Positive impact aside, infrastructure projects can have a negative climate impact.
In designing and financing infrastructure projects, it is essential to consider potential adverse effects and externalities. A vital tool to value climate externalities and include them in the valuation of infrastructure projects is shadow carbon pricing. With this tool, the cost of carbon and GHGs can be explicitly included in the project's price. A recommended approach for doing this consists of the following steps:
1 - Adequately assess the carbon footprint of the relevant infrastructure project
2 - Choose a carbon shadow price that is appropriate and aligned with the Paris Agreement
3 - Include the resulting cost of the project's carbon emissions in the valuation or cost-benefit analysis.
An example of an assessment method for the carbon footprint of an infrastructure project is the European Investment Bank’s (EIB) carbon footprint methodology.
Using this methodology, the EIB can calculate
(1) the absolute GHG emissions or sequestration of a project and
(2) the emissions variation of a project — that is, the difference in emissions between the “with” and “without” project scenarios.
The result measures a project's absolute and relative GHG emissions, laying the foundation for valuing its climate externalities.
Based on a comparison of different sources and to achieve the goals of the Paris Agreement, the EIB has developed a shadow price for carbon. Shadow pricing is a tool that assigns a cost to GHG emissions. This price increases over time to reflect the necessity of reducing GHG emissions. Table 1 shows how shadow carbon prices rise over time.
In the final step, the EIB applies the price of carbon to value GHG emissions for heavily emitting projects. The EIB can quantify its negative climate impact by valuing a project's GHG emissions. The valuation is included in the cost-benefit analysis and, hence, in the decision-making on the financing and execution of the project.
The application of carbon pricing for an infrastructure project can be done in three steps and relies on the following:
Measuring and correctly assessing the level of emissions of the project. This needs to be done for the different scopes of emissions triggered by the project: (1) direct emissions from the operation of the project,
(2) emissions resulting from energy used by the project, and
(3) downstream emissions from the project value chain.
Correctly measuring these emissions becomes more challenging as you move from (1) to (3).
Multiplying the carbon price by the amount of emissions from the project. The resulting cost of emissions is charged to the project as a cost.
It should be executed only if the project is profitable when considering this cost.
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