Filling Financial Gaps for Emission Reduction Projects Environmental Sustainability and Climate Change: Challenges and Opportunities for the Financial Sector in Latin America and the Caribbean D.F. Mexico November 11-12, 2010

1 Many emission reduction projects confront financial gaps:  Barrier 1 : Post 2012 uncertainty; discontinuity of markets  Barrier 2 : Projects with revenue coming only from sale of CERs, with no assets  Barrier 3 : Local FIs have not turned on yet  Barrier 4 : Many projects are small and/or are in sectors that are not carbon-rich

Barrier 1: Uncertainty of Post 2012  Only 2 years left until the end of the Kyoto Protocol commitment period  Post-2012 uncertainty is a major hurdle. Fragmented markets; lack of long-term price signal  Only a few buyers offer purchase of Post 2012 credits, with low prices and with conditionality 2

Innovative post 2012 carbon facilities can fill the demand / supply gap if they can offer…….. (To Sellers)  Long term purchase of CERs from 2013 to 2020  Unconditional floor price in order to obtain access to finance  Upside potential  Strong credit quality of Facility Participants (To Facility Participants)  Pipeline of projects with high probability of delivering CERs  Strong alignment of interest between the Facility Manager and Facility Participants  Upside potential 3

Example: IFC Post 2012 Carbon Facility  Participants: EU based energy and utility companies  IFC: acts not only as Facility Manager but also as a Participant  Forward purchase agreement for vintage CERs  From projects directly / indirectly financed by IFC  Price indexed to spot price subject to floor and cap 4 IFC P12C Facility Projects Facility Participants CERs Finance Facility Manager EU Energy & Utilities Price with floor & cap

Advantages of IFC Post 2012 Carbon Facility (For Sellers)  High quality revenue stream by unconditional floor price increases access to long-term financing  Price indexed to spot price providing upside potential  Credit quality of participants including IFC gives comfort (For Facility Participants)  Pipeline of projects with high probability of delivering CERs benefited from financial closing by IFC  IFC as a Participant conforms alignment of interest  Indexed price with cap provides upside potential 5 First closing expected in December 2010.

Barrier 2: Projects with revenue coming only from sale of CERs, with no assets  Typically, projects under end-use / residential energy efficiency program, such as efficient lighting and cook stove projects  Project developers tend to be small, and not creditworthy enough for corporate lending  Difficulty to apply typical project finance due to lack of assets  Innovative financing may work as a breakthrough to untap this potential sector and promote replication of projects 6

Income participation loan / quasi equity can be a breakthrough by offering……. (Possible Proposal)  Return in the form of a pre-determined % of CERs (or CER revenues) to be earned by the sponsor, in addition to a (low) base interest rate  Longer tenor  Longer grace period to cope with Kyoto related lead time (Observation)  Loan with characteristics similar to equity; with upside potential driven by volume of CERs and spot price of CERs  Established financing structure can be used for replicated projects 7

8 Barrier 3: Local FIs have not turned on yet  Not fully familiar with carbon finance  Lack of resources / experience for sourcing carbon projects  Not prepared for risk assessment / project appraisal  Lack of resources for developing legal documents Local FIs offer great potential for reaching out to a wide and highly diversified spectrum of small scale emission reduction projects.

9 International FI can assist local FIs by providing Capacity Building such as….  Knowledge and outreach - Carbon finance training - Marketing support  Transaction support - Project development support - Customized tools for appraisal and underwriting - Form legal documentation  Scaling up - Portfolio review and recommendations

10 …which can create “win-win” business opportunities for both international FI and local FIs Capacity Building Support for Lending -Risk Sharing -Mezzanine Financing Etc. CER Off-take Arrangement

11 Barrier 4: Many projects are small and/or are in sectors that are not carbon rich (Possible Solutions)  Bundling through local FIs can help fill the financial gap for dispersed and smaller projects, which collectively represent a huge opportunity in emission reductions Projects International FI Local FI Capacity Building, Finance & Risk Sharing Finance CERs

12 Wrap Up  Creativity and innovation are needed in considering financing against post 2012 carbon revenue stream, and financing projects with revenue coming only from sale of CERs, with no assets  Creditworthy /international FIs can take a lead in adding value to the project developers and inspiring the carbon markets  Working together with local FIs is a key to uncovering small projects which have been overlooked

13 For information, please contact: Kiyoshi Okumura, CFA Investment Officer Climate Financial Products Climate Business Group Tel: Vikram Widge Head, Climate Financial Products Climate Business Group IFC Washington, DC Web: