Catalysing private and public action for climate change mitigation: the World Bank’s role in international carbon markets

Abstract

This policy analysis examines the role of the World Bank in shaping and stimulating international carbon markets. Adopting a public choice perspective, we argue that its engagement can be understood as a response to the joint goal of reputational and financial benefits. The detailed empirical account of the Bank's activities -from its pioneering role through the Prototype Carbon Fund in the early 2000s, to its initiatives for upscaled crediting subsequent to the 2015 Paris Agreement -is broadly in line with this interpretation. The period between 2005 and 2011 most clearly shows that the Bank was ready to forego some reputational benefits for the sake of financial benefits. During this period, it followed a flourishing privately driven carbon market, mostly competing with, rather than catalysing, private activities. After the Paris Agreement opened the door for a new phase of carbon markets, the Bank again took up a pioneering role, now focusing on the public sector. However, since transparency in relation to its activities is limited -thus reducing reputational risk -these activities may not meet the quality standards, notably with respect to additionality, that are a precondition for carbon markets to be an effective tool for climate change mitigation.

Do Multilateral Development Bank Trust Funds Allocate Climate Finance Efficiently?

“…This is particularly relevant for carbon finance, where the MBDs' trust funds are active on the same market as project developers, and buyers and sellers of emission credits, alongside with multiple private banks and consultancy firms. To be complementary to these activities, the MDBs need to focus on the function of an enabler or catalyzer [26] for private investment. The relatively large number of carbon trust funds focusing on capacity building could be a positive signal in this direction, enhancing readiness for climate change mitigation beyond specific carbon market transactions.…”

“…They can use the emission credits generated by these investments to fulfill their national emission reduction commitments, and thus their obligations in the framework of the Kyoto Protocol (and expect to use them in the context of the Paris Agreement in the future). There is hence a clear financial incentive for funders to select efficient locations, and the literature suggests that the World Bank at least has taken full advantage of its knowledge in this respect [11,26,41]. In contrast, climate finance through bilateral aid or aid channeled through any of the other MDB trust funds does not generate emission reduction credits.…”

“…While investing mitigation finance in places with no efficient mitigation options is simply a waste of resources, the MDBs' activities should not compete with a functioning private market, either [11,26]. This represents a dilemma if MDBs nevertheless decide to remain active in this area, as has been the case in carbon markets.…”

“…Specific studies focusing on climate-related MDB trust funds are rare. Yet, there is some initial work on individual trust funds, notably on the World Bank's Prototype Carbon Fund (PCF) [32][33][34], and on the development of carbon funds at the World Bank [26], on which we can build with our analysis. In this paper, we go beyond a discussion of the climate and carbon finance architecture and seek to understand the actual resource allocation patterns of MDB trust funds.…”

Reputational Risks in Banks: A Review of Research Themes, Frameworks, Methods, and Future Research Directions

“…On the other hand, non-financial reputation risk factors relate to nonquantifiable and unobservable factors identified to affect reputational risks. These include neglect or delay to contribute to building a better future, irresponsible managerial behaviour, inefficient system of governance, faulty strategy, poor management and leadership, inadequate supervision and problematic corporate culture, conflict of interest, promotion of a lenient interpretation of environmental integrity (Michaelowa et al, 2020), social requirement, customer satisfaction, quality of internal processes, crises in other banks, capital market orientation, legislative and regulatory requirements.…”