Shadow carbon pricing

Explanation

The AfDB does not currently apply a shadow carbon price (SCP) to any of its investments. Discussions with the Bank have previously suggested that the tool is not considered widely applicable for the AfDB’s operating context, given its relatively low emissions.

However, there are indications that the AfDB might be moving towards using a SCP. In setting out strategic actions for generating a more robust pipeline of bankable climate and green investments, the 2021–2030 Climate and Green Growth Strategic Framework commits the AfDB to pursuing the application of internal carbon pricing. This would involve using a shadow carbon price as a data point to reflect the risks of emissive investments and the value of the low-carbon transition, to ultimately support the development of “a pipeline of low-carbon options consistent with the Paris Agreement as well as global and national emission reduction”.

Recommendations:

• The AfDB should use a SCP to inform decisions about high-emitting projects. Indirect (scope 3) emissions should be included as this can substantially change assessments of environmental impact and is therefore material to investment decisions.
• In using a SCP, it is recommended that the AfDB adopt the pricing structure put forward by the High-Level Commission on Carbon Prices. This will allow the AfDB to use a price range, where it can tailor the to the specific national and local context of a given project, given development priorities. Using a dynamic SCP in this way reflects the understanding that shadow carbon pricing should not be seen as a deterministic or “solve-all” tool – rather as a useful input for making effective and informed decisions about the potential risks and costs of emissive projects.
• Where already in use, or if selective implementation is put in place, the AfDB should clarify the procedures regarding how the SCP is applied and influences decision making. This includes disclosing any discount rates used for specific countries, alongside the rationale and evidence for such rates. Moreover, the Bank should seek to ensure that SCP analysis is performed by an entity within the Bank that is independent from the project team, to mitigate the potential for perverse incentives for project approval to impact the process.