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  Why should developing countries care about climate change and the Kyoto Protocol?
  What is the CDM?
  How does a project qualify as a CDM project?
  Why do greenhouse gas emission reductions have value?
  Is the CDM letting the North off the hook for their carbon reduction obligations?
  Why do investors find the CDCF an attractive business proposition?
  Why has World Bank's President James D. Wolfensohn called the CDCF "an essential next step"      in the equitable development of the emerging carbon market?
  What is CDCFplus?

  Download the CDCF FAQs in PDF Format
 

Why should developing countries care about climate change and the Kyoto Protocol?

Climate change threatens to disrupt the weakest economies and disadvantage the poorest people. Those with the least resources and the least capacity to cope—the poor of the developing world—will be hardest hit. The United Nations Intergovernmental Panel on Climate Change estimates that the steady warming of the Earth's surface temperature will lead to falling agricultural production in tropical and sub-tropical countries. Sea level rise associated with projected increases in temperature could displace tens of millions of people living in low-lying areas. With climate change, the weakest economies will also be faced with new stresses such as resisting the spread of vector-borne diseases and moving away from increasingly marginal lands and habitat, among others.

Reducing emissions of carbon dioxide and other greenhouse gases in order to mitigate climate change is therefore a key challenge facing the international community. The Kyoto Protocol, the 1997 international agreement to combat climate change, provides an unprecedented opportunity for OECD countries to reduce greenhouse gas emissions and at the same time help developing countries and economies in transition invest in climate friendly technologies and infrastructure that will contribute to their sustainable development.

What is the CDM?

The Clean Development Mechanism (CDM) is a flexibility mechanism established by the Kyoto Protocol that allows public or private entities in developed countries that have signed onto the Protocol to purchase greenhouse gas emission reductions from a project in a developing country. Projects benefiting climate change and sustainable development in developing countries, help industrialized economies reduce the costs of implementation of the Kyoto Protocol. The purpose of the CDM is twofold: first, it assists developing countries with sustainable development through the transfer of cleaner technology and financial resources for specific projects and second, it allows public or private entities to meet targets to reduce greenhouse gas emissions that contribute to global climate change.

Under the Kyoto Protocol, thirty eight industrialized countries committed to reduce their collective greenhouse gas (GHG) emissions by at least 5 percent compared to 1990 levels by the period 2008-2012.

Recognizing that the cost of reducing greenhouse gas emissions are often lower in developing countries and economies in transition (such as Eastern Europe), the Kyoto Protocol established three "flexibility mechanisms," so-called because it allows public and private entities the flexibility to reduce some of their greenhouse emissions in more cost-effective ways that would be open to them at home.

How does a project qualify as a CDM project?

According to the rules that established the CDM, participation of all players in a CDM project is voluntary, and the CDM project must be approved by the host country. In addition, emission reductions from a CDM project can only be certified:

(a) if they are real and measurable and create long term benefits that mitigate climate change, as determined through a monitoring plan that is independently audited (b) if they are additional to any that would occur in the absence of the certified project activity, and c) if they are verified through an independent auditor that is accredited under the Kyoto Protocol.

Potentially eligible CDM activities cover a wide variety of initiatives including: electricity production and distribution, renewable energy, modern sector fuel-switching, oil and gas production, energy efficiency, waste management, afforestation and reforestation, among others.

Why do greenhouse gas emission reductions have value?

As a first response to climate change, the international community adopted the Kyoto Protocol, which commits 38 industrialized countries to reduce their GHG emissions by 5.2 percent below 1990 levels by 2008-2012 (known as the first budget period). Meeting this objective will require public and private investments in the order of a few billion dollars per year at the global scale. The Kyoto Protocol is expected to come into force this year once Russia ratifies it as it publicly pledged.

Many industrialized governments have ratified the Kyoto Protocol and already begun to implement domestic policies and regulations that will require emitters to reduce greenhouse gas emissions. So far, experience has shown that the cost of reducing one ton of carbon dioxide (a greenhouse gas) can cost from $15 to $100 in the energy-efficient economies of industrialized countries.

By contrast, there are many opportunities to reduce greenhouse gases in developing countries at a cost of $1 to $4 per ton of carbon dioxide. Hence, an emission reduction that was achieved at a lower cost has value to a public or private entity in an industrialized country that will be required by regulation to reduce their emissions.

Is the CDM letting the North off the hook for their carbon reduction obligations?

No, because industrialized countries have to implement domestic policies and measures to reduce the GHG emissions. These domestic measures have to generate a significant part of the emission reductions used by an industrialized to achieve its targets and emissions reductions earned through CDM can only be supplementary to these domestic actions.

Also, in practice, it is already clear that the more complex regulatory requirements required to achieve emissions reductions under CDM, and the business risks associated with undertaking projects in the developing countries will constrain the level of CDM output to a small percentage of the requirements of the OECD for the foreseeable future.

Furthermore, participation in the CDM and other flexibility mechanisms is voluntary. If a public or private entity so chooses, the CDM provides an opportunity to contribute to the global fight against climate change, to attract foreign investments in priority sectors of the economy, and to increase the profitability of climate-friendly technologies.

Why do investors find the CDCF an attractive business proposition?

Companies and governments are attracted to the CDCF by the proven record of the World Bank in providing shareholders with Kyoto-compliant certified emission reduction assets at a guaranteed low price—expected to be in the $7 range in the case of the CDCF—as well as by the unprecedented level of attention placed by the CDCF on ensuring that its projects measurably improve the material welfare of associated local communities.

Additional benefits for investors include the acquisition of high-value knowledge and intelligence on carbon finance and emerging national, regional and international markets.

In the case of European companies, further motivating factors of participation are the recent approval of the Directive on emissions trading by the European Parliament, the forthcoming proposal for a second Directive that will link credits from off-shore emission reduction projects to the European emissions trading system, and the publication of the national allocation plans expected by fall 2003.

The emerging European carbon regime is likely to add value to investments in high-quality funds such as the CDCF, given its expected stringent regulatory requirements on the transfer, acquisition and use for compliance purposes of carbon credits.

Why has World Bank's President James D. Wolfensohn called the CDCF "an essential next step" in the equitable development of the emerging carbon market?

Many small-scale projects, such as mini-and micro-hydro, wind energy, small municipal, and agricultural waste, as well as energy efficient appliances and clean transport, can benefit local communities as they abate greenhouse gas emissions. But these same communities are likely to be bypassed by carbon investors—proportionately higher business costs and bigger risks put them at a disadvantage when competing for carbon finance.

The World bank has launched the Community Development Carbon Fund as a means of channeling carbon finance to communities in smaller and poorer countries.

Through the CDCF the Bank will manage risk and lower transaction costs to enable private sector dollars to support small scale renewable energy projects right down to the community level in the poorest countries with the riskiest business environments.

The CDCF forge partnerships on the ground to lower costs and extend the reach of the market through partnerships with governments and corporations.

What is CDCFplus?

Least developed countries and poorer communities will only become players in the emerging carbon market—with its potential development benefits—if the international donor community helps them develop local capacity and expertise to prepare and manage carbon projects.

To this aim, the World Bank has created a multi-donor technical assistance trust fund, called CDCFplus, which will work in parallel with the CDCF.

CDCFplus will help create supportive CDM approval systems in host countries, including CDM designated national authorities, which are the single most critical factor determining the attractiveness of a CDM investment.

CDCFplus, will work with competent local intermediaries to lower the substantial front-end expenses that are still necessary to reduce investment risks, facilitate CDM project development and replication, streamline project procedures, and bring proposals to validation stage.
 





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