The Carbon Partnership Facility and other post-Kyoto carbon finance efforts should focus on demonstrating effective technical and financial approaches to boosting low-carbon investments. Funds and facilities should have clear exit strategies.
Original Response: Ongoing/Agree CPF and FCPF were clearly established for the purposes described. Beyond these facilities, WB is invited to explore how to facilitate developing countries further access to the carbon market and expand the reach of market mechanisms in land use, including in agriculture. Work is underway to develop successor facilities to CDCF and the BioCarbon Fund. Each fund and facility has its own clear exit strategy corresponding to when its capital has been fully committed. Regarding CPF, each tranche is to be established based on an assessment of the needs for further methodology development and piloting of new approaches to scale up the use of market mechanisms.
The comments made in the 2014 IEG update remain relevant: the collapse of the international carbon market and the lack of success of the Clean Development Mechanism have altered the context in which carbon finance instruments operate, and future directions will depend on the outcomes of the 2015 Paris COP.
The 2015 Management Update adds little new information as compared to 2014; no information is available on whether funds have had effective demonstration effects. The adjusted carbon finance approach as described in the 2014 IEG update is still in progress. The Carbon Initiative for Development has advanced further but has not signed any emission reduction agreements. The Forest Carbon Partnership Facility and BioCarbon Fund have continued to operate but as noted it is too soon to assess whether they have been effective in boosting low-carbon investments.
Ongoing/Agree
CPF was established for the purposes described. Beyond this facility, the WB has developed the Carbon Initiative for Development (Ci-Dev) - successor of CDCF -- focus on improving energy access in IDA countries in Africa and LDCs in South Asia. Al;so, work in underway to develop the Transformative Carbon Asset Fund (TCAF) focus on national, subnational, sectoral or city-wide level programs , to pilot new and innovative GHG emission reduction crediting mechanisms. Each fund and facility has its own clear exit strategy corresponding to when its capital has been fully committed. Regarding CPF, each tranche is to be established based on an assessment of the needs for further methodology development and piloting of new approaches to scale up the use of market mechanisms.
The Forest Carbon Partnership Facility (FCPF) and new BioCarbon Fund tranche (ISFL) continue to innovate by developing methodologies and helping to develop programs for supporting large scale forest and landscape approaches. Both funds are now moving into the demonstration period, as around 20 large-scale programs are developed and approved. The real demonstration will be when the first payments for verified results are made, which is not likely to be for another two or three years. This real demonstration should help boost low-carbon investments. Both the FCPF and the ISFL have clear exit strategies, with fixed closure dates.
The Carbon Finance Unit is demonstrating or planning to demonstrate new technical approaches (soil carbon, forest carbon) and financial approaches (programs of activities under the CPF; Partnership for Market Readiness). IEG acknowledges complementary efforts by the World Bank to shape the regulatory and market environment for carbon projects.
The work undertaken by the CPF continues to be very focused on supporting countries efforts to accelerate their transition to a lower carbon development path, by developing national or sub-national mitigation programs in renewable energy, methane capture, and energy efficiency. Likewise, the more recent facilities launched in December 2011, the Carbon Initiative for Development and a new tranche of the BioCarbon Fund, are geared to lending their support to scale up investments in mitigation in low-income countries, including through increasing access to low-carbon energy and expanding land-based mitigation activities. These carbon finance activities are more and more closely linked to strategic low-carbon development programs supported by the Bank through multiple instruments, including DPLs.
This recommendation was concerned with promoting the use of truly catalytic financial instruments; IEG's analysis found that many first generation carbon projects did not meet this test. Some of the activities under the CPF and Biocarbon Fund Tranche 3 are potentially promising in this regard, as is the Partnership for Market Readiness. However, all are at too early a stage of implementation to be assessed.
The Carbon Partnership Facility has initially focused on boosting low-carbon investments through carbon finance programs utilizing the CDM Program of Activities approach. The First Tranche of the Carbon Fund has Euro 100 million in commitments. Programs are at various stages of implementation in Brazil, Morocco, Vietnam, China, Thailand, Tanzania, Egypt and the Philippines, covering renewable energy, solid waste management, farm biogas, energy efficiency and transportation. The next phase of innovation in the CPF will pilot the use of scaled-up "new market mechanisms" under discussion in the UNFCCC negotiations, with a goal of generating credits from these new mechanisms before 2020. The CPF Instrument provides for the Facility to operate until 2038.
The Forest Carbon Partnership Facility (FCPF) has two separate but complementary funding mechanisms - the Readiness Fund and the Carbon Fund -- to achieve its strategic objectives for reducing emissions from deforestation and forest degradation, forest carbon stock conservation, the sustainable management of forests, and the enhancement of forest carbon stocks (activities commonly referred to as REDD+). The FCPF initially focused on supporting participating countries in their REDD+ readiness process and 33 of the 36 participating countries have now prepared their Readiness Preparation Proposals under the Readiness Fund. The FCPF Carbon Fund will provide performance-based payments to about five countries that have made significant progress in REDD+ readiness and will play an essential part in valuing forests more while they are standing then when they are cut. The Carbon Fund became operational in May 2011 and accepted Costa Rica's proposed national emission reduction program as a first entry into the fund's pipeline in March 2013. Several countries are developing their proposals for large-scale programs and have already presented early ideas. The FCPF will operate until 2020.
The BioCarbon Fund Tranche Three will build on the experience of Tranches 1 and 2 which were instrumental in developing the carbon market for land use projects. In particular, Tranches 1 and 2 were composed of afforestation / reforestation projects under the Clean Development Mechanism, and projects which reduced emissions from deforestation and forest degradation and addressed sustainable agriculture land management under the Verified Carbon Standard. Tranche 3 aims to build on these experiences to combine these various land use practices and carbon accounting at a landscape level. The Tranche will focus on a limited number of geographies, but will aim for scaled up approaches. Expected capitalization is between $70-150M. Tranche 3 will operate till 2030.
The successor fund to the CDCF is the Carbon Fund for Development (Ci-Dev). Ci-Dev will support Least Developed Countries access carbon finance by developing and advocating for improvements in CDM rules and methodologies and building capacity in country through implementation of carbon finance transactions. A $70 million contribution from UK will focus on energy access in Africa. In the current conditions of very depressed carbon markets, CiDev will purchase carbon credits at a price that will be based on each project's financial needs, in effect using the CDM as a framework for providing carbons-based performance grants. CiDev will operate until 2025.
The landscape of carbon finance is very different to that of the time of the evaluation. International carbon markets have collapsed following the international financial crisis and sustained economic downturn in Europe and elsewhere, and the original hopes of the Clean Development Mechanism in establishing a sustainable international market for emission reduction credits have not been successful. Consequently, the approach of the Bank in post-Kyoto carbon finance must be different from what was originally envisioned. The original recommendation must be reinterpreted in this context. There is still a strong need for demonstration, which implies a continual move to new approaches . However, the concern with exit strategies is less relevant because the World Bank Group is no longer competing in a well-established carbon market.
While the overall strategic vision of the Bank Group in the new environment is still being determined, a number of changes have been made. The Carbon Partnership Facility is emphasizing a program of activities approach that tries to enable widespread adoption of low carbon technologies, recognizing that a project-by-project approach did not always have a significant impact. It has 8 signed ERPAs and another 4 are in pipeline. The Carbon Initiative for Development has not yet signed any emission reduction agreements but plans to try to work in subsectors and counties not covered well by the original Kyoto funds. The strategy for demonstration has shifted from trying to demonstrate methodologies to private companies to trying to demonstrate to government agencies how carbon pricing systems can be used to support particular forms of low carbon development.
The scale of these funds is lower than the Kyoto era funds. However, the Bank is maintaining capacity in this area in order to be ready and to have done background work should the potential for widescale international trading of emissions reduction credits reemerge following 2015 negotiations.
Regardless of whether or not this occurs, a number of countries are working to establish domestic carbon trading or crediting schemes, and the Bank is providing technical assistance to a number of these countries under the Partnership for Market Readiness, which is another approach to boosting low-carbon investments. However it is too soon to assess the impacts of these efforts.
The forestry and landscape aspects of carbon finance have been less affected by the market collapse, since the Clean Development Mechanism did not recognize REDD+ as a source of credits. The Bank has continued to make incremental progress in these subsectors. The Forest Carbon Partnership Facility and new BioCarbon Fund tranche are innovating by developing methodologies for supporting large scale landscape approaches that cover impacts across multiple sectors in a defined area.
Some of IEG's core concerns about carbon finance remain. The complex process remains a potentially inefficient way of channeling resources to low-carbon projects that does not necessarily address investors main challenge of high initial capital investment. The logic that particular projects would not have been feasible without carbon finance (and so emission reductions are additional) is sometimes questionable for renewable energy projects where the contribution of carbon finance to revenues is low. To its credit, the Bank is working on means of simplifying the processes and reducing transaction costs (including through program of activities and landscape approaches).
Ongoing/Agree CPF and FCPF were clearly established for the purposes described. Beyond these facilities, the Bank is facilitating developing countries further access to the carbon market and expanding the reach of market mechanisms in land use, including in agriculture. A successor facility has been established for the CDCF (the Carbon Initiative for Development) and a new tranche has been created for the BioCarbon Fund (BioCarbon Fund Initiative for Sustainable Forest Landscapes). Each fund and facility has its own well-defined scope and objectives, set to demonstrate new approaches to using carbon finance, for learning and replication by others. They also have a clear exit strategy corresponding to when its capital has been fully committed. Regarding CPF, a new tranche is to be established for the piloting of new approaches to scale up the use of market mechanisms.