The Challenge of Low-Carbon Development - World Bank Internet ...

Catalytic or demonstration impacts werestressed in the publicly stated goals of thePrototype Carbon Fund.Catalytic or demonstration impacts were stressed in thepublicly stated goals of the Prototype Carbon Fund (PCF)(World Bank 2001):1. Show how project-based greenhouse gas emission reductiontransactions can promote and contribute to sustainabledevelopment and lower the cost of compliancewith the Kyoto Protocol.2. Provide the parties to the UNFCCC, the private sector,and other interested parties with an opportunityto learn by doing in the development of policies, rules,and business processes for the achievement of emissionreductions under Joint Implementation and theCDM.3. Demonstrate how the World Bank can work in partnershipwith the public and private sector to mobilize newresources for its borrowing member countries whileit addresses global environmental problems throughmarket-based mechanisms.In 2005, the Bank’s Board endorsed a revised approach tocarbon finance, with three general objectives:• “To ensure that carbon finance contributes to sustainabledevelopment• To assist in building, sustaining, and expanding the internationalmarket for carbon emission reductions• To further strengthen the capacity of developing countriesto benefit from the emerging market for emissionreduction credits” (World Bank 2006).In 2005, the Bank Board endorsed a revisedapproach that articulated more specificgoals for the CFU.In addition, there were specific goals:• Continue to align carbon finance more closely withpoverty alleviation and locally sustainable development,ensuring that smaller, poorer countries benefitfrom carbon market development.• Expand the technology frontiers of the carbon marketto ensure that carbon finance and carbon trade supportenergy infrastructure and technology transfer.• Expand the Bank’s role in helping developing countriesdevelop and market portfolios of carbon assets directlyto OECD buyers, as a “lead buyer” that helps developa project but purchases only a fraction of its emissionreductions.• Ensure that there is a value added from carbon purchase,for instance, through the application of Bank safeguards.• Achieve greater integration of carbon finance into themainstream of Bank lending operations.• Reach out to other international finance institutionsand entities.• Improve pipeline of carbon finance projects.Inherent tensions among the various strategicand fiduciary goals have been resolvedin part through differentiation of funds.In addition to these overarching goals, the CFU wanted tofully use its funds on behalf of participants, to support sustainabledevelopment in client countries, and to ensure anequitable division of benefits between participants and hostcountries.There are inherent tensions among the various strategic andfiduciary goals:• Demonstration versus volume. Demonstration or pilotprojects tend to be risky and demanding in preparation.Under UNFCCC regulations, first-of-a-kind projectsrequire large fixed costs in methodology development.If, as is likely, these demonstration projects are small,the preparation cost per ton of CO 2will be high. Sothere is a trade-off between demonstration (which benefitsa global community) and maximization of carboncredits (which benefits fund participants and recipientprojects).• Established versus less-established country locations. Thisis the same kind of trade-off. “Frontier” projects incountries with less CDM experience are costlier to preparebut promote the geographic growth of the carbonmarket to poorer countries.• Stringent versus less-stringent additionality determination.As was recognized from the outset of the CDM,both buyers and sellers benefit from lax baselines—thatis, funding of projects that are not really additional. Butadditionality is difficult to determine, and screeningfor additionality has led to burdensome bureaucraticprocedures. So for the CFU there is a potential tensionbetween setting high standards for additionality demonstrationand maximizing carbon credit transactionvolumes.• High versus low CO price; agent of buyers or sellers.2In the early years of the PCF, the carbon market wasvery thin or nonexistent. Without an objective meansof price discovery, determination of a “fair” price was achallenge for the PCF.These conflicting pressures were resolved in part throughdifferentiation of funds. The PCF was launched as a74 | Climate Change and the World Bank Group