Financing the Low-Carbon Transition
The Paris Agreement represents countries’ commitment to strengthening the global response to climate change and raising ambition. Countries set out their individual climate pledges by submitting nationally determined contributions (NDCs) to the UNFCCC that outline the actions they would undertake for low carbon economic development. A key challenge, however, is the financing required to bring about this global transformation while also recognizing that countries must meet and exceed their NDCs in order to meet the temperature goals of the Agreement.
Over half of the NDCs submitted by countries reference the use of climate markets to meet their targets. These climate markets can play a key role in unlocking private resources and reducing dependence on limited public and concessional finance.
Article 6 and Unleashing Private Capital
Article 6 of the Paris Agreement recognizes that countries may voluntarily cooperate with each other to deliver on their NDCs and raise ambition. Effectively, this Article introduces the use of carbon markets globally. Article 6.2 signals flexibility for and permits direct bilateral or plurilateral cooperation for the generation and transfer of mitigation outcomes (MOs) from one country to another under a variety of mechanisms. Article 6.4 will likely be governed by the Parties through the UNFCCC process.
The ‘Paris Rulebook’ – the implementing guidelines that will operationalize the landmark Agreement – is still under negotiation. In this context, focused piloting efforts are essential for providing practical experience on the use of climate markets post-2020.
Supporting Countries by Building the Next Generation of Climate Markets
The World Bank is working to support client countries through analytical and technical work to participate in post-2020 climate markets. The Bank has three complementary work streams:
- Supporting the creation of MOs;
- Developing a conceptual Climate Warehouse for connecting country and institution climate markets systems to enable tracking and recording of MOs; and,
- Facilitating their trade through the development of risk mitigation options.
For example, the Bank is working to generate MOs from projects in sectors such as improved cookstoves, livestock development, and solar power. The Bank supports the estimation of MOs from such projects, helps establish scalable monitoring frameworks to assess the project’s performance, enables information on MOs to be shared for tracking their generation and transfer, and facilitates transactions through risk mitigation products that address barriers for early market participants. These pilots form the basis for dialogue with governments on key institutional and capacity building requirements that need to be met for decision-making on the use of MOs. Together, this range of services will support our client countries’ participation in the next generation of climate markets, including capacity building and the development of institutional and governance processes.