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The Need to Transition to a Low Carbon EconomyA World Bank Perspective

June 5, 2007

Robert WatsonWorld Bank

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Climate Change – What is it?

• Climate change is both a development and global environment issue, which undermines:

• environmental sustainability• poverty alleviation and the livelihoods of the poor• human health• personal, national and regional security

• Climate change is an inter- and intra-generational equity issue:

• developing countries and poor people in developing countries are the most vulnerable

• the actions of today will affect future generations

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Climate Change and Development Climate Change and Development

Climate change resilient development requires implementation of cost-effective mitigation and adaptation strategies

while there is a need to minimize the emissions of greenhouse gases, it must be recognized that access to affordable energy is a pre-requisite condition for poverty alleviation and sustainable economic growth –therefore, the challenge is to develop and utilize cost-effective low-carbon energy technologies

the vulnerability of sectors to current climate variability and projected changes in climate and its variability and extreme events needs to be reduced through improved project and policy design -- this requires integrating considerations of current climate variability and projected changes in climate in sector and national economic planning

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Recent Reports

World Bank reports to the Development Committee in Spring and Fall of 2006, and Spring 2007 on the Clean Energy Investment Framework – response to a request from the G-8 meeting in Gleneagles

The Stern Report - October 2006 Focuses on the Economic Issues

International Energy Agency World Energy Outlook Focuses on Energy-Climate Change Nexus

The EC “Energy Policy for Europe” – January 2007 Identifies competitiveness, climate change and energy security as issues shaping

EU energy policies

IPCC Working Group I, II and III Reports

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Climate Change is Already Affecting Humans and Nature

The composition of the atmosphere, and the Earth’s climate has changed, mostly due to human activities, and is projected to continue to change, adversely affecting socio-economic sectors, ecosystems and human health:

Increased greenhouse gases and aerosols Warmer temperatures Changing precipitation (more heavy precipitation events) Higher sea levels (higher storm surges) Retreating glaciers Reduced arctic sea ice More frequent extreme weather events

Intense storms, floods, droughts and heat waves

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Projected Impacts of Climate ChangeSource: Stern Review

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Climate Change Goal

The goal should be to limit the changes in global mean surface temperature to about 2oC above pre-

industrial levels to limit the adverse consequences

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Emissions Paths to StabilizationSource: Stern Review

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How to Limit Temperature Changes to 2oC

Limiting changes in global mean surface temperature to about 2oC above pre-industrial

levels will require limiting the atmospheric concentration of carbon dioxide equivalent to

between 400 and 450 ppm

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Largest Emitters: Developed & Developing

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Who Needs to Reduce Emissions?

Limiting the atmospheric concentration of carbon dioxide equivalent to between 400 and 450 ppm

will require all major emitters of greenhouse gases to reduce their emissions – both developed

and developing countries

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GHG Flow Diagram: Global Emissions

Source: WRI, Baumert et al, 2005

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20552005

14

7

Billion of Tons of Carbon Emitted per Year

1955

0

Stabilization TriangleCurre

ntly pro

jected path

Flat path

Historical emissions

2.0

2105

Easier CO2 target~850 ppm

Tougher CO2 target

~500 ppm

The Stabilization Triangle

O

Interim Goals

Today and for the interim goals, global per-capita emissions are ≈ 1 tC/yr.

O

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Developed Country Per capita Emissions far Exceed Developing Country Per Capita Emissions

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OECD and non-OECD shares25-yr view

SourceI Socolow and Pacala, Scientific American, September 2006, p.56

+70%

+30%

-30%

+30%

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OECD and non-OECD shares50-year view

SourceI Socolow and Pacala, Scientific American, September 2006, p.56

+60%

-60%

+140%

+60%

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Which Sectors – Which Greenhouse Gases?

Limiting the atmospheric concentration of carbon dioxide equivalent to between 400 and 450 ppm

will require reducing all greenhouse gas emissions, not just carbon dioxide, and from all

sectors, not just the energy sector

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Potential Technological OptionsPotential Technological Options

• Efficient production and use of energy: re-powering inefficient thermal coal-fired plants; developing IGCC; hybrid and fuel cell cars; reduced use of vehicles; more efficient buildings and industries

• Fuel shift: coal to gas

• CO2 Capture and Storage: Capture CO2 in the production of electricity followed by geological storage (e.g., IGCC – CCS)

• Renewable Energy and Fuels: Wind power; solar PV and solar thermal; small and large-scale hydropower; bio-fuels (2nd generation)

• Nuclear fission: Nuclear power

• Forests and Agricultural Soils: Reduced deforestation; reforestation; afforestation; and conservation tillage

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Are Technologies Ready?

There are many technologies that are currently available to limit the atmospheric concentration of carbon dioxide equivalent to between 400 and 450 ppm, but further research and development will be

needed to commercialize a number of emerging technologies, such as carbon capture and

storage, second generation biofuels, and fuel-cell vehicles

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Power Generation Financing Gap

Electricity supply in developing countries needs an investment of $165 billion p.a.

Current private and public sector resources fund $80 billion p.a.:$48 billion private sector, IFIs, donors, ECAs$32 billion internal cash generation

Energy sector reform is needed to attract public and private investments

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The Transition to a Low Carbon Economy

The Power Sector is a critical Sector

The IPCC B1 and B2 scenarios have been used to provide top-down estimates of the additional costs of transitioning to a low carbon power

sector

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Top-Down Estimation of Incremental Investments

Incremental Cost in Power Sector(MESSAGE B1 Scenario, Reference for each year: B1-790 of that year)

-500

0

500

1000

1500

2000

2001-2010 2001-2020 2001-2030 2001-2040 2001-2050

OECD B1_670 Non-OECD B1_670

OECD B1_590 Non-OECD B1_590

OECD B1_520 Non-OECD B1_520

OECD B1_480 Non-OECD B1_480

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Top-Down Estimation of Incremental Investments

Incremental Cost in Power Sector (MESSAGE B2 Scenario, Reference for each year: B2-980 of that year)

-500

0

500

1000

1500

2000

2500

3000

3500

2001-2010 2001-2020 2001-2030 2001-2040 2001-2050

Billio

n 2

000 U

S $

OECD B2_670 Non-OECD B2_670

OECD B2_510 Non-OECD B2_510

Comparing this figure with the previous figure shows that the incremental investment costs are very sensitive to the assumed baseline

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The Transition to a Low Carbon Economy

The Power Sector is a critical Sector

A bottom-up analysis of the costs (in terms of US$ per ton of carbon dioxide saved) of different

power generation technologies compared to a conventional sub-critical thermal power plant

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US$/ t-CO2

-20 0 20 40 60 80 100 120

Biomass Steam

Geothermal

Solar Thermal

Nuclear

Large Hydro

Wind

Small Hydro

CCGT

CCS

Supercritical Coal

IGCC

Solar PV280 to 465

Costs of Reducing Carbon Dioxide Emissions Costs of Reducing Carbon Dioxide Emissions relative to sub-critical coal (life-cycle)relative to sub-critical coal (life-cycle)

A key challenge is to reduce the cost of IGCC and CCS, which are still pre-commercial

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Incremental Cost w.r.t. Reference MERGE for 2050

0

200

400

600

800

1000

1200

1400

1600

1800

650ppm 550ppm 450ppm

China India

Non-OECD OECD

Bill. $

Bottom-Up Analyses of Transitioning to Low Carbon

450 ppm stabilization by Changing Technologies

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

2010 2020 2030 2040 2050

wind

hydro

nuclear

gas-cs

gas

oil

coal-cs

coal

Change of Technology Mix w.r.t. Reference Case (Non-OECD: 450ppm)TWh

Changes in Technology Costs of Changing the Technologies

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Baseline and low-carbon projected energy scenarios for non-OECD countries

0

5000

10000

15000

20000

25000

30000

35000

2000 2010 2020 2030 2040 2050

wind

hydro

nuclear

gas-cs

gas

oil

coal-cs

coal

TWh

-16000

-12000

-8000

-4000

0

4000

8000

12000

16000

2010 2020 2030 2040 2050

wind

hydro

nuclear

gas-cs

gas

oil

coal-cs

coal

TWh

Baseline Low carbon scenario

CO2 would stabilize at about 450 ppm in the low carbon scenario, requiring an investment of ~$30 billion/year in electricity generation

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Incremental Cost w.r.t. ReferenceMiniCAM for 2050

0

100

200

300

400

500

600

700

800

650ppm 550ppm 450ppm

China India

Non-OECD OECD

Bill.

Bottom-Up Analyses of Transitioning to Low Carbon

450 ppm stabilization by Changing Technologies

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

2010 2020 2030 2040 2050

Biomass (IGCC)

Biomass

Wind

PV

Hydro

Nuclear

Oil (IGCC)_CCS

Oil (IGCC)

Oil

Gas (CC)_CCS

Gas (CC)

Gas

Coal (IGCC)_CCS

Coal (IGCC)

Coal

Twh Change of Technology Mix w.r.t. Reference Case (Non-OECD: 450ppm)

Changes in Technology Costs of Changing the Technologies

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Incremental Investment Costs to Transition to a Low Carbon Economy in the Power

Sector

The incremental costs in the power sector alone for non-OECD countries to stabilize between 450 and 500 ppm was estimated to range from about $25 – 50

billion per year by using three models: Merge

Message Mini-cam

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A Critical TechnologyA Critical Technology

Efficient of Coal due to the vast reserves in China, India, USA and Australia:

• Integrated Gasification Combined Cycle with Carbon Capture and Storage

• Current cost of IGCC is about $1400 per kw installed in USA or Europe

• Current estimated cost of IGCC-CCS is over $2100 per kw installed

• New thermal power generation in China is typically about 60% of the costs of the USA or Europe

• China may be willing to pay $800 per kw for IGCC – GE estimates the cost in China to be about $1000 per kw

• $1 billion of grants would buy-down the cost of generating 5GW of IGCC power

• R@D in CCS should be viewed as a global public good – need a public-private partnership to invest in this technology

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Global CO2 StorageGlobal CO2 Storage

•~8100 Large CO2 Point Sources

• 14.9 GtCO2/year

•>60% of all global anthropogenic CO2 emissions

•Potentially 11,000 GtCO2 of available storage capacity

•US, Canada and Australia likely have sufficient CO2 storage capacity for this century

•Japan and Korea’s ability to continue using fossil fuels likely constrained by relatively small domestic storage reservoir capacity

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Only three sources of funding for transitioning to a low carbon economy are available:

(i) voluntary actions, (ii) international grants, e.g., GEF(iii) carbon trading – emissions rights trading or project-

based

Financing for the Transition to a Low Carbon economy

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Voluntary measures are important, but unlikely to play a significant

role

To play a significant role the GEF would require an increase in funds by a factor of ten to a hundred

Carbon trade is likely to confer the biggest flow of funds to developing countries - between US$20 and $120 billion per year requires a long-term global regulatory framework (until 2050) with

differentiated responsibilities – with intermediate targets – many possible designs

Carbon Trade will Play the Largest Role in Financing a Transition to a

Low Carbon Economy

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Role and Constraints Faced by Private Sector to Finance “Low Carbon” Energy

Higher investment costs mean projects are not financially viable, resulting in relatively little equity and debt capital for cleaner technologies

Long lead times and untested technologies make the private markets nervous, limiting the amounts available

Uncertainty regarding future regulatory frameworks result in weak carbon markets thus limiting mobilization of long term capital

Current Carbon Prices for CDM projects are low to support mobilization of substantial private capital; implicit project/country risks are not mitigated

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Role of the World Bank

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World Bank Activities to Facilitate the Transition to a Low Carbon Economy

Prepare Low Carbon Country Case Studies with Brazil, China, India , Mexico and South Africa Assess technology options by sector, Assess the policy framework, and Assess the financing needs relative to a BAU world

The goal is to develop country ownership and an action plan to transition to a low-carbon economy consistent with their own development goals

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World Bank Activities to Facilitate the Transition to a Low Carbon Economy

Develop geographically and thematically diverse low-carbon projects, primarily using IBRD, GEF and carbon finance

Develop and scale-up energy efficiency and transport programs - work with IEA on energy efficiency indicators

Facilitate the development of the carbon market

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The Kyoto Protocol

Three Flexibility Mechanisms

Allowance Trading Clean Development Mechanism

Joint Implementation

Annex BAnnex B non rat.

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Carbon Market in 2006Volumes transacted (MtCO2e)

Allowance MarketsProject-Based Transactions

UK ETS

EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates

CDM

450

Other Compliance

19

na

10 MtCO2e

20

1,100

Voluntary& Retail

10 +

SecondaryCDM

25 +

JI16

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Alternate Business Model for Project-Based Carbon Trading

Provides up-front capital as a low-interest loan - self-sufficiency depends Provides up-front capital as a low-interest loan - self-sufficiency depends on cost of low-carbon technologies and carbon market priceon cost of low-carbon technologies and carbon market price

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WB Support to Carbon Reduction

Facilitate the development of the carbon market by: Expanding the range of eligible project activities in uncharted

sectors; Developing new methodologies

green investment schemes;avoided deforestationenergy efficiency standards

Assisting in building and sustaining the institutional and regulatory structures

Developing a post-2012 sectoral/programmatic funding mechanism

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Adaptation to Climate Risks The Challenge

Poor countries are disproportionately affected by climate variability 300 million people per year in developing countries are

affected by climate related disasters (droughts, floods, wind storms) and the rate is increasing

Chronic economic losses, particularly from droughts and floods, are an increasing barrier to poverty reduction

Failure to adapt to changing climate risks will threaten progress in development and the MDGs

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Analysing Climate Risk in the Development Portfolio

OECD Study

15 – 60 % of official flows potentially affected by climate changeSource: Bridge Over Troubled Waters: Linking Climate Change and Development, OECD (2005), p. 67

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Adaptation to Climate Risks: Development Financing at Risk

Tens of billions dollars per year of ODA & concessional finance investments are exposed to climate risks

Much larger exposure of private sector investment

Response by private sector in developing countries is constrained by Lack of information on the nature of the risks and adaptation

options Vulnerable public infrastructure on which they depend Insufficient risk spreading mechanisms – e.g. insurance

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Adaptation to Climate Risks: Costs and Actions Needed

Comprehensive project planning and additional investments to climate-proof development projects will require at least $1 billion per year

Actions needed, include: Better access to information on climate risks and impacts

Reduced institutional barriers to comprehensive planning across multiple sectors

Revised standards for planning and infrastructure

Develop and scale-up insurance for adaptation

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Role of the World Bank

Screening tool to assess sensitivity to climate (variability and change)

Climate risk assessment (variability and change)– project, sector and country

Policy dialogue - Climate (variability and change) considerations should be included in Project Environmental Assessments, Country Environmental Assessments, and PRSPs

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Role of the World Bank

Provisioning of climate information

Project investments that incorporate climate considerations

Analysis of the viability of different financial mechanisms

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Conclusions

The time for action is now

A wide range of technology and policy options exist to cut greenhouse gas emissions and transition to a low carbon economy

Current financial mechanisms to transition to a low carbon economy are inadequate in both design and scale

A long-term global regulatory framework (until 2050) with differentiated responsibilities – with intermediate targets – is needed