1. PROPOSAL FOR A CARBON GUARANTEE INSTRUMENT Chandra Shekhar Sinha Carbon Finance Coordinator Latin America and the Caribbean Region 1 November 15, 2010

2. I NTRODUCTION & O BJECTIVE Key Challenge 2 The objective: propose new financial products that monetizes future flows of CERs to raise finance today for investments Cashflow + - Time Investments in EE or RE projects require funding before they can generate returns Key challenge: raising funds today for investment in EE / RE projects Investment e.g., energy savings for EE; GWh for RE) Time Returns

3. I NTRODUCTION & O BJECTIVE Certified Emission Reductions (“CERs”) – a by-product 3 e.g., energy savings for EE; GWh for RE) Cashflow + - Time CERs CER (carbon credit) is a “by-product” which is typically not monetized… Investment Returns

4. I NTRODUCTION & O BJECTIVE Monetizing CERs today 4 e.g., energy savings for EE; GWh for RE) Cashflow + - Time CERs Investment Returns We will show you a product which can monetize today future flow of CERs to support the financing phase.

5. WB G UARANTEED CER S ALES C ONTRACT WB Guaranteed CER Sales Contract – How it works Proposal to monetize future CERs (the ‘Carbon Guarantee’): an upfront payment for forward sales CER Contract (i.e., selling today future CERs) to a seller (investor in EE/RE) to an Annex 1 buyer where CER volume delivery is guaranteed by the WB (or other similar financial institution)

6. WB G UARANTEED CER S ALES C ONTRACT 6 WB Guaranteed CER Sales Contract – How it works Compliance Buyer [Sovereigns, Private or Public entities] LAC Country Carbon Promoter $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA ) LAC Indemnity Agreement WB Guarantee of Shortfall Agreement “Off-Shore” Pool of CDM Projects CERs $ Day 1 Day 2 energy savings $

7. WB G UARANTEED CER S ALES C ONTRACT 7 WB Guaranteed CER Sales Contract – How it works Compliance Buyer [Sovereigns, Private or Public entities] LAC Country Carbon Promoter $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA ) LAC Indemnity Agreement WB Guarantee of Shortfall Agreement “Off-Shore” Pool of CDM Projects CERs $ Day 1 Day 2 If things go well…

8. energy savings $ WB G UARANTEED CER S ALES C ONTRACT 8 WB Guaranteed CER Sales Contract – How it works Compliance Buyer [Sovereigns, Private or Public entities] LAC Country Carbon Promoter $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA ) LAC Indemnity Agreement WB Guarantee of Shortfall Agreement “Off-Shore” Pool of CDM Projects CERs $ Day 1 Day 2 CER = $ m + interest CERs

9. energy savings $ WB G UARANTEED CER S ALES C ONTRACT 9 WB Carbon Guarantee Sales Contract – How it works Compliance Buyer [Sovereigns, Private or Public entities] LAC Country Carbon Promoter $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA ) LAC Indemnity Agreement WB Guarantee of Shortfall Agreement “Off-Shore” Pool of CDM Projects CERs $ Day 1 Day 2 Even if things go wrong with CER delivery…

10. energy savings $ WB G UARANTEED CER S ALES C ONTRACT 10 WB Guaranteed CER Sales Contract – How it works Compliance Buyer [Sovereigns, Private or Public entities] LAC Country Carbon Promoter $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA ) LAC Indemnity Agreement WB Guarantee of Shortfall Agreement “Off-Shore” Pool of CDM Projects CERs $ Day 1 Day 2

11. energy savings $ WB G UARANTEED CER S ALES C ONTRACT 11 WB Guaranteed CER Sales Contract – How it works LAC Country Carbon Promoter LAC Indemnity Agreement Pool of CDM Projects $ Loan $ m “Off-Shore” Loan Repayment $

12. R ISK A LLOCATION RiskSellerBuyerGuarantor Project Market/ Price Regulatory Allocation of Risk between the Buyer and Seller. Back-stopping by the Guarantor 12  The project owner takes all project risks, including completion risk and project performance risk  The Buyer takes all CER price risk  The Seller takes the risk that the CERs are not eligible in a pre- specified market (for e.g. EU Emissions Trading System).  The non-eligible CERs are considered as “not delivered” triggering the Guarantee if the Seller does not pay the Buyer for the shortfall.

13. P RODUCT 2: O FF B ALANCE S HEET CER-G UARANTEE 13 Product 2: Off Balance Sheet Carbon Guarantee – How it works Compliance Buyer [Sovereigns, Private or Public entities] LAC Country Carbon Promoter $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA ) LAC Guarantee of Shortfall Agreement “Off-Shore” Pool of CDM Projects CERs $ Day 1 Day 2 energy savings $ MDB Trust Guarantor GEF $ Indemnity Agreement

14. C ONCLUSIONS  Carbon Guarantee is possible financial product to allow developing countries to sell CO2 emission reductions to Annex 1 countries; an open market sale of a good  Provides funding today in exchange for a future flow of an EE/RE investment by-product, namely the CERs  If GEF or a Annex I funded climate fund could back-stop the World Bank/ MDB guarantee The carbon guarantee instrument would have wider application Private sector project owner and sellers could participate Public sector in countries where governments are not interested in providing guarantees can also benefit. Conclusions 14

15. Gracias, Thank you, Merci, Obrigado 15 Philippe Benoit, Chandra Shekar Sinha, Eduardo Ferreira The World Bank Sustainable Development, Energy Unit Latin America and the Caribbean Region