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Beyond repair? Bank lobbies for carbon markets

21 November 2011


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As UN climate talks loom, the Bank is lobbying G20 countries to resuscitate shrinking carbon markets through controversial measures, including using public climate finance to stimulate demand and creating markets for soil and forest carbon.

The Bank will use the United Nations Framework Convention on Climate Change (UNFCCC) summit in Durban, South Africa, in late November to launch the Carbon Initiative for Development fund. This aims to provide up front finance for carbon-credit-generating projects in least developed countries. The Bank is also expected to continue to lobby for international agreements to support the viability of carbon markets, which allow countries and companies to claim a reduction in carbon emissions by purchasing credits generated by emissions reductions from other sources. The Kyoto Protocol, the only internationally binding agreement on emissions reductions, is due to expire in 2012, and expectations are low that another legally binding agreement will be reached in Durban. This has raised fears over the future of the Clean Development Mechanism (CDM), mandated by the Kyoto agreement, which allows countries to reach their targets through carbon markets.

The launch of the new fund by the Bank, which already manages over $2.7 billion in carbon funds and is a major facilitator of carbon finance investments (see briefing), is further evidence of its efforts to prop up ailing carbon markets (see Update 77, 74 ). International markets in CDM credits have severely contracted in the last two years (see Update 77). Oscar Reyes of NGO Carbon Trade Watch, observes that: “The World Bank is continuing to push for more carbon markets, which have failed to reduce emissions and which displace responsibility for emissions reductions towards developing countries. The Carbon Initiative for Development explicitly acknowledges the failure of the carbon market in poor countries, but this is inscribed in the offset market’s economic DNA: investors find the economies of scale of heavy industry and large dam projects in middle-income countries most attractive, while most poor countries don’t pollute enough to be interesting to the market.”

more carbon markets, which have failed to reduce emissions and which displace responsibility

The Bank-led climate finance report for the G20 (seeUpdate 78) includes a section on carbon markets authored by the Bank. It admits that “carbon offset markets face major challenges”, but advocates a series of measures that it insists could buttress carbon finance. Controversially, this includes using publically provided climate finance to buy carbon credits to stimulate demand. Responding to the report in UK newspaper the Guardian, Murray Worthy of UK NGO World Development Movement said “limited public finance must not be used to prop up failed carbon markets. These markets only exist to pass the burden of cutting emissions back on to poorer countries, which are not responsible for causing climate change”.

Creating new markets

The report for the G20 also advocates that sectors currently “bypassed by existing regimes” be eligible to produce carbon credits, including soil carbon in agriculture (see Update 77) and Reducing Emissions from Deforestation and Degradation (REDD+). Speaking in September, Andrew Steer, the Bank’s special envoy on climate change, said the summit is an opportunity for a new focus on agriculture. On soil carbon he said: “You invest in things that are good for yields, good for resilience and also sequester more carbon. You can have it both ways if you get carbon back in soils.”

A September report by NGO ActionAid International critically examines the Bank’s assumptions on soil carbon. It argues that although the Bank wants soil carbon to be included in the CDM, “scientific uncertainty about the quantification and verification of soil carbon, as well as the non-permanence of sequestered carbon, put both the value of the associated credits and the mitigation potential of soil carbon markets in doubt”. It adds that “given the small amount of money that soil carbon would likely attract from a private market … it is likely that the most of the revenue will go to the technicians, not farmers”. ActionAid also warns that it leaves small farmers with traditional land rights vulnerable to land grabs (see Update 78, 77) by creating incentives for governments to reclaim land. Additionally, the report claims restricting farming practices to those that sequester carbon may actually reduce farmers’ ability to adapt to climate change. The report also argues that focus on soil carbon distracts from the more urgent need to find public money to address food security and adaptation in agriculture, puts the burden of emissions reductions on smallholder farmers in the developing world, and allows developed countries to evade their obligations to deliver public climate finance.

The negotiations in Durban will also focus on progress in establishing international agreement on REDD+. The Bank’s G20 report argues that agreements on carbon finance should take advantage of “the large mitigation opportunities from REDD+ activities”. The UNFCCC has not yet taken an official position on market-based financing for REDD+, although current Bank REDD programmes are designing projects to produce carbon credits.

A September letter by an international coalition of NGOs warns that the Bank’s Forest Carbon Partnership Facility (FCPF, see Update 76, 75, 72) is prematurely pushing ahead with its own Carbon Fund, which will facilitate the sale of forest carbon credits to investors. The letter, whose signatories include the Papua New Guinean Ecoforestry Forum and Gabonese NGO Brainforest, argues that the FCPF “should be wary of preparing countries for a market in forest carbon credits which may not materialise.” US NGO Bank Information Center also warned in its October REDD newsletter that methodological work by the Carbon Fund “may also end up leading or influencing the international climate negotiations.” The letter argues that social and environmental safeguards, the rights of indigenous peoples, and the participation of affected communities must be improved before the Carbon Fund launches activities in participating countries.

Bank’s “dubious role” in CDM hydropower project

Controversy has flared over the Bank-financed Rampur 412 megawatt hydropower project in India. The project was financed by the Bank in 2005, and at the time the project was presented as financially viable. The company behind the project is now claiming that it will only be financially viable by producing carbon credits, despite it already being 70 per cent complete. The board of the CDM is now considering whether to award the project 15 million carbon credits for the 2012-2022 period. A requirement for CDM projects is that they are additional, meaning that they would not go ahead without carbon finance, and therefore constitute genuine emission reductions. Peter Bosshard of NGO International Rivers argues in a September blog post that Rampur is a clear example of the “dubious role” the Bank plays in carbon finance. “The CDM board wouldn’t consider Rampur’s application for carbon credits if the financial institution didn’t talk out of both sides of its mouth. The Bank claims that its projects are financially viable when it lends to them, and pretends that they are not when it arranges carbon credits for some of the same projects.”