Carbon Finance at the World Bank: Netherlands Clean Facility

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The World Bank announced an agreement with the Netherlands in May 2002, establishing a facility to purchase greenhouse gas emission reduction credits. The Facility supports projects in developing countries in exchange for such credits under the Clean Development Mechanism (CDM) established by the Kyoto Protocol to the UN Framework Convention on Climate Change.

The Facility’s initial target was to purchase 16 million tons of carbon dioxide equivalent (mtCO2e) in the first two years of the agreement. The agreement has now been extended, with a firm commitment to purchase an additional five mtCO2e by mid-2005. The agreement also allows for a further purchase of up to approximately 11 million tons of carbon dioxide equivalent.

Opportunities for Both Developed and Developing Countries

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Project Selection Criteria

Opportunities for Both Developed and Developing Countries

For developed countries, such as the Netherlands, the establishment of a clean development mechanism facility increases the range of options for complying with their Kyoto Protocol emission reduction requirements, while at the same time promoting sustainable development, capacity building, fostering of knowledge, and market creation.

The Netherlands CDM Facility provides an excellent opportunity for many more developing countries to gain invaluable experience, by undertaking their first commercial transactions for the purchase of emission reduction credits under the CDM, and to compete in the emerging global carbon market.

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Project Selection Criteria

Projects shall be selected in accordance with the following Project Selection Criteria:

(a) Consistency with United Nations Framework Convention on Climate Change (UNFCCC) and/or the Kyoto Protocol. Projects should comply with all current decisions on modalities and procedures adopted by the Parties to the UNFCCC and/or the Kyoto Protocol, as well as all future decisions on modalities and procedures, when adopted, in particular those pertaining to sustainable development and additionality.

(b) Consistency with Relevant National Criteria. Project designs should be compatible with and supportive of the national environment and development priorities of the Host Countries. In addition, the projects, the transfer of Emission Reductions (ERs) and the issuance of Certified Emission Reductions (CERs) should be consistent with the rules and criteria adopted by Host Countries regarding Clean Development Mechanism (CDM) projects.

(c) Consistency with the General Guidance Provided by VROM . Projects should comply with the VROM requirements and the general guidance provided by VROM at their regular meetings. (VROM is the State of the Netherlands, acting through the Ministry of Housing, Spatial Planning and the Environment.)

(d) Location of Projects. Projects should be located in Non-Annex I Countries which have (i) signed and ratified, accepted, approved or acceded to the Kyoto Protocol, or (ii) signed the Kyoto Protocol and demonstrated a clear interest in becoming a party thereto in due time, for example those that have already started or are on the verge of starting their national ratification, acceptance or approval process or (iii) already started or are at the verge of starting the national accession process.

(e) No Nuclear Energy. Nuclear energy projects are not eligible.

(f) LULUCF (Land-Use, Land_Use Change and Forestry). Projects involving land-use or land-use change (afforestation, reforestation) are only eligible after the COP/MOP has decided on the relevant modalities and guidelines and VROM has agreed to accept such projects.

(g) Environmental and Social Impacts. Projects that are expected to have large scale adverse social or environmental effects are not eligible.

(h) Advance Payments. Projects that will require Advance Payments from the NCDMF, shall not be eligible, unless at least 50% (fifty percent) of the total financing needs of such Project will be provided by other entities which are at least A+ rated by S&P; or A1 rated by Moody's (bank rating or debt paper rating).

(i) Purchase Price. Projects that involve a purchase price of more than € 5.5 (five and a half Euros) per metric tonne of CO2 equivalent, calculated on the basis of ER Unit Price and the Kyoto Protocol Related Project Costs, shall not be eligible, unless they are expected, in VROM's opinion, to make a very significant contribution to sustainable development in the Host Country, preferably in Least Developed Countries.

(j) Proportion of Payments. The present value of the total payments (calculated at a discount rate of no more than 4% (four percent) to be made by the NCDMF for the purchase of ERs, shall not exceed 30% (thirty percent) of total financing needs of the project at commissioning, unless otherwise agreed by VROM.

(k) Financing of Projects. Of the total financing needs of each individual project at least 30% (thirty percent) shall be covered by co-investing entities meeting at least a rating of A+ by S&P; or A1 by Moody's (bank rating or debt paper entities). If such is not the case, an extensive due diligence performed by the NCDMF may determine the project's eligibility.

(l) Complementarity with GEF(Global Environment Facility). Projects should be complementary to the GEF and not compete with the GEF's long-term operational program nor with their short-term response measures. In furtherance of this criterion, potential projects will be reviewed by the Secretariat of the GEF to determine their GEF eligibility. Only if it is determined that a potential project will not receive GEF financing will it be considered for inclusion as a NCDMF project.

(m) Complementarity with the PCF (Prototype Carbon Fund). The PCF shall have the right of first refusal of a Project.

(n) Cost-effectiveness and Sustainability. Cost-effectiveness and sustainability will play a major role in selection and approval of projects. Projects may be drawn from a broad range of technologies and processes in energy, industry, and transport, which provide various vehicles for generating ERs, which contribute to sustainable development and achieve transfer of cleaner and more efficient technology to Host Countries. VROM ranks technologies in the following descending order: (i) renewable energy technology, such as geothermal, wind, solar, and small-scale hydro-power; (ii) clean, sustainably grown biomass (no waste); (iii) energy efficiency improvement; (iv) fossil fuel switch and methane recovery; (v) sequestration. VROM expects this ranking to be reflected in the ER Unit Price.

(p) Additional Characteristics of Projects. Projects should generally entail manageable technological risk. The technology to be used in a project should be commercially available, have been demonstrated in a commercial context, and be subject to customary commercial performance guarantees. The technical competence in the Host Country to manage this technology should be established in the course of Project appraisal. Projected Emission Reductions over the life of the Project should be predictable and should involve an acceptable level of uncertainty.

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