World Bank sees carbon finance role for years

(Reuters) - The World Bank's carbon finance initiatives will likely be needed for at least five years, as the United Nations struggles to create a self-sufficient, international carbon market, the manager of the bank's carbon finance unit told Reuters.

Negotiators at December's U.N. climate talks in South Africa agreed to extend the 1997 Kyoto Protocol - the only global pact enforcing carbon cuts on developed nations - for at least five years beyond its first commitment period at the end of 2012.

But the uncertainty over how Kyoto's existing market-based mechanisms should or could be included in a future pact that includes all major emitters means the World Bank is years away from ending its development role for carbon finance.

"There was a time a few years ago when we were thinking that shortly after 2012 we may not be needed," the World Bank's Joelle Chassard said in a telephone interview.

"(We thought) the market would've matured so much that there would be long-term visibility, and indeed the contribution that we made at the beginning of the market would no longer be needed. I think the circumstances have almost been the opposite of that," she added.

Since 1999, the multilateral development bank has launched 10 Kyoto funds and facilities capitalized at just over $2 billion, as well as five post-2012 carbon initiatives.

The funds support various projects and programs which cut climate-changing greenhouse gas emissions in developing nations.

Rather than lending or providing grants to projects, the bank's Kyoto funds contract to buy carbon credits generated by the emission reductions achieved by the projects, once they have been verified by a third party auditor.

According to the bank, carbon finance enables project developers to leverage new private and public investment.

But the political uncertainty over the future of the Kyoto Protocol's market mechanisms, mainly the Clean Development Mechanism (CDM), has choked new investment in projects as the end of the first commitment period nears.

The CDM, which awards credits to projects in developing nations, saw primary investment fall to just $1.5 billion in 2010, compared with a high of $7.4 billion in 2007.

Official figures for 2011 will be published by the World Bank around June, although Chassard predicted new investment in CDM last year was likely lower than in 2010.

The uncertainty has also increased risk for the bank's funds which buy post-2012 carbon credits. "Everything that is geared towards the longer term is facing a challenge," she said.

MARKET CRASH

To make matters worse, benchmark prices of CDM carbon credits are trading near a record low of under 4 euros a tonne - well below the cost of generating CDM offsets from projects using technologies such as landfill gas, wind and biomass.

Prices collapsed because of a supply-demand imbalance, as there was a record number of CDM credits issued last year in the face of a sharp fall in demand.

"The irony of the market is that it has continued to produce a pipeline of projects that we think are certainly worth supporting," Chassard said.

"Of course the demand side is drying up and it's very, very unfortunate," she said, attributing the slowing demand mainly to Europe's sovereign debt crisis. The European Union, home to the world's biggest carbon market, allows the use of CDM credits.

The EU cap-and-trade scheme will run through 2020, but the bloc has agreed to ban from next year the use of CDM credits issued to most industrial gas projects. Credits from these project types make up more than half of those issued to date.

"For us the market is going through an obviously difficult period, but that's certainly not the end of the market," Chassard said. "If one thing was achieved in Durban, it is that market mechanisms are very likely to be part of the future."

She said the bank was unlikely to launch new carbon finance initiatives in the near term, as it focuses on getting recently launched schemes off the ground.