Inter-American Development Bank

Shadow carbon pricing

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.

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Some progressThe IDB does not consistently apply a shadow carbon price across its operations, with application being optional on a project-by-project basis. Where it is applied, project teams are recommended to use the dynamic price range recommended by the High-level Commission on Carbon Prices (HLCCP), and to calculate this for all alternatives being considered. While the selective use of a shadow carbon price may be justifiable, the IDB does not appear to have provided a  supporting rationale for this practice, nor any guidance to project teams regarding when and why shadow carbon pricing should be applied.

The table below provides a summary of how a shadow carbon price is (or is not) applied across IDB operations.

Which projects subject to greenhouse gas (GHG) assessmentThe IDB project level GHG accounting approach covers projects in the seven sectors that dominate the GHG emissions footprint of its portfolio: energy, industry, agriculture, water and sanitation, transport, urban development, and tourism. All direct investment projects with emissions, or emissions savings, exceeding 25 kilotons CO2-equivalents (CO2e) per annum are assessed. 
Which projects apply shadow carbon pricingProject-by-project optional application. Rationale not clearly defined.
Price levelWhen applied, prices are aligned with the High-level Commission on Carbon Prices (HLCCP) recommended price range.
How shadow carbon price is usedOptional for project teams to estimate the cost of GHG emissions. Shadow price of carbon is multiplied by estimate of expected GHG emissions for all alternatives being considered where relevant.
What is it compared to?Unclear.
Are Scope 3 emissions included?Unclear.

The IDB does not have a mandatory policy or guideline for the use of a shadow carbon price (SCP). However, project teams that choose to consider a shadow carbon price in their economic analyses are recommended to use the dynamic pricing structure of the Report of the High-Level Commission on Carbon Prices (HCC) according to the IDB’s GHG Accounting Manual. This provides a minimum and a maximum price level, increasing in 2030 and 2050.

Recommendations:

  • The IDB should clarify the procedures and use of shadow carbon pricing internally through issuing clear, publicly available guidance to govern the application of shadow carbon pricing by project teams. A SCP is not a “silver bullet”, but rather an approach to be used most effectively alongside other measures. If the use of a SCP is to remain a selective practice (such as for cases where it is deemed “relevant”), the motivations for when it is used, and why it is used on these occasions should be made clear.
  • The IDB should consider mandating the implementation of a SCP for all projects in GHG intensive sectors across its approvals. This analysis should ideally be conducted by an independent office within the Bank which can feed results back to project teams. Such an arrangement can both lighten the capacity load on project teams, and ensure analysis is objective.
  • In doing so, the IDB should adopt a similar pricing framework to the HLCCP (which uses a price range) as it currently already recommends for those instances where a SCP is optionally used.
Last Update: February 2025

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