Carbon Crediting A Results-based Approach to Mobilizing Additional Climate Financing April 2025 © 2025 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Attribution Please cite the work as follows: “World Bank.2025.Carbon Crediting – A results- based approach to mobilizing additional climate financing. © World Bank.” Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e mail: pubrights@worldbank.org. The development of this report was led by the World Bank and prepared by experts from the World Bank and Climate Focus. The World Bank task team responsible for this report was composed of: Klaus Oppermann, Joseph Dickmann, and Yuejiao Wan. The Climate focus team included: Carolina Inclan, Mauriz Schuck, Laura Sepulveda, Imogen Long, and Sandra Greiner. Design and layout: Elisa Perpignan. This report benefited greatly from the insights and contributions from: Andres Espejo; Arun Singh; Chie Ingvoldstad; Dan Radack; Efrian Muharrom; Isabelle Blouin; Jason Smith; Joseph Pryor; Kym Smithies; Loic Braune; Maya Woser; Olivier Mahul; Pierre Guigon; Roy Parizat; and Zarina Azizova. This report has been developed as part of the Technical Work Program of the Transformative Carbon Asset Facility (TCAF). Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing FOREWORD Carbon crediting is increasingly seen as a promising crediting approach. It explores how different models tool for mobilizing financing for development. can be used to incentivize actions across sectors, from In a world where development aid is shrinking, landfill gas projects to forest conservation, and how carbon crediting provides an alternative avenue for they can help reduce the financing gap for climate debt-neutral funding, helping countries achieve their projects. climate goals while fostering long-term sustainable development. As the landscape of carbon crediting evolves, this report serves as a reference for program entities, This report takes a deep dive into various crediting policymakers, and practitioners who are navigating approaches—from project-based to the more recent the complexities of these financing mechanisms. policy and other scaled-up crediting models. Whether It offers insights into how carbon crediting can be you’re involved in a specific mitigation project or effectively integrated into development plans with working on larger-scale policy changes, this guide climate benefits, ensuring that investments not only provides valuable insights into which approach might generate financial returns but also deliver real and best support your objectives. measurable impact that benefits vulnerable people. This report offers a practical look at the strengths, I hope you find the read insightful as we continue to challenges, and applications of carbon crediting build on and mainstream these innovative solutions. through a set of examples and a comparison of each Olivier Mahul, Global Manager Climate Finance Mobilization, Global Department for Climate Change, The World Bank 3 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing CONTENTS Foreword  3 Acronyms  6 Glossary7 1. Introduction 8 How is carbon crediting framed in this report? 8 What is this report about? 9 Who is the audience for this report? 9 How is this report structured?  9 2. Carbon Crediting Approaches 10 2.1 Project-based crediting  17 2.2 Programmatic crediting 21 2.3 Jurisdictional crediting  26 2.4 Policy crediting 32 2.5 Sectoral crediting  36 2.6 Economy-wide crediting  39 3. Summarizing overview of the crediting approaches 40 Stylized features of the crediting approaches 40 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing FIGURES Figure 1. Credits issued by independent standards by project type 18 Figure 2. Carbon crediting under a project-based approach 19 Figure 3. Programmes of Activities registered 22 Figure 4. Share of Programmes of Activities registered by sector 22 Figure 5. Credits issued by PoAs under the CDM 22 Figure 6. How does programmatic crediting work? 23 Figure 7. Jurisdictional program compared to standalone projects 28 Figure 8. Sectoral crediting operation 37 TABLES Table 1. Criteria defined by carbon crediting standards 14 Table 2. Types of carbon crediting approaches 15 Table 3. Objectives of jurisdictional approaches 26 Table 4. Overview of Jurisdictional REDD+ programs 27 Table 5. Examples of policies suitable for policy crediting 32 Table 6. Examples suitable for sectoral crediting 36 Table 7. Project-based crediting 40 Table 8. Programmatic crediting 41 Table 9. Jurisdictional crediting 41 Table 10. Policy crediting 41 Table 11. Sectoral crediting 42 Table 12. Economy-wide crediting 42 BOXES Box 1. Baseline setting 11 Box 2. How was additionality defined under the CDM? 17 Box 3. Example Landfill Gas Power Generation Project type 19 Box 4. Energy Access and Quality Improvement Project (EAQIP) in Rwanda under the Standardized Crediting Framework (SCF) 23 Box 5. Ghana Cocoa Forest REDD+ Program (GCFRP) 29 Box 6. The Transformative Carbon Asset Facility (TCAF) and the Innovative Carbon Resource Application for Energy Transition Project (iCRAFT) in Uzbekistan 33 Box 7. Hypothetical case: light-duty vehicles emission standard 37 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing ACRONYMS AAU Assigned Amount Units (AAUs) ART-TREES Architecture for REDD+ transactions CDM Clean Development Mechanism CDR Carbon Dioxide Removal CER Certified Emission Reductions Ci-Dev Carbon Initiative for Development DACCS Direct Air Carbon Capture and Storage EAQIP Energy Access and Quality Improvement Project ER Emission Reduction or Removal ERPA Emission Reductions Payment Agreement ETS Emission Trading System FCPF Forest Carbon Partnership Facility GCFRP Ghana Cocoa Forest REDD+ Program GHG Greenhouse Gases HIAs Hotspot Intervention Areas iCRAFT Innovative Carbon Resource Application for Energy Transition Project IPs Indigenous Peoples ISFL BioCarbon Fund Initiative for Sustainable Forest Landscapes ITMOs Internationally Transferred Mitigation Outcomes JI Joint Implementation JCC Joint Coordinating Committee LCs Local Communities LULUC Land Use and Land Use Change MRV Monitoring, Reporting, and Verification NbS Nature-based Solutions NDC Nationally Determined Contribution OECD Organisation for Economic Co-operation and Development PoAs Programme of Activities RBCF Results-based Climate Finance RBP Results-based Payments REF Renewable Energy Fund REDD+ Reducing Emissions from Deforestation and Forest Degradation SCALE Scaling Climate Actions by Lowering Emissions SCF Standardized Crediting Framework SDGs Sustainable Development Goals SHS Solar Home Systems SIDS Small Island Developing States TCAF Transformative Carbon Asset Facility UNFCCC United Nations Framework Convention on Climate Change VCM Voluntary Carbon Market VCS JNR Verified Carbon Standard Jurisdictional and Nested REDD+ 6 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing GLOSSARY Baseline Counterfactual scenario of GHG emissions in the absence of mitigation activity. Carbon crediting Project-based crediting, programmatic crediting, policy crediting, jurisdictional approach crediting, sectoral crediting, and economy-wide crediting referring to the scope of the carbon crediting program. Carbon crediting The funding modalities are RBCF or carbon markets, which provide access to funding modality outcome-based climate finance based upon verifying the achievement of agreed- upon climate results. Carbon crediting Complete set of arrangements allowing to generate carbon credits from a program mitigation activity and receive respective carbon payments, implemented by a program entity under a standard, e.g., clean cooking carbon crediting program under Article 6 of the Paris Agreement, jurisdictional REDD+ program under FCPF. Carbon credits A standardized measure for a verified reduction/removal in emissions equivalent to one metric ton of carbon dioxide equivalent (tCO2e) certified and issued in a registry. Carbon markets Trading systems for exchanging carbon credits (or other carbon assets). It can be classified into compliance and voluntary markets. Corresponding Accounting adjustments made by the buying and selling countries to their NDC adjustments accounting to reflect the transfer of the authorized ITMOs. The adjustments are intended to ensure that an authorized ER is not double-counted. ERPA Emission Reduction Payment Agreement. A legally binding contract between the provider and the recipient of payments for verified ERs. Mitigation action/ Investment, change in behavior, policy, or sectoral/jurisdictional/economy-wide activity transformation processes generating ERs. Opportunity cost Value of the options not taken when one alternative is chosen. In the context of carbon finance, opportunity cost refers to the potential benefits a project developer or land/resource owner forgoes when choosing to participate in carbon crediting instead of pursuing alternative, potentially more profitable land uses or economic activities. Opportunity cost also refers to the cost of still meeting a country’s NDC after it has sold ITMOs to another country. Program entity The entity implementing the carbon crediting program. RBCF Results-based climate finance is provided upon verifying the achievement of agreed results but does not involve the transfer of assets from the recipient project. Results could be specified as any milestone (typically verified GHG emissions reduced or removed) that marks progress toward more significant climate mitigation. RBP Results-based payments are a financing modality or approach under which a donor or investor disburses funds to a recipient upon the achievement and independent verification of a pre-agreed set of results. RBP can be provided under RBCF or through carbon market transactions. Standard A crediting standard outlines a set of detailed requirements that must be met for a mitigation activity to generate carbon credits using that standard. These standards are typically maintained by independent bodies and are established using expert inputs. Examples include the UNFCCC’s Clean Development Mechanism, the Gold Standard, Verra’s VCS, and the World Bank’s FCPF. Verified ERs A measurable and verified reduction in GHG emissions compared to a baseline. A third party usually conducts this process. 7 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 1. INTRODUCTION Under the Paris Agreement, most countries have committed to Nationally Determined Contributions How is carbon crediting (NDCs) to reduce greenhouse gas (GHG) emissions. framed in this report? Many go further in their national development plans and sector strategies, outlining how these efforts can In the past, carbon crediting was equated with also advance low-carbon, resilient development. participation in carbon market mechanisms for GHG emission reductions or removals (ERs) at the However, developing countries face a substantial project level, such as under the Clean Development funding gap when it comes to implementing the full Mechanism (CDM) of the Kyoto Protocol or the range of planned mitigation and adaptation measures. Voluntary Carbon Market (VCM), both of which The Organisation for Economic Co-operation and focused on project-based (and programmatic) Development (OECD) estimates that developing crediting. countries will need up to USD 2.4 trillion by 2030 to achieve these goals. 1 Without significantly scaling up More recently, the scope of carbon crediting has investment and financing, countries will be unable to expanded beyond the project level under RBCF and fully deliver on their climate and development plans. the emerging carbon markets under Article 6 of the Paris Agreement, which established collaborative Carbon crediting can play an important role in approaches for bilateral carbon market collaboration addressing this challenge. By channeling essential and a centralized United Nations Framework financial resources into climate mitigation and Convention on Climate Change (UNFCCC) crediting adaptation efforts, carbon crediting can help mechanism following in many aspects the model of countries move from planning to implementation. the CDM. It can also incentivize broader climate action with benefits for resilience, green growth, and Against this background, this report introduces sustainable livelihoods—such as improved land carbon crediting as an important and versatile management, forest conservation, and access to financial instrument to support climate mitigation clean technologies. action and low-carbon, resilient development. It quantifies GHG ERs resulting from clean investment and sustainable landscape projects, climate The World Bank has more than 20 years of experience mitigation policies, or broader sectoral, jurisdictional, supporting countries to develop carbon crediting or economy-wide transformation processes along programs and market infrastructure to help scale defined decarbonization pathways. It monetizes these up financing for their development priorities. The mitigation outcomes by accessing funding from RBCF Bank continues to pioneer innovative approaches or carbon markets. to help countries originate, generate, and monetize high-integrity carbon credits linked to World Bank operations through a combination of technical assistance and results-based climate finance (RBCF). These solutions provide additional finance to help countries adapt to climate change, reduce emissions, and seize new opportunities for sustainable development. 1 OECD (2024). Finance and investment for climate goals. 8 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing What is this report about? developing or managing a carbon crediting program. Policymakers may include elected officials, ministers, or regulators. This report provides a comprehensive overview of carbon crediting approaches, focusing on the needs The report aims to guide these actors and their of entities in developing countries implementing development partners, including World Bank teams climate mitigation actions through dedicated working with such entities, in assessing opportunities investments, policy programs, or advancement of and informing robust decision-making about sectoral, jurisdictional, economy-wide transformation which carbon-crediting approaches may be most processes (program entities) and being interested in appropriate for which kinds of policies, projects, or accessing funding through carbon crediting. other interventions. In this sense, the report serves as a comprehensive upstream resource and reference The report offers guidance on when to use carbon guide for those interested in assessing potential crediting and how to select the most suitable carbon crediting approaches. It can be complemented approach for different mitigation actions across by more in-depth technical resources on how to economic sectors and contexts. By outlining these apply such approaches in different sectors and key approaches and considerations, the report contexts. The report is also of interest to a broader demonstrates how program entities in developing climate mitigation and development audience, countries can effectively leverage carbon crediting including developing country climate policymakers, to finance mitigation activities and low-carbon carbon market regulators, climate practitioners in development priorities. It also provides links development organizations, climate finance providers, to additional resources for further exploring or and buyers of carbon credits. developing carbon crediting programs or approaches in the outlined areas. How is this report structured? Who is the audience for this Chapter 2 is the core of the report, providing a report? detailed explanation of carbon crediting—what it is, how it works, when to use it, and the various approaches available. Subsequent sections delve This report is primarily intended for program entities deeper into each approach, including project-based, and policymakers in developing countries. Program programmatic, jurisdictional, policy-based, sectoral, entities are any agencies or institutions directly and economy-wide carbon crediting. The concluding administering a carbon crediting program. This may chapter 3 provides a summary of the key features of include, for instance, a country’s rural energy agency each carbon crediting approach. or forestry department, or private sector companies 9 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2. CARBON CREDITING APPROACHES What is carbon crediting? How does carbon crediting work? The process of carbon crediting begins with a Carbon crediting is a financial instrument that mitigation activity designed to generate ERs. 2 The ERs supports climate mitigation actions aimed at undergo a rigorous certification process, including reducing or removing GHG from the atmosphere. independent third-party verification, to ensure these These actions can take the form of individual are real, measurable, and verifiable. Once verified, projects, larger programs, or policy initiatives ERs can be issued as carbon credits. Each carbon across various sectors or jurisdictions aligned with credit represents one metric ton of carbon dioxide specific decarbonization strategies. equivalent (tCO2e) reduced or removed from the atmosphere. Carbon crediting provides funding to support such What sets carbon crediting apart from other activities through carbon markets or RBCF. In both instruments is that the ERs are quantified by cases, funds are disbursed only after achieving comparing the difference between a baseline scenario pre-agreed, measurable, and verified ERs that are and a project scenario after implementing the issued as carbon credits, improving the financial mitigation activity. The baseline serves as a reference viability of investments or policies. scenario, estimating the emissions that would have occurred without the mitigation activity. As the Carbon crediting is based on the principle of primary element to quantify ERs, a conservative additionality, i.e., that such mitigation activities would baseline setting is essential to avoid overcrediting and not proceed in the absence of the crediting program. ensure carbon credits’ environmental, economic, and As a result, carbon crediting serves as a critical tool for regulatory integrity (see Box 1). governments and private entities to secure financial resources to help implement and sustain climate action. When converted into carbon credits, these ERs can help countries achieve climate targets, such as those outlined in their NDCs, or enable companies to comply with climate-related regulations or voluntarily reduce their GHG emissions. 2 In the following and for simplicity, what is said about emission reductions (ERs) also applies to removals. Aspects specific to removals will be noted accordingly. 10 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing BOX 1. BASELINE SETTING Establishing a conservative baseline is crucial for preserving the integrity of carbon crediting approaches. It ensures that carbon credit issuance does not exceed the volume of achieved ERs, preventing over-crediting. 3 Baselines can be set up ex-ante, ex-post, or using a combination of both approaches to optimize accuracy and practicality. The key differences are: • Ex-ante: the baseline determined before the intervention begins, using projections or assumptions about future emissions. This approach provides certainty on baseline emissions upfront but may fail to account for the impact of external variables over time, such as economic shifts or technological advancements. If ERs are overestimated, the project could receive credits for reductions that weren't actually achieved. • Ex-post: the baseline is adjusted after the intervention has been implemented, based on relevant indicators, e.g., changes in fuel prices, changes in NDC ambition, etc., observed over the crediting period. This approach allows for more accurate measurements, reflecting real-world conditions and changes during the project’s duration. Ex-post baselines, however, reduce the predictability of the carbon credit flow over time at the time the mitigation action is planned and implemented. Shifting from an ex-ante baseline to an ex-post baseline may, therefore, require higher risk premiums to compensate for uncertainties related to the number of ERs that the intervention can achieve. There are key differences between carbon crediting country. In compliance carbon markets, credits are in carbon markets and RBCF. While both provide accompanied by such authorization committing financial incentives for verified ERs, their mechanisms to corresponding adjustment. This means the ERs differ: cannot be used for host country NDC compliance and thus create opportunity costs for host countries • RBCF directly rewards results through payments for that must be reflected in credit prices, which are ERs. The ERs and resulting carbon credits typically typically higher than prices of credits transacted on remain in the host country and are not transferred the VCM. Compliance markets are covered under to the RBCF provider. This allows host-country Article 6 of the Paris Agreement. 5 governments to count them toward their NDCs. From a policy perspective, RBCF is covered under Carbon market funding has the potential to Article 9 of the Paris Agreement and referenced in grow significantly, depending on the evolution of Article 5 for Reducing Emissions from Deforestation voluntary and compliance carbon markets. For and Forest Degradation (REDD+). 4 instance, between 2020 and 2023, independent In RBCF, funding depends on the availability of carbon standards issued 150–350 million carbon public climate finance and broader development credits annually, with about 150 million per aid. It is typically channeled through dedicated year being retired (i.e., used). 6 Meanwhile, the climate funds, such as the World Bank’s Scaling compliance market recorded its first transactions Climate Actions by Lowering Emissions (SCALE) under Article 6. umbrella trust fund. Each of the six crediting approaches covered in this • Carbon markets, on the other hand, involve report can, in principle, access both funding sources. buying and selling carbon credits through market For instance, the VCM is primarily focused on project- transactions to help entities meet emissions based and programmatic crediting. Jurisdictional targets. In the VCM, transactions occur between and policy crediting are mainly supported by RBCF, private buyers and sellers. Host-country though there is growing interest in jurisdictional involvement is optional but possible. These ERs crediting in the VCM and early-stage piloting of policy cannot be used against a buyer country’s NDC crediting under Article 6. This landscape, however, unless they include a ‘corresponding adjustment’ may evolve over time. in emissions balances authorized by the host 3 Overcrediting occurs when more carbon credits are issued for a mitigation activity than the actual ERs achieved. This can undermine the integrity of climate mitigation efforts because it misrepresents the true climate benefits delivered by the activity. Overcrediting can also result from poor monitoring or verification processes, non-ensuring additionality (see Box 2), or leakage (when emissions are reduced in one area but increase elsewhere due to the mitigation activity, reducing the net impact). 4 World Bank. (2022). Defining Results-Based Climate Finance, Voluntary Carbon Markets and Compliance Carbon Markets. 5 Ibid. 6 World Bank, State and Trends of Carbon Pricing 2014. 11 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Carbon crediting generates revenue streams for costs are covered by other means) and where the mitigation activities regardless of the funding source. mitigation impact per dollar spent is large. Following These revenues can, i) close cost and viability gaps this logic, carbon crediting has become a prime in investment projects, ii) cover operational or policy financial instrument to support forest protection costs and, iii) provide rewards and incentives for (REDD+) or clean cooking programs, which have mitigation actions. It is important to note that carbon rather low upfront investment costs compared to, e.g., revenues are not upfront investment financing. renewable energy solutions. However, they can help secure financing by de-risking investments and may be integrated into financial Beyond individual projects, mitigation policies can products such as outcome bonds, which allow some have similar cost structures, such as mandatory energy of the expected revenue stream to be frontloaded. 7 efficiency standards generating annual costs for equipment testing, custom controls, and equipment labeling. The cost structure is one reason policy When to use carbon crediting? crediting can be an attractive way to enable policy implementation. Carbon crediting can be used wherever the climate outcomes of a mitigation action or sectoral, Carbon crediting is of interest for projects with high jurisdictional, or economy-wide transformation can upfront costs as well improving the financial viability of be monitored, reported, and verified with sufficient such projects. This can facilitate access to investment accuracy and certainty. Carbon crediting is of interest financing by lowering the risk for the lender because if any of the following holds reflecting purpose and/or of the improved capability of the borrower to pay opportunity: debt services. • Operational or opportunity costs are high relative to investment costs (e.g., avoided deforestation) – Market creation cost structure. Renewable energies are the prime example of • The goal is to establish or scale a market for clean creating a clean technology market through results- technologies (e.g., atmospheric carbon dioxide based payments (RBP)—carbon crediting is a removal (CDR) technologies)—market creation. modality of RBP—. Renewables have a cost structure • The goal is to support the implementation of unfavorable to RBP, with high upfront costs and low climate mitigation policies and increasing ambition operating costs. - incentive setting. If the objective was to finance just an individual • The benefits of carbon crediting outweigh the cost windmill, the cost gap to implementation would be of monitoring, reporting, and verification (MRV) – best covered through a concessional loan or grant. transaction costs. Closing it by paying x per MWh of wind power • Program entities can take advantage of available produced (as has been done in most countries funding sources from RBCF or carbon markets – through feed-in tariffs) will cost the finance provider funding sources. more as it must compensate for the windmill’s performance risk. If the objective is, however, to create a market for Cost structure windmills and aim for hundreds or thousands instead of one to be installed, an RBP scheme at the national Carbon crediting provides a payment stream over level can be an instrument of choice. It pays for this time. For example, a program entity might receive technology’s environmental (climate) service and USD 1 million annually for delivering 100,000 t of ERs allows overtime – to leave the upfront financing to each year as carbon credits for USD 10 per credit over commercial finance providers. Together with cost 10 years. reductions through economies of scale, allowing the tariff premiums to be phased out over time allows for Purely from the perspective of covering costs, this creating a sustainable, clean technology market. makes carbon crediting interesting where costs are mainly opportunity costs or operational costs and less so upfront investment costs (or where these upfront 7 For more detail on blending carbon crediting in financial product see: Pengwern Associates, Integrating RBCF in financial products, 2024. 12 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Following the example of renewables, many other use clean cookstoves can qualify for carbon crediting if cases exist to promote capital-intensive mitigation aggregated in large quantities, size thresholds exist action through RBP. Technology-based CDR, such as for reasonably deploying carbon crediting. Direct Air Carbon Capture and Storage (DACCS), is an emerging new area. CDR has a similar cost structure Based on experiences made with this instrument, a as renewables, and the potential creation of a CDR crediting activity should at least reach an expected market could learn from the experience made with volume of tens of thousand tons a year and, in more renewables. complex cases, hundreds of thousands. As indicated above, this does not disqualify small and micro For CDR, which does not generate any commercial activities provided they can be aggregated into larger good but is a pure waste removal technology to clean programs. up the atmosphere of harmful excess CO2e, carbon crediting is the obvious instrument of choice if the objective is to create a CDR market. At the same time, Funding opportunities it is a good example of the need to combine several Finally, carbon crediting can be of interest simply instruments: Given the early stage of CDR, program because of the availability of funding. What then entities would find it challenging to secure commercial matters most is comparing benefits with carbon upfront financing even if they could receive very high crediting transaction costs. For instance, VCMs have carbon revenues. Concessional loans and/or grants, in created opportunities for nature-based solutions addition to RBP, will be critical to developing a CDR (NbS) that can complement traditional funding from market, as has been the case for renewables. development finance. Incentive setting High-integrity carbon crediting Carbon crediting can be used to incentivize good practice by following simple performance logic: the Carbon credit integrity is key to market credibility, more verified results are delivered, the more money fostering trust by ensuring authenticity, transparency, is paid. This positive incentive-setting effect can be and social responsibility. Integrity is important to used in practically all use cases, including incentivizing achieve the crediting program’s desired impact, sound policy implementation or enforcement, secure a funding source, and avoid unintended incentivizing implementation of least-cost solutions, or side-effects or reputational risks. The concept of supporting good practice in operating equipment. high-integrity carbon credits has multiple dimensions and can vary by sector, context, and crediting In setting crediting thresholds below business-as- standard, but generally adheres to three main usual baselines, carbon crediting can be used to set characteristics: 8, 9 incentives for increasing the ambition of all types of • Environmental integrity: Ensuring that mitigation program entities. For instance, baselines can be set at outcomes are real and verified. This requires carbon certain technology benchmark levels, incentivizing fast credits to demonstrate that they are: adaptation of more efficient technologies. * Additional, namely that the emissions would not otherwise have been reduced in the absence of Transaction Costs the crediting program; Transaction costs are a limiting factor when using * Permanent, with mitigation measures in place to carbon crediting. Depending on the mitigation activity prevent the ER from being reversed; type and underlying emissions drivers, quantifying ERs and undertaking MRV can be prohibitively expensive * Measurable, using clear and acceptable or even impossible, e.g., for climate awareness or standards; education programs. Typically, these costs are fixed, * Not double-counted by the buyer and seller; and i.e., per ton of carbon credit, and they decline in credit volume. While even micro activities such as 8 World Bank. (n.d.). High Integrity, High Impact: The World Bank Engagement Roadmap for Carbon Markets. 9 See also: Integrity Council for the Voluntary Carbon Market (ICVCM) Core Carbon Principles (CCPs); Voluntary Carbon Market Initiative (VCMI) Claims Code of Practice; International Institute for the Unification of Private Law (UNIDROIT); International Emissions Trading Association (IETA) Guidelines for High Integrity Use of Carbon Credits. 13 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing * Do not lock in activities or investments that are Country readiness for engaging in high-integrity incompatible with a country’s net-zero targets or carbon crediting can differ significantly by sector and with international climate goals in line with the context. The readiness of the governance and market Paris Agreement. systems can significantly influence the preparation time and effort for engaging in carbon crediting • Social integrity: Ensuring that local people and and often requires up-front resources to ensure a communities, including Indigenous Peoples (IPs) conducive enabling environment. Likewise, at the and Local Communities (LCs), can participate in and project, program, or sectoral level, and amongst equitably benefit from mitigation outcomes. This program entities, developing functional MRV systems, includes but goes beyond safeguarding against robust social engagement and risk management unacceptable practices such as non-compliance systems, and market transaction frameworks and with safety standards for workers or child labor infrastructure also require attention and investment and focuses on inclusion of affected stakeholders for optimal functioning of carbon crediting programs in decision making processes related to a carbon within these wider governance and market systems. crediting program and fair sharing of proceeds. • Financial, market, and policy systems integrity: Criteria for carbon crediting programs Ensuring clear and transparent legal nature of carbon credits and the governance of the trading Standards that govern how carbon credits are market architecture, transparent pricing, and generated, verified, and issued define the criteria rules to prevent fraudulent activities. For instance, for carbon crediting. Standard setters can be sellers need to be assured their efforts will be fairly regulators of international or domestic carbon market rewarded, and buyers need to have confidence mechanisms or providers of RBCF, defining eligibility in their purchase. This aspect looks beyond the criteria and requirements for accessing RBCF funds. boundary of the crediting program to confirm While each standard has its own objectives and the program’s eligibility with the host country’s requirements, each must define a set of minimum legal system and policy priorities. Legal aspects criteria that determine which mitigation actions to include the right of title of ERs. In case credits are fund and the rules, methodologies, and processes to transacted as ITMOs, host country authorization issue carbon credits. Table 1 presents each criterion. and conformity with the host country’s climate policy ambitions and strategies are essential. Table 1 Criteria defined by carbon crediting standards. CRITERIA DEFINITION Sector and eligible A crediting standard may target one or several sectors. Each sector includes mitigation mitigation activities activities defined within its scope. The eligible mitigation activities represent the interventions that can issue carbon credits according to the respective standards. Scale The scale defines the expected volume of emission reductions (tCO2e) or other measures, such as energy production (kWh) or intervention area (ha). The scale is often tied to different requirements. Boundary The geographic boundaries eligible under a standard determine whether ERs can be generated at the local, jurisdictional or national level. Crediting period The crediting period sets the length of time for which credits are issued for a specific mitigation activity. It guarantees that actions do not issue carbon credits after a period during which the activity was deemed eligible. Crediting programs may include an option for renewing or extending a crediting period. Methodology The methodology details the rules and methods a mitigation activity must implement to generate carbon credits. It sets the rules for eligibility, quantification of ERs (including the criteria for setting up the baseline), demonstrating additionality (Box 2), minimum criteria to meet social and environmental safeguards and monitoring processes. MRV systems The MRV ensures that the ERs resulting from the mitigation activity are real and measurable and comply with the carbon crediting program's standards monitoring, reporting, and third- party verification processes. 14 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing CRITERIA DEFINITION Social and Safeguards are measures designed to ensure that the climate mitigation activity respects environmental and protects the rights of communities and the environment. These safeguards aim to safeguards prevent unintended negative impacts and maximize co-benefits. Eligibility and Standards can impose obligations related to alignment with national policies (non-objection alignment with national from authorities), respect of national regulations, and managing alignment with the regulations procedures of Article 6 of the Paris Agreement, as well as the rules regarding double issuance/double claiming. Issuance Standards are issuing carbon credits to stakeholders' registry accounts in the crediting program. Types of carbon crediting approaches The choice of a crediting approach depends on the mitigation activity a program entity seeks to implement, its scope, financial requirements, Carbon crediting programs can operate under and the jurisdiction’s context. Each approach different approaches. Some approaches started with has distinct methodological requirements, with activities at the project level (e.g., renewable energy specific details depending on the respective plants). However, it has evolved to increase the scope carbon crediting standard. and drive ERs at scale, with several carbon crediting programs already generating carbon credits from broader policy and jurisdictional interventions. Table 2 presents the scope and key characteristics of different carbon crediting approaches. Table 2. Types of carbon crediting approaches. 10 CREDITING SCOPE TYPICAL BASELINE MRV EXAMPLE APPROACH PROGRAM ENTITY EMISSIONS Project Individual Private or public Counterfactual Monitor emissions or Renewable projects or enterprises (e.g., estimate of other drivers of energy power technologies steel producers, emissions at a emissions at the plants municipal landfill specific site(s) based project site(s); operators) on historical, ex-post data may be technology, used to calculate economic, or baseline emissions performance analysis Programmatic Large number of Public agencies (e.g., Counterfactual Monitor emissions or Installation of similar projects, for rural energy estimate of other drivers of cookstoves at often small and access), national emissions at a emissions at the the household micro-scale development banks, specific site(s) based project site(s); level at within a program or specialized on historical, ex-post data may be multiple enterprises (private technological, used to calculate locations in a or public) economic, or baseline emissions; country performance analysis sampling approach, i.e., a random sample of project devices are periodically selected for MRV Jurisdictional National, Specialized public Total projected Detailed bottom-up REDD+ provincial, or agency (e.g., env. emissions in the jurisdiction-level programs at municipal agency or forestry jurisdiction fixed GHG inventory with the jurisdictions; dept or several ex-ante clear boundaries jurisdictional overachievement agencies) level of jurisdictional mitigation targets 10 The World Banks Group (2019) Different approaches to carbon crediting and TCAF blueprint synthesis report. 15 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing CREDITING SCOPE TYPICAL BASELINE MRV EXAMPLE APPROACH PROGRAM ENTITY EMISSIONS Policy Policy National government Based on economic Monitoring of market Energy subsidy interventions represented by a modelling of penetration rates or reform or designated agency economy-wide modelling baseline carbon pricing emissions or sectoral and project policies emissions without emissions using policy (e.g., carbon ex-post input tax, performance parameters (e.g., standards, GDP, sectoral GDP, regulation), in some fuel prices) cases simplified approaches are possible Sectoral Overachievement Specialized public Total projected Detailed bottom-up Transport of sectoral agency (e.g., energy sector emissions, sectoral inventory emissions mitigation agency) fixed ex-ante with clear boundaries standards benchmarks or targets​ Economy Overachievement National government Total projected Economy inventory Supporting a of a national represented by a emissions of the of GHG emissions small country mitigation target designated agency economy fixed that can only ex-ante achieve on an economy-wide level sizeable mitigation A helpful way to differentiate these crediting approaches is by whether the ERs can be attributed to the entities carrying out the mitigation activities. This kind of attribution works well for project- based and programmatic crediting, as well as some policy crediting approaches, like feed-in tariffs for renewable energy. In contrast, attribution isn’t possible for price-based policies like subsidy reforms, and it usually doesn’t apply to jurisdictional, sectoral, or economy-wide crediting. This distinction has methodological implications, as outlined in Table 2, but also important operational implications—such as determining who holds the rights to the ERs, which can require different levels of domestic regulation. The following chapters present the main characteristics of each carbon crediting approach. 16 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2.1 Project-based crediting Introduction close cost/viability gaps of low-carbon technologies and/or to reward mitigation behaviors and outcomes. Project-based carbon crediting is the most common approach. It supports individual Background projects or technologies that result in measurable ERs and delivers carbon credits Project-based carbon crediting mechanisms have that can be sold primarily in carbon markets to evolved from the Kyoto Protocol, which introduced generate revenue. 11 two market-based mechanisms to help countries meet ER targets: the Joint Implementation (JI) and the CDM. The CDM was the most prominent of Project-based crediting is of interest for large point these mechanisms, allowing developed countries sources of ERs such as waste management (e.g., (known as Annex I countries) to finance ER projects methane capture from landfills) or mitigation in in developing countries (non-Annex I countries) and the industrial sector (e.g., transition to clean steel receive Certified Emission Reductions (CERs) in return. production). Project-level mitigation activities often The developed countries could use these CERs to generate revenue through the sale of carbon credits meet their ER targets under the Kyoto Protocol. The to private sector buyers on the VCM. The emerging CDM was crucial in establishing the principles and compliance carbon market holds potential for project- methodologies for carbon crediting, including MRV level mitigation as well. Proceeds (carbon revenues) systems, and it provided a concept of additionality from project-based crediting are typically used to that became a model for other carbon market standards (see Box 2). BOX 2. HOW WAS ADDITIONALITY DEFINED UNDER THE CDM? ERs must be proven additional, meaning that they would not have occurred without the financial support from the crediting program. Proof of additionality can be built on legal, financial, and technological arguments, and can be demonstrated on a case-by-case basis or for a whole category of mitigation activities. 12 Several tests are employed to ensure additionality: • Regulatory surplus test. It ensures that a project’s activities exceed what is already required by existing laws, policies, or regulations. • Financial or investment test. It evaluates whether a project is economically viable without the revenue from carbon credits. • Barrier test. It identifies non-financial obstacles, such as technological, institutional, or market challenges, that can only be overcome with the support of carbon credits. • Common practice test. It evaluates whether the proposed project activity is widely adopted in similar contexts. If the activity is already common it represents standard practice. In parallel with compliance-driven markets like the Carbon credits issued by project-based activities CDM, the VCM emerged as an alternative route have grown exponentially in recent years, especially for project-based carbon crediting. The VCM has for renewable energy and NbS (led primarily by grown significantly over the past decade, driven by REDD+ projects) (see Figure 1). However, in 2022, the corporate climate commitments and the creation of volume and value of carbon credits began to decline new methodologies and standards for the generation in tandem with growing scrutiny over their integrity, of carbon credits. quality, and transparency. Concerns were raised about whether certain projects, such as REDD+ activities, 11 Each carbon credit represents one metric ton of CO2 equivalent reduced or removed from the atmosphere by climate change mitigation projects or programs. 12 Partnership for Market Readiness (2021) A Guide to Developing Domestic Carbon Crediting Mechanisms. Synthesis: Developing methodologies. 17 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing genuinely achieve ERs, alongside allegations of rights of carbon credits. Changes include adopting violations involving IPs and LCs (including inequitable more rigorous tools to calculate and verify ERs, benefit-sharing from project revenues among actors strengthening the evaluation of additionality, and involved), as did doubts about the additionality of integrating social and environmental safeguards, some renewable energy projects. This has impacted including benefit sharing. In addition, the shift to project types preferred by buyers of carbon credits. jurisdictional approaches in REDD+ seeks to address some of these challenges, especially those related Conscious of these challenges and risks, several to leakage 13, inequitable benefit sharing, and lack of carbon market standards are updating and improving government buy-in (see Chapter 2.3). their methodologies to increase the integrity Figure 1. Credits issued by carbon standards by project type. Data source: Climate Focus (2024) VCM Dashboard. 2024 includes data until October 2024. *This figure includes credits issued in the CDM and under VCM standards: VCS, Gold Standard, ACR, CAR, Plan Vivo, GCC, Climate Forward, BioCarbon, Cercarbono and ART. How does project-based carbon crediting work? A project-based carbon crediting begins with the identification of a technology that has the potential to reduce or remove emissions. The baseline is tailored to the specific project and involves calculating the ERs that would have occurred if the specific project had not been implemented. Figure 2 presents the case for the installation of a wastewater plant. 13 Leakage in carbon crediting occurs when actions to reduce emissions in one place lead to increases elsewhere. In the forestry sector, for example, efforts to reduce deforestation in one area may lead to increased deforestation in other areas outside of project boundaries. By encompassing larger project areas, jurisdictional approaches help reduce the risk of leakage as compared to smaller project-based approaches. 18 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Figure 2. Carbon crediting under a project-based approach. Source: based on state and trends of carbon pricing 2018 Box 3 presents an example of a typical Landfill Gas Power Generation Project. BOX 3 EXAMPLE LANDFILL GAS POWER GENERATION PROJECT TYPE Overview The project involves the installation of a gas capture and power generation system at a municipal landfill located in a mid-sized city in a developing country. The main components include a gas collection system, compressors, and power generation units that convert the captured methane into electricity. The project aims to reduce GHG emissions in two ways: 1) by destructing methane before it escapes into the atmosphere and 2) by using methane as a renewable energy source. Landfills present a significant source of methane emissions. The project aims to mitigate GHG emissions and produce renewable energy to feed into the city’s power grid. Approach The project follows a project-based carbon crediting approach under the VCM methodology for landfill gas capture and utilization. Impacts • Mitigation impacts: GHG ERs, • Technology: MWh of renewable energy generated per year, • Economic impacts: revenue generated from carbon credit sales over the payment period and full-time jobs created during construction and permanent positions for operation and maintenance, • Environmental benefits: reduces methane emissions and improves local air quality, The project establishes a model for sustainable landfill management, encouraging replication in other regions. 19 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Strengths and weaknesses CRITERIA RATIONALE Environmental and • Risk of non-additionality: ensuring that projects are genuinely additional (i.e., would not social integrity have happened without the carbon crediting) can be challenging. • Risk of leakage and non-permanence, especially for REDD+ projects. Scalability • Low scalability potential. Uncertainties and • High transaction costs: the process of verifying, and maintaining a project can be complexity expensive and time-consuming, particularly for smaller projects. • However, the large number of methodologies and standards for different project types provides more flexibility, which is a strength. Further resources • World Bank (2021). A Guide to Developing Domestic Carbon Crediting Mechanisms. • EDF, WWF, and Öko-Institute e.V. (2020). What makes a high-quality carbon credit? • FMO (2024). Estimating Carbon in Forestry Investments: A Guide to available tools for climate- focused investors. • Climate Focus (2023). VCM Primer. • Climate Focus (2024). VCM Dashboard. 20 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2.2 Programmatic crediting Introduction identified yet. Additional activities can also be included over time. 14 These activities often tend to be small or even micro-scale and at the household The programmatic carbon crediting approach level, where scale does not necessarily relate to the emerged to address the challenges faced by size of a device but rather the program boundaries small-scale projects, particularly their inability or a number of different implementation sites. The to achieve scale and the high transaction costs program must define the scale. 15 associated with traditional project-based carbon crediting. Programmatic crediting generates payments for carbon credits from RBCF or carbon market sources (both voluntary and compliance market). Entities Programmatic crediting allows for the aggregation implementing programmatic crediting programs of smaller projects based on the same technology typically use the proceeds to fund incentive payments, under a single mechanism, making it easier to concessionality, or price discounts for low-carbon manage, monitor, and finance mitigation activities, technology. such as deploying small-scale solar systems or clean cookstoves in rural areas. Programmatic crediting acts similarly to project-level mitigation activities in the sense that it often attracts private-sector financing by Background generating revenue through the sale of carbon credits Programmatic crediting became widely known on carbon markets. under the CDM of the Kyoto Protocol. While the CDM proved that a concept of scale – in particular Programmatic carbon crediting is suitable for through private sector participation – was possible activities that can be consistently replicated across for project-based activities, supply and demand for multiple locations or sectors. The eligible activities small-scale projects were low due to high transaction need to share certain characteristics that allow costs and regulatory complexity. 16 This was paired them to be grouped together. Sampling reduces with low participation in low-income countries. The the administrative burden and transaction costs; programmatic approach under the CDM, namely instead of verifying each small project separately, the Programme of Activities (PoAs), was part of a programmatic approaches allow for sampling during reform process to increase and broaden participation. MRV. This means that a random sample of project Programmatic crediting approaches under the devices, e.g., cookstoves in households, is periodically CDM have been a turning point for small and micro selected for MRV. These samples are representative of mitigation activities that were previously difficult to the entire population. undertake. An important characteristic of programmatic crediting The following figures present the type of mitigation approaches is that they tend to be more flexible in activities funded under programmatic carbon that they allow activities to start even if the specific crediting and how they have evolved over time. number of devices and their locations are not clearly 14 World Bank (2021). A guide to developing domestic carbon crediting mechanisms. 15 Ibid. 16 World Bank (2018). Carbon markets under the Kyoto Protocol – Lessons learned for building an international carbon market under the Paris Agreement. 21 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Figure 3. Number of PoAs registered. Data source: CDM Pipeline (October 2024) and Climate Focus (October 2024) VCM Dashboard. Other PoAs registered under other standards may be missing from this chart as these are categorized differently in their respective registries. Figure 4. Share of PoAs registered by sector. Data source: Climate Focus (October 2024) VCM Dashboard. Figure 5. Credits issued by PoAs under the CDM. Data source: CDM Pipeline (October 2024). * The CDM Pipeline only publishes total issuances per PoA but is not disaggregated by year. In this figure, each PoA’s total issuances are associated with the project’s registration year date. 22 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing How does programmatic crediting families (i.e., at the household level) at multiple work? locations in a country. The cookstoves are based on similar technologies (e.g., ethanol as renewable fuel) The baseline setting in programmatic crediting is replacing non-renewable fuel, such as firewood, which mostly based on technology. Figure 6 illustrates the generates ERs. The methodology used to estimate programmatic crediting approach, using the example the ERs often uses default values for the estimation of cookstoves offered at the household level. The of baseline non-renewable biomass consumption and cookstoves (i.e., the device) are offered to low-income applies a sampling approach for monitoring purposes. Figure 6. How does programmatic crediting work? Source: Own elaboration. Box 4 presents a case study describing how programmatic crediting has worked in practice. BOX 4 ENERGY ACCESS AND QUALITY IMPROVEMENT PROJECT (EAQIP) IN RWANDA UNDER THE STANDARDIZED CREDITING FRAMEWORK (SCF) The SCF is a streamlined and country-owned ER crediting framework. It is developed and supported by the Carbon Initiative for Development (Ci-Dev), a World Bank trust fund that supports clean energy access in low- income countries. The SCF allows for more comprehensive geographic coverage, flexibility, and lower transaction costs through a simplified, systematic, and standardized approach that uses local parameters for determining ERs. It gives governments the opportunity to create national standards for carbon crediting, including under Article 6.2 of the Paris Agreement. The SCF supports programmatic crediting with many similar projects at small or micro- scale levels (e.g., renewable fuel cookstoves or SHS). Through the SCF, Ci-Dev builds on CDM methodologies and supports existing PoAs to generate ERs post-2020 and transition to approaches that are compliant with the Paris Agreement. Brief overview The EAQIP in Rwanda, 17 launched in 2020, aims to improve energy access for households, enterprises, and public institutions while enhancing electricity service efficiency. The parent project, approved for USD 150 million, includes four components: • increasing access to grid electricity, • enhancing electricity service efficiency, • increasing access to off-grid electricity and, • clean cooking solutions and, • technical assistance for capacity building. 17 Word Bank (2022) Rwanda – Energy Access and Quality Improvement Project: Additional financing. 23 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing The additional financing in 2022 included a USD 10.5 million Emission Reduction Purchase Agreement (ERPA) for ERs generated through activities financed by the Renewable Energy Fund (REF) Project, Component 1, Window 5 and the Rwanda Energy Access and Quality Enhancement Project (EAQIP) Component 3 - Increasing Access to Off-Grid Electricity and Clean Cooking Solutions (including Component 3(a) for SHS and EAQIP Component 3(b) and (c) for efficient cookstoves), as described in respective project appraisal documents and project papers. EAQIP was approved in September 2020 and became effective in March 2021. The parent project is expected to run until December 2026, with major activities such as grid connections, clean cooking solution deployment, and off-grid solar installations progressing throughout this period. The additional financing was approved in June 2022. Key information on the timeline and impact in ERs of the program: • Expected annual ERs (tCO2e): The crediting period is five years as the following: SHS Cookstoves 2021 1,098 0 2022 6,322 6,165 2023 13,420 161,410 2024 20,027 404,275 2025 26,650 609,375 • Length of the payment period: 2021-2024 • Volume of ERs paid for: Expected to include a firm purchase of ERs up to USD 10.51 million. Approach EAQIP follows an RBCF approach to finance subsidies via the private sector for households to purchase off-grid solar and efficient and clean cooking products. The Bank funds RBCF through grants and loans. Revenue from the Ci-Dev ERPA will be used to replenish the RBCF funding. The calculation of GHG ERs is based on methodologies approved under Rwanda’s SCF. The project uses MRV protocols to track and verify the ERs. The Ministry of Finance and Economic Planning holds primary responsibility for carbon operations, and the Rwanda Environment Management Authority oversees the national carbon crediting framework, including the listing of programs, approval of methodologies, and the issuance of ER credits. The Energy Development Corporation Limited is responsible for the implementation of MRV, including preparing annual GHG ER monitoring packages and ensuring that an accredited GHG ER verifier is hired to verify ERs. Impacts The project is expected to achieve the following impacts: • Mitigation results: GHG mitigation of 2.73 MtCO2e, • Community development: 200,000 households gaining access to clean cooking solutions and 150 schools benefiting from modern, efficient cooking technologies, • Health: enhanced health outcomes by reducing exposure to indoor air pollution, particularly in households and schools that currently rely on traditional cooking methods, • Long-term benefits: these include the reinvestment of carbon revenues to support further off-grid energy projects and the transition of subsidy mechanisms into revolving funds, which will sustain the scaling of energy access solutions. 24 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Strengths and Weaknesses CRITERIA RATIONALE Environmental and • Programmatic crediting approaches are very similar to project-based approaches when it social integrity comes to baseline settings and MRV. Both are based on the technology underlying the activities. • Similar to project-based crediting, there is also i) risk of leakage and ii) perverse incentives undermining environmental integrity when a) programs could displace ERs into non-program areas and b) when the government avoids implementing ambitious climate policies that might negatively affect carbon revenue generation. MRV can be challenging for a large number of dispersed activities. Scalability • A key strength of programmatic crediting is the possibility of scaling up mitigation by replicating projects. While the projects must use the same technology, it is not necessary to know the number of project devices in advance since any additional devices can be added to the program. • Programmatic crediting can reach small- and microscale activities that would otherwise not materialize due to prohibitive transaction costs. Uncertainties and Overall, the uncertainties and complexity of project-based crediting can also be observed with complexity programmatic approaches, with a key difference: • As projects are added to the program over time, achievable ER volume is highly uncertain compared to project-based crediting. • Ensure consistency of technology application, MRV methods, and sampling strategies across different project sites and contexts may involve additional program governance and management complexities. Further resources • World Bank (2021). A guide to developing domestic carbon crediting mechanisms. • World Bank (2018). Carbon markets under the Kyoto Protocol – Lessons learned for building an international carbon market under the Paris Agreement . • Foundation Future of the Carbon Market (2022). PoA Mapping and Reporting. 25 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2.3 Jurisdictional crediting Introduction climate-smart agriculture. Jurisdictional approaches could also potentially be applied in urban contexts to accelerate climate mitigation and finance Jurisdictional carbon crediting refers to the infrastructure projects aligned with city or regional quantification and issuance of carbon credits from targets. However, city-wide crediting has yet to be climate mitigation activities across a designated implemented or tested at scale. 19 area, usually delimited by the administrative boundaries of a national or subnational Jurisdictional approaches were initially developed government. to address shortcomings identified in project- based REDD+ approaches. They are well-suited for governments aiming to finance large-scale mitigation In contrast to project-based crediting approaches, activities, particularly related to emissions from Land which target a specific location or (limited) Use and Land Use Change (LULUC), aligned with geographical area, or to programmatic crediting their climate goals or broader environmental and approaches, which target a distinct set of project sites economic development policies. Table 3 presents or devices within an area, jurisdictional approaches the main objectives of jurisdictional carbon crediting target net ERs from specified activities across an approaches. entire city, province, region, or country. They are usually implemented with a high level of government Payments for carbon credits from jurisdictional involvement. 18 approaches can come from RBCF and carbon market sources. Jurisdictional REDD+ started with an RBCF Jurisdictional approaches were first pioneered in phase 20 and now sees increasing interest in carbon the context of REDD+, and they continue to account markets. Proceeds are typically used to reward and for the vast majority of jurisdictional approaches incentivize payments to a broad range of stakeholders implemented to date. Their application has, in some including farmers, LCs, IPs, and governmental instances, been extended to broader sustainable authorities. agricultural land management activities, such as Table 3. Objectives of jurisdictional approaches. ELEMENT RATIONALE Scalability • A primary motivator for the development of jurisdictional approaches was to scale REDD+ beyond the project level. Government • Government involvement is essential for successful, well-tailored forest and climate involvement interventions across a jurisdiction. Lower risk of • By monitoring emissions across a broader geographic area and engaging multiple leakage stakeholders, jurisdictional approaches can reduce the risk of emission-generating activities spreading to areas outside the intervention boundary, while tackling a broader range of deforestation drivers. Engagement and • REDD+ jurisdictional crediting aims to involve key stakeholders such as local and subnational ownership governments, civil society groups, and IPs and LCs in the program implementation cycle, as opportunities for well as provide a platform for dialogue among these actors. The participatory approach and key stakeholders typically high level of government involvement tend to ensure better transparency and equity in the development of benefit-sharing agreements. 18 See, e.g., Tropical Forest Alliance (2023) Company Action in Collective Efforts for Sustainable Land Use at Scale, CDP (2022) Landscape and Jurisdictional Approaches: Opportunities to finance a nature-positive net-zero transition. 19 The World Bank's Carbon Partnership Facility (CPF) developed a crediting methodology for city-wide mitigation actions, with credits potentially supporting NDC targets or attracting private and international investment. More information available here. 20 Article 5 of the Paris Agreement encourages parties to the agreement to take action on REDD+ including through results-based payments. Article 6 of the Paris Agreement on carbon markets and non-market approaches is in principal open to REDD+ activities broadening the potential funding basis from carbon markets beyond voluntary carbon markets. 26 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Background mitigation in the forestry sector and from contributor country governments to fund these efforts. In the context of REDD+, jurisdictional approaches were first explored at scale under the World Bank’s In addition to their uptake and advancement by Forest Carbon Partnership Facility (FCPF), 21 which multilateral climate funds, jurisdictional approaches created a mechanism to compensate developing have more recently been adopted by carbon countries for their efforts to conserve tropical forests standards certifying forest-based carbon credits for while simultaneously reducing GHG emissions. Its compliance markets, and have been endorsed by applicability for REDD+ interventions was later relevant sector initiatives, such as the Tropical Forest formalized under the Warsaw Framework for REDD+, 22 Credit Integrity Guide. 23 While this represents a new a framework that defines the international criteria avenue for jurisdictional REDD+ and creates a new for developing countries to reduce emissions from avenue for private finance, RBCF remains the principal deforestation and forest degradation and enables funding source for jurisdictional REDD+ initiatives. the delivery of RBCF for the associated (verified) ERs. At the time, avoided deforestation was not A variety of funds and standards have been an eligible project type under the CDM, and there developed for implementing jurisdictional REDD+ and was a desire from forest country governments for sustainable land management programs, including new opportunities to scale up finance for climate public sector funds and VCM standards (see Table 4). Table 4. Overview of Jurisdictional REDD+ programs. FUND/STANDARD REACH RESULTS FCPF Carbon Fund The Carbon Fund has signed ERPAs with By the end of 2025, FCPF expects to 15 countries. It is closed to new achieve or exceed its target of 144 programs but operational on its existing MtCO2e, generating a total of 167.8 portfolio (until 2028). MtCO2e in ERs. 24  BioCarbon Fund Initiative for The Biocarbon Fund has signed ERPAs By 2030, aims to reduce more than 40 Sustainable Forest Landscape with two countries; ERPAs for three MtCO2e across its target countries. 25 (ISFL) other countries are under development. ART-TREES: Architecture for Currently, 23 programs are listed under To date, TREES credits have only been REDD+ transactions the ART-TREES Standard, covering 47 issued to Guyana, a total of 33.47 million jurisdictions across 16 countries. 26 credits in 2022. 27 VCS JNR: Jurisdictional and Eligible VCS REDD+ projects may now No information available. Nested REDD+ transition and register under the JNR framework, but according to the Verra Registry, none have completed this process yet. 21 The World Bank’s FCPF was established in 2007. 22 REDD+ stands for Reducing emissions from deforestation and forest degradation in developing countries. The ‘+’ stands for additional forest-related activities that protect the climate, namely the sustainable management of forests and the conservation and enhancement of forest carbon stocks. (UNFCCC, 2024, What is REDD+?) 23 See Tropical Forest Credit Integrity Guide 24 Forest Carbon Partnership Facility (2024) Pioneering Climate Finance for Forest Conservation 25 BioCarbon Fund ISFL (2024) 2024 Annual Report. 26 See ART Registry 27 See ART (2022) ART Issues World's First Jurisdictional Forestry TREES Carbon Credits to Guyana. 27 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing How does jurisdictional carbon over the whole jurisdiction, with baselines and MRV crediting work? systems developed accordingly. It depends on the legal and regulatory context in the respective Under jurisdictional approaches, ERs are quantified jurisdiction and country, technical requirements for relative to a baseline set at the national, state, or ER quantification defined by the crediting standard provincial level, which can include one or more used, and requirements relating to safeguards economic sectors (often related to LULUC, such as and benefit sharing typically defined by the fund forestry and agriculture). 28 Jurisdictional approaches or standard supporting the crediting program. are typically used to support the achievement of Compared to project-based crediting approaches jurisdictional climate mitigation targets. The World where development and implementation are typically Bank elaborated on jurisdictional approaches for led by an independent entity, regional or national carbon crediting on a city-level as well, but no governments are centrally involved in the operation program experience outside REDD+ is available so far. and implementation of jurisdictional approaches, following from the need for broad stakeholder In jurisdictional REDD+ approaches, crediting is inclusion and scale of the effort (see Figure 7). 29 conducted based on net carbon stock changes Figure 7. Jurisdictional program compared to standalone projects. Source: VCM Primer 30 28 Schwartzman, S.; Lubowski, R.N.; Pacala, S.W.; Keohane, N.O.; Kerr, S.; Oppenheimer, M.; Hamburg, S.P. (2021): Environmental integrity of emissions reductions depends on scale and systemic changes, not sector of origin. Environmental Research Letters 16(9). DOI: 10.1088/1748-9326/ac18e. 29 For further guidance, see also World Bank. 2021 Nesting of REDD+ Initiatives: Manual for Policy Makers. © World Bank . 30 Climate Focus (2023) VCM Primer 28 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Box 5 presents an example of a jurisdictional program. BOX 5 GHANA COCOA FOREST REDD+ PROGRAM (GCFRP)  Brief overview The Ghana Cocoa Forest REDD+ Program (GCFRP) is an initiative funded by the FCPF Carbon Fund. The FCPF provides results-based payments to countries that have achieved verifiable ERs in their forest and broader land- use sectors through jurisdictional programs. The GCFRP aims to reduce deforestation and forest degradation while supporting sustainable cocoa farming and sustainable landscape management. In the target area, deforestation is driven by a variety of activities linked to agricultural expansion, including permanent land cultivation, shifting cultivation, and slash-and-burn techniques. For over a century, cocoa production has been a primary deforestation driver. 31 The GCFRP was the first program developed under Ghana’s National REDD+ Strategy. The program facilitates community-based landscape governance and multistakeholder collaboration. The GCFRP was accepted into the FCPF pipeline in April 2014, and the REDD+ Readiness process and all administrative requirements were finalized, including signing an ERPA in 2019. 32  Key information on the impact in ERs of the program: 33  • Annual ERs (tCO2e):  Period ERs Jun 2019 - Dec 2019 300,000 Jan 2020 - Dec 2021 2,700,000 Jan 2022 - Dec 2023 4,500,000 Jan 2024 - Dec 2024 2,500,000 Total 10,000,000 • Payment period: 2019-2024  • Volume of ERs paid for: 10,000,000 ERs  • Price of ERs: USD 5/tCO2e Approach and stakeholder engagement The GCFRP is nested within the national REDD+ framework and targets Hotspot Intervention Areas (HIAs), which are prioritized based on cocoa production levels, forest threats, and stakeholder presence. Each HIA is governed by a multi-tiered structure that includes governance bodies that facilitate landscape-level coordination. The MRV system for the GCFRP includes annual performance monitoring and biennial independent verification of ERs. The program supports farmers to increase cocoa production through agroforestry, sustainable intensification, and increased premium payments. These methods – primarily the implementation of cocoa agroforestry systems – are intended to increase cocoa production per hectare on existing plots, which helps to prevent encroachment onto nearby protected forest areas. 34 31 Ghana Forestry Commission (2010) REDD Readiness Preparation Proposal submitted to Forest Carbon Partnership Facility. 32 Ghana Forestry Commission (2020) Final Benefit Sharing Plan Ghana Cocoa Forest REDD+ Programme 33 Ghana Cocoa Forest REDD+ Program (2019) Emissions Reduction Payment Agreement (ERPA) 34 Dugasseh, F. A., Adams, M. A., & Zandersen, M. (2024). Actor perceptions of the governance framework and non-carbon benefits from the Ghana cocoa forest REDD+ program: An extended Q-study of the Juabuso-Bia hotspot intervention area. Environmental Management, 1-21; Hawkins, J. W., Gallagher, E. J., van der Haar, S., Sevor, M. K., Weng, X., Rufino, M. C., & Schoneveld, G. C. (2024). Low-emissions and profitable cocoa through moderate-shade agroforestry: Insights from Ghana. Agriculture, Ecosystems & Environment, 367, 108961. 29 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Key activities involve the following: • Forest monitoring, • Reporting ERs to stakeholders, • Ensuring compliance with safeguards and grievance redress mechanisms, • Evaluation of the program’s adherence to environmental and social management frameworks and ensure proper use of funds through regular audits. 35  The program required the engagement of diverse stakeholders, including a wide range of public and private institutions, such as national and local governments, NGOs, the private sector, civil society, research organizations, and donors. Over 40 institutions were consulted throughout the design and planning stages. These consultations included the following characteristics: • They were hosted by the Joint Coordinating Committee (JCC), made up of officials from the Forestry Commission and the Cocoa Board, with the role of engaging private sector actors and defining their roles for successful implementation. • They were aligned with international agreements, such as the Bali Action Plan and COP16 decision to ensure full and effective participation of relevant stakeholders. • Consulted community representatives from various regions to discuss both carbon and non-carbon benefits, such as sustainable agriculture, ecotourism, biodiversity conservation, and alternative livelihoods. • Private sector actors such as cocoa companies focused on promoting climate-smart interventions across forest- cocoa landscapes. 36  Impacts  • Mitigation results: 4.35 million ERs verified and issued from the first and second reporting periods, resulting in a total payment of $21.76 million to Ghana, • Community development: funding was approved and disbursed for 300 community projects from the first round of ER payments, • Enhanced governance: all six HIAs have established inclusive community governance structures representing their communities and farmers’ groups, • Distribution of farmer inputs: a renewed focus on ensuring equitable, high-quality agricultural inputs for farmers in subsequent distribution rounds, 37 • Satisfactory safeguard performance: social and environmental safeguard systems in place, with active REDD+ safeguards sub-working group, strengthened protection of LCs’ rights, customs, and traditions as a key outcome and promoting high-integrity of forest credits, 38 • Non-carbon benefits: farmers adopting climate-smart cocoa agriculture practices, improving the yield of cocoa production. 35 Government of Ghana (2020) Final Benefit Sharing Plan Ghana Cocoa Forest REDD+ Programme (2020) 36 Forest REDD+ Programme (2017) Emission Reductions Programme Document of Ghana Cocoa 37 Satisfaction surveys conducted with around 1600 beneficiary farmers revealed some dissatisfaction with the agricultural inputs received as benefits, prompting a renewed focus by the National REDD+ Secretariat on improving the quality of these benefits in time for the second round of distribution. 38 World Bank (2024) Ghana Emissions Reductions Program: Implementation Status & Results Report . 30 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Strengths and weaknesses CRITERIA RATIONALE Environmental and When compared to project-based crediting approaches, jurisdictional approaches offer a number social integrity of integrity benefits: • They are considered better able to avoid risks of leakage and inflated baselines by accounting for all changes in net carbon stock within a jurisdiction. • Given their scope, they can also better avoid or reduce adverse impacts on local populations, including infringing on the rights of IPs and LCs. • Nonetheless, risks relating to additionality and non-permanence remain largely the same as within project-based crediting. Scalability • One of the primary benefits of jurisdictional approaches is their potential for achieving larger- scale ERs and, more broadly, generating higher-level policy changes that may lead to more systemic change (e.g., across the agriculture and forestry sector). Uncertainties and In general, jurisdictional approaches are more complex to develop and manage than project- complexity based approaches, due to the following: • The number of stakeholders involved and the larger geographic area across which data gathering and MRV must be carried out. • They require longer-term planning and coordination by all stakeholders; robust and sustained political will, leadership and engagement by national or subnational governments; and the full and effective participation of local actors (including IPs, LCs, women, and underserved communities) in formal administrative and legal processes. • They rely on good governance at the subnational level and, as a result, can be vulnerable to delays or failures when governance issues arise. • For jurisdictional REDD+ reversal risks need to be managed, e.g., through buffer mechanisms. Further resources the Hashemite Kingdom of Jordan and Partnership for Market Readiness (PMR). World Bank, • Boyd, W. et al. (2018). Jurisdictional Approaches to Washington, DC. REDD+ and Low Emissions Development: Progress • BioCarbonFund Initiative for Sustainable Forest and Prospects. Working Paper. Washington, DC: Landscapes (2021). How BioCarbon Fund ISFL World Resources Institute. Programs Generate Emission Reductions Credits. • McCall-Landry, D. and McLaughlin, D. (2024). • World Bank (2024). Accelerating Natural Climate Navigating Jurisdictional REDD+: A Pricing Guide Solutions for Forested Landscapes: Key Lessons for Tropical Forest Nations. Environmental Defense from FCPF and ISFL Evaluations. World Bank, Fund. Washington, DC. • CDP (2022). Landscape and Jurisdictional • Dyck, M., Streck, C. and Trouwloon, D. (2023). The Approaches: Opportunities to finance a nature- Voluntary Carbon Market Explained. Chapter 15: positive net-zero transition. How does REDD+ nesting work? Climate Focus. • World Bank (2020). Analytical report on Urban Crediting Methodology. Ministry of Environment of 31 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2.4 Policy crediting Introduction policies that deliver significant ERs across or within a sector, supporting their climate targets and decarbonization strategies. Table 5 presents key Policy crediting can help developing countries examples. achieve broader policy objectives, such as meeting their NDCs and sectoral priorities. This Payments for carbon credits from policy crediting approach responds to the need for scaled-up and can come from RBCF and potentially carbon markets transformative mitigation actions that go beyond with a first transaction already undertaken under investment projects or programs. compliance carbon market modalities. Proceeds can be used for paying for policy implementation costs (e.g., cost of equipment testing under efficiency Unlike traditional projects, it focuses on driving standards), compensation payments to households large-scale change by financing ERs generated and enterprises potentially negatively impacted through the implementation and enforcement of (carbon pricing, subsidy reform), incentive payments policy instruments and regulations. This broader (e.g., under feed-in tariffs), and/or for fiscal revenue scope makes policy crediting an effective instrument generation. for governments aiming to implement impactful Table 5. Examples of policies suitable for policy crediting. POLICY INSTRUMENT SECTORS COVERED OBJECTIVES Carbon pricing instrument • Energy, transportation, • Price GHG emissions. (e.g., carbon tax) industry, and other sectors • Incentivize the use of low-carbon technologies. Fossil fuel subsidy reforms • Energy sector and low-carbon • Gradually reduce or phase out subsidies for fossil technologies fuels. • Promote clean energy alternatives while addressing social and economic impacts. Mandatory energy • Industry and industrial • Establish minimum efficiency standards for efficiency products appliances and equipment. • Phase out energy-inefficient products, reducing household energy consumption. Feebates for low-carbon • Transport and vehicles • Impose fees on high-emission vehicles and provide vehicles rebates for electric vehicles. • Encourage both consumers and manufacturers to adopt cleaner technologies. Background subsidies. Policy crediting helps address these barriers by identifying what is needed to implement the policy Policy crediting is a relatively new approach designed and how financing can provide solutions, such as to support the implementation of high-mitigation- strengthening technical and administrative capacities potential policies that governments often find or compensating potentially negatively affected difficult to implement effectively. These challenges households or businesses. vary by policy but commonly include insufficient public financial or human resources, limited technical expertise, and weak enforcement mechanisms. Additionally, governments frequently encounter lobbying from industrial groups or resistance from consumers and households, particularly with price-based policies like the removal of fossil fuel 32 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing How it works carbon tax or removing of fossil fuel subsidies. Unlike emissions inventories, which measure actual Policy-based carbon crediting requires innovative emissions after implementation, modelling provides MRV frameworks that can accurately capture the a controlled way to attribute changes solely to the ERs achieved through policy actions rather than just policy. 39 project-level activities. The calculation of the baseline • Monitoring market penetration rates. A key tool and ER outcomes depends on the policy type, based for assessing ERs, particularly for regulatory policies on two main methods: such as energy efficiency standards. It involves • Economic modelling. Economic modelling is systematically tracking the adoption of low-carbon suitable to quantify the mitigation impact of technologies to assess the impact of a policy or price-based policies such as implementing a regulation. Box 6 presents a case study of a carbon crediting program generating ERs from a policy intervention. BOX 6 THE TRANSFORMATIVE CARBON ASSET FACILITY (TCAF) AND THE INNOVATIVE CARBON RESOURCE APPLICATION FOR ENERGY TRANSITION PROJECT (iCRAFT) IN UZBEKISTAN. Brief overview The iCRAFT program implemented between TCAF and the Government of Uzbekistan is the world's first policy crediting program and the first international carbon market initiative in Uzbekistan and Central Asia under Article 6 of the Paris Agreement. TCAF was the first facility to promote and implement policy-based carbon crediting. TCAF, a trust fund of the World Bank, supports developing countries' efforts to implement transformative policies and economy/sector- wide programs beyond project-by-project mitigation activities. Examples include implementing carbon pricing policies, transport, climate-smart agriculture, urban programs, and greening the financial sector. The Facility emphasizes supporting policy reforms and institutional capacity building to create a long-term impact and lay the groundwork for sustained decarbonization. TCAF offers a hybrid funding structure through i) RBCF disbursed as RBPs to support the implementation of NDCs under Article 9 of the Paris Agreement, with the verified ERs remaining in the country and ii) carbon markets- based finance, under Article 6 of the Paris Agreement, which requires ERs to be transferred as Internationally Transferred Mitigation Outcomes (ITMOs). 40 The Innovative Carbon Resource Application for Energy Transition Project for Uzbekistan (iCRAFT) 41 iCRAFT aims to create incentives for energy subsidy reforms that will result in lower energy consumption and GHG emissions, seeking a dual benefit: implementing subsidy reforms while protecting vulnerable households and reinvesting revenues into energy efficiency, energy reforms, and renewable energy initiatives. Uzbekistan’s economy has traditionally relied heavily on its substantial natural gas reserves, which account for 83% of primary energy consumption and 80% of the electricity mix. This reliance, coupled with below-cost tariffs and significant energy subsidies (6.6% of GDP in 2020), has made Uzbekistan's energy sector one of the most energy- intensive globally, leading to inefficiency and waste. Despite this, the country faces gas production peaking in 2024–2025 and widespread shortages in heating and electricity services due to underinvestment. 39 TCAF (2021) Supporting transformative mitigation action in developing countries through results-based payments for verified emission reductions. 40 For more information, see The Transformative Carbon Asset Facility website. 41 TCAF (2022) Program overview: Uzbekistan iCRAFT. 33 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Key information on the impact in ERs of the program:  • Annual ERs: 3.6 MtCO2e (achieved in the first monitoring period – year 2022) • Potential ERs over the program lifetime: 10 MtCO2e per year • Payment period: 2021-2027 • Volume of ERs paid for: 1.3 MtCO2e under RBCF, 0.8 MtCO2e under Article 6.2 of the Paris Agreement • Price of ERs: USD 15/tCO2e under RBCF, USD 30/tCO2e under Article 6.2 of the Paris Agreement • Size of grant: USD 46 million, including USD 43.3 million for carbon credits under RBCF and Article 6.2 of the Paris Agreement Approach As part of the iCRAFT program, TCAF will provide technical assistance to the government of Uzbekistan to identify the country’s needs regarding policy, technical, and regulatory aspects required for carbon crediting transactions under Article 6 of the Paris Agreement. This support will also provide a roadmap to define a clear Article 6 strategy and understand the infrastructure needs, such as registry requirements, to meet the transparency and integrity requirements of Article 6 for tracking and transacting ITMOs. The program will help generate carbon credits that the government can sell in international carbon markets. Until 2028, iCRAFT will disburse RBPs to reward the phase-out of energy subsidies to reduce GHG emissions. A part of those being transferred as ITMOs to TCAF and another part staying in Uzbekistan for domestic NDC compliance following the hybrid structure of TCAF transactions as explained above. Impacts (2022 data from baseline) 42 The TCAF program is distinguished by its focus on achieving transformational impacts, which are evident across various categories and economic sectors: • Policy: 179.97 MW installed capacity of renewable energy, improved social security to more than three million households, and reduced fossil fuel subsidies by USD 21,038 million, • Technology: increased the import of 277,257 energy-efficient appliances, • Financing: reduced spending on fossil fuel subsidies in the USD billions p.a., • People: 2.7 million new green jobs, social acceptance of tariffs reforms (electricity 16.3% and natural gas 9.7%) • Environmental: improved air quality by reducing annually 1,720 kt of SO2, 2,688 kt of NOx, and 1,288 kt of NMVOC, • Sustainable Development Goals (SDGs): contribution to climate action (SDGs 3, 12 and 13), energy security (SDGs 13 and 11) and sustainable development (SDGs 1, 8 and 9). 42 TCAF (202) Program overview: Uzbekistan iCRAFT. 34 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Strengths and Weaknesses CRITERIA RATIONALE Environmental and • Policy crediting can achieve deep and transformative decarbonization. social integrity • Additionality demonstration and baseline setting are the main methodological challenges for policy crediting. • Depending on the policy type, policy crediting can play a major role in supporting the social integrity of policies, e.g., for subsidy reform policies. Scalability • Policy crediting responds to the need for scaled-up and transformative mitigation actions that go beyond projects and programs. • One of the primary benefits of policy-based approaches is their potential for achieving larger- scale ERs and, more broadly, generating higher-level policy changes that may lead to low- carbon transformation in several sectors of the economy. • Encourages governments and large organizations to adopt comprehensive climate policies, leading to more sustainable, long-term ERs. Uncertainties and • The challenges of policy crediting include technical complexities in baseline setting, complexity attribution, and monitoring. Addressing these requires robust methodologies, institutional capacity, and strong stakeholder coordination to ensure policy crediting delivers credible, scalable, and equitable outcomes. • Accurately measuring and verifying the impact of broad policies can be more complex and uncertain than project-based approaches. • The effectiveness of policy-based crediting is highly dependent on the stability and enforcement of the underlying policies, which could be subject to political changes. Further resources • World Bank (2023). Results-Based Climate Finance to Support Mitigation Policies in Developing Countries. • TCAF (2021). Supporting transformative mitigation action in developing countries through results- based payments for verified emission reductions. 35 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2.5 Sectoral crediting Introduction the grid mix can define a sectoral crediting program (Table 6). Sectoral crediting generates carbon credits Payments for credits from sectoral crediting based on sectoral targets that need to be programs can come in the first phase mainly from overachieved to generate ERs. The scope of this RBCF and then potentially from (compliance) carbon approach is defined by specific economic sectors markets. Proceeds can be used to pay for related or subsectors, such as the agricultural sector or policy implementation costs (see policy crediting) rice production subsector. 43 and/or to provide reward and incentive payments to key stakeholders in the respective sector (see jurisdictional crediting). For instance, in the energy sector, establishing sectoral targets for the share of renewable energy in Table 6. Examples suitable for sectoral crediting. SECTOR DEFINITION OBJECTIVES Transport • Gradually reduce circulating vehicles with high GHG emissions per kilometer driven. • Encourage low-carbon transport service supply and demand. Energy • Promote renewable electricity generation and phase out fossil fuels. • Promote clean energy alternatives. Agriculture, rice subsector • Reduce methane emissions from improved water management practices in rice cultivation. • Foster low-carbon rice production. Background to set baselines of sectoral approaches with these benchmarks, the EU sought to ensure that ERs The European Commission originally proposed generated in other jurisdictions would represent sectoral crediting as a reform of the CDM for genuine and significant improvements over existing advanced developing countries and highly practices, avoiding the risk of over-crediting and competitive economic sectors. Sector-wide promoting alignment with robust climate policies. 45 mechanisms were meant to overcome the limitations of project or programmatic carbon crediting. 44 However, this approach has not yet been tested. How does sectoral crediting work? The EU proposed using EU Emissions Trading System In sectoral crediting, ERs are quantified against a (EU ETS) benchmarks as a reference for setting the sector-wide baseline that can be defined based on baseline in sectoral crediting approaches. These gross emissions, emissions intensity, or technologies. 46 benchmarks reflect the performance of the most The unique feature of sectoral crediting is setting a efficient installations within specific sectors covered fixed baseline ex-ante for the entire sector, which is by the EU ETS, providing a standard for setting the compared with measured sectoral emissions ex-post baseline and estimating ERs in other jurisdictions (i.e., as opposed to using modelling tools to estimate without an ETS in place. By aligning the approach the baseline in policy crediting). 43 Environmental Defense Fund. (2011). Sectoral crediting: Getting governance right (Transparency International Briefing). 44 European Commission. (2009, January 29). Questions and answers on emissions trading and national allocation plans (MEMO/09/34). 45 European Commission. (2009, January 28) Towards a comprehensive climate agreement in Copenhagen. 46 Baron, R., B. Buchner and J. Ellis (2009), Sectoral Approaches and the Carbon Market , OECD/IEA Climate Change Expert Group Papers, No. 2009/03, OECD Publishing, Paris. 36 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Figure 8 presents an example of how sectoral implementation, the two organizations of this sector, crediting works. Prior to the crediting approach in A and B, reduced their emissions, emitting 40 tCO2e, place, the total emissions of a certain sector sum 50 which created a 5 tCO2e reduction below the sectoral tCO2e (per unit of output). The government sets an baseline. This reduction can be credited and generate ex-ante baseline of 45 tCO2e as a reference level, financial revenue that the government, e.g., distributes designs policies to drive ERs, and develops an MRV proportionally to each organization’s ERs. system to follow up during implementation. After Figure 8. Sectoral crediting operation. Source: Baron, R., Buchner, B., & Ellis, J. (2009). Sectoral Approaches and the Carbon Market. Box 7 presents an example. BOX 7 HYPOTHETICAL CASE: LIGHT-DUTY VEHICLES EMISSION STANDARD A government implements a measure to reduce transport emissions by establishing new standards for light- duty vehicles’ gCO2e/km emissions that are aligned with the EU’s regulations. The transport sector is the country's main consumer of fossil fuels, consequently becoming the highest GHG emitter sector. Within the sector most emissions are caused by on-road vehicles. In its NDC the country unconditionally committed to reduce transport emissions by 10% and the proposed intervention would go beyond this ambition, proving its additionality. Prior to implementing the regulation, the country sets a conservative baseline that captures the expected sector emissions under the NDC target. During implementation, the progressive introduction of light-duty vehicles that comply with the regulation lowers the sectoral emissions relative to the baseline, overachieving the NDC target and qualifying for carbon crediting. The country sets up the MRV framework to oversee the intervention impact, and independent bodies oversee the MRV framework to ensure transparency and accuracy. The country monetizes the achieved ERs as carbon credits in accessing carbon market or RBCF funding. The carbon revenues are used to sustain transport sector decarbonization through various measures. This intervention contributes to a cleaner transport sector and reduces reliance on fossil fuels. Additionally, its design facilitates ERs and strengthens the country's transport sector. In the long term, the transport sectoral intervention positions the country as a regional leader in sustainable transition. The successful implementation of sectoral crediting mechanisms paves the way for broader carbon pricing schemes, enhancing climate action at both national and international levels. 37 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Strengths and Weaknesses CRITERIA RATIONALE Scalability • Sectoral carbon crediting responds to the need for scaled-up and transformative mitigation actions that go beyond projects and programs. • Whole sector coverage, unlocking carbon revenues as a result. Sectoral approaches give host countries the flexibility to design and implement ambitious policies that exceed ER targets. • Paves the road for transitioning to an ETS. Sectoral crediting approaches require setting a conservative sector-wide baseline that can help to transition over time to an ETS. Uncertainties and • High dependency on external factors, which ends up in a high risk of generating ERs and complexity receiving related payments. • Incentives to individual sectoral entities (buyers of light-duty vehicles in the example) may be less direct and, therefore, weaker than those under project-based and programmatic crediting. Environmental and • Using emission intensity instead of gross ERs may compromise the environmental integrity of social integrity the credits generated, as the intensity can decrease while gross emissions increase with higher activity levels. • There is a risk of sectoral leakage as, typically, economic sectors show a high degree of interdependence. Further reading • Baron, R., Buchner, B., & Ellis, J. (2009). Sectoral Approaches and the Carbon Market, OECD/ IEA Climate Change Expert Group Papers, No. 2009/03, OECD Publishing, Paris. • Environmental Defense Fund (2011). Sectoral crediting: Getting governance right (Transparency International Briefing). • European Commission (2009, January 28). Towards a comprehensive climate agreement in Copehagen. • European Commission (2009, January 26). Questions and answers on emissions trading and national allocation plans (MEMO/09/34). • Sri Lanka (2019). Sri Lanka Climate Finance for Renewables Project. Carbon Partnership Fund (CPF). 38 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 2.6 Economy-wide crediting Economy-wide crediting approaches extend to meet the thresholds for large-scale crediting the inventory-based approach of sectoral or programs. These nations can access international jurisdictional crediting to a country’s entire carbon markets by aggregating reductions across the economy, establishing a single target line for ERs economy. Despite its promise, the lack of practical across all sectors. Countries earn carbon credits examples underscores its conceptual nature, raising for ERs exceeding this target, often linked to their questions about its feasibility and potential challenges NDCs. in implementation. This approach represents an innovative progression of inventory-based crediting with the scalability and adaptability to address diverse This approach resembles international emissions global mitigation needs. trading under the Kyoto Protocol, where countries traded Assigned Amount Units (AAUs). The main To get started with economy-wide crediting, SIDS are difference lies in using carbon credits instead of AAUs likely to be the most relevant. These countries would and the broader application to a single aggregated benefit from an approach that allows them to cover inventory rather than sector-specific baselines. the totality of their national emissions. Funding could The novelty of this approach lies in its potential for come from RBCF sources and/or from selling carbon simplicity and inclusiveness, though it has yet to assets within cooperative approaches under Article be implemented in real-world contexts, leaving its 6.2 of the Paris Agreement. operational dynamics untested.  Proceeds can be used to pay for related policy One significant advantage of economy-wide crediting implementation costs (see policy crediting) is its applicability to smaller countries, such as small and provide reward and incentive payments to island developing states (SIDS), that might struggle key stakeholders in the respective sector (see to generate sufficient ERs within individual sectors jurisdictional crediting). 39 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing 3. SUMMARIZING OVERVIEW OF THE CREDITING APPROACHES This chapter provides a summarizing overview of This overview certainly does not address each stylized features of each crediting approach in possible case but focuses on the most common suggesting for each approach the main areas of features of each approach. Programmatic crediting, application, typical program entities implementing e.g., can, in principle, also be applied to large-scale the respective crediting program, possible use of projects, but so far, it has been mostly applied to proceeds (carbon revenues) within or beyond the small and micro-scale activities; policy crediting, e.g., program, typical funding source, methodological is also complex on MRV, and integrity risks are not just approach and methodology availability, main risks limited to additionality and baseline setting, but the to credit integrity, and overall advantages and latter are the most crucial for policy crediting. disadvantages of the respective approach. Stylized features of the crediting approaches Table 7. Project-based crediting. FEATURE DEFINITION Application Individual projects with large mitigation impact (renewable energy, landfills, wastewater facilities, industrial plants, NbS, etc.) Program entity Private or public enterprise Use of proceeds Closing cost/viability gaps of low carbon technologies and/or rewarding for mitigation behaviors and outcomes Funding source Carbon markets Methodologies Technology-based, high availability Integrity risks Additionality, leakage, and social integrity Advantages Well-established and easiest applicable crediting approach Disadvantages Limited potential for scale 40 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Table 8. Programmatic crediting. FEATURE DEFINITION Application Large number of standardized projects, most often small/micro scale (household devices, biodigesters, green buildings, etc.) Program entity Energy agencies, domestic development banks, technology providers Use of proceeds Funding of incentive payments, concessionality, price discounts Funding source Carbon markets, RBCF Methodologies Technology-based relying on sampling, high availability Integrity risks MRV of large number of dispersed mitigation activities, social integrity Advantages Well-established, facilitates low-income countries’/communities’ access to carbon markets and RBCF Disadvantages Substantial capacity needs of program entity Table 9. Jurisdictional crediting. FEATURE DEFINITION Application Geographically localized economic and/or conservation activities, in particular forestry and landscape management (prime example REDD+) Program entity Landscape governance/management entities (e.g., forestry departments, provincial governments, etc.) Use of proceeds Reward and incentive payments to broad range of critical stakeholders including farmers, LCs, IPs, authorities, etc. Funding source RBCF, carbon markets Methodologies Jurisdictional inventory-based Integrity risks Baselines and MRV both relying on substantial data availability and quality Advantages Large scale, avoidance of leakage risks, transparent and equitable distribution of benefits/ proceeds Disadvantages High complexity on governance and use of proceeds Table 10. Policy crediting. FEATURE DEFINITION Application Sectoral or economy-wide policies including carbon pricing, subsidy reform, efficiency standards, feebates, feed-in tariff schemes, etc. Program entity Government Use of proceeds Paying for policy implementation costs (e.g., cost of equipment testing under efficiency standards), compensation payments to households and enterprises potentially negatively impacted (carbon pricing, subsidy reform), incentive payments (e.g., under feed-in tariffs), fiscal revenue generation Funding source RBCF and potentially compliance carbon markets Methodologies Modelling or market indicator based, very low availability Integrity risks Additionality and baseline setting Advantages Transformative impact and scale Disadvantages High technical complexity and substantial capacity needs 41 Carbon Crediting – A Results-based Approach to Mobilizing Additional Climate Financing Table 11. Sectoral crediting. FEATURE DEFINITION Application Low-carbon transformation of high emitting economic sectors (power, waste, industry, transport etc.) through multiple policies and measures Program entity Government agencies (e.g. energy agencies) Use of proceeds Broad (see use of proceeds under both jurisdictional and policy crediting) Funding source RBCF and potentially compliance carbon markets Methodologies Sectoral inventory based, still to be developed, can build on similarities and experiences with jurisdictional crediting Integrity risks Sectoral leakage due to high interdependency of most economic sectors Advantages Transformative impact and scale Disadvantages Still untested in practice Table 12. Economy-wide crediting. FEATURE DEFINITION Application Small economies including SIDS Program entity Government Use of proceeds Broad (see sectoral crediting) Funding source RBCF and potentially compliance carbon markets Methodologies National inventory-based, still to be developed, can build on similarities and experiences with international emissions trading Integrity risks Baselines face high level of uncertainty of future economic development Advantages Scale and simplicity Disadvantages Still untested in practice Developing countries face immense financing The report can thus inform decision-making about challenges to implement their development which carbon crediting approaches may be most and green growth strategies, including climate appropriate for which kinds of policies, projects, or mitigation and adaptation. Carbon crediting can other interventions. This overview resource can be be an important and versatile financial instrument complemented by other more technical resources on to support and further incentivize these goals. how to apply such approaches in different sectors and contexts. The additional resources cited in this report can help policymakers and entities continue This report has aimed to provide an overview of on this journey. However, they are not intended to be carbon crediting approaches, focusing on the needs comprehensive, and one should strive to consult the of policymakers and program entities in developing latest information in the dynamic and complex field of countries implementing climate-related actions. It is carbon crediting. also interested in better understanding the potential carbon crediting opportunities related to these actions. 42