TRANSACTION TYPES and FINANCING Architecture of CDM transactions By Steve Thorne SouthSouthNorth Addis Ababa 21 st October 2003

Contents of presentation CDM rationale overview CDM rationale overview Contribution of CDM to projects Contribution of CDM to projects Example of cash flows Example of cash flows Types of transactions Types of transactions Examples of types of transactions Examples of types of transactions What kind of finance is around What kind of finance is around Who is in the market Who is in the market

Emitter in NORTHEmitter in SOUTH Target level of emissions Achieved level of emissions COST $ COST $ Investment funds Emission Reduction credits The Clean Development Mechanism

ENERGY PROJECTDEVELOPED BY THE PARTICIPANT (e.g. Delivering of low-cost houses) CDM PROJECT ACTIVITY ( e.g. retrofitting by installing energy efficient technologies.) COST OF PROJECT AS WHOLE COST VALUE BROUGHT FROM PROCEEDS OF SALE OF CER’s PRICE

ENERGY PROJECTDEVELOPED BY THE PARTICIPANT (e.g. Delivering of low-cost houses) CDM PROJECT ACTIVITY ( e.g. landfill projects.) COST OF PROJECT AS WHOLE COST VALUE BROUGHT FROM PROCEEDS OF SALE OF CER’s PRICE

Let’s look at a CDM landfill… December 2003: CDM registered with EB This creates a set of registered and un-transacted Certified Emission Reduction Certificates CER’s The lifetime of the project is say 8 years, and in the MVP you verify every two years (optional)… Year 2 Year 4 Year 6 Completion

These issued CER’s are now commodities which can be sold, at a price the market dictates…. December 2005: $6/t December 2007: $11/t December 2009: $23/t December 2011: $21/t TOTAL CDM REVENUE

The block of CER’s can be transacted along three broad choices… 1: self develop the project and sell forward the predicted CER’s via an option or 2: bring in an investor Self develop The project and sell the CER’s as they are issued at prevailing market price 1: get a partner to help with the development of the entire project In return for sale of the CER’s

Option 1: 1: get a partner to help with the development of the entire project In return for an option on the CER’s RISK: here the risk is zero: you get help to put together the project and you get money REWARD: the reward is financed and transacted project PRICE: will obviously be greatly discounted against risk

Option 2: 1: sell forward the predicted CER’s via an option 2: bring in an investor RISK: here the risk is how to cover underperformance and future market uncertainty REWARD: the reward is flow of capital or letter of credit PRICE: will obviously be discounted against risk

Option 3: Sell the CER’s as they are issued at prevailing market price RISK: here the risk is the market price at time of going to market (issuance or beyond) REWARD: have to self finance, but rewards could be great PRICE: prevailing price, Maximum benefit if price is good

Sources of CDM finance Donor Funds for frictional costs (capacity development, institutional development, non- validation and verification transaction costs; establishment of African DOEs etc.) Donor Funds for frictional costs (capacity development, institutional development, non- validation and verification transaction costs; establishment of African DOEs etc.) Buyers of “off-the-shelf” CERs; Buyers of “off-the-shelf” CERs; Investors in project technologies (equity, forward purchase etc.); Investors in project technologies (equity, forward purchase etc.); Mixtures of types; Mixtures of types; Multinational internal trading; Multinational internal trading; Others? Others?

Who is in the market? Donor funds: Dutch, British, US, Germans, Danes etc. Donor funds: Dutch, British, US, Germans, Danes etc. World Bank e.g. PCF, CDCF, bio-carbon fund… World Bank e.g. PCF, CDCF, bio-carbon fund… CERUPT (Dutch funding) CERUPT (Dutch funding) Finnish, Danish, Govt. purchasers Finnish, Danish, Govt. purchasers Private sector: Eco-securities etc. Private sector: Eco-securities etc.

Emission trading Carbon markets under Kyoto Kyoto Protocol Annex I Non -Annex I JI project CDM Project Company

Expected sizes EU Emission Trading Scheme: Eur 8 billion/year; CDM/JI: Max 6-8% (600 mln/year) CDM institutional buyers: PCF, CDCF,Bio Carbon Fund; Cerupt: Eur 200 mln Danes/Austrians/France (Eur mln?) Japanese / Canadians