1. CLEAN DEVELOPMENT MECHANISM FACILITY Asian Development Bank www.adb.org/cdmf Bridging the Gap Towards Climate Change Mitigation in Asia and the Pacific 6 December 2003, COP9-Milano

2. 2 CDM Market Potential Cost-effective compliance option, “inevitable choice” for Annex I countries (esp. First Commitment period)Cost-effective compliance option, “inevitable choice” for Annex I countries (esp. First Commitment period) Opportunity for developing countries (technology, financial resources, sustainable development goals)Opportunity for developing countries (technology, financial resources, sustainable development goals) 2/3 rds Annex-I countries have net positive emissions, mitigation needs ~700 MtCO2e/yr2/3 rds Annex-I countries have net positive emissions, mitigation needs ~700 MtCO2e/yr CER (CDM) potential ranges ~ 55-360 MtCO2e/yrCER (CDM) potential ranges ~ 55-360 MtCO2e/yr Annex I “planned” CER procurement thru’ 2012, ~ 100 MtCO2e/yr, likely to increase (eg., Japan- high domestic abatement costs, EU – 13 behind target, high EU-ETS penalties)Annex I “planned” CER procurement thru’ 2012, ~ 100 MtCO2e/yr, likely to increase (eg., Japan- high domestic abatement costs, EU – 13 behind target, high EU-ETS penalties)

3. 3 Gaps in the CDM Market Almost everyone’s interested but very few “active” global players – Netherlands, Finland, WB (PCF, others).Almost everyone’s interested but very few “active” global players – Netherlands, Finland, WB (PCF, others). Primarily Annex I buyer- driven and -dominatedPrimarily Annex I buyer- driven and -dominated Largely public sector (Annex I Govts.) -driven, while private sector is “responsible”, and key market driverLargely public sector (Annex I Govts.) -driven, while private sector is “responsible”, and key market driver Large gap exists in global CDM market, actual/planned implementation far below planned procurement targets (completed transactions in 10’s not 100’s)Large gap exists in global CDM market, actual/planned implementation far below planned procurement targets (completed transactions in 10’s not 100’s) Slow Process - From 1997 to 2001 (Marrakech) to develop CDM Guidelines, Uncertainties continue….Slow Process - From 1997 to 2001 (Marrakech) to develop CDM Guidelines, Uncertainties continue….

4. 4 Barriers in CDM Market Barriers (and Possible Risk Mitigation)Barriers (and Possible Risk Mitigation) Kyoto risk (55% Annex I ratification) – Russia?, USA?Kyoto risk (55% Annex I ratification) – Russia?, USA? Methodology (Additionality, Baseline) risk for validation, registration- transparent rules/modalities (esp. for increased private sector participation), guidance/standardizationMethodology (Additionality, Baseline) risk for validation, registration- transparent rules/modalities (esp. for increased private sector participation), guidance/standardization Host country risk for endorsement/approval – ratification of KP, establishment of effective DNA, CDM policy and “mainstreaming” into other national policiesHost country risk for endorsement/approval – ratification of KP, establishment of effective DNA, CDM policy and “mainstreaming” into other national policies High transaction costs ($300K?)- standardization of procedures, development of country baselines, pilot PDDsHigh transaction costs ($300K?)- standardization of procedures, development of country baselines, pilot PDDs Lack of CDM professionals in host countries – capacity building including domestic financial sectors, OEs, etc.Lack of CDM professionals in host countries – capacity building including domestic financial sectors, OEs, etc. Financial risks – ensure upfront underlying project financeFinancial risks – ensure upfront underlying project finance

5. 5 CDM Market in Asia & the Pacific Relatively large potential (fastest growing energy sectors, high deforestation rates, etc.)Relatively large potential (fastest growing energy sectors, high deforestation rates, etc.) Currently little share in CDM Market, less than 20% (far behind Latin America, CEE-JI)Currently little share in CDM Market, less than 20% (far behind Latin America, CEE-JI) Lags behind on all fronts - Methodologies, Applicant OEs, Candidate/Approved Projects, Establishment of DNAsLags behind on all fronts - Methodologies, Applicant OEs, Candidate/Approved Projects, Establishment of DNAs Lack of understanding/information also leads to “perceived” risks (especially political/country risks), wide differences between price offers and price expectationsLack of understanding/information also leads to “perceived” risks (especially political/country risks), wide differences between price offers and price expectations Focus on RE/EE but low CER prices make little difference to RE project IRRs, while EE baselines difficult to establishFocus on RE/EE but low CER prices make little difference to RE project IRRs, while EE baselines difficult to establish

6. 6 ADB’s Clean Energy Initiatives & Experience 62 member countries (44 in Asia and the Pacific)62 member countries (44 in Asia and the Pacific) Energy Sector lending share significant (18% of $5.7 billion total lending in 2002)Energy Sector lending share significant (18% of $5.7 billion total lending in 2002) ADB’s Energy Policy – supports global environmental objectives and climate change mitigation, under the overarching goal of poverty reduction in Asia and the PacificADB’s Energy Policy – supports global environmental objectives and climate change mitigation, under the overarching goal of poverty reduction in Asia and the Pacific Mix of policy and program lending, TA, cofinanceMix of policy and program lending, TA, cofinance Climate Change Initiatives (Capacity Building and Investments)- covering over 25 countries in AsiaClimate Change Initiatives (Capacity Building and Investments)- covering over 25 countries in Asia ALGASALGAS REACH (by Govt of the Netherlands, Canada and Denmark)REACH (by Govt of the Netherlands, Canada and Denmark) ESCO Equity Fund (Fegace Asia Sub-Fund)ESCO Equity Fund (Fegace Asia Sub-Fund) CDM FacilityCDM Facility

7. 7 Potential CDM Projects (ADB Pipeline, Next 3 yrs) Approximately 40 projects have CDM potential for saving of estimated annually 15-25 million tons of CO 2Approximately 40 projects have CDM potential for saving of estimated annually 15-25 million tons of CO 2 Energy efficiency enhancementEnergy efficiency enhancement Renewable energy developmentRenewable energy development Coal bed methane recoveryCoal bed methane recovery Clean energyClean energy Methane capture from sanitary landfillMethane capture from sanitary landfill Different Stages (Feasibility, Project Preparatory Technical Assistance, Loan Design, Approved Loan…)Different Stages (Feasibility, Project Preparatory Technical Assistance, Loan Design, Approved Loan…)

8. 8 Clean Development Mechanism Facility at ADB CDM Facility established by ADB in August 2003, Pilot Phase of 3 years, Cost-recovery basisCDM Facility established by ADB in August 2003, Pilot Phase of 3 years, Cost-recovery basis To assist DMCs in accessing opportunities offered by the Kyoto Protocol for mobilizing additional resources and technology flows to support GHG- reducing, clean energy projects and to assist meeting national pro-poor and sustainable development goals.To assist DMCs in accessing opportunities offered by the Kyoto Protocol for mobilizing additional resources and technology flows to support GHG- reducing, clean energy projects and to assist meeting national pro-poor and sustainable development goals. To assist developed countries to meet their commitments under the Kyoto ProtocolTo assist developed countries to meet their commitments under the Kyoto Protocol Broad range of technologies and processes in energy, industry, agro-forestry, urban services and transport that generate ER and contribute to sustainable development in DMC.Broad range of technologies and processes in energy, industry, agro-forestry, urban services and transport that generate ER and contribute to sustainable development in DMC.

9. 9 Modalities of CDM Facility ADB announces CDM facility to  Potential buyers (countries and companies)  Potential sellers (DMCs and DMC companies) CDM facility and ODs with support from OCO identify potential CDM-eligible projects in pipeline ADB notifies the DMC project owner if there is interest in pursuing development of CDM YE S CDM activities STOP CDM facility screens initial project to assist ODs in preparing PIN PIN NO CDM facility assists ODs to satisfy all CDM requirements: 1) Project development 2) Validation and registration 3) Monitoring, verification, and certification of ER credits 4) Issuance of ER credits Buyer decides to pay for the processing costs of CDM and purchase CERs at an agreed price DMC/DMC company decides to pay for the processing costs of CDM and will sell CERs in the open market BUYER SELLER NO YE S ADB sets up market intelligence system YE S NO STOP CERs are produced by the project Sell CERs to highest bidder in the market Transfer CERs to buyer The Clean Development Mechanism Process CDM = clean development mechanism; CERs = certified emissions reduction credits; DMC = developing member country; ER = emissions reduction; OD = operating department; OCO = Office of Cofinancing Operations; and PIN = project identification number.

10. 10 Features of CDM Facility Bridging the Gap in CDM Market Mainstream CDM into ADB lending portfolio by assisting operational departments working with ER sellers (public and private entities in ADB’s Developing Member Countries).Mainstream CDM into ADB lending portfolio by assisting operational departments working with ER sellers (public and private entities in ADB’s Developing Member Countries). Lower transaction costs by integrating CDM elements (PDD development) into project appraisal and processing (ADB Project Cycle)Lower transaction costs by integrating CDM elements (PDD development) into project appraisal and processing (ADB Project Cycle) Allow sellers to explore multiple offers from buyers (public and private sector players from ADB’s Developed Member Countries who join the Core Buyers Group) and select the most appropriate oneAllow sellers to explore multiple offers from buyers (public and private sector players from ADB’s Developed Member Countries who join the Core Buyers Group) and select the most appropriate one Provide market intelligence on demand, supply and prices of ERsProvide market intelligence on demand, supply and prices of ERs

11. 11 Features of CDM Facility Bridging the Gap in CDM Market Assist in host country endorsement (e.g., engagement from Country Strategy & Programming Stage, Loan covenants)Assist in host country endorsement (e.g., engagement from Country Strategy & Programming Stage, Loan covenants) Assist in developing, processing, validating and registering, monitoring CDM projectsAssist in developing, processing, validating and registering, monitoring CDM projects Provide quality ERs through risk assessment and risk mitigation (underlying finance, host country endorsement, political risk guarantee)Provide quality ERs through risk assessment and risk mitigation (underlying finance, host country endorsement, political risk guarantee) Provide flexibility to buyers to exercise their preferences (country focus, RE vs EE, etc.)Provide flexibility to buyers to exercise their preferences (country focus, RE vs EE, etc.) Based on seller’s consent, provide buyers a chance to get in at early stage (project entails higher risk and lower prices for “verifiable” ERs) or late, mature stage (project entails lower risk and higher prices for certified ERs, which may be thru’ unilateral CDM)Based on seller’s consent, provide buyers a chance to get in at early stage (project entails higher risk and lower prices for “verifiable” ERs) or late, mature stage (project entails lower risk and higher prices for certified ERs, which may be thru’ unilateral CDM)

12. 12 PROJECT CYCLE CDM FACILITY SELLERBUYER Project Identification Provide information in identifying the potential CDM projects Encourage CDM project inclusion in CSP Pay subscription to facility Project Design Assess the CDM potential, assist project team in improving ER quality Advise seller on potential ER Agree or disagree to include CDM If seller agrees, incorporate CDM aspects in financial, economic, environmental and technical aspects to improve Feasibility Study and Board Document If seller agrees, inform buyers on potential ER, prepare PIN and distribute this to buyer Evaluates the PIN, get in touch with seller and make proposal to buy CDM Facility - Integration with ADB Project Cycle

13. 13 PROJECT CYCLE CDM FACILITY SELLERBUYER Share CDM Facility data obtained in the Feasibility Sudy Assist seller to evaluate proposal if requested Seller may request facility to assist in evaluation of buyer proposal Assist seller and buyer reach an agreement Shortlist and select buyers Buyer negotiates with seller Project Financing Share data and Project schedule with Facility Hires operational entity, and assist in preparation of PDD, registration with CDM Board Buyer pays facility to process CDM requirements Project Operation Assist in Monitoring project implementation Assist operation entity in verification and issuance of CERs Assist in the verification and documentation of CERs Assist in the transfer of CERs Collects CERs and turn over to buyer Pay for CER CDM Facility - Integration with ADB Project Cycle

14. 14 CONTACT INFORMATION Director, Finance & Infrastructure Division Regional and Sustainable Development Department Asian Development Bank P.O. Box 789, 0980 Manila, Philippines. Tel: (63-2) 632-6473 Fax: (63-2) 636-2198 E-mail: adbcdm@adb.org adbcdm@adb.org www.adb.org/cdmf