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Carbon finance
The next 10 years
The current uncertainty about the future of the
global carbon market mirrors that of 10 years ago
– and now, as then, the World Bank’s carbon finance
unit is pioneering new public-private partnerships to
help develop the market, says Joëlle Chassard
C
arbon finance is facing an uncertain future. Only two
years remain before the end of the first commitment
period of the Kyoto Protocol, and the future shape of
the international community’s commitment against climate
change is still unclear – affecting investment decisions and
slowing the growth of market mechanisms.
The Clean Development Mechanism (CDM), by far the
most successful flexibility mechanism established by the
Kyoto Protocol, is suffering from a lack of regulatory clarity.
The time it takes to validate or register a CDM project, or
to verify and issue certified emission reductions (CERs), has
dramatically increased over the past four years, and with it
CDM transaction costs. A persistent lack of trust between
the Designated Operational Entities (DOEs) charged with
auditing CDM projects, and the CDM Executive Board (EB),
which regulate them, is generating duplication and delays.
In some ways, today’s situation is somewhat similar to
where we were 10 years ago when the World Bank launched
the Prototype Carbon Fund – the world’s first global carbon
fund – at a time when the Kyoto Protocol had not yet entered into force, and the rules governing its flexibility mechanisms still had to be agreed upon.
Yet market mechanisms took root and it has been demonstrated that they can complement and leverage other
resources to unlock low-carbon investment by overcoming
barriers, driving innovation and creating a revenue stream
that sustains projects over time. Between 2002 and 2009,
CDM and Joint Implementation (JI) transactions led to an
impressive $27 billion of carbon finance flowing to emission
reduction projects – and leveraged more than an estimated
$100 billion in related financing. Market mechanisms are
bringing to bear the entrepreneurship, creativity and finan-
cial resources of the private sector in the fight against climate change. The advantage we have today is that the international community has a much better idea of what works
and does not work, and of the new directions in which carbon finance must now move.
Public funding is still needed to complement capacitybuilding efforts, correct market imperfections and target areas overlooked by the market. But the size of future financing needs for climate change mitigation leaves no doubt
that carbon markets and related instruments will remain a
key tool for channelling private sector financing and entrepreneurship towards greenhouse gas mitigation activities.
Strengthened by the deep experience gathered over the past
decade, and convinced of the need to continue its support
for mitigation actions, the World Bank proposes to embark
on its next 10 years of carbon finance by continuing its work
to expand the scope, scale and range of climate change mitigation activities in various sectors of its clients’ developing
economies.
To do so successfully, carbon finance should grow in three
main areas: it must ‘change gears’ by moving beyond a pure
project-based offsetting mechanism; contribute to carbon
sequestration by helping to underwrite sustainable management of forests in developing countries; and respond to
the needs of the world’s poorest. These three priorities will
Today’s situation is somewhat
guide the World Bank’s involvement in the coming years.
similar to where we were 10 years
First, carbon finance can and
ago when the World Bank launched
should contribute to supporting low-carbon growth stratethe world’s first global carbon fund
gies in developing countries at
a greater scale. Piloting of programmatic and sector-based
approaches using today’s carbon finance framework has
already started with the Carbon Partnership Facility (CPF),
which is developing emission reduction programmes building on a framework of policy-linked and technology-based
actions defined by country-specific circumstances and capacities. The CPF – which has attracted €100 million so far
for its carbon fund – is utilising the CDM programme of
activities model, in conjunction with World Bank lending
operations, to scale up low-carbon investments into programmes of projects, using a range of renewable energy
technologies, and in solid waste management. The CPF is
also piloting city-wide carbon finance programmes and targeting areas that have not been reached effectively by the
CDM in the past, such as energy efficiency.
Cumulative volumes of Kyoto offset transactions (CERs
and ERUs) since 2002
2,500
Mt CO2e
M
2,000
1,500
Source:World Bank
1,000
500
0
2002
2003
2004
www.carbon-financeonline.com
2005
2006
2007
2008
2009
oving beyond the instruments already in place,
there remains a lack of agreement on which mechanisms could and should be employed to scale up
carbon finance flows further. The fact that there has been
little testing of the various concepts put forward raises questions on the practical challenges of implementing the proposed new market instruments on the ground. Moreover, a
lack of technical and institutional capacity – such as reliable
emissions databases, legal and policy frameworks, and credible measurement, reporting and verification (MRV) systems – in many developing countries further hinders their
ability to move from a project-based mechanism such as the
CDM to any form of scaled-up instrument.
The Word Bank’s proposed Partnership for Market
Readiness (PMR), expected to be launched in December in
Cancún, is intended to help address these issues by creat-
Special Report Kyoto and the carbon markets S19
Carbon finance
ing a platform to enable policy-makers from both developed
and developing countries, practitioners, and public and private sector entities to share experiences and information
on elements of market readiness, thereby creating a body
of knowledge regarding market instruments that could be
tapped for country-specific requirements. The PMR, which
has a target size of $100 million, plans to: provide grant financing to participating countries in building ‘infrastructure’ for market readiness; pilot, test and sequence new
concepts for market instruments; and share lessons learned,
including with the bodies of the UN Framework Convention
on Climate Change (UNFCCC).
Second, the World Bank will continue to support the
growing consensus about an increased role for forests in developing countries in reducing carbon emissions from deforestation and forest degradation, and through conservation
and the sustainable management of forests and the enhancement of forest carbon stocks – the so-called ‘REDD+’ list
of activities. The $300 million Forest Carbon Partnership
Facility (FCPF), established in 2008, provides technical assistance and supports 37 forested developing countries in
the tropics in their efforts to develop national strategies and
systems for REDD+. It is based on a strong partnership of
50 countries and a broad range of international and national
stakeholders, building not only capacity, but also trust and
confidence among partners, and has proven helpful in moving the REDD+ agenda forward.
Looking ahead, the FCPF will continue to strengthen its
role as a forum to move REDD+ forward, providing technical assistance and grants to support strategies that promote
forests as a mechanism of climate change mitigation. The
FCPF also plans to launch its carbon fund – with a target of
$200 million – in the near future to provide performancebased incentives that test and demonstrate how emission reduction programmes generated by REDD+ activities could
work, ahead of the full elaboration of a REDD+ mechanism.
Furthermore, the FCPF is enhancing its coordination with
other relevant initiatives, including the UN-REDD Programme and the World Bank’s Forest Investment Program.
These three initiatives are preparing joint papers and means
for cooperation among multilateral REDD+ institutions that
might, for example, create a joint platform for sharing policy
discussions, country experiences and lessons learned.
T
hird, the World Bank will facilitate the development
of market mechanisms in support of the needs of
the poorest developing countries, especially in Africa. This requires action in two areas. On the one hand,
land-use change is responsible for about 20% of annual
greenhouse gas emissions, so it is important that sustainable climate change mitigation should include activities that
improve land management. The sale of carbon assets may be
an opportunity for rural populations to compete in a global
market by improving the way they manage their natural
resource base. Rewarding carbon sequestration can also
help in the fight against desertification and the protection
of biological diversity, creating multiple benefits. It also creates incentives for better natural resource stewardship, and
improves rural livelihoods.
Agriculture and forestry are areas where climate change
mitigation also supports adaptation to climate change.
Greenhouse gases will be removed from the atmosphere
and stored in vegetation and soils, and the resilience of communities and ecosystems to adjust to climate change will be
increased as activities are undertaken which both sequester
carbon and restore land fertility, contain desertification, reduce the impact of floods, etc. Current trends in the negotiations for land use, land-use change and forestry (­LULUCF)
rules post-2012 are leading to interesting areas for additional work, even though agriculture remains at an early stage
of discussion. The World Bank has been a leading actor in
these areas since 2003 with the creation of its $90 million
www.carbon-financeonline.com
Carbon finance
needs to
respond to the
needs of the
world’s poorest
BioCarbon Fund. It intends to pursue this engagement by
supporting pioneering work, such as ecosystem restoration
projects that sequester or conserve carbon in forest and
agro-ecosystems and have a strong emphasis on poverty reduction and improvements in rural livelihoods.
O
utside the LULUCF domain, the poorest countries
can also benefit more from carbon markets to meet
their energy access needs through clean energy and
implementing other carbon mitigation initiatives in sectors
such as transport or waste management, provided that the
regulatory framework evolves to reflect their situation better. In particular, regulators need to simplify procedures for
project approval and CER issuance to reduce transaction
costs and delays, something that is vital for making smallscale projects viable.
Furthermore, monitoring procedures and requirements
to demonstrate that projects are ‘additional’ to business as
usual need to be adapted to smaller projects with less capacity and less available data; CDM methodologies must be
adjusted to reflect real energy demand (not just historical
grid-connected energy supply) for meeting basic needs in
least-developed countries, and further development of programme rules and capacity-building is needed. The World
Bank has significant experience of implementing carbon
finance in the poorest countries through its $129 million
Community Development Carbon Fund. It intends to build
on this experience, working with developing countries, the
UNFCCC, the CDM Executive Board and other stakeholders to help turn the necessary CDM reforms into reality and
channel carbon market resources to the low-carbon poverty
reduction strategies of the poorest countries.
As a participant committed to making carbon markets
work for sustainable development, the World Bank will
continue to contribute through its capacity-building activities, its ability to mobilise financial resources and informally
build bridges between stakeholders. Using its experience as
a market maker in the early days of carbon finance, and as
a contributor to the global experiment that marks the first
commitment period of the Kyoto Protocol, the World Bank
recognises that the best opportunity to use carbon markets
to achieve successful large-scale greenhouse gas mitigation
in the future will be a partnership of all countries involved.
That is why the World Bank intends to continue facilitating
discussions and the exchange of views between all market
stakeholders in a variety of formal and informal settings. EF
Joëlle Chassard is the head of the carbon finance unit of the
World Bank, based in Washington, DC.
E-mail: [email protected]
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