Green Investment Schemes - Concepts, Ideas, Challenges Jari Vayrynen Operations Team Leader, Europe and Central Asia 14 February, Bonn UNFCCC Workshop

What is a GIS? A mechanism established by the selling country to assure buyers that proceeds from AAU trades will finance bilaterally agreed environmental projects and programs through and beyond 2012.

Demand and Supply? CDM and JI not expected to deliver all compliance needs Demand for 400-2000 million AAUs If Canada remains out of the international market, likely in lower end of range Supply: at least 3 times larger Implications: Likely to be a buyers’ market Sellers may have to be price takers BUT, sellers can limit the supply or not sell at all unless acceptable conditions met Early movers could have advantage

Challenge and Opportunity of Strategic allocation of AAU assets Pilot transaction $ Kyoto target Establishing GIS Greening program I Traded: GIS Surplus AAUs (potentially tradable) Reserve for JI projects (if applicable) “Banked” Greening program II Mln ton CO2E Greening program III Compliance (Including commitment period reserve) Mandatory set-asides (non tradable 1990 1995 2000 2005 2008 2010 2012 2015 2020

JI Projects vs. GIS Kyoto Protocol Rules Direct “GHG reduction/ ERU” -link Project by project ERUs issued after physical GHG reduction Gov & Private sector market ERU fully fungible Direct transaction between seller and buyer no “conditionality” on revenue use Payment on ERU delivery Revenue stream to 2012 Large number of projects already implemented No Kyoto Protocol rules No direct “GHG reduction/ AAU traded” -link Programmatic/sector wide AAUs can be traded ahead of physical GHG reduction Market mainly governments AAU limited fungibility Financial intermediary or fund structure used Scope and terms of revenue use negotiated bilaterally Flexible financing schemes Revenues possible post-2012 Less experience. WB supports market creation.

Flexible financing and delivery structures Maximizing value and minimizing risk Key negotiation elements payment schedule, product differentiation, price Forward contract or spot Pilot could include some advance + payments on delivery upon agreed milestones in implementation

Buyers’ and Sellers’ Concerns Transparency Accountability Efficiency, clear procedures/criteria Environmental integrity Robustness Legal authorization for trading AAUs Price

Green Investment Scheme: Generic structure and financial flows AAU buyers Greening reports Host Government AAUs $ $ Special budget arrangement Financial instrument Supervisory/Investors’ Board emission reductions/environmental benefits Energy supply Industry E Eff. buildings Other: “hard” and “soft” 2008 2012 2020 $ Verification of environmental results Investment financing Equity investors Banks $

Negotiation and pricing mechanism? Auctioning Politically more acceptable, transparent However, work best if well developed market and large number of potential buyers >> not the case Bilateral negotiations Could be more efficient in particular in pilot phase Hybrid could be based on pre-screening of expressions of interest, e.g. against a minimum price and other criteria

  Factor Impact? Pressure on AAU price vs ERU Kyoto Regulatory Risk Reputational Risk  Project Risk Demand Kyoto Regulatory Risk  Host Country regulatory risk; methodology risk; determination risk; monitoring and verification risk, issuance of ERUs/AAUs risk, etc. AAU risk seems to be equal or lower than ERUs because AAUs are valid for compliance immediately if accepted by ITL (no international boards, validation, determination, etc.) BUT eligibility criteria to transfer AAUs are more difficult than for JI Track 2. Reputational Risk  Risk that reputation of one of the carbon trade parties may be damaged because transaction revenues are not used to support environmental projects and programs; or that transparency, accountability, and efficiency in the use of the revenues is impaired. Risk of negative social or environmental impacts, etc. AAU risk seems to be higher than that of ERUs from JI Track 2 because there are no legal requirements for independent validation and verification of emission reductions from projects. Risk can be similar to JI Track 1. Project Risk  Host Country risk, risk of delayed construction; Risk of underperformance after completion of construction; AAUs risk seems lower than that of ERUs because validity of AAUs for compliance by parties is not dependent on performance of specific projects. Demand The Linking Directive (Directive 2004/101/EC) allows operators of the EU ETS installations to use CERs and ERUs for compliance, while AAUs are excluded. Global demand for AAUs will be lower than for ERUs, unless sovereign buyers and Japanese private buyers prefer AAUs, which is unlikely.

Categories of revenue use GHG reductions, [avoidance?] Reduction of local/regional pollutants GIS management, monitoring, verification, reporting Technical support to project developers Policy development? Adaptation? Biodiversity?

State aid concern limits on scope in EU countries EU ETS installations effectively excluded May not constitute state aid if supports: public services and utilities (e.g. schools, hospitals, public buildings) general public, e.g. private households May be compatible with Common Market if competitive process open to all EU firms May be incompatible with Common Market and require approval by EU Commission Likely to require several state aid schemes May also be ok if meets so called de minimis –rule

EU Countries: State aid or not? Test 1: Does state aid distort or threaten to distort competition and affect trade among member states as defined under Art 87/88 of European Treaty? The project/program is eligible for the Latvian GIS; state aid is deemed compatible with the Common Market Yes Test 2: Does state aid require notification? (e.g. “de minimnis rule”, competitively awarded) Test 3: Can state aid be authorized by the EC under the 2001 Guidelines for State Aid for environ mental protection or Guidelines for Regional Aid? No Notification of EC Authorization by EC If state aid is offered, the EC and European Court of Justice decide whether the project company must return money to Government.

Possible project types, Latvia [Relatively small potential for JI and GHG reductions] Biomass, small scale geothermal CHP Small hydro, wind, solar Biogas EE in generation, buildings DH rehabilitation Transport Local pollutants

Possible project types, Ukraine [Large potential for JI and GHG reductions] Sectors with large GHG emissions and a large reduction potential: Fuel extraction, transport and processing Iron and steel production Power and heat production Industrial energy use Opportunities are also with end-users: Residential sector Transport sector Forestry?

World Bank support to GIS (1) Bulgaria: GIS Options study finalized in 2004 Next steps expected to be agreed later in 2007 Russia Recent Government resolution to approve a WB PHRD Grant for JI/EIT/GIS Ukraine: International Emission Trading Options Study completed. Technical assistance to support IET institutions and preparation of a pilot GIS program initiated

World Bank support to GIS (2) Latvia Options Study completed (de facto pre-feasibility study) A number of promising project ideas identified (support by Finland) Technical Assistance for implementation/detailed design started GIS roundtables Two roundtables were arranged for buyers and sellers in 2006 World Bank could be made available to other countries

Thank You! Jari Vayrynen Operations Team Leader, Europe and Central Asia Word Bank Carbon Finance Unit