C L I M AT E C H A N G E A N D T H E W O R L D B A N K G R O U P
The Bank has had long-standing engagement on gas policy (focusing on nonassociated gas) in some countries. Engagement was stronger in the 1980s when the Bank lent for gas development, declined as investment attention focused more on transmission and distribution networks, and may now be increasing. Analytic work, including analysis of the economic value of gas in alternative uses, has been a frequent feature of this engagement.
would be readily recoverable at economic prices, 3,500 MW of gas turbines are being run on more polluting, more carbon-intensive, more expensive diesel (World Bank 2007e). And because electricity tariffs are held below the long-run marginal cost, the government is forced to subsidize the consumption of this diesel. However, Bank engagement continues, and the Bank has recently supported studies of gas pricing and pipeline policy.
The impact of the Bank’s engagement in gas reform is mixed, and it can be difficult to attribute results to a given intervention. In Egypt, Bank engagement traces back at least to the The impact of the Bank’s early 1980s when it supported a engagement on gas number of gas investment projects. It reform is mixed, and continued through a 1990s investment attibution can be project to a recently initiated project difficult. that seeks to promote use of LNG over heavily subsidized liquified petroleum gas. That engagement has had some positive outcomes. While gas has been subsidized, it has been explicitly subsidized at the consumer level rather than imposed through price caps on producer payments. Prices paid to producers (currently $2.65/mmbtu) are lower than the economic value (estimated at $3.65/mmbtu), but have still been sufficient to stimulate massive expansion in gas production and to switch Egypt’s expanding power sector, at the margin, to gas from more polluting and carbon-intensive petroleum products. Recently announced reforms have boosted the price of gas to energy-intensive consuming industries from $1.10 to $2.65, which should encourage greater energy efficiency while reducing expenditures on subsidies.
Nigeria, the world’s second-largest flarer, has reduced flares significantly over the past two decades through increased LNG exports, but it still has far to go to reach its long-standing goal of ending flaring in 2008. An ESMAP (2004) study outlined the scale of the problem: flaring consumes gas potentially worth $2.5 billion per year, while producing 70 million tons CO2e of GHGs. The study found that prices of $0.75/mscf would be necessary to elicit supply of associated gas and $1.00/mscf for nonassociated gas. The study focused attention on supplying gas for domestic power generation, noting the importance of maintaining gas prices sufficient to elicit demand. A country review by IEG found little indication that the ESMAP study had been used until recently, and found inadequate attention by the Bank to these issues over the past eight years. However, the government of Nigeria announced a Gas Master Plan and pricing strategy in early 2008. The extent to which it draws on the ESMAP study or Bank advice is unclear.
The experience in Indonesia, which dates at least to pipeline projects of the early 1990s, has been less successful. Gas is purchased at low prices for many uses. For instance, although the potential netback price of LNG sales is $11 per thousand standard cubic feet, much gas is sold to petrochemical or fertilizer producers at $6. Gas transport policies may inhibit the ability of producers to find remunerative markets. One consequence is that although Indonesia flares about 3 bcm of gas per year, and much of that gas 86
Conclusion While gas flaring is a complex phenomenon, economic fundamentals would often support the recovery and productive use of currently flared gas. Continued flaring thus reflects—in part—regulatory and policy failures, particularly in gas pricing. Where this is the case, the use of carbon finance as an instrument to reduce flaring is problematic. First, carbon payments may not change incentives significantly, even under current pricing policies. This would mean that such carbon projects are not additional, and that the carbon payments merely add to producer (or gas owner) profits. Second, policy or regulatory