1. Carbon Finance in Gas Flaring and Venting Reduction Veronique Bishop Carbon Finance Business The World Bank OPEC – GGFR Workshop Vienna, June 30-July 1, 2005

2. Kyoto Protocol basics Impact of carbon finance Securing financing Examples Outline

3. UN Framework Convention on Climate Change Industrialized countries (except US, Australia) commit to reduce GHG emissions by 5.2% on average in 2008-12 (vs. 1990) Target can be met by: –Reducing emissions: CO 2, CH 4, N 2 O, HFCs, PFCs, SF 6 –CO 2 sequestration via land use change and forestry –Purchasing ERs from other ratifying countries Joint Implementation – Industrialized countries (EEur, FSU) Clean Development Mechanism – Developing countries International Emissions Trading Entered into force on 2/16/05 Kyoto Protocol

4. Internalizes the climate externality (partly) –Polluter pays principle –Modeled on US SO 2, NO X market Free trade lowers the cost of compliance: –OECD: $25-150 per tonne CO 2 e (marginal abatement cost) –LDCs: <$10 / tCO 2 e OECD shortfall of ~ 2.8-4.8 billion tCO 2 equiv. Funds established to diversify risk, share cost World Banks role: jump-start market, disseminate lessons, catalyze LDC investment, support host countries. Kyoto Compliance Market

5. World Bank Carbon Funds Industrialized Governments and Companies Developing Countries and Companies Carbon Fund Carbon Fund $ $ Technology Finance $ $ Technology Finance CO Equivalent2 Emission Reductions CO Equivalent2 Emission Reductions

6. World Bank Carbon Funds Italian Carbon Fund Netherlands CDM Facility $ 180 m $ 43.8 m to date Community Development Carbon Fund. $128.6 m to date Prototype Carbon Fund $180 m Netherlands Europe and CentraI Asia Facility (with IFC) BioCarbon Fund $ 80 m to date $ 35 m Netherlands ECAF Spanish Carbon Fund $ 200 m $ 30 mDanish Carbon Fund

7. Emission reductions are calculated relative to a baseline Key elements: –CO 2 reduced by displacing fossil fuels –Mitigation of methane, nitrous oxide, other GHGs –CO 2 sequestered eg through agroforestry Impact depends on technology, ER price Price depends on: –Risk and risk-sharing –Supply and demand within market segment Impact of Carbon Finance

8. Carbon Prices (Jan. 2004 - April 2005 in $US/tCO2e) Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon

9. Impact by Technology

10. Fossil Fuel Displacement Fuel DisplacedGeneric Emissions Factor (tCO 2 e/MWh) Carbon Revenue at US$4/tCO 2 e (US$/MWh) Gas0.40$1.60 Coal0.85-1.0$3.40-$4.00 Diesel0.75-1.50$3.00-$6.00 ER cash flows improve IRRs by 0.5 – 3.0%

11. Methane Mitigation Carbon Revenue*(methane only) US$/tcm CH4US$/MWh Biomass cogen, landfill methane up to $60up to $16 Venting reduction, coalmine methane up to $52up to $14 * at US$4/tCO2e Impact on IRR can be >15 percentage points

12. Impact for Flaring Reduction at $4/tCO 2 e

13. Impact for Venting Reduction (flaring only), $4/tCO 2 e

14. Impact for Venting Reduction (commercial use), $4/tCO 2 e

15. Revenue boost: – ~$ 6/ 000m3 for flaring reduction –+~$52/ 000m3 for venting reduction High quality cash flow: –OECD - sourced –Investment-grade payor –$- or - denominated Eliminate FX risk Financial engineering helps tap capital Impact of Carbon Finance

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

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

18. Brazil RabobankProject PCF ERPA Financing Agr. Ltr. of Approval ERs Future flow structure: Plantar ER pmts $5 m Loan $5 m SPV ER payments placed in offshore escrow

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

20. Ecuador Project NCDF ERPA Ltr. of Approval ERs Future flow structure: Abanico CER pmt $4.03 Sub Hidrobanico PPA? Loan ? IIC

21. Ecuador IICProject NCDF ERPA Financing Agr. Ltr. of Approval ERs Future flow structure: Abanico CER pmt $4.03 Loan $7 m SPV CER payments placed in offshore escrow Sub Hidrobanico PPA

22. Flaring reduction: Rang Dong First GFR methodology approved Additionality: –Cash flows with and without carbon –Project must demonstrate that carbon finance raises IRR above sponsors hurdle rate

23. Venting reduction: FSU FSU republic that transits gas and receives share of gas + royalty Leaky transmission pipeline: 5% losses Poor financial condition due to low collections, theft

24. Venting reduction: case $45m investment to reduce losses to 2% over 3 years Negative IRR without carbon due to low gas price IRR increases to 37% with carbon Financing by oil co, MCM, World Bank Revenue in hard currency will enable sponsor to repay loan

25. Working with the World Bank Group World Bank Groups role in carbon market: Ensure liquidity in CDM, JI Benchmark new methodologies Introduce new countries, sectors, technologies Learning by doing projects Support to host countries: Capacity building Support in bringing CDM/JI projects to market

26. Working with the World Bank Group Carbon Finance support: Purchase of emission reductions Assistance throughout the project cycle Project design document Validation Project approval, registration Verification Flexible structuring: VERs, CERs, beyond 2012 … Help in securing underlying financing

27. Conclusions Carbon finance: 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 can help: Provide a combination of carbon finance and underlying financing Handle CDM registration process Help develop capacity

28. Carbon Market Structure Project-Based Transactions Allowance Markets UK Emission Trading Scheme EU Emission Trading Scheme Chicago Climate Exchange Retail Kyoto Pre- Compliance Not for Kyoto Compliance New South Wales Certificates

30. 0 20 40 60 1996199719981999200020012002 2003 Q1-Q3 Kyoto Pre-Compliance Not Kyoto Pre-Compliance Traded Volumes Volume traded in project-based transactions, m tCO 2 e