World Rainforest Movement

The World Bank’s role in the creation of the carbon market: helping the rich become richer, and the poor grow poorer as fossil fuel subsidies keep flowing

The concept of carbon trading as an instrument to ‘avert dangerous climate change’ first surfaced in the negotiations that resulted in the UN Framework Convention on Climate Change (UNFCCC) of 1992. Under the UNFCCC, projects claiming to reduce greenhouse gas emissions could sell the ‘saved’ emissions to a company that finds it more lucrative to pay someone else to reduce emissions rather than to reduce them themselves. Although the concept faced some opposition, the first Conference of Parties (COP) to the UNFCCC in 1995 established a pilot phase of Activities Implemented Jointly (AIJ), a mechanism that would allow for such projects. In response, a large number of countries, including Costa Rica, Vietnam, Zimbabwe, Russia and the USA set up AIJ funds and initiated projects.

In 1996 the World Bank also established an AIJ fund which developed pilot projects in conjunction with the Norwegian Government and the IFC. While the projects could not generate tradable carbon credits, they did begin the process of establishing the expertise and knowledge necessary for future schemes. As the Bank noted, this early learning was “critical for establishing a long-term basis for AIJ and other environmental trading schemes”.

The concept of a carbon market was consistent with the Bank’s ongoing liberalising and deregulating agenda for the South and it embraced the emerging market enthusiastically, seeking from the early days to become a key player. With its extensive project pipeline and experience in developing-country project finance the Bank was well placed to position itself as a fund manager for industrialised country governments and industries seeking to invest in projects, particularly in the South, that would enable them to lower emission reductions domestically. Embracing the role of fund management was also potentially lucrative. Early internal documents on the Bank’s carbon market activities estimated the international carbon ‘offset’ market reaching billions of dollars by 2020 with the Bank in a position to capture US$ 100 million per year in net revenue by 2005. In addition to its AIJ program the Bank began a range of ‘capacity building’ programs in key developing countries – such as the National Strategy Studies program – to identify projects and begin setting up the legal and institutional infrastructure necessary for future carbon market projects.

As international climate negotiations moved towards industrialised countries taking on mandatory emission reduction targets under the Kyoto Protocol in 1997, World Bank President James Wolfensohn at the Rio+5 Conference in June 1997 proposed a Carbon Investment Fund. Through the proposed fund, the Bank would invest money from industrialised countries into greenhouse gas reducing projects in exchange for carbon credits that industrialised countries could use to meet their Kyoto targets. At the conference, the Bank declared itself “willing to set up such a Fund if signatories to the Convention find the proposal useful”.

They did, but not under Bank management. Initially received with scepticism by everyone but US government officials and one or two non-governmental organizations, countries agreed to two similar project-based mechanisms under the Kyoto Protocol that would allow countries with a reduction target to exploit the theoretically cheaper reduction opportunities in other countries: Joint Implementation (JI) would allow for projects in other countries with a reduction target, and the Clean Development Mechanism (CDM) for projects in developing countries that did not have a reduction target.

The Bank’s plan for a Carbon Investment Fund was easily adapted to this new reality. Only 20 months later, in July 1999, President Wolfensohn had received approval from the IBRD Board of Directors to establish the Prototype Carbon Fund (PCF), a mutual fund that would operate along the same lines as the proposed Carbon Investment Fund, but within the CDM and JI framework. The PCF was publicly launched in January 2000 with contributions from Finland, The Netherlands, Norway, Sweden and a number of Japanese utilities and trading houses. It was soon followed by a variety of other funds under the Bank’s management. The structure of the Bank’s funds is also designed to showcase the use of “public-private partnerships” with the flagship PCF being described as a “Public-private partnership to combat global climate change”.

Today, the Bank is one of the largest public sources of funds for the fossil-fuel industry. From 1992 through late 2004, the World Bank Group approved US$ 11 billion in financing for 128 fossil-fuel extraction projects in 45 countries. These projects will lead to more than 43 billion tons of carbon dioxide emissions, with more than 82% of World Bank financing for oil extraction going to projects that export oil back to countries in the industrialised North. In 2003 alone, the Bank provided US$ 2.5 billion in financing for fossil fuel projects.

In contrast, the combined capitalisation of the six funds under Bank management as of May 2004 amounts to US$ 410 million. Thus, the entire amount that the Bank’s carbon funds will place in greenhouse gas-‘reducing’ projects over a period of seven years will be about 20% of annual World Bank financing for greenhouse gas-producing fossil fuel projects. Even the total amount of investment the Bank estimates will be leveraged by all its carbon market funds is only US$ 2.2 billion, less than 2003 spending on fossil fuels.

In 1999, the year the PCF was established, the Bank assured NGOs that it would focus on renewable energy projects, yet that very same year the Bank rejected a proposal to redirect 20% of its mainstream funding to renewable energy projects. Five years later, the Bank again rejected proposals to stop financing extractive industries and to utilise its lending to “aggressively promot[e] the transition to renewable energy” – this time from the Bank’s own Extractive Industries Review. The rejection to phase out fossil fuel funding came only two months after the Bank had sponsored the first carbon market trade fair in Cologne, Germany, whose promotional material called climate change “one of the main challenges facing humanity”.

The financing package for the controversial Chad-Cameroon pipeline project is more than the combined capitalisation of all six World Bank carbon funds. Greenhouse gas emissions directly related to the Chad-Cameroon pipeline project are estimated at 446 million tonnes of CO2 – more than six times the total expected emission reductions achieved by all 43 current PCF projects over the next 21 years and about 3 times the total amount of reductions that are expected through all six of the Bank’s carbon funds.

The contradictions of funding greenhouse gas producing projects at the same time as claiming a leading role in contributing to ‘avert dangerous climate change’ don’t end here. The Bank’s carbon funds continue this trend, with many PCF investors simultaneously receiving Bank financing for fossil fuel projects.

The contributions of the corporations Mitsui (PCF and BCF), BP, Mitsubishi, Deutsche Bank, Gaz de France, RWE, and Statoil to the PCF for carbon market projects in 1999-2004 were of US$ 45 million. The support they received from the World Bank for fossil fuel projects in 1992-2002 amounted to US$ 3,834,600 million.

Even more striking is that in many cases PCF investors are receiving emission reduction credits from projects in countries where they are simultaneously developing fossil fuel projects supported by the Bank – projects which will help lock those countries into a fossil fuelled energy path and lead to emissions of greater orders of magnitude than the PCF projects claim to be reducing.

The Bank is in the unconvincing position of claiming to be developing a market in greenhouse gas emissions to deal with a problem that the Bank itself helps perpetuate.

Given the Bank’s historic role in financing and promoting fossil fuel use, it is perhaps unsurprising that it has emerged as one of the most committed champions of using carbon finance to promote tree planting projects – so-called carbon sinks, because trees soak up carbon from the atmosphere. By absorbing carbon emissions in the short term, tree plantations help avert near-term action to reduce carbon emissions at source which would inevitably involve reducing fossil fuel use. Despite the Bank’s rhetoric about the PCF being focused on renewable energy projects, the two PCF carbon sinks projects in Brazil and Moldovia are claiming a combined total of over six million emission reduction credits – 15% of the credit volume from projects taken forward as of 30 September 2004. Moreover, the Bank has a specialist carbon sinks fund – the BioCarbon Fund (BCF), which is expected to deliver four million carbon credits through approximately 14 small afforestation projects. Critics argue that without the support of the BCF, many of these small projects would be unable to compete in a market where a single large-scale tree plantations project like the PCF’s Plantar project will deliver 4.2 million carbon credits – more than the entire portfolio of the BCF combined. The World Bank may also develop more plantations projects through its Community Development Carbon Fund, which was set up to “give carbon a human face”.

The Bank has publicly set itself the task of ‘selling’ carbon sinks. The Bank’s literature on carbon sinks focuses on small community based projects with an emphasis on poverty alleviation and sustainable development. The BioCarbon Fund slogan is, unblushingly, “bringing carbon finance to the world’s poor”. Yet behind the rhetoric the Bank is focused on using carbon financing for the same industrial tree plantation projects it has long championed. The first carbon sinks project developed by a World Bank carbon fund – the PCF in this case – is the Plantar project in Minas Gerais, Brazil; the project will establish 23,000 ha of eucalyptus plantations which temporarily sequester carbon before being converted to charcoal for use in pig iron production. For small farmers nearby, the consequences of this plantation are devastating: streams and swamps have dried up, chemicals contaminate the air and water, and the diverse species that once inhabited the land have all but vanished.

The Plantar project was always intended as a precedent for other projects of its type. The 2002 Project Appraisal Document states explicitly that “The project is expected to prepare the ground for similar projects in the future”. Projects like Plantar are the real focus of the Bank’s carbon sinks agenda. The BCF is primarily a greenwash fund that aims to increase support for carbon sinks with politically attractive initiatives that draw attention away from projects like Plantar, which are based on industrial wood production. Yet in the current carbon market, projects of the type being developed by the BCF will provide little more than a cover picture for the BCF annual report given the high costs and the tiny volumes of carbon credits these projects will generate. The small volumes also render them a largely irrelevant response to climate change as long as they justify additional fossil carbon releases.

It is unavoidable that if sinks projects are to attract commercial investment and generate significant volumes of carbon credits, they will inevitably involve projects based on industrial wood production, like Plantar. A comparison of the carbon credits being generated by the Plantar project compared to the BCF underlines the point well: Plantar’s single sequestration component alone will generate more emission reduction credits than the entire BioCarbon Fund, and forest destruction related to World Bank-funded fossil fuel extraction and infrastructure projects is likely to release more carbon than BCF projects claim to sequester.

By Jutta kill, Sinkswatch, e-mail: jutta@fern.org, http://www.sinkswatch.org, and Ben Pearson, CDMWatch, e-mail: cdmwatch@ozemail.com.au, http://www.cdmwatch.org

Leave a Comment

Your email address will not be published. Required fields are marked *