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Can financial markets solve the climate crisis?

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Can financial markets solve the climate crisis?

The headline is the title of a new report by the Italian NGO Campagna per la riforma della Banca Mondiale (CRBM) questions the role of the World Bank in financing responses to climate change. It’s a funny question to ask, particularly given the current state of the global economy (which, just in case you’ve not noticed, hasn’t recovered from a massive meltdown in 2008 – a result of massive deception in the financial markets).

Nevertheless, the CRBM report is important. It takes four assumptions about the World Bank’s role in climate finance and explains why what the Bank is proposing are false solutions. The report concludes that the Bank’s involvement in climate financing is “preventing an honest and sound discussion on the actual role of states and public policies in guiding the needed interventions to face up to and tackle climate change.”

The second part of the report (posted below) takes apart the assumption that carbon markets can reduce the costs of mitigating climate change, of transferring technology and in reducing greenhouse gas emissions. The full report can be downloaded here (219.1 KB).

While the section of the report posted below is not specifically about REDD, it raises serious questions about the role of the World Bank – one of the major proponents of a carbon market financed version of REDD. The Bank’s support for carbon markets to date has failed. Why will things be any different with the World Bank’s promotion of trading in forest carbon?

The clear answer to CRBM’s (presumably rhetorical) question in the title of their new report is obvious: There is no way that financial markets can solve the climate crisis.

On the capacity of carbon markets to reduce the costs of mitigation, to facilitate the transfer of technology and help to achieve reduction in global GHG emissions

“The Bank has played a key role in carbon market development, and our work in carbon finance has been instrumental to increasing global benefits from environmental projects supported by the World Bank Group.”
Robert B. Zoellick, President, The World Bank Group[1]

The World Bank is one of the key proponents and architects of the market-based mechanism included in the Kyoto Protocol: the Clean Development Mechanism (CDM). The Bank is also one of the largest brokers of carbon credits globally, managing a portfolio of 12 carbon funds, including highly controversial initiatives such as the Forest Carbon Partnership Facility[2] and the newly established Partnership for Market Readiness (PMR), launched at the climate negotiations in Cancun in December 2010.[3]

The World Bank vision on climate change financing is based around promoting a dominant role for the private sector. In the Bank’s view this should happen both through direct investments (FDIs), that should contribute to financing the needed interventions in emerging economies but also in the other developing countries. This is responding primarily to the needs of its traditional donors, that in the context of the crisis are increasingly looking for new markets where their corporate sector can invest, not least in mitigation interventions in the global South. More than anything, the Bank is play a key role in favouring private sector intervention in climate change financing through the expansion of carbon markets, towards the ultimate goal of creating a single global market for trading carbon. In this sense, the Bank is using its “knowledge” – and the public resources it manages – to explore new approaches to create and trade carbon, regardless of the unproven development outcome of offsetting projects both for poverty eradication and global sustainability.

The World Bank openly states that it is promoting the sale of emission reductions to increase the bankability of projects, “by adding an additional revenue stream in hard currency, which reduces the risks of commercial lending or grant finance”.[4] In other words, the Bank is using its government backed position to give confidence to financial actors on trading carbon, reducing the risk connected with the high volatility of the price of carbon. Moreover, the Bank have been proactively setting up new initiatives over the years that help the private sector to get the needed “pro-poor and pro-environment” credentials for their offsetting operations in the global South, while continuing to emit back home.[5] In fact, with new offsetting schemes there will be more carbon to trade, and less of an incentive to polluting industries to reduce emissions back home, and consequently resulting in more emissions globally.

By engaging in such practices, the Bank is at odds with its own institutional mandate, contributing as it does to facilitating a trend of increasing global emissions for which the poor are already paying the higher cost and not getting any benefit.

In the Bank’s terms: “Carbon finance provides a means of leveraging new private and public investment into projects that reduce greenhouse gas emissions, thereby mitigating climate change while contributing to sustainable development”.[6]

The reality, however, is that the CDM has been in operation now for more than 15 years, and the World Bank itself has admitted on several occasions that “the mechanism is not working perfectly”, and that it did not deliver the expected results.[7] In 2010, the World Bank’s own Independent Evaluation Group found that its emission reduction sales have failed to catalyse large-scale investment in renewable energy or to effectively reduce global emissions.

As pointed out by civil society organisations such as International Rivers, or academics such as David Victor and Michael Wara at Stanford University, a high proportion of CDM projects are “non- additional”. This means that projects that benefit from CDM support would have been built regardless. This is the case for instance of large hydros like the Bujagali dam in Uganda or the Baba Hydropower Plant in Ecuador, projects which are already built or under construction when applying for CDM support.[8]

The World Bank has also been among the most active actors in lobbying to defend one of the most obvious loopholes for non-additional projects. The reference is to highly controversial HFC23 projects, which account for almost half of the emission reductions generated through the CDM. In August 2010, civil society organisations CDM Watch, Environmental Investigation Agency and Noe 21 called on the World Bank to “stop obstructing the overhaul of the United Nations program for awarding emission credits tied to hydrofluorocarbons”. The World Bank has been accused of including factual and analytical errors in a report dismissing concerns that the UN Clean Development Mechanism has generated “fake carbon credits” for HFC-23 projects that reduce greenhouse projects.[9] Tellingly, the World Bank pronounciation on the matter is not independent; on the contrary it is a conflict of interest given the purchase of “very large quantities of certified emission reductions through 2013 from HFC23 incineration projects that the Bank is purchasing through one of its carbon initiatives, the Umbrella Carbon Facility”.[10]

Often, the narrative put in place by the World Bank to justify the institution’s support for expanding offsetting schemes in developing countries has been misleading. First of all, as pointed out by several actors, carbon offsets are not emission reductions. By definition offsetting is designed to produce a “zero-sum” outcome, simply moving emissions where reductions are made, but not reducing them. According to the UN’s own data and as reported by Carbon Trade Watch,[11] since the implementation of the CDM, CO2 emissions worldwide have increased.

The World Bank’s false promise has been to make offsetting look like a contribution to “sustainable development”. Rather than favouring investment in clean technologies, the evidence shows that the CDM has extensively supported heavy polluting industrial projects, in particular in the chemical, fossil fuels and large hydropower energy production sectors. According to the Institute for Policy Studies,[12] as of 2008 less than 10% of the Bank’s carbon deals supported new renewable energy projects. More than 75% of the World Bank’s carbon portfolio effectively subsidised polluting, energy-intensive coal, chemical, iron and steel industries.

Moreover, these are investments that do not help poor countries to achieve poverty reduction and access to energy, which should be the primary goal of any World Bank intervention. Evidence from past large-scale power projects backed by the World Bank shows in fact how this kind of centralised approach to energy generation does not help to increase access to energy for the poor; in some cases it makes it even more difficult, while imposing heavy impacts on the local environment and communities.[13]

In spite of this evidence of failure both in reducing emissions and supporting the development of a low carbon economy and energy access in poor countries, the World Bank is today, more than ever, using its public backing to support the carbon market.

In the first place, through injecting certainty into the carbon market when doubts about the reliability of carbon trading and offsetting schemes have started to be cast among private investors due to the lack of agreement on a global deal for emission reductions after the first phase of implementation of the Kyoto protocol expires in 2012. Already after the unsuccessful conclusion of the climate negotiations in Copenhagen, uncertainty has prompted speculation among investors that demand for the certified emission reduction (CER) credits issued under the CDM could collapse in 2012, if the future of the scheme is not assured in the framework of a long term global
climate deal.

To ensure that the market was kept alive and that the CER price did not drop, in January 2011 the World Bank announced that it was ready to use $68 million of its carbon funding to buy CER credits that will be generated by CDM projects after 2012,[14] also inviting other investors to participate in the scheme and take the fund to a total of $105 million.[15] As stated by Joëlle Chassard, manager of the World Bank’s Carbon Finance Unit, to Business Green, “during a period of regulatory uncertainty, the initiative is helping to maintain demand for post-2012 carbon credits”.[16]

During the climate negotiations in Cancun the World Bank also launched the Partnership for Market Readiness (PMR). The new Fund created by the Bank is aimed at major emerging economies and middle income countries to promote “market readiness”, a strategically key objective for the Bank (and its investors) to open up new forms of carbon market beyond the existing CDM in countries which until now have not been obliged to monitor their emissions.[17]

A large part of the funding of the initiative will be dedicated to start systems to measure, verify and account emission reductions in economies that have not yet any binding obligations on emission reductions under the UNFCCC agreement, like China or Chile. The initiative of the Bank is de facto shifting the attention from a political question still being discussed by governments into a technical solution to operationalise what climate negotiators have not yet agreed on. According to Carbon Trade Watch, “this is a slow path towards blurring the distinction between the industrialised North, among private investors due to the lack of agreement on historically responsible for global emissions, and the global South that is suffering the impacts of climate change”.[18] Aside from representing a failure in terms of environmental and climate sustainability, carbon trading also represents a serious threat to global financial stability. Carbon offsets are mostly traded on the secondary market, a market which is uncontrolled. Furthermore, new financial derivative platforms fully dedicated to carbon trading have been established, and most exchanges betting on the future price of carbon are ‘over the counter’ and are not regulated.[19] Needless to say that the carbon emission certificate is a derivative in itself, given that it is based on an expectation of emission reduction which might not happen due to the questionable baselines against which it is calculated. In short, carbon trading is a further step in the financialisation process of the economy, which public institutions like the World Bank are fully supporting both through technical assistance to create new offsetting schemes and by directly purchasing CERs, assuming that once again financial markets will find the best solution for climate finance. Yet this could instead help to develop new and “green” financial bubbles of considerable scale.

As a matter of fact, carbon trading is often used by large utilities to hedge the risk related to energy future price and currency holdings. In other words, utilities use the operations pursued by their “trading arms” in a speculative way and not as much for compliance with emission reductions. Financial instruments used include hedge funds looking for high returns from speculation on the future price of carbon.[20]

Concern about the high risk of a bubble in ‘subprime carbon’ has already been raised by several civil society groups, including Friends of the Earth, Fern, The Corner House, and the international network on private finance BankTrack.[21] The issue of carbon fraud and corruption has also been discussed at Interpol’s 7th International conference on Environmental Crime, held in Lyon on September 2010.[22]

To summarise…

Governments and decision-makers, by sticking their head in the sand and denying all evident flaws, will not serve the scope of accepting carbon market as a viable, sustainable and pro-poor source of climate finance. Public support for the expansion of the carbon market offered by governments through the World Bank is only serving the advantage of the most polluting entities and those financial actors that aim to secure high short-term profits based on speculation on offset trading.

The Bank’s original failing lies first in having contributed to the creation of a mechanism like the CDM on the false promise that while contributing to reduce global emissions it would also contribute to poverty eradication. Second, regardless of the evidence about the failure of carbon trading in delivering development outcomes as well as the promised emission reductions, the Bank is using its technical advice and market position to continue to support the expansion of offsetting schemes.

The role played by the World Bank should be questioned by civil society and governments, even more today when bold action is more and more urgent in developed economies for drastic reductions in green house gas emissions. An independent analysis of the real effects and claimed development benefits of offsets trading should be undertaken before there is any moving forward with giving the Bank a mandate for the creation of offset systems at the national or regional level, both in developed and developing countries. In particular, assessing the risk of a subprime carbon bubble should be central when considering the existing documentation that proves the overall failure of the CDM mechanism.

Is there an alternative?

Carbon markets fit in the new approach pursued by the World Bank to raise development finance not from public sources but through financial capital markets. However, governments have explored several other solutions to raise capital, which could be reviewed and championed as sustainable and viable solutions to the uncontrolled expansion of financial capital markets. In the case of carbon markets, governments have the chance today to assess viable alternatives before further funding is provided through the World Bank and other public finance institutions to continue developing the market infrastructures which do not yet exist. In particular, innovative approaches such as various forms of taxation to generate public revenues globally should be explored and discussed. Public interest policies and laws and public finance that supports changes in economic markets, in particular in those sectors which are vital for reducing emissions – such as transport, energy and agriculture – should also be explored in parallel.

This is true in particular for governments in developed economies that have not been reducing their internal emissions since the establishment of, and experimentations with, carbon trading and offsetting over the last decade, as has been the case with members of the European Trading Scheme (ETS).

Public policies and interventions will be crucial in the near future to give a clear direction to private sector investments. The polluter pays principle, as well as incentives and subsidies for low carbon investments, have the potential to be real drivers for rebalancing the economy toward a low-carbon and sustainable development path.


[1] ^ Quote from the World Bank Carbon Finance website.

2] ^ The Forest Carbon Partnership Facility was established in 2007 during the meeting of the Conference of the Parties (COP 12) of the UNFCCC in Bali. Its purpose is to help the governments of forest rich nations to get ready to include forest related projects in global offsetting schemes. The initiative was created without the free, prior and informed consultation of indigenous peoples and forest dependent communities. According to many, the initiative pre-empted the discussion at multilateral level on initiatives to reduce carbon emissions from forest degradation and deforestation, at a time when no agreement was reached on including carbon trading among the instruments. For more information, see: “REDD: the realities in black and White”, Friends of the Earth, 2010.

[3] ^New Multi-Million Dollar Fund for Developing Country Carbon Trading Initiatives”, December 8th 2010

[4] ^

[5] ^ The principle at the core of the flexible mechanisms (CDM and Joint Implementation) is precisely that developed countries can save money by buying “emission reduction” credits from developing countries rather than cutting their own emissions, and instead pay developing countries to reduce emissions for them.

[6] ^

[7] ^ Civil society Meeting with World Bank staff in Poznan (Poland) held on Sunday, December 7th, 2008 during the COP 14 UNFCCC. The meeting was held under Chatham House rules.

[8] ^

[9] ^

[10] ^

[11] ^ Critical Currents, Dag Hammarskjold Foundation, Occasional Paper Series, No.7 November 2009. In collaboration with Carbon Trade Watch, TNI, The Corner House. “Carbon Trading. How it works and why it fails”

[12] ^ Institute for Policy Studies/Sustainable Energy and Economy Network (SEEN), (2008), “World Bank: climate profiteer”.

[13] ^ Two institutional multi-stakeholder processes serve as reference on the impacts of large scale World Bank projects: The Extractive Industries Review (2004); and the World Commission on Dams (2001).

[14] ^World Bank puts up €68m to avert post-Kyoto carbon market crash”, Business Green, January 2011.

[15] ^ The operation is part of the implementation of the second tranche of funding under the World Bank Umbrella Carbon Facility (UCFT2) operational since January 2011. Most of the funding for UCFT2 is provided by Deutsche Bank, GDF SUEZ and the Swedish Energy Agency. The facility is already considering supporting 17 projects with the potential to reduce 26 megatons of carbon dioxide and other greenhouse gases from 2013 to 2018. “World Bank puts up €68m to avert post-Kyoto carbon market crash”, Business Green, January 2011.

[16] ^World Bank puts up €68m to avert post-Kyoto carbon market crash”, Business Green, January 2011.

[17] ^World Bank Partnership for Market Readiness: A critical Introduction”, Oscar Reyes, Carbon Trade Watch, January 2011.

[18] ^World Bank Partnership for Market Readiness: A critical Introduction”, Oscar Reyes, Carbon Trade Watch, January 2011.

[19] ^Trading Carbon. How it works and why it is controversial”. FERN, 2010.

[20] ^Uncertainty Markets and Carbon Markets. Variations on Polanyian Themes”, by Larry Lohmann, The Corner House, 2010.

[21] ^Subprime Carbon? Rethinking the World largest derivatives market”, by Michelle Chan, Friends of the Earth US, 2009.

[22] ^

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