World Bank involvement in GIS development Oleksandr Filonenko Carbon Finance Business Consultant, WB Ukraine office 25 April, Budapest CEU/REC Workshop

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

Market Realities CDM and JI not expected to deliver all compliance needs CDM and JI not expected to deliver all compliance needs Demand for million AAUs Demand for million AAUs If Canada remains out of the international market, likely in lower end of rangeIf Canada remains out of the international market, likely in lower end of range Supply: at least 3 times larger Supply: at least 3 times larger Implications: Implications: Likely to be a buyers’ marketLikely to be a buyers’ market Sellers may have to be price takers, however Ukraine and Russia can have more impact on trade terms than othersSellers may have to be price takers, however Ukraine and Russia can have more impact on trade terms than others Early movers could have advantageEarly movers could have advantage

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

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

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

Negotiation and Pricing Mechanism Auctioning Auctioning Politically more acceptable, transparentPolitically more acceptable, transparent However, works best if well developed market and large number of potential buyersHowever, works best if well developed market and large number of potential buyers Bilateral negotiations Bilateral negotiations Works best in particular for pilot phaseWorks best in particular for pilot phase Hybrid solutions Hybrid solutions E.g. pre-screening or tendering of EoI from buyers against a minimum price and other criteriaE.g. pre-screening or tendering of EoI from buyers against a minimum price and other criteria

Options for Revenue Use Climate change mitigation investment projects across sectors Climate change mitigation investment projects across sectors Reduction of local/regional pollutants Reduction of local/regional pollutants GIS management, monitoring, verification, reporting GIS management, monitoring, verification, reporting Technical support to project developers Technical support to project developers Policy development, market barrier removal, education? Policy development, market barrier removal, education? Adaptation to climate change? Adaptation to climate change? Biodiversity conservation? Biodiversity conservation?

World Bank Support for GIS (1) Analytical work (GIS options studies in Bulgaria, Latvia, Ukraine) Analytical work (GIS options studies in Bulgaria, Latvia, Ukraine) Technical assistance for development of institutional and regulatory framework for AAU trading (paid by the Bank for Ukraine and reimbursable for Latvia) Technical assistance for development of institutional and regulatory framework for AAU trading (paid by the Bank for Ukraine and reimbursable for Latvia) Grants for preparation of green investment schemes (Japanese trust fund grants for Ukraine and Russia) Grants for preparation of green investment schemes (Japanese trust fund grants for Ukraine and Russia) Underlying finance for GIS projects (build GIS windows around lending products) Underlying finance for GIS projects (build GIS windows around lending products) Purchase of greened AAUs via carbon funds’ participants including the CPF Purchase of greened AAUs via carbon funds’ participants including the CPF Securitization of AAU receivables (potentially in future) Securitization of AAU receivables (potentially in future)

World Bank Support for GIS (2) Ukraine: GIS Options Study WB T/A and PHRD grant work will be completed by the end of The GoU has indicated its strong interest in a pilot transaction, and that the WB is welcome as a participant; Latvia: GIS Options Study WB T/A to support implementation will be completed in late Negotiations with several buyers on a pilot transaction are underway. Since the WB provided fee-based TA for the preparation/implementation of the GIS the WB will not participate in the pilot transaction.

World Bank Support for GIS (3) Bulgaria: GIS Option Study in WB has discussed provision of a loan to finance AAU greening activities. The GoB’s position on the sale of AAUs is not yet confirmed; Czech Republic: Became eligible for AAU transfers in February No direct WB support for GIS but strong relationship through long cooperation on GEF and JI. The GoCR has indicated its interest in a WB purchase of AAUs and some TA for GIS development. The first target GIS activity might be energy efficiency in the residential sector;

World Bank Support for GIS (4) Hungary: Became eligible for AAU trading in December No direct WB support for GIS. The government has indicated its interest in a transaction with the WB’s carbon funds. The first target GIS activity will be energy efficiency in the residential sector. Russia: PHRD grant for the Russian GIS was launched in January 2008; huge greening potential, but not likely to be a quick mover.

World Bank Support for GIS (5) Romania: The WB has discussed loan support for a low carbon investment facility that could include AAU transactions as one financing tool; Poland: The Government is interested in discussion a potential transaction with WB. A GIS forum (workshop) is being organized and will be held in Warsaw in June.

Ukraine and GIS National Environmental Investment Agency of Ukraine was established in April Currently gains political weight, and becoming a key authority on emissions trading National Environmental Investment Agency of Ukraine was established in April Currently gains political weight, and becoming a key authority on emissions trading Ukraine will become eligible for GIS and JI Track 1 after April 29 th, 2008 Ukraine will become eligible for GIS and JI Track 1 after April 29 th, 2008 Pilot AAU transaction is under preparation; the procedure for this transaction is adopted by GoU on March 19, 2008, however conditions will still be negotiated individually with concrete buyer(s) Pilot AAU transaction is under preparation; the procedure for this transaction is adopted by GoU on March 19, 2008, however conditions will still be negotiated individually with concrete buyer(s) Trading of greened AAU will be available after the Law on GHG Regulation will be re-drafted and pass the Parliament Trading of greened AAU will be available after the Law on GHG Regulation will be re-drafted and pass the Parliament

Possible GIS Projects in Ukraine Large potential for GHG reductions, but shortage of investment and incentives Large potential for GHG reductions, but shortage of investment and incentives Sectors with large GHG emissions and a large reduction potential: Sectors with large GHG emissions and a large reduction potential: Fuel extraction, transport and processingFuel extraction, transport and processing Iron and steel productionIron and steel production Power and heat productionPower and heat production Industrial energy useIndustrial energy use Opportunities are also with end-users: Opportunities are also with end-users: Residential sectorResidential sector Transport sectorTransport sector Forestry Forestry

Carbon Partnership Facility CPF – long-term carbon trading platform for buyers and sellers with flexibility to current and future climate policy regimes, and scale of carbon abatement activities Approved by WB Executive Board on Sept. 25, 2007 Approved by WB Executive Board on Sept. 25, 2007 Focuses on large-scale and long-term activities Focuses on large-scale and long-term activities Taking a sectoral/ programmatic approach to asset development Taking a sectoral/ programmatic approach to asset development Minimum required starting capital: 0.5 billion USD Minimum required starting capital: 0.5 billion USD Operation will start as soon as minimum funds are committed by buyers (expected 4Q/2008) Operation will start as soon as minimum funds are committed by buyers (expected 4Q/2008) Encompasses ER trading for at least 10 year period beyond 2012 Encompasses ER trading for at least 10 year period beyond 2012 CPF structure will contain: CPF structure will contain:  Carbon Asset Development Fund  Carbon Fund

Generic Selection Criteria for CPF Programs 1. Priority sector - for Ukraine and in accordance with WB Country Partnership Strategy 2. Partner reliability - Committed towards program implementation - Capable to implement program or attract technical capacities externally 3. Manageable risks - Ability to generate steady flow of emission reductions (ERUs, AAUs, VERs, RMUs) over a long period of time - Political “green light” at local and state level - Absence of environmental and other externalities 4. Robust financing plan - Access to investment - Carbon finance disbursements based on ERPA

GIS and CPF GISCPF Possible Target Sector CPF + ForestryEnergy Generation, Energy Efficiency, Waste Management, Oil and Gas, Transport Target Partners The Host Country (and Project entities of the activities eligible for the GIS) Private and Public Sector Type of Approach Program and/or ProjectsMainly Program Role of the Host Country Commitment to establish and implement transparent and accountable GIS and sell AAUs to the buyers (MoU, AAUPA) Establishment of regulatory, budgetary and administrative frameworks Selection of the target projects/program Verification and Monitoring Transfer of AAUs Commitment to develop one or more programs for the CPF and to sell ERs to the CPF (LOI, ERPA) Establishment of the criteria Immediate Recipient of Carbon Revenue The government of the Host Country or authorized institution(s) Partners including the government of the host country

Thank You! OLEKSANDR FILONENKO Carbon Finance Business Consultant, Ukraine CO