Germany, Norway, Sweden and Switzerland on Monday became the first funders of a new World Bank facility seeking to carve out a new international carbon market by funding emission-reduction policies in developing nations.

The Transformative Carbon Asset Facility (TCAF) will establish the world’s first programmatic carbon market and according to World Bank President Jim Yong Kim will garner some $2 billion in lending from the bank.

“We want to help developing countries find a credible pathway toward low carbon development. This initiative is one such way because it will help countries create and pay for the next generation of carbon credits,” he said.

The new facility will begin operations when funders have pledged $250 million. It is uncertain how much the first four funders have invested, although Norway’s initial contribution will be $25 million. The Bank said in a statement it expects the $250 million limit will be passed in time for TCAF to start in 2016.

TCAF will look to pay for emission cuts achieved through large-scale programmes such as energy sector reforms on national or sub-national level, city-wide policies to cut carbon or similar initiatives.

“This facility will work alongside a range of global initiatives and national climate plans to help both developed and developing countries achieve their mitigation goals. It will pay for carbon assets with high environmental integrity and a strong likelihood to comply with future international rules, and will share its learning with the international community,” a World Bank statement said.

UNANSWERED QUESTIONS

Given the uncertainty around the implementation details of any agreement reached at the ongoing climate talks in Paris, a number of central elements are going to have to be worked out as the market develops:

– It is unclear what resulting carbon credits from TCAF might be used for, although officials in the four funding nations are optimistic that the programme will fit well into the future international climate policy framework. Three of the four have said they will meet their 2030 targets without using international credits, though Norwegian Prime Minister Erna Solberg told reporters Monday that TCAF credits could be used to over-achieve goals.

– A mechanism to avoid double-counting, for example by allowing carbon credits to be shared between investor and host countries, will be subject to negotiations. Close to 100 developing nations have said in their INDCs they would consider using an international carbon market to help meet their goals, but any carbon credits they sell to developed nations might limit their ability to meet their own unconditional targets.

– Under TCAF, participants will also have to develop clear rules for additionality as well as credible MRV.

LONG TERM VIEW

Sweden’s climate ambassador Anna Lindtstedt said at the TCAF launch on the sidelines of the Paris negotiations that funding through TCAF would be made available for a finite – though unspecified – period, but that she hoped it would create a market that would last a lot longer.

However, there is no expectation that the private sector will be involved in TCAF and from the basic design of the scheme, it is likely to remain a policy-driven primary market mechanism with little room for secondary trading to emerge.

The World Bank’s Kim said the TCAF could help developing nations implement carbon pricing measures and policies of their own, and was backed by Norway’s Solberg:

“We expect to achieve significant impact on the ground through the facility and ensure the sustainability of reducing emissions even beyond the facility’s initial support, for example, through carbon pricing instruments like emissions trading systems and carbon taxes, or stronger low-carbon policy standards and their enforcement,” she said.

TCAF will work closely together with the World Bank’s Partnership for Market Readiness, but participation will not be limited to PMR participants.

By Stian Reklev – stian@carbon-pulse.com

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