The Challenge of Low-Carbon Development - World Bank Internet ...
The Challenge of Low-Carbon Development - World Bank Internet ... 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
demonstration initiative. The Community DevelopmentCarbon Fund and the BioCarbon Fund have strong, explicitdemonstration goals. The other Kyoto Funds are stronglyoriented toward helping developed countries secure carboncredits for compliance purpose. The newer initiatives, theCarbon Partnership Facility and Forest Carbon PartnershipFacility, return to the pioneering mode in seeking to demonstratenovel kinds of carbon transactions not yet recognizedunder Kyoto.The new facilities also feature equal representation of donorand host countries in fund governance. In contrast, earlierfunds were governed by a committee of the participants(donors), though in consultation with host countries.Catalytic impact on the carbon marketThe CFU played an important role in catalyzing the emergenceof the market. Although there had been earliercarbon transactions (including Costa Rica’s pioneering saleof forest carbon credits), observers point to the PCF’s earlymobilization of funds and private sector investors as galvanizingthe realization that carbon markets were workable.The PCF invested heavily in developing monitoring andverification tools and in the legal apparatus for transactingoffsets, which were diffused among practitioners in theemerging market.The CFU was important in catalyzing theemergence of the carbon market and activein developing methodologies for carbonoffset measurement.The CFU was active in developing methodologies for carbonoffset measurement, though not uniquely so. As notedin box 5.2, development of a validation methodology is akind of public good: it cuts the development time, risk, andcost for all subsequent projects that use the same technology.In the first five rounds of the CDM’s MethodologicalPanel, the WBG was responsible for 12 of the 44 submittedmethodologies and for 6 of the 22 that were approved.Altogether, for large scale energy and transport technologies,the CFU has been involved in the preparation of 45 methodologies,of which 16 were eventually approved. Those methodologieshave been used so far in registered energy andtransport projects that are expected to produce 137 milliontons CO 2e, or about 10 percent of the CDM total for thesecategories. The CFU has also proposed most of the acceptedforestry methodologies, though there have been few otherusers of these and many small-scale methodologies. Currentwork on the Forest Carbon Partnership Facility and CarbonPartnership Facility aims at facilitating the development ofradically new approaches to the carbon market that work atscales much larger than site-specific projects.From the beginning, there was concern about whether theBank’s carbon funds would spur private sector participationor crowd it out—especially given the Bank’s perceived clout.UNFCCC statistics show that, using registered projects ortons as a measure, the Bank’s market share rapidly dwindled(figure 5.2). There was a surge of project registrationswhen the Kyoto Protocol came into force in 2005, so that by2005 the World Bank comprised only a small share of themarket. That being so, one could question the relevance ofthe 2005 goal of helping countries to market carbon credits,as a vibrant market was already emerging at the time.The World Bank’s market share of CDMprojects dwindled rapidly over time as avibrant market emerged.One way to assess the CFU’s demonstration effect on additionalityis to compare its relative success in securing CDMregistration. Registration is a measure of a project’s quality,including its stringency in determining additionality. TheCFU’s ratio of problematic to registered projects is smallerthan that of the CDM at large (table 5.2).Figure 5.2World Bank Share of CDM Projectsand Tons RegisteredPanel A. Registered projects (log scale)Registered CDM, number1,0001001012004 2005 2006 2007 2008 2009Registration, yearPanel B: CERs registeredCER by 2020 (tCO 2 ) (millions)1,2001,0008006004002000OtherWBG2004 2005 2006 2007 2008 2009Registration, yearOtherWBGSource: Calculated by IEG based on IGES Oct 2009, IGES as ofOctober 2009.Note: CDM = Clean Development Mechanism; CER = certifiedemission reduction.Special Topics | 75
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demonstration initiative. <strong>The</strong> Community <strong>Development</strong><strong>Carbon</strong> Fund and the Bio<strong>Carbon</strong> Fund have strong, explicitdemonstration goals. <strong>The</strong> other Kyoto Funds are stronglyoriented toward helping developed countries secure carboncredits for compliance purpose. <strong>The</strong> newer initiatives, the<strong>Carbon</strong> Partnership Facility and Forest <strong>Carbon</strong> PartnershipFacility, return to the pioneering mode in seeking to demonstratenovel kinds <strong>of</strong> carbon transactions not yet recognizedunder Kyoto.<strong>The</strong> new facilities also feature equal representation <strong>of</strong> donorand host countries in fund governance. In contrast, earlierfunds were governed by a committee <strong>of</strong> the participants(donors), though in consultation with host countries.Catalytic impact on the carbon market<strong>The</strong> CFU played an important role in catalyzing the emergence<strong>of</strong> the market. Although there had been earliercarbon transactions (including Costa Rica’s pioneering sale<strong>of</strong> forest carbon credits), observers point to the PCF’s earlymobilization <strong>of</strong> funds and private sector investors as galvanizingthe realization that carbon markets were workable.<strong>The</strong> PCF invested heavily in developing monitoring andverification tools and in the legal apparatus for transacting<strong>of</strong>fsets, which were diffused among practitioners in theemerging market.<strong>The</strong> CFU was important in catalyzing theemergence <strong>of</strong> the carbon market and activein developing methodologies for carbon<strong>of</strong>fset measurement.<strong>The</strong> CFU was active in developing methodologies for carbon<strong>of</strong>fset measurement, though not uniquely so. As notedin box 5.2, development <strong>of</strong> a validation methodology is akind <strong>of</strong> public good: it cuts the development time, risk, andcost for all subsequent projects that use the same technology.In the first five rounds <strong>of</strong> the CDM’s MethodologicalPanel, the WBG was responsible for 12 <strong>of</strong> the 44 submittedmethodologies and for 6 <strong>of</strong> the 22 that were approved.Altogether, for large scale energy and transport technologies,the CFU has been involved in the preparation <strong>of</strong> 45 methodologies,<strong>of</strong> which 16 were eventually approved. Those methodologieshave been used so far in registered energy andtransport projects that are expected to produce 137 milliontons CO 2e, or about 10 percent <strong>of</strong> the CDM total for thesecategories. <strong>The</strong> CFU has also proposed most <strong>of</strong> the acceptedforestry methodologies, though there have been few otherusers <strong>of</strong> these and many small-scale methodologies. Currentwork on the Forest <strong>Carbon</strong> Partnership Facility and <strong>Carbon</strong>Partnership Facility aims at facilitating the development <strong>of</strong>radically new approaches to the carbon market that work atscales much larger than site-specific projects.From the beginning, there was concern about whether the<strong>Bank</strong>’s carbon funds would spur private sector participationor crowd it out—especially given the <strong>Bank</strong>’s perceived clout.UNFCCC statistics show that, using registered projects ortons as a measure, the <strong>Bank</strong>’s market share rapidly dwindled(figure 5.2). <strong>The</strong>re was a surge <strong>of</strong> project registrationswhen the Kyoto Protocol came into force in 2005, so that by2005 the <strong>World</strong> <strong>Bank</strong> comprised only a small share <strong>of</strong> themarket. That being so, one could question the relevance <strong>of</strong>the 2005 goal <strong>of</strong> helping countries to market carbon credits,as a vibrant market was already emerging at the time.<strong>The</strong> <strong>World</strong> <strong>Bank</strong>’s market share <strong>of</strong> CDMprojects dwindled rapidly over time as avibrant market emerged.One way to assess the CFU’s demonstration effect on additionalityis to compare its relative success in securing CDMregistration. Registration is a measure <strong>of</strong> a project’s quality,including its stringency in determining additionality. <strong>The</strong>CFU’s ratio <strong>of</strong> problematic to registered projects is smallerthan that <strong>of</strong> the CDM at large (table 5.2).Figure 5.2<strong>World</strong> <strong>Bank</strong> Share <strong>of</strong> CDM Projectsand Tons RegisteredPanel A. Registered projects (log scale)Registered CDM, number1,0001001012004 2005 2006 2007 2008 2009Registration, yearPanel B: CERs registeredCER by 2020 (tCO 2 ) (millions)1,2001,0008006004002000OtherWBG2004 2005 2006 2007 2008 2009Registration, yearOtherWBGSource: Calculated by IEG based on IGES Oct 2009, IGES as <strong>of</strong>October 2009.Note: CDM = Clean <strong>Development</strong> Mechanism; CER = certifiedemission reduction.Special Topics | 75
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