AT A GLANCE: - The Intergovernmental Panel on Climate Change (IPCC 2007) report states that warming of the climate system is unequivocal and mostly due to human activities.
- Eleven of the last 12 years are among the hottest on record.
- Climate change is already having devastating effects on the world’s poor.
- Global greenhouse gas emissions would have to peak by 2015—and then decrease—to keep global temperatures from rising more than 2 degrees Celsius over pre-industrial levels.
- Whatever regulatory framework emerges for reducing greenhouse gas emissions, it should generate significant investment resources to help developing countries’ growth.
- Underlying the carbon market is a simple fact: no matter where on the planet you reduce greenhouse gases, it has the same positive impact.
- The carbon market is emerging as a powerful tool to reduce greenhouse gas emissions and to transfer financial resources and clean technology to the developing world.
- The World Bank Group is building opportunities for developing countries to access carbon finance in support of low-carbon development goals.
The Global Context: CURRENT INTERNATIONAL AGREEMENTS TO TACKLE CLIMATE CHANGE At the beginning of 2005, the Kyoto Protocol and the European Union Emissions Trading Scheme came into force, turning reduction targets by most industrialized countries into international commitments. Under the Kyoto Protocol, 38 industrialized countries have committed to reduce their greenhouse gas emissions by an average of 5.2 percent below 1990 levels between 2008 and 2012. These countries can do so by reducing domestic emissions; exchanging emission permits among themselves via a cap-and-trade system; and purchasing emission reduction credits from projects in developing countries using the Clean Development Mechanism (CDM) or, in economies in transition, using Joint Implementation (JI). In December 2007, parties to the United Nations Framework Convention on Climate Change (UNFCCC) met in Bali to begin to hammer out a post-2012 agreement that will limit greenhouse gases in the atmosphere. They agreed on the so-called Bali Roadmap that sets the meeting of the UNFCCC parties at the end of 2009 in Copenhagen as a target for reaching an international agreement. |
The Role of Carbon Finance The IPCC concludes that an effective carbon price signal could achieve significant mitigation potential in all sectors by making many mitigation options economically attractive. Mitigation technologies with the largest economic potential exist in the areas of energy supply, transport, industry, buildings, agriculture, forestry, and waste management. According to Yvo de Boer, Executive Secretary of the UNFCCC, “through carbon finance, there is the potential to generate up to US$100 billion per year in green investment flows to developing countries. None of the other types of financial resources available to these countries have a potential of this scale.” The Kyoto Protocol’s flexible mechanisms (Clean Development Mechanism - CDM and Joint Implementation -JI) can help catalyze new investment for climate mitigation and, in particular, to support clean energy investments. For example from 2002 through the end of 2006, US$2.7 billion worth of emission reduction credits from clean energy projects (renewable energy and methane recovery, fuel switching, and energy efficiency) were contracted, leveraging an estimated US$16 billion in investment in those areas. State of the Carbon Market In its annual review of the state of the carbon market, World Bank research shows that in 2006 the global carbon market grew to an estimated US$30 billion, trebling in value over the US$10 billion registered in 2005. The European Union’s Emissions Trading Scheme continued to dominate the market with transactions nearing US$25 billion. Other statistics: Project-based transactions, primarily through the CDM, doubled in value over 2005 to about US$5 billion.
In 2006, developing countries supplied nearly 450 million tons of carbon dioxide equivalent of CDM credits for a value of US$4.8 billion, with China leading at 61% of transacted volumes.
About 920 million tons of emission reduction credits were transacted under the CDM between 2002 and 2006, corresponding to a cumulative value of US$7.8 billion, leveraging an estimated US$21.6 billion in investment (74% for clean energy related projects).
In 2006, Joint Implementation projects from economies in transition saw increasing interest from buyers, with 16.3 million tons transacted (up 45% over 2005 levels)—with Russia, Ukraine and Bulgaria providing more than 60% of transacted volumes—for a value of US$141 million.
Beyond the Kyoto framework, important regulatory developments have occurred in North America and Australia in recent months, with initiatives to manage greenhouse gas emissions at least at regional levels; there has also been increasing activity in the voluntary market.
These figures demonstrate that carbon markets are able to cost-effectively catalyze emission reductions. These markets—together with policies and measures for those sectors that are not easily reached by the carbon market—could contribute to the enormous mitigation effort required to avoid dangerous climate change. Carbon Finance at the World Bank Carbon Finance at the World Bank has expanded from a prototype engagement in an emerging trade of greenhouse gas emission reductions to an increasingly mainstream activity for supporting sustainable development. The World Bank was a pioneer in the carbon market. The Bank’s operational engagement in carbon finance started with the establishment of the US$180 million Prototype Carbon Fund (PCF) in 1999. This was rapidly followed by the establishment of other funds and facilities as the Kyoto Protocol was ratified. Today, the World Bank manages over $2 billion across 10 carbon funds and facilities. Sixteen governments and 66 private companies from various sectors have made financial contributions to these funds. The funds and facilities: The Prototype Carbon Fund (PCF) closed its portfolio in 2007.
The Community Development Carbon Fund (CDCF) provides carbon finance to projects in poorer areas of the developing world that combine community development with investments in clean energy.
The BioCarbon Fund (BioCF) focuses on projects that sequester or conserve carbon in forest and agro-ecosystems while promoting biodiversity conservation and poverty reduction.
The Netherlands Clean Development Mechanism Facility (NCDMF) supports projects in developing countries that generate potential credits under the CDM.
The Netherlands Joint Implementation Facility (NECF) purchases emission reductions from JI projects located in countries with economies in transition.
The Italian Carbon Fund (ICF) supports projects that generate cost-effective emission reductions and clean technology transfer.
The Danish Carbon Fund (DCF) purchases emission reductions under both CDM and JI.
The Spanish Carbon Fund (SCF) promotes projects that contribute significantly to the sustainable development of developing countries and countries with economies in transition.
The Umbrella Carbon Facility (UCF) is an aggregating facility that pools funds from World Bank managed carbon funds and other participants to purchase emission reductions from large projects.
The Carbon Fund for Europe (CFE), a partnership with the European Investment Bank (EIB), was launched in March 2007
While the Bank’s initial role was to catalyze the global market for carbon emission reductions, carbon finance is now emerging into the mainstream of the Bank’s programs of assistance to its client countries. It is one of the key instruments to be used by the Bank in its Clean Energy for Development Investment Framework (CEIF) and in the Strategic Framework on Climate Change and Development (SFCCD) to provide incentives to its client countries for transitioning to a low-carbon economy. The Human Face of Carbon Finance From Argentina to Kenya, from landfills to small hydro projects, all over the world through World Bank carbon finance projects, local communities are reaping benefits. This is the human face of carbon finance at the World Bank, the development dividend that is measured in improved working conditions, access to clean drinking water, health benefits where there were none, and livelihoods that didn’t exist—until the project. These are the waste pickers at a landfill site at the Argentine city of La Salta (CDCF La Salta Waste Management Project) who now work in greater safety and earn more money from recovering more recyclables from the site; or the community in Nigeria (CDCF Aba Cogeneration Project in Nigeria) that now has a health clinic thanks to community benefits arranged through a co-generation carbon finance project. The Community Development Carbon Fund specifically targets community benefits. CDCF projects benefit both the global environment as well as poor communities affiliated with the projects. The CDCF has committed almost $5 million for the provision of, among others: extension of sewage networks to connect poor households (Santa Cruz Urban Wastewater Gas Capture in Bolivia); construction of potable water supply, rehabilitation of three small bridges and construction of social center (Small Hydro projects in Georgia); upgrading rural roads for improved access to services (Kenya Olkaira 11 Geothermal Project). Other World Bank managed carbon funds also provide benefits at the community level. For example, each of the BioCarbon Fund projects has a community social benefits plan as part of the purchase agreement. |
The Next Chapter—Larger Scale and Longer Term The first 10 years of the Bank’s work in the carbon market were about institution building; the next 10 years must be about making good on our commitments and about addressing the need to mitigate emissions aggressively. It is one thing to trade tons of carbon, it is quite different and a much more challenging task to change global development pathways, to change technologies and behaviors that have existed and were successful for a century or more but now jeopardize the human future. Meeting this challenge will require scaling up and broadening the scope of carbon markets in order to have an impact on emission-intensive long term investments and phase in new cleaner technologies in order to ultimately “bend” the emission trajectories that most countries around the world would otherwise follow. In September 2007, the World Bank Board of Executive Directors approved the proposal to establish two new carbon facilities designed to support developing countries in their move towards lower carbon development paths. Both facilities will pilot ways to ratchet up the fight against climate change by adopting a larger-scale, longer-term approach to greenhouse gas emission reductions, and by testing the use of carbon finance in new fields, for example, avoided deforestation. The Carbon Partnership Facility (CPF) is expected to be used in areas like power sector development, energy efficiency, gas flaring, transport, and urban development, including integrated waste management systems. For example, instead of purchasing greenhouse gas emission reductions from one project at a time (such as reducing methane emissions from a landfill) the facility will be able to work strategically on numerous projects simultaneously across a country or a region. This facility will place the World Bank in a position to dramatically expand—in reach, scope, and effectiveness—its carbon finance operations and integrate them more closely into the Bank’s country assistance programs. The Bank has conducted extensive consultations on the CPF and is in the process of finalizing its design. The CPF is expected to open for contributions by late June and become fully operational later in 2008. The innovative Forest Carbon Partnership Facility (FCPF) would prevent deforestation by compensating developing countries for carbon dioxide reductions realized by maintaining their forests. Most of the forest-rich countries are among the poorest in the world. The FCPF will support programs targeting the real drivers of deforestation and develop concrete activities to reach out to poor people who depend on forests to improve their livelihoods. It will also help developing countries build the technical, regulatory, and sustainable forestry capacity to reduce emissions from deforestation and forest degradation. These emissions now account for an estimated 18% to 25% of all global greenhouse gas emissions. The FCPF was launched at the Bali Climate Change Conference in December 2007, where 10 developed countries and a non-governmental organization made financial commitments totaling US$165 million. Both facilities will be a unique partnership between buyers and sellers of emission reductions and will be designed to purchase greenhouse gas emissions far beyond 2012, which will help to remove some of the uncertainty currently surrounding the post-Kyoto Protocol era. - ### - For more information on the World Bank and Carbon Finance, please see the website: www.carbonfinance.org Updated March 2008 Contact:
Anita Gordon: (202) 473-1799; Agordon@worldbank.org
Roger Morier: (202) 473-5675; Rmorier@worldbank.org |
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