Access to finance is a major constraint to expanding renewable energy technology (RET) projects, especially for small-scale energy projects in developing countries. The availability of carbon finance has created opportunities for entrepreneurs who are developing sustainable energy projects.
What is Carbon Finance?
Carbon finance is a general term applied to resources provided to projects that are generating or are expected to generate greenhouse gas (GHG) emission reductions in the form of the purchase of such emission reductions which are tradable on the carbon market.
Carbon markets provide an additional source of revenue for sustainable energy projects by creating a commercial value for reducing greenhouse gas emissions. This can increase the commercial viability of RET projects and thus can play an important role in sustaining and growing RE enterprises.
|Source: Adapted from The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds|
A carbon market is one created to buy and sell carbon credits. Under a regulated limit/’cap’ carbon emissions, permits or allowances are given or auctioned to carbon emitters. Entities that emit below their cap can then trade their extra allowances (the carbon credits) to those who need additional capacity, thus creating a market for buying and selling carbon credits.
For example, if a company wants to emit more than it is allowed to, then it can buy credits from those who have reduced their emissions below the target level, or also from a project in a developing country which has certified emission reduction credit (CER) to sell. Emission reductions certificates or ‘carbon credits’ are the currency of carbon markets.
The Clean Development Mechanism
The Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC) is one of the available flexible mechanisms provided by Article 12 of the Kyoto Protocol.
It is intended to reduce the concentration of GHG emissions in the atmosphere in a cost effective way. The CDM allows developed countries to use CERs generated from sustainable development projects in developing countries to meet part of their emission reduction (ER) targets under the Kyoto Protocol. Developing Countries in turn receive investments in clean technology and revenues from the sale of these ERs once they are generated and delivered. One CER is equivalent to one tonne of carbon dioxide equivalent (tCO2e).
The CDM Project Cycle
Program of Activities
This is a mechanism under the Kyoto Protocol through which a developed country can receive emission reduction units when it helps to finance produce that reduce net GHG emissions in another developed country. In practice the recipient country is likely to be one with an economy in transition. An Annex 1 Party (countries listed in Annex 1 of the UNFCCC and in Annex B of the Kyoto Protocol.) must meet specific eligibility requirements to participate in Joint Implementation.
Carbon Finance for RET Projects
RET project developers can sell CERs in advance as a way of managing the risks associated with the sale of CERs and also mobilise funding. Such sales can be made on the basis that the purchaser will be responsible for obtaining the necessary registration under the CDM (which will reduce the price offered) or that the project developer will do so.
The risk involved with advance purchase of CERs is that the expected volumes of emissions reductions will not be forthcoming. To manage this carbon delivery guarantees might be used to cover the losses resulting from the actual emissions reductions being less than expected.
Various commercial entities are engaged in such purchases. The World Bank administers a number of trust funds for the purposes of purchasing CERs. The Carbon Partnership Facility under the World Bank will further enhance this capability as well be a mechanism for post-2012 funding by providing guaranteed commitments to purchase certified reductions in emissions on a standard basis rather than negotiating individually on a project-by-project basis, as is common at present.
Voluntary Carbon Markets
- Carbon Markets for Biogas Digesters
- Carbon Markets for Energy Access Projects
- Carbon Markets for Improved Cooking Stoves (ICS)
- Carbon Markets for Photovoltaic (PV) Systems
- Carbon Markets for Small Hydro Power
- General Information on Carbon Markets
- Disch, D., Rai, K. & Maheshwari, S., 2010. Carbon Finance - A Guide for Sustainable Energy Enterprises and NGOs, s.l.: Ashden, GVEP International.
- The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds.
- Assessing the Impact of the Clean Development Mechanism Report, Commissioned by the High Level Panel on the CDM Policy Dialogue, July 15, 2012.
- Boukerche, S., Dulal, H., Brodnig, G. & Quesnel, B., 2013. CDCF Making an Impact - Carbon Finance Delivers Benefits for the Poor, Washington, DC: World Bank.
- The World Bank - Carbon Finance Unit, 2012. Carbon Finance for Sustainable Development - 2012 Annual Report, Washington, DC: The World Bank.