How Carbon Markets Are Helping Support Uzbekistan’s Energy Transition

STORY HIGHLIGHTS

• A pioneering program to support Uzbekistan’s energy transition rewards the country for policies that reduce greenhouse gas emissions and prepares it to trade on international carbon markets.
• The iCRAFT project in Uzbekistan can serve as a global model for countries wanting to reduce harmful energy subsidies.
• Results-based payments connected to energy policy reforms can be used to support people and communities most vulnerable to these changes.

Across the globe, countries are looking to cut their greenhouse gas (GHG) emissions to meet the national determined contributions (NDCs) they have committed to as part of the Paris Agreement to combat climate change.

Uzbekistan is one of the most energy and emissions-intensive countries in the world, with high energy subsidies propping up the use of fossil fuels, discouraging households and businesses from pursuing energy efficiency, and acting as a burden on the national budget.

To support Uzbekistan’s green transition, the World Bank has launched a landmark program that leverages carbon markets to encourage energy policy reform. The Innovative Carbon Resource Application for Energy Transition Project (iCRAFT) rewards Uzbekistan for each metric ton of carbon it cuts through energy conservation. This is the World Bank's first initiative globally to support policy changes through payments for emission reductions – a practice called policy crediting. If successful, iCRAFT can be scaled up and replicated elsewhere to help countries achieve their national emission targets.

iCRAFT Pays Off

Because countries need to reduce overall greenhouse gas emissions to meet their NDCs, they put a price on emissions of other harmful gases as "carbon equivalents." This is where carbon markets come into play. Countries can now monetize their efforts to reduce the amount of carbon released into the atmosphere by selling carbon credits on international markets. This provides a strong incentive for nations to curb carbon-intensive activities.

This June, Uzbekistan received its first payment of $7.5 million carbon credits through iCRAFT for cutting half a million tons of carbon emissions. Those credits were financed by the Transformative Carbon Asset Facility (TCAF), a World Bank trust fund that offers a unique combination of capacity building, results-based climate finance, and carbon market funding.

How Policy Crediting Works

Policy crediting aims to quantify emission reductions and attribute them to the implementation and enforcement of policies, using a policy measurement, reporting, and verification (MRV) model built for this purpose by TCAF.

The MRV Model analyzes the effects of energy-pricing policies on end-user energy demand. By comparing a measured with policy scenario(what really happened and was observed and measured) against a modeled counterfactual without policy scenario (what would have happened if the policy had not been enabled), the model calculates the GHG emission reductions resulting from end-user tariff changes for electricity and natural gas.

To ensure that emissions reductions are the result of these policy changes, TCAF sets baseline below-business-as-usual (BAU) levels, and only credits achievements beyond BAU targets. Independent experts validate the baselines and crediting thresholds, and the verification of emission reductions is conducted by independent third parties.

Policy crediting for iCRAFT quantifies reduced carbon emissions through a more efficient use of energy resources. By using carbon payments as reward for the implementation of effective carbon reduction policies (in this case the removal of subsidies), the program creates an incentive for Uzbekistan to accelerate its green transition.

Sustained Economic Benefits

Because iCRAFT marks Uzbekistan’s first step towards accessing international carbon markets, it is crucial that the country, with the assistance of its development partners, builds the necessary infrastructure, systems, and human capacity to roll out further climate-friendly, energy-efficient initiatives.

Moreover, the country will also have to work to mitigate the potential impacts of energy price hikes on the most vulnerable consumers. That will require undertaking awareness campaigns to communicate why cost recovery tariffs are necessary and highlight the consequences of energy consumption—efforts TCAF will support.

These efforts are essential for reaping the enormous economic benefits involved in cutting emissions, particularly by reducing fossil-fuel subsidies in Uzbekistan and around the world, which the IMF estimates were equivalent to 7% of global GDP in 2022 or $7 trillion. Uzbekistan can also make money selling residual emission reductions or emission reductions from other activities on the international carbon markets through the systems developed under iCRAFT.

More than just a boon for Uzbekistan's economy, iCRAFT is a model for Central Asia and the world on how to pursue policy crediting to promote a greener, more sustainable future.