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

THE WORLD BANK

THE WORLD BANK

Climate Change and theWorld Bank GroupPhase I: An Evaluation of World BankWin-Win Energy Policy Reforms

Climate Change and theWorld Bank GroupPhase I: An Evaluation of World BankWin-Win Energy Policy Reforms

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Climate_cover_ES.qxd:Climate_cover-ES 12/8/08 12:21 PM

Climate Change and the

World Bank Group

Phase I: An Evaluation of World Bank Win-Win Energy Policy Reforms

2008The World Bank

Washington, D.C.http://www.worldbank.org/ieg

—Evaluation Summary—

©2008 The International Bank for Reconstruction and Development / The World Bank1818 H Street NWWashington, DC 20433Telephone: 202-473-1000Internet: www.worldbank.orgE-mail: [email protected]

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Photo credits—Front cover: A coal-run power plant in Tangshan, China, in China’s Hebei Province, on December 9, 2005. Reproduced bypermission from Corbis; photo © Jason Lee/Reuters/Corbis. Back cover: A natural gas flaring tower at Pemex’s Dos Bocas petroleum-exportingcomplex, Mexico. Reproduced by permission of Corbis; photo © Keith Dannemiller/Corbis.

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Foreword

Scientific consensus warns that climate changethreatens to derail development, while business-as-usual development threatens to destabilizethe climate. The World Bank Group hasawakened to the challenge of disarming theseinterlocking risks. But in doing so, it has toconfront areas of possible tension:

• Between a country-focused operational modeland support for global public goods

• Between a global role encompassing devel-oped countries and its focus on developing na-tions

• Among greenhouse gas mitigation, climateadaptation, and near-term growth.

Win-win policies in energy pricing and in non-price energy efficiency have the potential toreconcile national and global goals. They can helpcountries meet a good part of their incrementalenergy needs at low cost, while freeing up fundsfor social protection and increasing resilience tointernational energy price shocks. About a fifth ofthe baseline global increase in energy-related CO2

emissions could be reduced by 2030 throughefficiency measures that pay for themselves, inthe developing world alone.

Policy reforms are needed to unlock thesebenefits. Energy price reform is seldom easy, but2008 market conditions showed the unsustain-ability of energy subsidies, and the Bank is wellplaced to help. Analytic and financial support canpromote socially beneficial and politicallyfeasible options—for instance, redirection ofpoorly targeted energy subsidies to social protec-

tion. The Bank’s investments in energy efficiencyhave often been effective, but they have beenmodest, with little emphasis on policies. There ischange, however, including a recent ramp-up inInternational Finance Corporation investments.Countries are receptive, and Bank Group leader-ship could make a difference to this up-to-nowunder-prioritized area.

Win-win policies will not be enough to meetclients’ energy needs or to decouple develop-ment from emissions. The UN FrameworkConvention on Climate Change stressesdeveloped countries’ responsibilities to reducetheir own emissions and to provide financial andtechnological support to developing countries.Relevant to this is Bank Group experience inusing concessional and carbon finance tosupport clean energy technologies—the subjectof the second phase of the climate evaluation.IEG is also assessing forest sector experience thatbears on reduced emissions from deforestation.

The Bank has had limited direct experience inadaptation, although efforts in disaster preven-tion and weather index insurance are cases thatsuggest consonance with near-term develop-ment goals. Adaptation is the subject of theclimate evaluation’s third phase.

The World Bank Group has a vital role in address-ing the interlinked problems of developmentand climate change. IEG’s three-year program ofevaluation is designed to assist the Bank Groupas it formulates and implements an operationalstrategy in this critical area.

Vinod ThomasDirector- General, Evaluation

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

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Policy Reforms

Climate change threatens to derail development, even as developmentpumps ever-greater quantities of carbon dioxide into an atmospherealready polluted with two centuries of Western emissions. The World

Bank, with a newly-articulated Strategic Framework on Development and Cli-mate Change, must confront these entangled threats in helping its clients tocarve out a sustainable growth path.

But this is known territory— many of the climatechange policies under discussion have closeanalogues in the past. This phase of the evalua-tion, focused on the World Bank (and not theInternational Finance Corporation or theMultilateral Investment Guarantee Agency),assesses the World Bank’s experience with key win- win policies in the energy sector— policiesthat combine gains at the country level withglobally beneficial greenhouse gas (GHG)reductions. The next phase will look across theentire World Bank Group at project- level experi-ence in promoting technologies for renewableenergy and energy efficiency and at some issuesrelated to climate change in the Bank’s transportand forestry portfolios.

Within the range of win- win policies, this reportexamines two that have long been discussed butare more relevant than ever in light of recordenergy prices: removal of energy subsidies andpromotion of end- user energy efficiency. Energysubsidies are expensive, damage the climate, anddisproportionately benefit the well- off. Theirreduction can encourage energy efficiency,increase the attractiveness of renewable energy,and allow more resources to flow to poor peopleand to investments in cleaner power. Thoughsubsidy reduction is never easy, the Bank has a

record of accomplishment in this area, especiallyin the transition countries. About a quarter of Bankenergy projects included attention to price reform.Improvements in the design and implementationof social safety nets can help to rationalize energyprices while protecting the poor.

End- user energy efficiency has long been viewedas a win- win approach with great potential forreducing emissions. It becomes increasinglyattractive as the costs of constructing and fuelingpower plants rise. About 5 percent of the Bank’senergy commitments by value (about 10 percentby number) have gone to specific efficiencyefforts, including end- user efficiency and districtheating. Including a broader range of projectsidentified by management as supporting supply- side energy efficiency would boost the propor-tion above 20 percent by number. Few projectstackled regulatory issues related to end- userefficiency, though the Bank has invested in sometechnical assistance and analytical work. Thishistorical lack of emphasis on energy efficiency isnot unique to the Bank and reflects the complex-ity of pursuing end- user efficiency, a pervasiveset of biases that favor electricity supply overefficiency, inadequate investments in learning,and inattention to energy systems in the wake ofpower sector reform.

Executive Summary

The record levels of energy prices in 2008,although they have been relaxed, provide animpetus for the Bank and its clients to choosemore sustainable long- term trajectories of growth.The mid-2008 oil price was equivalent to the 2006price, plus a $135 per ton tax on carbon dioxide— the kind of level that energy modelers say isnecessary for long- term climate stabilization. Tohelp clients cope with the burden of these prices,and take advantage of the signals they send forsustainability, the Bank can do four things:

1. It can make promotion of energy efficiency apriority, using efficiency investments and poli-cies to adjust to higher prices and construct-ing economies that are more resilient.

2. It can assist countries in removing subsidies byhelping to design and finance programs thatprotect the poor and help others adjust tohigher prices.

3. It can promote a systems approach to energy. 4. And it can motivate and inform these actions,

internally and externally, by supporting bettermeasurement of energy use, expenditures,and impacts.

Goals and ScopeThis evaluation is the first of a series that seekslessons from the World Bank Group’s experienceon how to carve out a sustainable growth path.The World Bank Group has never had an explicitcorporate strategy on climate change againstwhich evaluative assessments could be made.However, a premise of this evaluation series isthat many of the climate- oriented policies andinvestments under discussion have closeanalogues in the past, and thus can be assessed,whether or not they were explicitly oriented toclimate change mitigation.

This report, which introduces the series, focuseson the World Bank (International Bank forReconstruction and Development and Interna-tional Development Association) and not on theInternational Finance Corporation (IFC) or theMultilateral Investment Guarantee Agency(MIGA). It assesses its experience with key win- win policies in the energy sector: removal ofenergy subsidies and promotion of end- user

energy efficiency. The next phase looks at theexpanding project- level experience of the Bankand the IFC in promoting technologies forrenewable energy and energy efficiency; it alsoaddresses the role of carbon finance. A parallelstudy examines the role of forests in climatemitigation. The climate evaluation’s final phasewill look at adaptation to climate change.

MotivationOperationally, the World Bank has pursued threebroad lines of action in promoting the mitigationof GHG emissions, the main contributor toclimate change. First, it has mobilized conces-sional finance from the Global EnvironmentFacility (GEF) and carbon finance from the CleanDevelopment Mechanism (CDM) to promoterenewable energy and other GHG- reducing activi-ties. Second, and to a much more limited extent,it has used GEF funds to stimulate the develop-ment of noncommercial technologies. Third, andthe subject of this evaluation, it has supported win- win policies and projects— sometimes withan explicit climate motivation, often without.These actions not only provide global benefits inreducing GHGs, but also pay for themselves inpurely domestic side benefits such as reduced fuelexpenditure or improved air quality. The win- windesignation obscures the costs that these policiesmay impose on particular groups, even whilebenefiting a nation as a whole. This presentschallenges for design and implementation.

Two sets of win- win policies are perennial topicsof discussion in the energy sector: reduction insubsidies and energyefficiency policies, particu-larly those relating to end- user efficiency. Thisreport looks at these, and at another apparently win- win topic: gas flaring. Flaring is interestingbecause of its magnitude, the links to pricingpolicy and to carbon finance, and the existenceof a World Bank–led initiative to reduce flaring.

Findings

Development spurs emissions.

A 1 percent increase in per capita income induces— on average and with exceptions— a 1

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C L I M AT E C H A N G E A N D T H E WO R L D B A N K G R O U P

per cent increase in GHG emissions. Hence, to theextent that the World Bank is successful in support-ing broad- based growth, it will aggravate climate change.

But there is no significant trade- off between climatechange mitigation and energy access for the poorest.

Basic electricity services for the world’sunconnected households, under the mostunfavorable assumptions, would add only a thirdof a percent to global GHG emissions, and muchless if renewable energy and efficient light bulbscould be deployed. The welfare benefits ofelectricity access are on the order of $0.50 to $1per kilowatt- hour, while a stringent valuation ofthe corresponding carbon damages, in a worst- case scenario, is a few cents per kilowatt- hour.

Country policies can shape a low- carbon growthpath.

Although there is a strong link between per capitaincome and energy- related GHG emissions, thereis a sevenfold variation between the most andleast emissions- intensive countries at a givenincome level. Reliance on hydropower is part ofthe story behind these differences, but fuelpricing is another. High subsidizers— thosewhose diesel prices are less than half the worldmarket rate— emit about twice as much percapita as other countries with similar incomelevels. And countries with long- standing fueltaxes, such as the United Kingdom, have evolvedmore energy- efficient transport and land use.

Energy subsidies are large, burdensome, regressive,and damage the climate.

The International Energy Agency’s 2005 estimateof a quarter-trillion dollars in subsidies each yearoutside the Organisation for Economic Co-operation and Development (OECD) mayunderstate the current situation. While poorpeople receive some of these benefits, overall thebenefits are skewed to wealthier groups and oftendwarf more progressive public expenditure. Fuelsubsidies alone are 2 to 7.5 times as large as publicspending on health in Bangladesh, Ecuador, the

Arab Republic of Egypt, India, Indonesia, Morocco,Pakistan, Turkmenistan, República Bolivariana deVenezuela, and the Republic of Yemen. At the sametime, subsidies encourage inefficient, carbon-intensive use of energy and build constituenciesfor this inefficiency.

The Bank has supported more than 250 operations forenergy pricing reform.

Success has been achieved in the transition countries— in Romania and Ukraine, forexample, where energy prices were adjustedtoward market levels, and the intensity of carbondioxide emissions dropped substantially. Subsidyremoval can threaten the poor, however. Recentefforts to assess poverty and welfare impactssystematically appear to have informed thedesign and implementation of price reformefforts, though not necessarily with direct Bankinvolvement. Examples include Ghana andIndonesia, where compensatory measures weredeployed in connection with fuel price rises.

The Bank has rarely coordinated efficiency improve-ments with subsidy reductions to lighten the imme -diate adjustment burden on energy users.

An exception is the China Heat Reform andBuilding Efficiency Project, which links improvedinsulation with heat pricing. A growing numberof projects sponsor nationwide distribution ofcompact fluorescent light bulbs, but this hasbeen done in response to power shortages(Rwanda, Uganda) or to stanch utility losses(Argentina, Vietnam), rather than to facilitatesubsidy reduction.

Despite emphasis on energy efficiency in Bankstatements and in Country Assistance Strategies(CASs), the volume and policy orientation ofIBRD/IDA efficiency lending has been modest.

Although the IFC has recently increased itsinvestments in energyefficiency projects, WorldBank commitments for efficiency have beenabout 5 percent by value of energy finance over1991–2007. This includes investments in demandside efficiency and district heating, and

E X E C UT I V E S U M M A RY

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may also include some supply- side efficiencyinvestments. By this definition, about 1 in 10projects by number involve energy efficiency.Including a broader range of projects identifiedby management as supporting supply- sideenergy efficiency would boost the proportionabove 20 percent by number over the period1998–2007. Globally only about 34 projectsundertaken over the 1996–2007 period hadcomponents oriented to demandside energyefficiency policy. Among these, many attempts topromote efficiency have had limited successbecause the Bank has engaged with utilities,which have limited incentives to restrict electric-ity sales.

There are several reasons why end- user energyefficiency projects, and especially policy- orientedprojects, appear to be under- emphasized in theBank’s portfolio.

The Bank has carried out some successful andinnovative efficiency projects. But internal Bankincentives work against these projects becausethey are often small in scale, demanding of stafftime and preparation funds, and may requirepersistent client engagement over a period ofyears. There is a general tendency to preferinvestments in power generation, which arevisible and easily understood, over investments inefficiency, which are less visible, involve humanbehavior rather than electrical engineering, andwhose efficacy is harder to measure. A generalneglect of rigorous monitoring and evaluationreinforces the negative view of efficiency.

The Bank- hosted Global Gas Flaring ReductionPartnership (GGFR) has fostered dialogue on gasflaring, but it is difficult to assess its impact onflaring activity to date.

Associated gas (a by- product of oil production) isoften wastefully vented or flared, adding morethan 400 million tons of carbon dioxide equiva-lent to the atmosphere annually, or about 1percent of global emissions. A modestly funded public- private partnership, the GGFR hassucceeded in highlighting the issue, promotingdialogue, securing agreement on a voluntary

standard for flaring reduction, and sponsoringuseful diagnostic studies. But only four membercountries have adopted the standard. The GGFRhas emphasized carbon finance as a remedy forflaring, but the use of project- level carbonfinance is a mere bandage for policy ailments thatrequire a more fundamental cure.

RecommendationsIn mid-2008, real energy prices were at a recordhigh. While this is burdensome for energy users,it opens an opportunity for the Bank to supportclients in making a transition to a long- termsustainable growth path that is resilient to energyprice volatility, entails less local environmentaldamage, and is a nationally appropriate contribu-tion to global mitigation efforts.

Clearly the World Bank needs to focus its effortsstrategically on areas of its comparativeadvantage. This would include supporting theprovision of public goods and promoting policyand institutional reform at the country level.Furthermore, the Bank can achieve the greatestleverage by promoting policies that catalyzeprivate sector investments in renewable energyand energy efficiency, including those supportedby IFC and MIGA.

The analysis in this report supports the following recommendations:

Systematically promote the removal of energysubsidies, easing social and political economyconcerns by providing technical assistance andpolicy advice to help reforming client countries findeffective solutions, and analytical work demonstrat-ing the cost and distributional impact of removal ofsuch subsidies and of building effective, broad- based safety nets.

Energy price reform can endanger poor peopleand arouse the opposition of groups used to lowprices, thereby posing political risks. But failureto reform can be worse, diverting public fundsfrom investments that fight poverty and foster -ing an inefficient economy increasingly exposedto energy shocks. And reform need not be under -taken overnight. The Bank can provide assistance

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in charting and financing adjustment paths thatare politically, socially, and environmentallysustainable. Factoring political economy into thedesign of reforms and supporting better- targeted,more effective social protection systems will beelements of this approach.

Emphasize policies that induce improvement inenergy efficiency as a way of reducing the burden ofthe transition to market- based energy prices.

Historically, energy efficiency has received rhetori-cal support but garnered only a small share offinancial support or policy attention. This isbeginning to change with such moves as China’scommitment to drastically reduce its energyintensity and India’s Energy Conservation Act. Butthe Bank can do much more to help clients pursuethis agenda. If a real reorientation to energyefficiency and renewable energy is to occur, theBank’s internal incentive system needs to bereshaped. Instead of targeting dollar growth inlending for energy efficiency (which may skeweffort away from the high- leverage, low- costinterventions), it needs to find indicators that moredirectly reflect energy savings and harness them tocountry strategies and project decisions. It needsalso to patiently support longer, more staff- intensive analysis and tech nical assistance activities.Increased funding for preparation, policy dialogue,analysis, and technical assistance is required.

Promote a systems approach by providing incentivesto address climate change issues through cross- sectoral approaches and teams at the country level,and structured interaction between the Energy andEnvironment Sector Boards.

To tackle problems of climate change mitigationand adaptation, the Bank and its clients need tothink, organize, and act beyond the facility level,and outside subsectoral and sectoral confines. Oneavenue for this is through greater attention tosystemwide energy planning. Integrated resourceplanning, once in vogue, has been largelyabandoned in the wake of power sector privatiza-tion and unbundling. Yet current planningmethods are inadequate in integrating considera-tions of end- use efficiency and in balancing the

risks of volatile fuel prices and weather- sensitiveelectricity output from wind and hydropowerplants. Water management, urban management,and social safety nets are other areas where cross- sectoral collaboration is essential to promoting win- win policies and programs.

Invest more in improving metrics and monitoring formotivation and learning— at the global, country, andproject levels.

Good information can motivate and guide action.

First, building on the Bank’s current collabora-tion with the International Energy Agency onenergy efficiency indicators, the Bank could setup an Energy Scoreboard that will regularlycompile up- to- date standardized information onenergy prices, collection rates, subsidies,policies, and performance data at the national,subnational, and project levels. Borrowers coulduse indicators for benchmarking; in the designand implementation of country strategies,including sectoral and cross- sectoral policies;and in assessing Bank performance.

Second, more rigorous economic and environ-mental assessment is needed for energy invest-ments and those that release or prevent carbonemissions. These assessments should draw onenergy prices collected for the Scoreboard;account for externalities, including the net impacton GHG emissions; and account for price volatil-ity. Investment projects should also be assessed,qualitatively, on a diffusion index, which wouldindicate the expected catalytic effect of the invest-ment in subsequent similar projects. It isdesirable to complement project-based analysiswith assessment of indirect and policy-relatedimpacts, which could be much larger.

Third, monitoring and evaluation of energyinterventions continue to need more attention. Large- scale distribution of compact fluorescentlight bulbs is one example of an intervention thatis well suited to impact analysis and where atimely analysis could be important in informingmassive scale- up activities.

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

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Management Response

Management welcomes the evaluation by the Independent Evalua-tion Group (IEG) of some of the World Bank’s experience with ”win- win” energy policy reforms, which constitute an important but not

exhaustive set of activities within the wider suite of World Bank Group effortson the energy front.

It is useful to take stock of progress on the win- win reforms as defined by IEG, as they are animportant element of the World Bank Group’svision to contribute to inclusive and sustainable globalization— to help reduce poverty, enhancegrowth with care for the environment, andexpand individual opportunity. In this context,management particularly would welcome thepromised second phase of IEG’s evaluation,covering the expanding project- level experienceof the Bank and International Finance Corpora-tion (IFC) in promoting renewable energy,energy efficiency, and carbon finance, theabsence of which precludes a comprehensiveassessment of the focus and success of WorldBank Group efforts on the energy front.

Overview of Response Management concurs with several aspects of IEG’smain findings, many of which reinforce importantmessages already captured in the Bank’s energysector practices or in the findings from Bankeconomic and sector work, internal reviews and self- evaluation, and emerging lessons fromoperational experience across the World BankGroup. At the same time, management takes issuewith the evaluation scope of IEG’s report; itsdefinition of win- win energy opportunities; thegaps in evaluated areas; and the use, in certaincases, of findings to draw overly broad conclu-sions or recommendations, such as promotingthe use of integrated resource planning by regula-tors of supply- side energy entities. Therefore, inseveral respects, management differs with IEG’sfindings and recommendations.

Key Issues of Agreement and DivergenceThis management response first outlines the areasin which management broadly agrees with theanalysis in the review, noting, however, areaswhere IEG could have given a fuller account ofefforts the World Bank has made or is making. Itthen discusses areas in which managementbelieves that IEG has drawn conclusions from ananalysis based on limited coverage or that do notfully take into account the underlying context.

Areas of AgreementManagement agrees with the importance ofenergy efficiency and energy pricing in the Bank’swork and the need for strong collaboration acrosssectors on energy policy issues. However,management believes that the report does notadequately reflect the considerable work theBank has undertaken to address energyefficiency. The Bank’s strong involvement inenergy efficiency began in the late 1970s/early1980s in response to oil price shocks. Althoughinterest in energy efficiency languished after thesubsequent fall in oil prices, it was rekindled inthe early 1990s when Eastern European andformer Soviet Union countries became activeborrowers. During the 1990s, the Bank sup -ported energy efficiency reforms in Europe andCentral Asia Region countries through a combina-tion of technical assistance, policy loans, andinvestment projects.1 The role of energy efficiencywas further reinforced by the Bank’s Fuel forThought (World Bank: Washington, DC, 2000),which pushed for market- based approaches toenergy efficiency.

Post- Bonn Efforts. The World Bank Group has followed- up on its commitment made at the2004 Bonn International Conference onRenewable Energy to increase annual energyefficiency and new renewable energy lending by20 percent, starting in fiscal year 2005. Indeed,average fiscal 2005-07 energyefficiency commit-ments have more than doubled compared withthe previous three- year period. The World Bankcontinues to scale- up energy efficiency work inthe energy sector. Staffing- up to increase theskills base is well under way in both the anchorand operational units. Energy efficiency special-ists have been/are being hired by Regional units,Carbon Finance, and the Energy Sector Manage-ment Assistance Program (ESMAP).

Areas of DivergenceManagement believes that IEG has drawn conclu-sions from an analysis based on limited coverageor that do not fully take into account the underly-ing context. Management is concerned thatlimitations on both definitions and the scope ofIEG’s report open the way to mischaracterizationof the extent and impact of World Bank Groupeffort on energy efficiency.

Circumscribed Scope. The evaluation scope ofIEG’s report is circumscribed, incorporating onlyInternational Bank for Reconstruction andDevelopment (IBRD) and International Develop-ment Association (IDA) energyefficiency policy,energy pricing, and gas flaring initiatives, whileexcluding IFC’s substantive role (except, veryoccasionally, at the margins). Managementobserves that excluding IFC programs and activi-ties that target the key private sector role inpromoting energy efficiency is a major shortcom-ing. IFC activities encompass a range of initiatives(such as the Efficient Lighting Initiative) andsustainability advisory services. By focusingpiecemeal on Bank policy experience anddeferring project- level experience to a secondphase of review, IEG has not taken into accountthat the efforts of each of the World BankGroup’s components are intended to comple-ment one another and build on respectivecomparative advantages and synergies, and it hasprecluded a comprehensive evaluation of the

energy efficiency experience in the World BankGroup. As a result, management observes thatsome of the report’s Phase 1 findings paint anincomplete picture of World Bank and WorldBank Group efforts on the energy front.

Definition of Win- Win. IEG’s report uses a narrowdefinition of win- win energy opportunities.Management is concerned that the reportfocuses on, and draws conclusions from, onedimension of energy efficiency (end- user energyefficiency), while not adequately incorporatingother important win- win energy opportunities,in particular, supply- side energy efficiency(which covers power plant rehabilitation toimprove efficiency and also electricity transmis-sion and distribution system loss reduction),renewable energy, and fuel switching.

Indicator. The IEG report uses an indicator that islimited to “specific efficiency efforts, includingend-user efficiency and district heating.” Thisopens the way to conclusions and perceptions thatmay be misleading, including that only about 1 in10 World Bank energy projects involves energyefficiency. However, as noted in the IEG report,“including a broader range of projects identified bymanagement as supporting supply-side energyefficiency would boost the proportion above 20percent by number.”2

Management, and certainly the clients of theWorld Bank Group, would have benefited from amore comprehensive analysis and an indicatorthat included all energy supply- side efficiency,technical assistance, and development policylending, as well as IFC investments in energy efficiency.

Management Action Record. Management’s specificresponses to IEG recommendations are outlinedin the attached draft management action record.

Notes1. The Bank's energy efficiency work in the 1990s was

guided by the 1993 policy paper, "Energy Efficiency and

Conservation in the Developing World: The World

Bank's Role." (World Bank: Washington, DC, 1993) and

the companion, “Power & Efficiency—Status Report

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M A N AG E M E N T R E S P O N S E

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on the Bank’s Policy and IFC’s Activities” (Joint World

Bank/IFC seminar, July 7, 1994).

2. Management notes that the definitions underly-

ing the figures it shared with IEG reflect, as well as en-

ergy efficiency captured by IEG, all World Bank lending

for (i) supply-side energy-efficiency measures, includ-

ing power generation plant rehabilitation, transmission

and distribution loss reduction, and energy sector tech-

nical assistance with pricing covenants, and (ii) devel-

opment policy lending with energy price reform.

On this basis, IEG observes that it may need to re-

vise the language in order to describe more precisely

the measures cited in the report and the differences be-

tween them. IEG acknowledges that alternative defini-

tions of energy efficiency are possible. IEG has reported

the proportion of energy efficiency projects using both

stricter and broader definitions. The latter used the man-

agement-supplied information to calculate the pro-

portion of projects incorporating plant rehabilitation and

transmission and distribution measures. IEG has re-

ported, separately, the proportion of projects involving

price reform.

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Systematically promote the removal of energy subsidies,

easing social and political economy concerns by provid-

ing technical assistance and policy advice to help re-

forming client countries find effective solutions, and

analytical work demonstrating the cost and distributional

impact of removal of such subsidies and of building ef-

fective, broad- based safety nets.

Energy price reform, never easy or painless, can pose social and

political economy risks in client countries. But the Bank can help

provoke and promote reforms by providing clients with assistance

in charting and financing adjustment paths that are politically,

socially, and environmentally sustainable.

One way to do this is for the Bank to continue to develop and share

knowledge on the use of cash transfer systems or other social

protection programs as potentially superior alternatives to fuel

subsidies in assisting the poor. This would include systematic

analyses of the distributional impact of energy subsidies. Timely

monitoring and analysis of energy use and expenditure, at the

household and firm levels, will also be important in policy design,

in securing public support, and in detecting and repairing holes

in the safety net.

Emphasize policies that induce improvement in energy ef-

ficiency as a way of reducing the burden of transition to

market- based energy prices.

Cost- reflective prices for energy boost the returns to efficiency,

but the Bank should support country policies that allow house-

holds and firms to exploit efficiency opportunities. Conversely,

the deployment of energy- efficient equipment such as compact

fluorescent lights can be used as a device for cushioning the im-

pact of price increases. The Bank should explore innovative ways

to finance efficiency (and renewable energy) investments in the

face of fuel price volatility.

Agreed; work is already ongoing.

The Bank continues to work with client countries to address the

issue of energy subsidies. Technical assistance and policy advice

are provided, as requested by our client countries. The Bank fo-

cuses on the legal and regulatory mechanisms needed to sup-

port sustainable energy pricing reforms.

Energy staff will continue to work with Poverty Reduction and Eco-

nomic Management Network and Human Development Network

staff (for example, Guidance for Responses from the Human De-

velopment Sectors to Rising Food and Fuel Prices, World Bank, HDN:

Washington, DC, 2008) to develop and apply social safety nets, in-

cluding cash transfers, designed to protect the poor from the im-

pact of energy price adjustments. A regulatory thematic group has

been established in the Bank to foster dissemination of lessons

learned. These lessons will be applied, taking into account the

unique circumstances in client countries. When requested, the Bank

provides support to enable countries to monitor and analyze en-

ergy use so that findings can be applied to their energy policies.

Partially agreed; work is already ongoing.

The Bank has established an Energy Efficiency for Sustainable

Development program to help guide and scale- up energy efficiency

activities. It is implementing the first step of this program, to in-

crease the staffing with energy efficiency experience, in ESMAP,

the Energy Anchor Unit, and the Regions. This effort is comple-

mented by a learning program developed by the Bank’s energy

efficiency thematic group, under the oversight of the Energy and

Mining Sector Board. Another step is the development of programs

and projects at the country/policy level, the industry level, and

the equipment level to ensure that a broad- based implementa-

tion program evolves.

Management Action Record

Recommendation Management Response

M A N AG E M E N T R E S P O N S E

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In order to strengthen internal incentives toward promotion of

energy efficiency, the Bank should develop appropriate metrics,

such as indicators that more directly reflect energy savings, in-

stead of dollar growth targets in lending for energy efficiency

(which may distort effort away from the high- leverage, low- cost

interventions). These indicators, in turn, need to be harnessed to

country strategies and project decisions. All of these efforts are

likely to call for increased funding for preparation, policy dialogue,

analysis, and technical assistance rather than lending.

Promote a systems approach by providing incentives to ad-

dress climate change issues through cross- sectoral ap-

proaches, teams at the country level, and structured

interaction between the Energy and Environment Sector

Boards.

Helping clients reform will require a systems view, such as look-

ing at the power system as a whole; looking at energy subsidies

as just one, undesirable, part of a social protection system; and

looking at the connections between water and power

management.

To be effective the Bank needs to break down sectoral silos and

encourage cross- sector approaches and teams. This will require

championship by country directors and vice- presidents, to pro-

mote incentives such as supporting capacity building for power

system regulators in integrated resource planning, and using

the Clean Technology Fund to support public systems that will

catalyze widespread investments.

To foster World Bank Group support for energy efficiency, the draft

“Development and Climate Change: A Strategic Framework for

Climate Change and Development” (World Bank: Washington, DC,

2008) has proposed an initiative to screen the project pipeline

for energy efficiency potential early in the project design phase.

The Bank is working with the donor community to: (i) increase the

financial support needed to intensify energy efficiency efforts; (ii)

increase low- cost funding to support energy efficiency and renew-

able energy programs; and (iii) broaden the support from partners

in implementing a renewable energy and energy efficiency program.

In terms of internal incentives, the discussion on developing ap-

propriate metrics has been ongoing with International Energy

Agency and with UN Energy, but to date it has been inconclusive.

Given the inconclusive nature of the discussion to date, man-

agement is not prepared to agree with establishing new metrics

that focus solely on energy efficiency. The World Bank Group has

committed to accelerate lending for new renewable energy and

energy efficiency to 30 percent per annum over the next three

years, a 50 percent increase over the 2004 Bonn commitment

(which it has consistently met since that time).


The Bank will continue to use a system- wide approach in re-

viewing projects and programs.

Most Regions and many country teams have already created cli-

mate change teams of staff from several sectors to promote

synergies, and are developing cross- sectoral business strategies

to integrate climate change considerations. The World Bank

Group established a Climate Change Management Group as a

focal point to discuss cross- sectoral issues and promote synergies.

The Bank supports regulatory capacity building, drawing on les-

sons learned from successful cases accomplished to date. On the

basis of previous experience, management disagrees with the

proposed use of integrated resource planning, as it is unconvinced



x v i


Structured interaction of the Energy and Environment Sector

Boards, initiated with ad hoc groups to address specific cross-

sectoral challenges, could move the Bank closer toward main-

streaming sustainable development.

Invest more in improving metrics and monitoring for mo-

tivation and learning at the global, country, and project

levels.

Good information can motivate and guide action. One particularly

useful global initiative for the World Bank would be to collabo-

rate with the International Energy Agency or other partners to set

up an Energy Scorecard that would compile up- to- date and reg-

ular standardized information on efficiency indicators, energy

prices, policies, and subsidies at the national and sectoral lev-

els. Indicators could be used by borrowers for benchmarking; in

the design and implementation of country strategies, including

sectoral and cross- sectoral policies; and in assessing Bank per-

formance in assisting countries.

At the national level, the Bank should support integration of

household and firm surveys with energy consumption and access

information to lay the foundation for assessing impacts of price

rises and mitigatory measures, as well as planning for improved

access.

At the project level, the Bank should invest in rapid- feedback mon-

itoring and impact evaluation of efficiency projects and policies.

of the effectiveness of the use of integrated resource planning

by either supply- side entities or their regulators.

However, the Bank supports the use of broad- based planning tools

by policy makers to support the implementation of policies in the

legal and regulatory framework.

The Bank is currently considering large- scale responses to

demandside issues using new funding for low- carbon tech-

nologies when the funds become available.

The merging of infrastructure and environment into a common

vice- presidency has facilitated interaction at the sector boards

and thematic working groups.


The Bank has been working with the International Energy Agency

on collecting energy efficiency–related information in pilot countries

for two years, with limited success. Management does not commit

to the idea of establishing a centrally maintained Energy Scorecard.

Rather, the focus of our efforts is now on helping client countries

establish their capacity to undertake the data collection exercise in

a manner that targets both effective implementation and related

policy- making guidance. Without this capacity and country willing-

ness to participate in and lead this initiative, it will not be sustained.

The Bank is also looking into possible new, innovative knowledge-

sharing mechanisms to facilitate sharing lessons learned.

The Bank lacks the resources to maintain a comprehensive and

reliable database on energy policies, prices, subsidies, and en-

ergy efficiency at the national level. Regional organizations pro-

vide part of this information, which the Bank selectively draws

upon, depending on the information’s reliability.

The Bank, with ESMAP support, has led in improving Living Stan-

dards Measurement Survey (LSMS) instruments for increased col-

lection of energy data as part of LSMS surveys.

The Bank will include rapid- feedback and monitoring and impact

evaluation of efficiency projects when requested by our borrowers.



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Background On December 17, 2007, the Committee consid-ered a study entitled The Welfare Impact ofRural Electrification: A Reassessment of theCosts and Benefits, prepared by IEG. TheCommittee considered the IEG report Support-ing Environmental Sustainability— An Evalua-tion of World Bank Group Experience,1990–2007, and draft management response onJune 18, 2008. Recently, the Committeediscussed the draft Strategic Framework onClimate Change for the World Bank Group at itsmeeting of August 6, 2008.

IEG Evaluation IEG introduced the current evaluation report aspart of a phased series on climate change.Subsequent phases will address issues of cleantechnology investments, carbon finance, andadaptation, and will look across the World BankGroup. This Phase I evaluation assessed theWorld Bank’s experience with key win- winpolicies in the energy sector— those thatcombine gains at the country level with globallybeneficial greenhouse gas (GHG) reductions.The analysis of this report supported the follow-ing recommendations:

• Systematically promote the removal of energysubsidies, easing social and political economyconcerns by providing technical assistance and

policy advice to help reforming client countriesfind effective, broad- based safety nets.

• Emphasize policies that induce improvementsin energy efficiency as a way of reducing theburden of transition to market- based energy prices.

• Promote a systems approach by providing in-centives to address climate change issuesthrough cross- sectoral approaches and teamsat the country level and structured interactionbetween the energy and environment sector boards.

• Invest more in improving metrics and moni-toring for motivation and learning at the global,country, and project levels.

Draft Management ResponseManagement agreed with the importance ofenergy efficiency and energy pricing in theBank’s work and the need for collaborationacross sectors on energy policy issues. At thesame time, management believes that IEG hasdrawn conclusions from an incomplete analysisbased on limited coverage and that do not fullytake into account the underlying context.Management expressed concerns that the IEGreport does not cover the full range of the WorldBank Group’s programs and activities (forexample, assisting the private sector in promot-ing energy efficiency) and that it focuses on onesubset of win- win energy opportunities and

Chairperson’s Summary: Committee on Development

Effectiveness (CODE)

On August 27, 2008, the Committee on Development Effectiveness(CODE) met to consider the report entitled Climate Change and theWorld Bank Group— Phase I: An Evaluation of World Bank Win- Win

Energy Policy Reform prepared by the Independent Evaluation Group (IEG),together with the draft management response.

excludes others, such as energy conservation,load management, and supply- side efficiencyinvestments, as well as renewable energies andfuel switching.

Overall ConclusionsThe Committee commended IEG for anexcellent report, which members found veryinformative, and acknowledged that the trade- offs of undertaking the evaluation in appropri-ate, sequenced parts as had been outlined andagreed in the Approach Paper. Nevertheless, itwas essential that strategic communication becarefully designed to avoid misleading or unfairinterpretations of the findings. The plan for acapstone paper covering all three phases wasendorsed. There was strong support for deepen-ing the Bank’s engagement with clients onenergy pricing policies, though there wasrecognition that it is a complex issue encompass-ing economic, environmental, social, and politi-cal aspects that were likely to vary country bycountry and over time. The Bank could play auseful role in sharing best practices and distillinglessons of experience, particularly on energytaxes and subsidies and on pricing policies forrenewable energy to help countries institutesocially and environmentally sustainable pricing.

The general sentiment was for greater emphasisthan hitherto on energy pricing policy, andenergy efficiency in a broad sense. In this regard,the issues of external institutional incentives andinternal incentives resonated with severalattendees who recommended that managementpay greater attention to this matter, includingone suggestion to consider organizationalchanges (noting parenthetically that this issue’srelevance goes well beyond the energy sector).While noting management’s point about dividinglabor appropriately with other agencies such asthe International Energy Agency (IEA), the broadsentiment at the meeting was supportive of IEG’srecommendations that the Bank be moreinvolved in developing metrics and performanceindicators. Indeed, several speakers added thatanalytical and design work in this regard shouldbe at a global level, encompassing developedcountries as well. Thus, the World Bank Group

could play a very useful role in making high- quality information and a balanced monitoringframework for a global public good.

Next StepsThe report is the first of a three- part IEG evalua-tion on Climate Change and the World BankGroup, and focuses on IBRD- IDA experience. Inresponse to the Committee’s request, IEGcommitted to clarify the scope, content, andcontext of the Phase I report as part of itspreparation for publication. This includes clarify-ing how it fits in the three- phase evaluation byIEG (where the second phase will look at theWorld Bank Group’s project- level experience inpromoting technologies for renewable energy,energy efficiency, and transport; and the thirdphase will look at adaptation issues). IEG alsocommitted to prepare a capstone papersummarizing the three phases at the conclusionof the series; the Committee will considerwhether or not to recommend this paper for afull Board discussion.

Main Issues Raised at the MeetingThe principal issues discussed were the following:

Scope of IEG ReportSome speakers would have liked to have seenimmediate treatment (in the current phase) of abroader range of topics, including energy conser-vation and energy access; supply- side in additionto demandside efficiency; discussion of new andadditional financing, particularly for technologyand equipment; discussion of additional energysources, including biofuel or nuclear; coverageand targeted analysis of Bank support for adapta-tion; and extension of the evaluation beyondenergy to forestry, transport, and agricultureissues. One member agreed with IEG’srecommendations but felt that further thoughtshould be given on how to implement them.

IEG’s definition of win- win (or no-regret)policies and projects offering potential gains atthe country level aligned to global interest (forexample, reduction in GHG) drew somecomments. One member felt the report could

x v i i i


have expanded this concept to consider environ-mental taxation and subsidies for renewableenergy. Some others underscored that the papershould have given more emphasis to the princi-ple of “common but differentiated responsibili-ties and respective capacities” in emissions andin additional financing, rather than focusing onsavings from removal of subsidies. In this regard,a member noted that the poorest countries,which emit only a tiny fraction of the per capitaemissions of developed countries, will be dispro-portionately affected by climate change. At thesame time, the need to address subsidyreductions and energy efficiency in developedcountries was raised by another speaker.

Some members stressed the importance ofbroadening the evaluation to World Bank Groupactivities, including synergies between institu-tions. One speaker considered that the structureof IEG’s proposed suite of climate- relatedanalyses would be incomplete without explicitlyaddressing the GHG implications of the BankGroup’s engagements to help developingcountries reform their power sectors. Thisspeaker suggested that IEG should evaluate thepositive and negative links between different power sector reforms and low- carbon electricityservices as part of the second phase of its climateevaluation. IEG said that Phase I focused mainlyon the World Bank, but the next phase willcertainly include the International FinanceCorporation and the Multilateral InvestmentGuarantee Agency. A few members suggested anappropriate communication strategy for dissemi-nating the IEG three- phased review in a compre-hensive manner to avoid misunderstandings. Assuggested by some speakers, IEG agreed tohighlight, during the dissemination of each phaseof the report, that it is part of a broader review.

Bank’s AssistanceThe Bank was encouraged to deepen its engage-ment with countries through policy dialogue andto support them to pursue appropriate regulatoryand institutional settings. Some speakers stressedthe importance of adjusting the internal (for staffand management) and external (countries, Bank,and development partners) institutional incentive

system. However, they also cautioned about theneed to consider political economy considera-tions, as well as market failure and institutionalconstraints in client countries. A question wasraised about the adequacy of the Bank’s resourcesas well as organizational and operational capabili-ties to address the challenges of policy dialogueand reforms. In addition, one member stressedthe need to balance the emphasis betweensoftware (price reform and regulatory framework)and hardware (energyefficiency equipment).Management affirmed the Bank’s internal capacityto provide a full package: 200 experts in thematicteams and cross- sectoral teams in the Regions,offering not only lending but also technicalassistance, as well as social safety nets and policy advice.

Subsidies and Energy PricingThere was general consensus on the need to bemindful of the political challenges of subsidiesand pricing reforms, as well as economic andsocial dimensions at the national and regionallevels. Speakers agreed that more emphasisshould be given to removal of energy subsidiesand were not surprised by IEG findings thatsubsidies were a poorly monitored drag on theeconomies of developing countries. They alsostressed the importance of supporting energypricing reform, an area recommended by IEG forgreater emphasis. On price reform, theimportance of diversity of reform packages toaddress country- specific circumstances; of agradual approach to complement progress ininstitutional development; of finding windows ofopportunity for analytical work and policydialogue to motivate reform; and of clientownership were noted. It was also added that theadjustment of prices to market level should takeinto account vulnerable groups in relation to theother interests vested in the society, and theneed for appropriate compensation systems.

Speakers encouraged the Bank to disseminatelessons learned, good practices, and guidelines,as well as more analytic work on implementingvarious reforms including fiscal sustainability, cross- subsidization, distributional impact, and cap- and- trade schemes. Management indicated

C H A I R P E R S O N ’ S S U M M A RY: C O M M I T T E E O N D E V E L O P M E N T E F E C T I V E N E S S ( C O D E )

x i x

that the Bank uses a number of instruments toappreciate the political economy, such as Povertyand Social Impact Analyses. Management alsonoted that the Organisation for Economic Co- operation and Development (OECD) has donework on best practices on environmental taxationand cap- and- trade that the Bank is using in itsanalysis. Some speakers stressed the importanceof addressing energy subsidies analysis andenergy pricing reform in the new StrategicFramework on Climate Change and Develop-ment (SFCCD), which management indicatedwould be addressed in the full SFCCD paper.

Efficiency Policies Some speakers agreed with IEG on the need forthe Bank to systematically encourage more energy-efficiency activities in client countries. Manage-ment agreed, and stated that the full range ofinterventions, including the supply side of energyefficiency (loss reduction in distribution, transmis-sion, and generation), and alternatives such asbuses and public transportation systems need tobe taken into account, depending on the country- specific circumstances. While acknowledging theimportance of supply- side efficiency, IEG stressedthat demandside efficiency measures have beenviewed by recent studies as offering the largestopportunities for energy savings and emissions reductions— larger than those offered by supply- side measures. Demand- side and end- useefficiency require policy attention because ofunderlying market failures and have been repeat-edly stressed in Bank policy documents.

Metrics and Monitoring Several speakers concurred with IEG’s recommen-dation that the Bank should work toward develop-ing appropriate metrics, while recognizingmanagement’s point that data collection would becostly. A few speakers pointed to a 1999 ESMAP“scorecard” publication as precedent. Additionally,some speakers stressed the need for the Bank toplay an advocacy role in promoting a morebalanced global monitoring mechanism by includ-ing indicators such as mobilizing financial andtechnological support to developing countries,while the political sensitivities and technicalcomplexities of carbon accounting were acknowl-edged. Management indicated that it does notcommit to developing and maintaining a databaseof this type, but it will work to develop indicatorsand help countries to establish capacity. Manage-ment noted that the Bank works together with theOECD, EUROSTAT, and multilateral developmentbanks, and supports specialized agencies such asthe IEA and UN, trying to help them formulatebetter indicators.

Global Gas Flaring Reduction Partnership(GGFRP)A few speakers noted that the Bank has playedan advocacy role in promoting reduction of gasflaring, but that adherence to the initiative hasbeen below expectations. Questions were raisedon whether there was a lack of interactionbetween the GGFRP and Bank’s business or lackof competitiveness of the Bank’s financial instruments.

x x


Jorge Familiar, Acting Chairperson

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Geoffrey M. HealPaul Garrett Professor of Public Policy andBusiness Responsibility, Columbia University

Overall I think this is a very good report. Itfocuses on important issues that are ones wherethe Bank can make some difference. Mycomments are minor.

I think that the two main themes, removal ofenergy subsidies and improvement of energyefficiency, are critical issues in the context ofdeveloping countries (and rich countries too!)facing rising energy prices and threatened byclimate change. We know from experience thatneither is easy to achieve, but for both I feel surethat the benefits outweigh the costs and fullyjustify the efforts. I do think it is particularlyimportant to stress, as the report does, thatremoving energy subsidies need not compro-mise the ability to get energy to the poorest insociety more efficiently, and that the main benefi-ciaries of subsidies are often the middle andupper classes. I was struck by the numbersindicating that high subsidizers have muchhigher emissions per capita than others: notsurprising, but the numbers are impressive.

The report refers several times in the earlysections to a systems approach to energy. I amstill not completely sure what is meant by this. Itake it to mean looking simultaneously at allaspects of energy production and consumptionand thinking through interactions and possibleduplication and overlap, worrying more aboutjoint heat and power schemes, and so on. It is

likely that there are real gains in this area but Ifeel that this is something that should be spelledout more clearly.

I was impressed by the comment that the socialbenefits of providing power to the poorestgreatly outweigh the social costs, even if power isprovided in a way that generates greenhousegases. These numbers should be more widelyknown. They are important in the global discus-sions on climate change and the role of the poorcountries in mitigating this.

I like the suggestion of Energy Scorecards. Thesecan provide a basis for benchmarking, oftenimportant in the policy- making context, andcould also be useful in climate negotiations.Connected to this is the idea of carbon pricing ofprojects that emit CO2, even when there is nolegal requirement to purchase permits. Mostmajor banks in the West now require this of theirclients: U.S. banks, for example, require theirclients to charge for carbon emissions in projectevaluations even though there is no need to buycarbon permits. It would be natural for the Bankto do this too.

As the report mentions, emissions fromdeforestation are large and generated bydeveloping countries: Brazil, Indonesia, andChina are in the top four emitters, and for Braziland Indonesia it is the case that most emissionscome from deforestation. There is scope for aglobal win- win move if we implement one of theReduced Emissions from Deforestation andDegradation (REDD) ideas now under discus-

Statements by the External Review Panel:

Climate Evaluation, Phase I

sion, as this will not only reduce emissions butalso lead to new development finance. TheBank’s Prototype Carbon Fund is important inthis context.

Again, in summary, I was impressed by thereview: it seems to address very importantissues, and does so clearly.

Thomas C. HellerLewis Talbot and Nadine Hearn Shelton Profes-sor of International Legal Studies, StanfordUniversity

My comments are intended to be useful andprovocative, even though I understand that, asdetailed in chapter 1, the segment of the overallprojected IEG evaluation we have before us isvery restricted. It deals with win- win opportuni-ties and defers systematic consideration of majorissues (like carbon markets) that are only alludedto in this initial treatment. Any criticism offindings or recommendations in these areas ofwork key to rating and reforming Bank Groupperformance is evidently unfair as premature.Still, I hope that these remarks on theincomplete work may contribute to shaping theentire final product.

I want to state immediately that I like the reportand find its organization, analyses, andrecommendations generally clear, well founded,and pertinent. I will describe below the mainpoints that exemplify these contributions. Afterstressing my strong appreciation for the tenor andcontent the report already makes (part A), I wouldlike to discuss an implicit issue that runs through-out that is troubling (part B.). The issue is thateven a cursory history of the Bank Group’sengagement, though admittedly indirect, withclimate change since the early 1990s indicates thematters stressed in the report have been knownto the Bank’s actors and central to the Bank’sagenda for this whole period. The unansweredquestion that runs through the report is whyoutcomes should be different now, and in years tocome, than they have been in the past. As thereport implies in chapter 7, box 7.1, what isneeded most in the future elaboration of the

entire IEG project is to clarify and elaborate, in thelight of its recorded behavior, the Bank’s compar-ative advantage in the field of climate change.

Part A. There are very many discrete elements ofthe report that I found coherent, enlightening,and innovatively put forward. It makes a veryuseful contribution to the literature on energyand climate that would well be read within andoutside the Bank Group. I’ll list areas oftreatment that, in my view, reinforce this conclusion.

1. The initial chapters on the relationships amongenergy growth, carbon emissions, and eco-nomic growth are concise and precise state-ments of what we know about these essentialmatters. They stress the critical points for theBank Group and other major actors in the cli-mate/energy intersection that poverty reduc-tion and energy growth are not directly inconflict, that carbon and energy intensity arepartially functions of natural endowments andpartially products of clear choices about eco-nomic development paths, and that wide vari-ation between nations in carbon emissionperformance is in part a function of energypolicy and pricing. (Although given differentlabor, capital, and energy endowments, as wellas the lack of understanding of carbon dy-namics during the period in which basic pat-terns of economic development and resourceuse were set, the province and maintenance ofthese policies may themselves be subject to al-ternative interpretations.)

2. The tabular and analytical work on the carbontax equivalence of recent increases in resourceprices is original and quite helpful.

3. The case against subsidies and its political dy-namics in the emerging era of high commod-ity prices and resource rent transferssummarizes well a mass of (fragmented) dataclearly and deals nicely with the lack of basisfor pushing these policies forward in the nameof the poor, much better aided through otherpolicy means.

4. The scale of the economic opportunities to re-duce waste through energy efficiency andthereby avoid the construction of additional

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carbon- intensive generation is restated, butwith apt attention directed to the gap betweenthe technical and engineering potential of im-proving both economic and environmentalperformance and the far weaker experience ofclosing this gap. There are many particularand original observations throughout the re-port, based on case studies of the Bank Group’senergy-efficiency program record, (see #6below) that contribute to the political economyor organizational theory explanations why energy-efficiency gains are often ignored in practice.

5. The report is very informative in describinghow WB concentrations of loans and invest-ments in specific dimensions of broad projectcategories. For example, in the area of energyefficiency, the bulk of projects and funds areplaced in supply-side efficiency (equipment).Even in the limited set of projects aimed atmanaging demandside efficiency (DSM), thereis more emphasis given to technology (for ex-ample, CFL bulbs) than policy reforms (tariff decoupling— though it is shown that BankGroup electricity pricing reform should havea positive impact on the demand for energy-efficiency measures of all types). In the area ofcodes and standards, the emphasis is moreon the elaboration and enactment of codesthan on their monitoring or enforcement.Equally important, there are allusions to therole of organizational structures and incen-tives in producing these concentrations.

6. The report is replete with valuable and origi-nal observations that reflect the IEG author’ssubstantial knowledge of the sectors and pro-grams under review. They often stand in con-trast to the lack of quality evaluation in otherBank Group processes designed to yield on-going increases in the productivity of invest-ment. These observations most often are madein the course of case or project studies. Ex-amples include:a. DSM projects may often be undertaken as

economical by utilities in developing coun-tries that are forced by subsidized pricing torealize losses in some retail services.

b. In many cases there are serious questionsabout the causal impacts of Bank Group

projects. Brazilian gains in conservation andenergy efficiency in the 2001 drought periodwere more likely attributable to learningduring mandatory rationing than codes orother policy reforms. Eastern Europeanprice reforms were more likely due to widesystemic movement toward markets thanspecific policy measures.

c. Even in cases where the economies of en-ergy efficiency seem clear, subsidies to com-pact fluorescent lighting (ILUMEX) werenot sustainable learning instruments that ledto changed behavior when terminated.

d. The best energy-efficiency codes have littleimpact in the longer run without greater andsustained attention to monitoring and im-plementation capacity.

e. Favorable organizational image (public re-lations) was a more effective cause of re-producible behavior than other policies orsubsidies in EGAT’s (Thailand) success withcompact fluorescent lightbulbs, indicatingthe potential of properly incentivized utilities.

7. The report details well how and why what ap-pear to be win- win investments, especially inthe area of energy efficiency, do not eventuatein a great number of instances. The roster ofreasons varies from an absence of core col-lective goods like information to the presenceof intranational resource transfer that requireseither compensation or regulatory expropria-tion. But the report also makes it clear thatmany of these collective gains are efficient atthe national level and that international trans-fers may be an unwise use of scarce financialresources. With these insights, it would seemthat it would by now, after many years of BankGroup investment in this area, be standardoperating practice within the Group to have de-veloped effective analytical tools to discriminatebetween what should be done nationally andwhat internationally. However, there is no casemade in the evaluation that any such toolshave been consistently applied as normal use.The lack of attention over the years of BankGroup experience raises concerns about the in-centives within the Group to manage theseissues as well as might be hoped.

S TAT E M E N T S BY T H E E X T E R N A L R E V I E W PA N E L : C L I M AT E E VA L U AT I O N , P H A S E I

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Part B. Before explaining my questions about theimplications of the report for defining thecomparative advantage of the WB Group in thearea of climate change, I want to list a number ofspecific criticisms of the record made in theReport itself that are both persuasive and tempered.

1. 1. Although, there is increasing recent atten-tion given to energyefficiency support, es-pecially by the IFC, when one considers the fullspectrum of Bank Group investment in theenergy/climate intersection (one in five proj-ects have some connection to efficiency if abroader range of supply side measures is con-sidered, the relative proportion of the projectfunding going to energy efficiency has been lessthan optimal. Within this class of under-fundedactivities, the relative proportion to demandside management is especially low in compar-ison to supply-side efficiency.

2. 2. The report presents a good compilation ofthe mixed record of effectiveness of many of thecore programs in the World Bank portfolio.These include the large number of investmentsin power sector reform, gas flaring in generaland the Global Gas Flaring Reduction Partner-ship in particular, and energy pricing reforms.There are patterns observable in the variationin effectiveness within these programs. For ex-ample, fuel price reforms have been less suc-cessful than electricity price reforms; EasternEurope did better than large-scale fuel-pro-ducing nations. Moreover, the report notesvery variable performance in project monitor-ing, analysis, and performance evaluation inthe Bank’s portfolio as well. (It is again sur-prising that there is as little systematic exami-nation and learning from the variable record ofperformance as one would gather has occurredfrom a reading of the report’s description of thematerials to which it had access.)

3. There is good emphasis given in the report tothe need for greater coordination across de-partments of the Bank Group to reduce intra-organizational stove-piping and the loss ofpotential benefits from a more comprehen-sive and systematic evaluation of the produc-tivity of different investment options.

These three main themes form the logical andempirical basis for some of the key recommen-dations for reform. The first four recommenda-tions are indisputable and well supported by theinternal analysis of the report. These are: (1)focus on the removal of subsidies and providetargeted income compensation to the poordamaged thereby; (2) emphasize energy-efficiency opportunities and correct fuel andpower prices to support these initiatives; (3)approach climate change systematically acrossthe full range of World Bank country engage-ments because of the risk of perverse incentivesunder stove- piping; (4) improve the metrics andmonitoring capacities to improve the informa-tion base on which such policy and programchoices are made.

It is the fifth recommendation—that it would bebetter for the Bank toconcentrate on those areasof the Bank Group’s competitive advantage,namely, promoting policy and institutionalreform—that I think would benefit from clearerand more explicit elaboration in future work. Ido not suggest this because I disagree with therecommendation. I agree wholeheartedly thatthe weak record of positive results of all of ourinstitutions around global climate change isgenerally best explained by hard problemsassociated with the implementation, monitoring,evaluation, and reform of misgovernance. Whatseems to merit further development in the lightof this perception is more empirical evidence ororganizational analysis that it is the comparativeadvantage of the Bank Group to be the agentbest positioned to improve the record withregard to these agreed institutional objectives.

Just as the report correctly emphasizes that theproblems with the realization in practice of win-win opportunities in theory lie often in politicaleconomy and organizational behavior, it may beuseful in framing the future completion of thisIEG project to ask directly why the Bank Group,after some 15 years of programming in theclimate/energy intersection, continues to operatewith a suboptimal investment portfolio andhighly inconsistent analysis based on aninadequate information base. Project assessment

x x i v


has been narrow; carbon footprints have beenhaphazard; funding for renewables and energyefficiency has been generally low; implementa-tion and monitoring are less attended than arenormative prescriptions in policy-oriented activi-ties. Are there systemic or institutional reasonsthat cause the persistence of these obvious andlong-standing attributes of Bank Group practice?After initial experience with earlier programs thatwere subject to these same criticisms, why havethere not been processes of systematic andsustained correction in later investment vintages?Would ongoing IEG work be more likely toinduce positive change in the development in theBank Group’s program over time if there weremore explicit discussion of the reasons that clarifywhy it has mainly stuck to a course that has longbeen subject to serious criticism?

We might here only speculate on types of organi-zational explanations that might be subjected tomore intensive analysis to improve Bank Grouppractice by exposing the incentives that still aremanifest in a relatively stagnant and problematicinvestment program. These might includearguments that an emphasis on normativeeconomic prescription is too clear and too easy.This argument has been leveled at otherdimensions of Bank Group programs by internalcritics in areas including liberalization, privatiza-tion, and sectoral reforms. Related is the refrainthat the path of transition from state-controlledto market-dominated economies was imaginedas straightforward and technical, rather thanprofoundly political and conditioned by historicaland institutional particularities in differentcountries. All of these claims could suggest theBank Group has internal incentives to emphasizenonpolitical, often technical, remedies for poorgrowth performance; to stress upstream (techno-logical) and normative solutions instead ofdownstream regulatory or behavioral orimplementation problems because the latter arerelatively more constrained by fundamentalconcerns about intrusion into political operationsthat impose larger sovereignty conflicts.

An alternative line of explanation might begin inorganizational sociology. The report notes that

many of the relatively less frequent elements ofBank Group programs, like DSM or particulartypes of renewable generation, have been carriedon under the particular aegis of GEF funding orare championed by small expert teams marginalto the larger Bank system. This observationsuggests the foundational proposition of organi-zation theory that large organizations have a coremission and an attendant adapted culture thatdominates their priorities and performance. Suchorganizations respond to threats from theenvironment by establishing marginal groups thatmediate external demands without disturbingcore operations. The Bank Group’s core missionin this perspective is certainly to foster economicgrowth, with a strong amendment in the lastdecade to an express poverty alleviation orienta-tion. This is reflected in an incentive system thatconcentrates on economic expansion and acommitment to short-run measures that bringpoverty relief. Outcomes such as continuedinvestment in energy infrastructure growth notnecessarily constrained by environmental consid-erations (for example, coal plant investment) ortechnology diffusion rather than (longer-run)technology innovation would be expected insuch an organizational culture explanation.(Conversely, focus on demand restriction mightbe less prized and reinforced by the facts thatefficiency projects are complicated and staff-intensive, don’t expend a lot of cash, and are lesstangible and less prone to offer ceremonialoccasions.)

These deeper issues of Bank organizationalculture or internal incentives raise questionsabout what the report poses as the key issuegoing forward: what is the Bank Group’s compar-ative advantage that should define itsclimate/energy strategy? With vast new resourcescoming onto the climate table, should primaryresponsibility be assigned to the Bank in allocat-ing important segments of these resources givenits own institutional incentives? These questionsmay be premature in terms of the various phasesof the complete IEG evaluation project. Majorissues are not yet examined. These include boththe contested record of the Bank Group inexpending many times the funds on fossil fuel


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infrastructure financing than on noncarbonalternatives and the record of the Bank Group’scarbon market initiatives. While the former is notat all addressed in the report, there are importantanecdotal accounts of the latter.

Yet the preliminary work in the report alsoquestions the Bank Group’s early engagementwith the CDM market in energy-efficiency financ-ing, raising well-founded concerns about addition-ality if international funds are devoted to reducingcosts of projects that are economically efficient atthe national level. This is particularly true if contin-uing subsidies in retail prices reduce incentives fordemand management. The report’s chapter on gasflaring also analyses critically the Bank’s use ofCDM in cases where gas is not flared in thecommon cases where the regulated wholesaleprice of gas undercuts its collection and transmis-sion, where electricity prices are held at levels toolow to justify gas-fired generation, and where gastransportation projects that should be whollyeconomic at oil prices in excess of $40 per barreldo not take place because of risks of nonpaymentfrom state-owned and run-off takers. Theseprospective questions, yet to receive comprehen-sive IEG analysis, may be seen as challenges to theconclusory proposition that the Bank Groupshould have a strong, though reformed, role in thegrowing world of carbon finance or climate policy.

In conclusion, at the end of discussing anexcellent report, I wonder whether the report canbest further the more effective resolution of suchkey climate change questions and help steer theBank’s internal evolution through more directattention in the phases of the project to come tothe issue of whether the Bank Group does havecomparative advantages in climate in comparisonto other potential climate institutions or to otherpublic purposes the Bank Group might pursue.

Rajendra K. PachauriChairman, Intergovernmental Panel onClimate Change; Director- General, Tata EnergyResearch Institute.

The report is comprehensive and reviews a rangeof World Bank activities that fit into an overall

program related to climate change. Quiteappropriately, the report traces the history andrecord of World Bank activities that are expectedto have driven mitigation of greenhouse gas(GHG) emissions over the years. The emphasison institutional changes and reform measures isquite appropriate, because in the operations ofthe World Bank these assume logical primacyand should lead to outcomes in developingcountries ensuring higher levels of energyefficiency and reduced emissions of GHGs as aconsequence. It may be mentioned that theIntergovernmental Panel on Climate Change(IPCC) in its Fourth Assessment Report (AR4)has very clearly emphasized the importance ofplacing a price on carbon as perhaps the mosteffective policy measure for promoting techno-logical change and other actions that couldresult in reduced emissions of GHGs. Hence,the viewpoint of the Bank on the issue ofsubsidies and their removal as well as rationalpricing for different applications constitutes animportant set of priorities that over a period oftime can bring about change in the rightdirection. Addressing the assessment of severalco-benefits, including lower levels of air pollutionat the local level with attendant health benefits,higher security of energy supply, and the like inrelation to mitigation of GHGs would haveprovided another dimension of externalitieswhich should be part of economic decision -making. This aspect has not been addressedadequately.

In my view, two additional aspects in preparingthis report could have enhanced its value:

1. Research and development and technology is-sues for ensuring mitigation of greenhouse gases.While a number of technological innovationswould generally flow from the developed to thedeveloping countries, the need for customizationof specific technologies to suit local conditionsis an important aspect of technological changethat perhaps deserved greater analysis and cov-erage in the report. This would also be justifiedby the fact that in several developing countries’technological capabilities have reached a levelwhere they are making a significant difference

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in bringing about efficiency improvements andreduced emissions of GHGs.

2. The second subject on which greater coverageand targeted analysis would have been usefulrelates to adaptation to the impacts of climatechange. It is very clear that effective climate pol-icy in every country of the world would re-quire a combination of mitigation as well asadaptation, most effectively to be conceptual-ized and implemented by the same organiza-tions and authorities handling both. By not

covering adaptation measures in adequate de-tail and confining the report essentially to mit-igation, this dimension has been a loss in termsof the value of what is presented in the report.

All in all, this is a useful document, which, I amsure, will not only help the Bank in developingits own climate change portfolio in the comingyears but would also be of value to policy makersand analysts in both the developing as well as thedeveloped world.


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Wind turbines contrast with the architecture of the 300-year-old buildings of Bada Bagh,Rajasthan, India. Photo ©Jacqueline M. Koch/Corbis, reproduced by permission.

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Glossary

Adaptation Measures taken by societies and individuals to adapt to actual or expectedadverse impacts on the environment, especially as the result of climatechange.

Biodiversity Short for biological diversity. Refers to the wealth of ecosystems in thebiosphere, of species within ecosystems, and of genetic informationwithin populations.

Carbon capture and storage A technology for preventing the release of carbon dioxide to the atmos-phere from thermal power plants by capturing the gas and storing itunderground.

Carbon dioxide equivalent (CO2e) A standard unit for measuring the impact of a greenhouse gas on globalwarming. For instance, one ton of methane is considered equivalent inwarming to 23 tons of carbon dioxide.

Carbon accounting (and/or Measurement of the gross or net impact on greenhouse gas emis-carbon footprint) sions of an organization, project, or program.

Carbon fund A fund set up for the purchase of carbon credits.

Carbon offset (or credit) A financial instrument representing a reduction in greenhouse gas emis-sions (including gases other than carbon dioxide), used by purchasers tomeet regulatory or voluntary limits on emissions.

Carbon shadow pricing The practice of incorporating into the economic analysis of projects orprograms an economic value associated with the external costs of green-house gas emissions or external benefits of emissions reduction.

Certified emission reduction A carbon credit (measured in tons CO2e) for an emissions reduction asso-ciated with a Clean Development Mechanism project.

Clean Development Mechanism “A mechanism under the Kyoto Protocol through which developed coun-tries may finance greenhouse-gas emission reduction or removal projectsin developing countries, and receive credits for doing so which they mayapply towards meeting mandatory limits on their own emissions”(UNFCCC).

Climate change Changes in climatic conditions and processes (including but not limited towarming) that go beyond natural climatic variability. When used in con-nection with mitigation, refers to human-induced changes.

Combined-cycle turbine A relatively efficient technology for power generation from combustion,usually of natural gas.

Demand-side management Actions or incentives, often directed by energy utilities to their customers,to reduce the level of energy demands (typically through efficiency meas-ures) or change the timing of those demands.

District heating Centralized system for the provision of steam heat to an urban neighbor-hood or district.

Ecosystem The interacting system of a biological community and its nonliving envi-ronmental surroundings.

Emission In this volume, emission primarily refers to the anthropogenic release ofgreenhouse gases, as from fossil fuel combustion or deforestation. Usedalso to refer to other kinds of air pollution from combustion, such as par-ticulates and sulfur oxides.

Energy services company A company that provides clients with some combination of assessment,financing, and implementation of options for increased efficiency of useand reduced expenditure on energy.

Environment The sum of all external conditions affecting the life, development, andsurvival of an organism.

Environmental assessment A process whose breadth, depth, and type of analysis depend on the pro-posed project. It evaluates a project’s potential environmental risks andimpacts in its area of influence and identifies ways of improving projectdesign and implementation by preventing, minimizing, mitigating, orcompensating for adverse environmental impacts and by enhancing posi-tive impacts.

Environmental impact Any change to the environment, whether adverse or beneficial, wholly orpartially resulting from an organization’s environmental aspects (asdefined in ISO 14001).

Environmental mainstreaming The integration of environmental concerns into macroeconomic and sec-toral interventions.

Environmental sustainability Ensuring that the overall productivity of accumulated human and physi-cal capital resulting from development actions more than compensates forthe direct or indirect loss or degradation of the environment. Goal 7 ofthe UN Millennium Development Goals specifically refers to this, in part,as integrating the principles of sustainable development into country poli-cies and programs and reversing loss of environmental resources.

Gas flaring Burning of natural gas, usually when released as an unintended by-prod-uct of oil production.

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Greenhouse gas Gases whose atmospheric buildup contributes to global warming and cli-mate change. Greenhouse gases regulated under the Kyoto Protocol arecarbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluoro-carbons, and sulphur hexafluoride.

Mitigation Measures taken to reduce adverse impacts on the environment.

Netback price Wellhead value of natural gas computed by netting transport costs fromfinal market price.

Ozone-depleting substances Manufactured chemical compounds that reduce the protective layer ofozone in the Earth’s atmosphere. The Montreal Protocol, administered bythe UN, maintains the list of ozone-depleting substances that are targetedfor control, reduction, or phase-out.

Performance Standards The eight Performance Standards establish requirements that the client isto meet in IFC-financed projects.

Safeguard policies Policies designed specifically to ensure that the environmental (and social)impacts of projects supported by the Bank Group are considered duringappraisal and preparation. The Bank’s safeguard policies cover environ-mental assessment, natural habitats, pest management, indigenous peo-ples, cultural resources, involuntary resettlement, forests, dam safety,international waterways, and disputed areas.

Sustainable development Development that meets the needs of the present without compromisingthe ability of future generations to meet their own needs.

Win-win policy Here, a policy that provides net benefits both to the nation that adopts itand to the world at large. Individuals or groups may suffer losses underwin-win policies, though in principle they could be compensated from thebenefits. Also called no-regrets policy.

G L O S S A RY

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Abbreviations and Terminology

Glossary

Acknowledgments

Foreword

Executive Summary

Management Response

Chairperson’s Summary: Committee on Development Effectiveness (CODE)

Statements by the External Review Panel: Climate Evaluation, Phase I

1 Introduction, Scope, and MotivationConfronting Inexorable Calamities and Unreckonable Risks Three Approaches to Greenhouse Gas MitigationPriority Areas for Evaluation Related to MitigationScope and Methods of This Evaluation

2 National Policies and Climate ChangeEnergy, CO2, and Development: A Strong but Pliable RelationshipPolicies and Institutions Can Make a Big DifferenceGHG Mitigation Need Not Compromise the Pursuit of Energy Access for

the Poorest

3 World Bank Operations and Climate ChangeClimate in World Bank Policies and StrategiesGlobal Finance and InstitutionsMainstreamingStrategic Considerations for the Bank: Accounting for Local and Global Impacts

4 Subsidies and Energy PricingThe Nature of Subsidies and Price DistortionsThe Problem with SubsidiesEnergy Subsidies and the PoorExperience in the Transition EconomiesBank Engagement with the Large SubsidizersEnergy Loans and PricingConclusion

5 Efficiency PoliciesOvercoming the Barriers to Energy EfficiencyThe Efficiency PortfolioDemand- Side Management

Table of Contents to the Complete Volume

Bank Engagement on DSMAppliance Standards and Building CodesPublic BuildingsDistrict HeatingConclusion

6 Natural Gas FlaringContextThe Paradox of Gas FlaringThe Global Gas Flaring Reduction PartnershipEconomics of Gas FlaringConclusion

7 Findings and RecommendationsFindingsConclusion and Recommendations

AppendixesA: Bank Attention to Subsidies in the Large Subsidizing CountriesB: Energy Efficiency Projects with Policy ComponentsC: Distributional Incidence of Subsidies

Endnotes

Bibliography

Boxes2.1 Emissions Intensities of Power Supply3.1 The $135 per Ton CO2 Price Is Already Here4.1 Ghana and Indonesia: Using Social Safety Nets to Protect the Poor

from Fuel Price Rises4.2 Ukraine: Gradual Energy Policy Reform and Decreasing Emissions

Intensity4.3 Egypt: Policy Dialogue and Pricing Reform5.1 Rates of Return to Energy Efficiency Projects5.2 DSM in Brazil5.3 Heat Reform and Building Efficiency in China7.1 The Challenge of Catalyzing Technology Adoption

Figures1.1 Intersection of Issues Related to Climate Change1.2 Global and Domestic Benefits2.1 Per Capita Energy Emissions and Income, 20042.2 Absolute Changes in Emissions and Income, 1992–20042.3 Relative Emissions Are Higher in Countries with Diesel Subsidies3.1 World Bank Climate-Themed Projects and Commitments 3.2 Real Energy Prices of Coal, Gas, and Oil, 1990–20084.1 Conditionality Related to Petroleum Products4.2 Trends in Energy Sector Loans with Pricing Goals4.3 Distribution of World Bank Lending Related to Electricity Power

Pricing Policy, 1996– 20075.1 Energy Efficiency Investments6.1 Recent and Planned Generation Capacity Additions by Fuel Type

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6.2 Global Flaring: Comparison of GGFR Partner and Non-partner Countries

Tables1.1 Topical Map of Issues in the Climate Evaluation Series 1.2 IEG Evaluations Relevant to Climate Change2.1 How Policies Affect Energy-Related Emissions2.2 Pathways from Policies to Emissions3.1 Climate-Themed Projects by Sector Board and Funding Source,

Cumulative, 1990–20073.2 CAS Goals for Energy Policies and Climate Change Issues, 1995–20073.3 Effect of Carbon Shadow Price on Generating Capacity Mix for South

East Europe, 20204.1 Fuel Subsidies Compared with Health Expenditures4.2 Sensitivity of Energy Demand to Price4.3 Outcomes of Loans with Electricity Tariff Goals5.1 A Typology of Efficiency Interventions5.2 Utility-Based Demand-Side Management Projects5.3 Projects with Appliance Standard and Building Energy Code

Components

C O N T E N T S

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

Documents

Transcript of Climate Change and the World Bank Group Climate Change and the World Bank Group