Carbon Finance Key Part of Future Climate Change Fight

June 2, 2009

  • The carbon market doubled to $126bn, but the value of transactions financing project-based emission reductions fell 12% to $6.5bn in 2008.
  • Difficulties in getting financing for projects during the financial crisis, regulatory delays and the market's uncertain future caused the drop.
  • World Bank is working to deepen the reach of the carbon market with two new facilities.

June 2, 2009—Even amid financial crisis, the carbon market still boomed.

The World Bank’s State and Trends of the Carbon Market Report 2009 reveals the market doubled to $126 billion.

Not as welcome is the news that the value of transactions financing actual project-based emission reductions fell 12 percent to an estimated $6.5 billion in 2008.

The drop was the result of a complex set of factors related to difficulty obtaining financing for climate-friendly projects during the financial crisis, regulatory delays and uncertainty surrounding the future of the market under a new global climate change agreement expected to take effect in 2012.

As delegates from 120 countries gathered at Carbon Expo 2009 in Barcelona last week, discussions focused on potential growth in both the carbon market and on-the-ground measures to combat climate change.

Proposed climate change legislation in the United States is seen as having a potentially large impact on carbon markets—voluntary and official—around the world.

In addition, the European Union recently approved a package of post-2012 commitments to reduce emissions, with a promise to reduce even more if other countries join an international agreement to be negotiated in Copenhagen later this year.

“Innovative financing in the fight against climate change is needed now, more than ever, if we are to confront what has emerged as the major threat to the development priorities of the poorest countries and communities,” says Joëlle Chassard, manager of the World Bank’s Carbon Finance Unit.

The Intergovernmental Panel on Climate Change (IPCC) estimates global CO2 emissions must drop to less than 10 billion tons per year by 2050 to stave off potentially catastrophic environmental impacts expected to affect developing countries disproportionally. Annual emissions by Annex 1 countries alone currently stand at about 20 million tons.

The Stern Report published in 2006 estimates that carbon finance has the potential to account for 25 percent of the actions needed to stabilize emissions. Carbon finance could be used strategically to foster larger-scale, long-term low-carbon development.

The effort now—and under a post-2012 global climate change agreement—needs to be scaled up from “individual projects to sector-wide, programmatic interventions, like energy efficiency, transportation and creating urban carbon assets,” says Kathy Sierra, World Bank Vice President for Sustainable Development.

Next Step: Catalyzing Larger-Scale Investments

Sierra says the World Bank is working to deepen the reach of the carbon market with two new facilities.

The Forest Carbon Partnership Facility aims to reduce deforestation—the second-leading cause of greenhouse gas emissions—through incentives and compensation for leaving forests standing.

The Bank established the Carbon Partnership Facility to catalyze large-scale, long-term investments in clean technology programs that will help developing countries move to lower-carbon development paths.

The facility’s business model takes into account the large-scale, potentially risky investments with long lead times that require durable partnerships between buyers and sellers, possibly spanning several market cycles.

The Bank says the facility could grow to several billion dollars over time and will operate beyond 2020—allowing carbon finance to be integrated more closely with national development strategies and policies.

According to Sierra: “As one response to the climate crisis, a deep and global carbon market continues to hold the promise to deliver significant benefits to both developed and developing countries alike.”

Carbon Finance Facts

  • 82% of transacted volumes in the carbon market in 2008 were for projects in renewable energy, fuel switching and energy efficiency.
  • 70% of new projects in 2008 were in hydro, wind, biomass energy and energy efficiency of power generation.
  • China, with an 84% market share in 2008, accounted for the lion’s share of confirmed transactions in the primary Clean Development Mechanism (CDM) market.
  • The CDM pipeline now consists of over 4,500 projects in about 80 countries, with an increasingnumber from countries in Sub-Saharan Africa.
  • World Bank carbon funds and facilities have 186 projects with an estimated asset value of $2.3 billion.
  • The value of emission reductions purchase agreements signed by Dec 31, 2008 for World Bank carbon funds and facilities, is more than $1.8 billion.
  • East Asia & Pacific, with total emission reduction value of $1.3 billion, makes up largest share of active projects in the World Bank’s carbon finance portfolio.