An illustration for renewable energy investment as future natural fund
Infrastructure must respond to climate. At the very least, any infrastructure project must be resilient and continue to deliver services even where climate change makes that service delivery more difficult (adaptation). Ideally, infrastructure will be climate proactive, seeking to actively reduce greenhouse gasses (GHG) from the atmosphere (mitigation).
But good intentions aren’t enough. For true change, we need to make climate proactivity commercially viable.
It’s a bit like buying a car. My Dad’s view of a car was a mode of transport, to get from A to B. So, being a “sensible” teenager, I bought a 1967 Mustang fastback with a 390 cubic inch engine—crazy fast but not green. This teenage boy got a car to look cool, feel powerful, and get a date (three things I was not good at and needed all the help I could get). Getting from one place to another was a secondary goal. My Dad was not impressed.
Now, we need to find a way to make investors in proactive climate infrastructure look cool, feel powerful—and help them earn a profit.
First, we need to identify the ways in which proactive climate investments make or save money. Many proactive climate investments save money, like energy efficiency projects. Those cost savings should become revenues for the investment. Others generate revenues—biochar removes carbon from waste but can also be sold for fertilizer. Even adaptation projects like flood management or sea walls can make land more valuable by reducing flood damage. This land in turn can be used for toll roads or harbors, or developed for housing, offices and retail.
Proactive climate investments can generate new revenues from carbon credits. Companies (and others) have made commitments to reduce their net emissions to specified levels by set dates. These companies try to reduce emissions through their own activities and those of their suppliers and service providers. But these reductions take time and money. Polluting companies therefore buy emission reductions from highly climate-proactive companies, those with very low or even negative net GHG emissions.
The emissions reductions purchased need to comply with established standards and methodologies, they must be verified and monitored, and will then be registered as carbon credits. Because the purchase of these carbon credits is not obligatory, this is called the voluntary carbon market (VCM). And because it is not regulated or obligatory, the VCM is messy, with many different methodologies , and only a few entities that provide monitoring, reporting, and verification (MRV) services. At the same time, there are many critics—the VCM is an easy target and this criticism is useful and important, but can result in the good being lost as we seek to eliminate the bad.
In parallel with the VCM, governments have made commitments to reduce their net emissions. In order to reduce GHG emissions, governments establish incentive mechanisms in particular carbon pricing mechanisms, such as taxes on entities that emit more than they are allowed, or emissions trading systems (ETS) that require highly polluting entities to buy emission reductions from low or negative net emitting entities. These ETS are known as compliance carbon markets (CCM), since polluters must comply. The EU has one of the largest and oldest “compliance” carbon markets.
CCM is clearly different from VCM. CCMs are regulated, defined, and structured. VCM credits are unrestrained, innovative, and a bit chaotic. VCM credits help a company bolster its image, as important as VCM credit emission reductions are the other benefits they achieve, such as biodiversity and local community engagement. A good narrative can make a VCM credit more valuable.
Government commitments have been reinforced by nationally determined contributions (NDCs) under the Paris Agreement of 2015, Article 6 of which also creates a system for trading carbon credits that apply to NDCs, known as credits with corresponding adjustments or internationally traded mitigation outcomes. The Article 6 mechanism runs in parallel with but relevant to CCMs and the VCM.
Confused? You’re not alone. This is hard enough for the private sector to understand, demonstrated by the volatility of VCM prices. Governments, in particular in developing countries, are hard pressed to adjust to the requirements of this complex market. Governments need to establish the right enabling environment to provide confidence they will not impede the sale, price, or ownership of carbon credits. Projects need to be selected and prepared in order to respond to carbon market requirements to get the best price possible.
You’ll find more on this on the World Bank's PPP Legal Resource Center (PPPLRC) in a new “living” section we’ve developed on Unlocking Global Emission Reduction Credit Demand that will be reviewed and updated regularly—it includes a video explaining VCMs and sections such as strategic guidance for countries and mobilizing finance for emission reduction credits (ERCs). The Climate Warehouse, IETA, and UNFCCC websites are also useful resources.
We should all do what is right and good for the world, but the cold truth is that we really want to look cool and feel powerful. If we want to save the world, we have to find a way to make proactive climate investments—including carbon credits—commercially viable.
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