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Financing the Destruction of Unwanted ODS through the Voluntary Carbon Market Potential Options for Mobilizing Funds Steve Gorman GEF Coordination / Montreal.

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Presentation on theme: "Financing the Destruction of Unwanted ODS through the Voluntary Carbon Market Potential Options for Mobilizing Funds Steve Gorman GEF Coordination / Montreal."— Presentation transcript:

1 Financing the Destruction of Unwanted ODS through the Voluntary Carbon Market Potential Options for Mobilizing Funds Steve Gorman GEF Coordination / Montreal Protocol Operations The World Bank 14 May 2010 Geneva Seminar on the Environmentally Sound Management of ODS Banks

2 Potential Options for Mobilizing Funds Study on Financing the Destruction of Unwanted ODS thru the Voluntary Carbon Market (VCM) Context for the Study Objectives and Planned Outcomes of the Study Study Findings Options for Article 5 Countries Another Resource Mobilization Option to Complement Multilateral Fund Financing for Wider ODS Financing Challenges Conclusions 2

3 Context of the Study Montreal Protocol has significantly reduced production/consumption of ODS Emissions of ODS banks in equipment, products, and stockpiles – not controlled IPCC/TEAP has estimated that: One-third of ODS banks in 2002 would be vented by 2015 unless action was taken This venting would result in emissions of almost 7 billion tCO 2 e End-of-life ODS banks need to be recovered, consolidated, transported, and destroyed using technologies approved by the Parties End-of-life management of ODS banks can result in significant human health and climate benefits Pictures courtesy of ICF International 3

4 Context of the Study The voluntary carbon market is an important opportunity to finance the destruction of ODS because: ODS destruction is not covered under CDM and to date, the Executive Committee has decided to provide funding only for pilot ODS disposal projects (in accordance with Decision XX/7) Financial incentives are needed to ensure proper disposal of unwanted ODS, since the process is costly The high GWPs of ODS can generate significant carbon credits ICF was contracted by the World Bank on behalf of the MLF Executive Committee to undertake a study on these opportunities, guided by the Terms of Reference approved in Decision 55/34. 4

5 Objectives and Planned Outcomes D etermine opportunities for financing the destruction of unwanted ODS by: Conducting financial and technical feasibility assessments on financing ODS destruction thru the VCM (volume, impact, costs); Reviewing existing methodologies for validation and verification of ODS disposal and recommend to ExCom; Applying practical experience from case studies; Consulting with stakeholders to develop understanding of benefits and challenges of VCM. Objectives 5

6 Strengthened and expanded carbon voluntary market for ODS destruction offsets; Streamlined project cycles for ODS disposal; Value of carbon credits from ODS disposal enhanced; ODS disposal market in Article 5 countries created; Revenue sharing to support transaction costs, and; Art. 5 countries enabled to identify additional external assistance if required. Objectives and Planned Outcomes Outcomes 6

7 Study Findings Significant opportunity exists for ODS destruction projects under the VCM but depends on a number of factors including among others: Attractiveness and value of an ODS offset Growth of the voluntary market Rates of ODS recovery Development of capacity (project dev., monitoring, verification) A global market platform has been created with three standards offering ODS destruction credits – including for projects in Art. 5 countries Chicago Climate Exchange (CCX) Climate Action Reserve (CAR) Voluntary Carbon Standard (VCS) Demand for ODS destruction credits is affected by the relationship between future VCM size and volume of ODS for destruction: 7

8 1) ODS Potentially Available and Eligible for Destruction (Bars) with the Projected Volume of the Voluntary Market ( ) In millions of tons of CO 2 equivalent

9 2) ODS Potentially Available for Destruction from Retired Equipment in Millions of tCO 2 eq, assuming a 10% Recovery Rate (2010-2050)

10 Study Findings (cont.) ODS destruction credits are unlikely to flood the market or negatively impact compliance markets Solid, draft methodologies/protocols exist Challenges and gaps remain: Some ODS are not covered by the VCM (halon) Weak country capacity in carbon finance; lack of experienced bodies/structures; lack of upfront capital Can an adequate system be put in place to prevent gaming and perverse incentives? Many Art. 5 countries will have low volumes of ODS for destruction ODS projects can be costly depending on effort level and project size and price of credit per tCO 2 equivalent - how to manage revenue at the country level? 10

11 Costs of ODS destruction projects Collection, recovery, transport, and destruction costs Segregation/Collection$0-100/kg Transport (recovery)$0-50/kg Recovery processing$4-40/kg Transport (destruction)$0.01-0.06/kg Destruction$5-7/kg Transaction costs to prepare and register a project Project preparation$0 - 60,000 Third-party validation$0 - 40,000 Third-party verification$20,000 One-off joining fee & annual fee $0 – 500 Project fee$0 – 500 Issuance/registration fee$0.05 – 0.20 /tCO2e

12 Example project profitability calculations 10 tons CFC-12 example yields profits of ~US$184,000 Minimum amount of ODS needed to result in a financially viable project can be estimated using equations Project Revenue =Amount of ODS destroyed xGWP of ODS xEmission reduction discount* xTrading price of credit $383,680=10 tonsx10,900x88% (12% discount)x$4/tCO 2 e Project Costs =Fixed project transaction costs** +Issuance / registration fee*** +Project implementation costs**** $200,184=$81,000+$19,184+$100,000 * Determined by equations in selected methodology ** Includes project preparation, validation, verification, annual and project fees *** Based on selected voluntary standard, and equal to number of credits issued multiplied by fee per credit (tCO 2 e) **** Includes collection, transportation, storage, testing, and destruction

13 ODS Destruction Project Break-even Costs Compared to Average Price for an Industrial Gas Carbon Credit 13

14 Options for Art. 5 Countries: Markets and Methodologies Voluntary Carbon Standard Methodology: New or CARs Art. 5 Protocol Countries with ODS Destruction Facilities ODS can be consolidated by an aggregator Countries with small volumes of Unwanted ODS CAR (where price of VER is the highest) Countries interested in Maximizing Returns Chicago Climate Exchange Countries seeking credit for halon /CTC destruction 14 For all options see Table 6 of the ICF Study

15 Options for Art. 5 Country Governments 15 Upfront Financing Multilateral Fund Dec. 58/19 - ODS Pilot Projects (collection, storage, transport, destruction) Demonstrated savings from national ODS phaseout plans might be used New financial mechanisms (?) Revenue from the voluntary carbon market Directly Government Role = Facilitator Government Role = Project Developer Indirectly (taxation, auctions, etc.) from the private sector

16 Options for Art. 5 Country Governments 16 Integrating ODS destruction into waste management programs or energy efficiency programs through appliance replacement and take back schemes Aggregating voluntary carbon market offset projects (within a country and/or a regional country grouping) Establishing producer responsibility schemes which rely on levies or licensing fees from import of ODS containing equipment or rebates for surrendering recovered ODS

17 Leveraging private sector finance and using market mechanism to augment funding available for the global environment: Voluntary carbon market to finance ODS destruction for carbon and ozone benefits is one model Others are needed for short-term funding requirements, including HCFC phaseout…where there could be an MLF financing gap on the global level to meet the 2015 Montreal Protocol phaseout requirements Another Option for Wider ODS Challenges 17

18 HCFC Funding Demand and Availability $1.334 billion $800 million Required funding to meet 10% reductions for all Art. 5 countries in 2015 Expected MLF funding (current and next replenish ment) Unavoidable, non- incremental costs Climate + Ozone Benefits Global Funding Requirements Extrapolated from China HCFC consumption and production figures (total phaseout required: 150,428 MT total funding required: US$902 million) Additional Financing for non- incremental costs

19 Market Mechanisms to Scale-up Donor Funding + Carbon Assets Investors Capital Market Investors Capital Market ++ Positive impact on environment Positive impact on environment DonorsMLFProjects for ex. sustainable investing bonds Monetization of Commitments 19 Three Levels of Priority in Scaling-Up 1.Meeting the MP HCFC Phaseout Obligations (filling the funding gap) 2.Future carbon assets generated by projects could also be monetized and channeled to projects for frontloading funding 3.Using carbon assets to lower the cost of project financing with ozone- climate co-benefits

20 20 Year 150 Alternative 1: Donors scale up 300 Current funding model Alternative 2: Market Alternative 3: Market + Carbon Market + Carbon accelerated US$ Million 20 Market Mechanisms to Scale-up Donor Funding

21 Conclusions Opportunities exist to utilize alternative sources of funding for ODS activities where MLF funding is not sufficient or not available. Innovative financial engineering model to monetize future commitments to support up-front investment exists and could be applied to future commitments (MLF contributions) and, possibly future carbon revenues. Strategic thinking is necessary to piece together puzzle and maximize global benefits. Cooperation and synergies are necessary to leverage large impacts and benefits. 21

22 Final study is available at the 30 th OEWG Meeting as an information document to the 61 st Executive Committee in PDF format at: For more information from the authors, please contact: Mark Wagner Senior Vice President ICF International Phone: +1.202.862.1155 Fax: +1.202.862.1144 E-mail: Website:

23 Thank you Montreal Protocol Operations The World Bank Washington, DC

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