Carbon Finance Strategy the World Bank

Carbon Finance Carbon Finance Strategy the World Strategy the World

BankBank

CHARLES CORMIERCHARLES CORMIER

Sept 2005Sept 2005

Key Features of Carbon FinanceKey Features of Carbon Finance Both public and private capitalBoth public and private capital – new and – new and

additional sources for sustainable development additional sources for sustainable development financingfinancing

Payment on DeliveryPayment on Delivery – payments are made – payments are made upon annual independent verification that upon annual independent verification that emissions reductions have occurred. emissions reductions have occurred. • Unlike most buyers in the market, Participants in Bank Unlike most buyers in the market, Participants in Bank

Funds agree to take Kyoto regulatory risk:Funds agree to take Kyoto regulatory risk: Hence, our Hence, our carbon fund contracts are “bankable”, allowing more carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk projects to get financing than if regulatory risk remained open. remained open.

Payment stream is in hard currency, reducing Payment stream is in hard currency, reducing financing risk for foreign lendersfinancing risk for foreign lenders

Cashout

Cashin

Equity

Debt

Construction Capital for underlying c limate fr iendly project

Yrs 0 1 2 3 4 5 6 7 8 …………………………………….15-20

Carbon Revenues for10-21 years

World Bank Emissions Reductions Purchase Agree ment is bankable and additional revenue commitment helps bring projects to financ ial closure

= annual payments under carbon purc hase agreement

= annual payments under power purchase or othersource of revenues to underlying proje ct

Carbon sales revenues are commonly in the range from 10-50% of total revenues for power and waste management projects

Construc tion

Operation

Understanding the impact of carbon finance on project financing and financial sustainability

8

Technology IRRfinancial

Hydro, Wind, Geothermal

0.5-2.5%

Crop/Forest Residues 3-7%

Municipal Solid Waste 5-15+%

Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO2e

Carbon Economics

Improve Liquidity in the Carbon Market Improve Liquidity in the Carbon Market Benchmark carbon asset creationBenchmark carbon asset creation: : Increase certainty Increase certainty

and lower entry barriers for private capital (“crowd-in and lower entry barriers for private capital (“crowd-in private sector”)private sector”)

Expand frontiers of the market: Expand frontiers of the market: expanding the benefit expanding the benefit of carbon finance to countries, poorer regions and of carbon finance to countries, poorer regions and technologies not yet benefiting from carbon trade, and to technologies not yet benefiting from carbon trade, and to sectors where Bank intermediation is critical to expand sectors where Bank intermediation is critical to expand supply supply

Address Market Distortions: Address Market Distortions: demonstrate credible forestry/agriculture “sinks” demonstrate credible forestry/agriculture “sinks”

activitiesactivities Open Markets for small projects and small countriesOpen Markets for small projects and small countries

Integrate and strengthen Technical Assistance and Integrate and strengthen Technical Assistance and Capacity Building: Capacity Building: to assist participating countries to assist participating countries to access market to access market

Carbon Finance StrategyCarbon Finance Strategy

World Bank Carbon Finance Products~$900 million under management

$80 million committed - Italian multi-participant

170 million euro – Spanish Government; will be open to private sector

–

Bio Carbon Fund: $51.3 million; multi-shareholder; second tranche opened to contributions in September 05

Community Development Carbon Fund: multi-shareholder. Firsttranche closed at $128.6 million; second tranche to open once Portfolio for first tranche is well developed

Prototype Carbon Fund: $180 million, multi-shareholder

Netherlands JI

Facility

$35 million. Economies in Transition only (with IFC)

$180 million – single government participant (Dutch Government)

$35 million – Danish multi-participant

Under development: Carbon Fund for Europe

How Carbon Funds WorkHow Carbon Funds Work

Industrialized Governments

and Companies

Developing Countries and Communities

Bank Managed Carbon Fund

Bank Managed Carbon Fund

$$Technology

Finance $$Technology

Finance

CO Equivalent22

Emission Reductions

CO Equivalent22

Emission Reductions

Payment on delivery of emissions reductions, not up-front capital costs

Preparation and review of the Project

Carbon Asset Due Diligence

Validation process

Project Appraisal and Negotiation

Periodic verification & certification

Construction and start up

Project completion

3 months

2 months

2 m

onth

s

3 months

1-3 years

Up

to 2

1 ye

ars

• Upstream Due Diligence, carbon risk assessment and documentation: $ 25K

For new methodologies•Baseline : $30 K• Monitoring Plan: $25K

• Contract, Processing •and documentation: 25k

• Consultation and Project Appraisal: $60K• Negotiations and Legal documentation: $100K

Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience

Total through Negotiations

All expenses: $265 K for regular size projects$150 K for small scale projects

• Initial verification at start-up: $25K

• Verification: $10-25 K• Supervision: $10-20K

Bagasse1% Energy

Efficiency4%

LULUCF4%

Geothermal1%

Cement Manufacturing

6%

Biomass8%

N20 Removal

7%Coal Mine Methane

11%

Wind6%

Waste Management

37%

Small Hydro15%

PCF TECHNOLOGICAL DISTRIBUTIONACTIVE PCF PORTFOLIO PROJECTS - TOTAL OF APPROX US$176 MILLION

Carbon Finance AssistCarbon Finance AssistA Single-Purpose Multi-Donor Trust Fund for all A Single-Purpose Multi-Donor Trust Fund for all

WB Carbon Finance Capacity Building and Technical WB Carbon Finance Capacity Building and Technical AssistanceAssistance

CF Assist Umbrella

FIREWALL

• Enhance capacity of participating countries to fully participate in the carbon market

• World Bank Carbon Funds is a buyer of last resort

PCF

BioC

Direct Donor Contributions

Carbon Finance Business

Carbon Finance Business

$ Interest Earnings on CFB Funds

(Implemented By Countries

& Regions w/CF-A Assistance)

Experience Exchange

CDCF

(pledged as of Aug05)

+

+

+

(Carbon Asset Purchases)

(Coordination of all Technical Assistance and Capacity Building)

PHRD

$10M

“Plus TA Funds

Challenge of the Closing Window to Deliver Projects for First Commitment Period

(CO2/CH4 Segment of CDM Market)

2006 20082003 2012

Operating

Wind, Efficiency, Waste to Energy and Small-scale projects

Large Hydro, Geothermal, Coal to Gas PowerCDM Investment Window: 3years

Window closes in 2006 if there is no decision on 2nd

Commitment Period of KP or ETS as there is no incentive to buy beyond 2012 and little demand

Operating

= Start of Construction

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Strategic Issues in CDM Market Strategic Issues in CDM Market DevelopmentDevelopment

Potentially Competing InterestsPotentially Competing Interests CDM needs to deliver high volumes to keep cost of CDM needs to deliver high volumes to keep cost of

Kyoto compliance affordableKyoto compliance affordable Developing country government preferences going Developing country government preferences going

into 2into 2ndnd Commitment Period negotiations is that Commitment Period negotiations is that CDM helps modernize and de-carbonize CDM helps modernize and de-carbonize infrastructureinfrastructure

““Sustainability” concerns constrains asset choice in Sustainability” concerns constrains asset choice in many OECD governments, and some corporationsmany OECD governments, and some corporations

Market Inflection Points to WatchMarket Inflection Points to Watch Post-2012 market signal by EU and/or KP Parties on Post-2012 market signal by EU and/or KP Parties on

long lead time assetslong lead time assets Second phase ETS review of sequestration/ LULUCF Second phase ETS review of sequestration/ LULUCF

assetsassets

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