Carbon finance is an important revenue stream for greenhouse gas mitigation projects. It has so far played a catalytic role in leveraging other sources of finance in support of low carbon investments. However, there is still room for improvement, according to an initial assessment released Wednesday by The World Bank.

The publication, 10 Years of Experience in Carbon Finance -- Insights from working with carbon markets for development & global greenhouse gas mitigation, looks at the World Bank's experience of working with the Kyoto Protocol’s flexibility mechanisms (Clean Development Mechanism and Joint Implementation).

According to the assessment, the experience of carbon finance has -- and continues to be -- one of rich learning. It says significant capacity-building has occurred and must be sustained. Over the last decade, the assessment highlights the most important lessons learned by the World Bank as:

• The CDM and JI market mechanisms are an important tool for private sector action on climate mitigation, which should be further encouraged.

• There are significant developmental and social co-benefits associated with market mechanisms and these need to be valued.

• Insufficient predictability in the CDM is an obstacle to maximizing the leverage potential of carbon finance for low carbon investments.

• A supportive enabling environment and overall investment climate are key to attracting CDM investments.

• Some CDM decisions have had a disproportionate negative impact on Least Developed Countries.

• Environmental integrity is essential for both the overall climate regime and the carbon market. However, additionality remains a challenge due to its inherent subjective nature.

• Improvements to the CDM are needed to scale-up emission reductions. Measures are already being taken and must be sustained and stepped-up.

The World Bank's carbon finance operations expanded from the pioneering Prototype Carbon Fund, which helped catalyze a nascent carbon market in 2000, to ten funds and facilities with a current capitalization of more than US$2.5 billion. The funds and facilities are financed by public and private entities from industrialized countries to support CDM and JI projects and purchase ensuing emission reductions. The experience and initial insights gained from this work are being presented at the UN climate change meetings in Copenhagen, to serve as a springboard for discussions and further analysis.

The World Bank supports greenhouse gas (GHG) emission reductions through ten funds and facilities, which focus on a number of different sectors and countries. These include, for example, the BioCarbon Fund which focuses on forestry and land-use projects, and the Community Development Carbon Fund, which focuses on projects in least developed countries that have strong social co-benefits in addition to reducing GHG emissions.

(China Development Gateway December 10, 2009)