<strong>of</strong> the Kyoto Protocol, is supposed to reduce the cost <strong>of</strong>achieving that goal, making it easier for countries to agreeon what to do and how to pay for it. It does this by requiringdeveloped countries to limit their emissions, but allowingthem to meet that limit by paying to reduce emissions (buyingcarbon credits) abroad rather than at home. Developingcountries face no caps but can sell carbon <strong>of</strong>fsets—reductions<strong>of</strong> emissions compared with emission levels from doingbusiness as usual.<strong>The</strong>re are cheaper opportunities to reduceemissions in transition and developingcountries than in developed ones.<strong>The</strong> carbon market, inspired by successful market-basedschemes to reduce acid rain, was attractive for several reasons.<strong>The</strong> atmosphere does not care where the CO 2comesfrom—the impact on climate change is the same. Comparedwith developed countries, transition and developing countrieshave cheaper opportunities to reduce emissions, theformer through replacing a legacy <strong>of</strong> energy-wasting infrastructureand industry and the latter by installing efficientnew equipment to meet rapidly growing energy demands.<strong>The</strong> carbon market can provide money and technology fordeveloping country infrastructure. Because carbon creditsare a priced commodity, developing countries can realizepr<strong>of</strong>its if they can produce them cheaply. Having a price oncarbon emissions may motivate research and developmentfor low-carbon technologies. Finally, some view the carbonmarket as a more reliable means <strong>of</strong> raising funds from developedcountries (which are historically responsible forcurrent levels <strong>of</strong> GHGs) than the competing alternative: directannual appropriations from those countries’ individualnational budgets.In contrast, the carbon market faces significant practicalobstacles. <strong>The</strong> logic <strong>of</strong> the system requires that emissionsreductions must represent a new, additional effort so thatthe developed country’s extra emissions are exactly <strong>of</strong>fsetby reductions elsewhere. Otherwise, buyers and sellersmight collude and claim bogus carbon credits, and totalemissions would increase. To prevent this, an elaborateproject-by-project validation system has been set up underthe auspices <strong>of</strong> the CDM to certify the additionality <strong>of</strong> carboncredits (box 5.2).Box 5.2<strong>Carbon</strong> Offsets—A Peculiar Commodity<strong>Carbon</strong> <strong>of</strong>fsets are a peculiar commodity. <strong>The</strong>y are defined as the difference between the number <strong>of</strong> tons <strong>of</strong> GHGyou emit and the number <strong>of</strong> tons you would have emitted had you not been paid not to emit them. In an idealizedexample, the <strong>of</strong>fer <strong>of</strong> carbon payments might induce a utility to build a geothermal power plant (with no emissions)rather than a cheaper diesel plant (which would have emitted 100,000 tons per year). <strong>The</strong> <strong>of</strong>fset would thenbe 100,000 tons per year.Actual emissions can be measured with instruments, but quantifying counterfactual, business-as-usual emissionsis difficult. Both sellers and buyers have an incentive to claim <strong>of</strong>fsets for a project that they were going to doanyway—projects that are not “additional.” But if many people did this, then these bogus <strong>of</strong>fsets would be used bypurchasers to increase their emissions above agreed limits, frustrating the goal <strong>of</strong> the Kyoto Protocol.This is the heart <strong>of</strong> the additionality dilemma. <strong>The</strong> CDM has set up an elaborate system for determining additionalityfor each proposed project. <strong>The</strong> project proponent must argue that carbon funding is critical to project bankabilityor helps to overcome other kinds <strong>of</strong> barriers. Methodologies for demonstrating additionality are developedat some cost by the first people to undertake a specific kind <strong>of</strong> project. <strong>The</strong>n, if approved by the CDM, that methodologyis available to others, accelerating project approval. <strong>The</strong> CDM uses private third-party verifiers to validateadditionality claims and to verify annual reports <strong>of</strong> emissions reductions.In sum, the carbon <strong>of</strong>fset commodity is in effect an impact evaluation, and an elaborate institutional mechanismhas been set up to conduct that evaluation. Few other development projects attract the same degree <strong>of</strong> scrutinyon impacts.However, the additionality screening process has been widely criticized as ponderous, costly, and ineffective.Environmentalists press for stricter screening, investors for more streamlined procedures. <strong>The</strong> current system maycombine the worst <strong>of</strong> both worlds: high transaction cost with substantial nonadditionality. A growing consensusviews determination <strong>of</strong> additionality as quixotic at the project level. An alternative would be to set up technologyspecificcrediting rules, creating a system akin to a feed-in tariff premium for renewable energy or energy efficiency,with higher credits for less-competitive technologies.Source: IEG.72 | Climate Change and the <strong>World</strong> <strong>Bank</strong> Group
Table 5.1<strong>Carbon</strong> Funds at the <strong>World</strong> <strong>Bank</strong>Fund Year established Currency Capital % PrivateKyoto FundsPrototype <strong>Carbon</strong> Fund 2000 $ 219.80 57.6Danish <strong>Carbon</strong> Fund 2005 € 90.00 78.0Community <strong>Development</strong> <strong>Carbon</strong> Fund 2003 $ 128.60 45.1Spanish <strong>Carbon</strong> Fund Tranche 1/Tranche 2 2005/2008 € 220/70 22.7Bio<strong>Carbon</strong> Fund Tranche 1 2004 $ 53.80 51.0Umbrella <strong>Carbon</strong> Facility 2006 € 799.1 a 75.0Netherlands CDM Facility 2002 $ — 0.0Bio<strong>Carbon</strong> Fund Tranche 2 2007 $ 38.10 47.0Netherlands European <strong>Carbon</strong> Facility 2004 $ — 0.0<strong>Carbon</strong> Fund for Europe 2007 € 50.00 20.0Italian <strong>Carbon</strong> Fund 2004 $ 155.60 30.2New facilitiesForest <strong>Carbon</strong> Partnership Facility 2008 $ 155.00 3.2<strong>Carbon</strong> Partnership FacilitySource: <strong>World</strong> <strong>Bank</strong> data.Note: — = not publicly available.a. Includes €224.54 million total participation <strong>of</strong> Prototype <strong>Carbon</strong> Fund, Netherlands CDM Facility, Italian <strong>Carbon</strong> Fund,Danish <strong>Carbon</strong> Fund, and Spanish <strong>Carbon</strong> Fund.<strong>Carbon</strong> funds at the WBG<strong>The</strong> <strong>World</strong> <strong>Bank</strong> carbon funds were conceived when theKyoto Protocol was under discussion and the concept <strong>of</strong>carbon markets was being explored. <strong>The</strong> WBG’s carbonfunds were intended as a “pro<strong>of</strong> <strong>of</strong> concept” for the carbonmarket and as a pilot device for testing practical approachesto the novel challenges <strong>of</strong> defining, creating, andtrading the carbon commodity, and integrating it withdevelopment goals. Building on a precursor program, ActivitiesImplemented Jointly, the <strong>Bank</strong> began consultationson carbon in 1997. <strong>The</strong> first carbon fund was approvedin 1999 and launched in 2000. It was followed by severalmore (table 5.1).By May 2010, the <strong>World</strong> <strong>Bank</strong>’s <strong>Carbon</strong> Finance Unit(CFU) had $2.358 billion under management and signedpurchase agreements for a total <strong>of</strong> 228 million tons <strong>of</strong> CO 2<strong>of</strong> carbon credits, with total value <strong>of</strong> $1.84 billion (implyingan average price <strong>of</strong> $8.07 per ton). Pipeline projects represented,notionally, an additional 53 million tons worth$208 million. However, not all tons may be delivered beforeKyoto-driven carbon market provisions expire in 2012;In May 2010, the <strong>World</strong> <strong>Bank</strong>’s <strong>Carbon</strong>Finance Unit had $2.358 billion undermanagement and purchase agreements forcarbon credits worth $1.84 billion.the carbon funds allow for some post-2012 purchase, butthe market is limited. 4Since 2002, IFC has managed carbon funds on behalf <strong>of</strong> theNetherlands government. <strong>The</strong> funds have contracted to buy$135 million in carbon credits from more than 40 projects.In addition, IFC has marketed a carbon delivery guarantee,booking guarantees for 2.2 million certified emissionreductions (CERs) in three projects.MIGA insured a landfill gas project against breach <strong>of</strong> contract,including governmental failure to honor the CDMrelatedLetter <strong>of</strong> Approval. <strong>The</strong>re has been no a replication<strong>of</strong> this CDM-related insurance provision to date.Goals and operation <strong>of</strong> the funds<strong>The</strong> <strong>World</strong> <strong>Bank</strong> carbon funds are trust funds managed bythe <strong>Bank</strong>’s CFU. <strong>The</strong> participants are developed countriesand companies seeking to acquire carbon credits to fulfilltheir obligations under the Kyoto Protocol. <strong>The</strong> CFU solicitscarbon project proposals from the general public andwrites purchase agreements for selected projects’ emissionsreductions. Typically it pays for <strong>of</strong>fsets on delivery, withlimited up-front payments.<strong>The</strong> CFU and its operations are entirely funded by the participants,rather than through the <strong>Bank</strong>’s own budget. AlthoughCFU staff act as “deal managers,” the CFU engagesregional <strong>Bank</strong> staff for project preparation. <strong>The</strong> CFU hasgrown large, with 68 staff and 72 consultants.Special Topics | 73
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Phase II: The Challenge of Low-Carb
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CLIMATE CHANGE AND THE WORLD BANK G
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Figures1.1 GHG Emissions by Sector
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Executive SummaryUnabated, climate
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IEG PublicationsAnalyzing the Effec