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World Bank Carbon Finance: Experience, Strategy and New Products Addis Ababa 21 October 2003 www.carbonfinance.org.

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Presentation on theme: "World Bank Carbon Finance: Experience, Strategy and New Products Addis Ababa 21 October 2003 www.carbonfinance.org."— Presentation transcript:

1 World Bank Carbon Finance: Experience, Strategy and New Products Addis Ababa 21 October 2003

2 The Banks Mission and Climate Change Banks Mission: Poverty reduction and sustainable development Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impacts Poor countries will be worse off and poorest people have the least capacity to adapt, especially the rural poor Private Capital and Technology Transfer: Kyotos flexible mechanisms and lower marginal cost of abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies

3 World Bank Carbon Finance Vehicles BioCarbon Fund Netherlands CDM Facility Italian Carbon Fund

4 How the Funds Work Industrialized Countries and Companies Host Countries and Communities $ Finance $ Technology Finance CO Equivalent 2 Emission Reductions PCF Other project funding Payment on delivery

5 Source: PCF calculations, based on database assembled with Natsource,Co2e.com and PointCarbon (est.) Estimated volumes transacted (MtCO2e) Vintages up to 2012 only Carbon Trades: est. volumes

6 Buyers are becoming more diverse Source: Authors own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

7 Carbon Finance flows Source: Authors own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon USA Canada Australia Latin America Asia Africa

8 Market Intelligence: Few Countries Benefiting, Little Private Sector Buying Market: cumulative 200 million tonnes CO 2 traded ($500 million) since 1996 Five-fold increase between 2001 and 2002 But … Only 43% of all carbon transactions made in CDM/JI ( ), dominated by Dutch and PCF Only 13% of the private sectors purchases were in CDM ( ) African countries, smaller countries and small-scale projects are largely bypassed

9 Public Sector (6) Governments of Netherlands, Finland, Sweden, Norway, Canada, and Japan Bank for International Cooperation Private Sector: (17) RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP, Fortum, RaboBank, NL PCF Shareholders Subscribed $180 million for Learning-by-Doing

10 PCFs investment Phase is almost over. 100% of contracts have to be agreed and 75% signed by June 2004

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12 Preparation and review of the Project Baseline Study and Monitoring and Verification Plan (MVP) Validation process Project Appraisal and Negotiation Periodic verification & certification Construction and start up Project completion 3 months 2 months 3 months 1-3 years Up to 21 years Upstream Due Diligence, carbon risk assessment and documentation: $ 40K Baseline : $20 K Monitoring Plan: $20K Contract, Processing and documentation: $30k Consultation and Project Appraisal: $105K Negotiations and Legal documentation: $50K Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience Total through Negotiations All expenses: $265 K Initial verification at start-up: $25K Verification: $10-25 K Supervision: $10-20K

13 Technology IRR Hydro, Wind, Geothermal Methane Kick Crop/Forest Residues3-7 Municipal Solid Waste5-10+ Impact of Carbon Finance on Project Financial Rate of Return Revolution in Solid Waste Management Important impact on small-holder crop-processors and animal production

14 Lead Time and Uncertainty Constraints on CDM Projects Operating Wind, Efficiency, Waste to Energy Large Hydro, Geothermal, Coal to Gas Power Second Commitment Period Rules and Targets Need to be decided by 2006 to ensure continuity in CDM Market Development 5 year average Pre- feasibility = Start Construction

15 CDM as a Source of Compliance Assets CDM/JI will fall far short of the 2 billion ton plus cumulative compliance gap Even at 50% compound per annum in CDM activity, CDM is unlikely to deliver more than 350 million tons ERs before 2012 Aggressive Chinese CDM participation may increase this by tons CO2e million maximum Hot Air is key to Kyoto compliance but is politically inaccessible Greening hot air is essential to making AAUs acceptable to OECD buyers

16 World Bank Carbon Finance Strategic Objectives Beyond PCF Expand core carbon market development: crowd in private sector: OECD Country Funds (Netherlands, Italy) Extend carbon finance to poorer communities in developing countries and smaller, poorer countries CDCF Demonstrate sustainable development impact of carbon finance for sinks BioCarbon Fund Build capacity of Host Countries for Carbon Trade PCFplus, CDCFplus, BioCFplus

17 Capacity Building Services in Carbon Finance Training and Knowledge Management: World Bank Institute (governments, private sector, Bank Group staff) – 2200 training days in FY03 Help desk, briefings, targeted awareness-raising Internships and Fellowships: PCF+ and shareholder privileges (20 + to date) Staff Exchange Program in CF: 7 currently on staff Institutional Strengthening: CF-Assist, PCF+, CDCF+ Research and Policy Analysis: NSS, Market intelligence, technical benchmarking, baseline and monitoring methods, policy research.

18 C F Carbon Finance Products of the World Bank New Funds Development BioCarbon Fund

19 C F Carbon Finance Products of the World Bank Summary CF to small projects in small CDM countries, poor areas Generate high value ERs Development + Carbon ($3 to $6 = $7/t/CO2e) Catalyze private capital to alleviate poverty Local intermediaries Highly replicable Multiple tranches Developed with IETA Community Development Carbon Fund (CDCF) BioCarbon Fund Extend CF to agricultural, forestry sectors Generate cost-effective ERs from sequestration and conservation ($3 to $4=?) Support projects that conserve biodiversity, combat desertification, alleviate poverty, explore adaptation options CDM and JI Learn by doing prototype

20 C F Carbon Finance Products of the World Bank Who is contributing (investing) ? Committed contributions Canada, Italy & Netherlands; others expected Seven companies so far, mostly Japanese, but North American and European companies expected Community Development Carbon Fund (CDCF) BioCarbon Fund MoU stage only Canada Japanese & European finance companies Japanese energy companies Major NGOs

21 C F Carbon Finance Products of the World Bank Benefits Private capital flows for projects that help reduce poverty Investment in cleaner technologies and best practices Ongoing partnerships Capacity building for communities and intermediaries Host Countries and Projects

22 C F Carbon Finance Products of the World Bank Benefits Acquire high value ERs for compliance, trading, insurance Cheaper transaction costs: expertise of World Bank carbon finance team Risk mitigation via diversification, hedge future costs Knowledge of carbon asset creation, market intelligence: internships, training, advice Demonstrate social responsibility Access to additional CO2e in each deal Leverage private investment for sustainable development Influence future regulations Participants (Companies & Governments)

23 C F Carbon Finance Products of the World Bank Development + Carbon = Carbon with a human face

24 C F Carbon Finance Products of the World Bank CDCF Rationale Extend CF to small projects in small CDM countries, poor areas Generate high value ERs development + carbon ($3-$6=$7/t/CO2e) Catalyze private capital to alleviate poverty Use local intermediaries, streamlined procedures, replicable projects Multiple tranches Developed with International Emissions Trading Association (IETA)

25 C F Carbon Finance Products of the World Bank CDCF Portfolio Criteria Small projects (UNFCCC definition: less than 15MW or equivalent) CDM countries only No more than 10% of capital in one country Minimum of 25% of capital in LDCs and other poor smaller developing countries Limit of 10% of capital in small-scale afforestation, reforestation Measurable, certifiable community benefit from ER project

26 C F Carbon Finance Products of the World Bank Project Technology Distribution from PCF Experience Technology Distribution of PCF Projects Under Development for FY 03 Bagasse cogen 15% Biomass 5% Energy efficiency 17% MSW 19% LULUCF 2% Small hydro 14% Wind 16% Geothermal/ EE 4% Gas flaring 8%

27 C F Carbon Finance Products of the World Bank CDCF Potential Early Deal Flow 22 project proposals/ ideas in hand: Africa: 5 Asia: 9 Latin America: 8 More than half of proposals are from IDA countries Togo, Ghana, Kenya, Sri Lanka, Bangladesh, Nepal, Vietnam, Honduras, Nicaragua.

28 C F Carbon Finance Products of the World Bank CDCF Potential Early Deal Flow Wide variety of technologies represented: Hydro power: 6 Energy efficiency: 5 Bagasse/ Sawmill Cogeneration: 2 Biomass: 4; Wind: 2; Solar: 1; Geothermal: 1 Fuel-switching in transport sector: 1 All fit CDM definition of small-scale projects Capacity ranges from 0.1 MW – 15 MW

29 C F Carbon Finance Products of the World Bank BioCarbon Fund Harnessing the carbon market to sustain ecosystems and alleviate poverty

30 C F Carbon Finance Products of the World Bank BioCarbon Fund Rationale Demonstrate technical and policy issues of Land use, land- use change and forestry (LULUCF) activities: learn by doing prototype Extend carbon finance to agriculture and forestry sectors – particularly in countries with limited opportunities for energy projects Multiple goals: Atmospheric benefit, local environmental benefits, social benefits and, where possible, explore adaptation options Meet demand for cost-effective ERs from mandatory and voluntary markets (buy at $3-6/ton/CO 2e ) CDM and JI

31 C F Carbon Finance Products of the World Bank BioCF 1 st Window Kyoto-Eligible Examples Afforestration/ Reforestration CDM & JI Countries Sustainable Forest Management JI only Reduced tillage

32 C F Carbon Finance Products of the World Bank BioCF - Biofuels – First Window Projects where new trees or crops are established to provide biofuels as part of a wider social and landscape management goal.

33 C F Carbon Finance Products of the World Bank BioCF 2 nd Window Landscape Management CDM Host countries RevegetationSoil Carbon Management Currently have about 90 project proposals (PINs) Includes a strong set from Africa Seeking more dryland projects

34 C F Carbon Finance Products of the World Bank Technical Assistance Trust Funds

35 C F Carbon Finance Products of the World Bank Implementation Partnerships Objective = build local capacity needed to make the CDM a reality in LDCs and poorer rural areas and communities of the developing world

36 C F Carbon Finance Products of the World Bank How IPs work Multi-donor Technical Assistance Funds from IP participants, as well as investment income from full upfront payments by CDCF participants and some special grants to the Trust funds IPs are part of the WBs CF-assist, ensuring coordination among the various assistance initiatives of the WB in the area of carbon finance

37 C F Carbon Finance Products of the World Bank Implementation Partnership Activities Identify and prepare projects Identify, train and collaborate with local intermediaries to prepare project proposals Develop their capacities to bundle and deliver projects Develop simplified baseline and monitoring methodologies Develop local capacity to undertake baseline, monitoring, and verification studies Encourage and support the participation of local stakeholders in CDCF projects

38 C F Carbon Finance Products of the World Bank The Case for Capacity Building Experience with PCF (lessons learned): Learning by doing: 1 st and 2 nd transaction key to existence of supportive approval system and capacity of agencies, sponsors, intermediaries, NGOs Substantial front-end expenses to reduce investment risks, facilitate project development and replication, and streamline project procedures. Project validation costs also significant EcoSecurities for DFID, 09/2002 study: … without robust frameworks for implementing the CDM […] distributional inequity […] losers being the poorer people in smaller countries.

39 C F Carbon Finance Products of the World Bank The Case for Capacity Building Point Carbon Market Analyst (12/02) - survey: The single most critical factor determining the attractiveness of a CDM investment is a supportive CDM approval system in the host country PCFplus Study (11/02): The main challenge in reducing transaction costs of small projects is reducing operational entities (OEs) costs. This could be addressed by promoting accreditation of local OEs charging local rates (US$200 per day) instead of international rates (US$1000 per day)

40 C F Carbon Finance Products of the World Bank Concessional development finance is key to project development and preparation LDCs and poorer rural areas and communities will only become players in the emerging carbon market if the international donor community helps them develop local capacity and expertise to prepare and manage carbon projects The Case for Capacity Building

41 The Banks Mission and Climate Change Banks Mission: Poverty reduction and sustainable development Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impacts Poor countries will be worse off and poorest people have the least capacity to adapt, especially the rural poor Private Capital and Technology Transfer: Kyotos flexible mechanisms and lower marginal cost of abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies


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