This page is part of the E3G Public Bank Climate Tracker Matrix, our tool to help you assess the Paris alignment of public banks, MDBs and DFIs.
| Paris alignment | Reasoning |
|---|---|
| Some progress | Both the Energy Sector Strategy and Paris alignment methodology of the AIIB state that shadow carbon pricing will be used as part of the economic assessment of prospective projects. As per information received from the AIIB, the Bank requires an economic analysis utilising a shadow carbon price to be conducted for all sovereign-backed financing, as well as all non-sovereign backed financing “with large climate externalities”. Price levels used are in line with the High-Level Commission on Carbon Prices (HLCCP). However, neither document provides clear details regarding how the shadow cost of carbon informs investment decisions in practice, and whether it is applied across multiple reference scenarios. Moreover, the robustness of its usage is severely constrained by the Bank’s nascent project level GHG accounting procedures. |
The table below provides a summary of how a shadow carbon price (SCP) is applied across the Bank’s operations.
| Which projects subject to greenhouse gas (GHG) assessment | GHG accounting is currently explicitly mandated only for energy sector projects, though has been extended beyond this on a case-by-case basis. However, this is not accompanied by any clear quantitative thresholds for inclusion, and is subject to caveats regarding feasibility, client capacity, and reporting. |
| Which projects apply shadow carbon pricing | The AIIB’s Energy Sector Strategy confirms that the economic analysis of energy projects involves the use of a SCP. Moreover, the AIIB’s recent Paris alignment methodology suggests it will also apply an SCP to energy, transport, desalination, and waste-to-energy projects. |
| Price level | While the Energy Sector Strategy does not specify a price level, the Paris alignment methodology recommends the price level of the High-Level Commission on Carbon Prices (HLCCP). |
| How shadow carbon price is used | Both the Energy Sector Strategy and Paris alignment methodology suggest that an SCP is applied as part of the economic analysis of prospective projects. The latter ties this explicitly to the assessment of economic viability as part of Paris alignment. There is no indication of how the result of the SCP informs or affects investment decisions. |
| What is it compared to? | Although this is not explicitly confirmed, one project suggests the SCP is applied to the difference in emissions relative to a business-as-usual project. |
| Are Scope 3 emissions included? | Scope 3 emissions are considered on a case-by-case basis (such as for transport projects). However, the AIIB has yet to explicitly set out formal criteria for ensuring consistent inclusion. |
Explanation
The AIIB’s Energy Sector Strategy (updated in 2022) states that the Bank will consider the shadow cost of carbon as part of the economic analysis of projects. In terms of price level, the strategy refers to applying a shadow cost of carbon “consistent with its peer MDBs, and which relies on an extensive review of studies valuing these costs”. Further details regarding how the shadow cost of carbon informs investment decisions, and whether it is applied to multiple reference scenarios, are not provided. However, the strategy commits the AIIB to iterate this methodology with evolving evidence of best practice, as well as to build staff capacity to ensure robust economic evaluation.
Since then, the AIIB issued its Paris Agreement alignment (PAA) methodology in 2023, further alluding to the use of a shadow carbon price (SCP). This document draws heavily on the joint MDB approach to assessing Paris alignment, under which operations that are not considered automatically aligned with the Paris Agreement mitigation goals undergo an economic assessment under “SC5”.[1] SC5 verifies the economic viability of a project according to individual MDB criteria, with an SCP referred to as a “possible simplified way to incorporate climate change considerations” as part of this process. While the PAA methodology does not provide granular detail on how the Bank uses an SCP, it does explicitly confirm that it is considered as part of the assessments of Paris alignment of energy, transport, desalination, and waste-to-energy projects.
Use of an SCP relies on a robust process for project level GHG estimation being in place. However, the AIIB currently only mandates this for the energy sector, and the details of its approach undermine confidence in its robustness, consistency, and efficacy.[2] As a result, the Bank’s statements regarding the use of an SCP must be considered in the knowledge that effective implementation will require significantly improved processes.
Recommendations:
- Current indications from both the Energy Sector Strategy and the AIIB’s PAA methodology suggest that an SCP is considered as part of the economic analysis of investment decisions, but granular detail regarding its use is not forthcoming. As such, the AIIB should clarify the procedures and usage of an SCP internally through issuing clear, publicly available, guidance on the application of shadow carbon pricing by project teams. As part of developing this, the AIIB could draw on best practice approaches among peer institutions, such as those adopted by the Asian Development Bank (ADB) and the European Investment Bank (EIB).
- While recognising that an SCP is not a “silver bullet”, but rather an approach used most effectively alongside other measures, the AIIB should consider mandating its use for all projects in GHG intensive sectors. The Bank should clearly define in relevant documentation how these sectors are determined (e.g. in the PAA methodology and/or the Environmental Social Framework). Similarly, if the use of an SCP is to continue to remain a selective practice (for example restricted to energy, transport, desalination, and waste-to-energy projects), the thresholds for when it is used, and motivations for why it is used on these occasions, should be made clear.
- The AIIB should aim to ensure that economic analysis of project proposals using an SCP is ideally conducted by an independent office within the Bank, which relays results back to project teams. Such an arrangement can both lighten the analytical capacity load on project teams, and ensure the analysis is carried out in an objective manner, without incentives relating to the outcome.
[1] Paris Alignment Specific Assessment Criterion 5: Is the operation/economic activity economically unviable, when taking into account the risks of stranded assets and transition risks in the national/sectoral context?
[2] See the “GHG accounting and reduction” metric for further details.
Last Update: April 2025