The BioCarbon Fund: An Overview

October 7, 2004

Introduction

  1. The BioCarbon Fund (Fund) was designed to provide the Bank’s Borrowing Member Countries with an opportunity to benefit from carbon finance in the areas of forestry, agriculture and land management, while undertaking activities which reduce rural poverty and improve the local environment. The Fund provides resources for projects that are consistent with the regulatory requirements of Joint Implementation (JI) and the Clean Development (CDM) defined by Articles 6 and 12, respectively, of the 1997 Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC). The Fund also provides resources for projects that explore modalities and procedures beyond Article 12 of the Kyoto Protocol in Developing Countries.
  2. The Fund has been developed in response to a perceived gap in the emerging global carbon market in the areas of forestry and sustainable agriculture. Since these are two areas of particular importance to the rural poor in the Bank’s Borrowing Member Countries, the Fund was proposed as a means of facilitating the extension of existing carbon finance opportunities to the rural sectors of the Developing Countries and Countries with Economies in Transition.
  3. Building on the activities and experience of the World Bank’s Carbon Finance Business Prototype Carbon Fund (PCF), the Netherlands Clean Development Mechanism Facility (NCDMF) and the Community Development Carbon Fund (CDCF), the Fund is similarly structured, but with a portfolio built around Projects designed to facilitate the storage of carbon in vegetation and soils (these are commonly referred to as “sinks” or Land Use, Land-Use Change, and Forestry or “LULUCF” Projects) while helping to reverse land degradation, conserve biodiversity, and improve the livelihoods of local communities.
  4. Experience with the PCF, NCDMF and CDCF has suggested that sinks may be the only significant option for many poor countries with only small industrial sectors and energy use, to benefit from the CDM and JI as defined under the Kyoto Protocol. Sinks Projects also offer opportunities to the rural poor to take up new practices, which will assist in reducing the long-term impacts of climate change.

Rationale

  1. Approximately one-third of the increase in concentration of Greenhouse Gases in the atmosphere has resulted from losses of carbon associated with past and current land use.[1] It is therefore important that any efforts to mitigate climate change also include LULUCF activities that will help curb these losses. These activities can include, among others, establishing new forests, and improving agricultural practices on degraded lands.
  2. Experience with the PCF suggests that in addition to the climate mitigation effects, LULUCF Projects can provide rural communities in Developing Countries with significant economic, environmental and social benefits over current practices, leading to improvements in local livelihoods. Unfortunately, however, the technical complexities associated with undertaking these types of Projects, which have to do with regulatory uncertainty at the UNFCCC level and methodological difficulties, as well as the difficulties of transacting in Developing Countries and Economies in Transition are creating significant barriers to private sector investment, preventing the Bank’s Borrowing Member Countries from taking advantage of the opportunities which might otherwise be available to them. Because of its technical expertise and development experience, including with the PCF, the Bank is in a unique position to create an enabling environment for the benefits of LULUCF activities to flow to its Borrowing Member Countries, including the poorest.
  3. The Fund would be designed to augment the upfront project investment financing activities of the Global Environment Facility (GEF) and other financing sources by providing an additional stream of revenues to projects[2] generated from the purchase of greenhouse gas emission reductions as well as support for preparing these climate change mitigation projects. The Fund would also catalyze additional private sector investment for agriculture and forestry. In the longer term, this should help to increase the carbon financing opportunities available, particularly to the rural communities in the Bank’s Borrowing Member Countries.
  4. The Fund also represents an important opportunity for the Bank to simultaneously promote the objectives of the United Nations Convention on Biological Diversity (CBD) and the United Nations Convention to Combat Desertification (CCD), which were adopted at the same time as the UNFCCC to improve rural livelihoods, and to contribute to the sustainable development objectives of Host Countries, including their activities regarding adaptation to the impacts of climate change. The CCD, in particular, critically lacks financial resources to attain its objectives. Carbon finance represents a new financing source for revegetating drylands, providing alternative sources of energy and making drought-prone areas more resilient to climate change. In the area of biodiversity protection, too, carbon finance can play an innovative role by creating, at the individual or community level, market-based mechanisms supplying the financing incentive to reverse natural habitat loss.

Fund Structure and Operations

  1. The Fund is established as a trust fund by the Bank pursuant to a Resolution adopted by the Executive Directors on September 11, 2003.
  2. The Fund is set up with two Windows and potentially three Tranches, each with different project portfolios. The distinction between the First Window and the Second Window has to do with the eligibility criteria of sinks projects under the Kyoto Protocol’s Clean Development Mechanism. The project portfolio for the First Window (expected to be the larger one), is comprised of Projects which are within the most conservative interpretations of the Kyoto Protocol. In comparison, the Second Window focuses on purchasing Emission Reductions created other than through activities eligible to create Certified Emission Reductions (CERs) under the Kyoto Protocol, i.e. beyond afforestation and reforestation.[3] Emission reductions from the Second Window will be monitored and verified using the same procedural requirements currently existing in both the Kyoto Protocol and the Marrakesh Accords, as well as the regulatory requirements of the Executive Board of the Clean Development Mechanism.[4]
  3. Tranches different from each other with respect to the type of ecosystem supported by each one. The First Tranche (the only one to be operational so far) is dedicated to all types of ecosystem, while the envisages Dryland Tranche and Marine and Coastal Ecosystem Tranches, as their names suggest, would be devoted to projects in arid and semi-arid regions and marine and coastal areas, respectively.
  4. Should all three Tranches be created, there could be a maximum of six Windows in the BioCarbon Fund (two Windows per Tranche).
  5. Participants (both Public and Private Sector) are required to commit a minimum of US$2.5 million into the Fund, choosing to commit any operational Window, or to split their contribution across two or more Windows (with the required minimum contribution to any Window of US$1 million).
  6. The active life of the Fund is 15-18 years, depending on the level of capital. At the end of that period, arrangements will be made for the pro rata distribution of the Fund’s remaining assets.
  7. The Fund supports projects designed to reduce greenhouse gas concentrations, which are additional to what would have happened in the absence of such projects. The additionality element is critical to the development of internationally accepted emission reductions, and is validated by an independent third parties accredited as “Operational Entities” by the Executive Board of the Kyoto Protocol’s Clean Development Mechanism.
  8. Financial support covers project preparation and the purchase of greenhouse gas emission reductions. First, the Fund would finance the costs of preparing LULUCF Projects, including baseline study, monitoring plan, validation, etc. Then, as the project activities create emission reductions, these are purchased by the Fund and transferred to the Participants in the Fund in accordance with their pro rata interests. The Fund pays on delivery of the verified emission reductions, not in advance.
  9. Fund projects comply with the Bank’s Operational Policies and Procedures, including the Bank’s Forest Policy, and policy on disclosure of information, the requirements for consultation procedures and participation of affected communities in project development as well as other environmental and social safeguard requirements.[5]
  10. The Fund’s organizational structure consists of four principal bodies. The Fund Management Unit is the same as the one managing the PCF, NCDMF and CDCF, and is charged with the overall administration and operation of the Fund. A Meeting of all of the Participants is convened annually. At such Meetings, the Participants approve the annual budget of the Fund and provide the Trustee with general policy and strategic guidance. Elected Participants’ Committees for each Window advise on issues regarding the operation of their Window of the Fund, and review and advise the Participants on the Window’s budget and financial performance in advance of the Participants’ Annual Meetings. The Participants’ Committees also review and advise on potential projects, with clearance on a no-objection basis. A Fund Management Committee reviews the activities and projects of the Fund and advises on their compliance both with Bank Operational Policies and Procedures, and the Fund’s Project Portfolio and Selection Criteria.
  11. To cover development costs and expenses, the Fund reimburses the Bank for all the costs and expenses incurred in the development and marketing of the Fund. Project-related costs are pre-financed by the Fund, but charged back to the projects and withhold form the first carbon payments.
  12. The BioCarbon Fund started operations on May 17, 2004. The first meeting of the Participants, called the Organizational Meeting, took place on June 10-11, 2004. The next meeting of the Participants, called a Special Meeting, will be held on November 16, 2004 and dedicated to project selection. 122 project proposals have been received, out of which about 15 have been identified as the leading candidates for the First Tranche.
  13. As of October 7, 2004 the Fund has a capital of US$15 million contributed by the Governments of Canada and Italy, Agence Française de Développement, Okinawa Electric Power Company and Tokyo Electric Power Company of Japan, and Eco-Carbone of France. More Participants are expected from Canada, Europe and Japan.
  14. More information on the BioCarbon Fund can be found at while an overview of the World Bank’s Carbon Finance Business is at

Benoit Bosquet

N:\Prototype Carbon Fund\BioCarbon Fund\Marketing\IFAD\Note on BioCF 10-07-04.doc

October 7, 2004 4:39 PM

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[1] IPCC Special Report on Land Use, Land-Use Change and Forestry, 2000.

[2] As opposed to the one-off, time limited grants of the GEF.

[3] The Second Window is expected to generate interest among potential Participants who are not subject to obligations under the Kyoto Protocol and therefore without a mandatory compliance target, and Participants who wish to explore and demonstrate that activities other than afforestation and reforestation can also provide atmospheric, social and local environmental benefits.

[4] All Projects in the Second Window comply with World Bank Group Safeguard Policies and good practice guidelines, as well as with policies and good practices established by other international organizations (for example, the Ecosystem Approach as endorsed by the CBD Decision V/6 and the National Action Programs for the CCD).

[5] The main Operational Procedures relevant to Fund Projects include the following Operational Policies: Environmental Assessment (OP 4.01), Natural Habitats (OP 4.04), Pest Management (OP 4.09), Cultural Property (OP 4.11), Involuntary Resettlement (OP 4.12), Indigenous Peoples (OP 4.20), Forests (OP 4.36); as well as the Policy on Disclosure of Information.