Going Forward: Carbon Finance in the Latin America and Caribbean Region
This article was originally written by Natsuko Utsumi for World Bank’s web site.
In 1997, the Kyoto Protocol was adopted unanimously as a part of the United Nations Framework Convention on Climate Change. As of April 2008, 178 states have signed and ratified the treaty.
Under this treaty, signatory countries that are industrialized must reduce their greenhouse gas emissions over the period between 2008 and 2012 by an average of 5.2% below the 1990 level, amounting to about 550 million tons of CO2 equivalent. Signatories that are developing countries, such as Mexico and Brazil, are exempt from this requirement.
Under the Kyoto Protocol, industrialized countries are expected to reach their reduction targets by reducing domestic emissions. However, the cost of reducing emissions varies considerably from region to region, depending on the level of industrialization and economy. That is to say, it is much more expensive for an industrialized country than a non-industrialized country to attain the same amount of reduction.
The Kyoto Mechanism seeks to maximize the global economic efficiency of abatement based on the fact that greenhouse gasses are a ‘global pollutant’ that affects the entire world equally, irrespective of their country of origin. In other words, cutting one ton of CO2 in the developing countries is just as effective as cutting one ton in the industrialized countries.
As one example, relatively cheap improvements made to older coal-burning power plants in developing countries can produce a substantial reduction in emissions that would be far more expensive to achieve through improvements made to modern combined-cycle gas plants that are more common in industrialized countries.
Through the following two project-based mechanisms, the Kyoto Mechanism provides parties with cost-effective opportunities to reduce emissions or remove carbon from the atmosphere:
• The Clean Development Mechanism (CDM) supports projects in developing countries that result in reduced emissions or increased carbon sequestration that can be purchased by Annex 1 countries to offset their domestic targets.
• QUESTION TO NATSUKO: Please check my changes above for appropriateness. I am still new to these expressions…
• The Joint Implementation mechanism (JI) is similar to the CDM, but is applicable to countries with economies in transition.
Carbon Finance at the World Bank
The World Bank Carbon Finance Unit (CFU) uses money contributed by governments and companies in OECD countries to purchase project-based greenhouse gas emission reductions in developing countries and countries with economies in transition. The emission reductions are purchased through one of the CFU’s carbon funds on behalf of the contributor, and within the framework of the Kyoto Protocol’s Clean Development Mechanism (CDM) or Joint Implementation (JI).
The Latin America and Caribbean region is among those in which the Bank’s carbon finance initiatives are being most actively implemented.
Carbon Partnership Facility (CPF) and Forest Carbon Partnership Facility (FCPF)
The World Bank is presently striving to evolve from being a representative of just the buyers to being an equal representative of the sellers as well. The business model remains the same, whereby the Bank raises and manages money for the buyers. But by combining seller and buyer in a partnership, it seeks to design a framework that reflects the interests of both parties.
Carbon Partnership Facility (CPF) is designed to spur the expansion of CDM volume within the current business categories (energy, transport, industry, etc.).
Forest Carbon Partnership Facility (FCPF) seeks to create a new asset category. Since the prevention of deforestation as a means of reducing emissions is currently not a component within the CDM, the FCPF is not active in areas where CDM is applicable today.
The Forest Carbon Partnership Facility (FCPF) was developed because forests are more important left standing than cut down. The FCPF will reduce deforestation and forest degradation by compensating developing countries for carbon dioxide reductions realized by maintaining their forests. The FCPF will build the capacity of developing countries in tropical and subtropical regions to reduce emissions from deforestation and degradation (REDD) and tap into a future system of positive incentive for REDD.
As of April 2008, 13 Latin American countries have expressed significant interest in the FCPF, and 3 countries have submitted projects.
CDM Projects in the LAC Region
The Latin America and Caribbean region (LAC) is among those in which Carbon Finance projects are being most actively implemented. In the LAC region, 27 Carbon Fund projects have been signed in the energy and environment sectors, representing a value of 96,912,676.8 US dollars in Emissions Reduction Purchase Agreements (ERPA) and a volume of 19,197,614 tons CO2. The breakdown in projects is as follows: 7 CDCF projects (Community Development Carbon Fund), 7 PCF projects, 8 BIoCF (Bio Carbon Fund) projects, 4 Spanish Fund projects and 1 Danish Fund project.
QUESTION TO NATSUKO: Is the number “96,912,676.8” okay? How about rounding down to “9.69 million”? Also, I am not sure what is being counted here. Is the word “project” okay (i.e., 27 Carbon Fund projects)? I am taking a hint from the examples below. Also, shouldn’t there be a definition for “PCF”?
The following are examples of some of the projects currently being implemented in the Latin America and Caribbean region:
• BioCarbon Fund (BIoCF)
The BioCarbon Fund provides carbon finance to projects that sequester or conserve greenhouse gases in forests, agro- and other ecosystems.
The BioCarbon Fund tests and demonstrates how land use, land-use change and forestry (LULUCF) activities can generate high-quality emission reductions with environmental and livelihood benefits that can be measured, monitored and certified, and stand the test of time.
The BioCarbon Fund is a public/private initiative established as a trust fund administered by the World Bank.
Precious Woods Project (Nicaragua)
The Nicaragua Precious Woods Project supports the generation of 297,045 tons of carbon dioxide emission reductions by the year 2017 through reforesting 600 hectares of privately owned degraded agricultural lands in southern Nicaragua. In addition, within the same land and as part of this project, the project’s aim is to conserve approximately 350 ha of secondary forest and mature trees, for which it will not claim carbon credits from the BioCarbon Fund.
As a side benefit, this project seeks to create a sustainable and commercially viable source of wood for sale in domestic and international markets that will reduce pressures on natural forests. In this way, this project will increase carbon sequestration and enhance ecological, wildlife, and landscape diversity, while providing sustainable, income-generation options to poor and vulnerable communities.
• Community Development Carbon Fund (CDCF)
The single overarching factor which defines this fund and differentiates it from the other World Bank carbon funds is the generation of community benefits by the projects that it finances. The CDCF supports projects that combine community development attributes and emission reductions to create “development plus carbon” credits. These projects are opportunities for small communities in weaker economies to obtain clean water, improve health conditions and create jobs for women. At the same time they represent investments in clean technologies that will help reduce greenhouse gas emissions and mitigate climate change.
Olavarria Landfill Gas Recovery Project (Argentina)
The Argentine Olavarria landfill gas recovery project helps mitigate climate change by financing the improvement of municipal solid waste management and strengthening its commercial viability by leveraging additional revenue from carbon finance at the local landfill.
To achieve these objectives, the project will capture and destroy methane gas currently generated at the landfill. The project will also implement a micro-social enterprise to improve overall living conditions of the 550 inhabitants in the rural village of Espigas by enhancing the potable water and water heating supply at the local school through a renewable energy system,
The next step for The World bank is to further develop and expand the Carbon Fund market. This will involve moving from the funding of individual projects to the development of a market system, not only within the framework of the World Bank, but also within the countries themselves. In the LAC, the World Bank is working to develop internal markets, and markets that communicate with other Carbon Fund markets outside of the LAC, as well as local institutions that have the capacity to engage in larger-scale transactions.