Carbon Finance

Active Projects

The United Nations Framework Convention on Climate Change and the Kyoto Protocol

The United Nations Framework Convention on Climate Change (UNFCCC) was adopted in June 1992 by over 180 countries at the "Earth Summit" in Rio de Janeiro.  The UNFCCC provides a legal framework that enables Parties to the Convention to start the process of stabilizing greenhouse gases (GHG) in the atmosphere.  

The Kyoto Protocol (KP), adopted under the UNFCCC in December 1997, entered into force on February 16, 2005.  The KP commits industrialized country signatories ("Annex I" countries) to reduce their greenhouse gas or "carbon" emissions by an average of 5.2 percent, or 550 million tons of CO2, compared with 1990 emissions in the period 2008-2012 (often referred to as the first commitment period). 

Under the Kyoto Protocol, Annex I countries may achieve these emission reductions either domestically or by supplementing their domestic efforts through three international market-based or ‘flexible’ mechanisms:

Carbon Finance and the World Bank

The Bank is a key player in the carbon market with $845 million in available funds (as of January 2005). The Bank has been engaged in promoting and supporting the development of the carbon market since 2000.   Through the Bank’s carbon finance business every effort has been made to ensure that developing countries and economies in transition can benefit from international efforts to address climate change, including the emerging carbon market for greenhouse gas emission reductions.  Read more...

Carbon Finance in the Latin America and the Caribbean Region

Background:  In 1997 the Kyoto Protocol was negotiated as part of the United Nations Framework Convention on Climate Change.  This treaty commits industrialised signatory countries (known as Annex 1 countries in the Kyoto parlance[1]) to abating their greenhouse gas emissions over the period 2008-2012 by an average of 5.2% below a benchmark level of their historical emissions in 1990 – equating to around 550 million tonnes of CO₂ equivalent.[2]  The treaty entered into force on February 16^th 2005, following the ratification of Russia in November 2004, committing ratifying countries to realising their targets.  As of April, 2006 a total of 163 countries have ratified the treaty, representing over 61.6% of emissions from Annex 1 countries (notable exceptions include the United States and Australia) .  Developing countries, such as Mexico and Brazil, which have ratified the treaty, are not required to reduce carbon emissions under the agreement.

Annex 1 countries are expected, in the main, to realise their abatement targets by cutting domestic emissions.  However, Kyoto also contained provisions introducing flexibility into the system by allowing additional emission offsets made in developing countries to count towards national targets.  This process operates through two project-based mechanisms of the Kyoto Protocol: The Clean Development Mechanism (CDM) allows projects in developing countries, which can be shown to have made emissions reductions or increased carbon sequestration in addition to what would have occurred in a baseline scenario (i.e. absent climate change considerations), to be purchased by Annex 1 countries to offset their domestic targets.  The Joint Implementation mechanism (JI) is similar, but for countries with economies in transition.

These mechanisms maximize the economic efficiency of abatement in the following way: greenhouse gasses are a ‘global pollutant’ in that they effect the whole world equally, irrespective of the locus of their emission.  Cutting one ton of CO₂ abroad is thus exactly the same as cutting one ton at home.  However, since the cost of cutting one ton of carbon (the marginal abatement cost) can vary substantially between countries with different levels of industrial development, economic efficiency can be maximized by cutting emissions where it is cheapest to do so.  For example, relatively cheap improvements to older coal-burning power plants can often make substantial emissions reductions, at a far lower cost then that of a similar efficiency improvement in the modern combined-cycle gas plants more common in the industrialized world.

In order to realise their commitments, it is anticipated that Annex 1 countries will have to purchase up to 1.5 billion tCO2e through the CDM and JI mechanisms.  Prices per tCO2e range from US$3-12, depending on the type of transaction, and the risk that the purchasing party must share in the contract.  Project based transactions have typically been on the lower end of the scale, within the range of US$3-7 per CO2e, largely due to the project, country, and Kyoto (methodological) risks that characterise project-based transactions under the Protocol.  With the time window for satisfying commitments rapidly closing, activity in the CDM market is expected to ramp-up dramatically over the next several years.  This will represent a major source of near-term revenue for countries in the LAC region.  Read more...

Carbon Finance and the World Bank[3]:  The World Bank, one of the first players in the carbon finance market, first introduced the Prototype Carbon Fund as a partnership between 17 companies and 6 governments, managed by the World Bank, in April 2000.  As the first such fund, its mission continues to be to pioneer the market in project-based greenhouse gas emissions reductions, while promoting sustainable development and offering learning opportunities to its stakeholders.  Since then the Bank, as the largest single buyer of carbon credits, has continued to play a key role in developing the carbon credit market.

The World Bank’s Carbon Finance Unit (CFU) uses money contributed by partner governments and companies to purchase project-based greenhouse gas emissions reductions in developing countries, and countries in transition.  These reductions are purchased, within the framework of the mechanisms described above, through one of several CFU carbon funds, on behalf of the fund contributor.  Unlike other operations, the Bank neither lends nor grants resources for carbon finance projects, but instead contracts to purchase emissions reductions on behalf of contributors.  These reductions are then paid for, in a commercial arrangement, either annually or periodically (in some cases a proportion may be paid upfront), once they have been certified by a third party auditor.  By adding an additional stream of revenue in hard currency, carbon finance increases the financial return of energy, infrastructure, and environment projects, and has been shown to significantly increase developer’s access to project finance.  In addition, through carbon finance, issues of environmental sustainability have brought into a central role in projects in rural electrification, urban infrastructure, waste management, pollution abatement, forestry, water resource management, as well as the energy sector.

Climate change is widely acknowledged to pose the greatest threat to the most vulnerable -usually poor- societies, and may have a long-term, negative impact on their ability to escape from poverty.  Carbon finance is therefore a necessary part of the Bank’s mission to reduce poverty through environmental and energy sustainability.  Just as global climate change threatens to undo many of the significant changes made in developing countries over the past decades, so it is vital to bring these same developing countries into the dialogue on climate change mitigation, and therefore into a central role in the carbon finance market, as the Bank’s carbon finance programme is doing.

Carbon Finance in the LAC Region:

The Latin America and Caribbean region is one of the most active regions in the Bank on carbon finance.  Carbon finance is also one of the largest, and fastest growing business lines in FPSI, with 23 projects currently in the portfolio (11 under development, and 12 already under supervision).  Almost all of these are from projects sponsored by the private-sector, in which the Bank’s role is to offer technical advise on the registration process with the CDM executive board, provide technical, social, and environmental due diligence to assure project quality, and then purchase the generated carbon credits.[4]  The Bank’s thorough due diligence work, as a signal of project quality, also encourages other parties –such as financial institutions- into involvement in these projects.

The following are examples of some of the projects currently in implementation in Latin America and the Caribbean region (see below for more information):

·         A bagasse cogeneration project in Alta Mogiana, Brazil – in which bagasse (a waste product of the cane sugar production) is burned in boilers to supply heat and power – which can then be sold to third-party consumers;

·         Landfill gas recovery projects in Nova Gerar, Brazil and at several sites in Mexico – in which methane (a potent greenhouse gas) leaching from landfill sites is recovered, and then used to generate electricity (see slide);

·         Hydroelectric run-of-the-river projects in Chacabuquito and Hornitos (Chile), Rio Amoya (Colombia), Cote (Costa Rica), Abanico (Ecuador), La Esperanza (Honduras), Santa Rosa (Peru), as well as Poechos (Peru); and

·         A windpower project in Jepirachi, Colombia

World Bank Carbon Finance Products Value-Added

Emission Reduction Purchase Contracts:  The World Bank Carbon Finance Unit purchases greenhouse gas emission reductions through emission reduction purchase contracts, offering the widest range of in the market, including the choice between selling CERs and VERs[5], purchase contracts going beyond the Kyoto commitment period of 2012, and provision for monetizing part of the carbon revenues for upfront financing.   The purchase contracts are structured to maximize the leverage of the carbon finance element on project financing, and have very low credit risk with the World Bank as the counterparty to the purchase contract.   The World Bank carbon fund advances all preparation costs (including the Project Design Document, Validation costs and all due-diligence costs), which are then recovered from the project only if it subsequently results in a carbon finance transaction by the World Bank carbon fund.

Providing Sellers Access to the Carbon Market:  For sellers in more developed carbon markets willing to assume higher risks in return for more attractive prices, the World Bank is now offering to un-bundle emission reduction purchase and technical knowledge. The current practice of the World Bank in the carbon market is to find, prepare and contract emission reduction from eligible projects[6] for a specific World Bank carbon fund.   The Finance, Private Sector and Infrastructure Department of the Latin America and Caribbean Region of the World Bank now offers services to find, prepare, package and assist the project sponsor in accessing the carbon market to obtain more remunerative prices through, for example, auction of the emission reduction to the carbon market. Through this service the World Bank provides a no-risk service to the client whereby the Bank agrees to take on the whole process through to certification and sale of the emission reductions to the carbon market.

Promoting Participation of Public Sector Entities in Carbon market:  World Bank clients are primarily in the public sector energy sector and the Bank intends to devote special effort in promoting the participation of public sector entities, including municipalities and utilities. Funds through CF-Assist can be used to develop capacity of such entities and the World Bank invites interested entities to contact the Bank.

Aggregating Projects, Programmatic Approaches and Scaling-up Carbon Finance:     World Bank carbon finance is looking for opportunities for engaging in larger scale, programmatic approaches to greenhouse gas emission reduction. Such approaches may involve, for instance, group of cities to develop waste management facilities (landfills, recycling and composting) that are combined regionally or nationally. Bundles of projects, for instance bagasse cogeneration facilities though sugar or cogeneration associations, are also encouraged.

Mainstreaming Carbon Finance with World Bank Lending:  World Bank is tightening the association between lending projects and carbon finance opportunities and is looking for opportunities to link carbon finance to planned lending operation. New lending products that blend carbon finance in eligible projects to accelerate repayment and/or reduce interest payments are being considered on a project-by-project basis.

ACTIVE PROJECTS

Brazil - Nova Gerar Landfill Rio de Janeiro

The Nova Gerar Landfill Gas Generation Project aims to reduce greenhouse gases by investing in a gas collection system and a modular electricity generation plant at the landfill sites, in addition to further upgrading the waste management disposal system.

Brazil - Lages Woodwaste Cogeneration

This project aims to displace carbon dioxide equivalents by substituting electricity from thermal plants with electricity from renewable sources, using wood waste from existing wood processing units and other wood residues. This also avoids methane emissions from wood waste piles, currently land-filled in most cases in an environmentally harmful manner.

Brazil - PCF Sugar Bagasse Cogeneration Project

This project reduces emissions by generating energy from renewable resources through several subprojects in Brazil. Two subprojects focus on sugar bagasse cogeneration and the third is a cogeneration project that focuses on increasing efficiency in the cogeneration process to produce more steam, and increase electricity output to supply the national grid.

Chile - Chacabuquito Hydro Power Project

The Chacabuquito Hydro Power substitutes thermal plant electricity with electricity from a 25MW capacity, run-of-the-river hydro plant, thereby reducing greenhouse gas emissions. The Prototype Carbon Fund (PCF) will purchase the total of 1 million tons of carbon dioxide equivalent, corresponding to US$3.5 million, in the period of 7-15 years.

Chile - Hornitos Project (Chacabuquito II)

The Hornitos hydroelectric project consists of a 55 MW capacity run-of-river hydroelectric plant to reduce greenhouse gas emissions and includes the extension and voltage upgrade of the existing 66kV transmission line to 220 kV.

Colombia - Jepirachi Carbon Off-Set Project

The Colombia Jepirachi Carbon Offset Project contributes to the reduction of greenhouse gas emissions from the power sector in Colombia through the promotion of a 19.5 MW wind-based electricity generation facility. The project is expected to displace an estimated 1.168 million metric tons of carbon dioxide equivalent over a period of 21 years and generate revenue from emission reduction credits of US$3.2 million. Part of the carbon revenue will be dedicated to co-finance a social program that will contribute to improvements in the welfare of the local indigenous community.

Colombia - Amoya River Environmental Services

The Amoya River Environmental Services Project reduces greenhouse gas emissions from the power sector in Colombia through the promotion of a 80 MW run-of-river generation facility. Once in operation, the project is expected to displace an estimated 7.87 million metric tons of carbon dioxide equivalent by 2025. It will also support an environmental program for the protection of the Paramo de Las Hermosas, a unique, high-mountain biotope, upstream from the generation facility, and a social program that will contribute to improvements in the welfare of the local community in the area of the project.

Colombia - Furatena Agroindustry Carbon Offset Project

The Furatena Agroindustry Carbon Offset Project aims to reduce greenhouse gas emissions from the Panela, or whole brown sugar, manufacturing process in Colombia. The Panela manufacturing process is a significant part of Colombia’s industry, being the second largest contributor to rural employment.  The project is expected to displace an estimated total of 553,000 metric tons of carbon dioxide equivalent by 2025. The project will also implement an environmental program that calls for the adoption of sustainable agricultural practices (land set asides and elimination of biocides) amongst participating farmers.

Costa Rica - Umbrella Project for Renewable Energy Sources

This environmental assessment framework looks at the main negative environmental impacts of hydropower and renewable energy projects on aquatic and terrestrial ecosystems. It also examines its impact on social issues, particularly to indigenous peoples groups, based on the country's regulatory and institutional framework and on the Bank's operational guidelines regarding the environment.

Ecuador - Umbrella of Hydro Projects

This project supports non-fossil fuel-based power generating projects to reduce greenhouse gas emissions. It includes the development of three run-of-river hydroelectric plants, each of which will generate a specified amount of verified and certified emission reductions. The project site selection and development takes into account local ecological sensitivities, working to minimize damage to natural habitats and biodiversity.

Mexico - Waste Management and Carbon Offset Project: Social Impact Assessment

The Waste Management and Carbon Offset Project is supporting the development of three landfill gas facilities to capture methane released during land-filling of solid waste in Mexico and therefore reduce greenhouse gas emissions.   The project is expected to displace an estimated 2 million metric tons of carbon dioxide equivalent by 2015. The project will contribute to improve solid waste management practices through a remediation program to strengthening the integrity of closed landfills.

Peru - Huaycoloro Landfill Gas Recovery

The Huaycoloro Landfill Gas Recovery Project aims to use carbon financing to promote profitable and effective waste management for municipal solid waste landfills in Peru. The project also aims to promote private sector investment in the collection and use of landfill gas to reduce greenhouse gases.

Peru - Poechos Hydropower Project

By supporting the development of a small, 15.4 MW capacity, hydropower project, this project supports the reduction of greenhouse gas emissions while providing energy to northwest Peru. The project finances carbon purchases and includes cost recovery.

Peru - Santa Rosa Hydro Carbon Finance

The project reduces greenhouse gas emissions by developing three new hydropower plants to increase the national grid power generation in Peru and provide a percentage of the energy projection for sale in the spot market. The Certified Emission Reductions produced by the project will be sold to finance the project.