World Bank should shift carbon focus off hydro – report

The World Bank Group has been urged to curtail buying carbon credits from hydropower projects, shifting the emphasis of its carbon finance activities to areas where it can have more influence.

A report by the Independent Evaluation Group (IEG) says: “Carbon finance needs to be redirected away from hydropower, where it has minimal impact on project bankability, to applications where it can have more leverage.”

Post-2012 funds run by the bank, such as the Carbon Partnership Facility, should focus on demonstrating technical and financial approaches, the report says, and should have “clear exit strategies” once the private market matures.

The IEG is an independent unit of the World Bank, which regularly assesses the group’s activities. It evaluated the Carbon Finance Unit (CFU) as part of a wider report on the bank’s role in catalysing the shift to a low-carbon economy.

Responding to the report, the World Bank’s leadership said the IEG should outline alternative financing avenues for hydropower if it advocates such a switch, “in particular for Africa, where hydro remains a vast and largely untapped reservoir of clean energy”.

“Much of the CFU’s support for energy technologies has gone to projects where its financial leverage – and hence its catalytic impact – was relatively small,” the report says, referring to hydropower projects. Additionally, two thirds of the CFU’s purchases of carbon credits have been from HFC projects, the report notes.

It contrasts this with two funds run by the CFU, the BioCarbon Fund and Community Development Carbon Fund, which supported small-scale, rural and forestry projects.

Overall, the report praises the World Bank’s “important demonstration role” in developing the carbon markets, but criticises the group’s “exit strategy” from the market once the private market began to flourish.

“It continued to build up its lower risk Kyoto-oriented business after that market was already thriving,” the report says, rather than shifting to less developed project types where its involvement could have more of an impact.

The bank’s management disagreed with this assessment, arguing the report “fails to understand that withdrawal by the Bank in 2005 from the carbon markets where its Carbon Finance Unit operates would have been catastrophic to the long-term stability of these markets.”

The report also criticises the World Bank for failing to fully mainstream carbon finance into its general operations, noting that out of 108 carbon credit agreements signed by the CFU, only 10 are associated with World Bank projects.

“For the operational part of the Bank, mainstreaming of carbon finance is seen as too much trouble, because of the time and hassle of arranging for project registration,” the IEG says.

On the overall effectiveness of carbon offset programmes, the IEG concludes: “This evaluation finds that the size and timing of carbon credit purchases is far too small, in many cases, to plausibly constitute a make-or-break influence on the decision to undertake a project. Instead, carbon funds constitute a mild additional inducement to investors that, statistically over the set of projects involved, may have contributed to some additional reductions.”