High Integrity, High Impact: The World Bank Engagement Roadmap for Carbon Markets Carbon markets could be a game changer in advancing climate action. But they have to be trustworthy, transparent, result in real climate mitigation and bring tangible benefits, especially for developing countries, if they are to make a real di erence. Like any e ective market, incentives need to be well-aligned, both buyers and sellers need confidence in the quality of the product and the price it will get, and that the transactions themselves are sound and sustainable. If done right, carbon markets can serve as a crucial mechanism for financing decarbonization e orts and significantly enhance financial flows to developing countries. By assigning a financial value to carbon reduction and removal, carbon markets encourage private sector engagement in projects that might otherwise struggle to secure funding, especially without a clear price signal. The World Bank Group (the Bank) has been supporting countries by providing technical assistance and financing to enable countries to generate, and now to sell, high integrity carbon credits in the forests and other sectors, and bring benefits to people and communities see a snapshot of our work in box 1. This has been an e ort over twenty years in the making—building the institutional structures and capacity, at the country and global levels, to help bring greater transparency and reliability to the global market. Through this support countries have generated unimpeachable credits—namely, of high quality and high integrity—and developed country systems to share benefits and fairly compensate people and communities. In just 15 FCPF countries—Chile, Costa Rica, Cote Box 1: Forest Carbon Partnership Facility, At-A-Glance: » 15 countries » Up to90% of the » 126 million » 270 million across Asia, Africa, results-based payments credits can be available credits by 2028, of and Latin America go to Indigenous for sale, of which 24 which 95 million Peoples and Local million in 2024 already generated Communities 1 High Integrity, High Impact d’Ivoire, Democratic Republic of Congo, Dominican Republic, Fiji, Ghana, Guatemala, Indonesia, Lao PDR, Madagascar, Mozambique, Nepal, Republic of Congo, and Viet Nam—these e orts are expected to produce over 270 million high integrity carbon credits over the next five years, which could earn between $1.3 billion and $3 billion for the countries and communities. To unlock the potential of carbon markets, the global community needs to do more. The Bank has ambitious plans, internally, and with others. Our Engagement Roadmap for Carbon Markets is designed around three key results: First, supporting countries to generate a robust supply of high integrity credits to unlock financing from carbon markets, building on the promising results and achievements across 15 countries to conserve and sustainably manage forests. These countries have been able to generate credits beyond contracted volumes, allowing them the option to sell those high integrity carbon credits and earn income from the international market. scale programs that include emission reduction results-based payment components to channel climate finance. Building on the successful forestry model, the Bank will expand e orts by supporting programs that focus on the energy transition, on mangrove restoration, soil organic carbon, regenerative agriculture, among others. These e orts are enhanced by Bank programs that build capacity in countries to set up the institutions, market infrastructure and regulations to generate and sell high quality carbon credits. Third, ramping up e orts to shape a sound, well-functioning and trusted global carbon market. Partnering with stakeholders, the Bank is ramping up its e orts to unlock the most building this market is not an end to itself: climate, people and communities will be front and center in our approach, ensuring that they benefit from e orts to build a livable planet. Carbon markets could be a game changer in advancing climate action. Countries and communities blessed with natural resources, such as forests, can generate millions, if not billions of dollars from new sources of revenue from protecting, preserving, restoring and regenerating them. Carbon markets are primed for growth. This is because of positive developments during COP26 around Article 6 of the Paris Agreement, whereby carbon credits can be traded to meet countries’ Nationally Determined Contributions, as well as growth in the self-regulated Voluntary Carbon Markets, driven by demand from companies to meet their voluntary climate commitments. Domestic compliance market instruments, namely Emission Trading Systems and carbon taxes, have also been growing in size and scope. While Voluntary Carbon Markets play a pivotal role in directing immediate climate finance, compliance and Article 6 markets are key to enhancing long-term goals. However, many countries still lack the institutional capacity and infrastructure to participate in compliance markets and Article 6 markets, and it will take time to fully establish these systems. This is why the supply of carbon assets under Article 6, namely, Internationally Transferred Mitigation Outcomes has not yet emerged and the Internationally Transferred Mitigation Outcomes market has yet to be established. In the interim, well-designed Voluntary Carbon Markets can be instrumental in facilitating payments for emission reductions, o ering a source of financing for climate actions. They also help build capacity to support compliance and Article 6 implementation. However, Voluntary Carbon Markets require strong governance, oversight, transparency and integrity to grow further, and unlock the much-needed climate finance today. 2 High Integrity, High Impact As both markets continue to evolve, stronger Voluntary Carbon Markets today can set the stage for robust compliance markets tomorrow. Trustworthy Voluntary Carbon Markets will increasingly provide companies with the opportunity to use them to meet their voluntary climate commitments. These markets serve as a bridge to further decarbonization as companies make the harder transitions to low-carbon energy sources, greening supply chains and transportation fleets and investing in energy e ciency. Voluntary Carbon Markets also o er a space for innovation and piloting of approaches that can inform future program design and implementation in compliance markets. Developing an e cient and transparent global architecture for Voluntary Carbon Markets and piloting Internationally Transferred Mitigation Outcomes transactions can lay a strong foundation for robust international and national carbon markets. In one word: trust. Sellers need to be assured their e orts will be fairly rewarded, buyers need to feel confident in the regulatory framework, and environmental integrity of the credits they purchase, and overall, there needs to be confidence that the global carbon market architecture is well-functioning and able to yield mitigation results at scale. The good news is that substantial work has been done to find solutions for each of these concerns, and possible landing zones exist (see Figure 1). But much more needs to happen from players across the carbon markets ecosystem to deliver trusted and scalable ecosystems and infrastructure to support transparent carbon markets, enhance climate ambition and channel climate finance. Figure 1: A Call to Action for Trusted, Transparent Carbon Markets Address Operationalizing integrity principles: Both demand and supply side principles have been developed for Voluntary Carbon Markets: these need to integrity be operationalized and where doubts persist further clarification and concerns standardization sought. by: Social inclusion: For instance, through benefit sharing plans and safeguards to mitigate any potential environmental or social risks. Reinvestments back into communities and livelihoods will be the bedrock of ensuring that carbon markets work for climate action and communities. Strengthen Harmonizing and standardizing across the carbon markets ecosystem: Minimum service standards, common frameworks, and clarity about institutions governance across the ecosystem of principles-setters, independent and market standards, registries, validation and verification bodies and rating agencies, are needed to enhance trust. infrastructure by: Connecting markets: Interoperability between different registries and trading platforms along with transparent and integrated market-level data can alleviate uncertainty and risk for buyers and sellers. Harnessing digital technologies and scaling their use: Technology today—smart meters, Internet of Things (IoT) devices, satellite imagery, remote sensing, Artificial Intelligence and Machine Learning—is enhancing the capacity for measuring, reporting, and verifying emissions and reductions and, if more fully deployed, could provide a much-needed boost to the market. Building country capacity, especially in emerging markets and developing economies: Several countries are progressing in developing national or regional policy frameworks and the infrastructure, such as registries and measuring, reporting and verification systems, for carbon market participation. This now needs to be matched with better technical and institutional capacity at the country level. Clarify rules Strengthening the regulatory regime: Clarity about the regulatory regime 3 governing markets is needed to remove market uncertainty. Addressing policy of the game High Integrity, High Impact and regulatory risks faced by private investors will be needed, as governments institutional capacity at the country level. Clarify rules Strengthening the regulatory regime: Clarity about the regulatory regime governing markets is needed to remove market uncertainty. Addressing policy of the game and regulatory risks faced by private investors will be needed, as governments by: start defining and regulating their carbon assets. Risks that need to be mitigated could include restrictions on export of carbon credits, revocation over carbon rights, and new taxes on carbon project development. Boosting financial integrity: Clarity about the legal nature of carbon credits, the governance of trading market architecture, price transparency, and rules to prevent fraudulent market activity, among others, is key to building trust. The Bank has ambitious plans to partner with others to unlock the potential of high integrity carbon markets, building on over 20 years of engaging in this space. Box 2: The Bank’s History with Carbon Markets Date Milestone 1999 Created the world’s (Prototype Carbon Fund) 2008 Launched the Forest Carbon Partnership Facility and pioneered jurisdictional approaches through REDD+ programs in 47 countries. This is followed by the creation of several other multi- donor results-based climate and carbon funds (e.g. BioCarbon Fund Initiative for Sustainable Forest Landscapes, Carbon Initiative for Development, Transformative Carbon Asset Facility, Carbon Partnership Facility). 2015 Partnership for Market Readiness program launched to support countries with their carbon pricing and carbon crediting policies. Partnership for Market Readiness evolves to Partnership for Market Implementation in 2021, supporting 30 countries to date. The International Finance Corporation issued $152 million Forest Bond that supports private sector forest conservation project in 2016. 2018 Initiated the Climate Warehouse which supports global carbon market infrastructure development by leveraging low-cost open-source technology to create an end-to-end digital ecosystem for a globally connected carbon market. 2020 The Climate Market Club is launched to develop approaches to operationalize carbon markets. Today it convenes it convenes 19 market participants, of which 14 are governments. 2022 Launch of SCALE—Scaling Climate Action by Lowering Emissions to provide concessional to mobilize additional private sector revenue through carbon markets. An associated fund, enhances gender equality and social inclusion. 4 High Integrity, High Impact 2023 Developed innovative carbon-link outcome bonds that mobilizes private sector investments for project implementation and provides investors a return linked to the issuance of carbon credits. The Bank also signs a first-of-a-kind climate policy crediting program to support Uzbekistan’s clean energy transition, energy efficiency and energy subsidy reforms: supporting policy reforms through payments for emissions reductions. This program under the Transformative Carbon Asset Facility constitutes the world’s first large-scale Internationally Transferred Mitigation Outcomes transaction. Our efforts have yielded significant results (see Box 3). And they have been grounded in global partnerships. We work with sovereigns interested in purchasing credits, as well as emerging markets and developing economies who want to sell credits, private sector entities, Multilateral Development Banks and United Nations agencies. The role, voice and participation of Indigenous Peoples and local communities are central to our approach—ensuring that their efforts are fairly rewarded. Box 3: Results and Impact Mobilization » $4.8 billion in carbon funds, with over $1.7 billion disbursed towards emission reductions since 1999 » Over 220m tons of GHG emissions reduced Technical » Building capacity in more than 60 countries, with both project-level support to assistance generate credits, and country-level support to set up infrastructure and institutions (registries, national measuring, reporting and verification systems, regulatory frameworks) Innovations » Developing jurisdictional methodologies in the forestry sector to minimize leakage » Financial product innovation—carbon-linked instruments » Open-source technologies to create a connected global carbon market via Climate Action Data Trust Knowledge » The Annual State and Trends of Carbon Pricing report, a flagship analytical piece and about carbon pricing and crediting activity Partnerships » Annual Innovate4Climate conference and Partnership for Market Implementation Global Knowledge Forum to convene stakeholders to find solutions to the most pressing issues in carbon markets » The Digital4Climate public-private forum to discuss digital technologies for carbon markets » The Climate Market Club which brings developed and developing countries together to address compliance markets bottlenecks The Bank is Scaling Its Ambition on Three Fronts: 1 Supporting countries to unlock financing from carbon markets Launched in 2008, the Forest Carbon Partnership Facility has supported 47 countries to develop large-scale programs to reduce emissions from deforestation and forest degradation, conserve and enhance forest carbon stocks, and sustainably manage forests (activities are commonly referred to as REDD+). Forest Carbon Partnership Facility programs are implemented according 5 High Integrity, High Impact to a robust methodological framework that assures high environmental and social integrity of credits. We work with third-party verifiers to ensure that emission reduction credits are: • Additional, namely that the emissions would not otherwise have been reduced; • Permanent, with mitigation measures in place to prevent the emission reduction being reversed • Measurable, using clear and acceptable standards; • Not double counted, by the buyer and seller; and • Do not lock in activities or investments that are incompatible with a country’s net-zero targets. Countries supported by the Forest Carbon Partnership Facility have made significant progress countries to monitor and verify results, while also distributing revenue through a benefit sharing plan that stipulates the use of payments received, advances access and decision-making for Indigenous communities over forest management and the use of revenues (see Box 4). Today, 15 countries—Chile, Costa Rica, Cote d’Ivoire, Democratic Republic of Congo, Dominican Republic, Fiji, Ghana, Guatemala, Indonesia, Lao PDR, Madagascar, Mozambique, Nepal, Republic of Congo, and Viet Nam—have signed emission reductions payment agreements with the Bank and have reported 95 million high-integrity carbon credits. Five of these countries—Costa Rica, Ghana, Madagascar, Mozambique, and Viet Nam—have completed at least one cycle of measurement, reporting and third-party verification and received payment, resulting in $90 million of results- based payments that are being shared with communities. The remaining 10 country programs are currently undergoing third-party verification. The Bank will continue to support countries, Box 4: Involving Local Communities to Drive Success “Many times, we believe that these issues “I think this is a very are only for men or only for a small group, important moment for and that is not the case. This issue is for indigenous territories everyone, because we are all a ected by and local communities climate change, we are all a ected to demonstrate that they by environmental pollution. This can be actors, can have type of thing a ects not only resources, invest them in one person, but the entire their communities, and population.” generate development.” —Florita Martinez Jimenez, from the —Maria Elena Herrera Ugalde, Douro Community, Cabe Carneiro FONAIFO, the Costa Rican Bori Indigenous Territory REDD+ organization Beyond the credits that the Forest Carbon Partnership Facility has contracted to purchase, these 15 programs are expected to generate up to 126 million credits by 2028, with approximately 24 million available as early as 2024. Countries can now decide how to use these credits— either count them against their own Nationally Determined Contributions or sell them in carbon markets, via: • Direct sales which allow for the highest degree of customization of transaction terms and translate to greater flexibility and privacy. Some countries like Ghana and Costa Rica have already entered into agreements with private buyers. 6 High Integrity, High Impact • Auctions which allow countries to make a specified amount of Forest Carbon Partnership Facility credits available to auction, which enables credits to be sold e ciently and competitively, establishing a fair market price for both buyers and sellers. Viet Nam is the first country in a position to choose to auction a portion of its Forest Carbon Partnership Facility credits. • Exchanges which list the credits for purchase on a platform: sellers list a minimum asking price or choose whether to sell to a bid price. The transaction is made via international carbon credit exchanges, where contract terms become standardized, and information can be shared transparently and equally with all market participants. For the remaining Forest Carbon Partnership Facility countries, we will set up a technical working group for forests and land to support additional Forest Carbon Partnership Facility countries to generate emission reduction credits. de-risking instruments, to mitigate regulatory and policy risks faced by private buyers of the credits. Design and implement large-scale emission reduction 2 programs in the Bank’s portfolio Beyond our forests’ programs, the Bank is now working to systematically design, implement and integrity carbon credits. energy, energy access; and natural climate solutions including mangrove restoration and low Work is already underway in such projects in Eastern and Southern Africa, Europe and Central technical assistance and project preparation funding to build country capacity and design projects • Instituting policies, procedures and financing modalities that will support the generation of monetizable carbon credits in World Bank-supported programs. • Continuing to leverage our existing carbon funds to provide the technical assistance and project preparation needed to build country capacity for generating high-integrity and high- quality credits and will seek additional contributions as needed in the context of expanded ambition. • Creating financial products such as carbon-linked bonds, which mobilize ex-ante from the private sector flows against future delivery of carbon credits. • Designing guarantee instruments for private sector buyers to hedge certain carbon market risks associated with the regulatory and policy uncertainties of the host countries, such Multilateral Investment Guarantee Agency products that would provide private investors with political risk guarantees to cover non-commercial risks related to carbon credits. 7 High Integrity, High Impact Deepen partnerships to unlock critical bottlenecks for carbon 3 markets expansion 5 We will further partner with actors in the carbon markets ecosystem: • By working with our client countries through country programs, the Partnership for Market Implementation, and other carbon funds, we will build capacity to set up essential carbon markets infrastructure, we will build capacity to set up essential carbon markets infrastructure, such as national registries and national measuring, reporting and verification systems, that connect to Paris Agreement reporting requirements, as well as carbon markets strategies, frameworks and regulations. • we will accelerate operationalization of integrity principles that give clarity to the market. These include the “core carbon principles” as defined by the Integrity Council for Voluntary Carbon Markets and claims corporates can make when they buy carbon credits under the Voluntary Carbon Markets Initiative. • By working with independent standards such as Verra, Gold Standard, American Carbon Registry, and others, we will boost market transparency by connecting data on carbon credits that currently reside in disparate registries through the Climate Action Data Trust, as part of the Climate Warehouse initiative. • By working with validation and verification bodies, we will support the standardization of the services provided by these bodies and develop standard protocols to support the use of digital measuring, reporting and verification, including smart meters, sensors, IoT, and the latest remote sensing technologies and Artificial Intelligence. • By working with independent carbon credit rating agencies, we will improve the consistency of the carbon credit rating framework. • By working with entities including the United Nations Framework Convention on Climate Change, the International Organization of Securities Commissions, International Institute for the Unification of Private Law and others, we will help establish frameworks that enhance the financial integrity of carbon markets, such as the legal nature of carbon credits, the governance and reliability of transaction registries; and the e ciency and governance of the carbon trading market architecture. We will partner with others. We will continue to strengthen collaboration with our donor community, that have historically supported our carbon markets e orts, and our client countries, who are looking to tap into carbon markets to generate climate finance flows and help in achieving climate ambitions. We invite others: philanthropic foundations, the private sector, countries and civil society to join us in this journey. High-integrity carbon markets can be a win-win for people and the planet, potentially generating millions, if not billions, for countries on the pathway to low carbon development. While there are challenges, the potential of carbon markets needs to be tapped and fully utilized. 8 High Integrity, High Impact Our goal is ambitious: starting with catalyzing high integrity, high impact supply from our own portfolio, and building the capacity of client countries to get prepared and utilize the opportunities that carbon markets bring, we are working with the carbon markets ecosystem to unlock bottlenecks that have hampered growth. Our success depends on us partnering with others, and you with us. And our goal is to scale trustworthy, high impact, and high integrity carbon markets that benefit developing countries, increase climate ambition, and help channel much needed climate finance today. 9 High Integrity, High Impact