination, skepticism about the bulbs’ lifespan,and poor consumer knowledge.Although the potential benefits are large,households have been slow to adopt CFLtechnology.Energy Efficiency | 41

Since the early 1990s, public entities, utilities, and developmentagencies have use several (overlapping) design featuresto encourage CFL adoption: subsidizing bulbs, usingbulk procurement, imposing quality standards, offeringcertification, and mounting advertising campaigns.WBG portfolioSince 1994, the WBG has supported residential CFL programsin more than 20 countries; the Bank has coveredsome 50 million CFLs primarily through bulk distributionor market-based projects. Many projects have receivedGEF or carbon fund support, though many recent projectsaimed at rapid crisis mitigation have been implementedwithout GEF assistance.The WBG has supported residential CFLprograms in more than 20 countries.In the early 1990s, WBG-GEF projects supported CFLdistribution in Jamaica, Mexico, Poland, and Thailand. InPoland, though CFL sales increased and significant powersavings were attained, market transformation effects werenot fully sustained, as the project lacked effective mechanismsto sustain quality levels (GEF 2006a).Based on results from these projects, IFC undertook theGEF-supported Efficient Lighting Initiative (ELI), whichcarried out market-based programs in Argentina, the CzechRepublic, Hungary, Latvia, Peru, the Philippines, and SouthAfrica. ELI supported public education, targeted subsidies,demand-side management programs, and the developmentof standards and labeling for CFLs.After a lull, there was a surge in World Bank projects in2007–09. Many of these were emergency projects to addressdrought-induced hydropower shortages in Africa. Most ofthese new projects are bulk-purchase and distribution forresidential CFLs. Bulk-purchase projects have become favoredbecause of their ability to reduce unit costs of bulbsthrough bulk discounts, their substantial and immediatereductions in peak electricity demand, and the ability to accesscarbon financing.Economic, CO 2, and environmental impactsCFL project appraisals are generally back-of-the-envelopeexercises that calculate savings based on assumed numberof bulbs, wattage of new versus old bulbs, and hoursused per bulb. These ex ante calculations suggest ERRs inthe hundreds of percent together with more modest CO 2savings.Few of the WBG-supported projectshave applied rigorous monitoring andevaluation.Photo by Dominic Sansom, courtesy of the World Bank Photo Library.Well-developed methodologies exist for monitoring theseoutcomes and calculating impacts, as a result of decadesof demand-side management programs in developedcountries (Vine and Fielding 2006). However, few WBGsupportedprojects to date have applied rigorous monitoringand evaluation methods. ELI mounted a large monitoringand evaluation effort, but long-term impact monitoring wasnot undertaken, and the interim results were never publiclyreleased. Most other projects have undertaken limitedex-post monitoring, and few attempt to compare projectversus control group areas. Hence, the impact assessments(table C.3) must be read with great caution.Early projects claimed positive impacts but faced barriersto sustainability: commercial prices of CFLs remained highand quality often low. Yet in Sri Lanka, despite a high bulbfailure rate, a subsidy demonstration project with 100,000bulbs led to a successful follow-up where 511,000 bulbswere purchased at commercial rates. Survey results foundthat 58 percent of customers thought the utility’s endorsementof CFLs was important or very important in determiningtheir decision to purchase CFLs (SRC 1999).42 | Climate Change and the World Bank Group

ELI deployed a variety of tools to encourage commercializeduse of CFLs, combining limited-term subsidies, standardsand labeling, public education, and targeted creditschemes. Although the credit schemes were generally unsuccessful,the $15 million project claimed direct reductionsof 2,590 GWh and 1.9 billion tons of CO 2. The projectclaims also to have catalyzed reductions in CFL prices. Itis not possible to validate these claims—for instance, thereare no statistics on CFL prices and diffusion in comparisoncountries—but the project would have a high return even ifthese impacts are overstated by a factor of 10.In a follow-on project, the Bank and IFC, with GEF funding,commissioned the China Standard Certification Centerto operate the ELI Quality Certification Institute, whichdevelops quality standards and licenses manufacturers whocomply to use the ELI label. Some Bank projects use ELIstandards for procurement practices; so far the impact ofELI standards on commercial markets is unclear.The best-documented completed Bank project wasundertaken by Electricity of Vietnam over 2004–07, withGEF funding. The project included a CFL component thatdistributed 1 million bulbs to rural customers at a costof $1.8 million, along with other energy efficiency activities.Bulbs were purchased using bulk supply contracts atan average price of $1.07 per lamp and sold to customersby Electricity of Vietnam at an average price of $1.56 perlamp. In comparison, existing retail prices were $2.00–3.00 per lamp. Many utilities lack incentive to participatein programs that reduce electricity sales, but Electricity ofViet Nam was strongly motivated because it is mandatedto serve low-income and peak-hour customers at pricesbelow its cost (average marginal revenue from power saleswas 4.5 cents/kWh as opposed to average marginal cost of8 cents/kWh).The best-documented CFL project resultedin energy savings of 46 GWh per year at acost of $1.8 million.An ex post evaluation (IIEC 2006) found a peak load reductionof 30.1 MW, energy savings of 45.9 GWh per year, andexpected lifetime energy savings of 243 GWh. Average customerpower bill savings were estimated to be 15.2 percent.Failure rates of CFLs were relatively low (0.5 percent), andthe utility replaced failed lamps. A substantial subsequentrise in CFL sales was attributed to an accompanying publiceducation and CFL promotion campaign. The benefits fromincreased private sales potentially exceed the benefits fromthe primary distribution campaign. Although this markettransformation impact is difficult to validate, it is plausiblegiven the extremely large increase (80 percent and 150 percentincreases in first-year sales for the two largest sellers).CFL projects have also been a cost-effective response to energyemergencies, saving both costs of providing additionalcapacity and the fuel cost of running diesel generators. Forexample, during a 2007 power crisis in Ethiopia, $5 millionwas spent on 4.6 million CFLs, which were expected to save315 GWh per year for 4 years. Meeting the same demandfor 4 years using leased diesel generators would have cost$20–$115 million in leasing costs and $152 million in fuelcosts (EEPC 2009) and resulted in about 750,000 tons ofadditional CO 2emissions.Unlike incandescent lights, standard CFL bulbs contain asmall amount of mercury (about 0.001–0.025 grams, comparedto 0.5–3.0 grams in a mercury thermometer. 3 Bysome calculations, use of incandescent bulbs triggers moremercury release into the atmosphere because of the mercurycontent of coal. Mercury concerns have not played amajor part in CFL project design. These projects typicallytrigger environmental category B for safeguards, 4 but onthe basis of other, larger, power sector components. MostCFL projects do not explicitly mention mercury issues, butthe most recent Bank CFL projects (Rwanda 2008, Senegal2008, Benin 2009, and Mali 2009) incorporate designs forcollection or disposal mechanisms. Bank projects in Ethiopia(2006, 2007) are studying CFL disposal options for Sub-Saharan Africa.Coordination with policy reformThe first phase of this climate evaluation (IEG 2009)pointed to the potential to combine electricity pricing reformwith promotion of CFLs and other efficiency devicesas a way of cushioning the transition to environmentallyand financially sustainable pricing. Although many recentenergy projects include both CFL distribution andtariff reform (for example, in Benin, Cote d’Ivoire, Mali,and Togo), this has tended to occur because both CFLsand tariff reform are practical responses to power supplyshortages. In these cases, CFLs have been “sold” as a peakload reduction tool, rather than as a tool to mitigate tariffincreases. Thus the potential for policy coordination remainsunexplored.The potential for combining CFLdistribution with tariff reforms remainslargely unexplored.Incentives for staff and managersThese projects offer high returns, but they may not be attractiveto Bank staff and management in an environmentthat measures results by volume of disbursements. As anexample, compare a $5.7 million GEF-funded energy efficiencyproject in Vietnam that included a $1.8 millioncomponent for a residential CFL component to a $335 millionhydropower generation project in Ethiopia, funded inEnergy Efficiency | 43

part with a $198 million IDA credit. The hydropower plantcontributes 35 times as much to a tally of Bank disbursementsbut costs the Bank only 3.8 times as much in preparationand supervision. Overall, the hydropower project cost58 times as much as the energy efficiency project and 183times as much as the CFL component. Yet it generated onlyabout 20 times as much power and provided only about4.5 times as much capacity. This is not to suggest these twoparticular projects were substitutes or were inappropriate.Rather it serves to illustrate the order of magnitude of Bankcosts, client costs, and client benefits in energy efficiencyand renewable projects; it also suggests why preparation ofsmall energy efficiency projects has relied on trust fundsrather than Bank budget.The Way Forward for Energy EfficiencyEconomic and GHG returns to energy efficiencyinvestmentsEfficient lighting may offer extraordinarily high economicreturns, with substantial GHG reductions as a by-product.Promotion of efficient lighting may have large catalytic ordemonstration effects. A concerted, multinational effort topursue incandescent phase-out could lead to economies ofscale in production and distribution. Such an effort mightrequire considerable WBG staff time for preparation andcoordination but relatively low loan or grant amounts. Reductionof transmission and distribution losses also offersapparently high returns and scope for large investments.Scattered information from industrial energy efficiencyintermediation projects suggests that SMEs can achieveattractive rates of return through retrofits. But there mayalso be high returns in large, greenfield companies. Manycompanies operate at the state of the art in efficiency, butnot all do. A recent study in China found that large cementcompanies investing in new facilities failed to incorporatetechnologies that would have financial returns greater than35 percent (not taking into account carbon benefits) (Priceand others 2009). Globally, cement and steel account for15 percent of energy-related GHG emissions, about threequartersas much as coal burning, so this is an importanttarget for improved efficiency.Studies project large energy efficiencyopportunities in the building sector, wheremarket failures abound, representing alargely untapped area for WBG intervention.Studies project large energy efficiency opportunities inthe building sector, where market failures abound. Rapidurbanization during the coming decades will result in theconstruction of billions of square meters each year. Becauseof market failures, these buildings are likely to be energyinefficient and carbon intensive, and they will stand for decades.At the same time, demand for energy-intensive appliancessuch as televisions, refrigerators, and air conditionersis growing rapidly. As noted in Phase I of this evaluation,there is large scope for supporting policies for building andappliance efficiency.The WBG has modestly supported policy formulation but,with the notable exception of two Chinese projects, has notbeen deeply involved in implementation. There is considerablescope here for public-private coordination. The WorldBank could support policy implementation, and IFC (followingthe precedent of ELI) could work with manufacturersto promote more efficient and cost-effective productsand practices.Overcoming barriers to adoption and diffusionMany of the barriers to energy efficiency lending are in factbarriers to general lending: lack of liquidity, inability tomake long loans, and inability to rely on contracts. Hence,guarantees have been useful not as a temporary device toovercome banks’ unfamiliarity with energy efficiency, butrather the means to convince them to lend to enterpriseswith poor collateral. Future use of guarantees should bemore tightly focused on these targets. Technical assistancedoes appear to have helped some banks identify and marketenergy efficiency lending opportunities.Energy efficiency policies loom large as complements tofinance. China’s vigorous push for energy efficiency was amotivator for industrial investments. Hungary’s innovationsin municipal finance opened cost-saving, emissionsreducingopportunities. As noted in first phase of thisevaluation, cost-reflective prices are important motivatorsfor efficiency.Growing but largely unevaluated experience with CFL distributionprojects suggests that public policies can overcomehousehold barriers to adoption. Carbon financewould be another possible mechanism to pay for light bulbdistribution, because the carbon returns are large relativeto CFL costs. Further analysis is needed to determine whena one-time subsidized distribution of CFLs is sufficient totrigger follow-on adoption and diffusion.IFC could use its direct investments to promote energy efficiencyat three levels. First, just as it has encouraged clientbanks to market energy efficiency solutions to their ownclients, IFC itself could proactively seek new markets withlarge impacts. These could include, for instance, developersof large commercial buildings and residential developmentsthat are interested in pursuing low-energy buildingconcepts, including nascent proposals for “eco-cities.”Second, within its current client base, IFC could prioritizethe attention of energy efficiency staff to projects with the44 | Climate Change and the World Bank Group

highest potential for savings. Currently, IFC has devotedstaff attention to small loans offering only a few thousandtons per year of CO 2savings, and in at least one case (theabove-noted distribution utility) failing to follow up on aproject offering energy and CO 2savings a hundred timesgreater. IFC has just hired an expert in building energyefficiency—how should this expert’s scarce time be allocatedfor maximum impact? Third, IFC could encourage benchmarkingof performance among its smaller direct clientsand among clients of financial intermediaries, preparingstandardized audit services and loan products for them.Systems issuesEnergy efficiency can offer a cost-effective alternative tonew generation, but this may be overlooked in the absenceof a view of the entire power system. Similarly, thecongestion impacts of new generation on transmission canbe overlooked. A systems view is important to address thedegree to which energy efficiency provokes “snap-back”—increased consumption of electricity as its effective pricedrops.Learning and feedbackMost of the financial intermediation projects had a rationaleof promoting diffusion of financial technologies—thatis, the techniques of appraising and structuring energy efficiencyloans. However, this was most effective in China,where the Bank’s Energy Conservation Project (especially)and IFC’s CHUEE Program (to a lesser extent) sought tobuild networks and disseminate information throughoutthe financial and end-user industries. In contrast, mostother projects did not create explicit channels for diffusion,and banks had little motivation for sharing their learningwith competitors.There remains a tremendous need tounderstand what works and what does notin the evolving field of energy efficiency.There remains a tremendous need to understand whatworks and what does not in this still-evolving field. Financialreturns to energy efficiency are poorly and inconsistentlymeasured. A lack of monitoring information on thestate of T&D losses weakens power planning and makes itmore difficult to locate high-return investments. And thereis a desperate need for applied operations research in efficientlighting programs to understand which consumer andproducer barriers are most salient and which interventionsare most effective.The first phase of this evaluation stressed the importanceof developing indicators for energy efficiency to set targetsand assess progress. Learning is critical, because energyefficiency promotion is less well understood than renewableenergy promotion. However, current project-levelmethodologies are haphazardly applied, often lack ex postmeasurement, and are inconsistent in their treatment ofprojects that combine retrofits with capacity expansion.The United Nations Industrial Development Organization,however, has documented that it is possible to set up informationnetworks that facilitate benchmarking and sharingof infromation on efficiency performance. At the nationallevel, several countries are beginning to assemble sectoralinformation on energy efficiency, as a recent ESMAPsponsoredworkshop showed. “Bottom-up” indicators, forexample, for particular industry sectors or for power distributionlosses, would be more useful for the purposes discussedhere than national level indicators.Energy Efficiency | 45

Chapter 4eVAluATioN HigHligHTS• Bus rapid transit systems offer good returnsin reduced travel time, congestion, and airpollution, with carbon cobenefits.• Targeting, price-setting, and financial sustainabilityare major challenges for forest projectsusing payments for environmental services.• The BioCarbon Fund has helped catalyzethe forest carbon market but has hadimplementation problems.• Protected areas have been effective in reducingtropical deforestation, especially wheresustainable use is permitted; indigenous areasare even more effective.• IFC investments in the Amazon did notcatalyze deforestation, but neither did theycatalyze widespread changes in industrypractice.Photo by NASA, used courtesy of NASA; found at Visible Earth (http://visibleearth.nasa.gov/view_detail.php?id=1598).

Beyond Energy: Low-Carbon Pathsin Cities and ForestsThe futures of cities, urban transport, and growth are intertwined. Urban agglomerationshave the potential to provide a high-productivity, integrated labor market ifurban services, especially transportation, work efficiently. Once urban layouts havebeen established, they can persist for decades, even centuries, shaping circulationpatterns (Shalizi and Lecocq 2009). So avoiding lock-in is important for urban efficiency(and lower emissions) in those countries that are still urbanizing.Since the adoption of the SFDCC, the WBG has launchednew analytic and collaborative activities to promote efficientcities, including the Eco2 Initiative and ESMAP’s EnergyEfficient Cities Initiative.Urban TransitThis section examines bus rapid transit (BRT), for whichthere is a longer track record. Invented in the city of Curitiba,Brazil, in the 1960s, this is emerging as the single largestline of WBG action within urban transportation.BRT refers to a range of options (FTA 2003). At a minimum,it involves moving buses out of mixed traffic into buspriority lanes or into exclusive bus lanes as a way to appealto passengers who put a premium on time savings. Atthe high end, it includes bus rapid transit systems (BRTS).A low-budget version of a metro system, BRTS use articulatedbuses on dedicated roadways, allowing the systemto move more people more quickly than traditional buseson shared, clogged roadways. The capital costs (per kilometerof line) of a BRT can be a quarter to a third of thecost of building a comparable tramway and 5–10 percentof the cost of a metro system. (Nonetheless, metros may becost-effective in certain high-density locales, and the WorldBank continues to support them.)Transport, development, and climateIn the non-OECD countries, GHG emissions from transportnearly doubled from 1990 to 2006, and transport’sshare of emissions rose from 5.6 to 12.8 percent. 1 If thesecountries emulate developed countries, transport emissionswill continue to grow rapidly. At the global level, within thetransport sector, the land transport subsector accounted for85 percent of all energy consumed in 2009. To make a dentin CO 2reduction in the transport sector, the primary focuswill have to be on road transport, both within and betweencities.In already urbanized regions such as Latin America, publictransport typically accounts for at least half of public trips.There is an opportunity for developing countries to maintainthis high share for public transport if they can avoidthe death spiral found in developed countries. In that spiral,a burgeoning middle class abandons poor-quality publictransport for autos, imposing congestion and pollutioncosts on everyone. With ridership declining, public transitis forced to raise fares or further reduce quality, drivingaway more passengers, with a share declining to 10 or20 percent.Developing countries may be able to avoidthe spiral of declining public transportquality, rising fares, and declining marketshare that some developed countries haveexperienced.The consequences of this spiral are dire for developingcountry cities because of their lack of road capacity. Inmany developing countries, the circulation system in citiesaccounts for 10–20 percent of the urban area, in contrast to35–50 percent in developed countries. Squeezing more carsonto limited roadways generates congestion and heightenedCO 2emissions.48 | Climate Change and the World Bank Group

The WBG urban transport portfolio (2003–08)The IEG review of the overall transport portfolio (IEG2007) noted that the number of urban transport operationsis small relative to the scale of the problem. It suggestedthat the limited activity may reflect the complexity of theseprojects, but nonetheless it recommended that this subsectorof activity should grow. Since then the WBG TransportBusiness Strategy for 2008–12 has identified climate changeas one of its five strategic objectives.Bus rapid transit projects, many withcarbon objectives, multiplied at the Bankafter 2002.During 2003–08 there were 36 World Bank urban transportoperations, versus 37 in the previous five-year period1998–2002. However, average Bank commitments per yeardeclined from $713 to $611 million. The decline in part reflectsa complete lack of new operations in South Asia in2003–08. However, a post-2008 upsurge may signal a partialreversal of trends.During 2003–08, there was a clear shift toward BRT. Therewere 19 such operations (11 for full BRTS), compared with6 in 1998–2002 (only one of which was for a BRTS). Thenew operations were concentrated in Latin America andEast Asia.Attention to carbon has been increasing. During 2003–08,39 percent of the urban transport operations had formalor informal 2 carbon reduction goals, versus 19 percent inthe prereview period. As many as 10 operations in 2003–08had components to monitor carbon reduction (comparedto only 1 in the previous period), 6 of which involved GEFfinancing to develop the components.Barriers and interventions to reducing congestion andCO 2emissionsBRTSs face a number of barriers:• Conflicting demand for road space. Establishing dedicatedbus lanes can displace other road users, creating resistanceto the loss of circulation space and leading to spilloverof traffic to neighboring roads. Demand managementand parking restrictions are potential responses.• Institutional problems. The real benefits of mass publictransportation are only realized with a multicorridortrunk route system that is linked to a series of feederroutes. Scaling up to such a system puts a premium oncoordinated planning in multi-jurisdictional metropolitanareas and on sustained long-term political commitmentto routes and land use zoning.• Opposition by taxi and minivan owners. BRT achievespollution, congestion, and carbon emissions reductionslargely by substituting for existing fleets of minibuses.Such fleets are highly polluting and unsafe but employthousands of drivers, who tend to oppose change. Thisprocess has proven to be politically contentious in manycities; responses include finding ways to integrate the driversinto the new system or otherwise compensate them.Photo by Curt Carnemark, courtesy of the World BankPhoto Library.Beyond Energy: Low-Carbon Paths in Cities and Forests | 49

The challenges to bus rapid transit includecompeting demand for road space, lack ofcoordination between neighboring cities,and opposition by taxi and private minibusowners.The BRT experienceAmong WBG-supported programs, the BRTSs that aremost developed are those of Bogota and Mexico City. Inboth cases, the WBG worked with willing clients, who hadalready concluded that BRTS was a desirable alternative.In Bogota (box 4.1), a sequence of learning-by-doingloans totaling $887 million (together with non-Bank carbonrevenues) supported expansion of BRT corridors andtheir integration into a citywide trunk and feeder system,with attention to bikeways and pedestrians. Systemexpansion was complemented with serious demand-sidemeasures, including doubling parking fees, boosting thegasoline tax, and restricting car travel during peak hours.Cooperatives were formed to offer employment to the formerbus drivers as part of the new feeder routes. Companiesparticipating in the new routes were required to scrapfour to nine old buses for each new articulated bus addedto the system.Box 4.1The TransMilenio BRTSWithout an explicit goal to reduce CO 2emissions, the World Bank has been financing urban transport projects inBogota since the mid-1990s and has contributed to the development of Bogota’s TransMilenio BRT system. One ofthe earliest programs of Bank support for a BRTS, this is an example of learning by doing.Under the first Bank-funded Urban Transport Project, the World Bank helped finance traffic management systemsalong existing bus ways and connecting roads to improve the traffic throughput to an existing BRT corridor.This project also funded background studies that led to the development of a better parking policy for the city.According to the project completion report, this effort more than doubled average bus speeds, boosting themfrom an initial 12 kilometers per hour to 27 kilometers per hour post-project.The second project, the $130 million Bogota Urban Services, was designed to help implement the secondcorridor in the BRTS and promote nonmotorized traffic (an extensive network of bike paths). A third project, the$757 million Integrated Mass Transit System, was designed to support the critical second (post-demonstration)phase of Bogota’s BRTS as a citywide integrated trunk-and-feeder system with 14 additional corridors andan integrated fare system, and to introduce a number of transport demand-management initiatives. Mostimportantly, the Integrated Mass Transit System expanded BRTSs to five other cities, replicating the experienceof Bogota but tailoring it to specific conditions of those selected cities.By 2004, Bogota’s BRTS already consisted of 58 kilometers of dedicated bus ways and 309 kilometers of feederroutes and moved more than 800,000 passengers per day. According to Wright (2004), carbon emissions reductionhas been achieved through a combination of improved public transport and the introduction of complementarytransport demand management policies to discourage the use of private vehicles and roadway space. The20 percent increase in gasoline taxes, 100 percent increase in parking fees, and restriction on private car travelduring peak hours are said to have reduced car traffic by 40 percent per day.Wright and Fulton (2005) list the key factors contributing to emission reduction:• Replacing four to five smaller buses with larger articulated buses and requiring the destruction of four toeight older buses for every new articulated vehicle introduced into the system; articulated buses are more fuelefficient per passenger-kilometer traveled.• Increasing the vehicle load factor to approximately 80–90 percent by implementing global positioning systemcontrolledmanagement of the fleet, allowing the optimization of demand and supply during peak and nonpeakhours.• Enforcing emission standards, requiring buses to be EURO II emission level–compliant.• Increasing the share of public transport ridership in total transit. By 2002, the share of private car and taxi trips intotal trips was said to have been reduced from 19.7 to 17.5 percent and the share of public transit trips increasedfrom 67 to 68 percent (Karekezi, Majaro, and Johnson 2003).One of the main barriers to system expansion was resistance to expansion of the BRT from current bus owners—anissue endemic to BRT implementation. The two corridors of Phase I of the TransMilenio BRT were designed tomeet only about 10 percent of the public transportation demand, with the remaining 90 percent being met50 | Climate Change and the World Bank Group

y conventional transport systems, in particular a number of small bus owners competing with each other forpassengers. Hence, the first phase did not displace many bus owners. The subsequent phases (with an additional14 corridors), however, were designed to increase the share of BRT in total public transit to 70 percent and coulddrastically reduce the role of the remaining small bus owners.The solution to this has been to form cooperatives or holding companies that would employ many of thebus owners/drivers (the balance being placed in alternate jobs through financial transfers). The difficulties inimplementing this solution are ongoing but declining.A related problem has been the difficulty in enforcing the phase-out of old buses. This phase-out affects theexpected reduction in externalities determined at appraisal—particularly GHG reductions. Despite a monitoredscrapping program in which the low-quality minibuses were exchanged for higher-quality articulated buses atthe prescribed exchange rate and their destruction supervised, the total number of minibuses in the city did notdecline as expected. The inability to enforce regulations, such as licenses and routes for minibuses, resulted in newentrants and the use of secondhand mini-buses. It also generated congestion in other parts of the city. The hopedforreduction in CO 2emissions from scrapping buses will be frustrated if other old buses are pressed into serviceand increase their annual mileage.Maintaining and increasing ridership is also a challenge. Gilbert (2008) points to contractual arrangements thatnecessitate raising fares when ridership projections are lower than anticipated. That creates a spiral of decreasingridership caused by higher prices and leading to new rounds of price increases and the inability to ensure safetyon the new lines, which also contributes to ridership loss. In addition, the cost differential between extending theBRTS and extending the metro is declining as the system expands into more difficult terrain. As a result of all ofthis, the middle class (whose rate of BRT usage is highest relative to the lower income and higher income groups)has started voicing support for new metro lines at the expense of the BRT network.The Bogota experience has piqued global interest in BRTSs. The Bank and other donors have facilitated visits byofficials from other countries to see the experiment in Bogota. In fact, many other countries are learning fromthis experience and are now designing or implementing their own systems. However, the program is not yet fullyimplemented, and it is too early to judge whether it will realize the full benefits anticipated from expansion to amultiline, citywide, integrated system.Sources: Wright 2004, Gilbert 2008, TransMilenio PDD 2004.However, even as the old buses are scrapped and their driversassimilated into the system, it has been difficult to excludenew entrants who import additional second-handbuses. Although the system was initially successful in attractingriders, there are signs of an incipient rising fare/declining ridership cycle; concerns about passenger safetyare also eroding ridership, and public sentiment is shiftingtoward new metro lines (Gilbert 2008). Overall, however,the system is viewed as having demonstrated BRTS feasibility,and the Bank has actively facilitated visits to the projectby potential foreign emulators. Current projects seek to addeight more BRT lines to the Bogota system and replicate itin five other cities.The most developed systems were initiallysuccessful, but the future is uncertain.In Mexico City, the BRTS was largely financed domestically,but the World Bank had two catalytic interventions.First, a $6 million GEF-funded Bank project supportedinstitutional development for implementing the system.Second, a World Bank–financed carbon project arrangedfor $2.4 million in carbon credit purchase. This is a smallportion of the total $49.4 million project cost, but the proponentsclaim that the association with carbon has helpedpopularize the project. In addition, the project was responsiblefor developing the second CDM-approved methodologyfor assessing GHG reductions in public transport,opening the way for CDM finance of BRTS elsewhere.ImpactsDedicated bus lanes (precursors to BRTS) have been shownto increase travel speeds for bus passengers by 20–60 percent,based on completion reports (for example, from21.4 to 30 kilometers per hour in the Liaoning project inChina, 15.6 to 25 kilometers per hour in the Shijiazhuangproject in China, and 15 to 22 kilometers per hour in theDhaka project in Bangladesh). The Dhaka urban transportair-quality project also showed a dramatic drop in localair pollutants (31 percent decrease in PM 10, 59 percent inhydrocarbons, 28 percent in carbon monoxide) after threewheelers with highly polluting two-stroke engines wereremoved, generating $25 million per annum in health benefitsfor the city.Beyond Energy: Low-Carbon Paths in Cities and Forests | 51

Dedicated bus lanes have been shown toincrease travel speeds.In Bogota, CDM validation reports showed annual CO 2savings rising from 56,000 tons of CO 2e in 2006 to 79,000in 2009. Ridership increased from 346 to 449 million. Theproportion of passengers attracted from private cars andtaxis fell from 9.8 to 6.9 percent.BRTSs offer attractive economic returns infuel and time savings, reduced congestion,and reduced air pollution.In Mexico, the $47 million project is estimated to yieldannual noncarbon savings of $15.42 million (Schipper andothers 2009). About a third is from fuel and time savings ofbus riders, and the remainder is external benefits from reducedair pollution, congestion, and fuel expenditure by others.Annual CO 2reductions were measured at 39,870 tonsof CO 2for 2007–08. At current CO 2prices, these benefitsare small relative to the local economic benefits.ConclusionsBased on limited evidence, BRTSs offer attractive economicreturns to cities as a whole in time savings, fuel savings, reducedpollution, and reduced congestion; the savings donot go directly to the implementing agency. The short-runreductions in GHG generate carbon credits that are modestin value compared to the direct local benefits. Single-lineBRTSs have little impact on overall urban CO 2emissions—for instance, the reductions in Mexico city are less than 0.25percent of urban emissions from transport (Schipper andothers 2009). In other words, these investments make a lotof sense as development interventions with CO 2cobenefits;they would never be chosen solely as means to reduce CO 2.In the medium run, there are likely to be declining returnsas the number of corridors increases within a city; but cumulativeemissions reductions for the system as a wholecould increase, to 250,000–400,000 tons of CO 2e per year.Long-term impacts could differ substantially; BRTSs couldbe a contributing component in the construction of efficientcities with low carbon footprints, if they are able to retaintheir share of passenger trips. Demand-side managementwill be an important part of such a scenario.Efficient transport planning will require a systems view forplanning and monitoring. Installation of a BRT corridorcauses ripples throughout the entire transport network aspeople change trip patterns and vehicles enter the system.Indirect impacts could magnify or counteract the corridorlevelbenefits; these need to be anticipated and tracked.Although CDM projects have the tremendous benefitof tracking ridership and fuel use, they typically do notmonitor systemwide travel patterns. This requires systemwidetravel surveys, which are expensive but informative.As the World Bank embarks on sponsoring BRTSs aroundthe world, it should take the opportunity to promote harmonizedmonitoring of impacts. The Clean TechnologyFund or other concessional funds could be used to mountregular, consistent travel surveys. This would allow correctmeasurement of impacts and could stimulate south-southsharing of experience and drawing of lessons.ForestsDeforestation accounts for roughly one-fifth to one-sixth ofhuman-caused GHG emissions. Emissions result as forestsare cleared and burned to make way for farms and ranchesand to a lesser extent from damage caused by careless loggers.Most emissions are from tropical moist forests, wheredeforestation rates are high and biomass is dense.At CO 2values of $10–$20 per ton, forests are worth muchmore as living carbon storage than as sites for farms or forcattle ranches. Forests have additional value as havens forbiodiversity, and they play a role in regulating water flows.Nevertheless, forests are cut. Where land and forest tenureis well defined, landowners face strong incentives to liquidatestanding forests (rather than patiently harvest themover rotations of 30–100 years) and replace them with cashcrops, cattle, or fast-growing trees. In many forests, tenureis poorly defined, and people may use deforestation as amechanism to claim land as the approach of roads or marketscauses it to appreciate in value (Chomitz 2007).Forests can be worth more as living carbonstorage than as sites for farms or cattle ranches.In principle, landholders or nations would reduce deforestationif they were compensated for the local and globalbenefits their forests provide. This has motivated the REDDagenda, an element of ongoing negotiations on the internationalclimate regime. REDD seeks to mobilize global fundsto reward developing countries for reducing emissions.Countries would use these funds to implement programsand policies to promote sustainable land use.How, exactly, would that work? Although the forest carbonagenda is new, the forest conservation and managementagenda is not, and World Bank experience provides someparallels for potential future REDD actions.After briefly reviewing the World Bank forest strategy andportfolio, this section reviews three kinds of projects thatmay offer lessons for REDD. By far the largest set of projectswith an explicit goal of forest conservation is protected areaprojects. A novel approach that closely resembles REDD ispayment for environmental services, a category of projects that52 | Climate Change and the World Bank Group

include the forest carbon projects of the BioCarbon Fund. Finally,the durability and acceptability of forest conservationmay depend on the sustainable intensification of agriculture,to provide the food, timber, and jobs that motivate deforestationin the first place. IFC has supported agribusiness at theforest frontier with the goal of encouraging sustainability.The Bank’s 1991 Forest Strategy mainlyfocused on environmental issues,particularly protecting tropical forests.The Bank’s forest strategy and portfolioThe Bank’s 1991 Forest Strategy recognized the role that forestscould play in poverty reduction and the importance ofpolicy reforms in containing deforestation. However, it mainlyfocused on environmental issues, particularly protectingtropical moist forests. It reflected rising international concernabout the rate of tropical deforestation through adoptinga “do no harm” approach of not financing commerciallogging in primary tropical moist forests. Yet as the revisedstrategy attests, this emphasis on safeguarding forests didlittle to help countries actively manage their natural forests,especially in the tropics, and left the Bank scant opportunityto harness the poverty-reduction potential of forests. Termeda “chilling effect” by the IEG (2000) forest strategy review, thestrategy and associated safeguards prevented Bank staff fromengaging the sector in proactive ways to improve economicand environmental management of tropical forests.The 2002 Strategy refocused aroundpoverty reduction, economic management,and environmental protection, expandingto all forest areas.The revised 2002 Strategy expanded the Bank’s forest policyto include all forest areas; it refocused the strategy aroundthree pillars of engagement aligned with the Bank’s mission:poverty reduction, economic management (including governance),and protection of environmental services and values.The revised strategy also recognized that the 1991 Strategydid not clearly define implementation mechanisms, butrather set out a menu of approaches that could be pursued.To harness the potential of forests to reduce poverty,the revised strategy recommended strengthening the rights offorest-dependent people—especially marginalized groups—by promoting community forest management and agroforestry.To achieve progress on the second pillar, the integrationof forests into sustainable economic development, the Bankwould help governments improve forest governance by assistingwith legal and institutional reforms and encouraginginvestments that catalyze production of forest products.The protection of local and global environmental servicesand values, the third pillar, would be achieved by continuingto support the creation and expansion of protected areas,improving forest management outside these areas, anddeveloping options to build markets and finance forinternational public goods such as biodiversity and carbonsequestration, that would include payments for forest ecosystemand environmental services.A forest portfolio review conducted for this study foundthat investment lending in forests has declined since theadoption of the 2002 Forest Strategy (see figure 4.1). Theportfolio composition has changed, with a shift frominvestment projects to Development Policy Loans 3 andincreased prominence of GEF-funded projects with globalenvironmental goals.Investment lending in forests has declinedsince adoption of the 2002 policy.Of the 124 forest-related projects in the 2002–08 portfolio,46 had objectives or components related to protected areas,and 10 had connections with payment for environmentalservices. Of the 17 projects for which forests were designatedas the leading sector, 11 contained components related tocommunity forest management.Payment for environmental servicesThe World Bank has supported roughly a dozen projectsover the past decade that have incorporated some form ofpayment for environmental services (PES) scheme, mainlyin Africa and Latin America and the Caribbean. PESschemes reward landholders for growing or conserving forests,which provide services such as watershed protectionand carbon storage. Payment is based on compliance withagreed conditions. Because the forest holder is typically notable to exclude particular beneficiaries, funds are typicallyraised through a levy on beneficiaries, or through taxation,though there are also voluntary payments and marketbasedschemes. PES schemes could be one model for implementationof REDD at the national level.PES schemes provide one model for implementationof REDD at the national level.Beyond Energy: Low-Carbon Paths in Cities and Forests | 53

Figure 4.1Average Annual Forest Commitments400350Commitment ($ millions)300250200150100500IBRD/IDAinvestmentsIBRD/IDADPLsGEFfinancedOthertrust fundsFunding1992–2001 2002–08Source: IEG.Note: DPL = Development Policy Loan; GEF = Global Environment Facility; IBRD = International Bank for Reconstructionand Development; IDA = International Development Association.Costa Rica has led the way in the design and piloting ofmarket-based instruments to enhance the provision of forestenvironmental services. The World Bank has been apartner in this effort since the mid-1990s. By the end ofthe second phase of Bank support for Costa Rica’s PES program,the country will have put in place some 288,000 hectaresof land with environmental service contracts (equal toapproximately 5.6 percent of Costa Rica’s land area), half ofwhich will be financed by funding from service users. Theprogram showed that PES schemes could be accomplishedat relatively low administrative costs. A GEF-commissionedindependent review (Hartshorn, Ferraro and Spergel 2005)found that the program had achieved its output goals. Butit also found that the program had not set up a monitoringprogram adequate to determine impacts.The need for sustainable, long-term financing mechanismsis one of the main lessons that has emerged from the pilotingof PES systems in Latin America. In Costa Rica, the bulkof funding for the PES program comes from an earmarkedfuel tax subject to political decision making; most of thepayments are for limited duration, leaving no incentivefor continued forest care. New financing mechanisms areneeded to increase the long-term sustainability of the program.For instance, the second phase of Bank support forthe PES program in Costa Rica involves a water tariff that isexpected to generate $5 million a year in support of watershedconservation.Specifying whom to pay, and how much, is a major challengefor these programs. The economic logic of the programs requiresrewarding landholders according to the services theyprovide. This runs into scientific and political difficulties.First, the services themselves may be poorly understood andmeasured. A strong folk belief holds that forests generate water,while in fact forests typically are net consumers of water.Second, cost-effectiveness would require targeting paymentstoward forestholders most likely to be dissuadedfrom deforestation, with payment levels tied to the expectedbenefits of conservation. This may conflict with notions ofequity that favor uniform payment rates (as occurred inMexico and Costa Rica) and favors payments to ownerswho are not inclined to deforest. Third, there is pressure totarget PES payments to poor people, thus combining socialand environmental goals. However, poor people may ownrelatively little forest, and the transactions cost of dealingwith many smallholders is a barrier to including them.Targeting and price-setting are majorchallenges for PES programs.Econometric analyses of the early experience of the CostaRica and Mexico programs found that they were disproportionatelytargeted toward lands with little risk of deforestation.In the first four rounds of the Mexican program,52–72 percent of PES contracts were in forests in the bottomtwo quintiles of deforestation risk. However, 72–83 percentwere located in communities in the two highest quintiles ofeconomic marginality (Muñoz-Piña and others 2008).However, one study (Alix-Garcia, Shapiro, and Sims 2010)found that the program may have reduced the probabilityof deforestation by about 10 percentage points. An analysis54 | Climate Change and the World Bank Group

for Costa Rica for the period 2000–05 found that only0.4 percent of targeted landholdings would have experienceddeforestation in the absence of the program; similarfindings were found for earlier periods (Sánchez-Azofeifaand others 2007; Pfaff and others 2009). Sills and others(2008) find that PES recipients did not reduce deforestation,but increased reforestation. 4 It is possible that the PESscheme worked at a political level rather than at the plotlevel, by reinforcing decisions to stiffen penalties for deforestationand to market Costa Rica as an ecological touristdestination. Costa Rica’s deforestation rate declined to verylow levels by the late 1990s.Early programs targeted lands with littlerisk of deforestation, but program designshave since improved.In both countries, ongoing World Bank–supported programsare contributing to better targeting. One lessonlearned has been the need to incorporate better up-frontdesign for monitoring and evaluation in PES programs toallow more timely and reliable impact analysis. The RegionalSilvopastoral Project (see box 4.2) is an exemplary use ofexperimental determination of the impact of alternativepayment schemes and agroforestry approaches on carbon,biodiversity, and farm profits. 5BioCarbon FundLaunched in 2004, the BioCarbon Fund provides carbon financefor projects that sequester or conserve GHGs in forestsand agro- and other ecosystems. The BioCarbon Fundis mostly oriented to forest projects creditable under theKyoto Protocol: afforestation and reforestation. But it alsopays for credits generated from reduced deforestation andfrom soil carbon, which are not recognized under Kyoto.It is thus a prototype of REDD and other post-Kyoto proposedsystems.The BioCarbon Fund has helped catalyzethe forest carbon market.The BioCarbon Fund has helped catalyze the forest carbonmarket by contributing to the development of 3 of the 12approved afforestation/reforestation methodologies. TheBioCarbon Fund accounts for 5 of the 13 forestry projectsregistered with the CDM to date.Box 4.2The Silvopastoral Project: A Successful DemonstrationThe GEF/IBRD Regional Integrated Silvopastoral Approaches to Ecosystem Management Project (2002–08)—implemented in Colombia, Costa Rica, and Nicaragua—was designed to test the effects of payment schemes onthe adoption of conservation practices on cattle farms. The project, the outcome of which IEG rated as highlysatisfactory, identified a range of technical approaches in each country and tested four main categories ofsilvopastoral systems: forest plantations with livestock grazing; live fencing, wind protection shields, biologicalcorridors, and shade for animals; managed succession within silvopastoral systems; and intensive systems for cattleand other animal species.The implementation of these systems resulted in a large body of learning, including 70 reports, refereed journalarticles, and books about how to induce farmers to adopt biodiversity-friendly, carbon-fixing land uses. In somecases, technical assistance and credit are sufficient. In other cases, short-term payments are needed to coverfarmers’ initial investment costs, but not thereafter. However, land use changes that represent an ongoingopportunity cost for farmers require mid- to long-term payments for the environmental services being produced;those services could include watershed protection or secondary forest recovery in degraded pastures.Different combinations of silvopastoral practices have proven to yield varying internal rates of return; economicanalysis conducted in Esparaza, Costa Rica, revealed rates from 14 percent for a system with natural pasture anda fodder bank to 37 percent for a system with improved pasture and low tree density. Based on the attractivenessof a system to an individual farmer, some farmers may be willing to adopt certain systems even in the absence ofshort-term PES incentives.Lines of credit for scaled-up silvopastoral system implementation are now being made available through CostaRica’s Cattle Ranchers Association, Nicaragua’s Local Development Fund, and the Ministry of Agriculture in Colombia.However, it is unlikely that most farmers will be able to afford the high initial costs of introducing a new land usesystem or that credit will be able to be tapped across all farm households across varying silvopastoral applications.Additional and recurrent finance will be especially needed to promote investments in silvopastoral systems thatgenerate a high level of public environmental services compared to a more attractive private rate of return.Source: IEG.Beyond Energy: Low-Carbon Paths in Cities and Forests | 55

The BioCarbon Fund has signed emissions reduction purchaseagreements (carbon offset purchase agreements) with19 projects, originally for a total of $26 million. Focusingon poor and rural communities, the fund’s first tranche is25 percent invested in Africa. This is a far higher proportionthan the African share of other carbon funds at the Bank orof the CDM as a whole. In its first phase, the fund investedheavily in plantations and community reforestation (representing34 and 31 percent of the technical distribution ofthe portfolio, respectively), in addition to other activitiessuch as environmental restoration, assisted regeneration,and agroforestry.The Fund has struggled at the project level with implementationissues that are also encountered in the World Bank’sforest operations. However, it has built a comprehensivemonitoring system, allowing closer scrutiny of performancethan is possible for many noncarbon projects. Asof June 2009, 12 of 19 tranche 1 projects were expected todeliver less than half of contracted emissions reductions.In five of the projects, the contracted amount had alreadybeen revised downward.The BioCarbon Fund has underdeliveredcarbon reductions.There are several reasons for underdelivery. In Costa Ricaand Honduras, suitable CDM-eligible land was grosslyoverestimated, and carbon payments were not competitivewith other land uses; thus, these projects were scaledback by 80 percent or more. Inadequate up-front financingconstrained planting area in several projects. The projectimplementer’s capacity has been low in several cases,one factor behind low seedling survival rates in some projects.Unexpectedly bad weather has hampered projects inChina and Kenya.Given these risks, the Bank has increased supervision totry to improve expected delivery from the portfolio. Butaverage supervision budgets for these projects alreadyexceed the average for the PCF, which has much largerprojects.Preliminary reports show success in the Humbo AssistedNatural Regeneration Project in Ethiopia, the firstlarge-scale African forestry project to be registered withthe CDM. This project has adapted techniques demonstratedin West Africa to promote natural regenerationof woodlands and has restored more than 2,700 hectaresof degraded land. The regeneration project has reportedlyresulted in increased production of honey, fruit, andfodder. Further study is needed to assess the economicsof the project: the labor costs, the impacts on income,and the generation of local hydrological and biodiversitybenefits.The Forest Carbon Partnership Facilityis designed to pilot approaches that mightbe used in a future REDD regime.A follow-on to the BioCarbon Fund, the Forest CarbonPartnership Facility is designed to pilot approaches thatmight be used in a future REDD regime. It has supportedthe development of readiness plans, broadly outlining plansfor accomplishing and measuring deforestation reduction,in 37 forested countries. It will eventually purchase emissionsreductions from countries with approved plans. Investmentsto implement the plans will be funded via theClimate Investment Fund, a separate facility.Protected areasThe World Bank, combined with finance from GEF,has made a significant contribution to creating andstrengthening protected areas worldwide. According to theGEF Secretariat, GEF assistance—since it began operationsin 1991—has supported more than 1,600 protected areascovering 360 million hectares (GEF 2009). Protectedareas now cover more than a quarter of the remainingtropical forest, an area equivalent to Argentina and Boliviacombined (Nelson and Chomitz 2009).The World Bank, together with GEF, hasmade a significant contribution to thecreation and strengthening of protectedareas worldwide.This review identified a population of 114 World Bankprotected area projects, approved between 1988 and 2000,that are located in humid tropical forests. (With highdeforestation rates and high biomass, these forests accountmost forest carbon emissions.) Seventy-four percent ofthese projects have been rated satisfactory by IEG (receivingan outcome rating of moderately satisfactory or higher);however, these ratings do not necessarily reflect the effectivenessof the protected area sited, because the protectedarea in many cases is a component of a larger project. Likewise,although only 56 percent of this portfolio was ratedsustainable (likely or highly likely or an equivalent thereof),these risk ratings are composite ratings affecting the projectas a whole.In fact, despite 20 years of effort in creating protected areas,systematic information is lacking on their impact on biodiversity,on carbon storage, and on the welfare of peoplewho live in and around them. Hence, there is also no reliableinformation on what external and internal factors areconducive to positive impacts.56 | Climate Change and the World Bank Group

After 20 years of effort, systematicinformation is still lacking on the impactof protected areas on biodiversity, carbonstorage, and the welfare of forest-dependentpeople.Limited information is available from the Bank’s WorldWildlife Fund Management Effectiveness Tracking Tool,a simple checklist that describes management elementsbut lacks outcome measures. For projects financed partlyor fully with GEF funding, the GEF Secretariat requirestracking reports at inception, mid-term, and completion.Compliance with the latter two submissions is imperfect,and the Bank does not compile Management EffectivenessTracking Tool reports from its projects. The latest overallevaluation of the GEF (GEF Evaluation Office 2010), recognizedthe limitation of the tool and called for greaterreinforcement of it by including indicators for progress towardimpact and integrating these systems into the overallresults based management system of the fifth replenishmentof the GEF.IEG reviewed 34 protected area projects in forest ecosystems(approved between fiscal 2006 and 2008) for thisstudy and found severe limitations in monitoring. Onlysix of the projects included indicators that could track thefinancial sustainability of the targeted protected area—indicators such as revenue generation, park income, personnelbudgets, or fund-related information. And onlytwo projects included baseline measurements of vegetationcover and species count, although quantitative targets(usually in percent terms) for increased cover and greaterspecies resilience are often targets set in protected areaprojects.In the absence of good information, controversy persistsabout the effectiveness of protected areas. Some derideprotected areas as ineffectual “paper parks.” Others fear,to the contrary, that these areas are too effective, excludinglocal people from access to land and forest resources.As part of this evaluation, Nelson and Chomitz (2009)sought to fill the evaluation gap by assessing the globalimpact of all pre-2000 tropical forest protected areas ondeforestation over 2000–08. They used spatial data on thelocation of protected areas and of forest fires, an indicatorof deforestation, and controlled for potentially confoundinginfluences such as terrain and remoteness.Protected areas have been effective inreducing tropical deforestation, especiallywhere sustainable use is permitted;indigenous areas have been even moreeffective.They found that protected areas were on average effective inreducing deforestation (table 4.1). Multiple-use protectedareas—those that permitted some forms of sustainable useby local populations—were at least as effective as strictlyprotected areas. Areas that had been returned to indigenouscontrol were most effective of all. Similar results were foundin a sample restricted to World Bank-supported projects.These effects have been obscured in studies which did notallow for the possibility that some protected areas are preferentiallysited in regions of low deforestation pressure(because there are no politically powerful claimants on theland) or high pressure (because of the perceived importanceof conservation).In Costa Rica and Thailand, protected areashave reduced poverty rates.A recent study (Andam and others 2010) that also usedcontrolled comparisons shows that protected areas havereduced local poverty rates in Costa Rica and Thailand.Again, this impact had been obscured by the tendency forprotected areas to be located in impoverished regions.Table 4.1Impact of Protected Areas in Tropical Forests on Forest Fire IncidenceArea Mean fire incidence Mean reduction fromstrict protected areasMean reduction frommulti-use protected areasMean reduction fromindigenous areasLatin America and the Caribbean 7.4 2.7–4.3 4.8–6.4 16.3–16.53.8–7.7 6.2–7.5 12.7–12.8Africa 6.1 1.0–1.3 (0.1)–3.0 Not applicable4.4–4.5 Not calculatedAsia 5.5 1.7–2.0 4.3–5.9 Not applicable2.9–3.1 6.7–5.1Source: Nelson and Chomitz 2009.Note: Table reports percentage point reduction in forest fire incidence, a proxy for deforestation over the entire period 2000–08. Figures in italicsare for protected areas established 1990–2000; in plain text, all pre-2000 protected areas.Beyond Energy: Low-Carbon Paths in Cities and Forests | 57

demonstrate that chain-of-custody tracing was reliable andfeasible, and that verifiably sustainably produced productscommand a market premium, other agriprocessors might“green” their own supply chain. This could drive unsustainableproducers out of business.Agribusiness at the forest frontierDeforestation in the Brazilian Amazon is largely drivenby conversion to pasture and soy. Over the period 2002–07, IFC made three loans in the Brazilian Amazon: twoto a soy processor (Amaggi) and one to a beef processor(Bertin). The projects aimed to demonstrate sustainableagribusiness practices in the sector by building clients’ environmentalmanagement capacity. Both loans attempteda “law abidance” strategy—that is, to bring the respectivefirms and their suppliers into compliance with Brazilianenvironmental, social, and land tenure legislation, therebyreducing deforestation in the Amazon.Under the IFC loan, the soybean processor committedto ensuring that all soybeans grown on its farms andall soybeans purchased from prefinanced suppliers meetBrazilian and IFC environmental and social regulations.With the beef company, IFC sought to ensure compliancewith Brazilian legislation for all Bertin suppliers, as wellas to develop a chain of custody system to track animalsthroughout the supply chain.IFC loans to agriprocessors in the BrazilianAmazon attempted to bring firms andsuppliers into compliance with Brazilianenvironmental law.The law abidance/chain of custody strategy, if successful,would ensure that IFC was not directly associated with deforestation.And, with the right conditions, it might havea market transformation effect. If the companies couldPhoto by Yosef Hadar, courtesy of the World Bank Photo Library.But the conditions for this scenario are stringent. The processorsneed to be able to trace the purchases to the pointof origin—which is difficult because cows and soy can be“laundered.” Then the processors have to verify that theoriginating farms are in compliance with the law, a tasknormally undertaken by government. To motivate these actions,the processors would have to face a market in whicha significant proportion of buyers will pay a premium forsustainably produced goods. And it has to be possible tosustainably intensify production on farms and ranchesthat comply with the law. If any of these conditions fails,new investments at the forest frontier could end up simplyincreasing pressure on the forest.Outcomes. IFC and Amaggi succeeded in ensuring thatno new deforestation occurred on the company’s ownfarms or on those of prefinanced suppliers. The companyused a combination of satellite imagery, digital mapping,and field visits to verify the behavior of those suppliers.Development of this sophisticated monitoring systemserved the firm’s own quality control and fiduciarypurposes in addition to satisfying IFC requirements.However, a significant proportion of the company’s soypurchases were from the third parties that were outsidethe conditions of the loan agreement and for whichAmaggi had no capacity to identify the farm of origin.IFC’s agribusiness investments did notcatalyze deforestation, but neither did theycatalyze widespread changes in industrypractices.Little was accomplished under the environmental covenantsof the agreement with the beef producer. Bertin hadagreed to develop an environmentally sustainable supplychain, including 100 percent traceability of its cattle fromfarm to final product , and to make 600 suppliers compliantwith labor, land acquisition, and environmental legislation.Although some progress was made with ranchesreceiving direct support from IFC advisory services, manysupplier were noncomplant. The company also purchasedslaughterhouses close to the Amazon biome in breach ofIFC’s requirements, without first ensuring the sustainabilityof their supply chains. This noncompliance with IFC’ssocial and environmental standards was in effect when IFCdecided to disengage from the project.IFC wagered its reputation that these loans would tame,rather than encourage, deforestation. On one hand, both58 | Climate Change and the World Bank Group

orrowers have demonstrated the ability to raise fundingfar in excess of that provided by IFC, so IFC’s financing perse was not catalytic of deforestation. On the other hand,neither did IFC catalyze the kind of widespread change inindustry practice that would redeem its endorsement of soyand beef production at the forest frontier.Alternative approaches to ensuring supplier compliancewith environmental rules. IFC’s strategy was to holdbuyers responsible for the legality of their supply chain,tracing the chain of custody to the original producerand verifying that producer’s compliance with the law.Without significantly strengthened supporting institutions,this strategy was unviable. First, without effectiveinstitutions and infrastructure to create traceability, noncompliantfarmers could potentially launder their salesthrough “complying” farms. Second, being “out of compliance”was difficult to define. Cases of land invasion,rural violence, and forced labor in the Amazon remain inlegal limbo for decades. Third, an effective, comprehensivegeoreferenced land registry was required to enforcethe requirement that landholders keep 80 percent of theirproperty under forest cover (the legal forest reserve). Butno such registry exists. And finally, the commitment ofthe beef purchasers lacked credibility.Although IFC’s strategy had limited success in the Amazon,alternative strategies have shown more success. These relyon a combination of external pressure on buyers and theuse of simple but geographically comprehensive approachesto monitoring compliance.The Soy Moratorium and governmentenforcement to restrict deforestation forcattle development have shown moresuccess in reducing deforestation pressuresSoy. In the soy sector, industry groups announced in July 2006a moratorium on the purchase of soybeans planted in theAmazon in areas deforested after that date. This closely followedGreenpeace’s report “Eating up the Amazon” (Greenpeace2006) and its subsequent international campaign.Industry and nongovernmental organizations joined to implementthe Soy Moratorium, which continues to date. Thismonitoring system uses existing remote sensing data fromthe Brazilian Space Agency, supplemented by aerial flyovers.The success of the Soy Moratorium is based on three factors.It is a policy of zero new deforestation, which bypasses thequestion of the Legal Reserve and land ownership andtherefore is simple to monitor. Second, as an industrywideaction, it avoids leakage and achieves economies of scale inmonitoring. Third, Greenpeace’s participation as an independentmonitor lends credibility to the enterprise.Beef. In June 2008, Greenpeace launched Slaughtering theAmazon, an international campaign exposing the marketingof beef and leather products from illegally deforestedAmazonian areas. Shortly thereafter, the federal prosecutorof Pará and the Brazilian Environmental Agency broughtaction against 21 ranches and more than 13 slaughterhousesthat purchased cattle from these ranches, includingIFC’s client. Following warnings that they would besubject to prosecution if they continued to purchase fromthese slaughterhouses, 35 supermarkets and wholesalerssuspended contracts with the offending meat processors.Subsequently, four meat processors (including the client)agreed not to purchase cattle from ranches that are embargoedby the Brazilian Environmental Agency or that engagein unlicensed new deforestation in the next two years.Success in the beef sector is being won through a strategythat depends heavily on government enforcement and thecomprehensive use of remote sensing and georeferencingtechnologies. In February 2008, the national monetarycouncil in Brazil began embargoing the economic use oflands illegally deforested, as well as making all agents inthe productive chain co-responsible for deforestation fromthese areas. The Brazilian Environmental Agency publisheda “dirty list” consisting of municipalities in which mostillegal deforestation is occurring and an Internet site listingproperties embargoed due to deforestation.In addition, the 2008 resolution required that all farmerswishing to receive credit in the Amazon biome presentdocuments (issued by the state environmental agencies)demonstrating compliance with Brazilian environmentallegislation. Mato Grosso and Pará have begun to createrural environmental cadastres that register land for environmentalcompliance purposes, sidestepping the complexissue of regularizing ownership.Finally, the Brazilian government has built on an existingcattle-tracking system to control the spread of hoofand-mouthdisease. Environmental compliance of landholdersis now also tracked, incorporating the deforestationBeyond Energy: Low-Carbon Paths in Cities and Forests | 59

monitoring system. The cattle-tracking system has beenmodified to track “lots” of animals rather than individuals.Throughout, the quasi-independent public prosecutor hasbeen an important catalyst of action.Deforestation has fallen steadily from 25,000 squarekilo meters in 2003 to 7,000 square kilometers in 2009;deforestation from September 2009 to February 2010 fellmore than 50 percent relative to the same months in theprevious year. It is too early to tell the degree to which thisis due to enhanced enforcement versus a decline in beef andsoy prices.ConclusionsIf the REDD agenda succeeds, countries, donors, and investorswill put up massive funds in hopes of conservingforests and fostering sustainable land management in a sociallyacceptable way. Guidance is needed for these large,novel, and complex ventures, which will take many yearsto implement. Unfortunately, the Bank’s long experience inrelevant areas is not well documented. However, some lessonsemerge from this review.Protected area creation has been effective, on average, inreducing deforestation. Creation of large protected areasin remote areas where deforestation is currently low hasbeen a farsighted strategy that could reduce future deforestationas roads and markets expand. Evidence suggeststhat sustainable-use protected areas are compatible withreduced deforestation and that indigenous areas (at least inLatin America) are extremely effective in preventing deforestation.Together with recent findings that protected areasmay reduce local poverty, this points to the compatibility ofREDD with sustainable development and suggests greaterattention on the maintenance and expansion of protectedand sustainable use forest areas is necessary.Payment for environmental services schemes could constituteone element of a REDD strategy, appropriate forareas where land and forest tenure is well defined. Projectexperience shows that countries can manage the logisticsof enrolling, monitoring, and paying service providers. Ensuringsustainable finance has been a problem, but REDDmay solve this. More challenging is devising targetingmechanisms and payment schedules that are socially andpolitically acceptable as well as cost-effective in providingcarbon storage and other environmental services.Chain-of-custody tracing was an inefficientway to monitor environmental compliance:if trees are what you care about, it is cheaperto watch the forest than to follow the cowson their long journey to the market.Promotion of sustainably intensified agriculture is the flipside of forest conservation. If more forest is to be conserved,farms, ranches and tree plantations must be intensified onexisting, perhaps degraded lands, to meet the demand thatis driving deforestation. Chain-of-custody certificationof forest-competing products has been seen as a way ofshifting private sector incentives to sustainability, withoutrelying on often-ineffective government enforcement. Buta private-sector-only strategy is also problematic, and thatchain-of-custody tracing is difficult and expensive.A combination of nongovernmental organization- triggeredpressure on buyers, an independent governmental advocateforenvironmental enforcement, and government sanctionshas been effective. A key technical feature has beenthe use of wide-area remote sensing rather than chainof-custodytracing. If trees are the focus of conservation,it is cheaper to watch the forest than to follow the cowsand beans on their long journey to market. This experiencecould have important implications for palm oil, timber,and other markets.60 | Climate Change and the World Bank Group

Chapter 5EVALuATioN HigHLigHTS• Over 2003–08, almost all WBG support for coalhas been in IBRD countries.• WBG support for coal power had no impacton technology choice; in one case it mayhave accelerated diffusion of more efficienttechnology.• Rehabilitation of old coal plants proved moredifficult than anticipated.• Technology transfer projects succeeded onlywhen they planned well for demonstration,learning, and diffusion.• Private recipients of technology transferare reluctant to share technology withcompetitors.• The World Bank’s Carbon Finance Unit wasimportant in catalyzing the emergence of thecarbon market.• The World Bank has largely not realizedsynergies between operations and carbonfinance.• A sequence of mostly unsuccessful GEFfinanced,IFC-implemented projects hassupported small-scale renewable energyenterprises.• The Bank moved into pilot areas of the carbonmarket as planned, but did not exit establishedparts of the market.Photo by Dana Smillie, courtesy of the World Bank Photo Library.

Special TopicsWBG stakeholders are polarized about the organization’s role in supporting coal-firedpower plants. Coal is the most CO 2-polluting of fuels and a major contributor to climatechange. Environmental nongovernmental organizations argue forcefully for the WBG todevote its resources and moral authority to finding alternatives. But some developingcountries see no affordable alternative to power their aspirations for growth. Withoutthe WBG’s support for coal, “it is the cheaper, dirtier type of coal plants that willproliferate,” argues its chief economist. 1Efficiency in Coal-Fired GenerationIn response, the SFDCC sets out criteria for WBG supportfor coal-based generation. The WBG can support clientcountries in developing new coal power projects if itcontributes to energy security, reduced power shortages,or increased access; if it is least cost, taking environmentalimpacts into account; if it uses best “appropriate availabletechnology”; and if no donor financing is available forlower-emission alternatives.To assess the costs and benefits of the WBG’s involvementwith coal power, this chapter of the evaluation examines fiveof the six greenfield or rehabilitation coal power plants in the2003–08 portfolio 2 and addresses the following questions:• Were there alternatives that were both lower cost andless GHG intensive?• Did WBG involvement improve efficiency or reducepollution at the plant level?• Does the intervention promote or retard diffusion ofhigher efficiency technologies?Global context and the WBG’s role in power sectorfinanceBarring revolutionary technological developments, coal willbe in use through mid-century and beyond. InternationalEnergy Agency projections (OECD-IEA 2009) show thatunder a scenario where the world meets a stringent 450 ppmgoal for atmospheric CO 2, coal will still provide 7,300 terawatthours (TWh) in 2030 (24 percent of global generation),down from 8,200 TWh in 2007 (42 percent). Even in this450 ppm scenario, coal generation in non-OECD countrieswill be higher in absolute terms in 2030 (5,608 TWh) thanin 2007 (4,194 TWh). The Massachusetts Institute of TechnologyFuture of Coal study (MIT 2007) projected that in anactive mitigation scenario, energy from coal over 2000–50grows 12 percent in the United States, declines 11 percent inChina, and grows about 30 percent elsewhere. Coal plantshave a typical lifespan of 40 years, and many existing plantsare decades old. Thus even stringent climate scenarios foreseenew coal plants as part of the mix.The WBG is too small to have a large direct impact onglobal power plant construction. New power plants (acrossall fuels) with 607 GW capacity became operational over2003–08 in countries eligible for Bank borrowing (IDA/IBRD/Blend), but WBG-supported projects approved overthe period contribute only 28 GW. 3 Total 2003–08 WBGcommitments of $5,768 million constitute, as an order ofmagnitude, less than 1 percent of the cost of capacity installedin borrower countries over this period.The WBG is too small to have a large directimpact on global power plant construction,but it has a significant role in newgeneration in the poorest countries.The WBG does play a significant role in new generationin the poorest countries. New generation installed in IDAcountries over 2003–08 was 21.8 GW, whereas new generationplanned in these countries with some WBG involvementwas 6.2 GW, or 29 percent. However, over 2003–08,WBG support for coal-fired generation was much moreprominent outside IDA countries (figure 2.6).Over 2003–08, almost all WBG support forcoal has been outside IDA countries.In sum, substantial developing world investment in coalappears to be inevitable over the coming half century.62 | Climate Change and the World Bank Group

Consequently, the efficiency with which new or renovatedplants burn coal will affect global CO 2emissions. The scaleof that investment for non-IDA countries dwarfs the WBG’sfinancial resources, so any significant WBG influence oncoal investment or efficiency would have to be primarily viaother channels, including policy, technical assistance, anddemonstration effects.Assessment of WBG support for five coal plantsIn Turkey, the World Bank offered support for the rehabilitationof the Afsin-Elbistan A thermal power plant to remedypower supply shortages. The plant runs on lignite coal,which is plentiful in Turkey but CO 2intensive. The plant’sthermal efficiency fell from its design rate of 37 percentto 27 percent as a result of poor operations. Rehabilitationseemed an obvious, cost-effective way to boost powersupply. One would expect CO 2reduction as a side benefit,though this was not a project objective. However, this projectwas cancelled after two efforts at procurement failed toattract qualified bids, an indication that rehabilitation canbe complicated.Power generation from natural gas—a lower-carbonalternative—would have been economically competitivewith the rehabilitation project, if planning had attacheda shadow price to the local air pollution damages fromcoal use. A shadow price of $5/ton of CO 2would alsohave made gas cheaper; this may possibly be monetizabledepending on Turkey’s role in a future climate regime.However, energy security considerations might put a strongpremium on diversification away from gas.In Kosovo, IDA provided a grant totaling $10.5 million intechnical assistance to help bring in new investments inthe energy sector and attract private investors to developKosovo’s lignite mines and increase capacity for lignitefiredpower generation. Kosovo’s 11.5 billion ton reserve ofeasily accessible lignite constitutes one of this poor country’smain assets, for both internal consumption and exportas electricity. The technical assistance was broad, includingan assessment of carbon mitigation options (including optionsto leave space for a carbon capture and storage plant)as well as policies for promoting renewable energy in thecountry. The economic analysis for the new plant includedcosts of decreased air quality from plant emissions ofair pollutants. A systemwide analysis indicated that a newlignite-based plant in Kosovo is the least-cost option evenwhen carbon prices (or carbon credits) are of the order of€10/ton of CO 2.MIGA has issued guarantees for the construction of a660-MW lignite coal power plant in Bulgaria against risksof expropriation, war, and civil disturbance. The new plantis designed to meet European Union environmental standardsand replaces 500 MW of older, more polluting capacity(MIGA 2008). MIGA claims that its support wasessential for the project to mobilize long-term commercialbank financing. Alternative sources of power for Bulgariainclude nuclear, which has lower conventional pollutantsand would potentially allow Bulgaria to sell CO 2allowances.Nuclear has, however, costs of debated magnitude,related to safety and waste disposal.IFC invested $8 million as equity in the 660-MW LancoAmarkantak coal-based power plant project in Chhattisgarh,India. IFC’s investment is a small portion of the overallcost of the project, which is expected to be about $578 million.The financial closure for both units was achieved bySeptember 2006—prior to IFC’s approval of equity supportin June 2007.IFC’s support played a marginal role in improving the socialimpact assessment from the power plant and improved theenvironmental design standards of the plant. The plant’s designefficiency and GHG emissions are at business-as-usuallevels, and IFC cannot be credited with supporting anytechnological improvements. The environmental impactanalysis discusses the possibility of cofiring the plant withbiomass, which would reduce net emissions. Given IFC’srelatively small investment, it remains to be seen whetherany of the proposed social and environmental improvementswill be implemented.In April 2008, the IFC Board approved a $450 million debtinvestment in the Tata Mundra Ultra Mega Power Plant inGujarat, India. The 4-GW project is IFC’s largest coal-firedproject and IFC’s largest financing to date. The Indian governmentpromoted the development of this plant as criticalin meeting the power needs of a number of Indian statesthrough transmission of power on regional and nationalgrids. The plant is currently under construction.IFC’s support for this project probably resulted in improveddesign standards for environmental performance. IFC didnot have a role in the technology choice, as the Indiangovernment preselected the supercritical technology.Special Topics | 63

However, to the extent that the plant displaced subcriticalcoal plants, it may result in emissions reductions of about10 percent—significant, but far less than the 40 percent differentialrelative to the existing coal fleet average that IFCcites in the project’s Environmental and Social Review.It is likely that IFC’s funding was required for the plantto secure financing, and its successful closure has helpedreduce doubts within the domestic banking industry aboutthe viability of such large competitively bid projects. Thusit is plausible that the project may help catalyze the Indianpower sector’s movement away from subcritical to moreefficient supercritical technologies. This provides a cleardemonstration of the WBG dilemma: the investment hassupported what will be one of the largest point sources ofCO 2on the planet, but may well have reduced them incrementallycompared to a scenario without IFC involvement.Appendix tables E.1 and E.2 summarize the five cases.The WBG had little direct impact on technology choice.Kosovo was the only case in which the WBG supported exante planning, but a definitive technology recommendationwas not made. In the other cases, technology was largelyor entirely predetermined by project sponsors before WBGinvolvement. Hence, the main potential channel of WBGinvolvement was through the decision on whether to supportthe project—and whether that decision was critical tothe fate of the project. This was likely in the case of TataMundra and possible for Maritza. There was no impact inthe cases of Lanco (which would have taken place anyway)or the Afsin-Elbistan A thermal power plant in Turkey.The WBG has little direct impact ontechnology choices.Did the WBG explore cost-effective alternatives to theseplants? (All these plants were appraised before the SFDCC.However, the IFC plants were subject to Performance Standard3, which requires investigation of alternatives.) Thebest case is that of Kosovo. The Kosovo analysis and the relatedsoutheast Europe analyses explicitly considered damagesfrom local air pollution and the systemwide impacts ofa shadow price on CO 2.Nonetheless, a recent World Bank study points to very lowelectricity tariffs in Kosovo, and high rates of nonpaymentby customers, with the result that “35–60 percent of the totalfinal energy consumption in households is technicallyor economically lost” (Renner and others 2009). Technicallosses alone are estimated at 18 percent. So there couldbe cost-effective ways to reduce excess demand, in partthrough increased technical efficiency or by boosting pricesand collections to financially sustainable levels. In the caseof India, the government reports that overall transmissionand distribution system losses are 27 percent (thoughlower in the areas served by the plant under construction).The scope for efficiency improvements in India appears tobe large and likely insufficiently tapped.Kosovo and southeast Europe analysesdemonstrate an approach for consideringdamages from local air pollution andincorporating the shadow price of CO 2.Do plant-level efficiency improvements, such as those arguablyachieved in India, promote or undermine systemwidelevels of energy intensity and CO 2intensity? It is difficultto answer this question quantitatively, but the channels ofimpact can be sketched out and in some cases the level ofimpact indicated.First, as seen in the case of the Indian power plant, WBGsupport could help reduce perceived risk of a new technologyin a new setting, catalyzing its adoption and reducingCO 2emissions against a business-as-usual scenario atsome plants. Second, such support could in theory reducethe price of coal power relative to gas or hydropower. Thiscould induce a country to shift, at the margin, to greaterinvestment in coal, counteracting the new technology’sefficiency gains.However, this risk appears to be implausible in the case ofa shifts to supercritical, ultrasupercritical, or IntegratedGasification Combined Cycle coal technologies. Thesetechnologies save fuel costs relative to subcritical coal, buthave higher capital costs and so, on balance, produce powerat about the same cost. Promotion of these technologieswould therefore be expected to reduce emissions but not toappreciably induce shifts from gas or hydropower to coal.Most difficult to assess is the symbolic or leadership impactof the WBG in supporting or disengaging from coal power.However, there are analogies in other sectors. The WBG hassupported global phase-out of leaded gasoline, prohibitionof project support for tobacco, and phase-out of gas flaringand venting. The leaded gasoline phase-out has had considerablesuccess. Tobacco and lead control offer large domesticbenefits, facilitating acceptance of the WBG role. Thegas flaring initiative also potentially offers domestic benefitsand has nominal support from many country partners.Does the WBG have a compelling role in support for makingcoal power plants more efficient? It is clear that “retail”WBG support makes little difference, one way or the other, toglobal generating capacity because of the vast scale involved.It is conceivable that such support might be essential toparticular low-income countries with poor credit and noalternative power sources. It is conceivable also that supportfor regulatory changes or pilots that promote efficient coal64 | Climate Change and the World Bank Group

technologies could accelerate diffusion of those technologieswithin particular middle-income countries, possiblywith high leverage in reducing CO 2emissions. Recentlyapproved World Bank projects to rehabilitate Chinese andIndian coal generators use this rationale.Choices at the country level—whether financed by the WBGor not—would be illuminated by systemwide analyses of expansionoptions. Such assessments would consider efficiencyoptions, assign costs to domestic pollution, and exploredifferent shadow prices for CO 2. Such analyses would clearlyshow when there are no domestically affordable alternativesto coal power and would help to defuse controversy. Thisapproach is consistent with that of the SFDCC, but with anemphasis of the additionality of WBG support in effectingpoverty reduction or technology diffusion benefits.Decisions about coal should usesystemwide analyses that considerefficiency alternatives, local pollution costs,and shadow prices of CO 2.Technology Promotion and TransferGreat hopes are pinned on technology, a cornerstone ofboth the Bali Action Plan and the SFDCC. Developingcountries hope not only to acquire hardware—such as windturbines and solar panels—but also to gain the capability tomanufacture and innovate, sparking industrial growth.At the global level, new technologies are conventionally understoodto follow a path from laboratory research, throughpiloting and technical demonstration, to commercial demonstration,and finally widespread deployment and diffusion,with continual improvements and innovations alongthe way. With increasing cumulative production, firmslearn and costs decline, tracing a learning or experiencecurve. This reflects the solution of technical problems andthe advantage of economies of scale (box 5.1).At the global level, technology costs declinewith increasing production.There is debate about where to draw the line betweenpublic and private support and between coordination andcompetition. There is general agreement, however, that expensivebasic research, such as that underpinning nuclearfusion, must be government supported. Public sponsorshipof pilot or demonstration plants, with data providedto all in the industry, also makes sense as a public good.The existence of a declining cost curve suggests that thereare increasing returns to concentrating resources in a fewtechnologies—a “big push” could produce a competitiveproduct. However, many worry that public sector groupsare ill equipped to pick winners in this manner.There is debate about where in thetechnology development cycle to draw theline between public and private support.Similarly, there has been a vigorous debate about the roleof intellectual property rights (IPRs) in energy and climatetechnologies. What is the proper balance betweenrewarding innovators and accelerating access to new ideas?A growing literature on this topic notes that patents, oreven trade secrets, are only one facet of technology transferand typically represent only a small proportion of energytechnology costs. Possibly more important are transfer oftacit knowledge and learning by doing.Complementing the global technology development cycle isthe process through which technologies diffuse across andwithin nations. The WBG has been active in this technologytransfer process. It encompasses piloting, where globallyavailable technologies are tested against and adaptedto local conditions; demonstration, to convince producers,investors, and users of the technology’s reliability and costBox 5.1Technology Learning (or Experience) CurvesMany studies have shown that manufacturing costs decline with an industry’s cumulative production. The reasonsinclude debugging and refinement of processes and economies of scale.Learning rates are expressed as the percentage decline in unit costs with each doubling of cumulative industryproduction. According to a review by Neij (2008), learning rates in renewable energy range from 2.5 percent forgeothermal and 5 percent for biofuel to 15 percent for wind and 20 percent for solar photovoltaics.These statistical results are useful for summarizing experience, but they do not tell us how learning works. Costscan decline as a result of true learning as manufacturers tune their equipment and procedures, research and development,economies of scale, or increased competition among producers or component suppliers. The rate of costdecline is not predetermined, but can be influenced through these different channels.Source: Neij 2008.Special Topics | 65

Figure 5.1CommercialdemoSpectrum of Technology SupportScale-upCSP Fuel cells Photovoltaic BoilersSource: IEG.Note: CSP = concentrated solar power.Diffusioneffectiveness; and diffusion and scale-up, to reduce localcosts toward the global minimum and to help stimulatesupply and demand.WBG support for technology transfercan help reduce local costs towards globallevels.To bring concrete experience to these sometimes abstractdebates, we review here some of the largest and most prominentexamples of WBG support for energy technology promotionand transfer, across the spectrum from upstreamto downstream. These are roughly depicted along an upstream-downstreamspectrum in figure 5.1.However, this evaluation uses the term “technology” to referany kind of know-how or innovation that can advancedevelopment and GHG mitigation. For instance, ESCOs,chain-of-custody tracing of beef, and BRTSs all qualify astechnologies.The concentrating solar power experienceIn 1997, the GEF approved the first of four World Bankexecutedprojects designed to accelerate the diffusion ofconcentrated solar power (CSP). CSP, which uses focusedsunlight to drive a steam turbine or heat engine, is attractiveto the developing world. It can take advantage ofhigh levels of insolation in arid and semi-arid areas suchas northern Africa, the Middle East, western India, southernAfrica, and northeastern Brazil. It is steadier than windpower, providing power throughout the day and even intothe night, using molten salt to store heat. And it is basedon relatively low-tech components—mirrors and pipes—potentially within the manufacturing capabilities of manydeveloping countries.An effort to accelerate concentrated solarpower technology bogged down.Yet this effort to accelerate technology bogged down. After13 years, 2 of the projects are finally under construction,1 is out for bid, and the last was cancelled. What are thelessons of that 13-year experience for WBG technologypolicy?In 1996, the GEF’s Scientific and Technical AdvisoryPanel identified CSP as a promising target for technologypromotion under the GEF’s new Operational Program 7(OP7). At the time, although a subsidized CSP plant hadbeen operating in the United States since the 1980s, nonew plant had been constructed anywhere since 1991; thetechnology’s high cost was unsupportable, especially aselectricity deregulation progressed. Support for CSP wasin line with the goal of OP7, that “through learning andeconomies of scale, the levelized energy costs (of renewabletechnologies) will decline to commercially competitivelevels” (GEF 2003).In April 1997, the GEF approved a grant of $47 million toIndia for a CSP project and subsequently approved requestsfor projects in Egypt, Mexico, and Morocco. The projectswent to the Bank for development and execution. The Indiaproject was dropped; the others proceeded slowly.A fundamental source of project delay was a mismatchbetween project goals and design. The projects’ intent wasto drive the technology down the learning curve. However,the total planned capacity of 120 MW was only afraction of the amount needed to yield real cost reductions.Moreover, a learning goal would have been moreefficiently served by clustering the plants in the samecountry or region. This would have allowed manufacturersand developers to more easily assemble the necessaryskills and build manufacturing for components in largequantity locally—activities that can help drive costs downmore quickly.Project delays were in part due to mismatchbetween project goals and design.From the host countries’ viewpoint, these plants were anunproven and potentially unreliable source of power. Toaddress host countries’ concerns about power reliability,the plants were designed as hybrids, incorporating muchlarger gas-fired generators. This greatly complicated projectdesign and procurement. In India, it proved economicallyinfeasible to build a gas pipeline to the project, which wasdropped.Bidding the hybrids was problematic. An integrated approachto project contracting carried the risk that therewould be little competition or that contractors would be unwillingto guarantee performance of the novel system. Thealternative approach—separate contracts for gas, solar, andfor systems integration—is complex to manage and couldlead to disputes in the case of poor performance. Both approacheshave now been employed. A retrospective on thisexperience, when complete, could provide useful guidancefor future WBG work on integrated systems—for instance,in potential work on carbon capture and storage.66 | Climate Change and the World Bank Group

A second issue, inherent to any advanced technologyproject, has to do with cost uncertainty and paucity of suppliers.When a technology is new, there will be few experiencedsuppliers, and cost information will be uncertain andclosely held by those few. In the case of the GEF-Bank CSPprojects, initial cost estimates were grossly underestimated.Actual bids came in well above the estimates, but the GEFgrant amounts were already fixed. Hence the size of the CSPplants had to be scaled back, a process that incurred renegotiationand delay. In addition, procurement staff had towrestle with the problem of few qualified bidders. Althoughprocurement rules exist for this circumstance, its relativenovelty led to a cautious and protracted process.A further obstacle was the Bank’s initial insistence thatthe CSP plants be operated by private sector independentpower producers (IPPs). There was great enthusiasm forIPPs in the Bank at the time, but they were not present inthe CSP host countries even for traditional power plants.The IPP requirement thus complicated a technologicalinnovation by overlaying an institutional one. Moreover,the IPP approach held no attractions for the state utilities,whose cooperation was essential.During the long gestation period of the three survivingprojects, much changed at GEF and in the power industryat large. Disenchanted with OP7, the GEF eliminatedit. Meanwhile, CSP experienced a renaissance, driven by aSpanish policy of generous feed-in tariffs and renewed interestin the United States. (The GEF projects, according tosome industry observers, may have helped maintain interestin CSP in the meantime.) Costs appear to have declined,and several different technologies became available.Buoyed by these changes and the advent of the CleanTechnology Fund, and subjected to vigorous external criticismfor prioritizing coal over CSP, the WBG is planninga $750 million investment in a $5.6 billion, 900-MW setof CSP projects in Algeria, Egypt, Morocco, Jordan, andTunisia. A project is also planned for South Africa. Unlikethe modest original investment, these new projects wouldpotentially increase cumulative global capacity by a significantproportion and would be geographically concentrated.So there is a greater potential for advancing the globallearning curve. The imminent completion of the CSP projectsin Morocco and Egypt may help inspire interest in andsupport for the wider new venture.China Efficient Industrial Boiler ProjectIn the early 1990s, GEF-funded World Bank-Chinese analysis(NEPA and others 1994) found that industrial boilersconsumed 350 million tons of coal annually (more thanthe power sector) and accounted for 30 percent of China’senergy-related CO 2emissions. The boilers were also responsiblefor a large proportion of health-damaging urbanair pollution and crop-damaging acid rain. The report suggestedthat better boiler designs could yield 10–20 percentefficiency gains.Consequently, a 1997 GEF-funded, Bank-executed projectsought to spur Chinese capacity to build efficient industrialboilers, complementing government efficiency policies. Theproject’s objectives were to reduce GHG emissions and localair pollution through the development and deploymentof “affordable, energy-efficient and cleaner” boilers throughdesign and policy reform. Most of the $32 million grant wasspent on acquiring technology (IPRs) for new or upgradedboiler designs and auxiliary equipment (such as grates) andtransferring the technology to domestic manufacturers.Procurement was protracted and difficultbecause few companies were interested inselling the technology.Two problems were encountered during implementation.Both related to the project’s strategy of picking winners, thatis, precisely specifying the boiler types to be transferred.First, procurement was protracted and difficult. A combinationof small contracts, tightly specified technologies, anda two-step (technical/financial) bidding process, togetherwith concerns about IPR security, deterred participation byforeign technology suppliers. Only one package had multiplebidders, and two had none. Then, “once contracts wereawarded, contract negotiations proved difficult in somecases, due to difficulties in meeting commercial terms andperformance criteria using Chinese coals. Coupled withmisunderstandings concerning Chinese and internationalcontracting procedures, all of these factors contributed todelays in finalizing technology transfer contracts” (WorldBank 2004). This process delayed implementation by atleast two years. Meanwhile, evolving environmental regulationsbanned the deployment of some of the smaller boilersselected for the project.The project concluded in 2004. A follow-up survey commissionedfor this evaluation found that the beneficiarycompanies produced a total of 7,414 tons per hour of newboilers in 2009, accounting for 3.3 percent of the nationalmarket against an anticipated 35 percent.A 1997 project transferred technologylicenses for efficient industrial boilers toChinese manufacturers.Firms had divergent experiences. Two companies werehighly successful in producing and marketing the newboilers. These well-run companies invested in their own researchand development, improving the designs and keepingcosts nearly competitive with the older, less-efficientSpecial Topics | 67

oilers. They also launched effective marketing campaigns.In contrast, the other six companies abandoned or deemphasizedthe new boilers, for a variety of reasons. They wereless able to keep costs down, and customers were not willingto pay a 20 percent premium for the new boilers, beingdistrustful of the promised three-year payback. As noted,the markets were increasingly restricted by environmentalrules. And finally, some companies found more lucrativemarkets, such as waste heat recovery, in a rapidly changingmarket.Two successful technology recipientsimproved the designs and reduced costs;six others abandoned or deemphasized theboilers.At appraisal, the project’s intention was that “[t]echnologiesthat are proven to be technically and commerciallysuccessful will be disseminated to other boiler producersin China” (World Bank 1996), a key avenue of technologydiffusion. However, an IEG survey found that none of themanufacturers deliberately licensed or retransferred theirtechnologies to other firms, fearing competition. The mostsuccessful firm reported the existence of unauthorized copiesof their designs, so some informal diffusion may haveoccurred, but the quantity and efficiency of the copies arenot known.Data are lacking on the performance of the auxiliary equipmentmanufacturers. However, one of the grate manufacturershas been successful, because the new grates are notmuch more expensive than traditional ones but offer significantfuel savings.None of the manufacturers licensed orretransferred their technologies to otherfirms, limiting the overall impact.Meanwhile, the government has imposed new mandatorystandards for boilers, effective 2010, that are somewhat lessstringent than the boiler project’s design standards.Renewable Energy Development ProjectThe Chinese REDP (1999–2008) provides an interestingcounterpoint to the Efficient Boiler Project. Another largetechnology transfer project, REDP emphasized support fordomestic research and development and manufacturingcompetence rather than licensing of foreign IPRs. With $40million from an IBRD loan and a GEF grant, the projectfocused primarily on establishing a sustainable market forrural solar home systems (SHS). It aimed to do so by overcomingbarriers to commercialization: inexperience of localmanufacturers, poor quality products, and high marketprices.REDP spurred manufacturer capabilitiesthrough quality-contingent outputsubsidies.REDP used a combination of technical assistance, incentives,and subsidies to boost the capabilities of the smallscaleSHS manufacturers. SHS manufacture is a relativelylow-tech assembly business carried out in small workshops.A nascent industry already existed, including spin-offs of aformer government research institute in Xining. But manufacturingcosts were high and SHS reliability low.REDP offered a $1.50/Wp subsidy for manufacturing, contingenton meeting quality standards including componentquality. To help companies meet those standards, it providedpartial funding for company proposals to improve financialmanagement, quality control, and marketing practices,and to adapt and develop technologies. The technologiesinvolved were modest but crucial. For instance, some companiesdeveloped improved charge controllers—the apparatusthat prevents batteries from being overcharged andis thus essential for SHS life and performance. These wereadapted to operating conditions typical of the high plateauswhere customers lived.The project resulted in lower costs forlarger systems, growth of firms in size andcompetence, and improved technology.The combination of financing, incentives, and technicalassistance was effective.• SHS costs declined for larger systems. The project improvedfirms’ quality control, reducing wastage; mayhave contributed to greater scale economies at the firmlevel; and reduced mark-ups as competition increased.• Firms grew. Employment in monitored companies morethan doubled over 2002–07, and sales increased 363percent.• Firms became more competent, and quality improved. Allbut two of the 17 participating firms received ISO 9001certification. Seventy-four component suppliers wereREDP certified.• Technology improved. The technology improvement programsupported 197 proposals, with an average grant of$17,500. The project reported that among 81 auditedprojects, 95 percent achieved their objectives.As in the case of the Efficient Boiler Project, projectsupportedtechnologies became proprietary and were notshared among companies. This might spur technologicalcompetition but may sacrifice opportunities for industrywideadvancement. The REDP model is now being appliedto the more expensive and technologically sophisticated68 | Climate Change and the World Bank Group

goal of promoting wind turbine improvements, under theChina Renewable Energy Scale-Up Project.IFC support for technology transfer and deploymentOver the past 15 years, IFC has mounted a number of initiativesto invest equity, technical assistance, or both in start-upor early-stage clean technology ventures. Mostly funded bythe GEF, these initiatives have targeted both precommercialand commercial technologies. These high-risk ventures havefit uneasily within IFC’s generally conservative, risk-averseculture and indeed many have had a disappointing record.A sequence of mostly unsuccessful projects,financed by GEF and implemented byIFC, has supported high-risk, small-scalerenewable energy enterprises.A sequence of mostly unsuccessful GEF-financed projectshas supported small-scale renewable energy enterprises.These include the following:• The IFC-GEF Small and Medium Enterprise Program.In 1995, a $20 million initiative funded by GEF to increasethe markets of SMEs in the areas of climate changemitigation. The program provided loans of $500,000 to$1 million to various intermediaries and private companiesfor on-lending to SMEs. Though the program wasnot designed specifically to target the solar photovoltaicsector, it included six solar photovoltaic-related investments.Although solar photovoltaic proved to be too riskyfor most financial intermediaries, the SME program wasable to place funds in other technologies and sectors.• Renewable Energy and Energy Efficiency Fund. In 1997, thisfund was designed to place equity and debt investmentsin projects using renewable energy and energy efficiencytechnologies. But it had difficulty developing a projectpipeline, failing to meet modest targets. Developed as aconsortium, the division of responsibility among participantcompanies was unclear. Having made only one investment,the project was restructured in 2006 and foldedinto the Sustainable Energy Facility (see below).• Photovoltaic Market Transformation Initiative. In1998, IFC launched the $30 million PhotovoltaicMarket Transformation Initiative to provide concessionalfinance and grants. The program was designedto accelerate the sustainable commercialization andfinancial viability of solar photovoltaic technologyin India, Kenya, and Morocco. Early Initiative effortstook too long to materialize and required extensivedocumentation that proved to be too burdensome forsmall investments. In addition, the photovoltaic SMEswere operating with thin margins. The project wasrestructured in 2004 and aimed at industry-level ratherthan project-level capacity building. Results have beenpoor in Kenya and Morocco (IFC 2007). In India, theemphasis has shifted from SHSs to support for manufacturingof solar modules.• In 2001, IFC loaned $1 million to a private companyto invest in sustainable energy SMEs, especially thosethat offered electricity to unelectrified households, providedback-up energy sources to companies, or lackedaccess to financing and technical advice. The companyfully disbursed the $1 million loan to eight sustainableenergy SMEs in Latin America and Africa to finance investmentsin fixed assets and working capital. Projectsfunded include solar water heaters, photovoltaic power,natural gas power, hydropower, and energy efficiencyimprovements.• The Solar Development Group, a $41 million initiativefunded by IFC and GEF, was initiated in 1999 with thegoal of increasing the delivery of SHS to rural householdsin developing countries. The group was comprisedof two separate entities: Solar Development Capital, aprivate equity fund for private solar photovoltaic andsolar photovoltaic-related businesses, and the Solar DevelopmentFoundation, a nonprofit entity that providedgrants for business development assistance. The Foundationraised $12 million and disbursed $2.2 million intechnical assistance to 63 projects. Solar DevelopmentCapital disbursed only $660,000 and was liquidated(IFC 2007). Overall, the project did little to meet theobjective of accelerating the growth of solar photovoltaicinstallations and closed in 2004.• Environmental Opportunities Facility. In 2002, IFC establishedthis facility to provide catalytic funding forinnovative ventures with the potential to increaseenvironmental sustainability and the need to overcomePhoto by Trevor Samson, courtesy of the World Bank Photo Library.Special Topics | 69

significant barriers, such as entering new markets andapplying new technologies and new business models.The facility provided technical assistance grants andinvestment funding to projects with significant environmentalbenefits or projects that led to cleaner production.As of 2009, only 4 projects have been committed, and 25received technical assistance grants. High cost, low buyinfrom bilateral donors, unfocused strategy, and resourcelimitations led to under achievements in placing funds.As a pilot facility, the program aimed to demonstrate theviability of early-stage cleaner production projects. However,case studies and dissemination workshops appearto have had little impact on technology diffusion.• Sustainable Energy Facility with E&Co. In 2005, IFCestablished the Sustainable Energy Facility Project. Theproject consists of $14 million of investment capitaland up to an additional $ 2.6 million for technicalassistance and capacity building. Based on a mid-termself- evaluation, this facility appears to have learned thelessons of its predecessors, incorporating greater flexibilityin technology and attention to making sure productsare demanded by markets. Like some of its predecessorsit combines technical assistance and investment,taking a quasi-venture capital approach.One of IFC’s furthest ventures into upstream technologiesis its GEF-supported Fuel Cell Initiative, initiatedin 2001. The pilot phase was expected to supportthree companies with different fuel cell technologiesand help increase their supply of fuel cells, reduce theirmanufacturing and installation costs, and demonstratethe viability of the technology. The target market wasbackup and remote-location power for telecom companies.The program was supposed to close in December2008, but to date only about 85 systems have been installed,against a target of 400. There was no demand forthe remote-location fuel cell.In sum, IFC’s GEF-funded projects seem to have sufferedfrom a persistent set of design flaws. They have often supportedcompanies with the double handicap of inexperiencedmanagement and technology that is not locallyfamiliar. They have supported products that are too advancedor expensive for the target market. And they havesometimes presumed overoptimistically that providingtechnology to specific firms would lead to spontaneousdiffusion of that technology.IFC’s GEF projects have suffered frompersistent design flaws.There are, however, indications of a fresh approach thatrecognizes these past shortcomings. A new initiative onearly-stage clean-tech venture capital is led by staff whowere involved in IFC’s high-risk but ultimately high-returninvestments in African telecom. The new approach seeks tosupport experienced management in adopting technologiesthat are proven elsewhere in the world; it is prepared to takesome risks for prospectively high returns. At the same time,an investment in one of the developing world’s first largegrid-connected solar photovoltaic power plants also stressesworking with a well-qualified company, and the projectprovides for the construction of a “knowledge platform” toshare project results.A fresh approach emphasizes transferof well-proven technologies and creation ofknowledge platforms to share results.Demonstration and piloting in recent low-carbonenergy projectsTechnology transfer can occur through piloting and demonstration.Existing technologies face new challenges whenput in a new context. For instance, biomass technologiesmay require technical, logistical, contractual, and regulatoryadjustments to adapt to a novel location with untriedfeedstock. An effective pilot project will have a coherentlogical framework for demonstration. So, for instance, ifthe goal was to demonstrate the technical and financial viabilityof a biomass technology so as to induce spontaneousreplication, the project should specify the technical andfinancial indicators that will be collected at the plant level,the target audience, how the results will be communicated,and how uptake of the technology will be tracked.Recently initiated pilot projects had goodplans for monitoring internal projectoutcomes.To gauge the extent and practice of such projects, IEG dida desk survey of low-carbon energy projects over 2007–09for this evaluation. It found 21 projects that contained eitherpilot or demonstration in their project objectives, withtotal commitments of roughly $1.4 billion (see table H.1).Eleven of these projects were GEF supported; eight hadsolely GEF support. Nearly all project designs containedgood plans for monitoring internal project outcomes, butonly eight projects displayed a strong logical frameworkfor demonstration; few project designs contained any measurementof external demonstration effects. Although thethree carbon finance project designs included excellent internaloutcome measures (through the CDM), they lackeda coherent mechanism for demonstration and contained nomeasurement of demonstration impacts.Only 8 of 21 projects had strong logicalframeworks for demonstration, andfew contained any measurement of externaldemonstration effects.70 | Climate Change and the World Bank Group

ConclusionsThe WBG’s efforts to promote technologies have often foundered.There is a recurrent set of factors in these failures:• The projects often did not set out a clear logical frameworklinking interventions to technological progress.Efforts to support upstream technologies have been fartoo small by themselves to advance those technologiesalong a global learning curve.• New technologies inherently have few suppliers andpoorly known costs. The World Bank’s procurementsystem is not well adapted for these situations.• A combination of inexperienced entrepreneurs and unfamiliartechnology constitutes a double set of hurdles.REDP, however, shows that it is possible to address bothchallenges.• “Demonstration” projects fail if private companies, understandably,want to keep technologies proprietary.Successful projects, in contrast, planned well for demonstration,learning, and diffusion. REDP supported technologicalprogress in many competing firms, stimulating theindustry’s growth. The Energy Conservation Project introducedthe institutional technology of energy performancecontracting and arranged for beneficiary firms to participatein demonstration, while they adapted the practice tolocal conditions. It also disseminated 75 specific techniquesfor industrial energy conservation.The Regional Silvopastoral Project rigorously documentedand publicized its achievements in boosting farm productivityand sustainability, which facilitated scale-up. Thereare signs that some of these lessons are being incorporatedin new efforts. The GEF Evaluation Office cites a UnitedNations Development Programme energy efficiency projectthat was carefully designed for replication and successfullydid that (NCSTE 2009).Successful projects planned well fordemonstration, learning, and diffusion.Technology transfer projects face a number of barriers anddisincentives. Smaller (more pilot-like) projects may havedisproportionately high costs of preparing and supervising,including effective design and monitoring of diffusionimpacts. Borrowers—and country directors—mayperceive (correctly or not) that these projects are risky.Projects that involve less-commercial technologies mayrun into procurement issues beyond the expertise of moststaff. Projects may also involve complex issues of intellectualproperty rights.Should the WBG support the development of technologiesproprietary to individual companies? Under what circumstancesshould publicly supported technologies be providedopen source, as a public good, to an entire industry?Technology transfer projects face a numberof barriers and disincentives.Addressing these barriers requires a host of instruments.The prominence of GEF and donor funding points to concessionalfunds as one way to overcome borrower riskaversion and to support higher preparation and supervisioncosts. Staff and management incentives need to beaddressed—at the very least, by ensuring that pilot anddemonstration projects are assessed as pilots, with recognitionof the benefit of informative “failures.” The WBGshould consider setting up a physical or virtual technologyunit as a resource for project teams. The unit could provideadvice on procurement, IPRs, diffusion mechanisms, andmonitoring. It could also advise on the advantages and risksof engaging with less-mature technologies.The WBG should be cautious about trying to advance technologiesat the global level. It has little direct experiencewith upstream technology development. There is, however,an a priori argument for research and developmentsupport for technologies that reduce poverty and are easyto replicate—meaning that there is little private sector interestin them. These might include, for instance, farmingtechniques such as biochar (which increase soil fertility andsequester carbon), improved cookstoves, and techniquesfor reducing urban heat island effects.To make a global difference at the scale-up stage—push atechnology down the cost curve at the global level—thescale of intervention needs to be large relative to cumulativeglobal production. For instance, WBG and Clean TechnologyFund resources are large enough, if leveraged, to significantlyincrease the global capacity of CSP but are small comparedto the global investment needed to advance carboncapture and storage. And such efforts require weighing therelative merits of a purely country-based approach with onebased on global procurement. For example, there are potentialadvantages and disadvantages of a single global tenderfor CSP plants (resulting in a standardized design, witheconomies of scale and competition) versus a series of separatesmaller tenders in different countries (developing moretechnology paths, but not moving far along each one).These choices involve some degree of “picking winners,”which requires balancing risks against rewards. If the WBGgets involved in these activities, it needs to develop (or coordinatewith others) a clear technology map with goalsand exit criteria.Carbon Finance at the WBGThe UNFCCC, to which virtually all countries subscribe,has the goal of stabilizing atmospheric GHGs to head offdangerous climate impacts. The carbon market, a creationSpecial Topics | 71

of the Kyoto Protocol, is supposed to reduce the cost ofachieving that goal, making it easier for countries to agreeon what to do and how to pay for it. It does this by requiringdeveloped countries to limit their emissions, but allowingthem to meet that limit by paying to reduce emissions (buyingcarbon credits) abroad rather than at home. Developingcountries face no caps but can sell carbon offsets—reductionsof emissions compared with emission levels from doingbusiness as usual.There are cheaper opportunities to reduceemissions in transition and developingcountries than in developed ones.The carbon market, inspired by successful market-basedschemes to reduce acid rain, was attractive for several reasons.The atmosphere does not care where the CO 2comesfrom—the impact on climate change is the same. Comparedwith developed countries, transition and developing countrieshave cheaper opportunities to reduce emissions, theformer through replacing a legacy of energy-wasting infrastructureand industry and the latter by installing efficientnew equipment to meet rapidly growing energy demands.The carbon market can provide money and technology fordeveloping country infrastructure. Because carbon creditsare a priced commodity, developing countries can realizeprofits if they can produce them cheaply. Having a price oncarbon emissions may motivate research and developmentfor low-carbon technologies. Finally, some view the carbonmarket as a more reliable means of raising funds from developedcountries (which are historically responsible forcurrent levels of GHGs) than the competing alternative: directannual appropriations from those countries’ individualnational budgets.In contrast, the carbon market faces significant practicalobstacles. The logic of the system requires that emissionsreductions must represent a new, additional effort so thatthe developed country’s extra emissions are exactly offsetby reductions elsewhere. Otherwise, buyers and sellersmight collude and claim bogus carbon credits, and totalemissions would increase. To prevent this, an elaborateproject-by-project validation system has been set up underthe auspices of the CDM to certify the additionality of carboncredits (box 5.2).Box 5.2Carbon Offsets—A Peculiar CommodityCarbon offsets are a peculiar commodity. They are defined as the difference between the number of tons of GHGyou emit and the number of tons you would have emitted had you not been paid not to emit them. In an idealizedexample, the offer of carbon payments might induce a utility to build a geothermal power plant (with no emissions)rather than a cheaper diesel plant (which would have emitted 100,000 tons per year). The offset would thenbe 100,000 tons per year.Actual emissions can be measured with instruments, but quantifying counterfactual, business-as-usual emissionsis difficult. Both sellers and buyers have an incentive to claim offsets for a project that they were going to doanyway—projects that are not “additional.” But if many people did this, then these bogus offsets would be used bypurchasers to increase their emissions above agreed limits, frustrating the goal of the Kyoto Protocol.This is the heart of the additionality dilemma. The CDM has set up an elaborate system for determining additionalityfor each proposed project. The project proponent must argue that carbon funding is critical to project bankabilityor helps to overcome other kinds of barriers. Methodologies for demonstrating additionality are developedat some cost by the first people to undertake a specific kind of project. Then, if approved by the CDM, that methodologyis available to others, accelerating project approval. The CDM uses private third-party verifiers to validateadditionality claims and to verify annual reports of emissions reductions.In sum, the carbon offset commodity is in effect an impact evaluation, and an elaborate institutional mechanismhas been set up to conduct that evaluation. Few other development projects attract the same degree of scrutinyon impacts.However, the additionality screening process has been widely criticized as ponderous, costly, and ineffective.Environmentalists press for stricter screening, investors for more streamlined procedures. The current system maycombine the worst of both worlds: high transaction cost with substantial nonadditionality. A growing consensusviews determination of additionality as quixotic at the project level. An alternative would be to set up technologyspecificcrediting rules, creating a system akin to a feed-in tariff premium for renewable energy or energy efficiency,with higher credits for less-competitive technologies.Source: IEG.72 | Climate Change and the World Bank Group

Table 5.1Carbon Funds at the World BankFund Year established Currency Capital % PrivateKyoto FundsPrototype Carbon Fund 2000 $ 219.80 57.6Danish Carbon Fund 2005 € 90.00 78.0Community Development Carbon Fund 2003 $ 128.60 45.1Spanish Carbon Fund Tranche 1/Tranche 2 2005/2008 € 220/70 22.7BioCarbon Fund Tranche 1 2004 $ 53.80 51.0Umbrella Carbon Facility 2006 € 799.1 a 75.0Netherlands CDM Facility 2002 $ — 0.0BioCarbon Fund Tranche 2 2007 $ 38.10 47.0Netherlands European Carbon Facility 2004 $ — 0.0Carbon Fund for Europe 2007 € 50.00 20.0Italian Carbon Fund 2004 $ 155.60 30.2New facilitiesForest Carbon Partnership Facility 2008 $ 155.00 3.2Carbon Partnership FacilitySource: World Bank data.Note: — = not publicly available.a. Includes €224.54 million total participation of Prototype Carbon Fund, Netherlands CDM Facility, Italian Carbon Fund,Danish Carbon Fund, and Spanish Carbon Fund.Carbon funds at the WBGThe World Bank carbon funds were conceived when theKyoto Protocol was under discussion and the concept ofcarbon markets was being explored. The WBG’s carbonfunds were intended as a “proof of concept” for the carbonmarket and as a pilot device for testing practical approachesto the novel challenges of defining, creating, andtrading the carbon commodity, and integrating it withdevelopment goals. Building on a precursor program, ActivitiesImplemented Jointly, the Bank began consultationson carbon in 1997. The first carbon fund was approvedin 1999 and launched in 2000. It was followed by severalmore (table 5.1).By May 2010, the World Bank’s Carbon Finance Unit(CFU) had $2.358 billion under management and signedpurchase agreements for a total of 228 million tons of CO 2of carbon credits, with total value of $1.84 billion (implyingan average price of $8.07 per ton). Pipeline projects represented,notionally, an additional 53 million tons worth$208 million. However, not all tons may be delivered beforeKyoto-driven carbon market provisions expire in 2012;In May 2010, the World Bank’s CarbonFinance Unit had $2.358 billion undermanagement and purchase agreements forcarbon credits worth $1.84 billion.the carbon funds allow for some post-2012 purchase, butthe market is limited. 4Since 2002, IFC has managed carbon funds on behalf of theNetherlands government. The funds have contracted to buy$135 million in carbon credits from more than 40 projects.In addition, IFC has marketed a carbon delivery guarantee,booking guarantees for 2.2 million certified emissionreductions (CERs) in three projects.MIGA insured a landfill gas project against breach of contract,including governmental failure to honor the CDMrelatedLetter of Approval. There has been no a replicationof this CDM-related insurance provision to date.Goals and operation of the fundsThe World Bank carbon funds are trust funds managed bythe Bank’s CFU. The participants are developed countriesand companies seeking to acquire carbon credits to fulfilltheir obligations under the Kyoto Protocol. The CFU solicitscarbon project proposals from the general public andwrites purchase agreements for selected projects’ emissionsreductions. Typically it pays for offsets on delivery, withlimited up-front payments.The CFU and its operations are entirely funded by the participants,rather than through the Bank’s own budget. AlthoughCFU staff act as “deal managers,” the CFU engagesregional Bank staff for project preparation. The CFU hasgrown large, with 68 staff and 72 consultants.Special Topics | 73

Catalytic or demonstration impacts werestressed in the publicly stated goals of thePrototype Carbon Fund.Catalytic or demonstration impacts were stressed in thepublicly stated goals of the Prototype Carbon Fund (PCF)(World Bank 2001):1. Show how project-based greenhouse gas emission reductiontransactions can promote and contribute to sustainabledevelopment and lower the cost of compliancewith the Kyoto Protocol.2. Provide the parties to the UNFCCC, the private sector,and other interested parties with an opportunityto learn by doing in the development of policies, rules,and business processes for the achievement of emissionreductions under Joint Implementation and theCDM.3. Demonstrate how the World Bank can work in partnershipwith the public and private sector to mobilize newresources for its borrowing member countries whileit addresses global environmental problems throughmarket-based mechanisms.In 2005, the Bank’s Board endorsed a revised approach tocarbon finance, with three general objectives:• “To ensure that carbon finance contributes to sustainabledevelopment• To assist in building, sustaining, and expanding the internationalmarket for carbon emission reductions• To further strengthen the capacity of developing countriesto benefit from the emerging market for emissionreduction credits” (World Bank 2006).In 2005, the Bank Board endorsed a revisedapproach that articulated more specificgoals for the CFU.In addition, there were specific goals:• Continue to align carbon finance more closely withpoverty alleviation and locally sustainable development,ensuring that smaller, poorer countries benefitfrom carbon market development.• Expand the technology frontiers of the carbon marketto ensure that carbon finance and carbon trade supportenergy infrastructure and technology transfer.• Expand the Bank’s role in helping developing countriesdevelop and market portfolios of carbon assets directlyto OECD buyers, as a “lead buyer” that helps developa project but purchases only a fraction of its emissionreductions.• Ensure that there is a value added from carbon purchase,for instance, through the application of Bank safeguards.• Achieve greater integration of carbon finance into themainstream of Bank lending operations.• Reach out to other international finance institutionsand entities.• Improve pipeline of carbon finance projects.Inherent tensions among the various strategicand fiduciary goals have been resolvedin part through differentiation of funds.In addition to these overarching goals, the CFU wanted tofully use its funds on behalf of participants, to support sustainabledevelopment in client countries, and to ensure anequitable division of benefits between participants and hostcountries.There are inherent tensions among the various strategic andfiduciary goals:• Demonstration versus volume. Demonstration or pilotprojects tend to be risky and demanding in preparation.Under UNFCCC regulations, first-of-a-kind projectsrequire large fixed costs in methodology development.If, as is likely, these demonstration projects are small,the preparation cost per ton of CO 2will be high. Sothere is a trade-off between demonstration (which benefitsa global community) and maximization of carboncredits (which benefits fund participants and recipientprojects).• Established versus less-established country locations. Thisis the same kind of trade-off. “Frontier” projects incountries with less CDM experience are costlier to preparebut promote the geographic growth of the carbonmarket to poorer countries.• Stringent versus less-stringent additionality determination.As was recognized from the outset of the CDM,both buyers and sellers benefit from lax baselines—thatis, funding of projects that are not really additional. Butadditionality is difficult to determine, and screeningfor additionality has led to burdensome bureaucraticprocedures. So for the CFU there is a potential tensionbetween setting high standards for additionality demonstrationand maximizing carbon credit transactionvolumes.• High versus low CO price; agent of buyers or sellers.2In the early years of the PCF, the carbon market wasvery thin or nonexistent. Without an objective meansof price discovery, determination of a “fair” price was achallenge for the PCF.These conflicting pressures were resolved in part throughdifferentiation of funds. The PCF was launched as a74 | Climate Change and the World Bank Group

demonstration initiative. The Community DevelopmentCarbon Fund and the BioCarbon Fund have strong, explicitdemonstration goals. The other Kyoto Funds are stronglyoriented toward helping developed countries secure carboncredits for compliance purpose. The newer initiatives, theCarbon Partnership Facility and Forest Carbon PartnershipFacility, return to the pioneering mode in seeking to demonstratenovel kinds of carbon transactions not yet recognizedunder Kyoto.The new facilities also feature equal representation of donorand host countries in fund governance. In contrast, earlierfunds were governed by a committee of the participants(donors), though in consultation with host countries.Catalytic impact on the carbon marketThe CFU played an important role in catalyzing the emergenceof the market. Although there had been earliercarbon transactions (including Costa Rica’s pioneering saleof forest carbon credits), observers point to the PCF’s earlymobilization of funds and private sector investors as galvanizingthe realization that carbon markets were workable.The PCF invested heavily in developing monitoring andverification tools and in the legal apparatus for transactingoffsets, which were diffused among practitioners in theemerging market.The CFU was important in catalyzing theemergence of the carbon market and activein developing methodologies for carbonoffset measurement.The CFU was active in developing methodologies for carbonoffset measurement, though not uniquely so. As notedin box 5.2, development of a validation methodology is akind of public good: it cuts the development time, risk, andcost for all subsequent projects that use the same technology.In the first five rounds of the CDM’s MethodologicalPanel, the WBG was responsible for 12 of the 44 submittedmethodologies and for 6 of the 22 that were approved.Altogether, for large scale energy and transport technologies,the CFU has been involved in the preparation of 45 methodologies,of which 16 were eventually approved. Those methodologieshave been used so far in registered energy andtransport projects that are expected to produce 137 milliontons CO 2e, or about 10 percent of the CDM total for thesecategories. The CFU has also proposed most of the acceptedforestry methodologies, though there have been few otherusers of these and many small-scale methodologies. Currentwork on the Forest Carbon Partnership Facility and CarbonPartnership Facility aims at facilitating the development ofradically new approaches to the carbon market that work atscales much larger than site-specific projects.From the beginning, there was concern about whether theBank’s carbon funds would spur private sector participationor crowd it out—especially given the Bank’s perceived clout.UNFCCC statistics show that, using registered projects ortons as a measure, the Bank’s market share rapidly dwindled(figure 5.2). There was a surge of project registrationswhen the Kyoto Protocol came into force in 2005, so that by2005 the World Bank comprised only a small share of themarket. That being so, one could question the relevance ofthe 2005 goal of helping countries to market carbon credits,as a vibrant market was already emerging at the time.The World Bank’s market share of CDMprojects dwindled rapidly over time as avibrant market emerged.One way to assess the CFU’s demonstration effect on additionalityis to compare its relative success in securing CDMregistration. Registration is a measure of a project’s quality,including its stringency in determining additionality. TheCFU’s ratio of problematic to registered projects is smallerthan that of the CDM at large (table 5.2).Figure 5.2World Bank Share of CDM Projectsand Tons RegisteredPanel A. Registered projects (log scale)Registered CDM, number1,0001001012004 2005 2006 2007 2008 2009Registration, yearPanel B: CERs registeredCER by 2020 (tCO 2 ) (millions)1,2001,0008006004002000OtherWBG2004 2005 2006 2007 2008 2009Registration, yearOtherWBGSource: Calculated by IEG based on IGES Oct 2009, IGES as ofOctober 2009.Note: CDM = Clean Development Mechanism; CER = certifiedemission reduction.Special Topics | 75

Table 5.2Comparative Success at Registrationof CDM Projects, WBG versus OtherSponsors and PurchasersWBGOtherRegistered projects, Oct 2009 69 1,765Ratio of rejected to registered 0 0.07Ratio of validation negative, terminated orwithdrawn to registered0.26 0.34Ratio of in process to registered 0.65 1.58Source: IEG tabulation, UNEP Risoe center as of October 2009.Note: CDM = Clean Development Mechanism; WBG = World BankGroup.The CFU has been more successful insecuring CDM registration than othernon-WBG applicants.However, like previous observers, this evaluation finds thatthe size and timing of carbon credit purchases is far toosmall, in many cases, to plausibly constitute a make-or-breakinfluence on the decision to undertake a project. Instead,carbon funds constitute a mild additional inducement toinvestors that, statistically over the set of projects involved,may have contributed to some additional reductions.Poverty focusAs noted, the 2005 objectives called for ensuring thatsmaller, poorer countries benefited from the carbon market.This was inherently difficult, because these countrieshave very low levels of energy-related emissions to abate,but their deforestation and agriculture-related emissionsare ineligible under Kyoto rules.This mission was carried out largely by the BioCarbonFund and Community Development Carbon Fund,which comprise 8 percent of the overall portfolio. Thesehave placed 39 percent of their purchases in low-incomecountries, as opposed to 0.3 percent for the other carbonfunds (table 5.3). However, these demonstration-orientedfunds experienced high preparation and supervisioncosts, along with implementation problems. Outside thelow-income countries, some projects (such as JepirachiWind Farm) provided benefits to indigenous or lowincomecommunities.The BioCarbon Fund and CommunityDevelopment Carbon Fund put 39 percentof their purchases in low-income countries;the other funds put 0.3 percent intolow-income countries.Table 5.3Carbon Projects with Signed Purchase AgreementsPCF CDCF BioCarbon Fund National + umbrella TotalTotal project cost, a ($ millions) 975 781 265 5,246 7,266ERPA volume, million tons CO 2e 23 9 7 168 208Total volume, million tons CO 2e 60 17 70 515 663ERPA tons breakdown by country group (%)China 34 15 12 84 73JI (transition countries) 13 0 0 5 5Low income 2 42 35 0 3Lower middle income 25 41 38 6 11Upper middle income 26 3 14 5 8Total 100 100 100 100 100Total tons breakdown by country group (%)China 55 10 3 81 69JI (transition countries) 10 0 0 7 7Low income 1 49 74 0 9Lower middle income 12 36 21 5 8Upper middle income 22 5 2 5 7Total 100 100 100 100 100Source: World Bank CFU data.Note: CDCF = Community Development Carbon Fund; CO 2e = carbon dioxide equivalent; ERPA = emissions reduction purchase agreement;PCF = Prototype Carbon Fund. Totals are not exact due to rounding.a. “Total project cost” refers to the investment cost of establishing the project, not to the purchase amount of carbon offsets.76 | Climate Change and the World Bank Group

Impacts on technology transferThe 2005 goals called for the CFU to “expand the technologyfrontiers of the carbon market to ensure that carbonfinance and carbon trade supports energy infrastructureand technology transfer.” Energy technology constitutesa minority of total CERs under contract. The largest energysubsectors are hydropower at 6 percent of the overallpost-2004 portfolio, landfill gas (6 percent), energyefficiency (4 percent), and methane avoidance (3 percent).Biomass, geothermal, and wind are about 1 percent each.The degree of emphasis on technology transfer varies.The CFU has had an active role in the diffusion of landfillgas technology. The Jepirachi Wind Farm Project was thefirst grid-connected wind farm in Colombia; its operationprovided useful lessons on adapting turbine operations tothe coastal region’s distinctive climate conditions (Pinilla,Rodriguez, and Trujillo 2009). In contrast, hydropowerwas already well established in Chile and China before theBank’s carbon projects arrived in those countries.CDM project proponents must note technology transfer intheir project design document. Seres and Haites (2008) reviewedthese documents for all CDM projects in the pipelineas of June 2008. IEG reviewed the categorization of the59 WBG-sponsored projects in their database. Nineteenspecifically mentioned technology transfer, a slightly smallerproportion than the 36 percent in the overall sample. Ofthe 19, there were 6 landfill gas, 5 wind, 4 energy efficiency,2 biogas, and 2 industrial gas projects. Eight cases involvedequipment transfer only, 7 knowledge only, and 4 equipmentand knowledge. Nepal was the only low-incomecountry in this group.Almost two-thirds of the CERs under contract were forChinese reductions of HFC-23, a highly potent, industriallygenerated GHG. HFC-23 is a by-product of refrigerant productionand can be abated at very low cost. This purchasegenerated a large pulse of offsets at a time when there wasincreasing pressure on the Bank to deliver them. Globally,HFC-23–based offsets accounted for half of all CERs validatedin 2006, enabling the creation of a secondary marketand allowing CER-short companies to meet immediate carbonobligations.Almost two-thirds of carbon offset purchaseswere for Chinese reductions of HFC-23, aby-product of refrigerant production.However, HFC-23 offsets provoked concerns. As permittedby the CDM, the refrigerant companies realized a largeprofit on these transactions, subsequently taxed by Chinaat a 65 percent rate for development purposes. 5 However,critics say that carbon finance was unnecessary and inefficientfor this purpose, suggesting that the industries couldhave borne the cost or simply have been reimbursed for it,analogously to the Montreal Protocol 6 (Wara and Victor2008). There was also concern that companies might enterthe refrigerant business merely to profit from HFC-23destruction, because destroying the by-product pays morethan creating the refrigerant. For this reason, UNFCCCrules were put in place to exclude new entrants from claimingemissions reductions. 7Implementation and benefitsFor most projects, the production of carbon offsets is proportionalto the production of local benefits such as electricityor regrown forest volume. CDM monitoring reportsallow comparison of planned versus actual issuance ofoffsets. Looking at CDM-wide statistics, biogas, methanerecovery, cement, and transportation have performed farbelow expectations; for other technologies, there is widedispersion in planned versus actual performance.Chapter 2 discussed the performance of the 12 WBGcarbon-financed hydropower projects for which formalmonitoring information is available. Information is availablealso on 12 other WBG carbon projects (table A.6). Twolandfill gas projects have fared very poorly, with issuanceyields below 10 percent of planned levels (see box 2.2 onwhy landfill gas plans were too optimistic). Four other projectshad yields below 65 percent. The remainder performedas designed or better. Internal tracking of BioCarbon Fundprojects shows that reforestation and afforestation are proceedingmore slowly than anticipated.Biogas, methane recovery, cement, andtransportation have performed belowexpectations, and for other technologiesthere is wide dispersion in planned versusactual performance.Integration with Bank activitiesThe World Bank has largely not realized synergies betweenoperations and carbon finance in the Kyoto Funds. Only 10of the 108 agreements are associated with Bank operations.For the operational part of the Bank, mainstreaming of carbonfinance is seen as too much trouble, because of the timeand hassle of arranging for project registration. In contrast,four proposed operations under the Carbon PartnershipFacility are grounded in existing Bank projects.Knowledge transfer and capacity buildingThe carbon funds have supported CF Assist, a capacitybuildingprogram that advises countries on carbonregulation, sponsors a range of training, helps identify carbonprojects, and sponsors carbon trade fairs and expos.The annual carbon trade fair has been cited as an importantcontribution to information diffusion. Over 2006–09,Special Topics | 77

CF Assist provided training to 6,225 people, more than aquarter in Sub-Saharan Africa, and helped in the preparationof 300 projects, about half of which were in the Philippinesand Uzbekistan.ConclusionsThe World Bank’s CFU has played an important role inopening an entirely new field of environmental finance,popularizing the idea of carbon markets and contributingto the institutional infrastructure of the market. Dependingon the outcome of international negotiations, this couldevolve into a major financial vehicle for supporting developmentand climate mitigation. Higher carbon prices willbe necessary, though, to effect widespread transformationof energy technologies.The 2005 exit strategy did not functionsmoothly; the Bank moved into pilot areasof the carbon market as planned but didnot exit established parts of the market.Constrained by the strictures of the Kyoto Protocol, theCFU has spent much of its creative energy grappling withthe perplexities of establishing additionality and dealingwith the CDM apparatus. The additionality and impact ofits own actions are mixed. It has contributed to the diffusionof some technologies, such as landfill gas, and supportedfirst-of-kind technology investments in some countries.The BioCarbon Fund and the Community DevelopmentCarbon Fund have supported novel small-scale, rural, andforestry projects—and found in the process that this is difficultto do.In contrast, much of the CFU’s support for energy technologieshas gone to projects where its financial leverage wasrelatively small. CFU staff claim that the cachet of involvementwith the Bank’s carbon fund has attracted investorsto Bank-supported projects. To the extent that this is true,there may be other, less complicated ways to put the WBG’sprestige to use.The CFU has spent much of its creativeenergy grappling with the perplexities ofestablishing additionality and dealing withthe CDM apparatus.On market exit, the 2005 Strategy statement put it this way:To the degree that carbon markets thrive, the Bankwill exit from the carbon market. The Bank as trusteeof carbon funds will increasingly be able to act as the“buyer of last resort” and transition from being a ‘buyer’of carbon assets to helping its clients countries positionthemselves as sellers. If risk and uncertainty declinesin certain countries and for certain technologies, theBank’s carbon funds will be no longer needed as theBank’s participation becomes, over time, no longer necessaryto help create viable projects and to manage risksfor buyers and sellers. This, in effect, constitutes a builtinexit approach for the Bank from the lower-risk partof the carbon market (World Bank 2006).This exit strategy has not functioned smoothly. Althoughthe Bank did indeed move into higher-risk, pilot areas ofthe carbon market, it continued to build up its lower-riskKyoto-oriented business after that market was alreadythriving. It then became clear that the bottleneck was notmarket demand for offsets, but creative, high-leverage waysto use those funds for sustainable development. This wouldhave suggested greater emphasis on the supply side of themarket.78 | Climate Change and the World Bank Group

Chapter 6Photo by Martin Wright/Ashden Awards for sustainable Energy. Used with permission http://www.Ashden Awards.org

Conclusions and RecommendationsEconomic life and GHG emissions have been closely intertwined. This evaluation hastraced some of the most important parts of that large and complex knot, assessing theimpacts of WBG attempts to disentangle the threads. Table 6.1 summarizes the sectoralfindings. This chapter draws conclusions that cross-cut those diverse sectors andpresents recommendations.The Congruence of Mitigation andDevelopmentGHG mitigation directly contributes to development andpoverty reduction. But it does so by managing long-termrisks at the global level. Thus, countries are rightly concernedabout potential trade-offs between long-term, globallyshared benefits and short-term, local benefits.IEG finds that there are many important areas of action thatcombine significant global benefits with high local ones.Figure 6.1 plots indicative estimates of the local economicreturns and global mitigation returns of some of the interventionsdiscussed in this evaluation. These estimates mustbe taken with extreme caution, as they are based on possiblyoveroptimistic appraisals or on sometimes inconsistentor poorly documented monitoring reports.But this evaluation suggests that energy efficiency and BRToffer local ERRs that exceed most development projects,with GHG as a significant side benefit. At current valuationsof carbon reduction, the domestic benefits are muchlarger than the carbon benefits. There was insufficient informationto compute returns to forest interventions, butthere are large deforestation reductions (and therefore largeemissions reductions) from forest protection projects, especiallywhere local sustainable use is allowed, and evengreater reductions from the establishment or maintenanceof indigenous forest areas. This suggests a combination ofsocial, biodiversity, and carbon gains from these projects.A Systems View Is EssentialAs emphasized in Phase I of this evaluation (IEG 2009), asystems view is often necessary to assess interventions’ impactsand to appraise alternatives. A narrow project-levelfocus can fail to account for positive or negative indirecteffects, fail to identify important complementary efforts,and become mired in controversy uninformed by a considerationof alternatives.For instance, the WBG’s involvement in coal projects hasbeen a lightning rod for debate. If there were an internationalagreement that clearly set out how to achieve theUNFCCC goal of climate stabilization, with assigned rolesand responsibilities, such a debate would not be necessary.In the existing vacuum, the SFDCC set out criteria thatwould restrict support to cases that are least cost, that optimizeenergy efficiency options, and for which no financeablelow-carbon alternative exists.A study for Kosovo illustrates a way to apply these criteria.It employs a systemwide model to show that even in thepresence of €10/ton of CO 2charges or credits, and takingaccount of the damages from air pollution, it would still beadvantageous for Kosovo to build a large coal plant, whileclosing smaller, older ones. However, it is essential that suchmodels incorporate the scope for efficiency improvementsas an alternative to new power generation and considerhigher levels of carbon payment.Similarly, assessment of the costs and benefits of largehydropower plants should be made in the context of asystems model that identifies the advantages and disadvantagesof different sites (as in the Nile Equatorial Lake StrategicEnvironmental Assessment). The model should alsoconsider the social and environmental impacts of alternativemodes of power provision.In the area of forests and land use, forest conservationneeds to be accompanied by sustainable agricultural intensification.Increased agricultural profitability by itselfcould motivate added deforestation; increased forest protectionin one area could deflect pressures to another inthe absence of a compensating supply of food, timber, andjobs. Likewise, the benefits of improved urban transit canbe quickly eroded as cars expand into freed-up roadways;80 | Climate Change and the World Bank Group

Figure 6.1800Economic and Carbon Returns to InvestmentsPanel AProject ERR700600500400300200100CFLsEnergy efficiencyPanel B00 20 40 60 80 100 120 140 160Lifetime CO 2 emissions / investment cost (kgCO 2 per $)T&D Off-grid solar Energy efficiency HydropowerWind CFL BRT160Panel B140120CFLsProject ERR100806040SHSBRTT&DEnergy efficiency20WindHydropower00 20 40 60 80 100 120 140Lifetime CO 2 emissions / investment cost (kgCO 2 per $)Source: IEG.Note: Estimates—all adapted from WBG project documents—are mostly based on ex ante appraisals, could be overly optimistic, andare selected on the basis of availability. They are not produced with consistent methodologies or rigor. See appendix I for a fullerdescription of data limitations. BRT = bus rapid transit; CFL = compact fluorescent light; ERR = economic rate of return; SHS = solarphotovoltaic home system; T&D = transmission and distribution.a comprehensive system of transport demand managementis necessary for sustained gains.RecommendationsThe WBG’s resources are small compared with the capitalcost of providing low-carbon energy to developing andtransition economies—to say nothing of broader developmentneeds. To make a difference for the planet, the WBGneeds to leverage its resources as far as possible. It can dothis through four interlinked lines of action:• Support favorable policies (discussed at length inPhase I of this evaluation with respect to energy pricingand efficiency policies, and reiterated here in connectionwith renewable energy policies).• Be a venture capitalist for technical, financial, andinstitutional innovations (in short, for fostering technologytransfer) by identifying innovations that havepotentially high returns, using a cycle of piloting anddemonstration to test, adapt, upscale, and diffuse thesetechnologies to wider and wider audiencesConclusions and Recommendations | 81

• Scale up high-impact investments for solutions thatwork.• Use feedback and learning as a source of value for theWBG and its clients.The first point, with associated recommendations, wastreated in Phase I. The other two are discussed here.Be a venture capitalist of technologies, broadlyunderstoodIn both the public and private spheres, the WBG can supportthe transfer, adaptation, piloting and demonstration ofinnovative technologies, policies, and financial practices—as it has, for instance, with energy service companies, busrapid transit, solar photovoltaic systems, and agroforestry.As in the case of private investments, these demonstrationscarry risks but can offer high returns. What counts for clients,the WBG, and the world, however, is the return onthe portfolio in development, poverty reduction, and GHGmitigation. The vision is to prepare a pipeline of developmentsolutions that can be pursued on a large scale by theWBG and other funders, as climate finance expands.A first challenge is to accept some prudent risks in pursuitof a high-return portfolio. For World Bank clients, thismeans using GEF or other concessional funds to supportthe earliest and riskiest ventures. Risk is further mitigatedby starting small and staging successively larger pilots anddemonstrations, from test site to province to nation. Withincreasing experience and comfort, the scale expands andthe risk declines. For WBG staff and managers, it is importantthat demonstration and pilot projects’ objectives beframed in terms of learning. For instance, if the project’sgoal is to test the financial viability of an innovation andthe test shows convincingly that it is not viable, it should beconsidered a successful project.But a more fundamental change in incentives may be necessary.In IFC, for instance, a venture capital team has secureda niche within IFC’s generally conservative and risk-averseculture. This could be inspirational for the World Bank.A second challenge is to design projects effectively forleaning and diffusion. Pilot or demonstration projectsmust have a clear notion of what is being demonstrated, towhom, and how; demonstration should be formulated asa goal and appropriately measured. For instance, the RegionalSilvopastoral Project used experimental techniquesto rigorously document the private gains from some kindsof agroforestry, and industry groups used this informationto get government support to scale up. But some projectsfailed to recognize that private firms are reluctant to shareproprietary information. So, for instance, the beneficiariesof technology licenses in the Efficient Boiler Project did notshare their boiler designs with competitors. In contrast, pilotESCOs in the Energy Conservation Project were obligedto share their experience with others, and the model diffusedrapidly.In sum, the social networks and information mechanismsfor demonstration and diffusion should be as importantin project design as the hardware being demonstrated. So,too, is the capacity building, which is an integral part oftechnology transfer. The distinctive features of pilot, demonstration,and technology transfer projects argue for additionalsupport for preparation and supervision in fundingand on-call expertise.There is a clear case and large scope for WBG involvementin technology transfer at the national level. The case is lessclear for WBG involvement in new technology developmentat the global level. Candidate technologies would be thosewhere WBG support could make an appreciable differenceto the global market, helping to push costs down. Of specialinterest are technologies that are beneficial for poor peopleand difficult to protect from copying (and therefore attractlittle private research and development)—for instance, inagriculture and land use. The proposed new WBG effortto support concentrated solar power is a plausible area ofsupport because a large proportion of the suitable resourceis located in client countries, the technology is suitable formanufacture in client countries, and the proposed effort islarge enough to globally push the industry along the costcurve.Specifically:• The World Bank and IFC should create incentives andmobilize resources to support effective pilot, demonstration,and technology transfer projects that have aclear logic of demonstration and diffusion. This willinclude mobilizing GEF and other concessional fundsto mitigate World Bank borrower risk, reshaping incentivesfor staff and managers, providing adequateresources for the design and supervision of complexprojects, and making available specialized expertise intechnology transfer and procurement through a real orvirtual technology unit.Scale up high-impact investmentsIn the process of scaling up, the WBG can work with clientsto choose the sectors and instruments that offer the greatestreturn on investment. This evaluation finds that the WBGcould place more emphasis on energy efficiency. It is generallycheaper than renewable energy and has fewer potentialnegative environmental impacts. If coordinated with gridexpansion, it can be an important contributor to energyaccess. It plays a prominent role in the 2010–30 time-sliceof most long-term climate stabilization scenarios. And it isapplicable to all countries—it is the poorest who can leastafford inefficiency. There are many aspects of energy efficiencythat are in need of further piloting, but there areample candidates for scale up.82 | Climate Change and the World Bank Group

Specifically, the WBG could:• Place greater emphasis on large-scale energy efficiencyscale-up, as measured by savings in energy and reducedneed for new power plants. This includes support forefficient lighting and for exploration of the scope foraccelerating the global phase-out of incandescent lightbulbs. It includes continued and expanded support forreductions in T&D losses. And it includes proactivesearch by IFC for large-scale, catalytic investments inenergy efficiency. There is scope to coordinate WorldBank support for demand-side energy efficiency policieswith IFC support for more efficient manufacturingand more efficient products.The WBG should, wherever possible, help clients findcleaner, domestically available alternatives to coal power.As is clear from the findings here and in Phase I, no-regretsalternatives can include energy efficiency, hydropower, andnatural gas. Moreover, the WBG faces strategic choices instaffing and programming between building up expertisein “sunrise” sectors of broad applicability (energy efficiency,land use management for carbon, energy systems planning)versus “sunset” sectors (coal power).But should the WBG completely forswear coal? Consider,as an analogy, the 1991 Forest Strategy’s ban on commerciallogging in primary moist tropical forests. IEG’s review (IEG2000) found that the strategy prevented Bank staff from engagingthe sector in proactive ways to improve economicand environmental management of tropical forests. Theban was rescinded in the 2002 Strategy, without triggeringlogging investments. Analogously, it is important that theWBG maintain its “honest broker” ability to help countriesengage in systemwide energy planning. A perverse resultwould occur if disengagement from coal had a chilling effecton the WBG’s ability to engage in policy and planningdialogue that could promote low-carbon alternatives.IEG recommends that:• The WBG should help countries find alternatives tocoal power while retaining a rarely used option to supportit, strictly following existing guidelines (includingoptimal use of energy efficiency opportunities) andbeing restricted to cases where there is a compellingargument for poverty or emissions reductions impactsthat would not be achieved without WBG support forcoal power.The WBG cannot tackle coal substitution alone. Complementaryfinancing for renewable energy, and investments intechnology research and development, are needed from thedeveloped world to provide better options for WBG clients.Protected areas deter tropical deforestation, providing localenvironmental benefits and conserving biodiversity as wellas reducing carbon emissions. These impacts are greaterwhen sustainable use of the forest is permitted, and greaterstill for indigenous areas. This suggests compatibility of socialand environmental goals. Environmental service paymentscan, in principle, achieve much the same results inforests where protected areas are not an option. However,payment for environmental services impacts have been dilutedby limitations of finance and unfocused targeting ofpayments. Consequently, IEG recommends the following:• The WBG should continue to explore, in the REDDcontext, ways to finance and promote forest conservationand sustainable use, including support for indigenousforest areas and maintenance of existing protectedareas.In terms of WBG instruments—• MIGA’s upcoming FY 2012–15 Strategy should outlineMIGA’s role and scope for MIGA to provide political riskinsurance to catalyze long-term financing for renewableenergy projects, building on its expertise and existingportfolio of climate-friendly guarantee projects.• The World Bank should enhance the delivery of itsguarantee products by taking actions to improve policiesand procedures, eliminate disincentives, increaseflexibility, and strengthen skills for the deployment ofthe products. It should assess the potential for greateruse of partial risk guarantees to mobilize long-term financingfor renewable energy projects, particularly inthe context of feed-in tariffs or other premiums to supportinvestment in renewable energy.• The Carbon Partnership Facility and other post-Kyotocarbon finance efforts should focus on demonstratingtruly catalytic ways to overcome barriers to lowcarboninvestments. They should also have clear exitstrategies.Reorient incentives toward learning and feedbackThe WBG is valued by clients for its knowledge. It producesand publishes an impressive array of research, analyses, reviews,and toolkits, drawing in part on its experience. Yetby failing to gather feedback from operations, it squandersvaluable sources of knowledge—knowledge that couldimprove its products and advice in economically measurableways—by failing to learn from its project experience:• Hundreds of millions of dollars are allocated in guaranteesor loans for energy efficiency, without systematicfeedback on how and where these interventions are inducinginvestments.• CFL distribution projects are being scaled up to multimillionbulb efforts without systematic feedback fromearlier projects on which interventions are most effectiveand sustainable. 1• Protected area and community forest projects lack systematicmonitoring of forest conditions (including carbonstorage and biodiversity), of the welfare of forestConclusions and Recommendations | 83

esidents, and of the post-project financial sustainabilityof management. Failure to document impacts or tolearn systematically from experience has kept the REDDinitiative from having a 20-year “head start.”Failure to monitor can also lead to skewed incentives. Forlack of an alternative, the WBG (and to some extent thisevaluation) uses dollar volume of commitments to measurethe organization’s orientation toward climate issues. Usingdollars as a scorecard was arguably important for the BonnCommitment in directing attention and resources towardrenewable energy and energy efficiency. But ultimately theuse of an input rather than an outcome measure risks drivingthe organization toward inefficient or ineffective activities.For instance, efficient lighting programs offer much higherreturns—in cost savings and GHG reduction—than investmentin renewable energy. But a hydro plant offers a muchhigher ratio of loan amount to staff preparation cost and istherefore potentially more attractive in a budget-constrainedorganization that scores achievement by dollars loaned.The CDM experience with monitoring points to a wayforward. Unlike most other development projects, carbonprojects are required to monitor their outputs. (Otherwisethey do not get paid.) Calculating carbon offset productionrequires stipulating a “business as usual” emissions level.This is difficult and has often been contentious. But it alsorequires measuring the project’s actual performance—forinstance, how many hours a wind turbine operates, or howmany CFLs are distributed and installed. This generatestimely, publically available, comparable information.Just as private sector firms derive value from monitoringthe performance of and customer satisfaction with theirproducts, the WBG has an interest in tracking the performanceand sustainability of its projects. At the same time,it can work with public and private clients, when requested,to help them implement benchmarking and monitoringsystems, so as to better define goals and track outcomes.This becomes increasingly feasible as information costsplummet; remote sensing resources multiply in number,sensitivity, and accessibility; and cell phone access becomesnearly universal. By wiring projects and sectors to returncurrent and reliable information on forest cover, T&Dlosses, household access to electricity, and so on, global innovationcan be accelerated, and the returns to investmentenhanced.The WBG is a natural nexus and starting point for thisglobal public good, which should eventually expand to aglobal network of information sharing. This is consistentwith the strategic objectives for knowledge creation and capacitybuilding.Specific recommendations include the following:• Measure projects’ economic and environmental impactduring execution and after closure and aggregate thisinformation for analysis. For instance, renewable energyprojects should monitor capacity utilization, andenergy efficiency projects should monitor energy savings.This may require the use of concessional funds todefray additional costs of monitoring by staff, clients,and project proponents.• Link these measures to a results framework that shiftsthe SFDCC toward a focus on outputs such as powerproduced, power access, forest cover, and transit shareof urban trips, rather than money spent.Table 6.1Summary of Sectoral FindingsSector Intervention Direct impacts Leverage and diffusionimpactsRenewableenergy — ongridLendingLonger loan terms significantlyimprove bankability.Better upfront planning hasbeen important to assure betteroutcomes in hydropower.Monitoring needs and issuesWhat are the economic and carbonimpacts?What are the reasons for over orunderperformance in capacityutilization?GuaranteesHydropower has generallyhigher returns than wind power.Guarantees against breach ofcontract could significantlyimprove bankability.84 | Climate Change and the World Bank Group

Table 6.1Summary of Sectoral Findings (continued)Sector Intervention Direct impacts Leverage and diffusionimpactsCarbon financeCarbon finance has little impacton bankability of wind andhydropower projects. Moreover,the stated rationales for the useof carbon funds often refer tobarriers that are best addressedwith greater leverage throughpolicy reform (such as unreliablepower purchase agreements)rather than at the project level.Thirty-five percent ofWBG carbon financeprojects claimed somedegree of technologytransfer.Monitoring needs and issuesCarbon project monitoringprovides valuable feedback. Forexample, poor performance oflandfill gas projects was detectedand corrective actions taken. GEFor other funds could enhance thisde facto monitoring system.Solar homephotovoltaicsCarbon finance has significantimpact on bankability of projectsthat reduce methane emissions.Performance of carbon projectshas often been poor (lowerproduction of permits thanexpected).Resource Siting makes a huge differencesurveysin economic returns because ofspatial variation in wind, water,geothermal, and so forth. Therehave been modest investmentsby the Bank in resource surveys.Impact not evaluated.Policy reform Standardized smallpower purchase agreementshave reduced thecosts of entry of smallhydropower producers inSri Lanka, with significantcumulative impact.Regulatory reforms inChina, Mexico, and Turkeyhave catalyzed windinvestments.Subsidies Subsidies increase household Quality-contingent subsidiesdemand; impact not wellfor manufacturersmeasured.boost competition andquality, and reduce priceat the national level.No global impact onprice; scale was too small.Microfinance Specialized microfinanceinstitutions were able to supportSHS buyers in Bangladesh andSri Lanka.How useful are surveys?Can remote sensing providecontinually updated and improvedinformation on wind and waterresources?What is the fiscal impact andinvestment response of feed-intariffs or renewable portfoliostandards?Longevity and utilization of thesolar home systemsManufacturing qualityMarket penetrationGeographical extent of the electricgrid and connection rate within thegrid (to assess market size for photovoltaic);price elasticity of demand.(Continued)Conclusions and Recommendations | 85

Table 6.1Sector Intervention Direct impacts Leverage and diffusionimpactsEnergyefficiencySummary of Sectoral Findings (continued)Subsidizedguaranteesfor financialintermediaries’energy efficiencylendingto industry,commercial,and residentialsectorTechnical assistancefor banksOn-lendingthrough financialintermediariesESCO demonstrationPublic sector reformto permitESCO contractsDirect IFC investmentsin energyefficiencyGuarantees facilitate energyefficiency investment by SMEswith poor credit, in poorlydeveloped credit markets, or forhousing coops in East Europe;but are superfluous for largerfirms or for banks’ trusted clients.In China, technical assistancehelped Industrial Bank gainmarket share; in Russia, mayhave helped banks to convincecustomers to borrow for energyefficiency. Energy efficiencyappraisal tool was useful torecipient banks.Useful in countries with poorlydeveloped credit markets.Screening existing clients for energyefficiency opportunities hasidentified small loans with lowabsolute levels of CO 2reductionand is likely not cost-effective instaff time.Mainstream lending is usuallytoo late in the project cycle toaffect technology choice.However IFC may be able tofinance some credit-constrainedlarge firms with high absolutelevels of energy and GHGsavings.Guarantees were not,as assumed, catalytic ininducing diffusion of energyefficiency lending.Some diffusion of energyefficiency practice amongRussian banks.High leverage in China:demonstration wasscaled up.But ESCOs are small andare themselves creditconstrained,limitingscalability.In Hungary, facilitated nationwideinvestments bymunicipalities in efficientheating and lighting.Monitoring needs and issuesPool information on subprojectperformance to identify promisingmarket niches.86 | Climate Change and the World Bank Group

Table 6.1Sector Intervention Direct impacts Leverage and diffusionimpactsUrban transitSummary of Sectoral Findings (continued)Efficient lightingBuilding andappliance efficiencyand efficiencypoliciesT&D lossreductionEnergy pricingreformBus RapidTransitApparent very high returnsto compact fluorescent lightdistributionEvaluated in IEG (2009)High returns to engineeringbasedreductions in technicallosses.Evaluated in IEG (2009). Someexamples of progress, forexample, Vietnam.Strong returns in health, congestionreduction, fuel savings;modest CO 2reductions.Forests Protected areas Strict protected areas reducedeforestation on average; reductionsare higher for protectedareas that allow sustainable use,and higher still for indigenousareas.Afforestation/Reforestation/regenerationPayment forenvironmentalservicesSupport for useof sustainabilitycertification byagribusinessesThere have been implementationproblems in most afforestation/reforestationBioCarbon Fund projects. Smallproject scale makes theseuneconomic; low GHG impact;trade-offs.Impact depends on the efficiencywith which payments aresized and targeted at propertiesat risk for deforestation.Chain-of-custody tracing isexpensive and has little impactin IFC-supported investmentsin Brazil.Potentially very highdemonstration anddiffusion effects; poorlydocumented.With supportive enforcementand supply ofefficient materials, equipment,and techniques,has had large catalyticimpact in developedcountries.Institutional and legalreform can promotereduction of non technicallosses.Very high leverage in promotingenergy efficiencyand making renewableenergy more competitive.Bogota and Mexico Cityprojects have had demonstrationimpact.Silvopastoral Project hasdemonstration effect,was scaled up.Combination of NGOpressure on buyers, andgovernment monitoringmay have had significantimpact on reducingBrazilian deforestation.Monitoring needs and issuesOperations research on impact ofalternative promotion strategieson adoption and diffusion of CFLs;surveys on CFL usage.Survey info on building energyconsumption, both existing stockand new construction.Real time, spatially disaggregatedinformation on technical and nontechnicallosses; better understandingof who benefits from nontechnicallosses.Information on levels and trendsin energy pricing; industry andhousehold surveys on incidence ofsubsidies, burden of energy costs.Information on ridership, auto versustransport share, congestion, airpollution levels in transport corridors;evaluation of the effectivenessof vehicle scrappage programs.Info is lacking on protected areaimpacts on biodiversity and locallivelihoods and on protected areamanagement practices.Better documentation of theimpacts of reforestation andafforestation on biomass,hydrology, biodiversity, andlivelihoods.Better information on behavior ofrecipients versus nonrecipients.Impacts of certification schemes(timber, palm oil, etc) remain unknown.Better information requiredon relative prices of certified versusuncertified goods.(Continued)Conclusions and Recommendations | 87

Table 6.1Summary of Sectoral Findings (continued)Sector Intervention Direct impacts Leverage and diffusionimpactsMonitoring needs and issuesTechnologyVenture capitalHas failed when investmentsA new IFC approach—transferinvestmentshad multiple handicaps:invest in proven entre-in early stagenoncommercial technologies,preneurs and globallyclean technol-inexperienced entrepreneurs,proven technologies—ogy companiesuninterested markets.could be high leverage.Direct IPRHad modest effects in efficientPrivate companies didtransferboilers project.not share transferredtechnologies.Grants for R&DHad encouragingresults in REDP project.Industry-wide supportled to competition, pricereductions.Monitor results of such projects.Demonstrationof new technologiesHas been successful wherethere was a clear purpose fordemonstration and targetaudience and where adoptionwas profitable: for example,introduction of ESCOs in China;Regional Silvopastoral programin Colombia.Has failed or bogged downwhere purpose was not clear, forexample, 1990s era investmentsin concentrated solar power; orwhen there was an expectationthat private companies wouldshare proprietary technologies.Incorporate good monitoring intoprojects with pilot/demonstrationpurposes; monitor diffusion if thatis the goal.Source: IEG.Note: CFL = compact fluorescent light bulb; ESCO = energy service company; GEF = Global Environment Fund; GHG = greenhouse gas;IFC = International Finance Corporation; IPR = intellectual property rights; NGO = nongovernmental organization; R&D = research anddevelopment; REDP = China’s Renewable Energy Development Project; SHS = solar home voltaic system; SME = small and medium enterprise;T&D = transmission and distribution; WBG = World Bank Group.88 | Climate Change and the World Bank Group

Appendix ARenewable Energy Tables and FiguresTable A.1World Bank Group Commitments to 2003–08 Low-Carbon Projects (by source)Project type IBRD IDA IFC MIGA Guarantees GEF-WorldBankOff-grid and mini-grid renewablesDirect investments including cook-stovesand household biomass/biogasIFC-GEFCarbonfinanceTotal86.2 141.5 165.4 1.8 0.0 273.1 0.0 380.1 515.0Via funds that support subprojects 3.5 199.5 0.0 0.0 0.0 0.0 0.0 0.0 235.4Grid renewable energyDirect investments in RE 801.1 634.7 513.9 313.8 227.5 59.2 0.0 34.7 3,054.8Via financial intermediaries 202.0 0.0 0.0 0.0 0.0 0.0 0.0 65.7 212.6Energy efficiencyTransmission and distribution lossreduction188.7 247.6 144.4 39.6 0.0 32.4 0.0 0.0 632.8End user energy efficiency 119.7 21.4 199.7 0.0 0.0 10.5 0.0 0.0 422.1Combined heat and power and/or districtheating340.7 51.0 29.5 0.0 0.0 72.9 0.0 42.0 477.4Supply-side energy efficiency 336.0 8.3 117.6 0.0 0.0 22.9 0.0 3.3 527.7Energy efficiency investments viafinancial intermediariesOtherDPL, other investment programs andtechnical assistanceCombinations of RE and energyefficiency, or unspecified, via financialintermediaries314.0 3.8 214.1 0.0 0.0 10.3 165.1 20.6 811.8192.4 74.7 389.3 0.0 0.0 3.9 0.0 93.0 753.30.0 5.0 227.1 0.0 0.0 18.0 77.0 38.2 335.3Total 2,584.3 1,387.4 2,000.8 355.2 227.5 503.0 242.1 677.7 7,978.1Source: IEG.Note: Unit of analysis is the project component. Excludes freestanding WBG AAA and IFC advisory services, and “special financing.”DPL = Development Policy Lending/Loan; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development;IDA = International Development Association; IFC = International Finance Corporation; MIGA = Multilateral Investment Guarantee Agency;RE = renewable energy.Appendix A: Renewable Energy Tables and Figures | 89

Table A.2Secondary and tertiarysectorFinancial Rates of Return on IFC Infrastructure InvestmentsNo.MaxFRR %High risk Medium risk Low riskMinFRR %AvgFRR %No. MaxFRR %MinFRR %AvgFRR %No.MaxFRR %MinFRR %Large hydro 0 0 4 34.0 10.4 16.5Small hydro (

Table A.4Grid-Based Biomass/Biogass/Landfill Gas/Methane Commitments 2003–08 by Technology andProduct Line/Funding SourceTraditional financingBlendedactivitiesNew financingGuaranteesIBRD standaloneIDA standaloneIFCTotaltraditionalfinancingIBRD -GEF-carbon financeblendIDA -GEF-carbon financeblendTotalblendedfinancingGEF standalone, includingmed sizeWorld Bank carbonfinanceIFC-managed carbonfinanceTotal newfinancingTotalBiogas 2.8 2.8 40.2 40.2 5.8 4.2 10.0 53.0Biomass 39.7 39.7 20.0 20.0 48.9 21.0 69.9 129.6MunicipallandfillBiomassunknown18.4 18.4 18.428.0 28.0 0.0 28.0Source: IEG.Note: Unit of analysis is the project component. Excludes freestanding WBG AAA and IFC advisory services, and “special financing.”GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development; IDA = International DevelopmentAssociation; IFC = International Finance Corporation.Figure A.1Comparative Return on Equity and Economic Rate of Return for Different Technologies0.450.40.35Return on equity0.30.250.20.150.10.0500 0.05 0.1 0.15 0.2 0.25 0.3 0.35Economic rate of returnHydroWindSource: IEG, based on project documents.Note: This comparative analysis does not represent actual or predicted performance of the projects, because of the following standardized assumptions:lifetime 30 years; tariff 6 cents/kWh; toll to grid 0.2 cent/kWh; no carbon finance or other incentives. Financing structure: interest rate8 percent; grace period 2 years; maturity 10+ grace years; debt/equity 2.3; no local inflation; no hard currency inflation; stable exchange rate.Income tax rate 33 percent, capital gain tax rate 10 percent, VAT 18 percent; depreciation 10 years, 95 percent of total value at 10 percent rate.Appendix A: Renewable Energy Tables and Figures | 91

Figure A.2Capacity factor, as planned (%)12010080604020Capacity versus Planned CapacityUtilization, CDM Hydropower Plants00 50 100 150 200 250 300Capacity (MW)Source: UNEP Risoe CDM database.Note: CDM = Clean Development Mechanism; MW = megawatt.Figure A.3ROEReturn on Equity as a Function ofElectricity Tariff0.80.70.60.50.40.30.20.100–0.10.02 0.04 0.06 0.08 0.1 0.12Tariff ($ per kWh)Medium hydro Large hydro WindSource: IEG.Note: These are hypothetical returns using a standardized set of assumptions.kWh = kilowatt hour; ROE = return on equity.Table A.5ResettlementandenvironmentalissuesKey Factors in Hydropower Project Performance, with Outcomes and Lessons fromProject ReviewsNegative examplesLatin America: One factor that led to unsatisfactory projectratings was that the resettlement and environmentalmanagement program were only partly implemented, withmajor issues remaining unaddressed. In addition, pooroversight of the areas to be flooded resulted in invasion offamilies seeking resettlement compensation.Government was slow in performing land acquisitions andhousing construction, adding to pressures that sloweddown project.Africa: Absence of information disclosure and communicationsdeveloped in a sustainable manner.East Asia: Until 2003, resettlement was carried out inadequatelybecause of lack of knowledge or understanding atthe provincial level of the Resettlement Action Plan, someprovincial offices’ delayed approval of the compensationguidelines, and disparity between the compensation ratesin the Resettlement Action Plan and that which the provincesapproved. In 2003, the situation was resolved withPlan-based compensation agreements being signed with allthe households.Positive examplesEast Asia: Ertan resettlement program appears tohave been successful overall and has given satisfactoryresults in terms of restoration or improvementof living standards and better access to infrastructureand other services for the bulk of the affected population.A 10-year post-project rehabilitation levy of onthe project company’s electricity sales provided fundsfor environmental protection around the reservoir,infrastructure maintenance, infrastructure improvements,and income-boosting activities for the resettlementvillages. This is a useful instrument to help ensureproject sustainability, because it eliminates uncertaintyabout funding from budgetary sources. The use of aninternational environmental and resettlement panelproved its worth.East Asia: High-quality up-front assessment ensuredthe project success—the highly satisfactory outcome ofresettling more than 74,000 people.East Asia: An independent review rated resettlementperformance highly — “the best resettlement optionwas deduced from the country’s past resettlementexperience. The women’s role in resettlement is emphasized.”An international panel of experts on environmentand resettlement has conducted 12 meetings andhelped ensure effective management of adverse environmentalimpacts, by overseeing implementation of asystematic environmental management plan.(continued)92 | Climate Change and the World Bank Group

Table A.5 (continued)Negative examplesProject design Low ratings in some unsatisfactory projects in Africa wereissues: Policy caused by weakness or absence of up-front detailed assessment.contextEast Asia: Lack of sufficient counterpart funding from theprovincial government delayed the implementation of theirrigation works and the resettlement program. Resettlementproblems were compounded by the absence of aprovincial resettlement office (as has usually existed inother Chinese resettlement cases) and the Bank’s initialoverestimation of Hainan’s institutional capacity. As a result,the borrower has not yet achieved the project’s resettlementobjectives.Africa: Failure to define water rights at an early stage ofdevelopment of a hydroelectric project created water use,conservation, and environmental problems that were difficultto solve during project construction and introducedimplementation delays.Africa: Lack of government ownership led to low performance.Weak government commitment to implement— (unbundling generation, transmission and distribution,transparent subsidies) and low capacity of utilities to leadsector reforms could be the main reason for failure.South Asia: At the time of project appraisal, neither thegovernment nor the Bank had a clear vision of how powersector reform would be carried out during the life of theproject. Hence, in the two years before the project closing,as reforms started to take off in some states, the projectwas buffeted by unanticipated and sometimes ad hoc stateregulatory changes. With one exception, states did not addressthe renewable energy dimension of the sector.Project design: East Asia: The bank instability in the lower reservoir and theGeological excessive local ground settlement in the upper reservoirstudywere all unforeseen and delayed work progress. Adequaterisk coverage/insurance products could be built in the businessmodel to mitigate such risks for both the developersand lenders.Development Africa: Project delay was caused by the absence ofof adequate coordination between the project implementation planspowerand counterparts on provision of the energy delivery fromevacuation the plant to the consumers.infrastructureSource: IEG, based on ICR reviews and PPARs.Positive examplesEast Asia: (a) The Bank assisted the utility in optimizingits investment program, particularly at the time whenthe country had been severely affected by economicand financial crises. The utility modified its powerdevelopment plans, deferred many independent powerproducer projects, reduced operating costs, and scaleddown its investment Program. (b) The utility adoptedsound policies and strategies for environmental andsocial management and defined a framework andguidelines for environmental assessment of power developmentplans. (c) The utility implemented the recommendationsof a study on economic regulation, tariffs,and development of bulk supply after the economic/financial crises had faded out; these include efficiencyconsiderations in determining revenue targets, transparentmechanisms for transfer of subsidies, and therestructuring of the consumer billing system to providefor accounting of transmission and distribution charges.(d) The Bank acted as a facilitator and played an informalrole in advising the government on the reform of thepower sector, especially while the country experiencedthe economic and financial crises. During this period theBank, through Energy Sector Management AssistanceProgramme, had a more formal participation in anindependent review of the Power Pool and ElectricitySupply Industry Reform Study conducted by NationalEnergy Policy OfficeA Southeast Asia project was built on the outcomes ofthe first renewable energy project; by then the generalstrategies for renewable energy had been coordinatedto the project activities.Renewable Energy Project: One of the most crucialissues and/or potential barriers in the scaling updevelopment of large and small hydropower plants isthe interconnection between the plant and the nearestgrid point to maximize the power usage. Providinggrid extension up to the plants based on an integratedbasin development approach is one solution whichshould be considered when encouraging hydropowerdevelopment.Appendix A: Renewable Energy Tables and Figures | 93

Table A.6CER Yield Rate, Non-Hydro CDM ProjectsHost party WBG unit Type of project Supplemental information Scale CER issuance rateBrazil Bank Methane recovery and utilization Landfill gas flaring Large 0.02866Argentina IFC Methane recovery and utilization Landfill gas recovery and utilization Large 0.09123Indonesia PCF Cement Alternative fuels Large 0.21724Philippines Bank Wind power 1.65 MW x 20units Large 0.48997India Bank Energy efficiency Factory Small 0.6457India IFC Wind power 58.2 MW Large 0.82788China Bank HFC reduction Large 0.9857China Bank HFC reduction Large 1.03266South Africa IFC N 2O decomposition Large 1.05671Columbia PCF Wind power 1.3 MW x 15units Large 1.07518India IFC Wind power 0.6 MW x 28units Large 1.08339Brazil Bank Biomass Bagasse Large 1.13683Source: IEG.Note: CDM = Clean Development Mechanism; CER = certified emission reduction; HFC = Hydrofluorocarbon; IFC = International FinanceCorporation; MW = megawatt; PCF = Prototype Carbon Fund; WBG = World Bank Group.Table A.7ProjectSolar ProjectsTotal projectcosts a($ million)InitiationProject datesCompletionArgentina Renewable Energy in the Rural Market 79.10 12/09/1999 12/31/2011Bangladesh Rural Electrification and Renewable Energy Development 25.34 12/31/2002 12/31/2012Bolivia Decentralized Energy, ICT for Rural Transformation 13.93 12/18/2003 11/27/2009China Renewable Energy Development 155.90 12/12/2001 06/30/2008India Renewable Resources Development 23.80 04/06/1993 12/31/2001Mongolia Renewable Energy and Rural Access 9.76 05/04/2007 12/31/2011Pacific Islands Regional Sustainable Energy Finance 5.00 06/21/1007 12/31/2017Philippines Rural Power 11.90 05/06/2004 12/31/2012Senegal Electricity Services for Rural Areas a 18.00 06/30/2005 12/31/2012Sri Lanka Energy Services Delivery 9.20 2/20/1997 12/31/2002Sri Lanka Renewable Energy for Rural Economic Development 28.30 10/07/2002 06/30/2011Uganda Energy for Rural Transformation 9.80 07/30/2002 02/28/2009Source: World Bank.a. Costs/financing are specific to solar component except Senegal Electricity Services of Rural Areas Project.94 | Climate Change and the World Bank Group

Figure A.4A. Hydro/biomass capacity expansion (< 10 MW), Sri LankaCapacity additions (MW)B. Gas capacity expansion (< 90 MW), ThailandCapacity additions (MW)353025201510506005004003002001000Growth in Small Power Producers19851986198519861988198919901992199319871988198919901991199519961997YearTotal capacity additions under 10 MW19921993199419951996C. Renewable energy expansion (

Figure A.4 Growth in Small Power Producers (continued)D. Renewable energy expansion (

Appendix bWorld Bank Experience with Renewable Energy SurveysSurvey projects aim to reduce barriers to renewable energydevelopment by developing or collating spatial and temporaldata on wind speeds, water flows, sunshine hours, geothermalpotential, or biomass availability. These data, madefreely available, enable investors to select specific sites forthe more intensive local surveys needed to instigate specificprojects. Resource-based site selection can make a huge differenceto project viability. For instance, an InternationalFinance Corporation-financed geothermal plant performedpoorly because the steam resource was much weaker thanexpected. Exploration constitutes a large proportion of geothermalenergy costs, so a tool that increases the yield rateof exploratory drilling could boost profitability.The Bank has undertaken relatively few projects with significantrenewable resource survey components. Surveycomponents typically constitute a minor part of a muchlarger energy sector project—the component containingthe resource survey typically constitutes 1–5 percent of thetotal project spending, and this component often includestechnical assistance or capacity building that is not relatedto the resource survey.International Development Association/International Bankfor Reconstruction and Development or Global EnvironmentFacility (GEF) funding constitutes most or all of theresource survey financing. GEF financing has played a majorrole in all the surveys save Morocco. Of the surveys listedhere, only the Republic of Yemen and Armenia are complete.Data on survey impacts are not available.TAble b.1World bank and GeF Funding of Renewable energy Resource Survey projectsYear Country Resources Scale Componentcost($ millions)bank componentcontribution($ millions)2005 Yemen, Rep. of Wind National 1.00 1.002006 Mexico Wind National 4.27 3.902006 Lao PDR Biomass, micro-hydro National 1.70 1.702006 Armenia Hydro, wind, solar, biomass, geothermal National 3.65 3.002007 South Africa Solar, biomass, hydro. National 0.78 0.452008 Morocco Wind National 1.00 1.002008 Mexico Wind, hydro Unavailable 12.46 7.942008 Ghana Wind, biomass, micro-hydro National (biomass, hydro),3 specific sites (wind)1.96 1.74Total 25.82 20.73Source: IEG review of project documents.Appendix B: World Bank Experience with Renewable Energy Surveys | 97

Appendix CEnergy Efficiency: Supplementary InformationTable C.1 Transmission and Distribution Projects with Low-Carbon Components, 2003–08Country/Region Year Design features Expected outcomesPrimary goalWBG commitment($ millions)(T&D componentsTajikistan 2003 26.4Commercialloss reduction?Technical lossreduction (percentof generation)NPV($ millions)ERR(%)20 (reduced from30 to 10) — —Philippines 2004 Loss reduction 5 Yes — —Moldova 2004 Loss reduction 22 Yes 5 69.2 39.3Sub-Saharan Africa 2005 Interconnection/trading 75 No 2 — 48Benin 2005 Access expansion 52.2 No — 65 35Tajikistan 2005 Commercial loss reduction 8.5 Yes — — —Albania 2005 Loss reduction 41 No — — 46Senegal 2005 Access expansion 15.7 Yes 2 (reduced from17.5 to 15.5)— —Vietnam 2005 Access expansion 225 Yes — 68.5 16.5Sierra Leone 2005 Loss reduction 22 Yes — — 21Turkey 2006 Capacity increase 150 No — — 15Montenegro 2006 Capacity, outage reduction 2.1 No — — 13Guinea 2006 Loss reduction 5.9 Yes — — —Bosnia and Herzegovina 2006 Loss reduction 43 No — — 19Sub-Saharan Africa 2006 Interconnection/trading 55 No 3 (reduced from5 to 2)Lao PDR 2006 Access expansion 6 Yes 5 (reduced from22 to 17)Yemen, Rep. 2006 Loss reduction 48 Yes 5.5 (reduced from25 to 19.5)Tajikistan 2007 Loss reduction 1 Yes 5 (reduced from18.7 to13.7)(ex post)— —281 68733 —— —Madagascar 2007 Loss reduction 2.9 Yes — — —Timor-Leste 2007 Loss reduction 1.6 Yes — — —Nigeria 2008 Loss reduction 15 Yes 10 — —Guinea 2008 Loss reduction 7.4 yes — 2.29 25Dominican Republic 2008 Loss reduction 42 Yes 8 (reduced from15 to 7)428 73Ghana 2008 Loss reduction 77.4 Yes — — —Burundi 2008 Loss reduction 22 Yes 5.4 (reduced from24.4 to 19)Zambia 2008 Access expansion 21 No 9 (reduced from23 to 14)— —69 45Tajikistan 2008 Loss reduction 2.3 No — — —Brazil 2008 25 — — —Source: IEG component database. IEG has included some components not labeled as ‘low carbon’ in CEIF database.Note: ERR = economic rate of return; NPV = net present value; T&D = transmission and distribution; WBG = World Bank Group. — = information notavailable.98 | Climate Change and the World Bank Group

Table C.2Completed Low-Carbon Energy Efficiency Projects with Transmission and Distribution MainFocus, 1999–2009Year Country T&Dprojectcost($million)1999 India (AndhraPradesh)Loss reductiontargets260 Total losses33%→ 26.4%1999 Armenia 90 Total losses1999 Azerbaijan 9.433%→ 18%Loss reduction impactsTotal losses38%→ 26.5%Total losses33%→ 16.5%Expected economiceffectsEx post economiceffectsERR 37.6% ERR 41.8%ERR 24%, NPV$106mNPV $1,547m1999 Thailand 943 ERR 13% (includes1999 Yemen, Rep. of 19.4 Total losses39.5%→ 31%2000 Kazakhstan 367 Transmission losses6%→ 5%2000 Uttar Pradesh, India 201 Technical losses2001 Bosnia andHerzegovina41%→ 30.4%Total losses39.5%→ 33%Transmission losses6%→ 6.2%Technical losses41%→ 32.8%EIRR 24.5%, NPV$146m36 Improve revenuegenerationcomponent)EIRR 10.5% (includesgeneration)EIRR 24.1%, NPV$142m29% ERR 18% ERR (changedcollection, 97/89/87to 99/100/96 (%)WTP assumption)Improve revenuecollection to99/99/99 (%)2001 India 1,465 17.2% ERR (sector) 15.9% (sector,2001 Rajasthan, India 221 Distribution losses38%→ 12%Rural feeders lossesreduced 62.2%→ 21.1%2002 Albania 40 Losses 41.8% to 41%2002 Nigeria 122 Technical losses11%→ 8%2007 Tajikistan Losses keptbelow 19%Technical losses11%→ 9.5%Losses reduced18.7→ 13.7%using comparableassumptions)35% ERR (sector) ERR 22.39%29.2%, $76.9mCustomer paymentincreased to 54%(sector), ERR 18.1%(transmission),38.6% (distribution)Customer paymentincreased to 718%Source: World Bank.Note: Technical losses 33% → 26.4% means that losses were reduced from 33% to 26.4%. This is not an exhaustive list of all completed projectssince 1999 that had transmission and distribution focus. ERR = economic rate of return; NPV = net present value.Appendix C: Energy Efficiency: Supplementary Information | 99

Figure C.114Natural Gas Prices for Industrial Users (Euros/GJ), 1998–20091210Price (€)864201998 1999 2000 2001 2002 2003 2004Year2005 2006 2007 2008 2009BulgariaCzech RepublicGermany (excl. ex-GermanDem. Rep. from 1991)EstoniaLatviaLithuaniaHungaryPolandRomaniaSlovak Rep.United KingdomCroatiaSource: Eurostat 2010.Note: Prices are before taxes. GJ = gigajoules.Table C.3Country,approval yearCompleted CFL Project ImpactsNumber ofCFL bulbsEx ante expectationsEx post direct impactThailand, 1993 900,000 238-MW peak reduction, 1,427 GWh per year a 566-MW peak reduction, 3,140 GWh per year aJamaica, 1994 100,000 1-MW reduction, 4.4 GWh per year, 5,200 tons CO 21.7-MW reduction, 5.5-GWh savings, 6,500 tons CO 2Mexico, 1994 1,700,000 Peak demand reduction 100 MW, Energy savings100 MW, 1,014 GWhPeak demand reduction 34 MW, energy savings978 GWhPoland, 1994 1,218,000 519-GWh overall savings, 198,000 tons CO 2725 GWh overall savings, 206,000 tons CO 2(short term)Various (ELI),20003,364-GWh energy savings, 1.8 million tons CO 22,590 GWh energy savings, 1.9 million tons CO 2Uganda, 2001 800,000 20-MW peak demand reduction, 53,000 tons ofcarbon per yearVietnam, 2003 1,000,000 33.4-MW demand saving, energy savings 40 GWhper year, 48,000 tons of carbon per yearEthiopia, 2006 5,800,000 131-MW demand reduction, 560 GWh per year(includes street lighting as well as CFLs)20-MW reduction30.1-MW peak load reduction, 45.9 GWh per yearenergy savings5-MW demand reduction (first 350,000 bulbs only)Source: World Bank data.Note: CFL = compact fluorescent light; DSM = Demand side management; ELI = efficient lighting initiative; GWh = gigawatt hour; MW = megawatt.a. Entire DSM project, not just CFLs.100 | Climate Change and the World Bank Group

TAble C.4Reviewed energy efficiency Financial intermediation projectsproject name Country WbGapprovalyearApproachClosingYearIBRDBulgaria Energy Efficiency Fund (BEEF) Bulgaria 2005 Specialized fund 2010Croatia Energy Efficiency Project Croatia 2003 Loan to ESCO+PCG (2) to local banks 2010Poland GEF Energy Efficiency project Poland 2004 Grant to ESCO+PCG to local banks 2011Romania Energy Efficiency Fund (FREE) Romania 2002 Specialized fund 2007Energy Conservation Project I China ESCOIFCHungary Energy Efficiency Co-financingProgram (HEECP)Hungary 1997 PCG to local banks 2001HEECP 2 Hungary 2001 PCG to local banks 2005Commercializing Energy EfficiencyFinance (CEEF) (1)Czech Republic, Estonia,Hungary, Latvia, Lithuania,Slovak Republic2002 PCG to local banks 2008OTP ESCO Hungary 2006 PCG to local banks 2011Russian Sustainable Energy FinanceProgram (RSEFP)Russian Federation 2005 Credit lines and PCG to local banks 2010CHUEE I China PCG to local banksSource: IEG.Note: ESCO = energy service company; GEF = Global Environment Facility; OTP = Hungarian bank; PCG = Partial Credit Guarantee.Appendix C: Energy Efficiency: Supplementary Information | 101

Appendix DLessons from Completed Transmission and DistributionProjectsAlthough little evidence is currently available from transmissionand distribution projects approved by the WorldBank over 2003–08, evaluation lessons can be drawn fromprevious Bank projects and reform efforts outside theBank.Review of these projects provides some lessons:Large reductions in technical and nontechnical losses arefeasible but are not always achieved.A $201 million 2000–04 Bank project in Uttar Pradesh,India, was successful in its technical component (increasingcapacity and reducing losses) but unsuccessful in overallpower sector reforms because of a change of government.The project was successful in reducing technical losses,from 41 percent in 2002 to 32.8 percent in 2004 (thoughstill behind a target of 30.4 percent) but unsuccessful atreducing nontechnical losses, which remained at roughly11 percent. The ex ante project rate of return was appraisedat 29 percent, and the ex post rate of return was estimated at18 percent (rising to 25 percent when gains to nonbilledconsumers are included); the shortfall was due to a moreconservative valuation of power.Success depends crucially on local utility implementation,particularly for nontechnical loss reductions. It is difficultto reduce nontechnical losses without a local reform“champion.”A $40 million Bank power sector rehabilitation project inAlbania carried out over 2005–06 demonstrated weak resultsbecause of poor management by local utilities. Theproject was designed to increase use of on-grid power andto reduce transmission and distribution losses and outages.The project failed to achieve sustained target improvementsin loss reductions or bill collection. Total losses fell from44.8 percent in 2001 to 39.7 in 2004, but they increased to41 percent by 2006. Technical gains were difficult to estimateand were offset by increases in nontechnical losses.The economic impact of the project was poor, as expectedincreases in electricity sales did not eventuate.Power sector restructuring alone has not been sufficientto improve transmission and distribution performance incountries with high losses.A reform project in Andhra Pradesh, India, carried out bythe state government (without Bank support) over 2000–03had major success in reducing nontechnical losses (Bhatiaand Gulati 2004). The state utility was in poor financial condition,with losses of $0.9 billion in 1997. Despite powersector restructuring, new distribution utilities remainedweak, billing only 42 percent of the power entering theirsystem because of losses and nonmetered agricultural users.The utility companies undertook major institutionalchange, replacing meters and introducing remote- meteringtechnology. Irregularities in billing and metering werefound for 15 percent of the 23,000 industrial connectionsinspected in 2000–01. Total transmission and distributionlosses were reduced from 38 percent in 2000 to 26 percentin 2003 through reductions in nontechnical losses caused byregularization of 2.25 million unauthorized connections.Impacts of transmission projects are tied to activity inthe generation sector. Power planning requires a systemsapproach. Separating transmission from generation isdifficult because of their complementarity.A Bank-supported transmission development project inNigeria (carried out over 2004–08) highlights the impact ofthe generation sector on transmission investment economicreturns, as well as the potential vulnerability of loss reductiongains. The project was designed to respond to criticalpower needs in Nigeria and an urgent request for assistancefrom the newly elected democratic government. It aimed toimplement a major transmission system investment whilesupporting power sector reforms, including commercializationof the power sector. The project was also motivatedby the Bank’s desire for involvement in the power sectorreform process. Total project cost was $122 million ($103million from the International Development Association).Transmission infrastructure investments reduced technicallosses from 11 percent to 8 percent in 2007, but lossesrebounded to nearly 9.5 percent by 2008 because of acombination of poor maintenance and increased powertransmitted through the system transmission. Althoughsignificant gains were made in system reliability, the projectedeconomic benefits were not realized because powergeneration did not increase by enough to take advantage of102 | Climate Change and the World Bank Group

the new capacity. Transmission system collapses were reducedfrom 15 in 2000 to 5 in 2008. The project claimed aneconomic rate of return of 29.2 percent and a net presentvalue of $76.9 million. However, these calculations assumedthat grid users would switch from expensive off-grid powerto cheaper on-grid power, which has not yet happened.A Bank project in Kazakhstan further demonstrates theinterplay between generation and transmission and apotential problem with using “percentage loss” project targetsas a measure of project performance. The project wasimplemented over 2000–05 and added significant transmissioncapacity to the system. The goal was for transmissionlosses to drop from 5.8 percent in 1998 to 5.0 percent by2005, but losses actually increased to 6.9 percent in 2005and 6.2 percent in 2006. However, this increase in losseswas due to a 40 percent increase in generation over the period,which was the result of a booming economy. Higherpower generation causes higher transmission losses, as linesbecome congested. Without the transmission investmentsfrom the project, losses would have been even higher.Appendix D: Lessons from Completed Transmission and Distribution Projects | 103

Appendix ECoalTable E.1Coal Plant Case StudiesAfsin-Elbistan AThermal Power PlantLignite Power TechnicalAssistance ProjectMaritza East 1Tata Mundra UltraMega Power PlantLancoAmarkantakpower PlantWBG unit World Bank (IBRD) World Bank (IDA) MIGA IFC IFCCountry Turkey Kosovo Bulgaria India IndiaProject type Rehabilitation Rehabilitation and newSafeguardscategoryclassificationpower plantNew Plant (replacingolder unit)New PlantNew PlantA B A A APower plant size 1,355 MW 600 MW (rehab ofUnit sizes 3x340 MW + 1 x 335MWKosovo A) and 600 MW(new Kosovo C)3 x 200 MW (rehab);1 x 600 MW (new)660 MW 4000 MW 600 MW2 x 330 MW 5 x 800 MW 2 x 300 MWCoal Domestic lignite Domestic lignite Domestic lignite Imported IndonesianSulfur controlType of supportFGD to be installedby 2010Debt (Specific InvestmentLoan)FGD is planned forKosovo C, but not forKosovo A.Technical Assistance(IDA Grant)FGD is part of thedesignPolitical riskinsurancecoalUse of low sulfur coal(0.6% S content)Senior debtDomestic coalUse of low sulfurcoal(0.5% S content)Approval date June 6, 2006 October 12, 2006 2006 April 8, 2008 June 1, 2007WBG support $336 million $10.5 million Up to €99 million $450 million $8 millionTotal project cost $481 million Not yet defined €1.15 billion $3.2 billion $578 millionOthercomponentsSupport for financialand generationalrestructuring (€3million)Sector policy, legal,regulatory, transactionsand safeguards adviceSource: IEG (Chikkatur background paper, drawing on public documents including World Bank Project Appraisal Documents, IFC Summaryof Proposed Investment and Environmental and Social Review).Note: MW = megawatt; WBG = World Bank Group.Equity104 | Climate Change and the World Bank Group

Table E.2Climate obligationsCoal Plant Case Studies EmissionsAfsin-Elbistan AThermal PowerPlant (Turkey)Ratified Kyoto—no obligation;potential EU ETSLignite PowerTechnicalAssistance Project(Kosovo)Not ratified UNFCCC;potential EU ETSMaritza East 1(Bulgaria)Ratified Kyoto.Need to reduceby 8% below 1990emissionsTata Mundraultra MegaPower Plant(India)Case study facility Subcritical rehab Kosovo C supercritical Subcritical w/ FGD Supercritical noFGDLancoAmarkantak(India)Ratified Kyoto. no obligations;potential CDM creditsSubcritical noFGDPrior facility Pre-rehab plant Kosovo A Old plants None NoneComparator (counterfactual) plant Pre-rehab plant Subcritical similar toKosovo BOld plants8 units of 500 MWeach, subcriticalLower carbon alternative Gas Gas Nuclear Gas w/LNGinvestment bSame plantGas w/pipelineinvestment bSize (case study) MW 1,355 600 660 4,000 660Size (Prior facility) MW 1,000 275 500Size (comparator) MW 1,000 600 500 4,000 660CO 2intensity kgco 2/kWh (case study) 1.43 0.85 1.37 0.85 c 0.91CO 2intensity kgco 2/kWh (prior facility) 1.64 1.85 2.00CO 2intensity kgco 2/kWh (comparator) 1.64 1.47 2.00 0.95 d 0.91Reduction (case study/prior facility) 12.8%

Appendix FTransport Tables and FiguresTable F.1Number of Operations w/ GHG Reduction Objectives by Region and SubperiodRegion Prereview period1998–2002Review period 2003–08Postreview period2009–pipeineTotal 1998–presentGHG goalGHG goallowNo GHGgoalSubtotalGHG goalGHG goallowNo GHGgoalSubtotalGHG goalGHG goallowNo GHGgoalN/ASubtotalGHG goalGHG goallowNo GHGgoalN/ATotalLAC 1 2 5 8 5 5 7 17 3 2 1 1 7 9 9 13 1 32EAP 6 1 7 3 2 2 7 1 3 4 3 9 3 3 18AFR 7 7 2 2 3 7 2 2 2 2 10 2 16SA 2 3 5 2 2 2 2 4 2 4 5 11ECA 6 6 1 1 7 7MNA 4 4 2 2 1 1 7 7Total 1 10 26 37 10 9 17 36 5 5 2 6 18 16 24 45 6 91Source: World Bank project documents.Note: GHG goal includes operations with explicitly designed components to address carbon reduction with corresponding performanceindicators and systems to track and monitor progress. GHG goal low includes other operations that explicitly mention carbon benefits(avoiding global warming) and assume fuel savings or mode shifting that could have carbon reduction potential, but that do not monitor ortrack carbon reductions. No GHG goal includes all other operations that do not mention GHG reduction explicitly. GHG = greenhouse gas.Regions: LAC = Latin America and the Caribbean; EAP = East Asia and Pacific; AFR = Sub-Saharan Africa; SA = South Asia; ECA = Europe andCentral Asia; MNA = Middle East and North Africa. N/A Project document not available.106 | Climate Change and the World Bank Group

Table F.2GHG objectiveModeNumber of Operations with GHG-Reduction Objectives, by Mode and SubperiodPrereview period1998–2002GHG goalGHG goal lowNo GHG goalReview period2003–08GHG goalGHG goal lowNo GHG goalPostreview period, after2008GHG goalGHG goal lowNo GHG goalN/AGHG goalGHG goal lowTotalNo GHG goalN/ATotalTotals 1 10 26 10 9 17 5 5 2 6 16 24 45 6 91A) No PT investments a 8 6 1 15 15B) Traditional PT investments 11 2 13 13a) Traditional bus improvements 2 2 2b) No dominant PT mode b 9 2 11 11C) Urban rail investments 3 6 2 2 3 8 8 16a) commuter rail 3 5 2 1 3 8 6 14b) Metrollight rail 1 1 2 2D) Newer PT investments 1 5 8 6 5 4 1 1 6 13 12 6 6 37a) Dedicated bus lanes 5 3 1 8 1 9b) Proto-BRTS 2 2 1 3 2 3 3 8c) BRTS 1 6 1 4 4 1 3 11 1 5 3 20E) Other interventions c 2 1 2 1 2 1 1 3 4 3 10a) NMT 1 1 1b) Local air quality 1 2 1 1 1 3 3 6c) Technical assistance 1 2 3 3Source: World Bank project documents.Note: BRTS = bus rapid transit system; GHG = greenhouse gas; N/A = project document not available; NMT nonmotorized travel; PT = publictransport.a. Includes operations with explicitly designed components to address carbon reduction with corresponding performance indicators andsystems to track and monitor progress.b. Includes other operations that explicitly mention carbon benefits (avoiding global warming) and assume fuel savings or mode shifting thatcould have carbon reduction potential, but that do not monitor or track carbon reductions.c. Includes all other operations that do not mention GHG reduction explicitly.Appendix F: Transport Tables and Figures | 107

Appendix GEnergy Project Portfolio DatabasesCEIF Database (Master Energy Database)Scope 2003–08This database, compiled by the World Bank’ Energy Anchor,was the starting point for IEG’s analysis. Although the CleanEnergy Investment Framework (CEIF) was formulated in2005, the database was backfilled to include projects approvedin 2003. It covers all World Bank Group energy projects acrossthe International Bank for Reconstruction and Development/International Development Association, the Global EnvironmentFund, Carbon Finance, International Finance Corporation,and the Multilateral Investment Guarantee Agency.The unit of observation is the project component.Component type categories include—• Oil (extractive industries and downstream, excludinggeneration)• Gas (extractive industries and downstream, excludinggeneration)• Coal (extractive industries and downstream, excludinggeneration)• Energy efficiency• New renewable energy, broken down by technology,for example, wind, small hydro, solar photovoltaic, solarthermal, geothermal, and bioenergy. If there is morethan one technology supported by the component, thegeneral category “New Renewable Energy” is assigned.New Renewable Energy excludes hydropower> 10 MW.• Large hydro• Thermal generation (oil, gas or coal, specified)• Transmission and distribution• Other (including policy operations, environmentalassessment).Components were also mapped to the following groups:• Low carbon: Renewable energy projects (including allhydropower), energy efficiency, rehabilitation of powerplants, district heating, biomass waste-fueled energy;reduction of gas flaring, transmission and distributioncomponents that target low carbon and/or energy efficiency,and other—investments with lower carbon goals.• Access: Those that increase access to electricity services.In IDA countries, all investments in generationand transmission and distribution are assigned to thecategory of Access (as they all aimed to increase electrification);in IBRD countries only electricity accessprojects and rural electrification projects are consideredas “Access.”• Blended low carbon and access: Those access projectsthat use low carbon energy options to increase accessto electricity.• Transmission and distribution, oil and gas; other thermalgeneration: projects that do not specifically target lowercarbon or energy efficiency (some transmission anddistribution is classified under low carbon, however).• Other energy: Projects with energy policy support (DevelopmentPolicy Loans) or projects for which energyform cannot be defined clearly or that have multipleenergy subsector support—that do not target lower carbonand/or energy efficiency.IEG review of the databaseFor this evaluation, IEG reviewed and modified the 2003–08CEIF database as follows.Some components were further disaggregated, based ondescriptions in appraisal documents. For instance, an$87 million component labeled “New Renewable Energy”was disaggregated into subcomponents: a $20 millionbiomass facility and a $67 million wind project.IEG used budget allocations reported in the appraisaldocument rather than the sectoral percentage assignmentsused for project classification. For instance, theTurkey Renewable Energy project is a $202 million operationdesigned to support development of the renewableenergy, providing financing via Turkish banks to privatedevelopers. CEIF recorded this project as $101 million operation,because the project was officially allocated amongthe following sectors: central government administration(10 percent), micro- and small and medium enterprise finance(40 percent), and renewable energy (50 percent).IEG classified the entire expenditure as financing for renewableenergy development ($202 million), includinglarge hydropower, geothermal energy, and wind (as in theProject Assessment Document). For this reason, IEG’sreckoning of commitment amounts sometimes exceededthe CEIF’s.108 | Climate Change and the World Bank Group

IEG eliminated a few cases of double counting, usually involvingGEF-funded components.IEG identified some components that did not have clearlow-carbon content, based on review of project documents.These projects were excluded from the scope of the ClimateII database.CEIF designates some transmission and distribution projectsas “low carbon,” but not others. In principle, improvementof existing systems is considered as energy efficiency,as opposed to construction of new systems. In practice,some of the transmission and distribution projects discussedin chapter 3 appear to result in loss reductions butare not included in either the CEIF or IEG tally of lowcarbonprojects.IEG added information and codes describing componentor project objectives, technologies, instruments, and capacity(if applicable).Bonn Commitment Database and RenewableEnergy and Energy Efficiency WBG ProgressReportsScope 1990–2008At the Bonn International Conference on Renewable Energiesin 2004, the WBG made a commitment to accelerateits support for new renewable energy and energy efficiencyand committed to increase its financing for new renewableenergy and energy efficiency at a growth rate of 20 percentper annum between fiscal years 2005 and 2009, comparedto a baseline commitment of $209 million (equal to the averageof the previous three years).The World Bank reported on this commitment annually.For Bonn Commitment purposes, relevant project typeswere solar, wind, geothermal, biomass energy, hydropowerof 10 MW or less, waste to energy, and energy efficiency(demand-side management and end-use energy efficiency,supply side energy efficiency—including mass transit system).Large hydropower (>10 MW) was tallied but notcounted toward the Bonn Commitment. A comparable database,but with different criteria for energy efficiency, wasbackfilled to 1990.The following project types are classified by CEIF as lowcarbonbut are not counted toward the Bonn Commitment:• Policy reform loans (except where directly concernedwith renewable energy and energy efficiency)• Reduction of gas flaring• High-efficiency thermal plants are classified in CEIFas a low carbon, but not included in Progress Report/Bonn Commitment data• Industrial low carbon investments• Landfill gas capture without utilization.Appendix G: Energy Project Portfolio Databases | 109

Appendix HPilot and Demonstration ProjectsTable H.1Project andlocationSmall ScaleLivestockWaste ManagementProgram,ThailandRural EnergyAccess Project,Republic ofYemenRenewableEnergy DevelopmentProject,VietnamCoal-FiredGenerationRehabilitationProject, IndiaEmergencyPower Project,Central AfricanRepublicRegional SustainableTransportand Air QualityProject, LACRegionAssessment of Monitoring and Implementation Plans from Low-Carbon Energy Projects withPilot or Demonstration Objectives, 2007–09YearBank commitmentto project(millions)Productline2009 $6.39 CarbonoffsetWhat is beingdemonstrated?Effectiveness of techniquesfor reducingmethane emissionsthrough improved livestockwaste management;economic viability ofadopting these techniqueswhen supportedby carbon financing2009 $26.4 IDA Feasibility of increasingenergy access to ruralhouseholds using SHS2009 $200 IDA Financial viability ofsmall-scale gridconnectedrenewableenergy projects2009 $180 (IBRD)$25.4 (GEF)IBRDGEFEffectiveness and financialviability of energy- efficientrehabilitation of coalplants (versus replacement);effectiveness offramework for implementation,risk mitigation andpost-rehabilitation O&M ofenergy efficiency renovationand modernization2009 $8 IDA Effectiveness of prepaidmeters in reducingnontechnical losses frompower distribution (pilot)2009 $40 GEF Effectiveness of transportinvestments in improvingair qualityTo whom?Livestockproducers inThailandDonor agenciesthat mightfund scale-upprojectsCommercialbanking sectorGovernmentof India,electricityutilities in IndiaEnerca (powerutility)Other cities inLatin Americaand CaribbeanRegionAssessment of monitoring andevaluation(0 = no details, 1 = moderate, 2 = strong)InternalprojectoutcomeLogical frameworkfor demonstrationDemonstrationimpact2 0 01 1 01 1 12 2 1Unknown2 Unknown2 2 1110 | Climate Change and the World Bank Group

Table H.1Project andlocationBioenergy SugarEthanol WastewaterManagementProcess, ThailandEnergy EfficiencyProject,MontenegroThermalPower EfficiencyProject, ChinaEcofarmingProject, ChinaGEF-World BankUrban TransportPartnership,ChinaGEF IncreasedAccess toElectricityProject, ZambiaEnergy AccessProject, BurkinaFasoEnergy Development& AccessExpansion Project,TanzaniaElectricityDistribution andTransmissionProject, PakistanAssessment of Monitoring and Implementation Plans from Low-Carbon Energy Projects withPilot or Demonstration Objectives, 2007–09 (continued)YearBank commitmentto project(millions)Productline2009 €4.5 CarbonoffsetWhat is beingdemonstrated?Technology for methanecapture from wastewatertreatment2009 $9.4 IBRD Feasibility of energyefficiency program inpublic sector2009 $19.7 GEF Viability of efficiencyimprovements in thermalpower plants2009 $120 IBRD Technology best practicefor integrating biogasinto production systems2008 $21.0 GEF Series of high-profiledemonstration projectsthat will create modelsof sustainable transportsolutions2008 $4.5 GEF Pilot “Sustainable2008 $38.8 (pilot$1 million)IDA2008 $111.5 GEF/IDASolar Market Packages(SSMP)”—preparationof nine sustainable solarmarket packagesInerfuel substitutions:Pilot activities leadingpotentially to the productionof biofuels from Jatropha,cotton, and otheragricultural residuesLoss reduction in distributionsystems. Ruralenergy agency is pilotingschemes for off-grid andenergy expansion. Scaleup of pilot activities: solarphotovoltaic, small PPA2008 $256.7 IDA Pilot energy efficiencyprogram, involvinginstallation of energysaving equipment at thecustomer levelTo whom?Publicagencies inMontenegroPower utilitiesin China.Localgovernmentsin China.Localgovernments,municipalities,transportauthoritiesRural EnergyAgency—toprovide solarphotovoltaicenergy to publicinstitutions,households,commercialconsumersPrivate sector,householdsAssessment of monitoring andevaluation(0 = no details, 1 = moderate, 2 = strong)InternalprojectoutcomeLogical frameworkfor demonstrationDemonstrationimpact2 0 01 0 02 2 12 1 02 2 12 1 01 0 0Consumers inenergy efficiencycomponent.Private sector,cooperatives,NGO—renewableenergycomponent2 1 0Utilities 2 0 0(continued)Appendix H: Pilot and Demonstration Projects | 111

Table H.1Project andlocationElectricity SectorEfficiencyImprovementProject, GuineaLiaoningMedium CitiesInfrastructureProject III, ChinaIntegrated SolarCombined CyclePower Project,MoroccoRenewableEnergy for RuralAccess, MongoliaHybrid SolarThermal IntegratedCycle,MexicoFuratena EnergyEfficiency Project,ColombiaUrban TransportProject, GhanaAssessment of Monitoring and Implementation Plans from Low-Carbon Energy Projects withPilot or Demonstration Objectives, 2007–09 (continued)YearBank commitmentto project(millions)ProductlineWhat is beingdemonstrated?2008 $11.7 GEF Pilot operation focusingon improvement ofcommercial and technicalefficiencies2008 $191.0 IBRD Contribute to implementationof heating reformby implementing in newheat-only boiler and CHPsupplied systems: pilotingtechnical approachesin network designthrough use of about 150building-level substationsand in meteringthrough use of buildinglevelmeters2007 $43.2 GEF Demonstration of operationalviability of hybridsolar thermal powergeneration (disseminationof information)2007 $7.0 GEF/IDADemonstration of technicalmodels for smallhybrid systems in the extremeclimate conditionsof Mongolia (disseminationof information,public awareness)2007 $49.4 GEF Demonstrate the operationalviability and valueadded of integrating asolar field with a large conventionalthermal facility2007 $1.1 CarbonfinanceDemonstration pilotto exemplify a new approachto panela (sugarcane) production andcommercialization2007 $8.0 GEF BRT Infrastructure designand implementationTo whom?Government,utilitiesProvincialgovernment,heating companies/utilitiesONE (utility),government,private sectorHerders,private sectorUtility, privatesectorHillside sugarcane producersLocalgovernments,transportationauthoritiesAssessment of monitoring andevaluation(0 = no details, 1 = moderate, 2 = strong)InternalprojectoutcomeLogical frameworkfor demonstrationDemonstrationimpact2 1 12 2 12 2 12 2 12 1 02 0 02 0 0Source: World Bank data.Note: CHP = combined heat and power; GEF = Global Environment Facility; IBRD = International Bank for Reconstruction and Development;IDA = International Development Association; LAC = Latin America and the Caribbean Region; NGO = nongovernmental organization;O&M = operations and maintenance; PPA = Power purchase agreement; SHS = solar home system.112 | Climate Change and the World Bank Group

Appendix ICarbon and Economic Returns of ProjectsTable I.1 Carbon and Economic Returns on ProjectsType ERR (%) Lifetime CO 2reductions (kg per $ investment) Data source (appraisal, evaluation)CFL 714 80 AppraisalCFL 122 26.7 EvaluationCFL 178 134 AppraisalT&D 43.2 6.8 AppraisalT&D 16.5 10.6 AppraisalT&D 22.4 14.9 EvaluationOff-grid solar 93.4 3.1 EvaluationOff-grid solar 31.0 11.8 Evaluationenergy efficiency finance 20.0 23.4 EvaluationFinancial intermediary energy efficiency 22.0 61.4 EvaluationFinancial intermediary energy efficiency 20 117.2 EvaluationDirect energy efficiency 143 160.3 AppraisalLarge hydro 18.1 57.2 AppraisalLarge hydro 7.0 15.4 AppraisalLarge hydro 17.1 21.8 AppraisalMedium hydro run-of-river 18.0 42.8 AppraisalHydro 6.7 42.4 AppraisalHydro run-of-river 2.9 32.9 AppraisalMedium hydro run-of-river 11.9 37.3 AppraisalMedium hydro run-of-river 14.3 77.9 AppraisalMedium hydro run-of-river 14.7 75.4 AppraisalMedium hydro reservoir 16.5 82.8 AppraisalMedium hydro 13.3 76.0 AppraisalMedium hydro 9.5 25.4 AppraisalHydro run-of-river 12.7 49.5 AppraisalAppendix I: Carbon and Economic Returns of Projects | 113

Table I.1Carbon and Economic Returns on Projects (continued)Hydro run-of-river 8.7 76.9 AppraisalHydro run-of river 4.7 71.1 AppraisalMini-hydro 24 61.2 EvaluationWind 11.9 15.0 AppraisalWind 11.3 13.2 AppraisalWind 5.5 14.1 AppraisalWind 7.1 10.0 AppraisalWind 12.5 34.7 AppraisalWind 7.0 16.8 AppraisalWind 14.7 41.0 AppraisalWind 3.9 14.9 EvaluationBRT 81 9.6 AppraisalSource: World Bank data.Note: BRT = bus rapid transit; CFL = compact fluorescent light; T&D = transmission and distribution.Caveats:• These estimates have many limitations and are presented to indicate rough orders of magnitude and to illustrate the need for more thorough andrigorous analysis.• Estimates—all adapted from WBG project documents—are mostly based on ex ante appraisals and could be overly optimistic. They are not producedwith consistent methodologies or rigor.• Carbon reductions per dollar consider only investment costs; operations and maintenance are excluded.• Economic rates of return (ERRs) typically do not include nonmonetized benefits such as reduction in local air pollution or the value of increased energysecurity.• ERRs take the electricity tariff (and any associated capacity payments) to represent the economic value of electricity (except in the case of solar homephotovoltaics). In many cases tariffs are artificially low, so this will be an underestimate.• In this sample, wind projects receive tariffs that are 2.2 times higher, on average, than the tariffs received by hydropower plants. Hence these estimatesshould not be used for a head-to-head comparison of wind and hydro.• Lifetime emission reductions are based on approximations of project lifetime. Grid power plants are assumed to provide emission reductions for20 years; solar home photovoltaic systems 15 years; bus rapid transit 14 years; energy efficiency projects, transmission and distribution projects andoff-grid power have an assumed lifetime of 10 years; compact fluorescent light bulb life is 6 years. To the extent that projects provide emission reductionsbeyond this, emission reductions are understated.• ERR values for compact fluorescent light bulb projects generally include only fuel savings; they do not also include the value of deferring the need forconstruction of peak load plants, or reductions in load shedding.• Much of the variation in emission reductions (particularly for hydro) comes from variation in the carbon intensity of the baseline power generationbeing displaced by the project.• Energy efficiency financial intermediary project ERR counts all benefits from subproject investments, regardless of whether they were triggered byWBG involvement.• For direct investments in energy efficiency, the (relatively small) costs of energy audits are excluded.• Most of the economic benefits from offgrid solar come from studies that find high household willingness to pay for electrical power.114 | Climate Change and the World Bank Group

Appendix JRecent WBG Developments in Emission Mitigation ActivitiesThe main body of this paper and portfolio analysis has focusedon the 2003–08 period. As noted, there has been anincrease in climate-related activity since the 2008 adoptionof the Strategic Framework on Development and ClimateChange. This appendix provides a descriptive review ofkey developments since 2008, including the 2009 energyportfolio, the Climate Investment Funds, the Carbon PartnershipFacility, the Forest Carbon Partnership Facility,and the Low Carbon Growth Studies program of the EnergySector Management Assistance Program. These areashave not been evaluated in detail or fully validated by IEGanalysis.2008–09 Energy Portfolio DevelopmentsThe growth in support for low carbon energy activitiescontinued in fiscal 2009, reaching annual commitments ofmore than $3.3 billion. Low carbon financing constitutesroughly 40 percent of the energy portfolio. Although IEGhas not formally validated the CEIF 2009 low carbon portfolioclassification, the CEIF definitions have been verysimilar to IEG’s reckoning of low carbon support in the past(see figure J.1).Most financing continues to come from traditional (IDA,IBRD, and International Finance Corporation) fundingsources, with the proportion coming from traditional financingincreasing in 2009.For the first time, more than half of the low carbon portfoliois for energy efficiency, though support for new renewableshas also increased markedly.The increase in financing for low carbon projects in fiscal2008 and 2009 comes primarily from a few large investments.In fiscal 2008, most financing for energy efficiencyand large hydropower was provided by stand-alone projects;26 percent came from just three IBRD projects: IndiaRampur Hydropower Project ($395 million), ChinaEnergy Efficiency Financing ($200 million), and ChinaLiaoning Med. Cities III (an energy efficiency project,$185 million).The following year, the portfolio was dominated by largeenergy efficiency investments; 40 percent of financing camefrom 5 World Bank projects: Turkey Private Sector RenewableEnergy and Energy Efficiency Project ( $500 millionFigure J.1Commitment ($ millions)6,0005,0004,0003,0002,0001,0000Financing for Low and Non-LowCarbon Energy, 2003–092003 2004 2005 2006Year2007 2008 2009Non-low-carbon energy, CEIFLow-carbon energy, CEIFLow-carbon energy, IEGSource: IEG and CEIF.Note: CEIF = Clean energy Investment Framework.IBRD), India Coal-Fired Generation Rehabilitation($225 million), Turkey Programmatic Electricity SectorDevelopment Policy Loan ($200 million), Vietnam RenewableEnergy Development Project ($199 million), andNigeria Electricity and Gas Improvement ($182 million).Recent Activities: Climate Investment FundsIn 2008 the WBG and other multilateral developmentbanks jointly established the $6.2 billion Climate InvestmentFunds. The core of the Climate Investment Fund isthe $5.1 billion Clean Technology Fund (CTF), aimed atfinancing demonstration, large-scale deployment andtransfer of low-carbon technologies in large or middle-incomecountries.CTF financing eligibility requires the creation of countryor sector investment plans, and then selects projectsfor financing on the basis of potential for greenhouse gassavings, cost-effectiveness, demonstration potential atscale, development impact, implementation potential, andadditional costs and risk premium. Eligible technologiesinclude the power sector, transportation, and energy efficiencyin buildings, industry, or agriculture.Appendix J: Recent WBG Developments in Emission Mitigation Activities | 115

Figure J.2$ (millions)3,5003,0002,5002,0001,5001,000500Low-Carbon Energy, 2003–09,by Product Lines02003 2004 2005 2006 2007 2008 2009YearIBRD/IDAMIGACarbon Finance (WBG)To date, the CTF has supported creation of investmentplans for 12 countries, and for Concentrated Solar Power inthe Middle East and North Africa Region. Together theserepresent planned investments of $40 billion, of which $4.4billion would be from CTF funds. Since May 2009, sevenprojects have been approved, five of which will be administeredby the WBG and the rest by other multilateral developmentbanks. The WBG projects support wind power inEgypt and Mexico, urban transport in Mexico, renewableenergy in Thailand, and a mix of renewable energy and energyefficiency in Turkey.The second part of the Climate Investment Fund is theStrategic Climate Funds. With an initial capitalization of$250 million, the Funds aim to provide financing to pilotprojects that target specific climate change challengesor sector responses in five to ten low-income countries.The Strategic Climate Fund is currently supporting threeprograms. The Pilot Program for Climate Resilience fundsresilience projects and integration of resilience considerationsinto national development plans; the Forest InvestmentProgram supports capacity building for forest governanceand investments to reduce pressure on forests;and the Scaling up Renewable Energy Program supportsactions to remove barriers that inhibit private sector investmentin renewable energy in low-income countries.Whereas the CTF supports both renewable energy andenergy efficiency, the much smaller, low-income-orientedScaling up Renewable Energy Program supports only renewableenergy.IFCGEF (WBG)Other financingSource: CEIF.Note: GEF = Global Environment Facility; IBRD = InternationalBank for Reconstruction and Development; IDA = InternationalDevelopment Association; IFC = International Finance Corporation;MIGA = Multilateral Investment Guarantee Agency;WBG = World Bank Group.Carbon Partnership FacilityThe Carbon Partnership Facility (CPF) was establishedin 2007 as a response to uncertainty about the post-2012international climate regime and the associated limited demandfor post-2012 carbon assets. It is designed to developand market emission reductions on a larger scale by providingcarbon finance to investments that will deliver post-2012 emission reduction assets.The CPF intends to scale up carbon finance by supportingprogrammatic and sector-based approaches to reducegreenhouse gas emissions and by collaborating withgovernment and market participants. It will operate in traditionalsectors (power, gas flaring, transport, waste managementsystems, and urban development), in sectors thathave not been reached by the Clean Development Mechanism(urban transport and energy efficiency), and will pilotcity-wide carbon finance programs.CPF will draw on the World Bank’s financial and knowledgeresources to strategically integrate carbon finance withsustainable development plans. The emphasis on creatinglong-term credit streams will be attractive to both buyersand sellers, who prefer certainty in their offset requirementsand revenue streams.The CPF framework creates two funds. The Carbon AssetDevelopment Fund supports the preparation of emissionreduction programs, including grants. It provides fundingfor methodology development, emission reduction programidentification and development, and asset feasibility,Project Design Document development and monitoringplan. In addition, the Fund covers all facility costs for emissionreduction program preparation. The main sources offunding for CADF are buyers’ payments and donors’ contribution(about €2 million from each donor).The Carbon Fund will purchase the emission reductionsgenerated by the CPF programs. This fund became operationalin May 2010 with €100 million in assets.As of July 2010 the emission reduction program has signedagreements with a Moroccan solid waste management program(related to recent World Bank Development PolicyLoans in Morocco on waste management), a Vietnam renewableenergy program (corresponding to a World Bankloan in 2009), a Brazil solid waste management program,and an Amman city-wide program. In addition, there are13 different programs under development in East andSouth Asia, Europe and Central Asia, the Middle East andNorth Africa, and the Africa Regions.Forest Carbon Partnership FacilityThe Forest Carbon Partnership Facility is designed to reduceemissions from deforestation and forest degradation116 | Climate Change and the World Bank Group

y providing value to standing forests. It also seeks toprovide incentives and financing for the sustainable use offorest resources and biodiversity conservation. The Facilitybecame operational in 2008.The facility has two parts: a readiness mechanism, supportedby the Readiness Fund, and a carbon finance mechanism,supported by the Carbon Fund. Under REDD Readiness,the Forest Carbon Partnership Facility will help developingcountries prepare national reference scenarios for emissionsfrom deforestation and forest degradation, developcountry-owned strategies for reducing deforestation andforest degradation, and establish national measurement,reporting and verification systems for REDD. The CarbonFund will pilot and test REDD carbon transactions in thecountries that have established a sound national frameworkthrough the readiness mechanism.Thirty-seven REDD countries had been selected for the readinessmechanism by the end of fiscal 2009 (compared with theoriginal design target of 20). Thirty of these had signed participationagreements, and 18 had submitted detailed grantproposals (with three of the grant agreements fully signed).In this first year, the Facility has increased the target volumefor the Readiness Fund from $100 million to about $185 million;as of March 2010 the Readiness Fund has $115 million.By the end of fiscal 2009 each country’s Readiness PreparationIdea Note was submitted to the Facility and receivedone to three Technical Advisory Panel reviews/discussions,Facility Management Team reviews, and informal reviewsby World Bank country teams.REDD methodology support claims progress in the followingareas: establishing the first Team Advisory Panel; developinginstruments to support the process of the ReadinessMechanism; advancing thinking on reference scenarios,REDD modeling efforts, reporting and verification systems,and economic analysis of the costs of REDD; and creationof a capacity-building program for forest-dependent indigenouspeoples and other forest dwellers.Recent Activities: Low-Carbon Growth StudiesStarting in 2006, ESMAP’s Low-Carbon Growth CountryStudies Program began helping Brazil, China, India, Indonesia,Mexico, and South Africa assess their developmentgoals and greenhouse gas mitigation strategies. Thecenterpiece of the program is a series of country studiesdesigned to identify low carbon opportunities across arange of sectors, including energy, transport, waste, andland use/land use change. The studies or summary casestudies have been publically released for Mexico, Brazil,and India. Most studies generate a baseline scenario anda low carbon alternative and describe the technical solutionsby which the alternative could be achieved. Energyaccess objectives are not highlighted in the studies publishedso far.The studies recognize that climate change harms developmentand that mitigation actions form part of a developmentstrategy. In each case, the studies recognize the vulnerabilitiesof the particular country to climate change, and thusthe need for both mitigation and adaptation. However, theygenerally support the need for mitigation through an internationalclimate agreement, and emphasize that any mitigationobligations must not harm the development rightsof the poor. Low carbon development is also emphasizedas a means of supporting negative cost no-regrets options,energy security, nonclimate pollution reduction, and abilityto access carbon market opportunities.Though the studies consider mitigation options in each sectorsequentially, they attempt to take a systemic approach bymaking cost comparisons across sectors. Most studies developa unified marginal abatement cost curve, where optionsare ranked by cost and scope. These lead to different strategiesacross countries, depending on the specific details ofeach case. In each case, there are many negative or zero costchanges, particularly in energy efficiency or land use change.For example, for Brazil, the emphasis is on agriculture anddeforestation, with emission reduction goals of 11.7 GtCO 2eper year. There are few low-cost mitigation options in theenergy and transport sectors, because emission intensityis already low by international standards because of thereliance on hydropower and ethanol fuel. The Brazil studyidentifies negative cost options for roughly 1.1 GtCO 2e peryear (mostly energy efficiency) and a further 7.1 GtCO 2eper year of roughly zero cost changes for avoided deforestation,livestock and zero-tillage cropping options.For Mexico, the emphasis is still on agriculture and forestry,but energy and transport are also important in achievingemission reductions of 5.3 GtCO 2e per year. Under the lowcarbon scenario, the share of power from coal would dropfrom 31 to 6 percent, of which roughly 23.5 percentagepoints would come from increases in geothermal, biomass,wind, and small hydropower sources. Negative cost interventionswould save 3.4GtCO 2e per year, including bus systemoptimization, cogeneration, charcoal production improvements,fuel economy standards, biomass power andimproved cookstoves.The strategies recognize that energy efficiency (includingtransport efficiency) and demand-side management willplay a major role in any cost-effective mitigation strategy.In nearly every case, the scope for efficiency improvementsis large and can be achieved at lower cost than increases inincreasing generation through renewable energy.Energy access issues were considered in the India study,though not in Brazil, China, or Mexico.Appendix J: Recent WBG Developments in Emission Mitigation Activities | 117

Appendix KEvaluation Summary from Climate Change and the WorldBank Group—Phase IClimate change threatens to derail development, even as developmentpumps ever-greater quantities of carbon dioxideinto an atmosphere already polluted with two centuries ofWestern emissions. The World Bank, with a newly articulatedStrategic Framework on Development and ClimateChange, must confront these entangled threats in helpingits clients to carve out a sustainable growth path.But this is known territory—many of the climate changepolicies under discussion have close analogues in the past.This phase of the evaluation, focused on the World Bank(and not the International Finance Corporation or the MultilateralInvestment Guarantee Agency), assesses the WorldBank’s experience with key win-win policies in the energysector—policies that combine gains at the country levelwith globally beneficial greenhouse gas (GHG) reductions.The next phase will look across the entire World BankGroup at project-level experience in promoting technologiesfor renewable energy and energy efficiency and at someissues related to climate change in the Bank’s transport andforestry portfolios.Within the range of win- win policies, this report examinestwo that have long been discussed but are more relevantthan ever in light of record energy prices: removalof energy subsidies and promotion of end-user energy efficiency.Energy subsidies are expensive, damage the climate,and disproportionately benefit the well off. Their reductioncan encourage energy efficiency, increase the attractivenessof renewable energy, and allow more resources to flow topoor people and to investments in cleaner power. Thoughsubsidy reduction is never easy, the Bank has a record ofaccomplishment in this area, especially in the transitioncountries. About a quarter of Bank energy projects includedattention to price reform. Improvements in the design andimplementation of social safety nets can help to rationalizeenergy prices while protecting the poor.End-user energy efficiency has long been viewed as a winwinapproach with great potential for reducing emissions. Itbecomes increasingly attractive as the costs of constructingand fueling power plants rise. About 5 percent of the Bank’senergy commitments by value (about 10 percent by number)have gone to specific efficiency efforts, including end- userefficiency and district heating. Including a broader rangeof projects identified by management as supporting supplysideenergy efficiency would boost the proportion above20 percent by number. Few projects tackled regulatoryissues related to end- user efficiency, though the Bank hasinvested in some technical assistance and analytical work.This historical lack of emphasis on energy efficiency is notunique to the Bank and reflects the complexity of pursuingend- user efficiency, a pervasive set of biases that favorelectricity supply over efficiency, inadequate investments inlearning, and inattention to energy systems in the wake ofpower sector reform.The record levels of energy prices in 2008, although theyhave been relaxed, provide an impetus for the Bank and itsclients to choose more sustainable long- term trajectories ofgrowth. The mid-2008 oil price was equivalent to the 2006price, plus a $135 per ton tax on carbon dioxide—the kindof level that energy modelers say is necessary for long-termclimate stabilization. To help clients cope with the burdenof these prices, and take advantage of the signals they sendfor sustainability, the Bank can do four things:1. It can make promotion of energy efficiency a priority,using efficiency investments and policies to adjust tohigher prices and constructing economies that are moreresilient.2. It can assist countries in removing subsidies by helpingto design and finance programs that protect the poorand help others adjust to higher prices.3.It can promote a systems approach to energy.4. And it can motivate and inform these actions, internallyand externally, by supporting better measurement of energyuse, expenditures, and impacts.Goals and ScopeThis evaluation is the first of a series that seeks lessonsfrom the World Bank Group’s experience on how to carveout a sustainable growth path. The World Bank Group has118 | Climate Change and the World Bank Group

never had an explicit corporate strategy on climate changeagainst which evaluative assessments could be made.However, a premise of this evaluation series is that manyof the climate-oriented policies and investments underdiscussion have close analogues in the past, and thus canbe assessed, whether or not they were explicitly oriented toclimate change mitigation.This report, which introduces the series, focuses on theWorld Bank (International Bank for Reconstruction andDevelopment and International Development Association),and not on the International Finance Corporation(IFC) or the Multilateral Investment Guarantee Agency(MIGA). It assesses its experience with key win-win policiesin the energy sector: removal of energy subsidies and promotionof end-user energy efficiency. The next phase looksat the expanding project-level experience of the Bank andthe IFC in promoting technologies for renewable energyand energy efficiency; it also addresses the role of carbonfinance. A parallel study examines the role of forests in climatemitigation. The climate evaluation’s final phase willlook at adaptation to climate change.MotivationOperationally, the World Bank has pursued three broadlines of action in promoting the mitigation of GHG emissions,the main contributor to climate change. First, it hasmobilized concessional finance from the Global EnvironmentFacility (GEF) and carbon finance from the CleanDevelopment Mechanism to promote renewable energyand other GHG-reducing activities. Second, and to a muchmore limited extent, it has used GEF funds to stimulate thedevelopment of noncommercial technologies. Third, andthe subject of this evaluation, it has supported win-winpolicies and projects—sometimes with an explicit climatemotivation, often without.These actions not only provide global benefits in reducingGHGs, but also pay for themselves in purely domestic sidebenefits such as reduced fuel expenditure or improved airquality. The win-win designation obscures the costs thatthese policies may impose on particular groups, even whilebenefiting a nation as a whole. This presents challenges fordesign and implementation.Two sets of win-win policies are perennial topics of discussionin the energy sector: reduction in subsidies andenergy-efficiency policies, particularly those relating toend-user efficiency. This report looks at these, and at anotherapparently win-win topic: gas flaring. Flaring is interestingbecause of its magnitude, the links to pricing policyand to carbon finance, and the existence of a World Bank–led initiative to reduce flaring.FindingsDevelopment spurs emissions.A 1 percent increase in per capita income induces—onaverage and with exceptions—a 1 percent increase in GHGemissions. Hence, to the extent that the World Bank is successfulin supporting broad- based growth, it will aggravateclimate change.But there is no significant trade-off between climate changemitigation and energy access for the poorest.Basic electricity services for the world’s unconnected households,under the most unfavorable assumptions, wouldadd only a third of a percent to global GHG emissions,and much less if renewable energy and efficient light bulbscould be deployed. The welfare benefits of electricity accessare on the order of $0.50 to $1 per kilowatt-hour, while astringent valuation of the corresponding carbon damages,in a worst-case scenario, is a few cents per kilowatt-hour.Country policies can shape a low-carbon growth path.Although there is a strong link between per capita incomeand energy-related GHG emissions, there is a sevenfoldvariation between the most and least emissions-intensivecountries at a given income level. Reliance on hydropoweris part of the story behind these differences, but fuel pricingis another. High subsidizers—those whose diesel pricesare less than half the world market rate—emit about twiceas much per capita as other countries with similar incomelevels. And countries with longstanding fuel taxes, such asthe United Kingdom, have evolved more energy-efficienttransport and land use.Energy subsidies are large, burdensome, regressive, anddamage the climate.The International Energy Agency’s 2005 estimate of a quarter-trilliondollars in subsidies each year outside the Organisationfor Economic Cooperation and Development mayunderstate the current situation. While poor people receivesome of these benefits, overall the benefits are skewed towealthier groups and often dwarf more progressive publicexpenditure. Fuel subsidies alone are 2 to 7.5 times as largeas public spending on health in Bangladesh, Ecuador, theArab Republic of Egypt, India, Indonesia, Morocco,Pakistan, Turkmenistan, República Bolivariana de Venezuela,and the Republic of Yemen. At the same time, subsidiesencourage inefficient, 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 transition countries—inRomania and Ukraine, for example, where energy pricesAppendix K: Evaluation Summary from Climate Change and the World Bank Group—Phase I | 119

were adjusted toward market levels, and the intensity ofcarbon dioxide emissions dropped substantially. Subsidyremoval can threaten the poor, however. Recent efforts toassess poverty and welfare impacts systematically appearto have informed the design and implementation of pricereform efforts, though not necessarily with direct Bank involvement.Examples include Ghana and Indonesia, wherecompensatory measures were deployed in connection withfuel price rises.The Bank has rarely coordinated efficiency improvementswith subsidy reductions to lighten the immediate adjustmentburden on energy users.An exception is the China Heat Reform and Building EfficiencyProject, which links improved insulation with heatpricing. A growing number of projects sponsor nationwidedistribution of compact fluorescent light bulbs, but this hasbeen done in response to power shortages (Rwanda, Uganda)or to stanch utility losses (Argentina, Vietnam), rather thanto facilitate subsidy reduction.Despite emphasis on energy efficiency in Bank statementsand in Country Assistance Strategies, the volume and policyorientation of IBRD/IDA efficiency lending has beenmodest.Although the IFC has recently increased its investments inenergy-efficiency projects, World Bank commitments forefficiency were about 5 percent by value of energy financeover 1991–2007. This includes investments in demand-sideefficiency and district heating, and may also include somesupply-side efficiency investments. By this definition, about1 in 10 projects by number involve energy efficiency.Including a broader range of projects identified by managementas supporting supply-side energy efficiency wouldboost the proportion above 20 percent by number over theperiod 1998–2007. Globally only about 34 projects undertakenover the 1996–2007 period had components orientedto demand-side energy-efficiency policy. Among these,many attempts to promote efficiency have had limited successbecause the Bank has engaged with utilities, whichhave limited incentives to restrict electricity sales.There are several reasons why end-user energyefficiencyprojects, and especially policy-oriented projects, appear tobe under- emphasized in the Bank’s portfolio.The Bank has carried out some successful and innovativeefficiency projects. But internal Bank incentives workagainst these projects because they are often small in scale,demanding of staff time and preparation funds, and mayrequire persistent client engagement over a period of years.There is a general tendency to prefer investments in powergeneration, which are visible and easily understood, overinvestments in efficiency, which are less visible, involvehuman behavior rather than electrical engineering, andwhose efficacy is harder to measure. A general neglect ofrigorous monitoring and evaluation reinforces the negativeview of efficiency.The Bank- hosted Global Gas Flaring Reduction Partnership(GGFR) has fostered dialogue on gas flaring, but it isdifficult to assess its impact on flaring activity to date.Associated gas (a by-product of oil production) is oftenwastefully vented or flared, adding more than 400 milliontons of carbon dioxide equivalent to the atmosphere annually,or about 1 percent of global emissions. A modestlyfunded public-private partnership, the GGFR has succeededin highlighting the issue, promoting dialogue, securingagreement on a voluntary standard for flaring reduction,and sponsoring useful diagnostic studies. But only fourmember countries have adopted the standard. The GGFRhas emphasized carbon finance as a remedy for flaring, butthe use of project-level carbon finance is a mere bandagefor policy ailments that require a more fundamental cure.RecommendationsIn mid-2008, real energy prices were at a record high. Whilethis is burdensome for energy users, it opens an oppor tunityfor the Bank to support clients in making a transition to along-term sustainable growth path that is resilient to energyprice volatility, entails less local environmental damage,and is a nationally appropriate contribution to globalmitigation efforts.Clearly the World Bank needs to focus its efforts strategicallyon areas of its comparative advantage. This wouldinclude supporting the provision of public goods and promotingpolicy and institutional reform at the country level.Furthermore, the Bank can achieve the greatest leverage bypromoting policies that catalyze private sector investmentsin renewable energy and energy efficiency, including thosesupported by IFC and MIGA. The analysis in this reportsupports the following recommendations:Systematically 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, and analyticalwork demonstrating the cost and distributional impact ofremoval of such subsidies and of building effective, broadbasedsafety nets.Energy price reform can endanger poor people and arousethe opposition of groups used to low prices, thereby posingpolitical risks. But failure to reform can be worse, divertingpublic funds from investments that fight povertyand fostering an inefficient economy increasingly exposedto energy shocks. And reform need not be undertaken120 | Climate Change and the World Bank Group

overnight. The Bank can provide assistance in charting andfinancing adjustment paths that are politically, socially, andenvironmentally sustainable. Factoring political economyinto the design of reforms and supporting better- targeted,more effective social protection systems will be elements ofthis approach.Emphasize policies that induce improvement in energy efficiencyas a way of reducing the burden of the transitionto market- based energy prices.Historically, energy efficiency has received rhetorical supportbut garnered only a small share of financial supportor policy attention. This is beginning to change with suchmoves as China’s commitment to drastically reduce its energyintensity and India’s Energy Conservation Act. Butthe Bank can do much more to help clients pursue thisagenda. If a real reorientation to energy efficiency and renewableenergy is to occur, the Bank’s internal incentivesystem needs to be reshaped. Instead of targeting dollargrowth in lending for energy efficiency (which may skeweffort away from the high-leverage, low-cost interventions),it needs to find indicators that more directly reflectenergy savings and harness them to country strategies andproject decisions. It needs also to patiently support longer,more staffintensive analysis and technical assistanceactivities.Increased funding for preparation, policy dialogue, analysis,and technical assistance is required.Promote a systems approach by providing incentives toaddress climate change issues through cross-sectoral approachesand teams at the country level, and structuredinteraction between the Energy and Environment SectorBoards.To tackle problems of climate change mitigation and adaptation,the Bank and its clients need to think, organize, andact beyond the facility level, and outside subsectoral andsectoral confines. One avenue for this is through greater attentionto systemwide energy planning. Integrated resourceplanning, once in vogue, has been largely abandoned in thewake of power sector privatization and unbundling. Yetcurrent planning methods are inadequate in integratingconsiderations of end-use efficiency and in balancing therisks of volatile fuel prices and weather-sensitive electricityoutput from wind and hydropower plants. Water management,urban management, and social safety nets are otherareas where cross sectoral collaboration is essential to promotingwin-win policies and programs.Invest more in improving metrics and monitoring for motivationand learning—at the global, country, and projectlevels.Good information can motivate and guide action.First, building on the Bank’s current collaboration with theInternational Energy Agency on energy efficiency indicators,the Bank could set up an Energy Scoreboard that willregularly compile up-to-date standardized informationon energy prices, collection rates, subsidies, policies, andperformance data at the national, subnational, and projectlevels. Borrowers could use indicators for benchmarking;in the design and implementation of country strategies,including sectoral and cross- sectoral policies; and in assessingBank performance.Second, more rigorous economic and environmental assessmentis needed for energy investments and those thatrelease or prevent carbon emissions. These assessmentsshould draw on energy prices collected for the Scoreboard;account for externalities, including the net impact on GHGemissions; and account for price volatility. Investment projectsshould also be assessed, qualitatively, on a diffusionindex, which would indicate the expected catalytic effect ofthe investment in subsequent similar projects. It is desirableto complement project-based analysis with assessment ofindirect and policy-related impacts, which could be muchlarger.Third, monitoring and evaluation of energy interventionscontinue to need more attention. Large-scale distributionof compact fluorescent light bulbs is one example of an interventionthat is well suited to impact analysis and wherea timely analysis could be important in informing massivescale-up activities.Appendix K: Evaluation Summary from Climate Change and the World Bank Group—Phase I | 121

EndnotesChapter 11. MIT Joint Program on the Science and Policy of GlobalChange (http://globalchange.mit.edu/resources/gamble/nopolicy.html)based on the research described in Sokolov andothers (2009).2. Carbon dioxide (CO 2) is the most important anthropogenicgreenhouse gas, but there are others, such as methane.All are weighted according to their relative impact on climatechange (for instance, methane is 25 times as potent as CO 2).The weighted sum is expressed as CO 2-equivalent, ppm.Chapter 21. World Bank projects are evaluated after closure, andmany investment projects last six to eight years or more.IFC projects are usually evaluated five years after the initialinvestment.2. This set of projects follows the official classification ofprojects in an internal World Bank database. That classificationmay exclude some supply-side energy efficiencyprojects, including those that reduce T&D losses.3. Classification based on 2009 status.4. Data are from the Development Outcome TrackingSystem.5. IEG’s calculation of Bonn Commitment volume exceedmanagement’s report for 2005–08; no verification was attemptedfor the 2009 report.6. But see Deichmann and others (2010), whose spatialanalysis of Ethiopia suggests surprisingly broad competitivenessfor grid-based electricity.7. To impute the capacity factor, nominal capacity wasmultiplied by the ratio of actual certified emission reductions/designcertified emission reductions.8. For comparison, the average price of World Bankpurchasedcarbon credit is $8.07, according to the CarbonFinance Unit’s 2009 annual report. Average primary CERprice in 2009 was $12.69 according to World Bank (2010).9. Data from January 2009.10. The World Bank has recently supported an IndonesiaInfrastructure Guarantee Fund, though it is not specificallytargeted on renewable energy.11. Two supported both on- and off-grid.12. Global average, excluding high-income countries, fromWorld Development Indicators 2007 (World Bank 2007).13. The Sri Lanka Renewable Energy for Rural EconomicDevelopment Project has an exemplary monitoring systemand undertook a consumer satisfaction survey in 2006, butsubsequent monitoring reports complained of an inadequateresponse rate.Chapter 31. Tunisia (2005, $8.5 million) and Uruguay (2004,$6.9 million) were excluded for geographic coherence.2. Many efficiency projects involve replacement of oldequipment with new machinery that is both more efficientbut also has higher production capacity—for instance, replacinga bakery oven with a new one that produces twice asmuch bread per day. Energy savings are calculated by assumingthat, absent the project, the production would have beenexpanded using the old technology. This seems unlikely.3. Environment Canada: http://www.ec.go.ca.4. An intermediate category of scrutiny for environmentalimpacts.Chapter 41. Source is CAIT 7.0. Tabulation includes all GHGs andland use change.2. If a project had performance indicators linked to GHGreductions, it was classed as having a formal goal. Otherwise,if the project mentioned GHG reductions as a projectbenefit, it was classed as having an informal goal.3. Coincident with the financial crisis, which saw aBank-wide increase in Development Policy Loans, about$600 million in forest-related loans were committed duringfiscal 2009–10.4. The payments in question were for avoided deforestation,not for reforestation or natural regeneration. Thus,this observation of increased forest growth could either indicatea real but indirect impact (for instance, the abandonmentof marginal grazing land due to the PES payment) ora spurious correlation (the recipients’ land may, in fact, beof poorer quality than the control group’s, for reasons thatare not observable, with the result that they are more likelyto give up grazing).5. The Regional Silvopastoral Project is the reportedly thefirst World Bank-executed conservation project framed asan experiment. A review of the Nicaragua component ofthe project (GEFEO 2009) found that its control group waspoorly constituted and unsuitable for control/treatmentcomparisons. The Colombia component appears to have abetter constructed control group.122 | Climate Change and the World Bank Group

Chapter 51. From the chief economist’s blog: http://blogs.worldbank.org/climatechange/why-coal.2. Excluded was a small (60 MW) Indonesian facility. Theinvestment in Medupi (South Africa) is out of the timeframe for analysis.3. The figures are not directly comparable because of the lagbetween approval and installation, but they convey the relativescale of WBG involvement. Private sector companies enteredcontracts to build and operate 87.0 GW of new capacityin Bank-borrower countries over 2003–08. Of these, projectstotaling 10.9 GW had some WBG involvement. The WBG’sshare of investment (loans plus equity) in the private projectswas 1.6 percent, plus guarantees covering 0.3 percent.4. The demand for carbon offsets is driven partly by theneed for some developed countries (appendix I) to meettheir obligations under the Kyoto Protocol. At this writing,those obligations are not defined past 2012. However, CERsrecognized under the CDM will in some cases be acceptablein the European Union Emissions Trading System carbonmarket after 2012.5. CF Assist helped with the design of the Fund to whichthis tax contributes.6. The Montreal Protocol Fund’s phase-out of ozonedestroyingsubstances, many of which are also GHGs. Ithelps transfer technology and pays for the marginal cost ofabatement of the substances.7. However, new firms have entered the industry. They areineligible for CDM payments for HFC-23 emissions, andare emitting growing amounts of the gas (Montzka andothers 2010). Thus, low-cost GHG abatement opportunitiesare not being utilized.Chapter 61. As this report was being finalized, a WBG-supportedmass distribution of CFLs in Bangladesh took place andincluded a rigorous engineering assessment of impact onoverall power consumption.Endnotes | 123

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Photo DescriptionsxxiiixixxxiWomen working in a compact fluorescent light bulb assembly plant.Efficient steel press financed through an energy management company; Jinan, China.Lignite mining in Kosovo.Cleaning solar panels.1 Wind turbine in China.7 People and livestock walking in a dust storm during a drought in Madagascar, circa 2007.11 Boy stands in front of solar module at Caoduo School, Rongbo, Yu Shu—part of the 2008 Renewable EnergyDevelopment Project Ashden Award winner in China.27 Ain Beni Mathar Integrated Combined Cycle Thermo-Solar Power Plant in Morocco.33 Beneficiary of program that won Ashden Award for Sustainable Energy in Southeast Asia.39 Energy transmission lines in Tajikistan.40 Tangle of electric wires, Ho Chi Minh City, Vietnam.42 Solar energy is used to light a village shop in Sri Lanka.47 Deforestation in Brazil.49 Traffic congestion in Mexico.58 Deforestation in the Brazilian Amazon.61 Ain Beni Mathar Integrated Combined Cycle Thermo-Solar Power Plant in Morocco.69 Solar panels and telephones in Qunu in the Eastern Cape, South Africa.79 Child standing on digester, which provides biogas from waste in a 2010 Ashden Award-winning project in Ngechavillage, Kiambu West, Kenya.128 | Climate Change and the World Bank Group

IEG PublicationsAnalyzing the Effects of Policy Reforms on the Poor: An Evaluation of the Effectiveness of World Bank Support to Poverty andSocial Impact AnalysesAnnual Review of Development Effectiveness 2009: Achieving Sustainable DevelopmentAddressing the Challenges of Globalization: An Independent Evaluation of the World Bank’s Approach to Global ProgramsAssessing World Bank Support for Trade, 1987–2004: An IEG EvaluationClimate Change and the World Bank Group—Phase I: An Evaluation of World Bank Win-Win energy Policy ReformsDebt Relief for the Poorest: An Evaluation Update of the HIPC InitiativeA Decade of Action in Transport: An Evaluation of World Bank Assistance to the Transport Sector, 1995–2005The Development Potential of Regional Programs: An Evaluation of World Bank Support of Multicountry OperationsDevelopment Results in Middle-Income Countries: An Evaluation of World Bank SupportDoing Business: An Independent Evaluation—Taking the Measure of the World Bank–IFC Doing Business IndicatorsEgypt: Positive Results from Knowledge Sharing and Modest Lending—An IEG Country Assistance Evaluation 1999–2007Energy Efficiency Finance: Assessing the Impact of IFC’s China Utility-Based Energy Efficiency Finance ProgramEngaging with Fragile States: An IEG Review of World Bank Support to Low-Income Countries Under StressEnvironmental Sustainability: An Evaluation of World Bank Group SupportEvaluation of World Bank Assistance to Pacific Member Countries, 1992–2002Financial Sector Assessment Program: IEG Review of the Joint World Bank and IMF InitiativeFrom Schooling Access to Learning Outcomes: An Unfinished Agenda—An Evaluation of World Bank Support to PrimaryEducationGender and Development: An Evaluation of World Bank Support, 2002–08Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural DisastersHow to Build M&E Systems to Support Better GovernmentIEG Review of World Bank Assistance for Financial Sector ReformAn Impact Evaluation of India’s Second and Third Andhra Pradesh Irrigation Projects: A Case of Poverty Reduction with LowEconomic ReturnsImproving Effectiveness and Outcomes for the Poor in Health, Nutrition, and PopulationImproving the Lives of the Poor through Investment in CitiesImproving Municipal Management for Cities to Succeed: An IEG Special StudyImproving the World Bank’s Development Assistance: What Does Evaluation Show:Maintaining Momentum to 2015: An Impact Evaluation of Interventions to Improve Maternal and Child Health and NutritionOutcomes in BangladeshNew Renewable Energy: A Review of the World Bank’s AssistancePakistan: An Evaluation of the World Bank’s AssistancePension Reform and the Development of Pension Systems: An Evaluation of World Bank AssistanceThe Poverty Reduction Strategy Initiative: An Independent Evaluation of the World Bank’s Support Through 2003The Poverty Reduction Strategy Initiative: Findings from 10 Country Case Studies of World Bank and IMF SupportPoverty Reduction Support Credits: An Evaluation of World Bank SupportPublic Sector Reform: What Works and Why? An IEG Evaluation of World Bank SupportSmall States: Making the Most of Development Assistance—A Synthesis of World Bank FindingsSourcebook for Evaluating Global and Regional Partnership ProgramsUsing Knowledge to Improve Development Effectiveness: An Evaluation of World Bank Economic and Sector Work and TechnicalAssistance, 2000–2006Using Training to Build Capacity for Development: An Evaluation of the World Bank’s Project-Based and WBI TrainingWater and Development: An Evaluation of World Bank Support, 1997–2007The Welfare Impact of Rural Electrification: A Reassessment of the Costs and Benefits—An IEG Impact EvaluationWorld Bank Assistance to Agriculture in Sub-Saharan Africa: An IEG ReviewWorld Bank Assistance to the Financial Sector: A Synthesis of IEG EvaluationsWorld Bank Group Guarantee Instruments 1990–2007: An Independent EvaluationWorld Bank Engagement at the State Level: The Cases of Brazil, India, Nigeria, and RussiaThe World Bank’s Country Policy and Institutional Assessment: An EvaluationAll IEG evaluations are available, in whole or in part, in languages other than English. For our multilingual section, please visithttp://www.worldbank.org/ieg.

ISBN 978-0-8213-8653-8SKU xxxxx