| Paris alignment | Reasoning |
|---|---|
| Paris aligned | The WBG applies a carbon price across its operations, although criteria vary across the Bank Group’s institutions. All projects at IBRD & IDA are assessed where technically and financially feasible, while at IFC & MIGA, assessments are limited to certain sectors and apply only to projects exceeding a threshold of 25 ktCO2e/year. Carbon prices across the WBG are aligned with the recommended price range set out by the High-Level Commission on Carbon Prices (HLCCP). Scope 3 emissions are generally not covered. |
The table below provides a summary of how a shadow carbon price is (or is not) applied across WBG operations.
| Which projects subject to greenhouse gas (GHG) assessment | IBRD & IDA: All projects where technically and financially feasible, excluding projects with “diverse and small sources of emissions” or where emissions are “not likely to be significant”.1 IFC & MIGA: Projects that produce (or are expected to produce) 25 ktCO2e/year. |
| Which projects apply shadow carbon pricing | IBRD & IDA: All investment projects that are subject to GHG accounting, with those not subjected to GHG accounting invited to use it on a voluntary basis. IFC: The cement, chemicals, and thermal power sectors. MIGA: It is being piloted in “carbon-intensive projects”. |
| Price level | Will use the high and low values from the range of prices recommended by High Level Commission on Carbon Prices |
| How shadow carbon price is used | IBRD & IDA: The SCP is not used as a firm hurdle but rather intended to inform the decision making of management and the Board. Replicating best practice, a price range is used to allow contextual applicability. IFC: Limited information available. Replicating best practice, a price range is used to allow contextual applicability. MIGA: Limited information available. |
| What is it compared to? | IBRD & IDA: Both the GHG accounting and economic analysis typically compare “with project” calculations to a “without project” scenario. However, energy sector projects are also required to be compared with “alternatives delivering the same level of service within the same time frame as the proposed project”, as per the WBG Energy Sector Directions paper. IFC & MIGA: There is no public indication of the baseline used for economic analysis involving an SCP at IFC or MIGA. However, energy sector projects are also required to be compared with “alternatives delivering the same level of service within the same time frame as the proposed project”, as per the WBG Energy Sector Directions paper. |
| Are scope 3 emissions included? | GHG accounting across the WBG typically only includes scope 1 and 2 emissions. However, within project economic analysis, the scope of costs and benefits considered must be the same as the scope of GHG emissions calculated. Therefore, if the economic analysis considers indirect costs and benefits, then the scope 3 emissions will also be considered. |
Explanation
At COP22 in 2016, the Carbon Pricing Leadership Coalition (a WBG initiative) resolved to establish a High-Level Commission on Carbon Prices (HLCCP), comprised of economists and global experts on climate change and energy. The mandate of the HLCCP was to identify suitable ranges of carbon prices that could in turn be used to design suitable pricing instruments and inform other relevant climate policies across actors. The commission published its final report in 2017, which has served as a valuable reference point for approaches to shadow carbon pricing across MDBs.
Consequently, in the same year, the WB issued an updated guidance note on the use of a shadow carbon price (SCP) in economic analysis. This note applies to IBRD & IDA projects based on the commitment made for those arms of the Bank to use an SCP in the economic analysis for all investment projects that are subject to GHG accounting. Projects that are not required to undertake GHG accounting are “invited to use” an SCP in their economic analysis, “on a voluntary basis.” The note explicitly sets out that the use of an SCP is not intended as “an automatic rule to select projects”, but rather to inform the decision making of management and the Board.
The guidance note affirms the WB approach to follow the HLCCP-recommended price range in implementing an SCP. In doing so, the note explicitly recognises the value of using a price range in the context of differing country circumstances, as well as uncertainty about future socioeconomic and technological trends.2
For any given project, the economic analysis will include four calculations relating to shadow carbon pricing: (i) without an SCP; (ii) with the low-value SCP; (ii) with the high-value SCP; and (iv) with the “switching value” SCP (where relevant).3 The guidance note provides instructions for interpreting the results of these calculations, requiring the switching value SCP to be calculated when the low- and high-price calculations do not reach the same judgement on economic viability.
IFC and MIGA have not published a comparable dedicated policy note on the use of an SCP. However, other communications by IFC confirm that shadow carbon pricing has been in place since 2018 for the cement, chemicals, and thermal power sectors. For these use cases, the HLCCP-recommended price ranges are used. Similar to the WB guidance note, there is explicit reference to projects in lower-income countries as “subject to prices at the bottom end of the range”, compared with projects in middle-income countries using an SCP “at the upper end”.
MIGA’s 2023 sustainability report states that the institution has “started piloting a shadow carbon price to further address transition risks in its economic analysis of carbon-intensive projects”. However, there is no further publicly available information regarding the details of MIGA’s use of an SCP.
Recommendations:
- IFC should aim to broaden the scope of sectors covered by an SCP. It should ideally apply to all projects financed by the Bank which are above the inclusion threshold.
- MIGA should disclose more information on its planned use of an SCP, including what “carbon-intensive projects” amounts to in terms of sectoral inclusions and what baseline projects are measured against.
- The WBG should consider broadening the scope of emissions included within an SCP. Indirect (scope 3) emissions should be included wherever possible as their inclusion can substantially change assessments of environmental impact and is, thus, material to investment decisions.
1 These thresholds are not defined quantitatively in publicly available documentation. See the “Greenhouse gas accounting and reduction” metric for further details.
2 Determining country-specific price levels is said to depend on a range of characteristics such as “income level, poverty incidence, economic structure and dependence on fossil fuels, potential of renewables, and ability of the government to support the transition, especially for the poor and vulnerable”, among others.
3 The “switching value” refers to identifying the SCP (which increases at a constant rate of 2.25% over the project lifespan) that would change the economic viability of a project: i.e. either through making a GHG reduction project viable, or through making alternatives to a project which increases GHG emissions become relatively more economically viable and cost competitive.