Center for American Progress / by Gwynne Taraska and Ori Gutin
[Press Release] With world leaders meeting in Germany for the international climate negotiations, and G-7 countries meeting in Japan for their annual summit, the Center for American Progress has released an issue brief that looks at the ways multilateral development banks, or MDBs, can use proxy carbon pricing in evaluating the financial viability of potential long-term projects or investments.
Both world leaders and MDBs have commitments to steer investments toward international development projects that are climate-friendly. As a step toward reaching such commitments, participating countries should urge the MDBs of which they are shareholders to adopt the practice of anticipating that carbon pollution will carry increasing costs—a process called proxy carbon pricing.
Proxy carbon pricing helps direct investments toward low-carbon projects and technologies. The practice is well-known in the private sector, which uses proxy pricing to ensure that their projects remain profitable in a world of increasingly strict carbon limits. To date, proxy carbon pricing is not widely used in investment decisions outside of the private sector.
“Public entities—such as MDBs—should be even more motivated than private sector actors to use a proxy price on carbon,” says Gwynne Taraska, Associate Director of Energy Policy at American Progress and co-author of the brief. “MDBs operate under mandates not only to make fiscally sound investment decisions, but also to serve the public interest in developing regions—which entails an obligation to help mitigate future warming. Proxy carbon pricing can help fulfill both mandates.”
There are signs that the practice of proxy carbon pricing may start to gain traction in the MDB community. Several MDBs apply—or are taking initial steps to apply—proxy prices that take into account the financial damage to society caused by each ton of greenhouse gas pollution. As the banks seek to develop their tool kits to promote low-carbon growth, there is an opportunity for proxy carbon pricing to become more consistently and broadly used.
While not a panacea for climate change, proxy carbon pricing is a promising tool and has unique benefits as one in a set of tools that may be jointly sufficient to guarantee climate-compatible investments.