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Global Context
In June 1992, over 180 countries at the "Earth Summit" in Rio de Janeiro adopted the United Nations Convention on Climate Change (UNFCCC), a legal framework that commits Parties to the Convention to start the process of stabilizing climate-altering greenhouse gases in the atmosphere. The Kyoto Protocol, which was adopted under the UNFCCC, commits industrialized countries to reduce their carbon emissions by an average of 5.2 percent below their 1990 levels in the period 2008-2012.
To meet these commitments in the most cost-effective manner, the Protocol contains provisions allowing Annex I countries
some flexibility to meet their obligations through projects generating Emission Reductions (ERs) elsewhere. Two provisions
are particularly important:
- Article 6 allows for the Joint Implementation (JI) whereby an Annex I country may acquire emission reduction
units when it helps to finance projects that reduce net emissions in another industrialized country (including countries with economies in transition).
- Article 12 provides for a similar project-based mechanism, the Clean Development Mechanism (CDM)
to assist developing countries in achieving sustainable development by permitting industrialized countries to finance
emissions-avoiding projects in developing countries and receive credit for doing so.
The purpose of both mechanisms is to assist host countries with sustainable development through the transfer of cleaner
technology and financial resources for specific projects, while at the same time contributing to the objectives of the UNFCCC by lowering
emissions of greenhouse gases.
Committed to Reduce Carbon
Companies can supplement their commitments at home by purchasing potentially lower-cost emission reductions in developing countries and countries with economies in transition. As a result, projects in these countries will get a new source of financing for sustainable development in the energy, industrial and waste management sectors, land rehabilitation, and in the introduction of clean and renewable technologies. Industrialized countries can meet part of their Kyoto obligation, while the threat of climate change is reduced at a lower overall cost.
The Prototype Carbon Fund (PCF) was created as a response to the need to understand and test the procedures for creating a market in project-based emission reductions under the Kyoto Protocol's flexible mechanisms. The PCF has played a pioneering role in developing the market for greenhouse gas emission reductions, while promoting sustainable development, and offering a learning by doing opportunity to its stakeholders, and has paved the way for the additional carbon funds established by the World Bank.
Carbon Emission Reductions as
a Tool for Development
The private market for project–based emission
reductions, still in an early stage, does not yet
have significant volume, and the potential benefits
have not reached many developing countries.
The World Bank’s carbon finance products
help grow the market by extending and expanding
carbon finance to both developing countries
and economies in transition—linking private
sector buyers of carbon credits with climatefriendly
projects seeking financing. These carbon
finance products are helping to create an
environment in which the private sector can
more easily use their resources in support of
climate–friendly and environmentally and socially
responsible projects.
Mitigating climate change by reducing global greenhouse gas emissions is classified as an important
priority for World Bank operations, leading to substantial benefits for Bank borrowing member
countries. The limited existing capacity in developing countries in originating Clean Development
Mechanism (CDM) and Joint Implementation (JI) projects and undergoing CDM/JI transactions led
the World Bank Group to undertake a pioneering role in developing the market for greenhouse gas
emission reductions through the establishment of the Prototype Carbon Fund (PCF).
The World Bank’s carbon finance initiatives, including the PCF, are an integral part of the Bank’s
mission to reduce poverty through its environment and energy strategies. The threat climate change
poses to long-term development and the ability of the poor to escape from poverty is of particular
concern to the World Bank. The impacts of climate change could unravel many of the development
gains of the last several decades. The Bank is therefore making every effort to ensure that developing
countries can benefit from international efforts to address climate change.
A vital element of this is ensuring that developing countries and economies in transition are key players
in the emerging carbon market for greenhouse gas emission reductions. The role of the Bank’s Carbon
Finance Business is to catalyze a global carbon market that reduces transaction costs, supports
sustainable development and reaches and benefits the poorer communities of the developing world.
Carbon finance plays an important role in the Bank’s efforts to achieve a broad range of institutional
goals and to meet commitments made (a) through sector strategies in the infrastructure and environment
sectors, (b) at the Johannesburg World Summit on Sustainable Development, and (c) under
the Millennium Development Goals (MDGs). Over and above its impact on reducing greenhouse
gases—a specific MDG indicator in itself—carbon finance can directly catalyze sustainable investment
in a broad range of areas, ranging from afforestation and biodiversity, to renewable energy and solid
waste management.
What are the World Bank Strategic Objectives in the Carbon Finance Business?
The lessons of experience have profoundly influenced the strategic direction of the World Bank's Carbon Finance Business (CFB). Based on the founding premise of the Prototype Carbon Fund (PCF)—"learning-by-doing"—the strategic direction of the Bank's CFB today has been informed by its unique operational experience and by in-depth and ongoing consultations with Parties to the Kyoto Protocol, the private sector, and NGOs. Therefore the current strategic objectives are:
- Expanding support for core carbon market development under CDM and JI, the Kyoto Protocol's project-based market mechanisms, through OECD funds;
- Extending the benefits of carbon finance to the least developed countries and to the poorer communities in all developing countries;
- Demonstrating carbon finance for carbon sinks (sequestration) to achieve sustainable natural resource use, conservation, and sustainable rural livelihoods; and
- Strengthening and expanding capacity building initiatives for mitigation and adaptation.
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