Work Streams

Carbon Finance

It is recognised that emissions reductions can be achieved more quickly, and with less economic dislocation, by harnessing market mechanisms with a skilful blend of policies and measures. As the financial sector has a key role to play in delivering market solutions to climate change, the UNEP FI Climate Change Working Group (CCWG) is actively involved in promoting finance for carbon solutions.

The objective of carbon finance is to find the lowest cost emissions reduction possibilities. Under the Kyoto Protocol and other policies to combat climate change, projects that reduce emissions of GHGs also generate a valuable new commodity. The sale of emission reduction units, or as commonly known, "carbon credits", can significantly boost financial returns on climate-friendly projects.

How does it work?

The Kyoto Protocol created three so-called "Flexibility Mechanisms" to help countries fulfil their greenhouse gas reduction commitments – these are:

• Emissions Trading,
• Clean Development Mechanism (CDM), and
• Joint Implementation (JI).

Emissions Trading allows an Annex I country with an excess of emission units, to sell its credits to another Annex I country unable to meet its commitments. The European Union is the first to implement a trading system, and the European Union Greenhouse Gas Emission Trading Scheme (EU ETS) is set to start in January 2005. The CCWG released a CEO Briefing on Emissions Trading (PDF: 200KB) at COP 9 in Milan stating the benefits of such a system.

The CDM allows governments or private entities in industrialized countries to implement emission reduction projects in developing countries in order to meet their emission objectives, while JI allows Annex I countries to work together to meet their emission targets.

The CCWG's CEO Briefing on Finance for Carbon Solutions (PDF: 1.3 MB), launched at COP 10 (December 2004), focuses on the financial sector perspective on the CDM.