World Bank Creates First International Market Based Carbon Fund

WASHINGTON, DC, January 19, 2000 (ENS) - To address climate change and promote the transfer of finance and climate friendly technology to developing countries, the World Bank has launched the Prototype Carbon Fund (PCF), the world's first international market based emissions trading mechanism.

The PCF offers a tremendous opportunity to boost financial and technology flows to developing countries at a time when government-to-government transfers have fallen to historically low levels," said James Wolfensohn, president of the World Bank. "We are determined to explore how market-based mechanisms such as the PCF involving the considerable financial muscle of the private sector can contribute to addressing the twin challenges of climate change and sustainable development."

The primary focus will be on renewable energy technologies - such as wind, small-hydro, and bio-mass energy technology - that would not be profitable without revenue from emissions reductions sold to the PCF.

As a pilot activity, the PCF will not try to compete in the emission reductions market. It is restricted to US$150 million and is scheduled to terminate in 2012. Wolfensohn

World Bank President James Wolfensohn (Photo courtesy World Bank)

The name Prototype Carbon Fund evolved out of a popular shorthand term that uses the word "carbon" for all six greenhouse gases covered by the regulatory framework of the Kyoto Protocol, an addition to the United Nations climate change treaty. These gases are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexaflouride. The name of the fund does not mean it will only develop projects that aim to reduce or sequester carbon dioxide emissions.

In some cases the PCF will finance such projects through local carbon funds modeled on the PCF but using financing from local commercial and development banks, as well as private companies. Some 20 countries have already declared interest in hosting PCF projects.

"We are concerned about the vulnerability of poor people in poor countries to the threat of climate change. For an institution whose task is to alleviate poverty, we would be negligent if we failed to explore innovative ways of making the climate change convention work," Wolfensohn said.

Governments have recognized the seriousness of the threat of climate change and during the 1990s negotiated the Framework Convention on Climate Change and the Kyoto Protocol. The protocol, which guides implementation of the Convention, includes specific emissions reductions targets for industrialized countries. It also contains provisions allowing them some flexibility so they can meet these commitments to reduce emissions in the most cost-effective manner.

The PCF, established in the World Bank with contributions from governments and private companies, is an ambitious first attempt to experiment with the creation of a market in emissions reductions under these flexibility provisions.

It will invest in cleaner technologies in developing countries and transition economies, thus reducing their greenhouse gas emissions. These emissions reductions will be independently verified and certified, and then transferred to the Fund's contributors in the form of emissions reduction certificates rather than cash.

So far, four governments and nine companies have approved participation in the PCF, bringing the total of committed contributions to US$85 million. The Fund is capped at US$150 million, and plans to start operations in April 2000.

Governments that have approved participation in the PCF are Finland, The Netherlands, Norway, and Sweden.

Private sector participants include the electric power companies of Tokyo, Chubu, Chugoku, Kyushu, Shikoku, and Tohoku, the trading houses Mitsubishi and Mitsui, as well as the electric utility company Electrabel of Belgium.

Also, participation in the PCF is currently under active discussion by the top management at Statoil and NorskHydro of Norway, Gaz de France of France, Environment Banc and Exchange LLC (EBX) of the USA, and SK Power of Denmark.

The first deal made under the PCF is Latvia’s Solid Waste Management Project in Liepaja. Without the Bank’s investment, existing municipal waste disposal is open dump sites, which are a health hazard and an eyesore. The Latvian government wants, and the Bank is willing to finance, sanitary landfills which are clean and well-maintained, but recycle only a minimum of the waste materials and allow methane, a powerful greenhouse gas, to seep into the atmosphere. Liepaja

Liepaja (Photo courtesy Rochester Institute of Technology)
PCF financing will enable further upgrading of municipal waste treatment even beyond sanitary landfill, making the project climate friendly by capturing methane through energy cell technology and using it to produce power, which replaces fossil fuel fired electricity generation for the Latvian power grid.

With energy cell technology, dump site lifetimes are extended indefinitely, 90 percent of municipal waste is recycled, and the organic residue left after methane capture in energy cells makes compost for agriculture. The citizens of Liepaja will get lower cost waste treatment and a clean waste disposal facility using a minimum of prime urban land.

In return for PCF financing of an upgraded waste treatment technology, PCF participants will get the rights to claim the reductions in the greenhouse gas emissions that result from the new technology.

As the manager of the PCF, the World Bank will act as broker in helping to negotiate a price for the emissions reductions that is reasonable for both buyers and sellers. Developing countries will benefit by acquiring cleaner technology and making a profit from trade in a potentially plentiful product greenhouse gas emissions reductions. Industrialized country contributors will gain by paying a lower price for emissions reductions than available in the context of their own companies or countries.

"There are many opportunities to reduce emissions of greenhouse gases in developing countries at a cost of between $5 and $15 dollars a ton of carbon. This compares with a marginal abatement cost of upwards of $50 a ton of carbon in advanced economies. It is the difference in cost to industrialized and developing countries of reducing greenhouse gas emissions that provides the opportunity for mutually beneficial trading relationships" says Ken Newcombe, manager of the PCF for the World Bank.

"We will endeavor to negotiate prices for emissions reductions at about $20 a ton of carbon ($5 a ton of CO2), thus covering the regulatory and market risks to contributors while providing adequate incentives to project sponsors and their governments in developing countries," Newcombe said.

The emission reductions from PCF projects may eventually be used against industrialized countries' commitments to reduce their greenhouse gas emissions. Under the Kyoto Protocol, they must bring them down to at least 5.2 percent below their 1990 levels by the end of 2012. Whether the emission reductions earned by the PCF will count towards these commitments depends on rules being developed by the Parties to the UN Framework Convention on Climate Change that should be defined when the Parties meet in The Hague in November 2000.

During the next three years, the World Bank will invest all the Fund's capital in 20 or so projects. Most are expected to be linked to projects identified by the World Bank Group as part of its regular work, but they can also originate from the private sector, other multilateral development banks, and bilateral donors.

The 1997 Kyoto Protocol is an international agreement negotiated with the intent of slowing global warming. Eighty-four countries have now signed the treaty, which calls for a reduction in emissions of heat trapping greenhouse gases on the part of 39 industrialized countries including the U.S. and Russia. But none of the regulated countries have ratified the agreement. It cannot enter into force until 55 Parties to the Convention, including regulated countries which accounted in total for at least 55 percent of the total carbon dioxide emissions for 1990 from that group.

More information is available online at the Prototype Carbon Fund website: http://www.prototypecarbonfund.org