Washington - The World Bank (WB) has launched a new carbon credit trading guarantee that will allow private-sector firms in developing countries to tap the growing €40bn global carbon market, a senior official said.
The International Finance Corporation (IFC), the World Bank's private-sector lender, said it signed its first carbon delivery guarantee agreements with fertiliser producers Omnia of South Africa and Rain CII Carbon in India.
In South Africa, the IFC's agreement covers up to 900 000 credits from Omnia. For Rain, one of the world's largest producers of calcined coke, the deal covers 850 000 carbon credits.
Under the guarantee, the IFC will help facilitate the delivery of carbon credits from companies in developing countries to buyers in developed markets, such as Europe and Japan, said Lance Crist, head of IFC's oil, gas and chemicals division.
Interest
He said other companies in China, India, Mexico, Brazil, Egypt and Tanzania had expressed interest in the product.
Under the Clean Development Mechanism (CDM) of the Kyoto Protocol, currently being re-negotiated before it expires in 2012, companies in developing countries can qualify to sell carbon credits, known as Certified Emission Reductions, in global commodity markets when they reduce their output of environmentally harmful substances.
However, so-called compliance buyers, the large utility companies in Europe or Japan, which are obliged to reduce their emissions under Kyoto, have been averse to paying full price for credits from developing nations because of the risk associated with doing business in these countries.
Crist told Reuters the IFC product guaranteed companies' ability to deliver the carbon credit.
Transparency
"This is not yet a very efficient and completely transparent market, so sellers of the credits don't know exactly what the prices are that they're getting and they don't know if those funds are going to be around tomorrow," he added.
"So, IFC is offering a product that basically gives full transparency to carbon credit sellers by showing them what the prices are and guaranteeing their delivery to the buyers and in return we take a small spread to compensate us for that credit enhancement," Crist added.
Potential buyers
He said the carbon credits would be sold to potential European and Japanese buyers. Those contracts had not yet been signed in the case of Omnia and Rain, Crist added.
"We don't yet know who those buyers are, but we know that it will be attractive to the market and there is a price on a daily basis that fluctuates according to supply and demand," he said.
"But we still need to work with the companies to determine what price they are willing to sell and who the buyers should be. Until we execute the second-half of the trade, we won't know what the value of the transaction is."
Incentive
Crist said the guarantee gives companies in the developing world an incentive to participate in the growing global credit market and improve their profitability.
"Each of these companies are having to invest several million dollars to implement their emissions reduction projects. But in return, they have the prospect of generating significant inflows from the carbon credits," he added.
Global trade in carbon markets was up 80% last year at €40bn, dominated by a European Union (EU) trading scheme.
Uncertain future
However, a €12bn market under the Kyoto Protocol faces an uncertain future after the EU firmly linked this to international talks to agree on a Kyoto successor.
Still, Crist said once countries in the developing world join Kyoto, the global carbon market could become a trillion-dollar market.
"Participation so far from the developing world through the CDM has been limited," he said. "We believe there is immense potential for companies in the developing world to participate, which will have the benefit of both addressing climate change, which is fundamentally our concern, but also creating demonstration models to encourage other companies in the developing world to participate."
- Reuters