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Frequently Asked Questions

What is Carbon Finance?

Governments and companies in Annex I countries purchase project-based greenhouse gas emission reductions in developing countries or in other Annex I countries mostly to meet their obligations under the Kyoto Protocol or to trade them on the market for a potential profit. An emission reduction is defined as a measurable reduction of release of greenhouse gases into the atmosphere from a specified activity or over a specified area, and a specified period of time.  Emission reductions are typically measured in tons of carbon dioxide equivalent (tCO2e).  Some examples of Clean Development Mechanism (CDM)/Joint Implementation (JI) projects are renewable energy projects that include wind, solar hydro, biomass and biofuels; methane reduction mostly from landfill gas flaring, energy efficiency including building efficiency, and bio-sequestration through afforestation and reforestation projects.

The money that flows to countries hosting GHG emission reduction activiies under CDM/JI transactions is widely known as “carbon finance”.  Carbon finance is basically a payment to a project entity (this can be any legal entity, public or private, NGO, etc) for the emission reductions generated from that project, once the project is operational and tipically at yearly basis, like a commercial transaction.  The selling of emission reductions - or carbon finance - has been shown to increase the financial viability of projects, by adding an additional revenue stream in hard currency, which reduces the risks of commercial lending or grant finance.  The carbon finance can also help overcoming barriers for project developement and implementation, e.g. improving acces to financial resources, enabling transfer of technologies and know-how. Thus, carbon finance provides a means of leveraging new private and public investment into projects in developing countries and economies in transition that reduce greenhouse gas emissions, thereby mitigating climate change while contributing to sustainable development.

Emission reductions are calculated based on an established baseline scenario which must be explained within that project’s Project Design Document (PDD). The CDM PDD will eventually need to be registered with the CDM Executive Board (EB), the body that regulates CDM-based emissions trading under the Kyoto Protocol. The JI projects need to undergo the validation procedure under the Joint Implementation Supervisory Commitee (JISC, for so called Track II projects) or can be validated according to the national JI rules (for Track I projects).  In the case of the CDM project, before becoming registered, the PDD must be approved by a “Designated National Authority (DNA)” in the project’s host country and validated by an independent third-party auditor called a “Designated Operational Entity (DOE)”.  DOEs are firms accredited by the CDM EB in order to assure that the baseline scenario is real and that the project is additional to business-as-usual practices.  Once the project becomes operational, the project entity monitors the project based on a monitoring plan that is also included in the PDD.  Periodically, throughout the life of the project, an accredited DOE will visit the project, and based on the monitoring plan and the data collected from the project entity,  will verify that the emission reductions are actually happening and issue a report to the CDM EB stating that a certain amount of emission reductions have been generated.  This will eventually lead to certification of those emission reductions and then finally, issuance of the Certified Emission Reductions into the registries of those governments and private companies that have purchased the emission reductions from that project. The JI projects follow ressembling procedures and rules established by JISC or by national authorities, which are ensuring the integrity of the resulting emission reduction transactions.  

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How does Carbon Finance work at the World Bank?

In case a party is interested in applying for World Bank carbon finance, the first step in applying is to submit a Project Idea Note (PIN) to us for review.  The PIN is a short form, approximately 6 pages, explaining the general concept of the project.  The PIN template, instructions on how to submit it and a list of our minimum project requirements are located on our web site.

Here some pointers to consider:

  1. We are able to work with clients hand-in-hand to prepare all the carbon documentation for CDM/JI and create the carbon asset. We are able to advance funds for the preparation of this documentation and would cap them in our Letter of Intent, which would provide with certainty and limit any unforeseen risks or costs. We would recover the costs of preparing the CDM/JI documentation from our future carbon payments to the project.
  2. We can offer the option of selling VERs (Verified Emission Reductions) or CERs (Certified Emission Reductions under CDM/ERUs (Emission reduction Units under JI). When we purchase VERs, we will pay for the emission reductions when the project becomes operational (upon an independent validation and issuance of a yearly or periodic verification reports). This constitutes a low-risk carbon cash flow to the project which the project can count on from a credit-worthy carbon buyer paying in hard currency. Unlike many CER/URE contracts, the project is not penalized for regulatory delays outside their control. When the regulatory risk is low, ie. in projects where applicable baseline and monitoring methodologies have already been approved, or in sectors where the approval of the methodology is highly likely, the client may elect to sell CERs/ERUs to us, which would obtain a better price than VERs. However in those cases, payment depends on registration, certification, and issuance  by the UNFCCC and its bodies.
  3. Since some projects may be somewhat marginal in terms of IRR, our value proposition also includes:
    • A carbon payment stream beyond 2012 to ensure the viability of the project (most other buyers only buy carbon until 2012)
    • Up to 25% of the ERPA value payable upfront and undiscounted , given that acceptable guarantees are provided.

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Why has climate change become a development issue?

Climate change threatens to disrupt the weakest economies and disadvantage the poorest people in developing countries. Those with the least resources and the least capacity to cope.the poor of the developing world.will be hardest hit. The United Nations Intergovernmental Panel on Climate Change (IPCC) estimates that the steady warming of the Earth's surface temperature will lead to:

  • A decrease in the quantity and quality of water in many arid and semi-arid areas, and a decrease in the likelihood of making clean water available to the more than one billion people that already experience severe water shortages;
  • A decrease in the reliability of hydropower and plantation biomass, where energy supplies are already unreliable;
  • An increase in the incidence of vector-borne diseases (e.g., malaria and dengue), water-borne diseases (e.g., cholera), and malnutrition throughout the tropics and sub-tropics, where millions of lives are lost every year;
  •  A decrease in agricultural productivity in the tropics and sub-tropics. In particular, parts of Africa would be under additional stress, where an estimated loss of 10-30% of cereal production during the next several decades would make it even more difficult to attain the Millennium Development Goals (MDGs) of halving hunger by 2015;
  • An increase in the loss of species and degradation of key ecosystems such as coral reefs, which play a critical role in the economy of some developing countries;
  • The displacement of tens of millions of people in low-lying areas;
  • An increased threat in national and regional security because of the loss of natural resources and the potential flow of environmental refugees;
  • For low-lying areas in the world, the threat of climate change is a matter of survival. In the absence of concerted global action on climate change, the IPCC estimates that the sea level could rise by one meter over the next century, which would have the following consequences:
    • on countries with significant low-lying areas, coastal communities would be severely threatened. For example, 17% of the land area of Bangladesh would be lost and tens of millions of people displaced.
    • The survival of low-lying small island states would be in doubt, in particular for the many island states in the Indian and Pacific Ocean and Caribbean that are only a few meters above sea level.

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Which countries are engaged in the Kyoto Protocol?

With the entry into force of the Kyoto Protocol on February 16, 2005, more than one hundred and forty countries agree to work together to fight global climate change. The thirty six industrialized countries that ratified the Protocol - namely Canada, Japan, members of the European Union, as well economies in transition from Central and Eastern Europe – agree to put in place policies and measures to collectively reduce 5 percent of their emissions between2008 to 2012 as measured against 1990 levels. To meet this binding commitment, industrialized countries have the option to reduce part of their emissions domestically, and they can also emission reductions from developing countries (through the Clean Development Mechanism), or from countries with economies in transition (through Joint Implementation or International Emissions Trading).

The Kyoto Protocol fulfills the commitment made by one hundred and eighty six countries under the UN Framework Convention on Climate Change (UNFCC) that industrialized countries – who are responsible for the vast majority of emissions that cause climate change – should take the first steps towards sustainable energy consumption, use of clean technologies and sustainable land management practices, which are needed to mitigate the impacts of climate change.

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Is the CDM letting the North off the hook for their carbon reduction obligations and what’s in it for the South?

Industrialized countries have to implement domestic policies and measures to reduce Green House Gas (GHG) emissions. These domestic measures have to generate the most significant part of the emission reductions used by an industrialized country to achieve its compliance targets according to the Kyoto Protocol, and emissions reductions earned through CDM and other market mechanisms can only be supplementary to these domestic actions.

It is estimated that the cost to meet emission reduction commitments made under the Kyoto Protocol is in the order of billions of dollars. Given that they reduce cost of compliance, market mechanisms such as the CDM are relevant to the long-term engagement of the global community to combat global climate change.

For developing countries, the CDM represents an opportunity to attract investments from the public and private sectors in climate-friendly technologies, and to contribute to the global combat on climate change. In order to be eligible, CDM projects have to be above and beyond business-as-usual, and must contribute to sustainable development as defined by the host country (developing country). Participation in the CDM is entirely voluntary.

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Why do greenhouse gas emission reductions have value?

Meeting the Kyoto targets will require public and private investments. Many industrialized governments that have ratified the Protocol have already begun implementing domestic policies and regulations that will require emitters to reduce greenhouse gas emissions, according to the established targets. So far, experience has shown that the cost of reducing one ton of carbon dioxide (a greenhouse gas) can cost from $15 up to $100 in industrialized countries.

By contrast, there are many opportunities to reduce greenhouse gases in developing countries at a cost of $1 to $4 per ton of carbon dioxide. Hence, an emission reduction that was achieved at a lower cost has value to a public or private entity in an industrialized country that is required by regulation to reduce its emissions.

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What is the World Bank’s involvement in Carbon Finance?

The threat climate change poses to long-term development and the ability of the poor to move out from poverty is of particular concern to the World Bank. The carbon finance activities of the World Bank are a natural extension of the Bank’s mission to reduce poverty. The Bank makes every effort to ensure that poor countries can benefit from international responses to climate change including the emerging carbon market for GHG emission reductions.

The private market for emission reductions, still in an early stage, does not yet have significant volume, and the potential benefits have not reached developing countries. These countries, particularly the poorest among them, are bypassed by the carbon market and the potential development benefits it would bring. The World Bank’s carbon finance products help grow the market by extending the frontiers of carbon finance to new sectors or countries that have yet to benefit, and to reduce market entry risks for other buyers.

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What specific role is the Bank playing in the development of a market for carbon trade?

The role of the Bank through its Carbon Finance Unit has been one of market facilitator and catalyst. The Bank has made significant efforts in the development of the carbon market, first by launching the Prototype Carbon Fund (PCF) to demonstrate how to cost-effectively achieve GHG reductions while contributing to sustainable development. More recently, the Bank launched a series of carbon funds to expand learning-by-doing to other countries and economic sectors, and to address market failures, such as through the Community Development Carbon Fund (CDCF) and Bio Carbon Fund (BioCF), which are designed to enable smaller and rural poor communities to benefit from carbon finance.

The Bank has developed a balanced approach between stimulating demand as a buyer in the early stages of the market and its support to sellers to tap new and additional sources of funds from carbon trade to support their sustainable development and to alleviate poverty. This will consist of meeting the demand for capacity building and technical assistance through Carbon Finance (CF) -Assist, and designing instruments in consultation with developing countries to enable them to directly access the market.

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Who are the beneficiaries of the Bank’s actions in carbon finance?

The main beneficiaries of the Bank’s actions in the carbon market:

a) The global community. The Bank’s efforts to catalyze a market for greenhouse gas mitigation and sustainable development hopefully contributes to the success of the market mechanisms, which are essential to lowering the cost of global action on climate change.
b) The Public and Private sectors that wish to participate in the market. Through the establishment of Carbon Funds, and by pooling early participants in the market, the World Bank has reduced the market entry risk for other market players. The Bank’s procedures to create carbon assets are in the public domain.
c) The least developed countries and poor areas of all developing countries. The Bank is involved in market areas that the private sector simply won’t go because they perceive the risk as being too high. By doing this , the World Bank is helping to bring the benefits of carbon finance to those parts of the world that would be by-passed by the market. The Bank provides technical assistance in order to develop the set of procedures and institutional arrangements that can make the market more sustainable. For example in one developing country, it took 18 months to get the first approval for a carbon finance project. Now there are almost a dozen projects in that country.

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The Bank has created several carbon funds. How do they work? Who owns these funds?

The World Bank manages several carbon funds and facilities comprised of public and private participants: Prototype Carbon Fund (PCF); Netherlands JI and Netherlands CDM Facilities; Community Development Carbon Fund (CDCF); BioCarbon Fund; Italian Carbon Fund; Spanish Carbon Fund; Danish Carbon Fund; the Umbrella Carbon Facility (UCF); Carbon Fund for Europe (CFE); the Forest Carbon Partnership Facility (FCPF); and the Carbon Partnership Facility (CPF). These funds are public or public-private partnerships managed by the World Bank as a Trustee. They operate much like a closed-end mutual fund; they purchase greenhouse gas emission reductions from projects in the developing world or in countries with economies in transition, and pay on delivery of those emission reductions.

The emission reductions can be used against obligations under the Kyoto Protocol or for other regulated or voluntary greenhouse gas emission reduction regimes. All the emission reduction credits are purchased on behalf of the public and private sector Participants in the funds. The World Bank is acting as an honest broker to ensure that the benefits of carbon finance make their way also to the developing world and to countries with economies in transition. The World Bank regularly consults with a wide range of stakeholders, including the PCF’s Host Country Committee, about the design and operation of these carbon funds.

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Why do investors and governments find the World Bank Carbon Funds an attractive business proposition?

Companies and governments are attracted to the various Carbon funds of the World Bank by the proven record of the World Bank in providing shareholders with Kyoto-compliant certified emission reduction assets at a guaranteed low price. Additional benefits for investors include the acquisition of high-value knowledge and intelligence on carbon finance and emerging national, regional and international markets.

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Who are the main players in the carbon market at this point in time?

Companies and governments are attracted to the various Carbon funds of the World Bank by the proven record of the World Bank in providing shareholders with Kyoto-compliant certified emission reduction assets at a guaranteed low price. Additional benefits for investors include the acquisition of high-value knowledge and intelligence on carbon finance and emerging national, regional and international markets.

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What types of renewable energy projects should be eligible for carbon trade?

The Political Declaration of the Bonn International Conference for Renewable Energies 2004 that was discussed and adopted by ministers and government representatives from 154 countries acknowledged that "in the context of Renewables 2004, renewable energy sources and technologies include: solar energy, wind energy, hydropower, biomass energy including biofuels and geothermal energy," with no distinction with respect to scale. This is consistent with the discussions that took place at the World Summit on Sustainable Development held in 2002.

A shortage of access to energy is recognized as one of the great obstacles to development, impeding business activity and disproportionately affecting the poor who have traditionally the least access. Many OECD countries have developed more than 80 % of the potential of their economically-viable hydropower, and hydropower development has been a vital platform for economic growth. This is in contrast to 20 % in developing countries as a whole, and under 5 % in African countries. Developing countries themselves have repeatedly stressed the importance they attach to utilizing this large domestic source of energy, particularly when oil prices are now around $50 per barrel level. In recent years, they have improved the environmental and social quality of their renewable energy projects through the use of environmental assessments, resettlement action plans and related instruments.

For these reasons, the Bank considers that all renewable energy projects should be eligible for carbon trade, regardless of the scale and size, provided that such projects meet eligibility criteria, are environmentally and socially sustainable, and are consistent with applicable domestic policies and regulations.

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Should the eligibility of hydropower projects for carbon trade be restricted to 10 MW?

No, the eligibility of hydropower projects eligible for carbon trade should not be restricted to 10 MW.

There are many different ways to classify hydro projects – depending on purpose of classification - and it is clear that there is no single widely accepted definition of small hydro.

The 10 MW criterion is not widely used for reporting on the performance of the Clean Development Mechanism (CDM). For example, the CDM’s Executive Board has developed simplified procedures for small scale projects, which include renewable energy projects of less than 15 MW, for the implicit purpose of encouraging their implementation. In addition, various countries use different ways to classify small hydro - India up to 25 MW; Brazil and USA up to 30 MW; China up to 50 MW. Thus, one reason to define small hydro is presumably to link generation capacity with potential impact to the environment, in essence stating that small hydro projects have the least impact.

The Bank’s view is that the relationship between size and impact are not always directly related. The issue at hand with regard to hydropower projects is how to create development with minimal environmental and social impact. The Bank’s approach – including in its role as Trustee in Carbon Funds – is not to move forward with a project unless it is confident of its environmental and social soundness, in both the preparation and implementation phases, based on application of the World Bank’s Board-approved environmental and social safeguard policies.

That said, the Bank committed at the International Conference for Renewable Energies in Bonn and in the management response to the Extractive Industries Review to grow our portfolio of renewables including hydro up to 10 MW by 20 % per annum. No growth target for hydro more than 10 MW was established. Of course, this would be in addition to the Bonn target of increase by 20% annually.

In order to enhance clarity on the definition of small hydro, the Bank will, for reporting purposes, simply classify from now on all hydro projects in its carbon funds as renewable energy projects, consistent with the Bonn declaration. However, the Bank will include any CDM hydro projects under 10 MW when it reports on its commitment to increase its portfolio of renewables up to 10 MW by 20 percent per annum.

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How are the recommendations of the World Commission on Dams (WCD) addressed in World Bank projects?

In common with virtually all those concerned in the WCD process, the World Bank shares the WCD core values and concurs with the need to promote its seven strategic priorities. In addition, the lessons presented in the Report provide a valuable base for the Bank to draw from when considering development of hydropower projects. The focus of the World Bank in the case of hydropower projects is to ensure the environmental and social soundness of the proposed project, in both the preparation and implementation phases, through effective implementation of the World Bank’s Board approved safeguard policies. The existing safeguard policies remain in effect for all IBRD and IDA supported investment lending operations including carbon finance activities. The World Bank assesses the conformity of projects it supports in a manner that is consistent with the operational policies set by the World Bank’s Board of Executive Directors, representing the more than 180 governments that are members of the Bank. In contrast the Report of the World Commission on Dams does not have an official policy status within the Bank. For more detailed information on the World Bank and the Report of the World Commission on Dams please go to:

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Does the World Bank purchase Verified Emission Reductions (VERs), Certified Emission Reductions (CERs) or EU Allowances (EUAs)?

The Bank will encourage the seller to make an informed decision on whether to sell CERs or VERs based on sufficient understanding on the relative risks and price trade-offs between the two assets.

Verified Emission Reductions (VERs) are units of greenhouse gas reductions generated from Clean Development Mechanism (CDM) projects under the Kyoto Protocol, in developing countries and verified by external, UN-accredited third party verifiers. Certified Emission Reductions (CERs) are also project-based but have undergone registration (e.g. by the CDM Executive Board). CERs can be used for compliance with Kyoto Protocol obligations or to meet emissions caps under the European Union Emissions Trading Scheme. The European Union Emissions Trading Scheme (EU ETS) is an EU wide cap and trade emissions trading system, which trades in “EU Allowances” called Emission Reduction Units (EUAs).

When the World Bank Carbon Funds purchase Verified Emission Reductions, payment is made regardless of the outcome of subsequent regulatory review of whether such assets fully meet compliance standards and are converted to Certified Emission Reductions. In this case, the Bank seeks to maximize the share of VERs that become CERs through its due diligence and its thorough work on methodology development. It is up to the national governments to set the rules regarding the eligibility and conditions of import of CERs into the EU Emissions Trading Scheme.

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Top 10 things the World Bank is doing to facilitate a carbon market:

a. Building capacity of developing countries: In fiscal year 2004, the Bank launched a capacity-building initiative called CF-Assist to provide a unified approach to developing countries and to coordinate all World Bank capacity building and training activities on carbon finance.
b. Contributing to methodologies and procedures: Since its inception, the World Bank’s Carbon Finance Unit has been a major contributor to the development of internationally approved CDM methodologies and has contributed its experience to decisions by the Parties to UNFCC and the CDM Executive Board.
c. Providing carbon finance to poor countries that are bypassed by the carbon market: The Community Development Carbon Fund (CDCF) supports small projects in less developed countries.and poor areas of all developing countries.and delivers additional environmental and social development benefits to poor communities. The development of these small-scale CDM projects is typically too expensive and often too risky for the private sector to undertake on its own.
d. Helping to make carbon sinks an important aspect of emission reductions: The BioCarbon Fund is a prototype to demonstrate and benchmark the use of carbon finance in forestry and agriculture projects with strong co-benefits in terms of biodiversity, land protection and poverty reduction. The Fund will create assets that are eligible under the CDM (reforestation and aforestation projects, which create forests on deforested land or where none existed before, respectively), and other activities that sequester carbon from the atmosphere (e.g. watershed management).
e. Building confidence in the market and mitigating risks: The eight carbon funds that the World Bank currently manages have almost 60 private and public participants. For many of these, participation in the Bank’s Carbon Funds enables them to learn business procedures that they can integrate in their own carbon purchasing facilities, thus substantially reducing their market entry risk.
f. Continually extending the frontiers of the market: In many cases, the Bank has been the first to purchase emission reductions in specific countries, technologies or sectors, or in poor communities. As a development institution, the Bank is committed to continue to pioneer carbon finance transactions, and to expanding the frontiers of the market.
g. Creating a knowledge asset that is available and transparent: The Carbon Finance Unit website is the primary vehicle to disseminate procedures, documentation and methodologies to both fund participants and stakeholders in the CDM and JI. In 2004, the funds’ websites got hundreds of thousands of hits per month, and it continues to be a primary source of information regarding the carbon market.
h. Crowding in the private sector: The Bank continues to be proactive in promoting and supporting direct private sector participation in carbon procurement and in building confidence in private sector intermediation. This is achieved through partnerships in intermediation on a non-exclusive basis, dissemination of business practices, and offering co-purchasing opportunities (across its portfolio, the Bank has only purchased three quarters of all assets created by 2012, thus allowing the private sector to purchase secure assets alongside the Bank).
i. Greening bank lending by over-laying carbon finance: Where feasible, carbon finance will be linked to large-scale programmatic lending or non-lending assistance provided by the Bank and other multilateral financial institutions. This is necessary in sectors such as solid waste management where municipal sponsors have poor credit ratings and limited administrative capacity and need long-term assistance to make the transition to modern alternatives in waste and resource management.
j. Contributes to the success of market solutions to address climate change. Through the establishment of its carbon funds, the Bank has made a significant effort to catalyze markets for GHG mitigation and sustainable development.

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