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World Bank to Expand Plan to Rescue Emission Projects

By: Mathew Carr Bloomberg

The World Bank seeks to expand a plan to buy emission credits from projects including those that capture heat-trapping gas at garbage dumps, underpinning demand in the carbon markets for the first time in nine years.

The proposal would initially use options to help spur about $100 million in government donations to a World Bank methane-reducing facility, according to a bank consultation document obtained by Bloomberg News and confirmed as genuine by Robert Bisset, a spokesman for the lender in Washington. The program is designed to create more reductions for each dollar spent because only projects offering to cut emissions for the lowest prices would win access to its money, the document shows.

World leaders are gathering in New York Sept. 23 to spur climate talks through next year. Cutting
methane, which traps 21 times more heat than carbon dioxide, provides the best
opportunity to slow global warming through 2050, according to a Group of Eight
report published on the World Bank website. Projects
reducing emissions are threatened by a 99% drop in next-year United Nations
carbon credit prices since 2008.

“It’s a good idea, because the incentive is missing in today’s
market,” said Marten von Velsen-Zerweck, managing partner at Nserve GmbH, a
developer of credits in Hamburg. “The challenge is to expand the model to cover
other types of projects,” he said Sept. 2 by phone.

The bank and the U.S. State Department are among those working to
expand the planned program. “Several potential donors have come forward to
express interest to contribute,” according to the document.

‘Taxpayer Value’

The U.S. has backed the initiative since its G8 presidency in
2012. “This facility will pioneer an innovative climate finance model with
great potential to support low-carbon investment in ways that provide better
value and lower risk for the taxpayer,” the department said in an e-mailed
response to questions.

Private developers of carbon credits would need to bid for put
options to sell to the facility under the plan, driving down the level of
subsidy paid by governments, according to the World Bank document. Put options
give the holder the right to sell at a certain strike price, but not the
obligation.

Only projects willing to sell for the lowest strike prices would
win access, the document dated June shows.

The options would also encourage projects to participate, the
World Bank said. They can sell their put option if prices in carbon markets are
higher, cutting their risk.

The document shows examples with a strike price of $5 a metric ton
and a premium for the put option of 30 cents a ton. That’s compared with the
average cost of reductions of $7.63 a ton agreed by World Bank facilities
through 2012, according to data in the bank’s Carbon Finance Unitannual report for
that year.

Not Dependent

“The facility is not dependent on a carbon market,” the State
Department said. “It just borrows the monitoring and verification systems of
the carbon market to quantify the emission-reduction benefit of projects.”

It creates an instrument that’s fungible across climate finance
and carbon markets and gives project developers greater certainty they will get
some finance should they build a successful project, it said.

UN Certified Emission Reductions for December slipped to a record
8 euro cents ($0.13) a ton in May. They were unchanged today at 16 euro cents a
ton on ICE Futures Europe in London at 4:17 p.m.

The Washington-based bank had planned its first auction as early
as this year. That’s been reconsidered, it said by e-mail.

“A pilot facility is being discussed with stakeholders,” Bisset
said. “The agreed structure and timing will be announced in the coming weeks.”

Existing Standards

Emission reductions purchased by the facility will be retired “and/or not resold into
carbon market,” according to the document. It will rely on rules of existing
standards, citing the UN’s Clean Development Mechanism, the Verified
Carbon Standard
 and the Climate Action Reserve in Los Angeles.

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