76922 carbon �nance sustainabl development for sustainable 2011 ANNUAL REPORT mission statement Our mission is to support the global carbon market through catalytic initiatives that unlock private capital to mitigate climate change while supporting sustainable development and assisting the poorest communities in developing nations. The report covers the carbon funds, facilities and �nancial instruments managed by the World Bank during the period from January 1, 2011 through December 31, 2011. An online version of this report is available at www. carbon�nance.org/publications. Note: All dollar amounts are in U.S. dollars ($) unless otherwise indicated. The U.S. dollar/euro exchange rate used in this report is 1.30. All greenhouse gas emission reductions are reported in metric tonnes (equivalent to 1,000 kilograms) or carbon dioxide equivalent (tCO2e). This report is provided for informational purposes only. The carbon funds, facilities and �nancial instruments reported on are not legal partnerships. No warranties or representations are made as to the accuracy, reliability, or completeness of any information herein. carbon �nance for sustainable development 2011 ANNUAL REPORT Acronyms AAU Assigned Amount Unit BioCF BioCarbon Fund CDM Clean Development Mechanism CER Certi�ed Emission Reduction Ci-Dev Carbon Initiative for Development CFU Carbon Finance Unit (World Bank) CPF Carbon Partnership Facility ER Emission Reduction ERPA Emission Reductions Purchase Agreement EU ETS European Union Emissions Trading Scheme EUA European Union Allowance FCPF Forest Carbon Partnership Facility GHG Greenhouse Gas GIS Green Investment Scheme ha Hectare JI Joint Implementation LDC Least Developed Country LULUCF Land Use, Land-Use Change, and Forestry MW Megawatt MRV Measurement, reporting and veri�cation NAMA Nationally Appropriate Mitigation Action NGO Non-Governmental Organization PoA Programme of Activities PMR Partnership for Market Readiness REDD Reducing Emissions from Deforestation and Forest Degradation REDD+ REDD plus conservation, sustainable management of forests, and enhancement of forest carbon stocks R-PP Readiness Preparation Proposal tCO2e Tonne of carbon dioxide equivalent UN United Nations UNFCCC United Nations Framework Convention on Climate Change i l Carbon Finance 11 Annual Report Table of Contents From the Carbon Finance Unit ..............................................................................................1 Kyoto Market in Transition and New Low-Carbon Initiatives ......................................4 State of Trends on the Carbon Market ........................................................................4 Summary of Operations ............................................................................................................6 Distribution by Region and Sector .................................................................................6 2011 Highlights ............................................................................................................................8 Next Generation Carbon Initiatives.....................................................................................16 The BioCarbon Fund (BioCF) Tranche 3..................................................................18 Forest Carbon Partnership Facility ..............................................................................22 Carbon Partnership Facility ............................................................................................28 The Partnership for Market Readiness ......................................................................32 The Carbon Initiative for Development ....................................................................34 Who We Are................................................................................................................................38 Glossary ........................................................................................................................................40 Carbon Finance 11 Annual Report l ii Joëlle Chassard Manager, Carbon Finance Unit The World Bank From the Carbon Finance Unit This year’s Annual Report takes us through a very Secondly, a low price on carbon also becomes a long-term busy year with an abundance of activity as the end �nancing problem. It reduces the potential income of ongoing of the �rst commitment period of the Kyoto Protocol projects; without that secure future revenue stream, it is more dif�cult for projects to raise money. approaches and project developers are anxious to Finally, a low carbon price not only stymies mitigation, but get their projects registered so that they can see also affects the volume of resources available for other climate- the fruits of their labor in the form of carbon credits. related investments, be it through lower revenue flowing to the We signed 23 new purchase agreements in 2011; Adaptation Fund or from auctions of allowances in the EU ETS. seven of these were in sectors where we had seen A low price is de�nitely affecting the momentum of the relatively little activity in previous years, such as carbon market, but there are encouraging signs of recovery on forestry and land use. We are happy to be on the the horizon. The recent legislations adopted in Australia, South forefront of this, with our support of the �rst ever Korea, and Mexico are signi�cant indications of the resolve of soil carbon project, for which we also developed the these countries to address climate change in earnest and rely on methodology. Last year, we also saw the registration the market to give impetus to action. In our work with country of the �rst CDM household biogas project in clients over the course of the past year, several positive trends China, the �rst issuance of carbon credits from a have surfaced to reinforce that even as the existing carbon market CDM project in Nepal, the �rst inclusion of seven struggles, interest in the market continues, particularly among emerging economies. Partly with support from the Partnership for CPAs under the Uganda Municipal Waste Compost Market Readiness that was launched in April last year, countries Programme, and the �rst Programme of Activity in such as China, Brazil, and Mexico are taking the lead in developing the transport sector registered with the UNFCCC. national low carbon initiatives and piloting market-based instruments to achieve mitigation. All of this activity took place against the back-drop of a carbon Lower-income countries are also looking to carbon markets to market weakened by the global economic downturn as well as help them improve energy access, expand sustainable agriculture, long-term climate policy uncertainties. Unfortunately, we continue protect standing forests and bring low-carbon development to see a low price on carbon which is causing a domino effect on to scale. We are keen to support their ambitions and for this mitigation investments as well as overall climate �nance resources. purpose launched the Carbon Initiative for Development and a Firstly, a low price discourages entrepreneurs from launching third tranche of the BioCarbon Fund in Durban last December. new low-carbon investments. Without a respectable price for With these new initiatives in mind, we continue to take a long carbon—as mentioned by Madame Christine Lagarde, IMF term view of mitigation taking steps to �ll gaps in the market and Managing Director, at the World Bank’s Rio Breakfast at the recent help countries that are ready to take action now, pushing the Spring Meetings—we will not reach our goal for global emission climate agenda and carbon markets beyond the current model. reductions. Carbon Finance 11 Annual Report l 1 PCF NCDMF CDCF At the close of 2011, nearly all projects in the The Netherlands Clean Development The Community Development Carbon Fund Prototype Carbon Fund (PCF) portfolio had Mechanism Facility (NCDMF) has a mature (CDCF) now has 29 Emission Reductions generated Emission Reductions (ERs), and a portfolio that includes the �rst project ever Purchase Agreements (ERPAs). Fifty-�ve percent large share of the PCF’s Clean Development registered under the Kyoto Protocol’s CDM. of its portfolio is committed to projects in the Mechanism (CDM) projects had successfully All the projects in the NCDMF portfolio are world’s poorest countries, as de�ned by the completed the CDM project cycle and issued registered. World Bank Group’s International Development Certi�ed Emission Reductions (CERs). Association (IDA) and the United Nations’ Least Developed Country designation. Fund Capital $219.18 million Fund Capital * Fund Capital $128.6 million* Date Operational April 2000 Date Operational May 2002 Date Operational March 2003 Participants 22 Participants 1 Participants 25 Private Capital Invested 58% Private Capital Invested 0 Private Capital Invested 45% * Not disclosed. * Includes $5 million total participation of the Danish Carbon Fund. Danish Carbon Fund The Danish Carbon Fund (DCF) consists of 10 ERPAs in the Middle East, South Asia, East Asia, Latin America and Eastern Europe. Fund Capital €90 million Date Operational January 2005 Participants 5 Private Capital Invested 78% Spanish Carbon Fund Umbrella Carbon Facility Carbon Fund for Europe Divided into two tranches since 2008, the Consisting of 11 private sector participants plus With total capitalization of €50 million, the Spanish Carbon Fund Tranche 1 (SCF T1) �ve carbon funds administered by the World Carbon Fund for Europe (CFE) has signed eight consists of 18 signed ERPAs. In addition to Bank, the Umbrella Carbon Facility (UCF) holds ERPAs with a total amount of 3.2 million tCO2e. acquiring project-based ERs, Tranche 2 (SCF T2) a capital of €799.1 million, 78 percent of which participates in Green Investment Schemes (GIS). represents private investment. In 2011, the facility delivered 21.32 million tCO2e in CERs, bringing the total amount of emissions delivered Fund Capital €50 million since inception up to 82.90 million tCO2e Date Operational March 2007 TRANCHE 1 in CERs. Tranche 2 of the UCF was open to Participants 5 Fund Capital €220 million participation in 2010 and fully capitalized Private Capital Invested 20% Date Operational March 2005 in 2011 at €112.5 million. Participants 12 Private Capital Invested 23% TRANCHE 1 Fund Capital €799.1 million* TRANCHE 2 Date Operational August 2006 Fund Capital €70 million Participants 16 Date Operational April 2008 Private Capital Invested 75% Participants 1 Private Capital Invested 0% TRANCHE 2 Fund Capital €112.5 million Date Operational January 2011 Participants 4 Private Capital Invested 91% * Includes total €224.54 million participation of PCF, NCDMF, ICF, 2 l Carbon Finance 11 Annual Report DCF and SCF. Italian Carbon Fund BioCF NECF With a capitalization of $155.6 million, the The BioCarbon Fund (BioCF) has signed 23 The Netherlands European Carbon Facility Italian Carbon Fund (ICF) has signed seven contracts to purchase ERs from afforestation (NECF) is co-managed with the International ERPAs. The portfolio includes projects operating and reforestation activities, 15 of which have Finance Corporation (IFC) and supports carbon under the Kyoto Protocol’s CDM and JI been registered under the Kyoto Protocol’s CDM market operations in Ukraine, Russia, and mechanisms. up to the end of 2011, with the remainder in Poland. advanced stages of preparation. In addition, the BioCF is innovating with REDD+ and sustainable Fund Capital * land management projects currently excluded Date Operational August 2004 from the Kyoto Protocol. Participants 1 Fund Capital $155.6 million Private Capital Invested 0 Date Operational March 2004 TRANCHE 1 Fund Capital $53.8 million * Not disclosed. Participants 7 Private Capital Invested 30% Date Operational May 2004 Participants 14 Private Capital Invested 51% TRANCHE 2 Fund Capital $36.6 million Date Operational March 2007 Participants 7 Private Capital Invested 44% Forest Carbon Partnership Facility Carbon Partnership Facility Parnership for Market Readiness Operational since June 2008, the capital for The First Tranche of the Carbon Partnership In its �rst year of operation, the PMR raised the Forest Carbon Partnership Facility (FCPF) Facility (CPF) became operational on May 15, three-quarters of its targeted capitalization currently stands at $430 million. By 2011, 2010. The CPF’s Carbon Asset Development of $100 million from 11 donor countries. It 21 REDD Countries had received a formal Fund became operational January 2009. allocated $5.25 million* in preparation grants assessment of their Readiness Preparation (of $350,000 each) to its 15 Implementing Proposals; which is the �rst step in allowing Country Participants in order that they begin them to build capacity to tap into incentives preparing a “Market Readiness Proposal,� a under REDD+. roadmap for the design and implementation Fund Capital €143.5 million Fund Capital $430 million** of carbon market instruments, as well as the Date Operational January 2009 Date Operational June 2008 needed capacity building for such instruments. Participants 12* Participants 52* Private Capital Invested 31% Fund Capital $76 million Private Capital Invested 3% * 5 buyer participants and 7 seller participants. Date Operational April 2010 ** Includes $204 million for FCPF Carbon Fund, which has 10 Participants 26 participants. *15 �nancial contributors and 37 REDD country participants. *5 of these grants are expected to be awarded in May 2012. Carbon Finance 11 Annual Report l 3 Kyoto Market in Transition and New Low-Carbon Initiatives State and Trends of the Carbon Market CO2e, valued at US$148 billion. Trading volumes for secondary Kyoto offsets also soared in 2011, increasing by 43% year The carbon markets were not immune to on year (yoy) to 1.8 billion tons of CO2e, valued at US$23 the economic volatility of 2011. Carbon billion. This was propelled by increased liquidity in the CER prices plummeted toward the end of market and in nascent secondary Emission Reduction Unit the year as a result of increasing signs of (ERU) market. Largely driven by hedging and arbitrage, trading long-term oversupply in the EU Emissions volumes for all assets increased as annual GHG emissions in Europe declined for the second time in three years (primarily Trading Scheme (EU ETS), the backbone driven by weak industrial activity in the EU) and forecasts of the EU’s climate policy and the engine of compliance demand were dwarfed by an oversupply of of the global carbon market. However, allowances. As compliance demand and prices deteriorated, even as prices declined, the value of the the issue of whether current carbon prices can suf�ciently spur global carbon market increased in 2011, long-term low-carbon investments emerged in the debate, surfacing a key challenge in this market: an oversupply created driven predominantly by a robust growth in as a consequence of demand responding to the current transaction volumes. The total value of the macroeconomic scenario versus a pre-established supply market grew by 11 percent year on year, determined under very different market conditions. to US$176 billion, and transaction volumes reached a new high of 10.3 billion tons of State and Trends of the Carbon carbon dioxide equivalent (CO2e). Market Report 2012 Central to the rise in global transaction volumes, EU Allowance The State and Trends of the Carbon Market report is produced each year by (EUA) trading volumes increased, reaching 7.9 billion tons of the Carbon Finance Unit of the World Bank. The 2012 report, released at CARBON EXPO 2012 in Cologne, describes the carbon markets in 2011. It will be available in June 2012 in print and online nline line nl ne at in www.carbon�nance.org. 4 l Carbon Finance 11 Annual Report The global carbon market welcomed the news that the Australian Parliament had passed the ambitious Clean Energy Act, which will bring a nationwide cap-and-trade scheme to Australia by 2015. In addition, both Mexico and the Republic of Korea got their comprehensive climate bills passed a few days apart in April 2012. The value of the pre-2013 primary CER market declined adopted by the California Air Resources Board and is set to once again in 2011 as a consequence of the imminent end go into effect in 2013, covering 85% of California’s annual of the �rst commitment period of the Kyoto Protocol. Market emissions. Québec, which emits 12% of Canada’s annual value fell by 32% yoy to US$1.0 billion. The size of the ERU GHG emissions, adopted its own cap-and-trade plan, and and Assigned Amount Unit (AAU) markets also decreased, by the province is now working toward linking it with California’s 36% and 49% respectively. In stark contrast to this, the post- starting in 2013. In addition, both Mexico and the Republic of 2012 primary market increased by a robust 63% yoy to Korea got their comprehensive climate bills passed a few days US$2 billion despite depressed prices. Although China apart in April 2012. remained the largest source of contracted CERs, African These initiatives combined mean �ve new jurisdictions are countries—largely bypassed in the pre-2013 market—emerged adopting economy-wide cap-and-trade schemes. These events stronger in 2011 and accounted for 21% of post-2012 CERs are particularly noteworthy in contrast to 2010, when no such contracted during the year. Despite the increase in post-2012 initiatives were launched. Now the world looks with particular volumes, purchase agreements became less binding due to attention to China, which is also among the frontrunners in the lingering uncertainties regarding residual compliance demand race to become a low-carbon economy. Its advanced plan to and the eligibility of international credits in existing frameworks pilot several regional cap-and-trade schemes is expected to and schemes under development. provide the foundation for a nationwide scheme in the coming Against this backdrop, several domestic and regional low- years. carbon initiatives, including market mechanisms, gained traction in both developed and developing economies in 2011. The global carbon market welcomed the news that the Australian Parliament had passed the ambitious Clean Energy Act, which will bring a nationwide cap-and-trade scheme to Australia by 2015. In 2011, California’s cap-and-trade regulation was Carbon Finance 11 Annual Report l 5 Summary of Operations 6 l Carbon Finance 11 Annual Report In 2011, the Carbon Finance Geographic Distribution (by Active ERPAs) Unit’s carbon funds and facilities Middle East and North Africa 6% signed 23 new Emission Latin America and Africa 13% the Caribbean 25% Reductions Purchase Agreements (ERPAs), bringing the total number of active ERPAs to 160.* South Asia 15% The year 2011 was dedicated to reaping what has been East Asia and Pacific 23% sown during the past decade of project support. 25 projects Europe and Central Asia 18% and Programmes of Activities were registered with the UNFCCC after passing validation, of which 11 were forestry projects, indicating that projects in the afforestation/reforestation sector are moving forward. In 2011, 31 million carbon credits were delivered by projects compared to 16.7 million in 2010, a Sectoral Distribution (by volume of CO2e) 46% increase in the delivery of generated emission reductions. Furthermore, the Carbon Finance Unit extended the purchase period of 15 projects beyond 2012. The Unit continued its Energy Efficiency - Supply Side 0.5% Other 0.1% Solar 0.5% PFCs & SF7 0.2% cutting-edge work on policy and methodology issues and had Other 1.0% Energy Efficiency - Service 0.2% Energy Efficiency - Own Generation 1.0% Transport 0.3% several important methodologies approved by the UNFCCC. In Energy Efficiency - Industry 1.0% Fugitive 0.4% Energy Distribution 1.3% Geothermal 0.5% addition, a new work program on CDM reform was started. Afforestation 1.5% In more than a decade of work the World Bank funds Fossil Fuel Switch 2.1% Wind 2.2% and facilities have been responsible for the issuance of Methane Avoidance 2.2% approximately 106 million emission reductions of various types. Coal Bed/Mine Methane 2.3% Biomass Energy 2.4% Reforestation 2.5% N2O 2.6% Projects Value Volume (tCO2e) Energy Efficiency - Households 3.9% Landfill Gas 4.4% ERPAs Signed 160 $1.86 billion 229 million and Active Hydro 10.5% HFC-23 Destruction 56.5% Distribution by Region and Sector The Latin America and Caribbean region held the largest percentage of the carbon �nance unit portfolio in 2011 by number of active ERPAs, closely followed by the East Asia and Paci�c region. While the volume of emission reductions in Africa remains low at 4%, the number of active ERPAs in the portfolio in the Africa region is 18%,** substantially higher than the general percentage of projects in Africa registered under the Clean Development Mechanism, which remains low at 2%. As in past years, HFC-23 destruction projects represented the largest share of the carbon �nance portfolio by volume of emission reductions (56.5%), though accounted for by only two projects. The growth in ERA volume in 2011 was highest in the renewable energy sector and in the South Asia and Latin America regions. * This �gure includes cases where a project entity signs an ERPA with multiple funds. All such ERPAs are counted. **Africa is de�ned as North Africa and sub-Saharan Africa. Carbon Finance 11 Annual Report l 7 2011 Highlights ■ A 10-day South-South Exchange event on community forestry and REDD+ took place in Brazil in February and involved participants from six African countries meeting Brazilian counterparts ranging from government of�cials to forestry specialists, along with representatives from non-governmental organizations and the private sector, including forest reserves. The goal was to help these African countries better understand the role that community forestry and payments for ecosystem services Andrew Steer talks with Maurice Kwadha on his farm schemes can play in their national REDD+ strategies. in Kenya. They also learned about Brazil's emerging institutional framework for REDD+, including the Amazon Fund. ■ In February, Andrew Steer, World Bank Special Envoy for Climate Change, visited the site of an agricultural soil carbon project in Kisumu, Kenya. The Smallholder Agriculture Carbon Finance Project, supported by the Bank’s BioCarbon Fund, enables farmers to adopt new farming techniques which bring them the “triple win in agriculture�—higher yields, improved resilience of their crops to drought, and better soils that sequester more carbon. Ibi Bateke Carbon Sink Plantation Project in the Democratic Republic of Congo. ■ In March, the Ibi Bateke Carbon Sink Plantation Project in the Democratic Republic of Congo was registered with the UNFCCC, which means that the �rst carbon credits started flowing to the country. This reforestation project, covering 4,200 hectares of land, is the �rst CDM project registered and the �rst reforestation project in the DRC. The revenues generated by the sale of the carbon credits 8 l Carbon Finance 11 Annual Report The Smallholder Agriculture Carbon Finance Project, supported by the Bank’s BioCarbon Fund, enables farmers to adopt new farming techniques which bring them the “triple win in agriculture�—higher yields, improved resilience of their crops to drought, and better soils that sequester more carbon. . will �nance health, education, and agroforestry activities for the local community. ■ The India-Fal-G Brick and Blocks Project of the Community Development Carbon Fund was selected to sell its carbon credits to the International Monetary Fund as part of the institution’s move to become carbon neutral. The India project aims to reduce greenhouse gas emissions by promoting and deploying an energy-ef�cient India-Fal-G Brick and Blocks project of the Community brick-making technology. Development Carbon Fund aims to reduce greenhouse gas emissions by promoting and deploying an energy ef�cient ■ The Forest Carbon Partnership Facility (FCPF) held brick-making technology. its 8th Participants Committee meeting in Dalat, Vietnam, in March. A total of $14.2 million in new grant allocations were approved for Ethiopia, Vietnam, Cambodia, and Peru, and France committed an additional €4 million to the Readiness Fund. Also in March, the World Bank’s management and Board of Executive Directors approved the safeguards approach to be followed under the FCPF Readiness Fund and the opening of the Readiness Fund to several Delivery Partners. While more work was still needed on the modalities of opening up to other Delivery Partners, these two developments paved the way for grant agreements to be signed with REDD+ countries. ■ In April, Italy joined the FCPF's Readiness Fund, signing a Participation Agreement for $5 million. Italy became the 15th donor to commit funding to the Readiness Fund. Carbon Finance 11 Annual Report l 9 ■ In April, the World Bank’s Partnership for Market Readiness (PMR) held its organizational meeting in Bangkok. Twenty-nine countries and various organizations attended, and donor countries pledged �nancial contributions of $68 million—about 70% of the target amount of $100 million. The meeting adopted the PMR Governance Framework and con�rmed the expressions of interest of nine Implementing Country Participants. ■ The Hubei Eco-Farming Biogas Project issued its �rst carbon credits on May 11. This project, which is selling its certi�ed emission reductions to the Community Development Carbon Fund, is the �rst CDM household biogas project registered in China to generate carbon credits. With 33,000 individual households deriving biogas from pig manure, the project demonstrates innovative technical approaches and a credible process to trade carbon for household-based biogas projects. ■ On May 11, the Egypt Vehicle Scrapping and Recycling Programme was the �rst ever transport Programme of Egypt Vehicle Scrapping and Recycling Programme Activities to be registered under the CDM. It gives taxi owners the �nancial incentives to scrap cabs older than 20 years and provides them with lower prices and guaranteed �nancing for the purchase of new vehicles. Most importantly, the program paves the way for the sustainable and environmentally sound removal and recycling of old cars. ■ In May, the BioCarbon Fund organized a roundtable with a range of stakeholders to discuss the complex realities of Afforestation and Reforestation (A/R) projects and the issues they face in the application of CDM veri�cation requirements. This workshop created a basis for two 10 l Carbon Finance 11 Annual Report new guidelines, approved by the CDM Executive Board at their 63th meeting, that help to streamline the veri�cation of A/R CDM projects. ■ From June 1-3, 2011, the Carbon Finance Unit participated in the annual Carbon Expo in Barcelona, Spain. It is the principal annual conference focused on carbon �nance, and is co-hosted by the World Bank to showcase its support for current as well as post-2012 carbon markets through innovative �nancial instruments. The team's flagship publication The State and Trends of the Carbon Annual Carbon Expo in Barcelona, Spain. Market 2011 was launched at the event. Furthermore, the team started a work program on CDM reform and held a �rst expert workshop to discuss this topic. ■ The FCPF’s Carbon Fund became operational on June 1. The Fund, which is made up of three private sector and eight public sector participants, will provide 'payments for performance’, where emission reductions from REDD+ programs are veri�ed. ■ The FCPF’s 9th Participants Committee Meeting was held in Oslo in June. The Norwegian Minister of the Environment and Development Cooperation Erik Solheim Climate Change Envoy Andrew Steer and Norwegian Minister Solheim celebrate Norway's contribution to FCPF. and the World Bank’s Special Envoy for Climate Change Andrew Steer signed an agreement contributing $50 million to the newly launched FCPF Carbon Fund. In addition, Germany announced a new pledge of €30 million to the FCPF Carbon Fund. Also, $6.8 million in Carbon Finance 11 Annual Report l 11 The Unplanned Deforestation Methodology developed by the BioCarbon Fund was approved by the Veri�ed Carbon Standard Association which can help unlock carbon market revenues for countries and poor communities across Africa, Asia and Latin America, boosting the conservation of forests and creating new livelihoods. new grant allocations was approved for Liberia and ■ The Africa Carbon Forum was held on July 4-6 in Uganda, and three grant agreements of $3.4 million each Marrakesh, Morocco, bringing together stakeholders to support countries' REDD+ Readiness Preparation efforts working in carbon markets in Africa. At the event, the were signed prior to the meeting (for Nepal, Indonesia and BioCarbon Fund released a draft report which draws on the DRC). In addition, the Participants Committee approved seven years of experience of A/R projects in 16 developing a pilot Multiple Delivery Partner arrangement of �ve REDD countries. The report �nds that such projects face Country Participants, a Common Approach to numerous regulatory, capacity, �nance and land tenure environmental and social safeguards among Multiple issues. Despite these barriers, the projects are not only Delivery Partners, and approved the Inter-American mitigating climate change by contributing to the storage Development Bank and the United Nations Development of carbon dioxide, they are also improving rural livelihoods, Programme to act as the �rst Delivery Partners under increasing resilience to climate change, conserving the Readiness Fund in countries where the World Bank is biodiversity, and restoring degraded lands. not active. This was a key development in the life of the ■ Also in July, the Unplanned Deforestation Methodology FCPF, which should improve the service coverage to REDD developed by the BioCarbon Fund was approved by the Country Participants.. Veri�ed Carbon Standard Association. This can help ■ The Carbon Finance Unit’s Policy and Methodology Team unlock carbon market revenues for countries and poor contributed to the World Bank’s working paper Carbon communities across Africa, Asia and Latin America, boosting capture and storage in developing countries: a the conservation of forests and creating new livelihoods. perspective on barriers to deployment, published in The new methodology allows projects in the voluntary June, and led the preparation of the chapter on the role market to calculate avoided emissions by reducing of climate �nance sources in accelerating CCS unplanned deforestation either on the edge (“frontier�) demonstration and deployment in developing countries. of large cleared areas, like agricultural zones, or in a The report suggests that a range of support mechanisms, patchwork (“mosaic�) within standing forests. both market and nonmarket approaches working in ■ In August and September, the Nepal Biogas Project tandem at the national and international levels, may be received its �rst carbon credits. This was the �rst CDM required to support different types of CCS projects project in Nepal and the �rst household biogas CDM throughout their lifetime. project registered with the UNFCCC worldwide. The issuance of about 92,000 CERs marked a signi�cant milestone, as it was one of the largest issuances ever made in a least developed country. 12 l Carbon Finance 11 Annual Report ■ On September 19, the Minister of Environment of the Czech Republic signed an agreement with the World Bank to purchase an additional 2.6 million Assigned Amount Units (AAUs) under the country’s Green Investment Scheme, a second phase of an agreement that was signed in May 2010 for 2 million AAUs. The objective of the GIS program is to support selected measures in residential buildings that will lead both to reductions in carbon dioxide emissions and to the initiation of a long-term trend toward sustainable housing. ■ The Spanish Carbon Fund, the Carbon Fund for Europe, The Spanish Carbon Fund, the Carbon Fund for Europe, and the Polish Ministry of the Environment signed and the Polish Ministry of the Environment signed two agreements in October to help increase the energy two agreements in October to help increase the energy ef�ciency of public buildings in Poland. ef�ciency of public buildings in Poland. These agreements serve as a contribution towards the Polish Government’s Green Investment Scheme initiative called the Energy Management in Public Buildings to combat climate change and generate a revenue stream from carbon credits. ■ In October, the FCPF hosted its 4th Participants Assembly Meeting, its 10th Participants Committee Meeting and its 2nd Carbon Fund Meeting in Berlin. The Central African Republic and Colombia presented their Readiness Preparation Proposals (R-PPs) and were allocated grants totaling $7 million; Guatemala and Mozambique presented their draft R-PPs. Participants also discussed the The FCPF hosted its 4th Participants Assembly Meeting, its 10th Participants Committee Meeting and its 2nd lessons learned from the Technical Advisory Panels’ Carbon Fund meeting in October. reviews of the 26 country R-PPs presented to the FCPF to date. A Readiness Preparation grant was signed with Carbon Finance 11 Annual Report l 13 Ghana in October. The Food and Agriculture Organization was also approved to be a Delivery Partner for the FCPF. The size of the Multiple Delivery Partner arrangement was increased to 10 REDD Country Participants. ■ In October, the PMR held its second Partnership Assembly meeting in Istanbul with its 15 Implementing Country Participants. The PMR also hosted its �rst technical workshop, on the topic of Mitigation Programs for Scaled- up Crediting Mechanisms, including concrete studies from three different areas: the housing sector in Mexico, geothermal energy in Indonesia, and opportunities for multi-sector initiatives, such as city-wide mitigation initiatives. ■ Also in October, the Policy and Methodology Team carried out a consultation in Paris with representatives from developing countries and Annex I countries on CDM reform and standardized baselines to support the work on this topic by the Carbon Finance Unit. ■ In November, the Uganda Nile Basin Reforestation Project became fully registered. This brought the total number of afforestation/reforestation projects in Africa that are registered with the UNFCCC to nine—eight of which are BioCarbon Fund projects. ■ On December 5, the Carbon Partnership Facility (CPF) Uganda Reforestation Project. signed its �rst ERPA with Caixa Economica Federal, a municipal lending agency in Brazil. Caixa will sell three million carbon credits to the CPF’s carbon buyers to capture methane gas from land�lls, implementing a key environmental priority in Brazil while making a broader contribution to climate change mitigation. By combining a 14 l Carbon Finance 11 Annual Report World Bank loan and a programmatic carbon �nance emissions from chicken manure by improving its operation, it is a valuable innovation in the �nancing management at chicken farms and using a biogas- programs that produce environmental bene�ts. cogeneration system to supply cleaner power to a grid ■ In December, Germany formalized its contribution of an mainly based on fossil fuels. additional €30 million to the FCPF, making Germany ■ In late December, the Adoption of Sustainable the largest contributor to the FCPF. To respond to forest Agricultural Land Management Methodology country needs, the size of the FCPF Readiness Fund and developed by the Carbon Finance Unit was approved Carbon Fund grew to $230 million and $204 million, by the Veri�ed Carbon Standard. It allows projects to respectively, by the end of the year. This expansion will generate carbon credits by introducing sustainable enable the private sector and governments to contribute land management practices in degraded agricultural additional resources to the two funds. landscapes. The approval of this methodology is an ■ Also in December, Denmark pledged $5 million to the important step in supporting climate-smart agriculture Partnership for Market Readiness, bringing total pledges through linkages between agricultural productivity, to $75 million. adaptation and climate change mitigation. ■ At the 17th Conference of the Parties in Durban in December, the World Bank announced two new �nancial initiatives—the Carbon Initiative for Development and the third tranche of the BioCarbon Fund. Both initiatives will help poor countries access �nancing for low-carbon investments and enable them to tap into carbon markets after 2012 by selling carbon credits from a diverse range of projects. ■ On December 27, the China Shandong Minhe Animal Manure Management System Project, which treats the Uganda Reforestation Project. manure from 5 million chickens in 16 farms, supported by the Community Development Carbon Fund, issued its �rst carbon credits. This project is the �rst and only CDM project applying manure management systems methodology ACM0010 that has issued carbon credits. It is also the �rst CDM project in China to mitigate Carbon Finance 11 Annual Report l 15 Next Generation Carbon Initiatives 16 l Carbon Finance 11 Annual Report As the �rst commitment period of the Kyoto Protocol comes to a close, the World Bank is looking toward the future and has, in the last several years, launched a number of initiatives that support the growth of carbon markets beyond 2012. Such ‘next generation’ carbon initiatives focus on moving from project to program-based activities in order to scale up the impact of low-carbon activities; they strengthen our support for activities in the areas of forestry, land use, and access to energy in the poorest countries; and they provide technical and �nancial support to help set up domestic emissions trading schemes and other activities in developing and emerging- market countries. Momentum among developing and emerging-market countries to take domestic action is building; the World Bank is designing initiatives to leverage it. Carbon Finance 11 Annual Report l 17 The BioCarbon Fund (BioCF) Tranche 3 18 l Carbon Finance 11 Annual Report www.biocarbonfund.com To date, the BioCarbon Fund (BioCF) has committed $90 million to over 20 afforestation and reforestation projects as well as to three avoided deforestation, soil carbon and agriculture pilots. It has contributed to the development of the carbon market for land-use offsets through the development of these projects and through the development of methodologies and tools for project developers. Carbon sequestration from changes to land use remains a largely The BioCF T3 is now actively seeking funding of $75 million untapped opportunity, particularly in low income countries. This for two funds. A sub-fund dedicated to the purchase of emission situation is changing however, with new regional and international reductions is seeking $60 million (minimum contribution $2.5 developments that are opening up markets to forest and land-use million) with windows that cater to purchasing credits from the credits. voluntary and/or regulated markets; a sub-fund for technical Tranche 3 of the BioCarbon Fund (BioCF T3) was launched assistance, �nancing and testing of non-ER generating activities—is in December 2011 to build on the Fund’s considerable on-the- seeking $15 million (minimum contribution $1 million). ground experience and success while expanding the BioCF to new Financing will be sought from numerous sources, including both strategic areas. The next phase of the Fund will focus on i) scaling- donors and current participants. These sources will be linked to up afforestation/reforestation and regeneration of degraded lands; innovative �nancing operations to achieve scale, and will include ii) piloting areas not yet tested for agricultural land use which have fast-start climate �nance, or green bonds. Innovative �nancing signi�cant greenhouse gas emissions potential, including methane developed in parallel will likely need to incorporate some up-front emissions from rice paddies, grasslands and pasturelands, and investment which the BioCF T3 could provide. wetlands and coastal areas; and iii) exploring how new approaches such as “landscape accounting� can be put into practice. Such a breakthrough approach will include an ef�cient accounting mechanism for a variety of land-use and energy activities within a de�ned large-scale boundary. As Tranche 3 activities scale-up, they will be cognizant of national readiness frameworks within which or based on which future BioCF operations would be designed. Although the volume of carbon credits generated has been the main indicator of project success to date, additional bene�ts are also generated in land-use projects. Tranche 3 will also aim to pilot ways to quantify and subsequently value such co-bene�ts using some of the techniques deployed for robust carbon accounting. In time, this approach could be coupled with payments for ecosystem services. Carbon Finance 11 Annual Report l 19 Aim and New Features the measurement, reporting and veri�cation (MRV) approach to carbon accounting could be applied to the monetization of other The aim of the next phase of the BioCarbon Fund is to use climate ecosystem services; or whether an independent system should �nance to catalyze large-scale regeneration of degraded lands and be established. This approach would also involve actors under the sustainable land management. The focus will be on land areas that UN Convention on Biological Diversity and the UN Convention to are deforested and degraded that can be rehabilitated by better Combat Deserti�cation. A variety of pilots are envisioned in different agricultural practices, and/or through reforestation, and/or those landscapes in partnership with biodiversity and wildlife conservation areas that interface with REDD+ boundaries. entities. In the long-term, it is envisioned that biodiversity bene�ts Integrated landscape carbon accounting would be the �rst in a framework developed for making payments The BioCF T3 will build upon experience to-date and break down for a variety of ecosystem services. existing silos, where A/R, REDD+, agriculture and energy are treated Improved access for poor rural communities to environmental separately, in order to pilot a landscape and ecosystem approach. markets and safeguards This will involve greenhouse gas emission reduction activities with An approach that speci�cally improves access to markets by the signi�cant potential that have not yet been explored in developing poorest communities is important. Equally, the nexus of people and countries, including improved grasslands and pastureland land issues will not be overlooked; the Funds activities will conform management and trees outside the forest (agroforestry). There are to the World Bank’s environmental and social safeguards, with important synergies in the landscape approach, but also trade-offs, special attention to bene�t sharing. i.e., opportunity costs will be encountered. This work will also be complimentary with other activities supported by the World Bank Scaling-up such as access to energy and REDD+.. The need for scaling-up is supported by requests to the BioCF from both project entities and project host countries that want to apply Additional payments for ecosystem and environmental services beyond carbon the knowledge acquired from implementing projects to larger- scale interventions. Since most experience to date revolves around The BioCF T3 will test different models for determining premia or projects, there will be challenges in attaining scale. With a landscape stand alone payments, and for understanding the optimal way of approach, scaling up from the project level to the jurisdictional bundling or stacking a carbon asset with a premium for biodiversity level (i.e., a sub-national scale within a de�ned boundary) is the or similar asset. This has been tested to a limited degree by the natural progression. New tools, such as standardized baselines, will BioCarbon Fund by factoring environmental bene�ts into the be tested. Scaling up will aim to match national and sub-national contract price for carbon. The new approach would further whether criteria countries may be developing. 20 l Carbon Finance 11 Annual Report The aim of the next phase of the BioCarbon Fund is to use climate �nance to catalyze large-scale regeneration of degraded lands and sustainable land management. The focus will be on land areas that are deforested and degraded that can be rehabilitated by better agricultural practices, and/or through reforestation, and/or those areas that interface with REDD+ boundaries. Financing Tranches 1 and 2 of the BioCarbon Fund were not geared to providing up-front �nancing for projects. This was a signi�cant challenge for project developers. As a result, it is proposed that BioCF T3 will:: i) make provisions for some up-front �nancing for project entities (or else it will not be possible to embark on projects aiming for scale); ii) aim for a blend of �nancing with the Bank using its leveraging power, and co-invest alongside other public and private sector entities; and (iii) support innovative �nancial approaches that help close the early-stage funding gap. Carbon Finance 11 Annual Report l 21 Forest Carbon Partnership Facility 22 l Carbon Finance 11 Annual Report www.forestcarbonpartnership.org 2011 marked a clear shift in the Forest Carbon Partnership Facility (FCPF), from its early start-up phase of establishing the facility’s modalities to a phase of providing and enhancing support to countries. Over the course of the year, the FCPF Participants Committee approved $28 million in new Readiness Preparation grants to eight forest countries that presented Readiness Preparation Proposals describing how they will prepare for REDD+. Recognizing that �nancial flows from the FCPF have been began laying the foundation for this work through discussions slower than expected, advances were made to clear the way on the potential methodological framework and pricing for disbursement. The World Bank’s management and Board approach for REDD+ programs to be supported by the Carbon of Executive Directors approved the safeguards approach to Fund. be followed under the FCPF Readiness Fund as well as the The team is encouraged by donors’ demonstration of their opening of the Readiness Fund to several Delivery Partners, in con�dence in the FCPF, with the European Commission and order to engage other partners in addition to the World Bank Italy becoming the latest donors to contribute to the Readiness to carry out FCPF activities with REDD+ countries. Following Fund, and the Governments of France, Germany, and Norway this, the FCPF Participants Committee approved a “Common committing additional resources. With these additional Approach� to environmental and social safeguards to be contributions, total pledged funding to both the Readiness followed by Multiple Delivery Partners, and approved the Inter- Fund and the Carbon Fund amounted to over $430 million by American Development Bank, the United Nations Development the end of 2011. Programme, and the Food and Agriculture Organization to Also, the �rst evaluation of the FCPF was completed, and act as Delivery Partners under the Readiness Fund in a pilot it highlighted the multi-sectoral and cross-cutting nature of phase covering up to 10 countries where the World Bank REDD+ and the challenges that come with tackling an agenda does not have an active forest sector engagement. These key that presents both opportunities and risks, thus requiring a developments in the life of the FCPF paved the way for grant strategic approach for addressing the challenges during the agreements to be signed with REDD+ countries, and should REDD+ readiness phase and beyond. Within this context, improve service coverage to these countries. the FCPF is taking action to strengthen its support to REDD+ In line with these developments, grant agreements totaling country governments and stakeholders, including accelerating US$13.6 million were signed to support countries’ REDD+ �nancial flows to countries. The FCPF held a Global Dialogue Readiness Preparation efforts; and a number of other grant with Indigenous Peoples and Forest Dwellers and, in response agreements are nearing signature. to requests from Indigenous Peoples and Forest Dwellers, is 2011 also saw the start of operations of the FCPF’s Carbon organizing a series of regional dialogues in 2012 and launching Fund, which will pilot performance-based payments for programs to build the capacity of Indigenous Peoples and emission reductions from REDD+. This was a key milestone southern civil society organizations to engage in their national for the FCPF and a reminder that additional �nancial incentives REDD+ processes and increase their participation in FCPF are needed to sustain the momentum of REDD+. Participants meetings. Further work is also planned to enhance analytical Carbon Finance 11 Annual Report l 23 support to countries and promote knowledge exchange, livelihoods. The potential for biodiversity conservation is also including South-South cooperation, which REDD+ countries signi�cant since forests are home to more than half of all have found very valuable in the past. species and approximately a quarter of pharmaceutical drugs Looking ahead, and with the con�rmation at the UNFCCC are derived from rainforest plants. Similarly, in many countries in Durban in December 2011 of a role for the private sector deforestation is one of the major factors leading to depletion in �nancing for REDD+ and with REDD+ likely to be part of of water resources and degradation of water quality. REDD+ the eventual agreement emanating from the Durban Platform has the potential to maintain water quantity and quality, help agreement, the work of the FCPF remains critical. In the year control soil erosion, prevent flooding, and reduce run-off. ahead, the FCPF will advance its work on issues at the interface The FCPF has created a framework and processes for between readiness and carbon �nance through the design of REDD+ readiness, which helps countries get ready for a Readiness Package and an assessment approach, the design future systems of �nancial incentives for REDD+. Using of a methodological framework and pricing and valuation this framework, each participating country develops an approach for the Carbon Fund, and on the development of understanding of what it means to become ready for REDD+, reference levels and MRV systems for sub-national emission in particular by developing reference emission levels, adopting reductions programs. a REDD+ strategy, designing monitoring systems and setting up To achieve this, it is clear that REDD+ requires cooperation REDD+ national management arrangements, in ways that are among forest countries, donors, a variety of stakeholders and inclusive of the key national stakeholders. delivery partners. The advancements made in the FCPF in 2011 reflect this, and helped to build a stronger platform for all Governance parties to engage in tackling REDD+. As of December 2011, 37 forest developing countries (14 in Africa, 15 in Latin America and the Caribbean, and eight Background in Asia-Paci�c) were part of the partnership. The FCPF relies The FCPF, which became operational in June 2008, is a global on an effective and inclusive governance structure, with the partnership focused on reducing emissions from deforestation Participants Assembly and the Participants Committee at its and forest degradation, forest carbon stock conservation, core. sustainable management of forests and enhancement of forest The Participants Assembly, which comprises of all carbon stocks (REDD+). The FCPF complements the UNFCCC the countries and organizations participating in the FCPF, negotiations on REDD+ by demonstrating how REDD+ can be meets annually and elects the Participants Committee. The applied at the country level and by learning lessons from this Participants Committee is made up of an equal number of early implementation phase. forest (REDD+) countries (14) and �nancial contributors (14), It is widely recognized that REDD+ presents a potentially and is also composed of observers representing Indigenous huge developmental and environmental opportunity. In Peoples, civil society, international organizations, the UN- addition to the potential for substantial, cost-effective and REDD Programme, the UNFCCC Secretariat and the private immediate emissions reductions (around 17% of greenhouse sector. The Committee, which meets about three times a gas emissions are from deforestation and forest degradation, year, is the main decision-making body of the FCPF. It reviews though emissions may have declined in recent years), REDD+ country submissions, decides on grant resource allocation, and also has the potential to provide bene�ts to the estimated approves budgets inter alia. 1.2 billion people living in or depending on forests for their The World Bank assumes the functions of trustee, secretariat 24 l Carbon Finance 11 Annual Report and Delivery Partner. The Inter-American Development Bank contributors as of December 31, 2011) will have to meet the and United Nations Development Programme are in the following criteria: process of becoming Delivery Partners in some countries under s Focus on results, namely high-quality and sustainable the Readiness Fund. emission reductions including social and environmental bene�ts. Readiness Fund s Suf�cient scale of implementation (e.g., at the level of an With assistance from the Readiness Fund (about $230 million administrative jurisdiction within a country or at the committed or pledged by 15 public donors as at December national level). 31, 2011), each participating forest country prepares itself for REDD+ by developing the necessary policies and systems, in s Consistency with emerging compliance standards under particular by adopting national strategies; developing reference the UNFCCC and other regimes. emission levels; by designing measurement, reporting and s Diversity, so as to generate learning value for the FCPF veri�cation MRV systems; and by setting up REDD+ national and other Participants. management arrangements, including the proper safeguards. s Transparent stakeholder consultations. The focus of the FCPF to date has been on REDD+ readiness. As at December 31, 2011 a total of 21 countries In addition, programs implemented at the sub-national had received a formal assessment of their Readiness scale will need to be consistent with the emerging national Preparation Proposals and almost $80 million had been strategies, reference emission levels and MRV systems, and be allocated in grant funding. accompanied by measures to assess and minimize the risk of In the readiness phase, signi�cant cooperation has been leakage. developed between the FCPF and the UN-REDD Programme, The Carbon Fund is intended to play a catalytic role for the Forest Investment Program and the Global Environment REDD+, building on the experience of pioneering initiatives Facility. In addition, a common approach to environmental such as the BioCarbon Fund. Accordingly, Carbon Fund and social safeguards has been developed, which allows the commitments should be made early enough to provide proceeds of the FCPF Readiness Fund to flow through the incentives to countries to adopt the necessary policies and various Delivery Partners. systems and undertake the necessary investments. Consistent with the UNFCCC decision on REDD+ adopted in Cancun in Carbon Fund December 2010, the readiness, investment, and performance- The Carbon Fund, the second fund of the FCPF, became based payment phases are not purely sequential but will operational in June 2011. It will provide payments for veri�ed instead overlap to a large extent. Nevertheless, to ensure emission reductions from REDD+ programs in countries that that carbon �nance builds on readiness achievements, the have made considerable progress towards REDD+ readiness. FCPF Participants Committee must have assessed a country’s About �ve REDD Country Participants will qualify for the Carbon Readiness Package before the country can enter into an Fund based on a progress assessment by the FCPF Participants Emission Reductions Payment Agreement with the Carbon Committee. Fund. Programs submitted to the Carbon Fund (about $204 The Carbon Fund will deliver emission reductions to the million committed or pledged by 10 public and private �nancial contributors to the fund pro rata to the capital share. Carbon Finance 11 Annual Report l 25 Readiness Fund Participants Donor Participants EUROPEAN COMMISSION GOVERNMENT OF AUSTRALIA GOVERNMENT OF CANADA GOVERNMENT OF DENMARK GOVERNMENT OF FINLAND GOVERNMENT OF FRANCE GOVERNMENT OF GERMANY GOVERNMENT OF ITALY GOVERNMENT OF JAPAN GOVERNMENT OF THE NETHERLANDS GOVERNMENT OF NORWAY GOVERNMENT OF SPAIN GOVERNMENT OF SWITZERLAND GOVERNMENT OF THE UNITED KINGDOM GOVERNMENT OF THE UNITED STATES OF AMERICA Carbon Funds Participants PUBLIC SECTOR EUROPEAN COMMISSION GOVERNMENT OF AUSTRALIA GOVERNMENT OF GERMANY GOVERNMENT OF NORWAY GOVERNMENT OF SWITZERLAND GOVERNMENT OF THE UNITED KINGDOM *Argentina *Ghana Papua New Guinea GOVERNMENT OF THE UNITED STATES OF AMERICA Bolivia Guatemala Paraguay *Cambodia *Guyana *Peru Cameroon Honduras Suriname *Central African Rep. *Indonesia PRIVATE SECTOR & NGOs *Tanzania Chile *Kenya Thailand *Colombia *Lao P.D.R. BP TECHNOLOGY VENTURES *D.R. of Congo *Liberia *Uganda *Rep. of Congo Madagascar Vanuatu CDC CLIMAT *Costa Rica *Mexico *Vietnam El Salvador Mozambique THE NATURE CONSERVANCY Equatorial Guinea *Nepal *Ethiopia Nicaragua Gabon *Panama * Countries with Readiness Preparation Proposals formally assessed as of December 31, 2011. 26 l Carbon Finance 11 Annual Report Carbon Finance 11 Annual Report l 27 Carbon Partnership Facility 28 l Carbon Finance 11 Annual Report http://cpf.wbcarbon�nance.org/cpf/ The Carbon Partnership Facility (CPF) is one of the World Bank’s major new carbon �nance instruments. It is designed to develop and market emission reductions by providing carbon �nance to investments focused on delivering post-2012 emission reduction assets. It consists of the Carbon Asset Development Fund, which supports the preparation of the emission reduction programs, and the CPF Carbon Fund, which will purchase emission reductions generated by CPF programs. The CPF collaborates with governments and market In the current Kyoto period, existing carbon �nance participants on investment programs and sector-based mechanisms (e.g. CDM) operate largely on a project-by- interventions that are consistent with low-carbon economic project basis. The CPF utilizes scaled-up, programmatic growth and the sustainable development priorities of approaches, such as the CDM Programme of Activities (PoA), developing countries. to enable carbon �nance to systematically support partner The CPF has been established as a partnership, where country initiatives in support of low-carbon investments. The both our Buyer and Seller Participants, together with Donors team will work on a larger, more programmatic basis with and Host Country Partners, can sit together at the table, governments and agencies to develop large-scale carbon learn from each other’s experience and challenges, and work �nance programs. These programs will be linked to Bank together to design solutions that will work on the ground and operations and other sources of funding to provide more be mutually bene�cial. comprehensive approaches to �nancing clean technologies. The Facility draws on the World Bank’s �nancial and The CPF also targets areas that have not been reached knowledge resources to strategically integrate carbon �nance effectively by mechanisms in the past, such as energy with sustainable development plans by aligning carbon ef�ciency and will pilot city-wide carbon �nance programs. �nance with World Bank country assistance programs— The fundamental goal of the CPF is to help our partner and often linking with lending operations. It facilitates the countries utilize carbon �nance to implement systematic implementation of low-carbon programs across an array of approaches to low-carbon growth. To do this, our focus has to sectors and technologies—energy generation and distribution, be on �nding ways to support their policies and initiatives to energy ef�ciency, and waste management—in situations where catalyze public and private investment in clean technologies. governments need policy measures or investments. Carbon Finance 11 Annual Report l 29 30 l Carbon Finance 11 Annual Report CPF Status New approaches, such as city-wide programs, will be tested, and new CDM methodologies in areas of great potential for The First Tranche of the Carbon Partnership Facility became emission reductions, such as energy ef�ciency in buildings, will operational on May 15, 2010. By the end of 2011, it had be developed. The aim is to generate emission reductions that €132.5 million in commitments to the Carbon Fund and an will provide bene�ts to both Buyer and Seller Participants. additional €11 million in contributions to the Carbon Asset The longer-term vision is to use the CPF to innovate and Development Fund. scale up CDM modalities. The lessons learned from initial The key objective of the First Tranche is to test the CPF efforts on the First Tranche programs will set the stage for the model. The goal is to demonstrate the ef�cacy of using the Bank to make further constructive contributions to the design CDM Programme of Activities approach on a large scale, linked and implementation of future carbon market mechanisms. to Bank operations that support partner country initiatives. 2011 Participants Buyer Participants GOVERNMENT OF SPAIN ENDESA E.ON MINISTRY OF FINANCE GOVERNMENT OF NORWAY SWEDISH ENERGY AGENCY Seller Participants Donors to the Carbon Asset Development Fund FONDS D’EQUIPEMENT COMMUNAL OF MOROCCO GOVERNMENT OF SPAIN CAIXA ECONÔMICA FEDERAL OF BRAZIL GOVERNMENT OF NORWAY MINISTRY OF INDUSTRY AND TRADE OF VIETNAM GOVERNMENT OF ITALY GREATER AMMAN MUNICIPALITY EUROPEAN COMMISSION PROVINCIAL ELECTRICITY AUTHORITY OF THAILAND Host Country Partner HEBEI GREEN AGRICULTURE COMPANY TANZANIA RURAL ENERGY AGENCY GOVERNMENT OF CHINA Carbon Finance 11 Annual Report l 31 The Partnership for Market Readiness Launched in December 2010, the Participants include: Partnership for Market Readiness (PMR) s Contributing Participants: Australia, Denmark, the European Commission, Germany, Japan, the Netherlands, is one of the World Bank’s newer carbon Norway, Spain, Switzerland, the United Kingdom and the market instruments focused on emissions United States. These participants have pledged $75 reductions in emerging and developing million to the PMR Trust Fund. Target capitalization is economies. It brings together most of $100 and fundraising is ongoing. the world’s key market players to create s Implementing Country Participants: Brazil, Chile, China, Colombia, Costa Rica, India, Indonesia, Jordan, a global platform for discussions on Mexico, Morocco, South Africa, Thailand, Turkey, Ukraine new market instruments, including new and Vietnam. crediting instruments and domestic The PMR is country-led. It provides systemic support to emissions trading schemes. In little enhance Implementing Country Participants’ technical and more than a year, PMR participants have institutional capacities in order to implement market-based demonstrated a strong appetite to learn instruments, such as a domestic emissions trading scheme from one another, to generate an open or a scaled-up crediting mechanism. As countries are at different stages of development and market readiness, each dialogue on lessons learned from previous will approach the use of market instruments in a different way. successes and failures, and to work Some will focus on building core “readiness� components, together on devising new market-based such as new systems for MRV, data collection, baseline setting, tools for GHG reduction. and establishing regulatory institutions; others will go further and pilot a domestic or international market-based scheme. The PMR Participants include Contributing Participants— Regardless of a country’s choice, capacity building and piloting those who provide �nancial support to the PMR trust fund— can have cross-cutting bene�ts relevant to implementing and Implementing Country Participants—those who receive non-market based mitigation actions, designing low emissions funding. Together, they make up the PMR Partnership development strategies, and identifying areas of low-cost Assembly, the decision-making body of the PMR. mitigation potential. Since it began operation, 10 of the15 Implementing Country 32 l Carbon Finance 11 Annual Report http://wbcarbon�nance.org/pmr Participants (Chile, China, Colombia, Costa Rica, Indonesia, implementing readiness components or a market instrument. Mexico, Morocco, Thailand, Turkey and Ukraine) have This roadmap is known as the Market Readiness Proposal presented frameworks outlining anticipated PMR activities; each (MRP). Implementation Phase funding (in the amount of has received PMR Preparation Phase funding in the amount between $3 million and $8 million) is given following the of $350,000. The remaining �ve Implementing Country successful submission of an MRP. A number of countries are Participants are expected to present similar frameworks at the expected to complete a draft MRP before the end of 2012. PMR’s meeting in May 2012. Preparation Funding is used to President Robert Zoellick launches the Partnership for identify capacity-building gaps and to prepare a roadmap for Market Readiness at COP 16 in Cancun. Carbon Finance 11 Annual Report l 33 The Carbon Initiative for Development 34 l Carbon Finance 11 Annual Report wbcarbon�nance.org/Router.cfm?Page= CIDEV&ItemID=65997&FID=65997 The Carbon Initiative for Development (Ci-Dev) was launched in December 2011 and is focused on building capacity and developing tools and methodologies for supporting carbon market development in the poorest countries of the world, mainly in the area of energy access. The Ci-Dev consists of a Readiness Fund, a Carbon Fund and a Achieving universal access to electricity by 2030 would require Financing Fund. The “buyer� Carbon Fund will facilitate the sale an additional annual average investment of $36 billion. and purchase of the carbon credits created by the supported At the same time, energy is the greatest contributor of activities. The Readiness Fund will provide grants to help least greenhouse gas emissions worldwide Poor countries are developed countries (LDCs) build capacity and realize their among the most vulnerable to climate change, underlying the potential in carbon market participation. The Financing Fund, importance of clean energy for increasing energy access and an innovative approach to front-loading carbon revenues, will the role carbon �nance can play by serving as a catalyst. provide upfront �nancing for projects, a critical component for Carbon �nance can also be used in other relevant sectors expanding carbon �nance in poor countries. to support the sustainable development of poor countries with fast-growing populations. Waste management, energy ef�ciency The Challenge for services like water, lighting, and transportation are relevant At a global level, the magnitude of development and climate examples. change challenges facing the poorest countries is such that all �nancing sources, including carbon markets, must be Applying Lessons Learned harnessed. This was underscored, in the recent report from The World Bank has gained extensive experience in improving the UN Secretary-General’s High -level Advisory Group on carbon market access for low-income countries. One example Climate Change Financing. Energy poverty is a particularly is the Community Development Carbon Fund, a fund created relevant example. There are today about 1.4 billion people in 2003 with a speci�c focus on the poorest developing without access to electricity, 85% of whom are in rural areas. countries and on small-scale projects providing co-bene�ts About 2.7 billion people are relying on the traditional use to the poorest communities. These lessons learned from the of biomass for cooking, which results in an estimated 1.45 World Bank’s experience will be applied to the implementation million premature deaths each year due to indoor air pollution. of the Ci-Dev. Carbon Finance 11 Annual Report l 35 Currently, World Bank Carbon Funds are supporting 59 CDM ■ Supporting poor countries’ Designated National projects in IDA countries, with close to half of these in Africa. Authorities develop standardized baselines in such key areas as rural electri�cation, household energy Two main lessons can be drawn from this experience: access and energy ef�ciency. s,ARGE SCALEDEVELOPMENTOFCARBONlNANCEIN,$#SAND ■ Ensure the crediting of low-carbon projects in energy other poor countries requires signi�cant, or even radical, poor countries by establishing “suppressed demand� improvements in the CDM regulations and the accounting standards. development of new carbon �nance mechanisms that take ■ Contributing proposals to further improve and extend into consideration the capacity and needs of poor countries. the scope of the CDM towards new market s&RONT LOADINGCARBONREVENUESISKEYANDWILLREQUIRE mechanisms for use by the poorest countries. innovative approaches and public support to mitigate the associated risks. The Financing Fund A Financing Fund, aimed at a capitalization of $50 million, will The Readiness Fund help project sponsors use future carbon revenues to contribute The Ci-Dev Readiness Fund, aimed to be capitalized at $20 to closing the capital investment gap. Access to �nance remains million, will focus on enhancing existing and developing new a key barrier to investment in the poorest countries—especially carbon �nance mechanisms, building capacity to undertake in sub-Saharan Africa—due to lack of capital, poorly developed carbon �nance transactions in the poorest countries and �nancial markets, and other barriers to business activity. disseminating the lessons learned. These barriers compound well-documented obstacles to The Fund will contribute to ongoing efforts to reform investment in clean technologies (including renewable energy the CDM. Through its on-the-ground work creating carbon generation), such as high upfront costs, lack of familiarity with assets for its various carbon funds, the World Bank has made the technology, and lack of adequate tariffs. Household clean signi�cant contributions to capacity building, and to knowledge energy programs, like cookstoves, solar home systems, and creation and dissemination of carbon �nance initiatives–efforts biogas digesters also require high upfront investments. Project which bene�t the carbon �nance community (“public good owners have been mostly unable so far to monetize future creation�) and can have a large leverage in terms of further carbon credits due to the high perceived risks associated with opening carbon �nance to these countries and communities. carbon �nance. The technical work of the Readiness Fund will include: The Financing Fund is under development and will be launched in 2012. s)$!ISTHE7ORLD"ANKS)NTERNATIONAL$EVELOPMENT!SSOCIATION WHICH provides concessional �nancing to some of the world poorest countries.) 36 l Carbon Finance 11 Annual Report The Carbon Fund Potential for Operations A Carbon Fund, aiming at a capitalization of $50 million, will The following operations have been identi�ed by the World provide resources from buyers to project proponents for carbon Bank as potential projects where piloting and testing of the asset creation in exchange for a right of �rst refusal to sign an approaches would be applied: ERPA forward contract once the project reaches validation. The ■ Household biogas in Nepal Carbon Fund will initially target certi�ed emission reductions in LDCs through the Clean Development Mechanism. It will ■ Household solar power in Bangladesh broaden its geographical reach over time as new market ■ Energy ef�ciency in brick making in Bangladesh mechanisms appear and become eligible for compliance ■ Cookstoves in Africa markets. The Carbon Fund will support on-the-ground asset creation ■ Municipal solid waste in Africa work, including �nancial and technical support for project ■ Renewable energy access in Mali design documents and validation. Once a project reaches a late stage in its validation process, but before it is registered by the UNFCCC or other regulatory body, an ERPA with buyers will be signed. The Carbon Fund will offer access to market prices for sellers and a long-term purchase commitment. Carbon Initiative for Development (CiDev) (CiDev) (CiDev) (CiDev) Readiness Fund Financing Fund Carbon Fund Carbon Finance 11 Annual Report l 37 Who We Are 38 l Carbon Finance 11 Annual Report Carbon Finance Glossary Assigned Amount Unit (AAU) Carbon Asset A Kyoto Protocol unit equal to one metric ton of carbon dioxide The potential of greenhouse gas emission reductions that a equivalent. Each Annex I Party issues AAUs up to the level of its project is able to generate and sell. assigned amount, established pursuant to Article 3, paragraphs 7 and 8, of the Kyoto Protocol. Assigned amount units may be Carbon Credits exchanged through emissions trading. A permit that allows the holder to emit the equivalent of one metric tonne of CO2. Credits are awarded to countries or Adaptation groups that have reduced their emissions below an assigned Adjustment in natural or human systems in response to actual quota. Credits can be exchanged between businesses or or expected climatic stimuli or their effects, which moderates bought and sold in international carbon markets at the harm or exploits bene�cial opportunities; for example, the prevailing market price. construction of flood walls to protect property from stronger storms and heavier precipitation, or the planting of agricultural Carbon Finance crops and trees more suited to warmer temperatures and drier Resources provided to projects generating (or expected to soil conditions. generate) greenhouse gas emission reductions in the form of the purchase of such emission reductions. Afforestation Planting of new forests on lands that historically have not Carbon Market contained forests. A market created to buy and sell carbon credits. Under a regulated limit on carbon emissions (a “cap� on emissions), Annex I Parties permits or allowances are given or auctioned to carbon The countries listed in Annex I of the UNFCCC and in Annex B emitters. Entities emitting below their cap may trade their extra of the Kyoto Protocol. allowances (carbon credits) to those who need additional capacity, creating a market for buying and selling carbon credits. Avoided Deforestation Preventing deforestation by compensating countries for carbon Carbon Sequestration dioxide reductions realized by maintaining their forests. The process of removing carbon from the atmosphere and depositing it in a reservoir. Biomass Fuel Fuels produced from dry organic matter or combustible oils CDM Executive Board produced by plants. These fuels are considered renewable A 10-member panel that supervises the Kyoto Protocol’s as long as the vegetation producing them is maintained or CDM under the authority and guidance of the Conference of replanted, such as �rewood, alcohol fermented from sugar and the Parties. The CDM Executive Board is the ultimate point combustible oils extracted from soy beans. Their use in place of contact for CDM Project Participants for the registration of of fossil fuels cuts greenhouse gas emissions because the projects and the issuance of CERs. plants that are their sources recapture carbon dioxide from the atmosphere. Certi�ed Emission Reduction (CER) A unit equal to one metric tonne of carbon dioxide equivalent, Cap-and-Trade System which may be used by Annex I parties towards meeting their An environmental policy tool that institutes a mandatory cap binding emission reduction commitments under the Kyoto on emissions while providing emitters with flexibility on how Protocol. CERs are issued for emission reductions from CDM they may comply. Successful cap-and-trade programs reward project activities. Two special types of CERs (temporary CERs innovation, ef�ciency, and early action and provide strict and long-term CERs) are issued for emission reductions from environmental accountability without inhibiting economic afforestation and reforestation CDM projects. growth. Carbon Finance 11 Annual Report l 39 Clean Development Mechanism (CDM) Flexible Mechanisms A mechanism provided by Article 12 of the Kyoto Protocol, Three procedures established under the Kyoto Protocol through which developed countries may �nance greenhouse to increase the flexibility and reduce the costs of making gas emission reduction projects in developing countries, and greenhouse gas emissions cuts; they are the Clean receive credits for doing so which they may apply toward Development Mechanism, International Emissions Trading and meeting mandatory limits on their own emissions. Joint Implementation. Clean Energy or Clean Technology Greenhouse Gases (GHGs) Although there appears to be no strict de�nition, clean energy The atmospheric gases responsible for causing global warming is any energy that causes little or no harm to the environment. and climate change. Six gases are listed in Annex A of the Wind energy, solar energy (in all its forms—photovoltaic, Kyoto Protocol. The major greenhouse gases are carbon geothermal, solar thermal, etc.), hydrogen and fuel cells, wave dioxide (CO2), methane (CH4), nitrous oxide (N2O). Less and tidal energy and biomass are all examples of clean energy. prevalent—but very powerful—are hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Community Bene�ts Community bene�ts are identi�able and quanti�able Green Investment Scheme (GIS) improvements in the quality of life of a local group of people A �nancing mechanism in which the proceeds from emissions who are identi�ed by the trustee and the project entity as in trading under the Kyoto Protocol are reinvested in projects the vicinity of or affected by a project. in the host country’s economy with the objective of further reducing emissions. Countries with Economies in Transition Those Central and Eastern European countries and former HFC-23 (triofluoromethane) republics of the Soviet Union in transition from state-controlled Greenhouse gas that has 11,700 times the global warming to market economies. potential of carbon dioxide and is a by-product in the manufacturing process of HCFC-22, used in air conditioning, Designated National Authority (DNA) refrigeration and as a feedstock. An of�ce, ministry or other of�cial entity appointed by a Party to the Kyoto Protocol to review and give national approval to International Development Association (IDA) projects proposed under the CDM. One of the �ve institutions composing the World Bank Group, which focuses exclusively on the world’s poorest countries. Emission Reduction (ER) The measurable reduction of release of greenhouse gases into Joint Implementation (JI) the atmosphere from a speci�ed activity or over a speci�ed A mechanism under the Kyoto Protocol through which a area and a speci�ed period of time. developed country can receive “emission reduction units� when it helps to �nance projects that reduce net greenhouse Emission Reductions Purchase Agreement (ERPA) gas emissions in another developed country (in practice, the Agreement which governs the purchase and sale of emission recipient state is likely to be a country with an “economy in reductions. transition�). An Annex I Party must meet speci�c eligibility requirements to participate in Joint Implementation. European Union Emissions Trading Scheme (EU ETS) In January 2005, the European Union Emissions Trading Kyoto Protocol Scheme commenced operation as the largest multi-country, An international agreement standing on its own, and requiring multi-sector greenhouse gas emissions trading scheme separate rati�cation by governments, but linked to the UNFCCC. worldwide. The scheme is based on Directive 2003/87/EC, The Kyoto Protocol, among other things, sets binding targets which entered into force on October 25, 2003. for the reduction of greenhouse gas emissions by industrialized countries. It entered into force on February 16, 2005. 40 l Carbon Finance 11 Annual Report Land Use, Land-Use Change and Forestry (LULUCF) Tonne of Carbon Dioxide Equivalent (tCO2e) A greenhouse gas inventory sector that covers emissions and The universal unit of measurement used to indicate the global removal of greenhouse gases resulting from direct human- warming potential of each of the six greenhouse gases. Carbon induced land use, land-use change and forestry activities. dioxide—a naturally occurring gas that is a byproduct of burning Expanding forests reduce atmospheric carbon dioxide; fossil fuels and biomass, land-use changes and other industrial deforestation releases additional carbon dioxide; various processes—is the reference gas against which the other agricultural activities may add to atmospheric levels of methane greenhouse gases are measured. and nitrous oxide. Tranche Least Developed Countries (LDCs) The Spanish Carbon Fund, the BioCarbon Fund, and the The world’s poorest countries. Least developed countries are Umbrella Carbon Fund consist of tranches. For example, the countries (i) listed in the World Bank’s IDA list of countries; BioCarbon Fund’s �rst tranche supports a wide variety of land (ii) countries commonly referred to as “IDA blend,� with a use, land-use change and forestry projects, some providing population of less than 75 million; or (iii) countries designated emission reductions potentially eligible for credit under the as least developed countries by the United Nations. Kyoto Protocol, and some that explore options for carbon credits that achieve them by activities other than afforestation Mitigation and reforestation and therefore not eligible for Kyoto credits In the context of climate change, a human intervention to in the �rst commitment period. Depending on the interests reduce the sources or enhance the sinks of greenhouse gases. of contributors, various additional tranches may be opened, Examples include using fossil fuels more ef�ciently for industrial each one with a speci�c focus, which could be sectoral or processes or electricity generation, switching to solar energy geographic. or wind power, improving the insulation of buildings and expanding forests and other “sinks� to remove greater amounts United Nations Framework Convention on Climate Change of carbon dioxide from the atmosphere. (UNFCCC) The international legal framework adopted in June 1992 at the Programme of Activities (PoA) Rio Earth Summit to address climate change. It commits the Emission reductions that are achieved by multiple veri�able Parties to the UNFCCC to stabilize human-induced greenhouse activities executed over time as a direct response to a gas emissions at levels that would prevent dangerous man- government measure or private sector initiative. Programmes made interference with the climate system. In December typically result in a multitude of greenhouse gas-reducing 1997, the Parties to the UNFCCC adopted the Kyoto Protocol. activities in multiple sites over the life of the programme. In February 2005, the Kyoto Protocol entered into force thus becoming a legally binding instrument. Reforestation Replanting of forests on land that was previously forested but Voluntary Carbon Market subsequently converted to other use. The unregulated market which allows individuals, companies and organizations to purchase emission reduction credits to Small-scale Projects offset the emissions they produce. Projects that are compatible with the de�nition of “Small-scale CDM Project Activities� set out in decision 17/CP.7 by the Conference of Parties to the UNFCCC. Sustainable Development Development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Carbon Finance 11 Annual Report l 41 42 l Carbon Finance 11 Annual Report Carbon Finance 11 Annual Report l 43 Ackowledgements Team Leader Isabel Hagbrink Photo Editor Shahyar Niakan Copy Editor Daria Steigman Design Corporate Visions, Inc. Printer World Bank Photo courtesy of the World Bank photo gallery and Rhett A. Butler. 1818 H Street, NW Washington, DC 20433 www.carbon�nance.org