World Bank Carbon Funds
www.carbonfinance.org
Overview
Additionality and Quantification Procedures
Overview
Type of Standard and Context
The World Bank’s Carbon Finance Unit (CFU) manages carbon funds and facilities using resources contributed by companies and governments in industrialized countries to purchase project-based GHG emission reductions from projects in developing countries (non-Annex I countries) and countries with economies in transition (EIT).
The World Bank’s carbon finance initiatives are part of the Bank’s mission to reduce poverty through its environment and energy strategies. Through its work, the Bank endeavors to ensure that developing countries can benefit from international efforts to address climate change. The role of the CFU is to catalyze a global carbon market by reducing transaction costs, supporting sustainable development, strengthening developing country capacity and ensuring that the benefits of the carbon market reach the poorer communities of the developing world.
The World Bank started its carbon finance operations in 2000, launching the world’s first global carbon fund, the Prototype Carbon Fund, with a mission to pioneer the project-based GHG emission reduction market within the framework of the Kyoto Protocol and to contribute to sustainable development. Since then, it has created nine additional funds and facilities (BioCarbon Fund, Community Development Carbon Fund, Italian Carbon Fund, The Netherlands CDM Facility, The Netherlands European Carbon Facility, Danish Carbon Fund, Spanish Carbon Fund, Umbrella Carbon Facility and Carbon Fund for Europe), taking the total assets in its 10 funds and facilities to over USD 2.3 billion (World Bank, 2009). In September 2007, the World Bank’s Board of Executive Directors approved the creation of two new carbon facilities – the Carbon Partnership Facility and the Forest Carbon Partnership Facility. The former will pilot ways to use carbon finance on a larger scale and over longer timeframes, while the latter will do so in new areas such as avoided deforestation and reduction of forest degradation. The ultimate goal of these facilities is to help developing countries move towards low carbon development paths.
Standard Authority and Administrative Bodies
The emission reductions are purchased by the World Bank as the Trustee for one of the CFU’s carbon funds. The CFU is responsible for the overall management of the carbon funds. CFU staff review project proposals, prepare project documentation for consideration by each fund’s Participants Committee and contracts with the project entities for the purchase of emission reduction credits.
The Participants Committee for each fund is responsible for reviewing projects and authorizing the purchase of credits using the fund’s resources. The committee is comprised of the contributors to the fund, or of a sub-group of the contributors if there is a large number of participants in the fund.
The World Bank has also created a Host Country Committee to advise it on its carbon finance capacity building and training activities. This committee is comprised of representatives from countries that have signed a memorandum of understanding with the Bank to participate in the committee, or that host a CDM or a JI project supported by a Bank-managed carbon fund. At present, there are over 50 countries represented on this committee. (See list of countries.)
Regional Scope
The World Bank Carbon Funds work internationally. Through the CDM and JI, the funds develop projects in both Annex I and non-Annex I countries (as definied in the UN FCCC). Select carbon funds have a specific geographic focus. For example, the Netherlands European Carbon Facility focuses on the purchase of credits from JI projects located in countries with economies in transition that serve to meet the Netherlands’ compliance obligation. Similarly, the Netherlands CDM Facility focuses on the purchase of credits from CDM projects located in developing countries. The other carbon funds/facilities look at projects in both Annex I and non-Annex I countries.
Recognition of Other Standards/ Linkage with Other Trading Systems
Projects developed through the World Bank Carbon Funds are required to adhere to the modalities an procedures of the Kyoto Protocol mechanisms . The purchase of emission reductions by World Bank funds is designed to enable the carbon fund investors known as “Participants” to meet their emission reduction targets either under the Kyoto Protocol (in the case of governments) or the EU Emissions Trading Scheme (in the case of European private entities whose installations are covered under the EU-ETS).
Market Size and Scope
Tradable Unit and Pricing Information
The World Bank Carbon Finance Funds purchase CDM Certified Emission Reductions (CERs), Joint Implementation (JI) Emission Reduction Units (ERUs) and temporary CERs (tCERs) for afforestation and reforestation projects, as well as Assigned Amount Units (AAUs). In some cases, they also purchase Verified Emission Reductions (VERs) with the aim of converting them into Kyoto-compliant units.
The World Bank’s purchase pricefor the different emission reduction units it buys is not publicly available. However, the Bank has published its approach to determining price ranges for Emissions Reduction Purchase Agreements (ERPAs). It starts with a benchmark price, which is comparable to that which other market players have paid for similar transactions, and then adjusts the premiums or discounts based on the risks involved and how that risk is shared between the seller and the World Bank. Prices vary over time based on market supply and demand, as well as other factors such as project, regulatory and other risks, technology type, project location, project co-benefits, payment timing, and other costs. The preference of fund participants for projects of a specific technology type, and other environmental and social benefits, may also have an impact on the price.
The World Bank Carbon Funds VER ERPAs aim to shift the Kyoto regulatory risks from the seller to the buyer. Thus, the price paid for VERs would typically be lower than for CERs (or ERUs), but the seller is guaranteed payment for independently verified emission reductions – whether or not these VERs fully convert to Kyoto assets (i.e., CERs, ERUs, tCERs and AAUs). Discrepancies in the quantity of ERs between the VERs schedule specified in the ERPA and the issuance of Kyoto asset can be due to differences in methodology (i.e., difference between the methodology used to determine the VERs in the ERPA and the methodology approved by the CDM Executive Board) or differences between the start dates of VER and CER generation (due to delays in registration of the project by the CDM Executive Board). The VERs not converted to CERs due to delays in registration (which determines the start of CER generation) compared to VER start date are transferred to Fund Participants – who may then sell them on the voluntary market or use them for other purposes.
Participants/Buyers
The buyers, the fund participants (via the World Bank), include 16 governments and 66 private companies. The sellers of the emission reductions may include project entities in any Kyoto Annex-1 or non-Annex I country.
Current Project Portfolio
As of December 31, 2008, the World Bank-managed funds and facilities have 186 projects in their portfolio with an estimated carbon asset value of more than USD 2.3 billion (World Bank, 2009 The geographic distribution of projects funded is dominated by projects located in East Asia and the Pacific – particularly in China (World Bank, 2009). Latin America and the Carribean, followed by Europe and Central Asia, make up the second and third largest shares (World Bank, 2009). 10 projects have been signed in the Africa region, primarily for renewable energy (World Bank, 2009). HFC-23 projects account for 54% of the project portfolio, though this share has been declining as the number of renewable energy, energy efficiency, and waste management projects rise (World Bank, 2009).
Offset Project Eligibility
Project Types
The World Bank Carbon Funds/Facilities have no project type restrictions. However, specific funds have been designed to provide funding for specific project or technology types. For example, the BioCarbon Fund (BioCF) focuses on land-use and forestry projects, while the Community Development Carbon Fund focuses on projects with community development attributes. The Netherlands CDM Facility prioritizes projects in the following categories: i) renewable energy; ii) clean, sustainably grown biomass (not from biomass waste); iii) energy efficiency improvements; iv) fossil fuel switch and methane recovery; and v) sequestration. Similarly, the Danish Carbon Fund prioritizes projects in the areas of wind power, cogeneration , hydropower, biomass and landfills.
Project Locations
The World Bank Carbon Funds have no overall project location restrictions beyond those existing for CDM and JI projects.
Project Size
There is no upper limit on project size. However, the World Bank will typically not consider small-scale projects that generate less than 50,000 tCO2e of emissions reductions per year – a threshold it considers necessary for the project to be viable under CDM and JI, although there are exceptions.
Start Date
CDM and JI project start date requirements apply.
Crediting Period
CDM and JI crediting period requirements apply.
Co-benefit Objectives and Requirements
In addition to the CDM and JI rules, the World Bank requires that all projects comply with the World Bank Group’s Environmental and Social Safeguard Policies. (See the World Bank's Safeguard Policies.)
Additionality and Quantification Procedures
Additionality Requirements
CDM and JI requirements apply.
Quantification Protocols
CDM and JI requirements apply. The World Bank Carbon Finance Unit has developed several methodologies for projects in its portfolio (see Selected Issues).
Project Approval Process
Validation and Registration
CDM and JI requirements apply. The World Bank works with CDM- and JI-approved independent auditors, called Designated Operational Entities (DOEs) under the CDM or Independent Accredited Entities (IAE) (under JI), to validate and verify projects within their portfolio.
Monitoring, Verification and Certification
CDM and JI requirements apply.
Registries and Fees
Carbon assets are forwarded to the Fund Participants’ accounts (in their respective national registries) on a pro rata basis, according to each participant’s share in the Carbon Fund. In the case of CERs, the credits are transferred from the CDM registry, while ERUs are directly transferred from the national registry of the project host on issuance. The World Bank has developed a carbon asset registry system (CARS) to track the World Bank Carbon Funds’ carbon assets and manage allocations to Fund participants.
The Carbon Finance Unit of the World Bank (CFU) does not publish information regarding the fees it charges. However, the World Bank, as trustee of the Carbon Funds, manages the funds on a not-for-profit basis.
Selected Issues
In the early years of the carbon market, the World Bank played a pioneering role by setting up the first carbon fund – the Prototype Carbon Fund. It also helped to develop many of the approved CDM methodologies in existence today. By 2006, the World Bank had developed 31% of all approved methodologies (World Bank, July 2009). This includes a contribution to the development of methodologies for programmatic CDM, and methodologies in the forestry and transportation sectors (World Bank), where CDM project development have been scarce, in part due to methodological issues.
Through the recent introduction of two new carbon facilities, the CFU is trying to address some of the current challenges in the carbon market. The Carbon Partnership Facility aims to address the lack of investment in large-scale infrastructure with long-term emission reduction potential, which results from regulatory uncertainty beyond 2012 (World Bank 2008b). The Forest Carbon Partnership Facility is trying to address the problem of deforestation and degradation by valuing the carbon in standing forests, thereby providing an incentive for its sustainable use (World Bank 2008b).
Despite its pioneering role in the creation of new carbon funds, the World Bank is not without its critics. One of the key issues raised is that the price premiums offered by some of the buyers in the carbon market, including by the World Bank-managed carbon funds, have not been sufficient to significantly improve the internal rate of return for renewable energy projects (Pearson, 2007). This criticism is debatable since the CFU is arguably not the price-setter for the CDM market. At the same time, however, the World Bank as a whole is uniquely positioned to drive financing towards renewable energy. The World Bank through the development of the CFU pricing approach has taken steps to offer fair prices for buyers and sellers.
Further criticisms relate to the World Bank’s lending activities, and not necessarily to its carbon finance activities in particular. Nonetheless, it is important to highlight them as the Bank embarks on efforts to mainstream valuing carbon into its lending activities. For example, it has been criticized for continuing to invest, and perhaps even increasing its investments, in emissions-intensive projects such as coal-fired power or oil and gas development (Park, 2007; FOE, 2005).
In an effort to increase its funding available to address climate change in developing countries, the World Bank announced two new Climate Investment Funds in July 2008. One of the funds, the Clean Technology Fund, will serve as the Bank’s financing vehicle to accelerate low-carbon technology investments in developing countries. To complement this initiative, the CFU is reviewing specific ways in which the World Bank can integrate carbon finance into its other financial mechanisms to provide more effective support to low-carbon projects (2008a).
References
FOE (2005). Power Failure: How the World Bank is Failing to Adequately Finance Renewable Energy for Development. Retrieved July 21, 2008 from Friends of the Earth.
Park, S. (2007). The World Bank Group: Championing Sustainable Development Norms? Global Governance,13(4), 535–56.
Pearson, B. (2007). Market Failure: Why the CDM Won't Promote Clean Development. Journal of Cleaner Production, 15(2), 247–252.
World Bank (2006a). The Role of the World Bank in Carbon Finance: An Approach for Further Engagement. Retrieved March 9, 2008 from The World Bank CFU.
World Bank (2006b). Carbon Finance for Sustainable Development 2006. Washington DC: The World Bank.
World Bank (2007). Carbon Finance for Sustainable Development 2007. Washington DC: World Bank.
World Bank (2008a). Towards a Strategic Framework on Climate Change and Development for the World Bank Group: Concept and Issues Paper (Consultation Draft). The World Bank.
World Bank. (2008b). The World Bank Carbon Finance Unit. Available at The World Bank Carbon Finance Unit.
World Bank (2009). Carbon Finance for Sustainable Development 2008. Washington DC: World Bank.