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In a recent blog post, I criticized the World Bank Group's International Finance Corporation (IFC) for continuing to support massive coal-fired power projects. The blog focused on Tata's Mundra plant in India and the Clean Development Mechanism guidelines that provide the rationale for IFC support. But such a critique without constructive alternatives is insufficient: developing countries need power. They justifiably ask: "Why should we abandon cheap energy from coal when the US and other high-income carbon emitters continue to exploit it?"

The facile answer is that coal's huge carbon content makes it socially and environmentally costly, and that power consumers and investors everywhere should face the true costs, via carbon charges or cap-and-trade regulation. But we are far from global regulation of carbon emissions. Even if the UN's 2009 Copenhagen climate change conference creates a global regulatory architecture, it will take at least a decade to implement. Meanwhile, unless something else is done, the world will witness a massive surge in greenhouse gas emissions from new coal-fired power plants in developing countries. And the resulting acceleration in global heating will be felt most harshly by poor people in developing countries, who have the fewest resources and least capacity to adapt.

Fortunately something else can be done--by the World Bank Group and many other multilateral and bilateral financing institutions that work to foster development. These taxpayer-supported institutions don't need a Copenhagen agreement to incorporate the global environmental cost of coal into their project assessments and financing decisions--they can and should do so immediately. The resulting calculations will show that coal is not cheap at all. Indeed, when full social and environmental costs are included--as the multilaterals' own guidelines require--coal is more expensive than currently-available zero-emission technologies such as solar and wind. By accounting for coal's true cost and switching to renewable energy, the World Bank and other multilaterals can avert massive increases in emissions, and they can jumpstart the commercialization of clean technologies at a scale sufficient to challenge the dominance of fossil energy systems.

The process that the Bank and other multilateral financial institutions should follow in such an assessment involves three simple steps:

  • Adopt an explicit carbon accounting charge that can be defended as consistent with atmospheric safe limits for carbon loading. In view of the current scientific consensus, it will be very surprising if this is below $50/ton for carbon dioxide.
  • Add this charge to cost estimates for all proposed fossil-fuel energy projects (oil and gas as well as coal), with and without carbon capture and storage. Costs should also be adjusted for local pollution factors, fuel supply risks and risk insurance.
  • Compare the results with generating costs for locally-feasible zero-emissions options, with an appropriate learning-curve adjustment. This adjustment is critical for huge institutions like the Bank, which can generate aggregate global demand large enough to affect learning curves.

I have recently done these calculations for a huge coal-fired power plant in Botswana that the World Bank Group is considering for financial support (pdf). I'll be sharing the calculations--and have more to say about the Botswana case--in subsequent posts.

Meanwhile, the bottom line is good news indeed. According to my calculations, the most environmentally benign option, a solar thermal technology, has cost parity with an efficient coal-fired design at a carbon dioxide charge of just $35.50/ton -- far below the charge ($82/ton) recommended by the widely-supported Stern Review on the Economics of Climate Change. Moreover, since solar thermal technology and other low-carbon options are in the initial segments of their learning curves, it is entirely possible that volume production will ultimately reduce their costs to market parity with coal-fired technologies, even without any charges for carbon emissions.

For now, though, the World Bank and other development institutions will have to cover the market cost gap between coal-fired and zero-emissions technologies. Where will the additional money come from? Given the urgency of the global climate crisis, and rising concern among the donor countries that finance the World Bank Group and fund the Clean Development Mechanism, rich-world subsidies to jumpstart the market for zero-emissions power generation in the developing world would be a popular and smart investment. And in fact, the US has just proposed that international donors contribute several billion dollars to a Clean Technology Fund for exactly this purpose.

Here's hoping that the World Bank Group will begin to consider these factors as it weighs the wisdom of financing coal-fired plants in the developing world.

Disclaimer

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.