# **V. CATALYZING PRIVATE ENTRY AND MARKET DEVELOPMENT**

5.1 **A major component of innovative finance solutions on the ground involves the use of official flows to catalyze market creation and development,** including by reducing the risks and costs of private entry into existing markets **.** These catalytic mechanisms can also be used to tap new sources of official and private flows. Like other mechanisms discussed in this paper, these deploy an array of financial instruments.

# **<u>A. New Sources for Catalyzing Market Development</u>**

_Carbon Finance_ 5.2 **Carbon finance represents an emerging source of development finance.**<sup>38</sup> **By establishing a framework for trading “reduction(s) in greenhouse gases by the equivalent of one metric ton of CO2,” signatories to the Kyoto Protocol have essentially created a new globally traded commodity.** This commodity, which has a market value, is traded across borders both in markets within developed countries (through emission trading systems), between developed countries and developing countries (through the Clean Development Mechanism, or CDM), and between developed countries and economies in transition (through Joint Implementation, or JI). With the Kyoto Protocol coming into force in February 2005, the market for emission reductions has expanded with the sale of emissions reductions from developing countries. While there were private purchasers in the market early on, most generally traded in small quantities in pilot projects.

5.3 **The global market for greenhouse gas emission reductions through project-based transactions has been growing steeply, doubling in value between 2006 and 2007, reaching US$13.6 billion in commitments,**<sup>**39**</sup> **of which US$5.5 billion were traded on the secondary CDM market. However, only a few—mostly middle income—countries have benefitted to date.** At the end of March 2008, there were 3,188 projects in the CDM pipeline,<sup>40</sup> of which roughly one-third are registered or in the process of registration, while roughly two-thirds are at validation stage. It can take between one and two years for a project to go from validation to registration. European buyers account for 90 percent of the CDM market. For the third consecutive year, China was the world leader in CDM supply with a 73 percent market share in terms of 2007 transacted volume (compared to 54 percent market share in 2006). Brazil and India, at 6 percent market share each, transacted the highest volumes after China, although this represented a drop for each from 2006 levels. Africa followed with 5 percent.<sup>41</sup> 5.4 **As an experienced developer of CDM projects, the World Bank Group has played an important role in helping to deepen carbon markets.** To date, the Bank has sought to support developing countries in fully exploiting the capital transfers available from carbon finance by assisting in the identification and preparation of projects that reduce carbon emissions; moving to a programmatic approach (through the Carbon Partnership Facility); and promoting carbon projects in countries, sectors, and activities yet to benefit from carbon finance (including through the Forest Carbon Partnership Facility, which aims to reduce emissions from deforestation and forest degradation). It also raises additional carbon finance, and supports

> 38 Carbon finance here refers to purchases of greenhouse gas emission reductions in developing countries and economies in transition to offset emissions by governments and firms in industrialized countries. 39 The global carbon market was US$64 billion in 2007. Of this, EU ETS accounted for US$50.4 billion.

> 40 By the end of December 2008, the number of projects in the CDM pipeline had grown to about 4,200.

> 41 World Bank. _State and Trends of the Carbon Market._ 2008.

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