4 September 2002 – At the World Summit on Sustainable Development in Johannesburg on Monday, the World Bank launched a $100m Community Development Carbon Fund (CDCF), in collaboration with the International Emissions Trading Association (IETA).
The CDCF will provide carbon finance to small-scale projects in small developing countries and rural areas of all developing countries. The emphasis within the CDCF will be on renewable energy, energy efficiency, methane capture, and agro-forestry projects, with significant and measurable community development benefits.
The new fund is designed to put poverty reduction front and centre. “By delivering the benefits of carbon finance right down to the community level and to the farthest reaches of poorer countries and rural areas, carbon assets will serve sustainable development,” says Kenneth Newcombe, Manager of the World Bank Prototype Carbon Fund (PCF).
Two years after it launched its carbon finance business with the Prototype Carbon Fund (PCF), the World Bank is expanding its carbon products and their reach with this new proposed fund. Carbon finance activities have taken on a new sense of urgency as evidence continues to mount that the Earth is getting significantly warmer, and some changes in climate are inevitable. Climate change, and accompanying disrupted weather patterns-caused by the so-called greenhouse effect through atmospheric loading of greenhouse gases (carbon dioxide, methane, etc) could wreak havoc on the planet, particularly on large parts of the developing world.
The threat climate change poses to the poor is of particular concern to the World Bank. “Given our mission of sustainable poverty reduction, the World Bank is committed to helping its clients protect themselves from, and adapt to, the impacts of climate change,” says Ian Johnson, Vice President of the Environmentally and Socially Sustainable Development network. “However, we also recognize that without action to limit global greenhouse gas emissions, the Earth’s climate will warm at an unprecedented rate and undermine the very foundation of sustainable development.”
Many small-scale projects-such as mini- and micro-hydro, wind energy, small municipal and agricultural waste projects, energy efficient appliances, clean transport, and agro-forestry projects-offset, or sequester greenhouse gases. Higher business costs and risks in small and less developed countries-in particular in the poorer rural communities of these countries-put small-scale projects at a disadvantage when competing for carbon finance. Because of this, they are likely to be bypassed by carbon investors. “Small countries and small projects will be heavily discriminated against in the carbon market,” says Newcombe. ” The reality is that 80 per cent of developing countries won’t see any action though the CDM (the Clean Development Mechanism of the Kyoto Protocol). So the strategic decision is to do the CDCF.”
Michael Rubino, who is marketing the new funds to clients, says this is a particular challenge, “The Bank wants to extend the benefits of carbon finance to its clients, but for the most part, these clients are poor developing countries. The challenge is how to get this to a scale where it makes sense…how to, for example, bundle these projects.” By working through local intermediaries such as financial institutions, micro-credit institutions, co-operatives, and NGOs, and by applying streamlined project procedures compatible with small-scale Kyoto projects, the CDCF will seek to lower transaction costs and the risks involved in developing such projects.
There is a lot riding on this effort: The Community Development Carbon Fund may be the best or only opportunity for some countries to get any benefits from the Kyoto Protocol. With the CDCF, the World Bank will link private investors with community development projects, so that there are equitable benefits under the Kyoto Protocol, benefits that also go to the poorest of the poor.
The Bank has already received numerous project proposals that are potentially eligible within the CDCF and have distinct health or livelihood components.
For example, there are many communities around the world that go without electricity or have only intermittent electrical power. Yet these same communities sit on untapped renewable energy sources in the form of crop residues from coffee, sugar cane, or rice farming. They use imported diesel fuel or oil while burning off their crop wastes.
One proposed CDCF project in Thailand offers a different scenario: farmers would turn waste from their rice fields into a profitable and green carbon business. A newly formed power company will buy up rice husks from the farmers to burn in the new power plant, providing electricity for villages. The farmers will obtain additional employment and income, and after the first year, the project is intended to be carbon neutral.
The Bank is committed to independent monitoring of the development benefits that would come out of such CDCF projects, bundling these community development attributes with emissions reductions to create ‘Development plus Carbon’ and using financial innovation to improve the lives of the poor.
The new fund will build on the success of the Prototype Carbon Fund, which began operations in April 2000. The PCF was designed as a prototype to show how the Kyoto Protocol’s project-based mechanisms might operate. The primary focus is on renewable energy technologies-such as wind, small-hydro, and bio-mass energy technology-that would not be profitable without financial support from the PCF.
Six governments and 17 companies-including power and oil companies from Japan and Europe, and leading global banks-all from industrialized countries, have contributed funds to the PCF, which to date has projects with an emission reduction potential of more than $100m under preparation.
The PCF will have negotiated 20 carbon purchase agreements by the end of 2002. They include the West Nile hydropower project in Uganda, sustainable fuelwood and charcoal production for the pig iron industry in Minas Gerais, Brazil, afforestation of degradable agricultural land in Romania, a wind farm in Costa Rica, and solid waste management in Latvia. Together, these 20 projects will result in total carbon emission reductions of more than 25m tons of carbon dioxide equivalent.
The PCF’s projects are all subjected to independent validation and verification and may be potentially certified to receive carbon credits under the rules of the Kyoto Protocol-the 1997 agreement to cut industrialized world emissions of greenhouse gases.
Fund participants, in June 2002, expanded their contributions to the PCF from $145m to $180m. “These companies see the PCF as a powerful tool for learning how market based mechanisms can help mitigate climate change, while at the same time giving them the opportunity to reflect themselves as socially responsible companies,” said Newcombe.