Conducting the Project Assessment and making the Final Decision provides a deep dive on Step Three and Step Four of the assessment process, covering the assessable criteria in the Project Assessment step, and how the project’s overall alignment to best practice can be used to determine the final project decision or recommendations for action points.

Step Three is a follow-up step to the to the preliminary decision made in Step Two, whereby scores assigned to a given project dictate its continuation in the process towards a more detailed assessment. This step aims to further examine the project’s possible value across potential scenarios, evaluate its capabilities, and set up for successful execution. It is also designed to assess a given project’s measures for managing risks and analyze its socioeconomic contributions to the wider economy. The Project Assessment Template in Appendix B provides a guide to conducting the Project Assessment to make a final project decision, as laid out in Step Four.

The sections below will describe each criterion, suggested analyses for its assessment, and the guideposts for its rating for alignment to best practice, where the list of criteria is as follows:

F1: Project ERC value

F2: Additional Value Enabled by Project

Q1: MRV Infrastructure

Q2: Marketing, Sales, and Pricing

Q3: Project Governance and Structure

C1: Carbon Integrity

C2: Environmental Risk Management

C3: Social Risk Management and Benefits

S2: Socioeconomic Value

Initial Profiling and Preliminary Decision provides a deep dive on Step One and Step Two of the assessment process, covering each of the assessable criterion in the initial profiling step, and how these should be evaluated to inform a preliminary decision and high-level recommendations for improvement. The first step aims to provide a high-level understanding of the project’s context, estimate its potential value, and ascertain that its fundamentals for generating ERCs are in accordance with VCM standards. It will also take the inputs from Step Zero to assess the project’s alignment with any specific country objectives that may be in place, based on its project type or sector. The Project Profile Template in Appendix A provides a guide to conducting initial profiling as laid out in Step Two.

The sections below will describe each criterion and its method for the evaluation, following either a checklist or rating indicated in Introduction to the Project Assessment Framework, where the list of criteria is as follows:

• F1: Project ERC value
• F2: Additional value enabled by project
• C1, C2, and C3: Carbon integrity and environmental and social risk management
• S2: Socioeconomic value

Determining Country Inputs provides a deep dive on Step Zero of the process, before going into the project-level assessment. This step aims to provide a country-wide view on the alignment of various project types with its strategic objectives, which will be used in the Project Profile Template in Appendix A.

Find the analyses required for determining the country inputs for the following criteria:

• S1: Country priority
• S3: Article 6 readiness and eligibility

These are also the two criteria that can leverage on the analyses conducted for the country systems assessment, which will be further explained in the deep dive of each criterion.

Beyond capability development, cooperative approaches may also be beneficial across other market development activities. See Appendix A to understand more on the extent to which cooperation on a component is likely to be beneficial and effectively and Framework Component Deep Dives for an in-depth discussion on each component in the Country System Assessment Framework to enable users to develop the Assessment for the target country. 

Appendix B introduces Sample Country Assessment Pages. 

To find more visit the Unlocking Global Emission Reduction Credit sections below, the Content Outline, or download the following reports: Strategic Guidance for Country System Assessments, Guidance for Countries in Assessing ERC Projects, Mobilizing ERC Finance.

Find a full outline to sections and resources found in the Strategic Guidance for Country System Assessments. 

UNLOCKING GLOBAL EMISSION REDUCTION CREDIT (Main Landing Page)

Strategic Guidance for Country System Assessments

Chapter 1 - Introduction to Emission Reduction Credits

• The World Bank's Emission Reduction Program
• Emission Reduction Credits
• Classification of Emissions Reduction Credit
• Policy Context of Emissions Reduction Credit

Chapter 2: Objective of the Strategic Guidance for Country System Assessments

• Objective of these Guidelines
• Introduction to the Country System Assessment Framework
• Process to conducting assessments

Chapter 3: Framework Component Deep Dives

• Appropriate Institutional Mandates (I1)
• Capabilities Developed (I2)
• Transparency and Accountability Mechanisms in Place (I3)
• Well-Defined Asset Rights (S1)
• Streamlined Project Permitting (S2)
• Globally Accepted Methodologies (S3)
• Defined Benefit-Sharing Frameworks (S4)
• Robust MRV Approaches (V1)
• Adequate VVB Capabilities (V2)
• Defined Article 6 Transaction Frameworks (D1)
• Develops Trading Infrastructure & Mechanisms (D2)

Chapter 4: Scope for Further Refinements

Appendices

• Appendix A: Approach for Cooperative Approaches
• Appendix B: Sample Country Assessment Pages

Abbreviations

Figures

• Figure 1: The ERC Ecosystem
• Figure 2. Country System Assessment Framework
• Figure 3. Country assessment process
• Figure 4. Proposed sequencing of framework elements 

Find a list of helpful terms used in the Strategic Guidance for Country System Assessments Guidelines.

The carbon market landscape continues to evolve rapidly, and it is crucial that countries embrace the ability to adapt and reflect the latest market developments. Scope for Further Refinements highlights the scope for further work needed to keep this document aligned with evolving global standards and ensure that it remains relevant to a dynamic and fast-changing carbon market landscape. By staying abreast of the latest progressions in the market, we can ensure that the document provides the most accurate and comprehensive information to users.

Increased adoption of legal and institutional frameworks to support ERC ecosystem

One key consideration for keeping guidelines relevant is the increased adoption of legal frameworks and institutions to support ERC markets. There will be a clear need to review and update the guideposts for green status and country exemplars across all components of the guidelines as more countries develop the necessary infrastructure and regulatory frameworks to support ERC markets. This should consider new market standards for best practices across the core components highlighted within the report, reflecting deepening maturity of both exemplar and developing markets.

Furthermore, as more countries adopt legal and institutional frameworks to support their ERC markets, it may become necessary to reconsider the rating scale used in the guidelines to better reflect increasingly mature market practices.

These Guidelines recognize the potential to adopt a more robust 1–5 rating scale, with a score of 1 indicating basic compliance with guidelines, while a score of 5 indicates best-practice advanced practice. The revised rating scale could also include specific criteria for each level, such as evidence of transparency, stakeholder engagement, and alignment with national policies and goals. By updating the rating scale, countries will be better equipped to assess their progress in implementing the guidelines and identify areas for improvement, ultimately leading to further development of their ERC markets.

Developments relating to the implementation of Article 6

The ongoing development of Article 6.2 and 6.4 mechanisms related to the international transfer of mitigation outcomes and corresponding adjustments warrants close attention as the carbon market continues to evolve. Currently, the regulations, operating guardrails, and reporting and accountability mechanisms that are in place to guide ITMO transactions are still in their nascent stages and have yet to be fully fleshed out. The initial decisions regarding cooperative approaches referred to in Article 6 have been adopted by the United Nations Framework Convention on Climate Change (UNFCCC), as outlined in the ‘Report of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement on its fourth session, held in Sharm el-Sheikh from 6 to 20 November 2022’ released on 17 March 2023. These outcomes provide initial guidance on Article 6 transactions, reporting, review, infrastructure, and capacity building.

It is important to note, however, that the UNFCCC Supervisory Body is currently working towards building a more robust mechanism for the operationalization of Article 6, as established in the Paris Agreement. Recent strategic meetings, held on 5 and 6 March 2023, were conducted to discuss, and develop further guidance towards this objective. As such, a limited number of countries have so far implemented such practices within their frameworks. As rules become clearer and more countries develop the necessary infrastructure to support the transfer of mitigation outcomes, it is crucial to remain up to date with guiding regulations and market best practices, which will impact the guideposts for green of relevant sections in the framework, such as Section D1: Defined Corresponding Adjustments Mechanism.

Changes made by standard-setting bodies regarding types of methodologies accepted in the international carbon market

Changes made by standard-setting bodies regarding the types of methodologies that are accepted and considered in the international carbon market should also be carefully monitored and assessed. Such changes can have a significant impact on the types of credits that will be adopted by countries, affecting the overall structure of the market. By keeping track of any such changes, and assessing their implications, the guidelines can be updated to reflect the latest developments in the market and provide better guidance to countries on selecting the most appropriate methodologies to support their ERC markets. Ultimately, this will help to ensure that the guidelines remain up-to-date and relevant to the evolving needs of the international carbon market.

Introduction to the Deep-Dives

Each component in the Country System Assessment Framework is discussed in-depth in this section to enable users to develop the Assessment for the target country. Each Component deep-dive will include:

• Rationale & objectives: Explains why the component is critical for the Country System and discusses the overall objective that the guideposts will seek to support. This paragraph will also explain the applicability of the component to the country, as needed.
• Guideposts for Green: Lists the typical conditions that must be in place within the Country System for the overall objective of the component to be met. In some cases, guideposts are labelled as for “Best practice” to indicate that these are likely to be resource intensive elements that may be aspirational for most countries. Each condition or sub-component will be assessed a “color” based on the guidance in Section 1.4, which will then be used to assign an overall “color” for the component.
• Sequencing for roadmap: Explains the rationale for the phasing of the components in a typical country’s reform roadmap as explained in Section 1.4. The rationale for both the Impact and Resources needed are described, as well as the resulting “Phase,” to provide the user an example of how the concept can be applied to the target country’s context, especially in the case of competing resources to undertake reforms.
• Models/exemplars/further deep dives: Provides potential models or exemplars that users can leverage in developing reform recommendations, including the relevant context and considerations for applicability. In some cases, the deep dives will also recommend other resources to support the Assessment.

The list of criteria is as follows:

• I1: Appropriate Institutional Mandates
• I2: Capabilities Developed
• I3: Transparency and Accountability Mechanisms in Place
• S1: Well-Defined Asset Rights
• S2: Streamlined Project Permitting
• S3: Globally Accepted Methodologies
• S4: Defined Benefit-Sharing Frameworks
• V1: Robust MRV Approaches
• V2: Adequate VVB Capabilities
• D1: Defined Article 6 Transaction Frameworks
• D2: Develops Trading Infrastructure & Mechanisms

Overview of World Bank’s ERP

The ERP includes two main workstreams.

• Workstream One is focused on ERC market development, by providing governments with access to knowledge and technical assistance. It incorporates analysis and recommendations around legal and institutional frameworks, governance models, policies, and infrastructural and resource capacity for accessing global ERC markets, as well as ways to synergistically align domestic markets with a global ecosystem. Under this workstream, the Guidelines for Assessing Country Systems for Global Carbon Markets has been developed.
• Workstream Two is targeted at supporting ERC generation in participating countries. It is designed to support the creation and generation of ERCs, offering guidance and implementation assistance for project selection and preparation. It is also targeted at mobilizing relevant finance to sustain the generation of ERCs over time, incorporating a wide range of financing mechanisms. Under this workstream, the Guidelines for Assessing Emission Reduction Projects for Global Carbon Markets has been developed.

The Project Assessment Guidelines aim to provide a comprehensive and adaptable guide to identify and develop ERC projects and investments in order to generate high-quality ERCs to be sold in global markets, under Workstream Two of the ERP. These can be used in parallel with the Guidelines for Country System Assessments, under Workstream One of the ERP.

The Country System Guidelines aim to provide governments with a strategic and holistic assessment of their current legal and institutional frameworks, to help them understand how the global market perceives their country systems and where any gaps or short-comings might be found, under Workstream One of the ERP.

As part of ERC generation support, there is a general need for enhanced market clarity on the transaction-enabling conditions for and barriers to ERC program development, potential strategies to address those barriers, and the appropriate financial structures to unlock finance at scale. This is particularly important due to the potential role ERCs can play in achieving Nationally Determined Contributions (NDCs) under the Paris Agreement and monetizing climate change mitigation outcomes. The Mobilizing ERC Finance Guidelines aim to assist governments, project developers, and financiers in understanding key transaction-enabling conditions and financial structures to mobilize finance for ERC generation.

The ERP is starting with countries in East Asia and the Pacific (EAP), as a region with a variety of emission reduction opportunities and well placed to be at the forefront of global ERC development and will be rolled out to other regions globally.

A significant amount of effort has gone into quantifying the supply and demand for ERCs globally. There has been less focus on understanding the scale of investment into ERC-generating activities or analyzing the financing structures that are best suited to accelerate capital flow to ERC activities. This report aims to assist governments, project developers, and financiers in understanding key transaction-enabling conditions and financial structures to mobilize finance for ERC generation.

ERC markets are growing rapidly, but at the current level of market maturity there is not sufficient investment to support scaling up the market to meet the expected exponential growth in ERC demand. By any measure—issuance, trade value, trade volume, and retirement—the ERC market expanded significantly in recent years, correlated with a rise in net-zero commitments and urgency for climate action. Investment in ERC activities and developers is also increasing, but not in line with the pace of investment needed to meet ERC demand and enable a market that otherwise has the potential to grow significantly by 2030.

Establishing policies and market infrastructure is critical to grow ERC markets, but meeting the expected near-term demand for ERCs also requires financial solutions and risk mitigation to unlock greater pools of capital to invest in ERC-generating activities now. ERC markets are largely policy-driven and remain highly fragmented, creating a high degree of uncertainty from an investor perspective and thus hindering the growth of the market. To unlock the level of financing for ERC activities required to meet the growing demand, the fundamentals of the enabling environment will need to improve. However, the market cannot wait until the fundamentals are in place; ERC activities take time to plan, develop, and start issuing ERCs. Investment must happen now to meet greater future demand and accelerate progress on global climate goals, and this will require tailored financing solutions and targeted risk mitigation for ERC transactions to reduce risks for investors in the short term and create a more enduring ERC market in the long term.

Examples of novel ERC finance have demonstrated the application of standard blended finance approaches and a range of financial structuring options to allocate risk and mobilize private sector finance, but the use of any of these elements remains limited. Standard blended finance instruments­—including credit guarantees, first-loss/concessional capital, and technical assistance—can be particularly helpful to mitigate credit and ERC activity-level risk. But, of the $7.4 billion of blended finance transactions for climate mitigation tracked by Convergence in 2019-2021, only one deal worth about 1.5% of the total issued ERCs.¹ Experimentation with different ERC linkages and combinations of different types of investors have generated a menu of options for structuring ERC finance to attract investors with different preferences for ERC returns and market risk. Political risk remains the most challenging area, where engagement, and in some cases political risk insurance, will be critical to scale up finance while ERC policies and regulations are being developed. As the enabling conditions for ERC markets are put in place, the need for blended finance and other public support for ERC activities will decrease. In the meantime, such support should continue to focus on harder-to-reach markets where it is needed most.

Drawing on the available finance elements and pilot experience with novel ERC finance, three non-mutually exclusive options to scale up private sector capital for ERC activities appear particularly promising at this stage of market maturity and given current investor appetite:

• Support ERC-backed debt issuance with targeted support from development financiers. Debt instruments partially linked to or paid back in ERCs have been successfully piloted on a small scale; this approach could be scaled and replicated by large, non-multilateral issuers supported by the tailored use of concessional risk mitigation.
• Aggregate supply and mobilize capital to a broader set of ERC activities. An aggregation facility with sufficient DFI (including MDB) support, both financial and technical, could accomplish two objectives: (i) support small-scale ERC activities to overcome capacity and scale barriers to entering the market, and (ii) enable these ERC activities to collectively raise finance and so help mobilize capital toward ERC activities from smaller and hard-to-reach market segments.
• Establish an ERC club to pool demand and promote standardized approaches. Buyer’s clubs can send a strong market signal and more practically reduce market risk and improve the expected cash flows of ERC activities, which helps to unlock debt capital, especially when other market participants are invited into the club. A club may prove particularly beneficial to small-scale ERC activities needing a route to market and to small or mid-sized buyers for which extensive ERC due diligence may be prohibitively costly. The benefits of an ERC club can potentially be heightened through an Article 6.2 club that provides a government-sanctioned path to market.

Please click here to view Acknowledgements.

Footnote 1: Convergence, State of Blended Finance 2022: Climate Edition, 2022.