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

2. 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.

3. Demand and Supply?
CDM and JI not expected to deliver all compliance needs
Demand for 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

4. 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

5. 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.

6. 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

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

8. 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 $

9. 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

10.   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.

11. 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?

12. 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

13. 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.

14. 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

15. 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?

16. 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

17. 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

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