88283 carbon finance for sustainable development 2013 A NNUA L REP ORT mission statement Our mission is to support putting a price on carbon by providing assistance on and piloting innovative cost-effective climate change mitigation approaches in World Bank client countries. Such approaches include international mechanisms, emissions trading schemes, carbon taxes, and results- based finance. The report covers the carbon funds, facilities, and financial instruments managed by the World Bank between January 1, 2013 and December 31, 2013. An online version of this report is available at www.carbonfinance.org/ publications. Note: All dollar amounts are in U.S. dollars ($) unless otherwise indicated. The euro/U.S. dollar exchange rate used in this report is 1.37. The pound sterling/U.S. dollar exchange rate used in this report is 1.65. All greenhouse gas emission reductions are reported in metric tons (equivalent to 1,000 kilograms) of carbon dioxide equivalent (tCO2e). This report is provided for informational purpose only. The carbon funds, facilities, and financial instruments reported on are not legal partnerships. No warranties or representations are made as to the accuracy, reliability, and completeness of any information herein. carbon finance for sustainable development 2013 A NNUA L REP ORT Acronyms BioCF BioCarbon Fund CDCF+ The grant arm of the Community Development Carbon Fund (CDCF) CDM Clean Development Mechanism CER Certified Emission Reduction CFU Carbon Finance Unit (World Bank) Ci-Dev Carbon Initiative for Development COP Conference of the Parties CPF Carbon Partnership Facility CSO Civil Society Organization DOE Designated Operational Entities EE Energy Efficiency ER Emission Reduction ERPA Emission Reductions Purchase Agreement ERU Emission Reduction Unit, achieved through a Joint Implementation project ETS Emissions Trading Scheme EU ETS European Union Emissions Trading System EUA European Union Allowance FCPF Forest Carbon Partnership Facility FCPF PC Participants Committee of the FCPF GHG Greenhouse Gas GIS Green Investment Scheme ha Hectare IDA International Development Association, part of the International Bank for Reconstruction and Development IETA International Emissions Trading Association IFC International Finance Corporation IP Indigenous Peoples ISFL BioCarbon Fund Initiative for Sustainable Forest Landscapes JI Joint Implementation LED Light-Emitting Diode LDC Least Developed Country LULUCF Land Use, Land-Use Change, and Forestry M&E Monitoring & Evaluation MRP Market Readiness Proposal MRV Monitoring, Reporting, and Verification MW Megawatt NAMA Nationally Appropriate Mitigation Action NGO Non-Governmental Organization PAF Pilot Auction Facility for Methane and Climate Change Mitigation PMR Partnership for Market Readiness PMR PA Partnership Assembly for the PMR PoA Programme of Activities ppm parts per million REDD Reducing Emissions from Deforestation and Forest Degradation REDD+ REDD plus conservation, sustainable management of forests, and enhancement of forest carbon stocks R-PP Readiness Preparation Proposal tCERs Temporary Certified Emission Reductions tCO2e Tonnes of Carbon Dioxide Equivalent UNFCCC United Nations Framework Convention on Climate Change Table of Contents From the Carbon Finance Unit ................................................................................................ I Infographic: A Changing Climate Needs Smart Solutions ............................................2 Kyoto Funds and Facilities ........................................................................................................4 Next Generation Carbon Market Initiatives.........................................................................5 State and Trends of Carbon Pricing .......................................................................................6 New Approaches in Carbon Finance .................................................................................10 Sustainability on the Landscape Level ......................................................................11 Pilot Auction Facility for Methane and Climate Change Mitigation ................12 PMR Policy and Technical Work Program ................................................................13 Policy and Methodological Frameworks ...................................................................14 Update on the Kyoto Carbon Funds and Facilities .......................................................15 The Carbon Finance Unit's Global Network ....................................................................16 2013 Highlights .........................................................................................................................18 Infographic: Carbon Markets of the World ......................................................................22 Next Generation Carbon Market Initiatives......................................................................24 Forest Carbon Partnership Facility ..............................................................................26 Carbon Partnership Facility ............................................................................................30 The Partnership for Market Readiness ......................................................................34 BioCarbon Fund Initiative for Sustainable Forest Landscapes..........................38 Carbon Initiative for Development .............................................................................40 Who We Are................................................................................................................................44 Glossary ........................................................................................................................................45 Simon Whitehouse Acting Manager, Carbon Finance Unit The World Bank From the Carbon Finance Unit In 2013, we saw the continuation of two emerging any package of effective and cost-efficient policies to support trends in the global carbon pricing landscape: climate change mitigation. while it was a challenging year for existing While scaling up mitigation activities for maximum impact continues to be a challenge, carbon initiatives such international mechanisms, with credits from the as the CPF, FCPF, and the ISFL are pioneers in supporting Clean Development Mechanism (CDM) worth no large-scale interventions. The CPF is helping countries more than a few cents and the coverage of the implement programmatic interventions that reduce emissions, Kyoto Protocol shrinking to 12 percent of global such as capturing methane from landfills across Brazil. The greenhouse gas (GHG) emissions, we saw an FCPF and the ISFL focus on better land management at the increasing number of domestic initiatives that are landscape level, combining reforestation, REDD+, agriculture, putting a price on carbon. and biomass energy activities into an integrated approach In 2013, the Carbon Finance Unit (CFU) continued to to achieve the “triple-win” of mitigating climate change, develop and deepen innovative financial instruments that enhancing food security, and increasing the resilience of local support results-based mitigation. We are working on several communities and environments. approaches that support emission reductions (ERs), including It is also a matter of putting the right price on carbon. technical assistance and readiness for market-based initiatives, Carbon markets are one way of achieving this. The PMR scaling up from projects to programs, increasing access to participants, countries like China, Mexico, and Chile, are energy for the poorest, and helping to protect forests and implementing policy options and carbon pricing instruments farmers by introducing smarter land management practices. that incentivize mitigation and green growth, including In 2013, our staff worked with 90 countries, including emissions trading schemes (ETS) and carbon taxes. The donors and recipients, to deliver results. We raised $643 PMR also serves as an important forum to facilitate technical million for our “next generation” carbon market initiatives: discussions to spur innovation and support implementation. the Forest Carbon Partnership Facility (FCPF), the Carbon The World Bank Group is moving towards expanding Partnership Facility (CPF), the Partnership for Market the use of results-based payments and developing the Readiness (PMR), the BioCarbon Fund Initiative for next generation of innovative financial instruments. Carbon Sustainable Forest Landscapes (ISFL), and the Carbon finance under the CDM provided important lessons and has Initiative for Development (Ci-Dev). These carbon initiatives helped spur broader use of market-based mechanisms. The have a total fund allocation of $1.5 billion, including $0.5 Ci-Dev is taking CDM to the next level by providing access billion committed for technical assistance. to energy and bringing payments as well as social and Our Unit also continued to reap the results of over environmental benefits to the poorest countries. a decade’s work with carbon funds that support the Looking to the future, it is clear that several sources of mechanisms under the Kyoto Protocol’s first commitment climate finance will be necessary, and thinking outside the box period. By the end of 2013, the “Kyoto Funds” had delivered will be instrumental. One possibility we are helping develop 89 percent of the ERs set forth in their purchase agreements, is using innovative financial instruments to engage the private representing the equivalent of 187 million tonnes of carbon sector, such as using auctions to finance projects that are dioxide reductions, roughly equivalent to the annual emissions “stranded” due to the low price of carbon. of Colombia. The World Bank will continue to support innovation and Carbon Finance 13 AR Carbon finance has been a valuable instrument in offer technical assistance to developing countries as they helping to put a price on carbon. A strong price signal in explore their options and develop mechanisms that can bring major economies is essential to establish the right incentives mitigation to a scale commensurate with the challenges the to direct financial flows away from carbon-intensive growth world is facing. Putting a price on carbon has never been more to low-carbon investments. Pricing carbon must be part of important if we are to avert dangerous climate change. l 1 A CHANGING CLIMATE NEEDS SMART SOLUTIONS Climate change is a fundamental threat to economic development and the fight against poverty. Annual greenhouse gas We just surpassed 400 ppm of carbon emissions equal roughly 50 dioxide in the atmosphere gigatons of CO2e 15-20cm 0.8˚ The global mean temperature And sea levels have Deforestation causes has risen 0.8˚ since risen 15-20cm 12–17% of global emissions pre-industrial times annually WORLD BANK CARBON FINANCE IS MAKING A DIFFERENCE = OR =1 million Our projects have reduced The annual CO2 emissions Emissions of 46 million vehicles in an entire year 187 million tons of CO2e of Colombia since year 2000 Development Benefits: Less intense Technology weather-related transfer events Social impact: Co-benefits such as better Less climate education, impact on health and agriculture cleaner air and water Carbon Finance 13 AR Poverty Financing based on reduction concrete results l2 reduction concrete results TACKLING A GLOBAL PROBLEM WITH GLOBAL PARTNERS 90 52 3.6 $3 6BN government private companies contributed to 15 carbon partners funds and initiatives Our 145 projects around the world include: NEPAL BANGLADESH BRAZIL Biogas distributed to Introduced over 1 million solar 140,000 MWh created from over 2 60,000 households panels to poor households million tons of garbage per year South Asia South Asia Latin America SENEGAL MOLDOVA KENYA Replaced light bulbs with 1.5 Reforested 8,500 60,000 farmers improving million new CFLs hectares of land their land Africa Europe Africa THE FUTURE Carbon Finance 13 AR l 3 Kyoto Funds and Facilities The World Bank launched the world's first global carbon fund, the Prototype Carbon Fund, in April 2000. In the following seven years, another nine funds were launched to pioneer Prototype Carbon Fund CDCF a full range of flexibility mechanisms created for the Kyoto The Community Development Protocol’s first commitment period. By the end of 2013, Carbon Fund these funds had delivered more than 89 percent of the ERs set forth in their purchase contracts. Fund Capital $2.32 billion Date Operational April 2000 Danish Carbon Fund Italian Carbon Fund Participants 67 Private Capital Invested 49% NCDMF The BioCarbon Fund The Netherlands European Spanish Carbon Fund The Netherlands Clean Carbon Facility Development Mechanism Facility Umbrella Carbon Facility Carbon Fund for Europe Carbon Finance 13 AR 44 l Next Generation Carbon Market Initiatives The World Bank has taken a leadership role in shaping the next generation of carbon instruments Forest Carbon Partnership Facility for the post-2012 period by developing new approaches to performance-based payments. The Forest Carbon Partnership Facility The World Bank's five most recent carbon instruments aim to scale up ERs, focus on readiness (FCPF) was launched in 2008 and focuses for market-based carbon initiatives, increase access to energy in least developed countries, and on reducing emissions from deforestation reduce emissions from deforestation and forest degradation. These carbon initiatives have a total and forest degradation, forest carbon stock fund allocation of $1.5 billion, including $0.5 billion committed for technical assistance. In 2013 conservation, sustainable management of alone, $643 million was raised for these new carbon initiatives. forests, and enhancement of forest carbon stocks (REDD+). The FCPF demonstrates how REDD+ can be applied at the country level and provides lessons learned from this early implementation phase. The FCPF has created a framework and processes for REDD+ readiness, which helps countries get ready for future systems Carbon Partnership Facility Parnership for Market Readiness of financial incentives for REDD+. In 2013, The First Tranche of the Carbon Partnership The Partnership for Market Readiness (PMR) 16 REDD Country Participants submitted Facility (CPF) became operational in May 2010, was launched in December 2010, and in formal Readiness Preparation Proposals to and the CPF's Carbon Asset Development Fund 2013 reached a capitalization of $127 million the facility, bringing the current total number became operational in January 2009. The CPF from 13 Contributing Participants, including a to 39. Submitting such a proposal is the first uses scaled-up, programmatic approaches new addition, Spain. Peru became the PMR's step in building up capacity to be able to tap to enable carbon finance to support partner 16th Implementing Country Participant and into incentives under REDD+. Moreover, two country initiatives aimed at moving towards low- Kazakhstan became its first Technical Partner. countries presented formal proposals to the carbon economies. It targets areas that were not Seven countries presented final Market Carbon Fund. reached effectively by CDM in the past, such as Readiness Proposals (MRPs) and had funding energy efficiency (EE) and waste management. allocated to them for their implementation. Fund Capital $824 million Date Operational June 2008 Fund Capital $165 million Fund Capital $127 million Participants 62* Date Operational January 2009 Date Operational April 2011 Participants 10* * 18 financial contributors and 44 REDD participants. Participants 29 Eight additional countries were selected to join the FCPF in * Three buyer participants and seven seller participants. December 2013 and will sign Participation Agreements soon. BioCF Initiative for Sustainable The Carbon Initiative for Development Forest Landscapes The Carbon Initiative for Development The BioCarbon Fund Initiative for Sustainable (Ci-Dev) was launched in December 2011 Forest Landscapes (ISFL) was launched to build capacity and to develop tools and in December 2011 and aims to create a methodologies to help the world’s poorest portfolio of programs that promote sustainable countries access carbon finance, mainly in the agriculture, forestry, and smarter land-use area of energy access. The Ci-Dev is set up to practices in an integrated way. ISFL programs use performance payments to support projects will cover a variety of geographies and transform that use clean and efficient technologies in large rural areas by protecting natural forests, low-income countries to reduce emissions. restoring degraded lands, and enhancing agricultural productivity, thereby improving Fund Capital $127 million livelihoods and local environments, using Date Operational March 2013 results-based finance to incentivize changes at Participants 3 the landscape level. Carbon Finance 13 AR In 2013, the ISFL supported the development of a program with the government of Ethiopia to pursue a low-carbon forested landscape program to reduce emissions and combat poverty. Fund Capital $308 million Date Operational November 2013 5 l Participants 3 5 66 ll Carbon Finance 13 Carbon Finance AR 13 AR State and Trends of Carbon Pricing As the world shakes off the constraints of a deep recession, increased focus on climate change policy has become possible again. Despite arduous international negotiations, several economies are planning or refining domestic climate action. These activities take careful note of past experiences, mirroring successes and dealing with weaknesses. On the international level, the second commitment period of the Kyoto Nearly 40 national and Protocol covers only 12 percent of global GHG emissions. With ratification over 20 sub-national by only nine countries to date, all eyes are on the United Nations Framework jurisdictions are putting Convention on Climate Change (UNFCCC) 2015 Conference of the Parties (COP) in Paris, which offers an opportunity for convergence on international a price on carbon. climate action. A consensual and robust global solution could revive private Together these carbon sector confidence to invest in carbon markets. pricing mechanisms At the time when the international carbon market is uncertain, it is the continued traction at regional, national, and sub-national levels that shows cover almost 6 GtCO2e, some promise for the future. Domestic action has the potential to overcome or about 12 percent of the international regulatory gap by fostering targeted low-carbon investments the annual global GHG at the regional and national level. Today, nearly 40 countries and over 20 sub-national jurisdictions are putting a price on carbon. Together, these carbon emissions. pricing mechanisms cover the equivalent of almost 6 GtCO2, or about 12 percent of annual global GHG emissions. Carbon Pricing Comes in Different Guises Scaling up GHG ERs and lowering the cost of mitigation is crucial to combating climate change. Given the size and urgency of the climate challenge, a full range of carbon pricing policies and instruments will be required. Carbon pricing instruments such as a carbon tax, ETS, and crediting mechanisms are of great relevance to internalizing the cost of climate change in the broadest possible range of economic decision-making and in setting economic incentives for clean development. Carbon pricing instruments are also needed to tackle the problem at scale and used to foster complementary private sector investments. In addition, in light of the limited public resources available, it is important to recognize that carbon pricing can generate fiscal dividends. There are different carbon pricing approaches. A carbon tax, on the one hand, guarantees a carbon price in the economic system. An ETS, on the other hand, provides certainty about the environmental impact, through Carbon Finance 13 AR the cap, while the price remains flexible. Sudden and unexpected changes in economic parameters can be harmful, disrupting the basic functioning of the market, one of the issues currently being dealt with in the European Union State and Trends of Carbon Pricing 2014 Emissions Trading System (EU ETS). l 7 Figure 1 Summary map of existing, emerging, and potential regional, national, and sub-national carbon pricing schemes (ETS and tax) Source: Meike Naumann, Visuelle Kommunikation In terms of stimulating mitigation activity, the choice addition, the increase in discussions between these two between these instruments is less important than countries raises promising perspectives at global level. getting the design details right. Both instruments impact Progress across the globe is steady. A total of eight economic decision-making through setting a price on carbon new carbon markets opened their doors in 2013. With and both instruments raise revenue. In particular, taxes raise these additions, the world’s ETS are valued at about US$30 revenues directly, as do auctions in an ETS. The careful use billion.1 China now houses the second largest carbon market of these revenues can improve the effectiveness of the policy in the world, covering the equivalent of 1,115 MtCO2, after instrument. the EU ETS with its 2,039 MtCO2e cap in 2013.2 Carbon taxation is also gaining ground. New carbon taxes were Reach of Carbon Pricing Is Steadily Increasing Carbon Finance 13 AR Carbon pricing systems are now in operation in sub- national jurisdictions of the United States and China. 1 This is for the national, regional, and sub-national emissions trading schemes where Whilst overall progress at the national level in these countries a cap has been defined. It does not include the Kyoto Protocol international emissions trading. Calculated as the 2013 cap multiplied by the allowance price on may take some time, it is notable that the world’s two largest December 31, 2013, or the latest available data before this date. emitters are now home to carbon pricing instruments. In 2 Excluding aviation. l8 ”The world’s two largest emitters are now home to carbon pricing instruments.” introduced in Mexico and France in 2013. In North America, Oregon and Washington are searching for the right carbon pricing options, joining first-movers California, Québec, and British Columbia in concerted efforts to tackle climate change. Two Steps Forward, One Step Back Cooperation Remains a Key Feature of Success While some nations are taking concrete steps forward on The international market has been struggling for some carbon pricing, recent developments in some countries time. However, current domestic action has been buoyed are a setback. The Australian government plans to repeal its by growing cooperation among regional, national, and sub- Carbon Pricing Mechanism legislation and three major emitters national stakeholders. Although unilateral political changes (Japan, Russia, and New Zealand) officially pulled out of the have challenged the EU-Australia link, cooperation between second commitment period of the Kyoto Protocol. California and Québec demonstrates that carbon markets can In addition, the infrastructure created by the market- grow through linking. In the future, a variety of cooperative based mechanisms under the Kyoto Protocol continues to be approaches could strengthen carbon pricing—and wider climate dismantled as many players, including financial institutions, change policy—further. private sector intermediaries, aggregators, and Designated The difference in countries' domestic emissions—and Operational Entities (DOEs) have either exited the market consequently, in ER opportunities—across the globe underlines or substantially reduced their activities. No sign of a short- the need for some sort of international cooperation that takes term recovery in demand for international credits from the into account the vast range of domestic realities, priorities, and existing and emerging initiatives led to an intensified exodus possibilities. of private sector players in the last two years. Fears abound Such cooperation can create the basis for ambition. In turn, that the demobilization of the CDM market infrastructure could ambition itself can drive cooperation, as a tool to control cost substantially damage the institutional memory that has been and provide flexibility in compliance. Careful cooperation takes created, and delay the market recovery, if and when positive time, and may take different forms. Piloting and scaling up policy signals are given. carbon pricing on an international level and increasing climate Confidence in the EU ETS has been hit hard as the finance through market-based instruments is an important first mechanism design has been unable to cope with the major step. The next challenge would be to create a product that is economic downturn. Prices in the EU ETS remained in the greater than the sum of its parts by converting fragmented depressed range of about US$5-9 in the past year, contrasting initiatives into internationally integrated carbon pricing with the US$18 from three years ago. Without the demand approaches. from EU ETS installations, Kyoto credit prices also reached Carbon Finance 13 AR their historic lows in 2013 and 2014, with Certified Emission Reductions (CERs) worth US$0.51. An imbalance between little residual demand for Kyoto credits between now and 2020 and an existing portfolio of projects that has the potential to generate significant credits leaves no prospect for recovery. l 9 10 10 ll Carbon Finance 13 Carbon Finance AR 13 AR New Approaches in Carbon Finance In the past year, four new approaches to innovate climate finance have been central to the work of the CFU. These approaches showcase innovation and continuous development and are presented in this section. Sustainability on the Landscape Level Each sustainable landscape is unique and requires a dialogue among the affected stakeholders to agree on Climate change is to a large extent the result shared objectives, including a land-use plan. Establishing such of the way landscapes are mismanaged. a dialogue is not without challenges. Landscape interventions Unsustainable agricultural practices and land- require an institutional infrastructure to coordinate activities and use change currently account for about a third align interests of multiple stakeholders that agree on land uses of global greenhouse gas emissions. New that provide benefits and ensure delivery of services across approaches are needed to turn the use of multiple sectors. To foster longstanding commitment to the landscape-level goals, stakeholders’ long-term financing needs to land from a source of emissions into a net be managed at the global and local level. carbon sink. Climate finance is a possible means to providing A landscape approach can help address both local and incentives for sustainable land management at scale. These global challenges by contributing to sustainable economic incentives should encourage a change in behavior and the development as well as climate change mitigation. It aims to adoption of sustainable land management practices, rather than increase food security through higher agricultural production a continuation of business as usual. The incentives should also and productivity, while enhancing resilience to climate change reach all actors who are—directly or indirectly—involved in land and contributing to global climate change mitigation objectives. management. Sustainable landscapes are defined as geographical Incentives can be defined broadly. They could include cash areas containing several agro-ecological systems with payments, technical assistance (for example, better inputs multiple land uses, which are managed to ensure for agricultural productivity and extension services), access sustainability of the landscape’s natural resources. Achieving to ecosystem services, forest products, and land tenure. In a sustainable landscape means to manage natural capital landscapes where a shared vision includes the conservation in an integrated manner, while recognizing the trade-offs of forests under pressure or the restoration of forests, the inherent in different land-use decisions that may compete in objectives for a sustainable landscape and a national REDD+ a given landscape as well as considering the interdependency strategy may overlap significantly. Consequently, REDD+ across these uses. Working at the landscape level ensures that financing mechanisms can serve as a tool to achieve sustainable different land uses—such as agriculture, energy, and forest landscapes. protection—are duly considered, and that integrated solutions Programs that integrate climate finance at scale, in particular that serve multiple objectives are implemented at scale. The REDD+ results-based finance, are beginning to emerge and the goal is to meet the social, economic, cultural, and spiritual early experiences and lessons learned in the coming years will needs of present and future generations. help to refine the concept of sustainable landscapes. AR 13 AR Finance 13 Carbon Finance Carbon 11 ll Pilot Auction Facility for Methane and Climate Change Mitigation An international Study Group of experts The proposed facility intends to innovate the delivery evaluated new approaches for financing of climate finance by providing put options that guarantee a price for carbon (giving owners the right to sell credits projects that reduce methane emissions, to the facility at a set price) and by allocating these put including pay-for-performance mechanisms. options to private sector investors, using auctions as a way This group recognized the potential of these to maximize cost effectiveness. With visible carbon prices, innovative mechanisms to deliver cost- private sector actors will be in a position to invest in these effective, transparent financial instruments for methane-reducing projects. climate change mitigation. In response, the The facility will disburse its resources after carbon ERs World Bank is now actively discussing with have been independently verified, thus rewarding good a group of interested stakeholders possible performance. Pay-for-performance mechanisms are attractive instruments for governments faced with growing funding ways to further refine the concept and raise needs and the demand for accountability of achievements. The resources. combination of an auction process and payments based on Methane reduction activities alone could make up results maximizes value for money. approximately half of the potential 0.5°C in avoided The facility’s impact should be felt quickly as it will global warming needed by 2050, complementing the initially target around 1,200 methane-reducing projects international community’s critical measures to reduce CO2 that are “stranded” due to the low price of carbon emissions. Full implementation of such technically feasible and credits. Together these projects are capable of reducing the cost-effective measures would not only slow down the rate of equivalent of 850 million tCO2 by 2020, recognizing that at its climate change over the next decades but also contribute to capitalization target of $100 million the facility will only have improvements in local air quality and food security. Additionally, resources to fund a small sub-set of these projects. However, if captured methane can be burned for cooking or electricity successful, this approach could be scaled up rapidly and used generation, thereby improving access to clean energy. to tackle other climate pollutants. A large and growing number of methane-abatement The facility has been presented and discussed in a number opportunities have been identified across established of climate finance fora. Particularly at the High Level meeting of sectors in developing countries but in many cases these the Climate and Clean Air Coalition in Oslo, ministers strongly are not implemented due to financial and other barriers. supported the initiative and asked to launch a broad-based Yet the additional funding required to unlock these investments consultation to carry forward the piloting of a global pay- is often small. The methane sectors studied could deliver as for-performance facility to stimulate the implementation of much as 8,200 Mt of CO2 in ERs in developing countries at “shovel-ready” projects that reduce methane emissions. less than $10 per ton in incremental cost financing. Carbon Finance 13 AR 12 l PMR Policy and CREDIBLE environmental integrity, Technical Work Program transparency, and objectivity The World Bank is actively helping to put a price on carbon. It is now widely recognized that this is essential to shifting economic development away from carbon-intensive PMR TECHNICAL means of production and toward low-carbon WORK PROGRAM and resilient development. building confidence in offset programs Carbon markets are one way of achieving this. The & enhancing understanding of good practice Partnership for Market Readiness’ (PMR) work on carbon markets builds on what the CFU has learned from past CONSISTENT COMPATIBLE experiences to develop the next generation of carbon with other countries rules and procedures instruments. This includes supporting the collective innovation or international trading systems and piloting of carbon-pricing instruments for GHG ERs, such as domestic ETS and carbon taxes. The PMR also serves as a knowledge platform for technical discussions of such instruments to spur innovation and support implementation. Many of the PMR Implementing Country Participants The PMR policy and technical program includes the are in the process of building the infrastructure considered following support: essential for mitigation actions in general and a carbon • Upstream policy analytical work, including modeling pricing scheme in particular. This includes the establishment work on carbon pricing instruments; of data management and monitoring, reporting, and verification • Facility-level GHG MRV, data management, and (MRV) systems, GHG baselines, offset standards, and tracking/ registries/tracking tools; registry systems. • Baseline setting; and The PMR has a technical work program that helps • Offset standards. countries develop carbon market infrastructure that conforms to the common principles of credibility, consistency, The program works with countries to respond to real needs and compatibility (3C principles), and ensures that the and to foster the exchange of information and knowledge experiences can be shared with others. through technical notes, workshops, and webinars. Finance 13 Carbon Finance Carbon 13 l 13 l AR 13 AR Policy and Methodological Frameworks Necessary to Scale Up Climate Change Mitigation Scaling up GHG emission reductions and cities has the potential to help cut global GHG emissions by lowering their cost is crucial to combating 30 percent. The team’s analytical work focuses on identifying approaches for developing the emission profiles of cities, the climate change effectively. This requires, measurement and accounting of emissions and approaches among other things, the support of targeted aimed at reducing emissions. policies, methodologies, and regulatory The land sector is another major source of GHG frameworks. emissions. Policies and measures for reducing deforestation In this context and as part of the broader climate and forest degradation, and promoting climate-smart change agenda of the World Bank, the Policy and agriculture have the potential to scale up mitigation, restore Methodology team of the CFU has focused on developing threatened biodiversity and ecosystem services, and contribute methodological concepts to quantify GHG ERs resulting to improved livelihoods and adaptation benefits. The team from energy pricing reform policies, GHG accounting and developed a methodological framework for REDD and is carbon crediting approaches for low carbon livable cities, and currently working on a framework for promoting sustainable the sustainable management of land and forest resources. landscape management for scaling up climate mitigation action The team’s analytical work on energy pricing reform, in the land sector. targeting taxation, and removal of subsidies on fossil fuels Simpler policies, better regulation, and more private sector in developing countries is expected to facilitate the ex- investment are necessary to achieve cost-effective climate ante estimation of ERs as well as enable ex-post MRV of change mitigation in developing countries. Piloting fossil the mitigation impacts of fiscal policies and measures. A fuel subsidy reform in Vietnam, low carbon city programs in proposed pilot initiative in Vietnam on the removal of coal Latin America and Asia, REDD+ and sustainable landscape subsidies and its impact on energy use is expected to show the management in Asia, Africa, and Latin America, and CDM influence of energy pricing reform on climate change mitigation procedure reforms that promote results-based climate in a developing country context. financing, are all initiatives that highlight the significance of Tackling urbanization is a key element of GHG targeted policies and methodological frameworks necessary to mitigation since cities are major centers of population scale up climate change mitigation actions. and economic activity. A low carbon development path for Carbon Finance 13 AR 14 l Update on the Kyoto Funds and Facilities: Regional Distribution (by project) Bringing Results to Fruition Middle East and North Africa 5% Latin America and By the end of 2013, the projects supported South Asia the Caribbean 13% 29% by the World Bank carbon funds and facilities that focus on the first commitment period of the Kyoto Protocol (“Kyoto Funds”) had Africa 13% delivered 187 million tCO2e. East Asia and In 2013, the Carbon Finance Unit delivered 21 million Pacific Latin America and 21% carbon credits to its Kyoto Fund participants, reaping the fruits Europe and the Caribbean Central Asia of its pioneering work in the past decade. Of the total 229 19% 29% million ERs that are under contract by the Kyoto Funds, 211 million were scheduled for delivery by December 2013, and The chart depicts the regional distribution of the Carbon Finance 89 percent had been delivered by then. Unit’s 145* carbon projects in 2013. Sectoral Distribution (by project) Fossil Fuel Switch 1% 1% Transport Fugitive Emissions 8% Renewable Energy Forestry/Agriculture 33% 17% Energy Efficiency Waste Management/ 19% Methane Avoidance 21% The chart depicts the distribution of active projects by sector. *Note: Number of projects includes both active Emission Reductions Purchase Agreements (ERPAs) and closed ERPAs that have fully delivered ERs per their contracts. Carbon Finance 13 AR 15 l The Carbon Finance Unit's Global Network The CFU supports carbon finance operations and programs in over 70 countries. These comprise activities undertaken by the FCPF and the PMR as well as CDM and Joint Implementation (JI) projects and programs, as shown in the map to the right. The CFU is supported by 24 governments and public sector entities that purchase ERs as carbon fund participants and/or contribute donor resources to readiness activities. The CFU is also supported by 52 private sector firms and three foundations that, together with the public sector, purchase ERs via the carbon funds and facilities. Carbon Finance 13 AR 16 l 17 l Carbon Finance 13 AR 2011 Highlights 2013 Highlights Q January - Additional Funding for the FCPF Finland, Germany, and Norway announced new financial contributions to the FCPF totaling approximately $180 million. Q January - Innovative LED Streetlight Program in Thailand The UNFCCC registered the Energy Efficient Street Lighting Program in Thailand as a CDM Programme of Activities (PoA). Implemented and paid for by the Thai Provincial Electricity Authority, it will replace 250 Watt lamps with 110 Watt LEDs, resulting in energy savings of almost 65 percent. Q March - FCPF Carbon Fund Reaches Milestone, Selecting Costa Rica for Pipeline Energy Efficient Street Lighting At the 6th FCPF Carbon Fund meeting, Costa Rica's ER Program in Thailand proposal was selected for the fund's pipeline, authorizing a future negotiation with Costa Rica for the purchase of a maximum of 12 million ERs. Q April - Using Auctions to Finance Methane Abatement A new report by the Methane Finance Study Group was released on pay-for-performance mechanisms and innovative financial instruments such as auctions for methane abatement. Q May - Domestic Carbon Pricing Initiatives Offer Hope for Future Market Carbon Finance 13 AR The World Bank published its annual carbon markets report, Mapping Carbon Pricing Initiatives: Developments and Prospects 2013. It describes key domestic carbon initiatives Mapping Carbon Pricing Initiatives: around the world. Developments and Prospects 2013 18 l Q May - 10th Anniversary of Carbon Expo The Carbon Expo celebrated its 10th anniversary in Barcelona, with over 220 speakers and 1,000 participants from more than 100 countries discussing the climate change challenge. Q May - PMR Reached $119 million The PMR approved Turkey's MRP. With new funds from Spain and Switzerland, the PMR’s total resources reached $119 million. Q May - CDCF Making an Impact, Delivering Benefits for the Poor 10 Year anniversary of Carbon Expo The CDCF published a new report assessing the co-benefits of projects that go beyond ERs, such as improved health, education, and new jobs for poor local communities. Q July - Africa Carbon Forum Calls for Increasing Low- Carbon Investments on the Continent The 5th Africa Carbon Forum was held in Abidjan, Côte d'Ivoire. The Ci-Dev team participated with a discussion on access to energy in Africa. Carbon Finance 13 AR CDCF report on Co-Benefits 19 l Q September - Costa Rica First to Access FCPF Carbon Fund Costa Rica became the first country to sign a Letter of Intent with the FCPF to negotiate an agreement, worth up to $63 million, covering large-scale payments for conserving forests, regenerating degraded lands, and scaling up agro-forestry systems. Q November - BioCarbon Fund Launches $280 million Initiative for Sustainable Forest Landscapes A major investment by Norway, the United Kingdom, and the United States supports efforts to promote Costa Rica signs FCPF Carbon Fund Letter of Intent sustainable forest landscapes. The ISFL helps scale up climate-smart agriculture, forest protection, and land rehabilitation at the landscape level. Q November - First Project to Earn ERs in Kenya The Olkaria II Geothermal Expansion Project issued its first carbon credits. This makes it the first project in Kenya to earn certified GHG ERs under the CDM. Q December - New Funding for Ci-Dev The United Kingdom, Sweden, and Climate Cent Foundation announced pledges of more than $125 million to the Ci-Dev. Q December - New funding for the FCPF Carbon Finance 13 AR Norway pledged $100 million to the FCPF’s Readiness Fund and eight more countries were selected into FCPF and allocated readiness grants of $30.4 million. Schooling paid for by carbon credit revenues at the Olkaria geothermal plant 20 l Q December - Vietnam Signs First ERPA for Renewable Energy Development Vietnam and CPF signed the first ERPA to purchase carbon credits from the country’s Renewable Energy Development Project. Q December - FCPF Methodological Framework Cleared The FCPF partners and stakeholders agreed on a methodological framework for large-scale investments in tropical forest protection. This unblocked $390 million in the FCPF's Carbon Fund. Vietnam signs first ERPA Renewable Energy agreement Norway pledged $100 million to the FCPF’s Readiness Fund and eight more countries were selected into FCPF and Carbon Finance 13 AR allocated readiness grants of $30.4 million. FCPF Carbon Fund approves Methodological Framework in Paris 21 l CARBON MARKETS OF THE WORLD Put a price on carbon emissions and you create powerful incentives to invest in climate-smart, low-emissions projects and back away from behaviors that are contributing to climate change. 35% 45% 55% 30% The Biggest Emitters Can Make the 27% 60% Biggest Di erence 60% 40% 46% 60% 42% 35% 38% 20% Dozens of countries, regions, and cities have carbon markets in operation or plan to launch them as cost-e ective way to drive down 7% greenhouse gas emissions. These are the markets existing now or coming soon and Percentage of the percentage of greenhouse gas emissions N/A N/A N/A Greenhouse Gas each covers. Emissions Covered Key of Carbon Markets California Quebec US Northeast Europe Switzerland Kazakhstan Tianjin Shanghai Guangdong China Rep. of Korea Tokyo Australia New Zealand Beijing Hubei Shenzhen Chongqing Europe Kazakhstan Quebec Switzerland Beijing California Rep. of Korea US-Northeast Tianjin Hubei Shanghai China Chongqing Tokyo Guangdong Shenzhen Carbon Finance 13 AR Australia New Zealand 22 l Sectors Covered CALIFORNIA QUEBEC US REGIONAL - RGGI EUROPE BEIJING SHANGHAI SWITZERLAND KAZAKHSTAN CHINA (PROPOSED) REP. OF KOREA (PROPOSED) HUBEI SHENZHEN TOKYO AUSTRALIA GUANGDONG TIANJIN NEW ZEALAND Industry Waste/Landfills Power Sector Transportation Land Use Buildings & Forestry How They Work: Launch Dates Carbon market rules vary. Greenhouse gas Early adopters have paved the way for a new generation of carbon markets. Cap-and-trade schemes emitters that exceed the Members of the Partnership for Market Readiness are among these leaders with markets planned or underway. set a cap on emissions limit must then buy 13 and then distribute or sell permits from other 12 permits which allow companies that have 10 companies within kept their emissions low 8 targeted sectors to emit or utilize offsets from 6 greenhouse gases up to emissions-reducing 4 that limit. Some trading projects. Establishing a 2 schemes set high initial market encourages 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 limits based on historic lowering emissions. emissions and then lower them over time. Europe New Zealand Switzerland US-Northeast Tokyo Australia California Kazakhstan 7 Chinese Cities/Regions Quebec Rep. of Korea China (TBD) ENERGY EFFICIENCY Connecting Carbon Markets Some markets are already linked with one another. RENEWABLE Others are investigating ENERGY EUROPE networking options that Austria could allow them to trade Belgium Bulgaria assets between markets. US NORTHEAST Cyprus Czech Republic Denmark CHINA TBD Estonia METHANE COLLECTION Beijing Finland France DESTROYING Chongqing INDUSTRIAL SWITZERLAND Guangdong Hungary POLLUTANTS Hubei Germany Greece Shenzhen Ireland Tianjin PRESERVING Italy FORESTS Shanghai Latvia Lithuania Luxembourg Malta 2014 CALIFORNIA Netherlands Carbon Finance 13 AR Poland Portugal Romania Slovakia Slovenia Spain Sweden 2014 QUEBEC Sources: Preparedness for Emissions | Partnership for Market Readiness | United Nations Conference on | Regional Greenhouse Infographic Design By Trading in the EBRD Region Sustainable Development Gas Initiatives 23 l Next Generation Carbon Market Initiatives Carbon Finance 13 AR 24 l 24 With the end of the first commitment period of the Kyoto Protocol, the World Bank continues to grow its “next generation” carbon market initiatives: the Forest Carbon Partnership Facility (FCPF), the Carbon Partnership Facility (CPF), the Partnership for Market Readiness (PMR), the Carbon Initiative for Development (Ci-Dev), and the BioCarbon Fund Initiative for Sustainable Forest Landscapes (ISFL). These carbon market initiatives focus on scaling up activities in order to strengthen the impact of low-carbon initiatives, from landscapes to energy access for the poor. They provide technical and financial support to help countries explore and implement cost-effective and innovative approaches to GHG mitigation, including domestic ETS and carbon taxes. AR AR Momentum among developing and emerging-market countries to take domestic mitigation action is building; the World 13 13 Bank Group is designinginitiatives to leverage it. 25 l l Carbon 25 Carbon Finance Finance 26 l Carbon Finance 13 AR 26 l Carbon Finance 13 AR Forest Carbon Partnership Facility www.forestcarbonpartnership.org 2013 was a year of tremendous progress for the Forest Carbon Partnership Facility (FCPF). FCPF made landmark progress, adopting a set of frameworks that govern the two funds of the facility and further guiding countries in their REDD+ activities. Notably, the FCPF welcomed the first country program into the pipeline of the Carbon Fund and signed a letter of intent with Costa Rica. Achievements Readiness In December 2013, the Carbon Fund approved the 2013 marked a rapid development in the readiness Methodological Framework, concluding a two-year process of progress for REDD+ countries. Also, the global partnership consultations and reiterations. The resulting framework provides was expanded to another eight REDD+ countries: Bhutan, a global standard for REDD+ transactions at scale. These Burkina Faso, Côte d’Ivoire, Dominican Republic, Fiji, Nigeria, experiences could feed into the development of a REDD+ Pakistan, and Togo, thus raising the partnership of the FCPF to system under the UNFCCC. 44 developing countries (17 in Africa, 16 in Latin America and With the Methodological Framework approved, the Carbon the Caribbean, and 11 in Asia) and 18 financial contributors Fund is ready to pilot performance-based mechanisms (comprising developed countries, private sector participants, for REDD+ and generate “real life,” practical insights and and one NGO). 39 of the 44 FCPF countries have now had knowledge based on REDD+ country experience. their Readiness Preparation Proposal (R-PP) assessed by Under the Carbon Fund, ten program ideas have been the PC and reached a key first step to REDD+ readiness. presented, including eight new or updated ideas presented Moreover, there has been a steady increase in the quality of in 2013 alone. These ideas may shape a diverse and R-PPs submitted: the set of R-PPs presented at PC14 and innovative portfolio of programs that are expected to deliver PC16 were the strongest sets submitted to date. high-quality and sustainable ERs at scale, in combination with With significant new contributions from Norway, the environmental and community benefits. In March 2013, Costa UK, Germany, and Finland, a total of almost $825 million Rica was the first country to be accepted into the pipeline of has been raised for the FCPF to date—$360 million for the the Carbon Fund, and in September 2013 it signed a letter of Readiness Fund and $465 million for the Carbon Fund. Initial intent to negotiate an ERPA worth up to $63 million. targets have thus been exceeded. The adoption of the Monitoring and Evaluation (M&E) In 2013, the FCPF also redoubled its commitment to Framework by the Participants Committee (PC) put in place engage and enhance the capacity of Indigenous Peoples an important structure to track the overall performance of the (IP) and Civil Society Organizations (CSOs) working on social FCPF more systematically. inclusion, and to broaden the scope of outreach to a critical Another important highlight in 2013 was the approval mass of IP and CSOs. Further, a record number of 15 grants of the Readiness Assessment Framework, which supports worth over $1.2 million were approved to support capacity Carbon Finance 13 AR countries with measuring and communicating their relative building of IP and southern CSOs last year. Transitioning progress on REDD+ readiness. into new delivery modalities, the six regional intermediary organizations that will administer the Capacity Building Program in 2014 and 2015 were selected. 27 l Looking Forward Readiness Fund Participants Moving into 2014, the FCPF is keen to shape a diverse EUROPEAN COMMISSION portfolio of programs for the Carbon Fund that will GOVERNMENT OF AUSTRALIA generate high-quality and sustainable ERs at scale, deliver GOVERNMENT OF CANADA environmental and community benefits, and generate GOVERNMENT OF DENMARK important lessons. The experiences to be gained while GOVERNMENT OF FINLAND implementing these programs will surely offer important GOVERNMENT OF FRANCE lessons for all 44 countries participating in the FCPF. They will GOVERNMENT OF GERMANY also enable these countries to continue making great strides in GOVERNMENT OF ITALY reducing emissions from deforestation and forest degradation. GOVERNMENT OF JAPAN GOVERNMENT OF THE NETHERLANDS Considering that the countries participating in the GOVERNMENT OF NORWAY FCPF are home to over 50 percent of all forest areas in GOVERNMENT OF SPAIN the tropics and subtropics, the progress made with REDD+ GOVERNMENT OF SWITZERLAND readiness in the FCPF is bound to have a significant global GOVERNMENT OF THE UNITED KINGDOM impact on forest conservation and climate mitigation. GOVERNMENT OF THE UNITED STATES OF AMERICA Carbon Fund Participants GOVERNMENT OF AUSTRALIA BP TECHNOLOGY VENTURES GOVERNMENT OF CANADA CDC CLIMAT EUROPEAN COMMISSION GOVERNMENT OF GERMANY GOVERNMENT OF NORWAY GOVERNMENT OF SWITZERLAND THE NATURE CONSERVANCY Carbon Finance 13 AR GOVERNMENT OF THE UNITED KINGDOM GOVERNMENT OF THE UNITED STATES OF AMERICA 28 l In March 2013, the FCPF In July 2013, at its 15th In December 2013, in Geneva, at the PC hosted its 14th meeting meeting, in Lombok, 16th meeting of the PC, the FCPF in Washington DC, where Indonesia, the PC advanced selected eight new REDD+ country PC it approved the Readiness discussion on the General participants into the Partnership: Assessment Framework and Conditions and Commercial Bhutan, Burkina Faso, Côte d’Ivoire, allocated funding for REDD+ Terms of a future ERPA for the the Dominican Republic, Fiji, Nigeria, readiness to six additional Carbon Fund. Pakistan, and Togo. countries. Meetings Held in 2013 In March 2013, the FCPF held In June 2013, at the 7th Also in December 2013, the the 6th Carbon Fund meeting meeting of the Carbon Carbon Fund held its 8th CARBON in Washington DC, where Fund, in Paris, countries meeting, in Paris, and adopted Costa Rica’s Emission Reduction presented a number of new the Carbon Fund Methodological FUND Program Idea Note (ER-PIN) was program ideas. Framework. selected as the first program into the Carbon Fund pipeline. What Is the FCPF? The Forest Carbon Partnership Facility became operational in June 2008 and is a global partnership focused on reducing emissions from deforestation and forest degradation, forest carbon stock conservation, sustainable management of forests, and enhancement of forest carbon stocks (REDD+). The FCPF complements the UNFCCC negotiations on REDD+ by demonstrating how REDD+ can be applied at the country level and by drawing lessons from this early implementation phase. The FCPF has created a framework and processes for REDD+ readiness, which helps countries get ready for future systems of financial incentives for REDD+. About the Readiness Fund With assistance from the Readiness Fund (currently holding about $360 million committed by 15 public donors, each having provided at least $5 million), each participating country prepares itself for REDD+ by developing the necessary policies and systems, in particular by adopting national strategies; developing reference emission levels; designing MRV systems; and setting up REDD+ national management arrangements, including proper safeguards. As of December 2013, a total of 39 countries had formally presented their R-PPs to the PC and been allocated grant funding for REDD+ readiness. Total funding of close to $150 million has been allocated to these 39 countries and 14 have signed grants to implement their proposals. About the Carbon Fund The Carbon Fund, the second fund of the FCPF, became operational in May 2011 (currently holding about $465 million committed by eleven public and private contributors, each having provided at least $5 million). It will provide payments for verified ERs from REDD+ programs in about six to eight countries that have made considerable progress towards REDD+ readiness. Consistent with the UNFCCC decision on REDD+ adopted in Cancún, in December 2010, the readiness, investment and performance-based payment phases will not be considered purely sequential but instead be allowed to overlap to a large extent. Nevertheless, to ensure that carbon finance builds on readiness achievements, the FCPF Participants Committee must have assessed a country’s Readiness Package before the country can enter into an ERPA with the Carbon Fund. The Carbon Fund will deliver ERs to the financial contributors of the fund pro rata to their share of capital. Carbon Finance 13 AR 29 l Carbon Partnership Facility Carbon Finance 13 AR 30 l http://cpf.wbcarbonfinance.org The fundamental goal of the Carbon Partnership Facility (CPF) is to help our partner countries utilize carbon finance to implement scaled-up, systematic approaches to low-carbon growth. The focus is on finding ways to support their policies and initiatives to catalyze public and private investment in clean technologies. The CPF has as its primary objective to innovate in scaling These programs are developed along with Bank operations up carbon finance. The CPF has been established as a and other sources of funding to provide more comprehensive partnership, where both Buyer and Seller Participants, together approaches to financing clean technologies. with Donors and Host Country Partners, sit together at the table, learn from each other’s experiences and challenges, and Green Technology design practical solutions that are mutually beneficial. The CPF also targets areas that have not been reached It consists of the Carbon Asset Development Fund, effectively by mechanisms in the past, such as energy which supports the preparation of the ER programs, and efficiency, and will pilot urban approaches to carbon the Carbon Fund, which will purchase ERs generated by finance. City-wide programs have the potential to target a CPF programs. The CPF collaborates with governments and wide range of ER measures spanning energy efficiency in market participants on investment programs and sector-based buildings and street lighting, solid waste and waste water interventions that are consistent with low-carbon economic management, as well as renewable energy and transportation. growth and sustainable development priorities of developing countries. CPF Status The facility draws on the World Bank’s financial and The CPF became operational in May 2010. By the end of knowledge resources to integrate carbon finance into 2013, it had $135.2 million in commitments to the Carbon sustainable development plans by aligning carbon Fund and an additional $29.9 million in contributions to the finance with World Bank country assistance programs, Carbon Asset Development Fund. and often linking with lending operations. It facilitates the The key objective of the first set of CPF programs is to implementation of low-carbon programs across an array of scale up carbon finance through the CDM Programme of sectors and technologies—energy generation and distribution, Activities’ approach. The aim is to generate ERs that will energy efficiency, and waste management—in situations where provide benefits to both Buyer and Seller Participants. governments need policy measures or investments. The next phase of the CPF will be to innovate in the development and piloting of a new generation of scaled- Scaled Up up crediting modalities. The lessons learned from initial Carbon finance mechanisms (for example, CDM) have efforts on the first set of programs will set the stage for the thus far operated largely on a project-by-project basis. World Bank to make further contributions to the design In contrast, the CPF utilizes scaled-up, programmatic and implementation of new international carbon-crediting approaches to enable carbon finance to systematically approaches envisaged under the UNFCCC. Carbon Finance 13 AR support partner-country initiatives for low-carbon growth. 31 l CPF Participants Buyer Participants GOVERNMENT OF SPAIN NORWEGIAN MINISTRY OF CLIMATE AND ENVIRONMENT SWEDISH ENERGY AGENCY AR 13AR Finance13 CarbonFinance Carbon 32 ll 32 Donors to the Carbon Asset Development Fund GOVERNMENT OF SPAIN GOVERNMENT OF NORWAY GOVERNMENT OF ITALY EUROPEAN COMMISSION Host Country Partner GOVERNMENT OF CHINA Seller Participants FONDS D’EQUIPEMENT COMMUNAL OF MOROCCO CAIXA ECONÔMICA FEDERAL OF BRAZIL MINISTRY OF INDUSTRY AND TRADE OF VIETNAM PROVINCIAL ELECTRICITY AUTHORITY OF THAILAND TANZANIA RURAL ENERGY AGENCY MINISTRY OF FINANCE OF EGYPT LAND BANK OF THE PHILIPPINES AR 13 AR Finance 13 Carbon Finance Carbon 33 ll 33 Partnership for Market Readiness Carbon Finance 13 AR 34 l 34 www.thepmr.org The Partnership for Market Readiness (PMR) provides countries with an opportunity to explore and address the technical capacity gaps and issues they face in assessing and designing cost- effective approaches to GHG mitigation, to draw insights from existing and past experience, and to identify ways forward. Established in 2011, the PMR focuses on designing, piloting, contribute with insights based on their experience to combat and building capacity for carbon pricing and other innovative climate change, making the PMR a key platform for technical instruments to scale up domestic GHG mitigation in emerging discussions, knowledge sharing, and collective innovation on and developing economies. Also, the PMR provides countries new market instruments. with an opportunity to address the technical capacity gaps In addition, in 2013, the PMR created a new category of in assessing, designing, and adopting innovative and cost- participant—the Technical Partner—to include countries that effective approaches to GHG mitigation. Special attention have already made significant progress with the implementation is given to mitigation approaches that lead to a price on of a carbon pricing instrument but require specific technical carbon—such as domestic ETSs and carbon taxes. The PMR support either in the form of funding, expert advice, or both. also supports countries in moving forward with national action plans that lower carbon emissions while stimulating growth PMR Participants: and competitiveness. • Contributing Country Participants: Australia, Denmark, the European Commission, Finland, Germany, Japan, PMR Structure the Netherlands, Norway, Spain, Sweden, Switzerland, The PMR brings together more than 30 countries, the United Kingdom, and the United States. PMR funding including most of the world’s largest and fastest growing at the end of 2013 stood at $127 million. economies and leaders in climate action. The PMR serves • Implementing Country Participants: Brazil, Chile, as a platform for country-to-country exchanges that support the China, Colombia, Costa Rica, India, Indonesia, Jordan, collective pioneering of cost-effective approaches to combat Mexico, Morocco, Peru, South Africa, Thailand, Turkey, climate change. Ukraine, and Vietnam. PMR Participants include Contributing Participants, which provide financial support to the PMR trust fund, and • Technical Partner: Kazakhstan. Implementing Country Participants, which receive funding • Observers: New Zealand, South Korea, Italy, Singapore, to finance assessment, ground work, design, and piloting and France regularly participate in the PMR as Observer of market-based approaches to mitigation. Both groups Countries. Carbon Finance 13 AR 35 l Scaling Up Domestic Climate Action GHG baseline setting, MRV, and offset standards. and Carbon Pricing Instruments In 2012, the PMR Secretariat formed the PMR Baselines Working Group to advise on the development of a guidance Preparation-phase funding in the amount of $350,000 has note on baseline setting for crediting mechanisms. In 2013, been allocated to each of the 16 Implementing Country the Secretariat formed similar working groups to support the Participants to identify capacity-building gaps and prepare areas of MRV and carbon offsets. a roadmap—the Market Readiness Proposal (MRP)—to implement readiness components or a market instrument. • The MRV Working Group advises the PMR Secretariat As of December 2013, five Implementing Country Participants on defining priorities and scope of the PMR’s MRV- had completed a final MRP and one additional country had related work so that it responds to the needs of completed a draft. By the end of 2014, most Implementing countries, as well as provides feedback and comments Country Participants are expected to have completed the draft on PMR knowledge products. As part of the MRV work process. program, the Secretariat held the first in a series of three The MRP is also the basis for the allocation of a grant in regional technical training sessions. the amount of $3, $5, or $8 million. These funds are used to • The Offset Working Group brings together PMR implement the activities outlined in the MRP. Participant representatives, offset standard-setting organizations, and the PMR's pool of experts. This Supporting Country Participants Group facilitates knowledge and information exchange The PMR provides systematic support to Implementing on offset program design, development, and Country Participants as they develop their MRPs. As implementation. It also provides input to the countries are at different stages of development and market PMR Secretariat on delivery of knowledge products, readiness, they each approach the planning and use of market webinars, workshops, and e-learning modules that help instruments differently. To complement the work that countries Implementing Country Participants. are undertaking as they implement their MRP The technical work program also supports the development activities, the PMR has two tracks of of technical notes on topics such as data management support: i) analytical support, systems, baseline development, market linking, and such as modeling work on carbon offset programs. Topic selection is driven carbon pricing instruments, by country interest. While created for the PMR and a ii) technical Participants, all technical notes are publicly work program, which available. includes guidance on Carbon Finance 13 AR 36 l Partnership Assembly Meetings The Partnership Assembly (PA) is the PMR’s governing body and consists of all Contributing Participants and Implementing Country Participants. Partnership Assembly meetings are held three times a year to provide strategic operational guidance, confirm the participation of new countries, and approve the allocation of PMR resources. • March 2013 (5th PA meeting in Washington, DC): Chile, China, Costa Rica, and Mexico presented final MRPs, and each received $3 million in implementation funding, except for China, which received $8 million. The PMR also welcomed Peru as a new Implementing Country Participant, bringing the total number of Implementing Country Participants to 16. • May 2013 (6th PA meeting in Barcelona, Spain): Spain joined the PMR as a Contributing Participant, with a contribution of $5 million, and Switzerland increased its contribution by $4 million. Turkey was allocated $3 million to implement its MRP. • October 2013 (7th PA meeting in Marrakesh, Morocco): Germany confirmed an additional contribution of €5 million. The PMR allocated $3 million to implement the MRP from Indonesia and $1 million was allocated to Kazakhstan to support the implementation of its domestic ETS. Technical Workshops PMR technical workshops provide an important platform for countries to engage in technical discussions on market instruments—from baseline-setting to designing a domestic ETS to providing peer feedback on innovative policies. Workshops also harness momentum to spur action toward post-2012 GHG mitigation efforts using innovative and cost- effective instruments. • March 2013: Policy mapping and effective instruments for GHG mitigation in the urban transport sector. • May 2013: Building readiness for MRP implementation • October 2013: Stakeholder engagement and communication Technical Training PMR technical training events complement the technical work program by disseminating knowledge among participants on a number of issues—for instance, on developing facility-level GHG reporting programs. Technical training sessions are designed as hands-on practical learning events featuring a number of case studies and group exercises to examine practical considerations relative to the topic. • In September 2013, the PMR held the first in a series of three regional MRV technical training events. It was held in Beijing, China, for 60 participants from Asian countries on the subject of facility-level GHG MRV. Public Events Public events organized under the auspices of the PMR facilitate discussions on topics ranging from progressive domestic climate action to showcasing the experience and lessons learned from carbon pricing instruments. These events are a valuable forum for audience interaction beyond the PMR. • In March 2013, the PMR organized a public event on carbon pricing, which featured an update on China’s seven ETS pilots, South Africa’s plans for a carbon tax, and South Korea’s implementation of an ETS. Mr. René Castro, former Minister of Environment for Costa Rica, discussed the role of the domestic carbon market in achieving Costa Rica’s carbon neutrality goal. Carbon Finance 13 AR 37 l BioCarbon Fund Initiative for Sustainable Forest Landscapes The fate of the climate, forests, and agriculture are bound together. If agriculture and land-use change continue to produce up to 30 percent of global greenhouse gases, it will mean further disaster and disruption from climate change. That's why the new BioCarbon Fund Initiative for Sustainable Forest Landscapes is so important. ” AR 13 AR Finance 13 Carbon Finance Rachel Kyte Group Vice President and Special Envoy Climate Change Carbon l 38 l 38 www.biocarbonfund-isfl.org In November 2013, at the UN climate • Mobilizing the capital necessary to scale up successful land-use practices and accelerate the greening of supply summit in Warsaw (COP19), the World chains. Bank launched the BioCarbon Fund Global and local companies in the agricultural and Initiative for Sustainable Forest Landscapes food sectors increasingly recognize the value of prioritizing sustainability within their operations to secure long-term supply (ISFL) jointly with contributing participants chains and reduce investment risks, as evidenced by public Norway, the United Kingdom, and the commitments to zero-deforestation supply chains. The initiative is designed to work alongside a wide range of United States. This new multilateral facility private actors—from multi-national corporations to large national will use results-based finance to incentivize entities and emerging small and medium enterprises and smallholders—incentivizing them to accelerate “forest-proof” change at the landscape level. sourcing of commodities and redirecting market forces toward more sustainable and equitable land management practices. The initiative builds on the awareness that agricultural Financing Based on Results expansion and land-use change must be managed to minimize forest loss as well as GHG emissions. The ISFL will The ISFL will provide countries with the following types of help countries identify and promote climate-smart agricultural financing: and low-carbon land-use practices in selected geographical 1. Grant funding and technical assistance through the areas where agriculture is a major cause of deforestation. BioCF plus to support transformational change in Following a landscape approach, the initiative is creating a developing countries, leading to the implementation of portfolio of jurisdictional programs, spread across diverse their REDD+ strategies and the creation of enabling geographies, that will have a significant impact on rural areas. environments that change the way land-use decisions are On the one hand by protecting forests, restoring degraded made. Grants will be disbursed through BioCF plus based lands, and enhancing agricultural productivity, on the other on performance milestones. hand by improving livelihoods and local environments. 2. Results-based payments for achieved ERs (BioCF). The Taking a Landscape Approach main metric for results-based payments will be carbon ERs, Operating at the level of the jurisdictional landscape is but additional economic, environmental, and social considered one of the key design features of the ISFL. indicators may also be monitored. Carbon payments It is a prerequisite for allowing governments to consider the (including some up-front payments) will be made through trade-offs and synergies between different uses of land that the BioCF. The ISFL aims to test carbon accounting at the may compete in a jurisdiction—such as agriculture, energy, and landscape level within a comprehensive approach, in which forest protection—and successfully identify integrated solutions payments will be based on performance in the forestry, that serve multiple objectives. Adopting a landscape approach agriculture, and possibly also energy sector. means implementing a development strategy at scale that is climate-smart, equitable, productive, and profitable, and strives Building on Experience towards a positive environmental, social, and economic impact. The ISFL builds on a decade’s experiences of pilot projects under the BioCarbon Fund. These earlier pilots generated Building Public-Private Partnerships a wealth of knowledge on how to quantify ERs from different Carbon Finance 13 AR Another key design feature that sets the ISFL apart from land-use activities as well as important lessons on land-tenure previous climate and forest initiatives is the recognition of issues, financing arrangements, and benefits-sharing schemes the important role the private sector plays in: that are essential for the long-term success of the ISFL. • Spurring innovation; • Leveraging cutting-edge expertise and knowledge; and 39 l Carbon Initiative for Development Carbon Finance 13 AR 40 l The Carbon Initiative for Development www.ci-dev.org (Ci-Dev) improves energy access in the poorest countries through carbon-linked performance payments. The projects will be innovative, bring high development benefits, and use technologies that primarily deliver results at the community and household level, such as household solar and micro-hydro power and biogas. The Ci-Dev, launched in December 2011, will use all the more important. While the CDM has supported more performance payments based on emission reductions to than 6,000 renewable energy projects worldwide, the poorest support private sector projects that improve and increase countries have benefited very little from this. Only 2.9 percent energy access in low-income countries using clean and of all CDM projects are located in Africa. Simplified rules and efficient technologies. streamlined procedures are needed for carbon finance to The Ci-Dev will also build capacity and develop better support projects that benefit the poor, such as clean tools and methodologies so that low-income countries, technologies and business models for households. especially in Sub-Saharan Africa, receive a larger and fairer share of carbon finance. Applying Lessons Learned The Ci-Dev consists of a Readiness Fund and a Carbon The World Bank has gained extensive experience in Fund. The “buyer” Carbon Fund will purchase the carbon using carbon finance to support low-income countries’ credits created by the supported activities. The Readiness Fund development priorities. One example is the Community will fund studies, support capacity-building efforts and provide Development Carbon Fund, a fund created in 2003 with grants to improve CDM procedures, and help poor countries a specific focus on the poorest countries and on small- realize their potential in carbon market participation. scale projects, providing co-benefits to the most vulnerable communities. The lessons learned from such experiences will Expanding Energy Access be applied in the implementation of the Ci-Dev. Lack of energy remains a daunting challenge for the Currently, the World Bank carbon funds are supporting international community, with about 1.2 billion people 42 CDM projects in IDA countries. Close to half of these are still without access to electricity, 85 percent of whom live in Africa, but most of them involve very small interventions. in rural areas. The Ci-Dev addresses this challenge by This experience shows that large-scale development of carbon expanding energy access for households. About 2.8 billion finance in low-income and other poor countries requires people rely on the traditional use of biomass for cooking, which significant, even radical, improvements in CDM regulations and results in an estimated 1.5 million premature deaths each in the development of new carbon finance mechanisms that year due to indoor air pollution. Achieving universal access to consider the specific capacity and needs of poor countries. electricity by 2030 would require an additional average annual The international community has responded through the investment of about $35–40 billion. CDM’s Executive Board, by taking decisions that simplified At the same time, energy is the greatest contributor to GHG the additionality demonstration requirements for micro-scale emissions worldwide. Poor countries are particularly vulnerable projects and allowed for the introduction of standardized Carbon Finance 13 AR to climate change, making clean, affordable, and reliable energy baselines, among other things. 41 l 36 Carbon 42 l l Carbon Finance Finance 1312 ARAR The Readiness Fund The Carbon Fund The Ci-Dev Readiness Fund capitalization rose to $29 The Carbon Fund capitalization rose to $98 million in 2013, million in 2013, with additional contributions pledged with additional contributions pledged by the Swiss-based by the Swiss-based Climate Cent Foundation, and the Climate Cent Foundation, and the Swedish Energy Agency. Swedish Energy Agency. The Readiness Fund will focus on The fund will support energy access projects by providing enhancing existing carbon finance mechanisms and developing performance-based payments in the form of Certified Emission new ones, building capacity to undertake carbon finance Reduction (CER) purchases. It will aim to demonstrate transactions in the poorest countries, and disseminating the successful and viable business models by focusing on private- lessons learned. sector projects in technologies aimed at households, such as The Ci-Dev Readiness Fund will contribute to ongoing biogas, solar home systems, or micro-hydro power generation. efforts to reform the CDM. Through its work on the ground, Recognizing the current downturn in carbon markets, CER creating carbon assets for its various carbon funds, the World payments will be made at a price determined on a project-by- Bank has contributed significantly to capacity building and project basis in order to make technologies affordable to poor knowledge creation and dissemination of carbon finance people and expand their adoption. initiatives—efforts that benefit the carbon finance community (“public good creation”). The Ci-Dev’s support is timely as the Project Pipeline Development poorest countries have only recently started to develop the In 2013, the Ci-Dev began to identify possible projects, needed capacity for carbon finance and for attracting private including off-grid energy access, renewable energy, and rural sector interest. This progress is at risk in the current carbon electrification projects. A number of proposals were received market downturn. following a successful fund-raising and a public request for In 2013, the Ci-Dev made a submission to the UNFCCC project ideas launched in December 2013. on the simplification of the CDM project cycle and another on alternative approaches to standardized baselines for demonstrating additionality and the establishment of baseline emission factors adapted to low-income countries. The Ci-Dev launched a business model study to analyze the role that carbon finance can play in supporting energy access projects and identifying necessary reforms to promote energy access. In addition, a methodology mapping exercise was conducted to identify improvements that could be made to methodologies currently applied in energy access projects. Carbon Finance 13 AR 43 l 44 l Carbon Finance 13 AR Who We Are Carbon Finance Glossary Assigned Amount Unit (AAU) Carbon Asset A Kyoto Protocol unit equal to one metric ton of carbon dioxide The potential of greenhouse gas emission reductions that a equivalent. Each Annex I Party issues AAUs up to the level of its project is able to generate and sell. assigned amount, established pursuant to Article 3, paragraphs 7 and 8, of the Kyoto Protocol. Assigned amount units may be Carbon Credits exchanged through emissions trading. A permit that allows the holder to emit the equivalent of one metric ton of CO2. Credits are awarded to countries or groups Adaptation that have reduced their emissions below an assigned quota. Adjustment in natural or human systems in response to actual Credits can be exchanged between businesses or bought and or expected climatic stimuli or their effects, which moderates sold in international carbon markets at the prevailing market harm or exploits beneficial opportunities; for example, the price. construction of flood walls to protect property from stronger storms and heavier precipitation, or the planting of agricultural Carbon Finance crops and trees more suited to warmer temperatures and drier Resources provided to projects generating (or expected to soil conditions. generate) greenhouse gas emission reductions in the form of the purchase of such emission reductions. Afforestation Planting of new forests on lands that historically have not Carbon Market contained forests. A market created to buy and sell carbon credits. Under a regulated limit on carbon emissions (a “cap” on emissions), Annex I Parties permits or allowances are given or auctioned to carbon The countries listed in Annex I of the UNFCCC and in Annex B emitters. Entities emitting below their cap may trade their extra of the Kyoto Protocol. allowances (carbon credits) to those who need additional capacity, creating a market for buying and selling carbon credits. Avoided Deforestation Preventing deforestation by compensating countries for carbon Carbon Sequestration dioxide reductions realized by maintaining their forests. The process of removing carbon from the atmosphere and depositing it in a reservoir. Biomass Fuel These fuels are considered renewable as long as the CDM Executive Board vegetation producing them is maintained or replanted, such as A 10-member panel that supervises the Kyoto Protocol’s firewood, alcohol fermented from sugar, and combustible oils CDM under the authority and guidance of the Conference of extracted from soy beans. Their use in place of fossil fuels cuts the Parties. The CDM Executive Board is the ultimate point greenhouse gas emissions because the plants that are their of contact for CDM Project Participants for the registration of sources recapture carbon dioxide from the atmosphere. projects and the issuance of CERs. Cap-and-Trade System Certified Emission Reduction (CER) An environmental policy tool that institutes a mandatory cap A unit equal to one metric ton of carbon dioxide equivalent, on emissions while providing emitters with flexibility on how which may be used by Annex I parties towards meeting their they may comply. Successful cap-and-trade programs reward binding ER commitments under the Kyoto Protocol. CERs are innovation, efficiency, and early action and provide strict issued for emission reductions from CDM project activities. Two environmental accountability without inhibiting economic special types of CERs (temporary CERs and long-term CERs) Carbon Finance 13 AR growth. are issued for emission reductions from afforestation and reforestation CDM projects. 45 l Clean Development Mechanism (CDM) greenhouse gas emissions cuts; they are the Clean A mechanism provided by Article 12 of the Kyoto Protocol, Development Mechanism, International Emissions Trading, and through which developed countries may finance greenhouse Joint Implementation. gas emission reduction projects in developing countries, and receive credits for doing so, which they may apply toward Greenhouse Gases (GHGs) meeting mandatory limits on their own emissions. The atmospheric gases responsible for causing global warming and climate change. Six gases are listed in Annex A of the Clean Energy or Clean Technology Kyoto Protocol. The major greenhouse gases are carbon Although there appears to be no strict definition, clean energy dioxide (CO2), methane (CH4), and nitrous oxide (N2O). Less is any energy that causes little or no harm to the environment. prevalent—but very powerful—are hydrofluorocarbons (HFCs), Wind energy, solar energy (…), hydrogen and fuel cells, wave perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). and tidal energy, and biomass are all examples of clean energy. Green Investment Scheme (GIS) Community Benefits A financing mechanism in which the proceeds from emissions Community benefits are identifiable and quantifiable trading under the Kyoto Protocol are reinvested in projects improvements in the quality of life of a local group of people in the host country’s economy with the objective of further who are identified by the trustee and the project entity as in reducing emissions. the vicinity of or affected by a project. HFC-23 (triofluoromethane) Countries with Economies in Transition Greenhouse gas that has 11,700 times the global warming Those Central and Eastern European countries and former potential of carbon dioxide and is a by-product in the republics of the Soviet Union in transition from state-controlled manufacturing process of HCFC-22, used in air conditioning, to market economies. refrigeration, and as a feedstock. Designated National Authority (DNA) International Development Association (IDA) An office, ministry or other official entity appointed by a Party One of the five institutions composing the World Bank Group, to the Kyoto Protocol to review and give national approval to which focuses exclusively on the world’s poorest countries. projects proposed under the CDM. Joint Implementation (JI) Emission Reduction (ER) A mechanism under the Kyoto Protocol through which a The measurable reduction of release of greenhouse gases into developed country can receive “emission reduction units” the atmosphere from a specified activity or over a specified when it helps to finance projects that reduce net greenhouse area and a specified period of time. gas emissions in another developed country (in practice, the recipient state is likely to be a country with an “economy in Emission Reductions Purchase Agreement (ERPA) transition”). An Annex I Party must meet specific eligibility Agreement that governs the purchase and sale of ERs. requirements to participate in Joint Implementation. European Union Emissions Trading System (EU ETS) Kyoto Protocol In January 2005, the European Union Emissions Trading An international agreement standing on its own, and requiring System commenced operation as the largest multi-country, separate ratification by governments, but linked to the UNFCCC. multi-sector greenhouse gas emissions trading scheme The Kyoto Protocol, among other things, sets binding targets worldwide. The scheme is based on Directive 2003/87/EC, for the reduction of greenhouse gas emissions by industrialized which entered into force on October 25, 2003. countries. It entered into force on February 16, 2005. Carbon Finance 13 AR Flexible Mechanisms Land Use, Land-Use Change and Forestry (LULUCF) The procedures established under the Kyoto Protocol to A greenhouse gas inventory sector that covers emissions and increase the flexibility and reduce the costs of making removal of greenhouse gases resulting from direct human- 46 l induced land use, land-use change, and forestry activities. fossil fuels and biomass, land-use changes, and other industrial Expanding forests reduce atmospheric carbon dioxide; processes—is the reference gas against which the other deforestation releases additional carbon dioxide; various greenhouse gases are measured. agricultural activities may add to atmospheric levels of methane and nitrous oxide. Tranche The Spanish Carbon Fund, the BioCarbon Fund, and the Least Developed Countries (LDCs) Umbrella Carbon Fund consist of tranches. For example, the The world’s poorest countries. Least developed countries are BioCarbon Fund’s first tranche supports a wide variety of land countries (i) listed in the World Bank’s IDA list of countries; use, land-use change, and forestry projects, some providing (ii) countries commonly referred to as “IDA blend,” with a emission reductions potentially eligible for credit under the population of less than 75 million; or (iii) countries designated Kyoto Protocol, and some that explore options for carbon as least developed countries by the United Nations. credits that achieve them by activities other than afforestation and reforestation and therefore not eligible for Kyoto credits Mitigation in the first commitment period. Depending on the interests In the context of climate change, a human intervention to of contributors, various additional tranches may be opened, reduce the sources or enhance the sinks of greenhouse gases. each one with a specific focus, which could be sectoral or Examples include using fossil fuels more efficiently for industrial geographic. processes or electricity generation, switching to solar energy or wind power, improving the insulation of buildings, and United Nations Framework Convention on Climate Change expanding forests and other “sinks” to remove greater amounts (UNFCCC) of carbon dioxide from the atmosphere. The international legal framework adopted in June 1992 at the Rio Earth Summit to address climate change. It commits the Programme of Activities (PoA) Parties to the UNFCCC to stabilize human-induced greenhouse Emission reductions that are achieved by multiple verifiable gas emissions at levels that would prevent dangerous man- activities executed over time as a direct response to a made interference with the climate system. In December government measure or private sector initiative. Programmes 1997, the Parties to the UNFCCC adopted the Kyoto Protocol. typically result in a multitude of greenhouse gas-reducing In February 2005, the Kyoto Protocol entered into force, thus activities in multiple sites over the life of the programme. becoming a legally binding instrument. Reforestation Voluntary Carbon Market Replanting of forests on land that was previously forested but The unregulated market which allows individuals, companies, subsequently converted to other use. and organizations to purchase emission reduction credits to offset the emissions they produce. Small-scale Projects Projects that are compatible with the definition of “Small-scale CDM Project Activities” set out in decision 17/CP.7 by the Conference of Parties to the UNFCCC. Sustainable Development Development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Tonne of Carbon Dioxide Equivalent (tCO2e) Carbon Finance 13 AR The universal unit of measurement used to indicate the global warming potential of each of the six greenhouse gases. Carbon dioxide—a naturally occurring gas that is a byproduct of burning 47 l Ackowledgments Managing Editor Isabel Hagbrink Production Editor Maria Ekman Copy Editor Inge Pakulski Design Corporate Visions Printer World Bank Photos courtesy of the World Bank photo gallery, Leon Biaou, Rhett Butler, Reidar Kvam, and Meike Naumann, Visuelle Kommunikation. 1818 H Street, NW Washington, DC 20433 www.carbonfinance.org