1. Kyoto and Beyond: Opportunities for Flemish Business in Carbon Finance
Veronique Bishop
Carbon Finance Business
The World Bank
Presentation to Export Flanders
May 26, 2005

2. Outline Kyoto Protocol basics
Impact of carbon finance on your projects
Key issues
Working with the World Bank
How carbon finance impacts RE projects, by poviding a high-quality revenue stream that improves projects’ bankability
Tools that we have used to help RE projects secure underlying financing– both equity and debt

3. Kyoto Protocol Basics Entered into force Feb 16
OECD countries will need ~5.5 btCO2e
Gap may be met by:
Domestic measures: ~ 50%
EU Emissions Trading Scheme
Trading via 3 KP mechanisms:
“Clean Devt Mechanism”
“Joint Implementation”
“Intl Emissions Trading”

4. EU Targets under Kyoto

5. Structure of the Carbon Market
Project-Based Transactions
JI and CDM
Voluntary
Retail
Other Compliance
Allowance Markets
UK ETS
EU Emission Trading Scheme
Chicago Climate Exchange
New South Wales Certificates

6. Volume Traded Through Projects: Growing (in million tCO2e)
(Jan-Apr)

7. CDM, JI by sector % of CDM+JI ~150m t CO2e traded Jan
CDM, JI by sector % of CDM+JI ~150m t CO2e traded Jan April 2005

8. CDM, JI by host country % of CDM+JI ~150m t CO2e traded Jan
CDM, JI by host country % of CDM+JI ~150m t CO2e traded Jan April 2005

9. Impact of Carbon Finance
Emission reductions are calculated relative to a baseline
Key elements:
CO2 reduced by displacing fossil fuels
Mitigation of methane, nitrous oxide, other GHGs
CO2 “sequestered” eg through agroforestry
Impact depends on technology, ER price
Price depends on:
Risk and risk-sharing
Supply and demand within market segment

10. Carbon revenues depend on price + fossil fuel displaced
Generic Emissions Factor (tCO2e/MWh)
Carbon Revenue at US$4/tCO2e (US$/MWh)
Gas
0.40
$1.60
Coal
$3.40-$4.00
Diesel
$3.00-$6.00
ER cash flows improve IRRs by 0.5 – 2.5%

11. Carbon prices: Project-based (weighted average prices from Jan
Carbon prices: Project-based (weighted average prices from Jan to April 2005 in U.S.$ per metric tonne of CO2e)

12. Impact by Technology

13. Impact by project Sector Country/Project Incremental IRR .
Discounted Payback Per.
Landfill CH4
Brazil: Nova Gerar
32.70%
0.3
South Africa: Durban
32.60%
0.5
Argentina: Olavarria
13.30%
0.7
Energy Eff.
Indonesia: Indocement
12.80%
1.1
Coalmine CH4
China: Jincheng
8.00%
1.5
Biomass+CH4
Bulgaria: Svilosa
5.00%
3.6
Biomass
Hungary: Pannonpower
2.00%
4.9
Forestry+Bio
Brazil: Plantar
4.70%
1.8
Forestry
Romania: Afforestation
0.60%
6.2
Hydro
Ecuador: Abanico
2.10%
6.8
Peru: Poeches
0.70%
12.4
Wind
Philippines: Northwind
0.40%
20.0
Colombia: Jepirachi
23.1

14. Impact of Carbon Finance
Revenue boost
$3 to $5 per MWh for renewables, EE
Up to $20 per MWh /$60/tcm for CH4 mitigation
High quality cash flow
OECD - sourced
Investment-grade payor
$- or €- denominated
Eliminate FX risk
Financial engineering helps tap capital

15. Issues in executing projects
Lack of access to financing
High capital cost, long payback period
Risk (& risk aversion)
Tariffs
Collections
Borrowing against revenue streams
Loan cost & tenor
Availability of risk mitigation instruments
A solution: carbon finance

16. Kyoto Protocol: Constraints
CDM, JI:
Complex & uncertain eligibility rules
Lead time
Underlying financing
Industrial gases lack sustainable development impact
Small, poorer countries are bypassed
Post – 2012?
IET:
Sellers must meet prerequisites
Buyers want AAUs to be backed by real emission reductions

17. World Bank: solutions CDM, JI: Benchmark new methodologies
Help Host Countries develop project pipelines
Catalyze underlying financing
Demonstrate “greening” of industrial gases
Seek clarity & govt commitments beyond 2012
Defray KP registration risk
IET:
Green Investment Schemes to fund RE/EE investment
TA to help sellers meet prerequisites

18. World Bank’s role Help OECD countries address CO2 shortfalls
Catalyze climate-friendly investment in developing and transition countries
Benchmark methodologies
Inform buyers, regulators, public

19. How Carbon Funds Work Bank Managed Carbon Fund $ $
Technology $
Technology
Finance $
Finance
Industrialized Governments and Companies
Developing Countries and Communities
Bank Managed
Carbon Fund
CO Equivalent 2
Emission Reductions
CO Equivalent 2
Emission Reductions
Payment on delivery of emissions reductions, not up-front capital costs

20. World Bank Carbon Finance
Prototype Carbon Fund
$180 m
Community Development Carbon Fund.
$128.6 m
to date
BioCarbon Fund
$ m
to date
Netherlands CDM Facility $ 180 m
$ 80 m
to date
Italian Carbon Fund
Netherlands ECAF
Netherlands Europe and CentraI Asia
Facility (with IFC)
$ 35 m
$ 200 m
Spanish Carbon Fund
Danish Carbon Fund
$ 30 m

21. Securing Underlying Finance
Host Country
Ltr. of Approval
Engagements re:
Regulation (e.g. tariffs)
Kyoto Protocol
compliance CF
ERPA
ER pmt
ERs
Sponsor/ Project

22. Securing Underlying Finance
Host Country
Ltr. of Approval
Engagements re:
Regulation (e.g. tariffs)
Kyoto Protocol
compliance CF
ERPA
ER pmt
ERs
Sponsor/ Project
Lender?
Loan ??

23. ER payments placed in offshore escrow
Future flow structure: Plantar
Brazil
Ltr. of Approval
PCF
ER pmts $5 m
ERPA
ERs
SPV
World Bank Multi-shareholder Fund Participants take Kyoto Risk
If not:
Fewer carbon contracts would be bankable and fewer projects would get built, and
Less opportunity to explore financial structures to enhance value of carbon streams on project financing
Less opportunity to develop and present baseline methods and pioneer asset creation process in core CDM/JI market
Financing Agr.
Rabobank
Project
Loan $5 m
ER payments placed in offshore escrow

24. Brazil Plantar Sust. Fuelwood
ER payments amortized 100% of commercial loan principal

25. Ecuador: Abanico Hydro
30 MW ROR hydro
85% capacity factor
$33.3m cost
IRR 15.6%
800,000 tCO2e ERs
ERPA $4m
rIRR 0.73% => 16.3%

26. CER payments placed in offshore escrow
Future flow structure: Abanico
Ecuador
Ltr. of Approval
NCDF
Hidrobanico
CER pmt $4.03
ERPA
ERs
SPV
World Bank Multi-shareholder Fund Participants take Kyoto Risk
If not:
Fewer carbon contracts would be bankable and fewer projects would get built, and
Less opportunity to explore financial structures to enhance value of carbon streams on project financing
Less opportunity to develop and present baseline methods and pioneer asset creation process in core CDM/JI market
Financing Agr.
IIC
Project Co.
Loan $7 m
PPA
Off-taker
CER payments placed in offshore escrow

27. Abanico Cash Flows
CF Impact in Annual Debt Service, including interest (%)
33.3%
19.4%
41.4%
44.5%
48.0%
52.1%
57.0%
CER payments helped project meet IIC’s investment criteria

28. Abanico Project Carbon finance enabled project to:
Meet IIC’s investment criteria
Lower interest rate by 100 bp
Expedite financial closure
…In one of L. America’s riskiest countries

29. Uganda ERT

30. Financial engineering solutions
E. Eur: Green Investment Schemes
Designed for Bulgaria, Romania
Planned for Czech, Slovak, Latvia
Dialogue beginning with Russia and Ukraine
China: Greening Industrial Gases
Channel proceeds of ER sales from HFC23 to renewables and other sustainable investment
Argentina: carbon/investment fund
Govt request for Bank assistance to help develop and deliver carbon assets to global market
Bank seeking participation by bilateral

31. Financial engineering solutions
Financial engineering of carbon transactions to facilitate lending against ERs:
Offshore escrow
Long-term contracting
Energy funds
Senior-subordinated/mezzanine structure
Risk mitigation instruments
Direct financing
Insurance

32. Conclusions Carbon finance: World Bank Group’s role
Lowers compliance costs
Improves returns on climate-friendly projects
Provides a bankable revenue stream
Is taking off: Kyoto enters into force 1/4/05
World Bank Group’s role
Support sustainable development
Prepare the ground for the private sector
Facilitate carbon market development
Purchase ERs to catalyze investment

33. Carbon Market Structure
Project-Based Transactions
Allowance Markets
UK Emission Trading Scheme
Kyoto
Pre-Compliance
EU Emission Trading Scheme
Key Figures:
Project-based transactions account for more than 96% of volume traded (2003)
Methodology:
Limited information on transactions in the carbon market is publicly available
Material for this study provided by Natsource LLC, Evolution Markets LLC, and PointCarbon, and direct interviews with market players
Database of 288 project-based transactions (signed or advanced stage of negotiation) + aggregate data on allowance markets
Chicago Climate Exchange
Not for Kyoto Compliance
New South Wales Certificates
Retail

34. Traded Volumes Volume traded in project-based transactions, m tCO2e 60
Kyoto Pre-Compliance
Not Kyoto Pre-Compliance 40 20
70 million tCO2e traded in 2003 (vintages up to 2012)
2.5 times more than 2002
 220 million tCO2e traded since 1996
On average, projects generate 70% more emission reductions (post-2012 in general)
Total value $200-$300m
1996
1997
1998
1999
2000
2001
2002
2003
Q1-Q3
Volume traded in project-based transactions, m tCO2e

35. Thank you!