The role of the World Bank in carbon markets: The Carbon Finance Unit

29 November 2010 | Inside the institutions

The World Bank’s engagement in carbon finance has expanded from its “pioneering” Prototype Carbon Fund in 1999, which provided the groundwork for a market-based approach to emission reductions. Today, the Bank’s carbon finance portfolio has grown to 12 funds and facilities, managing $2.4 billion, with over 200 active projects. The Carbon Finance Unit (CFU), headquartered in Washington DC, is presented as a natural extension of the Bank’s mission to reduce poverty. It has three main functions: a trustee role; an administrative role; and an advisory role.

The Bank acts as a trustee of carbon funds and facilities. In this role, it collects financial contributions from OECD countries that have committed to lowering their emissions under the Kyoto Protocol, a global climate agreement adopted in 1997, but have not fulfilled this promise domestically. Contributors include governments, private companies and industrial associations. The Bank’s CFU then pools these financial contributions into one or more trust funds.

Subsequently, the Bank uses these funds to purchase emission reductions on behalf of contributors. So far, the Bank has bought credits in 57 countries for 16 governments and 66 companies. It does so within the Joint Implementation or Clean Development Mechanism (CDM) of the Kyoto Protocol. The CDM is designed to assist developing countries in achieving sustainable development by allowing rich countries to buy Certified Emission Reductions (CERs) related to emissions reduced by projects in developing countries. JI allows developed countries to buy Emission Reduction Units (ERUs) from an emission reduction project in rich countries, rather than reducing emissions domestically.

The most recent finance instrument to be established by the Bank’s CFU is the Carbon Partnership Facility (CPF). It consists of a Carbon Asset Development Fund, which supports the preparation of emission reduction programmes, for example through client executed grants, and the Carbon Fund, which purchases the emission reductions generated by CPF programmes. The facility is intended to move past individual projects and finance large-scale, long-term programmes. The facility targets energy efficiency, the power sector, waste management systems, gas flaring and urban development. The Bank estimates the capital of this facility could reach $5 billion over time.

In its trustee role, the Bank also acts as an advocate for projects under registration review by the CDM executive board.

As an administrator, the Bank contracts “verifiers” registered with the CDM executive board to confirm that the project under review is going to result in more emission reductions than it would have without the Bank’s funding. After the CDM board approves a project, the Bank negotiates a contract stipulating the price and volume of emission reductions and identifies partys’ rights and responsibilities. The Bank also contracts “verifiers”, licensed through the UN, to evaluate whether the project activities actually reduced emissions, and by how much.

Upon delivery of emission reduction credits to the Bank, the contracted amount of carbon credits are distributed back to fund participants on a pro rata basis, according to each participant’s share in the trust fund. Payment is made to project sponsors, or to private banks that loaned initial investment funds to those sponsors.

In its advisory role, the Bank creates baseline and future emission scenarios, crafts the project designs to generate the maximum possible number of credits, and calculates the volume of reduced emissions that the proposed project could be expected to deliver over its lifetime. Based on these assessments, the Banks’ technical advisors then calculate a per-tonne price of expected emissions credits. The Bank generally negotiates a price for carbon credits at a level below expected market price.

The Bank’s CFU does not publish information regarding the fees it charges, but claims to operate on a not-for-profit basis.