1. CoP6 bis Outcomes Clinic Implications for the Global Carbon Market July 30, 2001 World Bank

2. Public Sector (6) Governments of Netherlands, Finland, Sweden, Norway, Canada, and Japan Bank for International Cooperation Private Sector: (17) RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP-Amoco, Fortum, RaboBank, NL PCF Subscribers ($145 million)

3. Host Country Committee Joined (through MoU or Project Endorsement) Latin America (13) Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Peru, Uruguay Africa (9) Benin, Burkina Faso, Ghana, Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe Eastern Europe/ C Asia (7) Bulgaria, Czech R., Hungary, Kazakhstan, Latvia, Poland, Romania Considering Bhutan, Belarus, Egypt, Sri Lanka, Thailand Asia (1) India

4. Key Demonstration Effects … that investments under CDM/JI can: Earn export revenue for Developing Countries/Transition Economies engaging in the new ER commodity trade Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors Contribute to sustainable development … and how private sector and governments can implement the CDM/JI project cycle and compete in emerging carbon market

5. PCF Status and Focus Deal flow far exceeds funding - several carbon contracts now under negotiation  >50 deals with $350m+ carbon purchases under review Targeting signed Emissions Reductions Purchase Agreements (ERPAs)  by end 2001 15 deals of $45-50mm in Chile, Costa Rica, Nicaragua, Brazil, India, Uganda, Romania, Morocco  by July 2002 ~$35mm in Guatemala, Argentina, Honduras, Thailand, El Salvador, Belarus, Nicaragua, Czech; Under review or on hold for FY02 ~$40mm: China, Kazakhastan, Belarus, Guyana, Hungary, Poland Constraints: FMU and country capacity, quality of asset

6. Carbon prices on past transactions Based on data provided by Natsource for the PCF, June 2001.

7. Early developments of the market 1997 to 2001 Partial information available. Within OECD and EITs: 40-60 MtCO 2 e have been transacted. In developing countries: Less activity but growing. Mostly government funded, but private activity growing. General trend towards sophistication: buyers clubs (PCF), traders, financial derivatives (options), integrated marketplaces, etc.

8. Demand and supply under Kyoto scenarios Total Annex B demand for ERs Domestic carbon sinks Hot Air  financial flow to Russia and EE  Action within OECD Remainder  Russia and EE (trading and JI)  Developing countries (CDM)

9. Volumes in Kyoto w/o the US Gross annual demand for ERs1400 – 2400MtCO 2 e between 2008 and 2012 - Credits for hot air 950 – 2150 - Credits for Annex B Sinks  330 = Net demand 0 – 1800MtCO 2 e Based on UNFCCC Technical Paper 2001/01 “Comparison of emission projections” and in-house analysis.

10. Carbon Market Impact Hot Air and new Annex I Sinks Allowances depresses CDM/JI market –W/o US, up to 100% of OECD needs may be met by Hot Air+sinks. Both CDM/JI “project-based” Market and “Hot – Air” (emissions trading) market will be “policy- driven” –Hot Air may be cheap but politically unpalatable –CDM/JI project-based more expensive and difficult but high quality and politically acceptable

11. Prices in Post CoP6 World With full competition, market analysis suggests : –CDM trades down to $0-7/tCO 2; –lower range of $0-4/tCO2 more likely –PCF pays $3-4/tCO2 Non-KP Market drivers are significant: OECD domestic regimes and Corporate Voluntary market

12. Other Emerging Market Drivers Regulations constraining carbon emissions are being developed –National policies (UK, The Netherlands, etc.) –Subnational regulations (e.g. some US States) –Regional initiatives (EU-wide trading) Some firms are taking voluntary emission commitments

13. Current or projected national policies TradingStart-up Project-based mechanism? EU Yes 2005 At least from 2008 UK Yes. 2001 Yes France Yes 2003? Yes Norway Yes 2005 or earlier Yes Germany No  Later Denmark Yes 2001 Yes Sweden Yes 2005 or later Yes Netherlands Ongoing work  Yes Finland Ongoing work  Yes Ireland Ongoing work  Ongoing work Australia Yes US dependent Yes USA Yes ? Yes Canada Yes US dependent  Japan Ongoing work  Yes New Zealand Yes Not decided Yes Russia No  Yes Based on Confederation of Norwegian Business and Industry: “Meeting the Kyoto Protocol Commitments, Summary - Domestic Emissions Trading Schemes”, January 2001.

14. Regional regulations in the US Oregon: CO 2 emissions standard for new energy utilities. Price cap: $0.57/tCo2. Utilities can offset emissions using project based mechanisms. Washington: New plants must demonstrate the use of best available techniques for CO 2 emissions control. Massachusetts: CO 2 emissions cap for energy utilities effective in 2005. Utilities can offset excess emissions using project-based mechanisms. Near future: New York?

15. Voluntary corporate commitments Rapid survey indicates more than fifty companies representing one billion tCO 2 e emissions in 1999 have pledged to reduce GHG emissions by 2010. Resulting demand depends on the baseline. If we set baseline at 1999 emissions, we obtain a total demand of 500 MtCO 2 e over the next decade. At least eight have said they would use project based mechanisms.

16. Alcoa --25% below 1990 in 2010 BP Amoco 79.8Cumulative 2%/year below 1990  Chubu EPCo. 51.30.410 kgCo2/kWh in 2005 Dupont 44.465% below 1990 in 2010 Kodak --20% below 1990 in 2004 Fortum 90.5 MtCo2e below baseline in 2010  IBM 4.1Cumulative 4%/year below 1998 until 2004 Intel 3.310% below 1995 in 2010 (PFCs) Johns. & John, 1.57% below 1990 in 2010 Motorola -- 50% below 1995 in 2010 (PFCs) Ontario Pow.Gen. 26 6% below 1990 in 2010  PEMEX 177-1% per year until 2010  Shell 99103 MtCo2e in 2002  Statoil 8.31.5 MtCo2e below baseline in 2010  Suncor 5-1.5%/year until 2002 (-1%/year for 2003-2008)  Transalta 38.5 -----  Keidanren478.6Level of 1990 in 2010 (34 Japanese industries representing 75% of Japan’s industrial emissions) 1999 Emissions Commitment Internal Trading CDM/JI Corporate voluntary commitments

17. Impact of Carbon Finance on Project Financing at $3/t CO2e Technology  IRR Energy Eff.-District Heating<1.0 Wind0.9-1.3 Hydro1.2-2.6 Bagasse0.5-3.5 Biomass<5.2 Methane-SWM>5.0 Note: data are preliminary

18. Impact of Carbon Finance on Project Financing at $3/t CO2e AnnualUgandaCosta Rica Chile Chocosuela off-grid grid ERs (000 t) 49 61 79-138* Net Gen.(GWh) 30 75 160 CO2 ERs/GWh1664 807 494-860 ER (USc/kWh) 0.50 0.24 * Gas vs. 0.15-0.26 coal BL Hydro: Off-grid vs. Grid

19. Methane-capture projects: carbon finance can turn “dogs” into “cash cows” “Traditional” renewables: boost return by 0.5-2.5% –Off-grid projects have higher carbon factor –Makes marginal deals bankable –Reduces subsidy required – may attract ODA (addl boost) Improves project’s access to capital markets thru: –Certain, contractual flow of FX from reliable counterparty –“Seal of approval” –Improved Quality of cash flows  Sponsor can borrow against contract (like PPA) Impact of Carbon Finance on Project Financing at $3/t CO2e

20. Conclusions: High financial impact on Methane projects Catalytic for traditional renewables as well –Improved financial viability Quality of cash flows Quality of asset – SRI features  Enhanced ability to attract financing + donors –Greater impact for off-grid solutions –Local environmental, social benefits Impact of Carbon Finance on Project Financing

21. Methane project : India SWM Gasification of solid waste 15 MW plant, 95 GWh/ann, $38m cost ERs from: –Power generation displacing fossil fuel (40%) –Methane capture & conversion (60%) Project IRR Equity IRR Without carbon finance14% 16% With carbon finance19% 25% Impact of Carbon Finance on Project Financing at $3/t CO2e

22. CountryProjectTot. ($m) ERs ($m) IRR w/o IRR w/ER  IRR RomaniaDH375.510.511.40.9 Costa RicaWind18.60.59.710.60.9 JamaicaWind26417181.0 MoroccoWind2001412.714.01.3 ChileHydro3749.210.41.2 Costa RicaHydro1.30.17.19.72.6 GuyanaBagasse5067.27.70.5 NicaraguaBagasse3.10.314.618.23.6 BrazilBiomass53138.313.55.2 LatviaMethane162.511.418.87.4 IndiaMethane40813.818.74.9

23. Summary Findings from Fund Manager Interviews 5 private Funds to capture C-credits in all investments (UBS, Hancock, Commonwealth, Carbon Trader, Env Fin Prod) Handful of private equity funds also seeking carbon credit investors to raise IRR in deals Major forestry funds thinking about C credits New energy private equity and mutual funds might seek C credit deals if demand rises Social funds use C as screening indicator total capital driving C credits: $2.5-4 billion in Energy sector; $1bn+ in forestry

24. Investor Carbon Market Sentiment Most fence sitting – waiting for national and international regulations Early movers in deals and funds: –have high carbon exposure and regulatory risk, –are seeking strategic positioning –are seeking to influence policy –are at an early stage –wish to capture upside speculative C benefit Mainstream investment, “big” money still skeptical

25. Carbon Funds (All leverage private finance) PCF $145M + potential fund subscription by Participants up to $180m Netherlands Clean Development Funds: ~$230m over three to four years Commonwealth Bank’s Clean Fuel Program BP is first participant, other companies expected. Funded by consumer “checkoff.” Program invests in GHG mitigation projects in Australia. AGO certifies. National Funds  Australian government funds/initiatives  The Netherlands – Eru-PT – government funded

26. Typology of Funds/Plays Pure Carbon Funds (PCF, National Funds) Private Equity Funds  Aimed at JI/CDM Projects  New Energy, RE, EE Funds with Carbon Credits  Forestry Funds with Carbon Credits  Energy or Forestry Funds that Could Add Carbon Credits Mutual Funds with % in Private Equity NGO Funds Sustainability, Social, Ethical Mutual funds Corporate “Funds” Earmarked for Carbon Credit Investment