Catalysing private and public action for climate change mitigation: the World Bank’s role in international carbon markets

ABSTRACT

This policy analysis examines the role of the World Bank in shaping and stimulating international carbon markets. Adopting a public choice perspective, we argue that its engagement can be understood as a response to the joint goal of reputational and financial benefits. The detailed empirical account of the Bank’s activities – from its pioneering role through the Prototype Carbon Fund in the early 2000s, to its initiatives for upscaled crediting subsequent to the 2015 Paris Agreement – is broadly in line with this interpretation. The period between 2005 and 2011 most clearly shows that the Bank was ready to forego some reputational benefits for the sake of financial benefits. During this period, it followed a flourishing privately driven carbon market, mostly competing with, rather than catalysing, private activities. After the Paris Agreement opened the door for a new phase of carbon markets, the Bank again took up a pioneering role, now focusing on the public sector. However, since transparency in relation to its activities is limited – thus reducing reputational risk – these activities may not meet the quality standards, notably with respect to additionality, that are a precondition for carbon markets to be an effective tool for climate change mitigation.

Key policy insights

• Over time, the World Bank has alternated between being an ‘agenda setter’, catalysing private and public sector engagement in carbon markets, and a ‘regime follower’ regarding international carbon markets, based on varying reputational and financial benefits.

• In the post-Paris climate regime, the Bank has resumed its original pioneering role, although the scale of its activities is smaller, and they are less transparent, than during the Kyoto Protocol period of the early 2000s.

• To maximize its contribution, the Bank can act as a source of initial demand for carbon credits, but must have an exit strategy in place once the private and public sector gets sufficiently involved.

• Sufficient transparency on the Bank’s activities is required; reputational considerations provide an incentive to support generation of high-quality carbon credits.

KEYWORDS:

• International carbon markets
• carbon credits
• World Bank
• Paris Agreement
• Kyoto Protocol

Acknowledgements

Axel and Katharina Michaelowa acknowledge funding for the University of Zurich through the Swiss Network for International Studies in the context of the project on ‘Effectiveness of Partnerships for Advancing the SDGs: Behavioural Pathways and Impacts. We thank our project partners for valuable comments. Moreover, we thank Joanna Depledge for her careful editing of the final text.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 This is particularly difficult if resources are scarce. For a discussion on the resources available for managing the CDM at the UNFCCC Secretariat, see Michaelowa and Michaelowa (2017).

2 For recent works, see e.g. Kersting and Kilby (forthcoming), Dreher et al. (2019), Michaelowa et al. (2018), and more directly related to our context: Flues et al. (2010), and Michaelowa and Michaelowa (2017).

3 Exact rejection rates were 40 and 43% for the World Bank and 44 and 54% for the average methodology developer, for 2003 and 2004 respectively. Calculation is based on the CDM methodology database in UNEP DTU (2019) and Annex 4 of IEG (2018). The latter does not list the rejected cases, so the assessment is conservative.

4 The Adaptation Fund receives 2% of all issued CDM credits as an ‘in kind’ financing. The Bank is in charge of administering the sale of these credits, obviously with the aim to maximize the revenue.

5 Credit sellers from developing countries were generally unable to enforce the contracts which usually referred to places of litigation in industrialized countries and contained many complex requirements. The failure to comply with these could be used as a pretext by the buyer to state ‘material breach’ by the seller and thus not honour the contract (see the frank statement of credit buyer Natsource in Rosenzweig, 2016, p. 114).