Carbon Markets March On

The UN’s December Copenhagen meeting on climate change ended with draft text of an agreement that left many provisions undecided. The subsequent uncertainty about the future of international action on climate change suggested that interest in carbon trading and carbon financing could be depressed (FT). But Joelle Chassard, manager of the World Bank’s Carbon Finance unit, sees hopeful signs in the February 1 submissions by more than fifty countries on their voluntary emissions reduction actions (PDF) under the Copenhagen Accord. "We feel quite encouraged, but from an outsider’s perspective, it may not be as meaningful because there still is so much work to be done to translate that political commitment into the nitty-gritty of implementation," Chassard says, arguing the overall demand for carbon trading will continue to rise. "[If] you talk to companies, all the economic actors working on future development, it’s almost now a given that you have to take into account the impacts of climate change." She notes that movement on a U.S. carbon market is also playing a role in improving the outlook for global carbon markets. "We do hope if there is a legislation adopted by the U.S., it will include some sort of cap-and-trade scheme," she says. "That will create a lot of demand for emissions-reducing projects in developing countries."

What impact is Copenhagen’s lack of clarity having on markets? Will the Copenhagen Accord’s voluntary target approach be enough to bolster markets?

We don’t think that Copenhagen was such a disaster. We were hoping the uncertainty would diminish, but we were not confident that everything would become clear after Copenhagen. Prices in the market have not fallen that significantly. They have actually stayed relatively steady. This reflects the fact that the market had already managed expectations about the outcome of Copenhagen. There is still a lot of uncertainty, but if you look at the totality of what happened in Copenhagen, we certainly feel that there is cause for optimism. Important political signals on certain aspects of the future climate change regime have been stated, and now of course all the work that needs to be done is to build on this important direction that Copenhagen has laid out. We are quite confident that the latest submission [by countries under the Copenhagen Accord] over the weekend confirmed that there is momentum to continue on this.

What specifically has you confident?

There is definitely a momentum [behind the scenes] to make significant improvements in the way the current flexibility mechanism of the Kyoto Protocol operates. The discussions from the CDM [Clean Development Mechanism] are moving quite nicely and reflect a general recognition that, yes, there are problems and we need to fix them. I would say also the prospect of a possible mechanism or a cap-and-trade regime in the United States has had a very positive influence on encouraging the current regulators to look more seriously at the weaknesses and the efficiencies of the Kyoto Protocol mechanism. There has been significant progress on the whole REDD [Reducing Emissions from Deforestation and Forest Degradation] agenda, and reinforced in the Copenhagen Accord, you saw an immediate direct reference to moving immediately on the REDD mechanism.

There was also in the Copenhagen Accord a political statement that acknowledged, or at least opened the door to continue exploring, the role of markets. Even more significantly, it’s really the first time, in Copenhagen and pre-Copenhagen, where developing countries have stated that they are committed to undertaking significant mitigation action. From a general perspective, there is a strong movement toward acting on friendly change and putting in place the means to act in a meaningful way, both by bringing public finance and letting the market play a role in supporting this mitigation action. We feel quite encouraged, but from an outsider’s perspective, it may not be as meaningful because there still is so much work to be done to translate that political commitment into the nitty-gritty of implementation.

The World Bank’s Carbon Finance unit started working on financing carbon projects more than a decade ago. What do you tell people when there is all this uncertainty?

What we say is, first, this is nothing new for us. When we started in 2000, the world was much more uncertain than it is today. The world knew nothing about how carbon markets were going to function, how the mechanism would be used. The market has developed sufficiently, and carbon finance has reached a certain level of maturity, certainly not yet an adult, but we have been able to garner enough experience to have a pretty good idea of how it should evolve. We feel that the next ten years are there to build on the first ten years, and we are putting in place instruments that will help pioneer what could be the future market instruments.

The trend is going to be that the price of carbon will go up, because the more seriousness there is in doing mitigation, the more the demand for emission-reduction investment will go up. Certainly, greater clarity on an international regime is needed to make that happen. But if you talk to companies, all the economic actors working on future development, it’s almost now a given that you have to take into account the impacts of climate change, and there is an expectation that as an economic actor you will be subjected to certain kinds of regulation. It’s clearer in some parts of the world than in others, but companies are definitely anticipating that and already acting on it.

What’s the biggest worry for carbon financing outside of a lack of clarity on an international regime?

Carbon finance is a very important catalyst for mitigation, but it doesn’t do everything. It needs help from other elements. Some countries pursue policies that go against the implementation of certain types of projects. Their energy-sector policies are not yet fully consistent with promoting CDM projects. We have, in many countries, tariff policies that are not adequate yet. Or you have simply the investment climate that is not fully adequate to promote private investment. For instance, the African continent has so far [participated] very little in the [Clean Development Mechanism]. One reason for that is that they are low emitters, so the potential for reduction is limited. But participation in the market is certainly lower than it could occupy if it were fully responding. Some of this is due to a private sector that is much less vibrant than in other regions of the world. Part of it is a perception of risk for investment in these countries. We need to help overcome this bias.

Is this atmosphere of uncertainty about what Copenhagen accomplished hurting carbon-finance investment in developing countries?

It’s probably slowing down the pace at which market participants were ready to continue their activities. I see more of a slowdown, and slowdown just means that getting developing countries to fully embark on mitigation strategies is not going to go at the pace we would like. We know how much must be put in place before you really can get into action, and it’s something that I think richer countries don’t fully appreciate. We see also market players that are already very actively involved in considering projects for post-2012 and so on. We are receiving a lot of requests to consider programs in developing countries that could be supported by the market. That for us is very encouraging.

There’s some discussion about shifting the Clean Development Mechanism to focus on least-developed countries. Right now, India and China have the bulk of the projects. What do you think of this plan?

That least-developed countries should benefit from the market to a greater extent than they have today is something we fully support. I mentioned earlier that Africa is hardly anywhere to be seen in the carbon market. They have less than 2 percent of the [CDM] projects that are currently active. In our own operations, Africa represents 21 percent of the number of CDM projects, so we have always had that focus, and we see by working in Africa that there is a lot of potential that needs to be further developed in carbon finance.

But if you stand back and ask yourself, "How can we tackle the challenge of climate change?" we need to continue to have the big countries, the big emitters [such as China and India] not only continue their mitigation efforts but accelerate. And we cannot just decide because we have seen it work for them, that we will pull the plug. It just does not make sense. We need the global community to encourage these countries to go forward, [but] not indefinitely. There is recognition that at some point they will need to rise to the same level as developed countries. But we are only at the beginning of these mitigation efforts. So we feel the mechanism needs to be available to everybody at least for another few years.

Some activists were disappointed with the tabling of deforestation policy in Copenhagen. How much has this affected REDD projects?

We are very encouraged by what Copenhagen did, and by the follow-up to Copenhagen that is taking place on REDD. The day you would tell me an environmental group is happy, then we must have a problem. They are there to push and push, and maybe their expectations were not realistic. We welcome very much their input and their push, we find it very constructive, but REDD will not appear in isolation. The text has been negotiated already to a very large extent, but it’s not going to be a stand-alone text. It will have to wait for all of the other pieces to fall into place. But the good thing is in the meantime, the countries are already getting ready.

What do you think about the debate over whether the World Bank should be in charge of the proposed global green finance fund? Several developing countries said they would prefer to have a different organization, maybe one created out of the negotiations.

In the end, it’s very important to let the parties negotiate. We are aware of the criticisms that are voiced about the bank; we acknowledge that a lot of points of view are justified, and the bank as an institution is already responding to this criticism. There is a lot of discussion currently among the shareholders of the bank about the relative distribution, the voice to be given to its membership. So this is a debate that goes well beyond climate change. But because [climate change] is an area where finance is such a critical aspect of future action, the role of institutions like the World Bank is debated. It’s an encouraging trend that the developing countries want to have a bigger say, and we need to listen to how they want to conduct their affairs. The world is different from what it was sixty-five years ago when institutions like the World Bank were established. The world is changing, and we need to change. We are ready to help in whichever way the parties decide the bank should play a role. We believe there are services we can offer, but we will do so in response to demand from developing countries.

The United States is still debating a carbon market, and the climate bill’s future is unclear. How much of an impact would a U.S. market have on carbon finance?

Even before there is any legislation in place, the debate that is taking place in the United States is having already a positive influence on the current market mechanisms. Being users of the mechanism, we know that the U.S. mechanism can’t be vastly different from the existing ones. But if they [improve on some of the deficiencies in the current mechanisms], it provides an incentive for the existing ones to align themselves and get improved in the process. We do hope if there is a legislation adopted by the U.S., it will include some sort of cap-and-trade scheme, because we see it’s working well [and would] like to expand that. That will create a lot of demand for emissions- reducing projects in developing countries.