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Yesterday, the G20 leaders released a statement that commits the World Bank and the other MDB’s to financing low-carbon growth:

We will make the transition towards clean, innovative, resource efficient, low carbon technologies and infrastructure. We encourage the MDBs to contribute fully to the achievement of this objective.

The marching orders are clear, because the World Bank and other MDB’s obviously cannot “contribute fully” to the transition toward a low-carbon economy without accounting for carbon emissions in the projects they finance. At present, they don’t do this. To move forward, the MDB’s will have to:

  • Calculate net carbon emissions for alternative project designs, taking account of both carbon emissions (e.g., CO2 emissions from a coal-fired power plant) and carbon absorption (e.g., sequestration of carbon in a reforestation project).
  • Assign an accounting charge ($/ton) to a unit of net carbon emissions that reflects its global social cost.
  • Include the carbon charge (net emissions x accounting charge) in a project’s full benefit-cost analysis.
  • Use the benefit-cost analysis to rank the alternative project designs.
  • Identify the best project that the potential borrower will accept, given the terms that the Bank can offer from its own resources.
  • Identify projects with better benefit-cost ratios but higher financing costs and seek donor-country funds to cover the extra costs.

At this point, the MDB’s will have done their part. Then the rich countries will have to step up, because projects that incorporate the cleanest technologies often have higher financing costs. Hard-pressed developing countries should not be expected to pay this extra cost, and the MDB’s cannot pay it without depleting the capital resources that are also needed to finance critical investments in education, health, infrastructure and other sectors.

So, as it turns out, the G20’s marching orders for the MDB’s also contain a clear message for the rich countries: To accelerate the transition to a low-carbon economy, you will have to pay the extra cost. This can be achieved by scaling up the existing Clean Technology Fund (with a tough low-carbon mandate), expanding bilateral grants, and reforming and expanding the Clean Development Mechanism that governs payment for carbon offsets in rich countries.

To summarize, the G20’s marching orders to the MDB’s will be nothing more than an unfunded mandate if the rich countries don’t step up. And they should, because our survival requires accelerating the low-carbon transition in developing countries. Otherwise, as Kevin Ummel and I have shown in Another Inconvenient Truth, poor countries’ carbon emissions will grow so rapidly that we’ll face catastrophic global warming even if rich countries stop emitting entirely.

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CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.