What You Need to Know About Policy Crediting

The World Bank views climate action as fundamental to alleviating poverty and boosting shared prosperity, on a livable planet. Carbon markets can help countries achieve their climate goals, but they need to be transparent, trusted and high integrity. Recognizing this, the World Bank has developed an Engagement Roadmap for Carbon Markets to guide its programs. Part of the Roadmap includes a new and innovative crediting approach to support countries’ efforts to meet their Nationally Determined Contributions (NDCs), align with Article 6 of the Paris Agreement, and move climate action from the project level to actions that transform entire sectors: policy crediting.

Our approach to policy crediting not only rewards countries for cutting carbon, but it helps them sustain policy reforms and prepare the enabling environment for more mitigation initiatives to access international carbon markets.

How does policy crediting work?

Policy crediting is a mechanism to reward countries for making policy changes that along with broader development impacts, lead to a decrease of greenhouse gas emissions in the atmosphere. It is a way of addressing the underlying causes of emissions and reducing and eliminating them throughout an entire sector. Changes in policy are designed to lead to a reduction in emissions. During this process, these reductions are monitored, reported on, and verified – eventually becoming carbon credits. Countries and communities are rewarded with payments for the carbon credits – either through pre-arranged payment agreements, or by selling them through carbon markets.

Policy crediting is a mechanism to reward countries for making policy changes that along with broader development impacts, lead to a decrease of greenhouse gas emissions in the atmosphere.

When evaluating a policy crediting program, it is necessary to identify the fundamental challenges in a country or region that is generating excess carbon, and then work with the government to evaluate how a change in policy could alleviate the issues. When this type of action happens, we can address underlying causes of emissions and enable environmental benefits across the board. This can be done through policy changes that remove harmful subsidies and correct the energy end users’ wasteful behavior, thus reducing demand for fossil fuel-generated energy. Reduction of fossil-fuel subsidies also helps restore financial sustainability in the energy sector, enabling an equal playing field for renewable investment, a successful transition and more clean energy usage that can be rewarded with carbon credits.

For instance, in Uzbekistan, energy subsidies have been distorting the actual costs of energy use and production. With the support of the World Bank supported Innovative Carbon Resource Application for Energy Transition Project - iCRAFT project (funded by Transformative Carbon Asset Facility – TCAF) fund, the government of Uzbekistan is gradually reducing subsidies which is expected to result in more efficient energy use and also create more incentives for renewable energy scale-up. The first results-based payment for the verified emission reductions was made in June 2024. The country is rewarded for the reduction in greenhouse gases through payments from TCAF for verified carbon credits.

How does policy crediting help scale climate action?

Most climate financing has been taking place at the investment level, through single projects such as investments in renewable energy projects, or reducing methane emissions from landfill sites. These are contributing to and driving innovation in this complex space, but they are limited in scope. For real impact, the enabling environment needs to be supportive of policy reforms. Policy actions can create incentives and attract more investment, both public and private, therefore having a much more systemic and broader impacts than single projects. That is very important because to fight climate change there is a need for actions from all parts of society and economies. Policy changes can provide the right or correct the wrong economic incentives to support activities with mitigation impacts.

If a policy is designed properly and comprehensively, then it can mobilize climate finance and carbon finance at a much larger scale. The mobilization of financial resources is a particularly attractive aspect of policy crediting because we know that access to finance and capacity building support are some of the biggest challenges facing developing countries. Policy crediting can help mobilize financial resources to implement the policies central to their economic development, green transition and achieving NDCs.

To fight climate change there is a need for actions from all parts of society and economies. Policy changes can provide the right or correct the wrong economic incentives to support activities with mitigation impacts.

What are the benefits of policy crediting?

As well as the financial and environmental benefits that come with shifting to greener policies, policy crediting can bring additional benefits to countries. For example, as well as reducing greenhouse gas emissions, the World Bank’s policy crediting programs help a country prepare to participate in international carbon markets. By assisting countries in establishing the regulatory and legal frameworks for carbon transactions, we are also laying the groundwork for the country to further replicate this type of project design going forward. Countries are enabled to generate high integrity carbon credits that can both help them meet their NDCs and provide new revenue streams - from selling carbon credits through markets - to support their citizens. Putting in place the measurement, reporting and verification mechanisms and systems to check that emission reductions are high quality helps reassure governments and communities accessing carbon markets for the first time that their product will sell for a worthwhile price.

By assisting countries in establishing the regulatory and legal frameworks for carbon transactions, we are also laying the groundwork for the country to further replicate this type of project design going forward.

Overall, incentivizing policy change can give governments and communities confidence that their actions – shifting policy, adapting behavior to adhere to that policy change – are beneficial to the whole country in the longer term. They are generating results-based payment whilst helping reduce greenhouse gases: a win for countries and communities and a win for a more livable planet.