Facing the severe consequences of global warming, climate change has emerged as a key concern for the World Bank. The Prototype Carbon Fund, which was established four years ago to demonstrate how project-based emissions transactions can mitigate climate change, is now being fine tuned with the help of DNV.
Sea level rises, warming temperatures and increased variability and volatility in weather patterns will have a significant and disproportionate impact in the developing world, where the world's poor remain most susceptible to the potential damages and uncertainties of a changing climate. The World Bank is engaged in a variety of activities to mitigate climate change. This process includes exploring mechanisms that will provide opportunities for addressing climate change while facilitating new resource flows for its clients.
In 1999 nations and companies worldwide were invited to invest in the newly established Prototype Carbon Fund, which was soon fully booked with 180 million US dollars invested by six governments and 17 companies.
The fund is managed by Ken Newcombe, who has worked for the World Bank for 20 years and is also fund manager for the newly established Community Development Carbon Fund and the BioCarbon Fund. "It is a key role for the World Bank to help the developing world benefit from the enormous investments required by the developed countries to combat the climate change problem. Our mission is to pioneer the market for project-based greenhouse gas emission reductions within the framework of the Kyoto Protocol and to contribute to sustainable development," he says.
Flexible mechanisms
The Kyoto Protocol provides for the possibility of creating transferable greenhouse gas emission reductions through investment in mitigation projects operated under so-called flexible mechanisms.
One of these is the Clean Development Mechanism, where industrialised countries or companies are permitted to finance emissions-avoiding projects in developing countries and receive credit for doing so. In this way companies can supplement their commitments at home by purchasing lower cost emissions in developing countries.
As a result, projects in developing countries gain a new source of financing for sustainable development in the energy, industrial and waste management sectors, within land rehabilitation and clean technologies. The Mechanism also enables industrialised countries and companies with greenhouse gas reduction commitments to purchase some of their required reductions in developing countries. It ushers in a new era of possibilities for developing countries, in which reductions in greenhouse gases are exchanged for development cash.
One of the reasons for establishing the fund is the need to understand and test the processes and procedures for creating a market in project-based emission reductions under the flexible mechanisms.
"To make these mechanisms work, it is vital to get practical project experience, as well as making sure that the lessons learned are disseminated properly. The Prototype Carbon Fund is therefore operated from a "learning-by-doing" approach," explains Newcombe. "While we are now more experienced than when we started in 1999, our enthusiasm for this new process has not decreased," he adds.
The Chacabuquito project
So far 15 projects have received funding. One of them, the Chacabuquito hydropower project in the Chilean Andes, is already installed and in operation. The 26-megawatt plant is scheduled to deliver one million tons of carbon dioxide emission reduction credits to the fund participants, and the power company is forecast to receive some 3.5 million US dollars in return. The independent verification has documented that 112 thousand tons of carbon emission reductions can be sold the first year of operation.
"These were the first verified greenhouse gas emissions reductions in the developing world, following the rules and procedures of the Clean Development Mechanism of the Kyoto Protocol," says Newcombe.
Credibility assurance
As the Kyoto Protocol only allows industrial countries to offset their emission with real, measurable and additional emissions reductions, it has been important to develop international regimes to assure the credibility and quality of emission reductions. This requires the application of an agreed framework, ‡
which can assure international investors and other interested parties that verified and certified emission reductions fully satisfy all Kyoto Protocol criteria.
The Protocol has therefore introduced validation, verification and certification by independent entities. The term validation means the approval of a project’s design documents, while verification is the periodic auditing of monitored results. Certification is the written assurance that, in the verification period, a project has achieved the stated emission reductions. The World Bank has collaborated with the industry in developing standards for this work in connection with climate change projects.
"DNV has had a pioneering role in this work, and they have also validated more than half of the 15 projects being funded so far, including the Chacabuquito project," explains Newcombe
Carbon market trade between the OECD and the rest of the world is forecast to exceed one billion dollars a year by 2008. It is the World Bank’s responsibility to make sure that an equitable share of this money, much of it from the private sector, ends up in the hands of the poorer countries and benefits poor communities. "We are now fine-tuning our strategy and expanding our product line to add depth and credibility to the global carbon market with a view to increasing private sector confidence and participation in carbon trading with developing and transition economies," says Newcombe.