The Challenge of Low-Carbon Development - World Bank Internet ...

for monitoring their direct results, they do not yet trackhow effectively these results are reaching their intended audience.As other IEG reports have noted, cost-benefit analysis hasfallen out of fashion, impeding the WBG’s ability to identifyhigh-return investments. The estimates quoted here remainan unvalidated and possibly overoptimistic guide. The lackof good impact evaluations of forest projects, for instance,has deprived the REDD agenda of urgently needed guidanceon how best to combine forest protection with economicdevelopment.Publicly disclosed monitoring of carbon projects shows thegains from feedback. Landfill gas projects proliferated withthe advent of the carbon market, but monitoring reportssoon showed that these projects were systematically underperforming,relative to their design expectations. Thisfeedback revealed that the appraisal models were based onUS experience, which is inapplicable to the waste streamsof developing countries. The WBG helped to publicize thisdiscovery.Newer projects have incorporated design and operationallessons. This kind of systematic feedback is missing frommost projects, though IFC’s monitoring system is beginningto cover it. Feedback is especially needed for renewableenergy projects, where economic and carbon impactsare proportional to capacity utilization. Many hydropowerand wind projects are underperforming for reasons that arenot clear.At the organizational level, the WBG has framed SFDCCgoals in terms of dollars committed, rather than outcomesor impacts. This sets up poor incentives. For instance, energyefficiency projects are expensive in staff time and leadto relatively modest volumes of lending, yet can benefit clientsmore than cheaper-to-prepare, larger-volume generationprojects.RecommendationsThe WBG should maximize its leverage in promoting lowcarbondevelopment. This will require a strategic approachto portfolio choice, instruments deployed, and technologypolicy. And it means scaling up what works and redesigningwhat does not, using learning to unlock value for clientsand for the world. Key aspects are as follows.Act like a venture capitalistIn both the public and private spheres, the WBG can supportthe transfer, adaptation, piloting, and demonstrationof innovative technologies, policies, and financialpractices—as it has, for instance, with ESCOs, bus rapidtransit, solar home systems, and agroforestry. These demonstrationscarry risks but can offer high returns. Whatcounts for clients, the WBG, and the world, however, is thereturn on the portfolio in development, poverty reduction,and GHG mitigation.A first challenge is to mitigate risks. This means using GEFor other concessional funds (grants or low-interest loans)to support the earliest and riskiest ventures, so that failuresare less costly to borrowers. Because of the potential forhigh returns, this could be a much higher-leverage use ofclimate finance than the purchase of carbon offsets frommarginally profitable renewable energy projects. Risk isfurther mitigated by staging successively larger pilots anddemonstrations, from test site to province to nation. Withincreasing experience and comfort, scale expands and riskdeclines. Changes are necessary, too, in internal WBG incentivesto reward staff and managers for conducting informativepilots and for producing results at the portfoliorather than the project level.A second challenge is to design projects effectively for learningand diffusion. Pilot or demonstration projects musthave a clear, logical framework showing how they will promotediffusion the knowledge gained through experience.Pilot, demonstration, and technology transfer projects requireadditional support for preparation and supervision infunding and on-call expertise.Though there is a clear case and large scope for WBG involvementin technology transfer at the national level, thecase is less clear for WBG involvement in new technologydevelopment at the global level. Candidate technologieswould be those where WBG support could make an appreciabledifference to the global market, helping to pushcosts down. Of special interest are technologies that benefitpoor people and are difficult to protect from copying(and therefore attract little private R&D)—for instance, inagriculture and land use. The proposed new WBG effortto support concentrated solar power is a plausible area ofsupport because a large proportion of the suitable resourceis located in client countries, the technology is suitable formanufacture in client countries, and the proposed effortis sufficiently large to globally push the industry down thecost curve.The World Bank and IFC should—• Create incentives and mobilize resources to supporteffective pilot, demonstration, and technologytransfer projects that have a clear logic of demonstrationand diffusion. This will include mobilizingGEF and other concessional funds to mitigate WorldBank borrower risk, reshaping incentives for staff andmanagers, providing adequate resources for the designand supervision of complex projects, and makingavailable specialized expertise in technology transferand procurement through a real or virtual technologyunit.xiv | Climate Change and the World Bank Group