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
emissions-intensive when considered on its own, is a necessary part of a portfolio that includes lower-carbon sources. This suggests a systemwide approach to assessing costs and benefits, including emissions. Again, this approach is not new to the Bank. Two state-level studies of the Indian power sector, while not formally designated as EERs, exemplify the approach and are noteworthy for monetizing local and global environmental damages and assessing trade-offs against the consumption value of electricity. The studies of A systemwide approach Rajasthan and Karnataka (ESMAP and has been studied in others 2004a, 2004b), undertaken in collaboration with the state governments, examine supply and demand alternatives—including power sector and tariff reform—for meeting the states’ power needs. Environmental impacts include three kinds of local air pollution (SOx, NOx, and PM10 [particulate matter of 10 micrometers or less]), consumptive water use, and CO2 emissions, with damages put at $55 per ton of CO2e. The Rajasthan study shows that failure of reform, by choking off power capacity expansion, severely stunts economic performance and leaves local pollution virtually unchanged as industry switches to small, polluting diesel generators. Stunted growth leads to slightly lower CO2 emissions, but the extreme implicit cost of this reduction—$480 per ton of CO2e— easily rules out policy failure as a climate mitigation strategy. At the same time, going from a basic reform scenario to one that includes some degree of tariff rationalization and DSM is winwin. It boosts the value of the investment program by 13 percent and reduces air pollution and water use by about 6 percent, and CO2 emissions by about 4 percent. The South East Europe Generation Investment Plan computes a least-cost power expansion plan for the region (2005–20) under a number of scenarios that comply with European Union (EU) environmental standards for air And it has been applied pollutants, including CO2. Table 3.3 in South East Europe. shows that imposition of a €10 per ton 34
Table 3.3: Effect of Carbon Shadow Price on Generating Capacity Mix for South East Europe, 2020 CO2 shadow price
Lignite plus coal (%)
Gas (%)
Nuclear (%)
€0
36.9
13.1
10.3
€5
34.0
16.0
10.4
€10
30.9
17.2
12.3
Source: South East Europe Consultants (2005). Note: The baseline is a cost-minimizing optimal scenario, which features less rehabilitation of old plants than the official scenario. Other elements of the generating mix, including hydropower, are constant across scenarios.
of CO2 shadow price shifts 6 percent of total capacity from lignite and coal to gas and nuclear. Even at €10 per ton, the optimal plan still involves the construction of large new lignitefired plants in Kosovo. However, since the plan was generated, the European Trading System for carbon has started operation, and CO2 traded at €25–30 in mid-2008.
The Role of Economic Analysis of Projects Among practitioners of carbon shadow pricing, there is a debate on what price level to assign. This value, which represents the damages imposed by an additional ton of CO2, is set in the Stern Review at $85 per ton of CO2e; the U.K.’s Department for Environment, Food, and Rural Affairs recommends a value of £26 per ton of CO2e for project appraisal (rising over time).4 However, while this debate was going on, the price of oil, gas, and coal rose drastically (see figure 3.2). The mid-2008 price of oil was equivalent to the 2006 price of oil plus a $135 per ton CO2 price. Although prices have since declined, expected future prices remain high by recent standards. Hence, actual project appraisal decisions should already be moving in directions similar to those suggested by carbon shadow pricing. For project appraisal to send these signals, it must value energy and electricity at economic prices. This is not easy in systems where prices are distorted or where electricity supply is constrained. For instance, the Rwanda Emergency