The World Bank seeks to expand a plan to buy emission credits from projects including those that capture heat-trapping gas at garbage dumps, underpinning demand in the carbon markets for the first time in nine years.
The proposal would initially use options to help spur about $100 million in government donations to a World Bank methane-reducing facility, according to a bank consultation document obtained by Bloomberg News and confirmed as genuine by Robert Bisset, a spokesman for the lender in Washington. The program is designed to create more reductions for each dollar spent because only projects offering to cut emissions for the lowest prices would win access to its money, the document shows.
World leaders are gathering in New York Sept. 23 to spur climate talks through next year. Cutting methane, which traps 21 times more heat than carbon dioxide, provides the best opportunity to slow global warming through 2050, according to a Group of Eight report published on the World Bank website. Projects reducing emissions are threatened by a 99 per cent drop in next-year United Nations carbon credit prices since 2008.
“It’s a good idea, because the incentive is missing in today’s market,” said Marten von Velsen-Zerweck, managing partner at Nserve GmbH, a developer of credits in Hamburg. “The challenge is to expand the model to cover other types of projects,” he said Sept. 2 by phone.
The bank and the U. State Department are among those working to expand the planned program. “Several potential donors have come forward to express interest to contribute,” according to the document.
‘Taxpayer value’
The US has backed the initiative since its G8 presidency in 2012. “This facility will pioneer an innovative climate finance model with great potential to support low-carbon investment in ways that provide better value and lower risk for the taxpayer,” the department said in an e-mailed response to questions.
Private developers of carbon credits would need to bid for put options to sell to the facility under the plan, driving down the level of subsidy paid by governments, according to the World Bank document. Put options give the holder the right to sell at a certain strike price, but not the obligation.
Only projects willing to sell for the lowest strike prices would win access, the document dated June shows.
The options would also encourage projects to participate, the World Bank said. They can sell their put option if prices in carbon markets are higher, cutting their risk.
The document shows examples with a strike price of $5 a metric ton and a premium for the put option of 30 cents a ton. That’s compared with the average cost of reductions of $7.63 a ton agreed by World Bank facilities through 2012, according to data in the bank’s Carbon Finance Unit annual report for that year.
Not dependent
“The facility is not dependent on a carbon market,” the State Department said. “It just borrows the monitoring and verification systems of the carbon market to quantify the emission-reduction benefit of projects.”
It creates an instrument that’s fungible across climate finance and carbon markets and gives project developers greater certainty they will get some finance should they build a successful project, it said.
UN Certified Emission Reductions for December slipped to a record 8 euro cents ($0.13) a ton in May. They were unchanged today at 16 euro cents a ton on ICE Futures Europe in London at 4:17 p.m.
The Washington-based bank had planned its first auction as early as this year. That’s been reconsidered, it said by e-mail.
“A pilot facility is being discussed with stakeholders,” Bisset said. “The agreed structure and timing will be announced in the coming weeks.”
Existing standards
Emission reductions purchased by the facility will be retired “and/or not resold into carbon market,” according to the document. It will rely on rules of existing standards, citing the UN’s Clean Development Mechanism, the Verified Carbon Standard and the Climate Action Reserve in Los Angeles.
UN envoys are seeking to scale up climate-protection projects, especially in developing nations, as greenhouse-gas output continues to rise globally. Carbon dioxide emissions from energy use climbed 2.1 percent to a record 35.1 billion metric tons last year, according to data published in June by BP Plc.
Setting rules
The World Bank “quick win” facility may initially target 1,200 methane-cutting projects in developing nations, representing 850 million tons of carbon dioxide equivalent through 2020 from 2013, the document shows. It’s unclear which projects will be eligible because rules are still being set.
In July, German Chancellor Angela Merkel promised 750 million euros to the UN Green Climate Fund, the first major pledge it has received. It’s seeking to raise as much as $15 billion by year-end.
The World Bank facility is “intended to inform future scaled-up flows of pay-for-performance climate finance, including through the Green Climate Fund,” according to the bank’s document.
