Catalysing private and public action for climate change mitigation: the World Bank’s role in international carbon markets

This policy analysis examines the role of the World Bank in shaping and stimulating international carbon markets. Adopting a public choice perspective, we argue that its engagement can be understood as a response to the joint goal of reputational and financial benefits. The detailed empirical account of the Bank’s activities – from its pioneering role through the Prototype Carbon Fund in the early 2000s, to its initiatives for upscaled crediting subsequent to the 2015 Paris Agreement – is broadly in line with this interpretation. The period between 2005 and 2011 most clearly shows that the Bank was ready to forego some reputational benefits for the sake of financial benefits. During this period, it followed a flourishing privately driven carbon market, mostly competing with, rather than catalysing, private activities. After the Paris Agreement opened the door for a new phase of carbon markets, the Bank again took up a pioneering role, now focusing on the public sector. However, since transparency in relation to its activities is limited – thus reducing reputational risk – these activities may not meet the quality standards, notably with respect to additionality, that are a precondition for carbon markets to be an effective tool for climate change mitigation

Do multilateral development bank trust funds allocate climate finance efficiently?

The Paris Agreement has been celebrated as a breakthrough for international climate policy. However, relatively scant attention has been given to the emergent ecosystem of climate finance facilities that support it. We provide an overview of the rising number of climate-related trust funds at multilateral development banks (MDBs). These funds can be distinguished into mitigation funds and adaptation funds. Some funds have a focus on capacity building activities. To maximize their effect on sustainable development, the different types of funds should follow different resource allocation criteria: For adaptation funds, vulnerability should represent the primary criterion. For mitigation funds, the main criterion should be the emission reduction potential. Capacity building should primarily focus on countries with weak institutions. Using a novel dataset of disbursements of climate-related trust funds, available for the World Bank, we examine whether fund allocations correspond to these expectations, and compare them with those of bilateral donors. We find that while trust funds with a focus on mitigation generally allocate aid in line with efficiency considerations, trust funds with a focus on adaptation do not seem to prioritize the countries most strongly in need, contrary to bilateral aid. Furthermore, capacity building activities do not seem to focus on countries with weak institutions. These findings have important implications for the effectiveness and legitimacy of climate aid to developing countries

Etude d’opportunité sur la mise en place d’un instrument de tarification carbone au Sénégal

Perspectives and the Senegalese consultancy Afrique Énergie Environnement find a carbon tax with careful redistribution as most promising carbon pricing opportunity for Senegal

Essays on the economics of climate policy monitoring

Cette thèse vise à améliorer la compréhension de l'économie du suivi des GES dans les politiques climatiques, qui est la problématique principale de ce travail de recherche. À cet égard, cette thèse développe un cadre analytique général pour l'analyse de la surveillance, notification et vérification (MRV) dans les politiques climatiques à travers l’étude d’arbitrages clés – tels que le coût vs incertitude – ainsi que d'un modèle microéconomique pour évaluer l'impact des choix de règles du suivi sur la performance économique et environnementale des politiques climatiques. Alors que les expériences pratiques avec les mécanismes de tarification et de gestion du carbone les plus importants, ainsi que la modélisation microéconomique, démontrent qu'il n'y a pas de solution « miracle » concernant les règles MRV dans la politique climatique, cette thèse, néanmoins, tire trois leçons clés concernant la comptabilisation du carbone qui devraient aider les décideurs à concevoir des règles du suivi en fonction de leurs objectifs.Tout d'abord, en ce qui concerne la rigueur du suivi, il peut être conclu que les règles sur les incertitudes sont rarement exhaustives. Avec une exception importante de la mesure directe dans le SCEQE, les systèmes de comptabilisation du carbone existants ne fixent pas une exigence sur l'incertitude globale. Les exigences du suivi dans le cadre du MDP ont en partie suivi le principe de précaution – par le biais d'un choix conservateur d'incertitude pour certaines valeurs par défaut du GIEC ainsi que pour certaines variables surveillées. Le modèle microéconomique développé dans cette thèse démontre qu’en présence d'asymétrie d'information, ne pas comptabiliser l'incertitude conduit à des résultats économiques et environnementaux sous-optimaux.Deuxièmement, il a été démontré que les coûts de MRV sont soumis à un fort effet d'économie d'échelle, à la fois dans et entre les différents cadres de comptabilisation du carbone. Les régimes obligatoires doivent être particulièrement prudents avec les coûts qu'ils imposent aux entités réglementées parce qu'elles peuvent fausser le marché – par exemple en mettant des coûts plus élevés sur les petites entités – ou même entrainer des coûts non supportables pour certaines entreprises. Inversement, les systèmes de compensation, pour lesquels la participation est volontaire, ne peuvent pas entrainer la faillite des entreprises participantes du fait des coûts de MRV : s’ils sont trop élevés, les entreprises ne participeront tout simplement pas. En outre, l'un des intérêts de la mise en place d'un programme de compensation est de révéler des informations sur les possibilités de réduction des émissions, les techniques de surveillance et les coûts. Dans ce contexte, il y a une justification pour la hausse des coûts de MRV afin d'obtenir une meilleure information. Troisièmement, les coûts de surveillance sont aussi directement proportionnels à la rigueur du MRV. En effet un suivi plus précis s’accompagne habituellement par un coût plus important. Le régulateur doit donc faire face à un compromis entre les coûts et la qualité de l’information. Peu de systèmes de comptabilisation du carbone existants contiennent des dispositifs de flexibilité pour adapter les exigences de la précision aux coûts supportés par les parties prenantes. Ces dispositions peuvent prendre la forme de « seuils de minimis » (les niveaux d'émissions en dessous desquels la surveillance et la notification des émissions ne sont pas exigées), ou « seuils de matérialité » (les niveaux de seuil d'erreurs pour lesquels les erreurs sont tolérées lors de la vérification). ... (suite et fin du résumé dans la thèse)This dissertation aims at improving the understanding of the economics of monitoring in climate policy, which is the main problematic of this research work. To this end, this dissertation develops a general analytical framework for the analysis of monitoring, reporting and verification (MRV) in climate policy across several key tradeoffs – such as cost vs. uncertainty – as well as a microeconomic model to assess the impact of monitoring policy choice on the economic and environmental performance of climate policy. While the practical experiences with the most important carbon pricing and management mechanisms, as well as microeconomic modeling highlight that there is no “silver bullet” solution regarding MRV rules in climate policy, this dissertation, nevertheless, draws three key lessons regarding carbon accounting that should help policymakers design “silver bullets” depending on their objectives.First, regarding the stringency of monitoring, it can be concluded that the rules for monitoring uncertainty are rarely exhaustive. With an important exception of direct measurement in the EU ETS, existing carbon accounting systems do not set a requirement on the overall uncertainty of a given source. The CDM monitoring requirements have partly followed the conservativeness principle, mainly through a conservative choice of uncertainty bounds for some IPCC default values as well as for some monitored variables. The microeconomic model developed in this dissertation demonstrates that in the presence of information asymmetry not accounting for monitoring uncertainty leads to suboptimal economic and environmental outcomes of climate policy.Second, it was demonstrated that MRV costs are subject to a strong economy-of-scale effect both across and within different carbon accounting frameworks. Indeed, MRV costs decrease with the comprehensiveness of the perimeter: the larger and the more comprehensive a scheme, the lower the MRV costs. Mandatory schemes must be especially careful with the costs that they impose on regulated entities as these may distort the market – for example by putting higher costs on smaller entities – or even put unbearable burden on some firms. Conversely, offset schemes, in which participation is voluntary, cannot bankrupt participating companies through MRV costs: if they are too high, companies simply do not participate. Moreover, one of the interests of running an offset scheme is to reveal information on abatement opportunities, monitoring techniques and costs. In this context, there is a rationale for higher MRV costs in order to obtain better information.Third, monitoring costs are also directly proportional to MRV stringency, as more accurate monitoring usually comes at an increasing cost. The regulator therefore has to deal with a tradeoff between information quality and monitoring costs. Few existing carbon accounting systems incorporate flexibility provisions to adapt uncertainty requirements to the cost incurred by stakeholders. These provisions may take the form of de minimis thresholds (that is, threshold levels of emissions under which monitoring and reporting are not required), or “materiality thresholds” (that is, threshold levels of errors under which errors are tolerated during verification). They can also take a more continuous form, for example by increasing the cost of compliance or discounting the benefits from carbon credits in proportion to the uncertainty of monitoring. The microeconomic model developed in this dissertation demonstrates that in choosing the monitoring policy to address uncertainty – prescribing the error, setting maximum uncertainty thresholds or applying a discount – the regulator has to balance welfare, risk and undue wealth transfers

10 lessons from 10 years of the CDM

The Clean Development Mechanism (CDM) is the first and by far the largest carbon offset instrument in the world. To date, it is the only market based on an environmental commodity which managed to attract several billions of euros of private capital on an annual basis. Being the first-of-a-kind climate change mitigation instrument, the CDM followed a "learning by doing" pattern undergoing numerous reforms throughout its more than 10-year history. Although the post-2012 fate of the mechanism remains uncertain, one should not "throw out the baby with the bath water" as the lessons from the CDM experience may be useful not only for the CDM reform but also for new market instruments. One of the widely discussed topics is the economic efficiency of the CDM. Despite being largely concentrated on the supply side (93% of all issued credits come from 5 countries), the CDM provided a useful ―search tool‖ to identify new greenhouse gas abatement opportunities although in most cases failed to scale them up across the economies. The lion’s share of the demand for carbon offsets comes from the European Union Emissions Trading System (EU ETS), where the CDM helped companies save millions of euros by reducing emissions where it was the cheapest. With the quantitative restrictions in place, the demand for CDM offsets from projects registered after 2012 will likely dwindle to a few public buyers, dwarfed by the size of supply. The CDM has also raised criticism regarding its environmental integrity. For example, there is strong evidence that HFC-23 destruction projects provided perverse incentives for installations to engage in strategic behavior. Besides, there are concerns over the additionality of some large renewable energy projects, in particular in China and India. The transparency of the framework has allowed identifying loopholes and implementing the reforms that have been ongoing since the inception of the CDM. Finally, the evaluations of the contribution of the CDM to sustainable development are mixed and largely depend on the project type and national circumstances. The principle of national sovereignty dominates the existing sustainability assessment which fully rests on the host country without any standardized criteria or monitoring. These issues have been and keep being addressed in reforms that have not ceased since the inception of the CDM. The gradual introduction of more stringent baselines has been one of the tools used to reinforce environmental integrity. Standardized baselines and positive lists help simplify and speed up the registration of projects, and hence the scaling up of local projects. This paper reviews the CDM’s achievements and challenges and derives 10 key lessons that should be taken into account while reforming the mechanism as well as while designing new instruments to tackle climate change. As the Green Climate Fund is still wondering how to raise the pledged 100 billion dollars until 2020, the CDM recipe for attracting private investments in the billions of euros per year to climate action is worth some attention

Do multilateral development bank trust funds allocate climate finance efficiently?

The Paris Agreement has been celebrated as a breakthrough for international climate policy. However, relatively scant attention has been given to the emergent ecosystem of climate finance facilities that support it. We provide an overview of the rising number of climate-related trust funds at multilateral development banks (MDBs). These funds can be distinguished into mitigation funds and adaptation funds. Some funds have a focus on capacity building activities. To maximize their effect on sustainable development, the different types of funds should follow different resource allocation criteria: For adaptation funds, vulnerability should represent the primary criterion. For mitigation funds, the main criterion should be the emission reduction potential. Capacity building should primarily focus on countries with weak institutions. Using a novel dataset of disbursements of climate-related trust funds, available for the World Bank, we examine whether fund allocations correspond to these expectations, and compare them with those of bilateral donors. We find that while trust funds with a focus on mitigation generally allocate aid in line with efficiency considerations, trust funds with a focus on adaptation do not seem to prioritize the countries most strongly in need, contrary to bilateral aid. Furthermore, capacity building activities do not seem to focus on countries with weak institutions. These findings have important implications for the effectiveness and legitimacy of climate aid to developing countries

Moving from the CDM to "various approaches"

The Clean Development Mechanism (CDM) facilitated the emergence and deployment of low-cost greenhouse gas (GHG) abatement technologies such as destruction of industrial gases and capturing methane from landfills and coal mines. Some of these technologies are now ripe to “graduate” from the CDM into other, more mainstream, economic tools. The first such step was taken in September 2013 when the G20 leaders agreed to phase out HFCs – highly potent greenhouse gases – including HFC-23 that was the focus of 19 CDM projects. A potential HFC-23 abatement fund under the Montreal Protocol could reduce up to 1.8 Gt CO2e by 2020 at a cost of under US$0.2 per ton of CO2e, i.e. much cheaper than the price paid to CDM projects through carbon crediting. The next potential candidate technology to “graduate” from the CDM is the abatement of nitrous oxide (N2O) emissions in the chemical industry, which have already been placed on the agenda of the Montreal Protocol

Review of the experience with monitoring uncertainty requirements in the Clean Development Mechanism

In order to ensure the environmental integrity of carbon offset projects, emission reductions certified under the Clean Development Mechanism (CDM) have to be ‘real, measurable and additional’, which is ensured, inter alia, through the monitoring, reporting and verification (MRV) process. MRV, however, comes at a cost that ranges from several cents to €1.20 and above per tCO2e depending on the project type. This article analyses monitoring uncertainty requirements for carbon offset projects with a particular focus on the trade-off between monitoring stringency and cost. To this end, existing literature is reviewed, overarching monitoring guidelines, as well as the ten most-used methodologies are scrutinized, and finally three case studies are analysed. It is shown that there is indeed a trade-off between the stringency and the cost of monitoring, which if not addressed properly may become a major barrier for the implementation of offset projects in some sectors. It is then demonstrated that this trade-off has not been systematically addressed in the overarching CDM guidelines and that there are only limited incentives to reduce monitoring uncertainty. Some methodologies and calculation tools as well as some other offset standards, however, do incorporate provisions for a trade-off between monitoring costs and stringency. These provisions may take the form of discounting emissions reductions based on the level of monitoring uncertainty – or more implicitly through allowing a project developer to choose between monitoring a given parameter and using a conservative default value.Policy relevanceThe CDM Executive Board acknowledged that monitoring uncertainty has not been treated in a consistent manner and the draft standard on uncertainty was subsequently presented in May 2013. This article supports the implementation of this standard for more comprehensive, yet cost-efficient accounting for monitoring uncertainty in carbon offset projects. Moreover, in the light of the ongoing discussions on the New Market Mechanisms as well as the operationalization of the Green Climate Fund and different national mitigation policies, the CDM experience provides valuable insights with regards to the treatment of monitoring uncertainty and constitutes a solid basis for designing uncertainty requirements for new mechanisms to mitigate climate change

Unlocking private investments in energy efficiency through carbon finance

According to the latest IEA World Energy Outlook, energy efficiency is a “key option” in transition to a low-carbon economy. A decade of experience with the CDM and JI demonstrates that carbon finance can be used as an effective tool to unlock private investments in energy efficiency. Capital investments in offset projects may significantly exceed the expected carbon revenues resulting in an average weighted leverage ratio of 4:1 and 9:1 for the CDM and JI respectively, which is comparable to other international financial instruments. So far carbon finance has been used mostly for large-scale industrial energy efficiency projects in advanced developing countries and economies in transition, although it is increasingly suited to tap into scattered household energy efficiency projects