The Need to Transition to a Low Carbon Economy A World Bank Perspective June 5, 2007 Robert Watson

1. The Need to Transition to a Low Carbon Economy A World Bank Perspective June 5, 2007 Robert Watson World Bank

2. 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

3. 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

4. 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

5. 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

6. Projected Impacts of Climate Change Source: Stern Review

7. 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

8. Emissions Paths to Stabilization Source: Stern Review

9. 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

10. Largest Emitters: Developed & Developing

11. 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

12. GHG Flow Diagram: Global Emissions Source: WRI, Baumert et al, 2005

13. The Stabilization Triangle Billion of Tons of Carbon Emitted per Year Easier CO2 target 14 ~850 ppm Currently projected path Stabilization Triangle Interim Goals Historical emissions 7 O O Flatpath Tougher CO2 target ~500 ppm 2.0 0 2105 1955 2005 2055 Today and for the interim goals, global per-capita emissions are ≈ 1 tC/yr.

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

15. OECD and non-OECD shares25-yr view +70% +30% +30% -30% SourceI Socolow and Pacala, Scientific American, September 2006, p.56

16. OECD and non-OECD shares50-year view +140% +60% +60% -60% SourceI Socolow and Pacala, Scientific American, September 2006, p.56

17. 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

18. Potential 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

19. 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

20. 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

21. 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

22. Top-Down Estimation of Incremental Investments

23. Top-Down Estimation of Incremental Investments Comparing this figure with the previous figure shows that the incremental investment costs are very sensitive to the assumed baseline

24. 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

25. Costs of Reducing Carbon Dioxide Emissions relative to sub-critical coal (life-cycle) A key challenge is to reduce the cost of IGCC and CCS, which are still pre-commercial

26. Bottom-Up Analyses of Transitioning to Low Carbon 450 ppm stabilization by Changing Technologies Changes in Technology Costs of Changing the Technologies

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

28. Bottom-Up Analyses of Transitioning to Low Carbon 450 ppm stabilization by Changing Technologies Changes in Technology Costs of Changing the Technologies

29. 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

30. A 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

31. Global CO2 Storage • 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 • ~8100 Large CO2 Point Sources • 14.9 GtCO2/year • >60% of all global anthropogenic CO2 emissions

32. Financing for the Transition to a Low Carbon economy 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

33. Carbon Trade will Play the Largest Role in Financing a Transition to a Low Carbon Economy • 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

34. 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 notmitigated

35. Role of the World Bank

36. 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

37. 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

38. Annex B Annex B non rat. The Kyoto Protocol Three Flexibility Mechanisms Joint Implementation Allowance Trading Clean Development Mechanism

39. CDM 450 Carbon Market in 2006Volumes transacted(MtCO2e) Project-Based Transactions Allowance Markets JI 16 EU Emission Trading Scheme SecondaryCDM 1,100 25 + Other Compliance New South Wales Certificates UK ETS Voluntary& Retail Chicago Climate Exchange na 20 19 10 + 10 MtCO2e

40. Alternate Business Model for Project-Based Carbon Trading Provides up-front capital as a low-interest loan - self-sufficiency depends on cost of low-carbon technologies and carbon market price

41. 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 deforestation • energy efficiency standards • Assisting in building and sustaining the institutional and regulatory structures • Developing a post-2012 sectoral/programmatic funding mechanism

42. 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

43. Analysing Climate Risk in the Development Portfolio OECD Study 15 – 60 % of official flows potentially affected by climate change Source: Bridge Over Troubled Waters: Linking Climate Change and Development, OECD (2005), p. 67

44. 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

45. 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

46. 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

47. Role of the World Bank • Provisioning of climate information • Project investments that incorporate climate considerations • Analysis of the viability of different financial mechanisms

48. 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