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.
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 in 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.
Policy crediting aims to quantify emission reductions and attribute them to implementing and enforcing 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 measured scenarios against modeled counterfactuals without policy scenarios, the model calculates GHG emission reductions resulting from end-user tariff changes for electricity and natural gas.
To ensure that emissions reductions result from these policy changes, TCAF sets baselines below business-as-usual (BAU) levels and only credits achievements beyond BAU targets. Independent experts validate these baselines and crediting thresholds; independent third parties conduct verification of emission reductions.
Policy crediting for iCRAFT quantifies reduced carbon emissions through more efficient use of energy resources. By using carbon payments as rewards for implementing effective carbon reduction policies—such as removing subsidies—the program creates an incentive for Uzbekistan to accelerate its green transition.
Because iCRAFT marks Uzbekistan’s first step towards accessing international carbon markets, it is crucial that the country builds necessary infrastructure systems and human capacity with assistance from development partners.
Moreover, mitigating potential impacts of energy price hikes on vulnerable consumers will require awareness campaigns explaining why cost recovery tariffs are necessary while highlighting consequences of energy consumption—efforts TCAF will support.
These efforts are essential for reaping economic benefits involved in cutting emissions by reducing fossil-fuel subsidies in Uzbekistan and around the world which IMF estimates were equivalent to 7% of global GDP in 2022 or $7 trillion. Uzbekistan can also make money selling residual emission reductions or reductions from other activities on international carbon markets through systems developed under iCRAFT.
More than just benefiting Uzbekistan's economy, iCRAFT serves as a model for Central Asia and globally on how policy crediting can promote a greener future.
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