“We are concerned about the vulnerability of poor people in poor countries to the threat of climate change. For an institution whose task is to alleviate poverty, we would be negligent if we failed to explore innovative ways of making the climate change convention work,” he says.
Governments have recognized the seriousness of the threat of climate change, and during the 1990s negotiated the Framework Convention on Climate Change and the Kyoto Protocol. The protocol, which guides implementation of the convention, includes specific emissions-reduction targets for industrialized countries. It also contains provisions allowing them some flexibility so they can meet these commitments to reduce emissions in the most cost-effective manner.
The PCF, established in the World Bank with contributions from governments and private companies, is an ambitious first attempt to experiment with the creation of a market in emissions reductions under these “flexibility” provisions. It will invest in cleaner technologies in developing countries and transition economies, thus reducing their greenhouse gas emissions. These emissions reductions will be independently verified and certified, and then transferred to the fund’s contributors in the form of emissions reduction certificates rather than cash.
So far, four governments and nine companies have approved participation in the PCF, bringing the total of committed contributions to $85 million. The fund is capped at $150 million, and plans to start operations in April 2000.
Governments that have approved participation in the PCF are Finland, The Netherlands, Norway, and Sweden. Private sector participants include the electric power companies of Tokyo, Chubu, Chugoku, Kyushu, Shikoku, and Tohoku, the trading houses Mitsubishi and Mitsui, as well as the electric utility company Electrabel of Belgium.
Also, participation in the PCF is currently under active discussion by the top management at Statoil and NorskHydro of Norway, Gaz de France of France, Environment Banc and Exchange LLC (EBX) of the USA, and SK Power of Denmark.
As the manager of the PCF, the World Bank will act as broker in helping to negotiate a price for the emissions reductions that is reasonable for both buyers and sellers. Developing countries will benefit by acquiring cleaner technology and making a profit from trade in a potentially plentiful “product”—greenhouse gas emissions reductions. Industrialized country contributors will gain by paying a lower price for emissions reductions than available in the context of their own companies or countries.
“There are many opportunities to reduce emissions of greenhouse gases in developing countries at a cost of between $5 and $15 dollars a ton of carbon. This compares with a marginal abatement cost of upwards of $50 a ton of carbon in advanced economies. It is the difference in cost to industrialized and developing countries of reducing greenhouse gas emissions that provides the opportunity for mutually beneficial trading relationships,” says Ken Newcombe, manager of the PCF for the World Bank. “We will endeavor to negotiate prices for emissions reductions at about $20 a ton of carbon ($5 a ton of CO2), thus covering the regulatory and market risks to contributors while providing adequate incentives to project sponsors and their governments in developing countries.”
The emission reductions from PCF projects may eventually be used against industrialized countries’ commitments to reduce their greenhouse gas emissions. Under the Kyoto Protocol, they must bring them down to at least 5.2 percent below their 1990 levels by the end of 2012. Whether the emission reductions earned by the PCF will count towards these commitments depends on rules being developed by the Parties to the UN Framework Convention on Climate Change that should be defined when the Parties meet in The Hague in November 2000.
During the next three years, the World Bank will invest all the fund’s capital in 20 or so projects. Most are expected to be linked to projects identified by the World Bank Group as part of its regular work, but they can also originate from the private sector, other multilateral development banks, and bilateral donors. The primary focus will be on renewable energy technologies—such as wind, small-hydro, and bio-mass energy technology—that would not be profitable without revenue from emissions reductions sold to the PCF. In some cases the PCF will finance such projects through local carbon funds modeled on the PCF but using financing from local commercial and development banks, as well as private companies. Some 20 countries have already declared interest in hosting PCF projects.
Helpful links: For more information, and for a Q&A, visit the Prototype Carbon Fund website at www.prototypecarbonfund.org. For more on the Bank’s environmental work, click here.
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