Carbon Finance

From energypedia


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[1].

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[1].

Uses Advantages Disadvantages
  • Allows projects to access expected rev­enue streams from CERs ahead of commis­sioning or at start of operations.
  • A possible means of obtaining up-front financing secured against carbon revenues (that is, project financing).
  • Used to refinance projects, thus freeing up resources for development of new projects.
  • Only a small number of potential buyers of CERs exist.
  • Significant risk is transferred to the public financing agencies, if purchases are made ahead of project registration (under the CDM) or if carbon revenues are uncertain.
  • Process of realizing carbon revenues can be complex and costly, particularly for first-of-a-kind projects, and reliance on these may delay project development substantially.
  • Front-end loading of carbon finance revenues has been difficult to realize in practice given the regulatory and opera­tional uncertainties of these projects.
  • Financing only covers a part of costs and amounts received depend on carbon prices.
Source: Adapted from The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds[2]

Although carbon markets are currently experiencing a downturn, they generated $215 billion in capital investments until 2012[3] [4].

Carbon Markets

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[5].

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[1].

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)[4].

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The CDM Project Cycle

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Program of Activities

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Joint Implementation

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[5].

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[2].

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[2].

Voluntary Carbon Markets

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Further Information


  1. 1.0 1.1 1.2 Disch, D., Rai, K. & Maheshwari, S., 2010. Carbon Finance - A Guide for Sustainable Energy Enterprises and NGOs, s.l.: Ashden, GVEP International.
  2. 2.0 2.1 2.2 The World Bank, 2013. Financing Renewable Energy - Options for Developing Financing Instruments Using Public Funds.
  3. Assessing the Impact of the Clean Development Mechanism Report, Commissioned by the High Level Panel on the CDM Policy Dialogue, July 15, 2012.
  4. 4.0 4.1 Boukerche, S., Dulal, H., Brodnig, G. & Quesnel, B., 2013. CDCF Making an Impact - Carbon Finance Delivers Benefits for the Poor, Washington, DC: World Bank.
  5. 5.0 5.1 The World Bank - Carbon Finance Unit, 2012. Carbon Finance for Sustainable Development - 2012 Annual Report, Washington, DC: The World Bank.