The Challenge of Low-Carbon Development - World Bank Internet ...

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