Meaningful carbon pricing can build a business case for green projects: World Bank’s Xueman Wang

Climate change is real. Regardless of what critics say, forest cover is on the decline, green house gas emissions is on the rise, and global temperatures are increasing every year. Today is a historic day for those fighting against climate change. The Paris Agreement, a plan aimed at limiting global climate change which was introduced by the United Nations Framework Convention on Climate Change, comes into force. Signed last December, the agreement binds member countries to take steps to reduce emissions. Of the 195 countries that have signed on, India—the fourth-largest emitter of carbon dioxide (behind China, U.S., and Russia) in the world accounting for over 4% of global emissions— was the 62nd country to ratify the agreement in October.
As part of the agreement, India plans to cut its emissions by 33%-35% and produce 40% of electricity from non-fossil fuels by 2030. This would mean a shift significantly from coal-based power generation (a key source of carbon emissions) to renewable energy sources such as solar, wind, biomass, and hydropower. We talk to Xueman Wang, coordinator—cities and climate change at World Bank, about how India can meet its climate related targets and attract financing for projects that mitigate climate change. Wang has been closely involved with designing carbon finance models and sustainable development policies across various economies. Edited excerpts:

The Indian leadership has been arguing about climate justice and the need for the developed world to do more for financing the developing countries’ efforts to go green. Do you agree with this view?
After Paris, development agencies have started looking at climate financing closely and are setting specific targets for it. Currently, about 20% of the World Bank’s funding is climate related and the aim is to make it 28% by 2020. This focus has trickled down to how we select projects as well, where we look at the climate resilience and emissions of projects. A lot of private sector companies are incorporating sustainability and climate change into their business plans. However, the challenge lies in the profitability of such plans. Take for example, in India, there’s massive urban infrastructure, but investment from the private sector is minimal because returns are low and spread over a long-term.

For countries like India, what is the better option: cheap financing for green projects or emissions trading? [Emissions trading is a market-based approach where polluters can trade carbon credits if they want to increase emissions.]
Each country is different. For some countries, it makes sense to use market instruments such as emissions trading. For others like South Africa, it is better to go for carbon pacts, which are essentially agreements that companies get into for reducing emissions. India already has carbon pacts. Although they are not emissions trading per se, there is already an economy around them wherein companies are given incentives to be more energy efficient in order to sell their certificates. The question now is whether the pact system can be moved to a bigger emissions-trading scheme. For countries like India and China, if emissions-trading schemes are managed well, there can be a lot of energy efficiency gains. It will also provide an important incentive for the private sector to reduce emissions. That said, emissions-trading schemes are high maintenance and require a lot of governance. Since trading is based on data, it is important to build a robust system of auditing and governance. It requires a huge amount of investments as well.

What are the challenges for financing climate-related projects?
Environmental activists mainly like to look at the ‘green’ part of businesses whereas financing people look at the financial aspect. When it comes to green bonds [where funds are used for environment-friendly projects], investors will not pay a premium just because it is green. It has to be viable for investors such as banks. Renewable energy projects right now have a good business model. In India, for projects like solid waste management, people want to do public-private partnerships, but there isn’t a good business model. The money is there, but there is no business model. Policy interventions are also required. Having meaningful carbon pricing can help build the business case for green projects. For instance, if coal is made costlier, the business case for renewable projects improves. Carbon pricing, therefore, is one of the most important policy interventions.

What is your assessment of the energy-efficiency programmes undertaken by the Indian government to attract financing?
We work closely with Energy Efficiency Services [EESL; a joint venture of public sector undertakings to implement energy-efficient projects] and are impressed with how fast it has developed a business model. EESL is still a young company with a mission to create a market for energy-efficient products. It recently issued corporate bonds at attractive coupon rates. This shows that it is able to mobilise financing on its own from the capital market. And this is something that other countries can learn.

In the aftermath of the Paris Agreement and its targets, is the importance of emissions trading declining?
Emissions trading is not a silver bullet. Instead, it is one of the many interventions needed and should be combined with sustainable development initiatives such as renewable energy programmes. Not doing so would be a mistake. For instance, the European market focussed solely on emissions trading while underestimating the importance of energy efficiency and renewable energy. While designing the market for emissions trading, countries need to keep in mind how policies that mitigate climate change interact.