IFC and Carbon Finance: Building for the Future

The ever increasing emissions of carbon dioxide—the most common of "greenhouse gases" (GHGs)—are contributing significantly to changes in temperature. IFC has been pioneering carbon finance programs to support the flexible trading mechanisms of the Kyoto Protocol, an international agreement entered into force this year that calls for reductions in GHG emissions.

What is required under the Kyoto Protocol?

Countries that have ratified the protocol commit to reduce their emission of GHGs, mainly carbon dioxide and methane. Many countries, especially those in the European Union, have devolved a significant part of this obligation to the companies that emit GHGs. When countries or companies are unable to reduce emissions on their own, the Kyoto Protocol allows them to purchase credits from projects that are reducing GHGs in the developing countries party to the Kyoto Protocol, but not obligated to reduce emissions under it.

What is IFC doing?

IFC, through its Carbon Finance program, is leveraging its extensive project finance experience in developing countries to identify and structure emission reduction projects that help minimize key risks associated with delivery of carbon credits.

IFC currently has about $100 million under management in partnership with the government of the Netherlands. Through this arrangement, IFC purchases emission reduction credits from projects eligible under the Kyoto Protocol's CDM and JI mechanisms, including:

• Brascan Energitica in Brazil, which has more than 100 megawatts of operating run-of-river hydro generation assets in six locations that are helping to displace fossil fuel based generation
• Balrampur Chini Mills Limited, one of the largest sugar producers in India, which has developed two cogeneration projects with a total capacity of nearly 40 megawatts and is helping to reduce India's reliance on fossil fuels
• Eco Power, one of the most active private developers of small hydro power plants in Sri Lanka, which has more than 30 megawatts in seven projects currently operation or under construction

These three agreements together represent a total of 4.5 million carbon credits and a contract value of more than $25 million. Furthermore, IFC has a number of additional CDM and JI projects in the pipeline and expects to commit an additional $65 million to such projects by mid-2006.

Going forward

IFC aims to facilitate the development of a commercial carbon market and to deliver innovative financial products that will unlock the value of carbon assets in developing countries and mitigate risks in this new market.

These new products include a guarantee to provide investors with comfort about delivery of credits .from projects in emerging markets and monetization of future cash flows from sales of carbon credits to help projects with their financing needs.

Over the coming decade, carbon is likely to be a key value driver in IFC's operations. Given IFC's project finance experience and its commitment to developing a sustainable private sector in developing countries, it is well positioned to design and deliver value-added financial projects that will help mitigate risks in the carbon market by leveraging its own ability to take long-term project and credit risk in emerging markets.