World Bank Carbon Finance: Experience, Strategy and New Products Addis Ababa 21 October 2003 .

World Bank Carbon Finance:

Experience, Strategy and

New ProductsAddis Ababa

21 October 2003

www.carbonfinance.org

The Bank’s Mission and Climate Change

Bank’s Mission:

Poverty reduction and sustainable development

Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impacts Poor countries will be worse off and poorest people have

the least capacity to adapt, especially the rural poor

Private Capital and Technology Transfer: Kyoto’s flexible mechanisms and lower marginal cost of

abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies

World BankCarbon Finance Vehicles

BioCarbon Fund

Netherlands CDM Facility

Italian Carbon Fund

How the Funds Work

Industrialized Countries

and Companies

Host Countries

and Communities

$ Finance $Technology

Finance

CO Equivalent2

Emission Reductions

PCF

Other project fundingPayment on

delivery

Source: PCF calculations, based on database assembled with Natsource,Co2e.com and PointCarbon

0

10

20

30

40

50

60

70

1996 1997 1998 1999 2000 2001 2002(est.)

Est

imat

ed v

olu

mes

tra

nsa

cted

(M

tCO

2e)

Vintages up to 2012 only

Carbon Trades: est. volumes

Buyers are becoming more diverse

Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

1996-2000 2001-2002

Canada

USA

Netherlands

Other WEU

Japan PCF

Australia

Canada

USA

Other WEU

Japan

Australia

PCF

Netherlands

0

2

4

6

8

10

12

14

16

18

Annex II JI Countries CDM Countries

Volu

me

of

ER

Pro

ject

s (M

tCo

2e)

Carbon Finance flows 2001-2002

Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

USA

Canada

Australia

Latin America

AsiaAfrica

Market Intelligence:“Few Countries Benefiting, Little Private Sector Buying”

Market: cumulative 200 million tonnes CO2 traded ($500 million) since 1996

Five-fold increase between 2001 and 2002

But … Only 43% of all carbon transactions made in CDM/JI (2001-

2002), dominated by Dutch and PCF

Only 13% of the private sector’s purchases were in CDM (2001-2002)

African countries, smaller countries and small-scale projects are largely bypassed

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, Fortum, RaboBank, NL

PCF ShareholdersSubscribed $180 million for

Learning-by-Doing

0

5 0 0

1 0 0 0

1 5 0 0

2 0 0 0

2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2

Y e a r

$ i

n 0

00

's

P C F P o r t f o l i o

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2

Y e a r

US

$ M

illi

on

s

P o r t f o l i o

P C F A d m i n i s t r a t i v e B u d g e t

I n v e s t m e n t P h a s e

I m p l e m e n t a t i o n P h a s e

M a i n t e n a n c e P h a s e

P i p e l i n e

PCF’s investment Phase is almost over. 100% of contracts have to be agreed and 75% signed by June 2004

Technological Distribution of Active PCF Pipeline ProjectsTotal of Approx. US$ 227 Million

Bagasse6% Biomass

8%

Energy Efficiency

18%

Geothermal12%

LULUCF4%

Waste Management

21%

N20 Removal5%

Small Hydro12%

Wind14%

Preparation and review of the Project

Baseline Study and Monitoring and Verification Plan (MVP)

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: $ 40K

• Baseline : $20 K• Monitoring Plan: $20K

• Contract, Processing •and documentation: $30k

• Consultation and Project Appraisal: $105K• Negotiations and Legal documentation: $50K

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

Total through Negotiations• All expenses: $265 K

• Initial verification at start-up: $25K

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

Technology IRR

Hydro, Wind, Geothermal 0.8-2.6

Methane Kick

Crop/Forest Residues 3-7

Municipal Solid Waste 5-10+

Impact of Carbon Finance on Impact of Carbon Finance on Project Financial Rate of Project Financial Rate of ReturnReturn

•Revolution in Solid Waste Management

•Important impact on small-holder crop-processors and animal production

Lead Time and Uncertainty Constraints on CDM Projects

2006

2003

2008

2012

Operating

Operating

Wind, Efficiency, Waste to Energy

Large Hydro, Geothermal, Coal to Gas Power

Second Commitment Period Rules and Targets Need to be decided by 2006 to ensure continuity in CDM Market Development

5 year average

Pre-feasibility

Pre-feasibility

= Start Construction

CDM as a Source of Compliance Assets CDM/JI will fall far short of the 2 billion ton plus

cumulative “compliance gap” Even at 50% compound per annum in CDM activity,

CDM is unlikely to deliver more than 350 million tons ERs before 2012

Aggressive Chinese CDM participation may increase this by 150-250 tons CO2e million maximum

“Hot Air” is key to Kyoto compliance but is politically inaccessible

“Greening” hot air is essential to making AAUs acceptable to OECD buyers

World Bank Carbon Finance Strategic Objectives Beyond PCF Expand core carbon market development:

“crowd in” private sector: OECD Country Funds (Netherlands, Italy)

Extend carbon finance to poorer communities in developing countries and smaller, poorer countries CDCF

Demonstrate sustainable development impact of carbon finance for sinks BioCarbon Fund

Build capacity of Host Countries for Carbon Trade PCFplus, CDCFplus, BioCFplus

Capacity Building Services Capacity Building Services in Carbon Financein Carbon Finance Training and Knowledge Management: World Bank

Institute (governments, private sector, Bank Group staff) – 2200 training days in FY03 Help desk, briefings, targeted awareness-raising

Internships and Fellowships: PCF+ and shareholder privileges (20 + to date)

Staff Exchange Program in CF: 7 currently on staff Institutional Strengthening: CF-Assist, PCF+,

CDCF+ Research and Policy Analysis: NSS, Market

intelligence, technical benchmarking, baseline and monitoring methods, policy research.

CF

Carbon Finance Products of the World Bank

New FundsDevelopment

BioCarbon Fund

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Summary

CF to small projects in small CDM countries, poor areas

Generate high value ERs “Development + Carbon” ($3 to $6 = $7/t/CO2e)

Catalyze private capital to alleviate poverty

Local intermediaries Highly replicable Multiple tranches Developed with IETA

Community Development Community Development Carbon Fund (CDCF)Carbon Fund (CDCF)

BioCarbon FundBioCarbon Fund

Extend CF to agricultural, forestry sectors

Generate cost-effective ERs from sequestration and conservation ($3 to $4=?)

Support projects that conserve biodiversity, combat desertification, alleviate poverty, explore adaptation options

CDM and JI

Learn by doing prototype

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Who is contributing (investing)?

Committed contributions

Canada, Italy & Netherlands; others expected

Seven companies so far, mostly Japanese, but North American and European companies expected

Community Development Community Development Carbon Fund (CDCF)Carbon Fund (CDCF)

BioCarbon FundBioCarbon Fund

MoU stage only

Canada

Japanese & European “finance” companies

Japanese energy companies

Major NGOs

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Benefits

Private capital flows for projects that help reduce poverty

Investment in cleaner technologies and best practices Ongoing partnerships Capacity building for communities and intermediaries

Host Countries and ProjectsHost Countries and Projects

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Benefits

Acquire high value ERs for compliance, trading, insurance

Cheaper transaction costs: expertise of World Bank carbon finance team

Risk mitigation via diversification, hedge future costs

Knowledge of carbon asset creation, market intelligence:

internships, training, advice

Demonstrate social responsibility

Access to additional CO2e in each deal

Leverage private investment for sustainable development

Influence future regulations

Participants Participants (Companies & Governments)(Companies & Governments)

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Development + Carbon = Carbon with a human face

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

CDCF Rationale Extend CF to small projects in small CDM countries,

poor areas

Generate high value ERs “development + carbon” ($3-$6=$7/t/CO2e)

Catalyze private capital to alleviate poverty

Use local intermediaries, streamlined procedures, replicable projects

Multiple tranches

Developed with International Emissions Trading Association (IETA)

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

CDCF Portfolio Criteria Small projects (UNFCCC definition: less than

15MW or equivalent)

CDM countries only

No more than 10% of capital in one country

Minimum of 25% of capital in LDCs and other poor smaller developing countries

Limit of 10% of capital in small-scale afforestation, reforestation

Measurable, certifiable community benefit from ER project

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Project Technology Distribution from PCF Experience

Technology Distribution of PCF ProjectsTechnology Distribution of PCF ProjectsUnder Development for FY 03Under Development for FY 03

Bagasse cogen

15%

Biomass

5%

Energy efficiency

17%

MSW

19%

LULUCF

2%

Small hydro

14%

Wind

16%

Geothermal/ EE

4%Gas flaring

8%

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

CDCF Potential Early Deal Flow 22 project proposals/ ideas in hand:

Africa: 5

Asia: 9

Latin America: 8

More than half of proposals are from IDA countries

Togo, Ghana, Kenya, Sri Lanka, Bangladesh, Nepal, Vietnam, Honduras, Nicaragua.

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

CDCF Potential Early Deal Flow Wide variety of technologies represented:

Hydro power: 6

Energy efficiency: 5

Bagasse/ Sawmill Cogeneration: 2

Biomass: 4;

Wind: 2;

Solar: 1; Geothermal: 1

Fuel-switching in transport sector: 1

All fit CDM definition of “small-scale projects”

Capacity ranges from 0.1 MW – 15 MW

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

BioCarbon Fund

Harnessing the carbon market to sustain ecosystems and alleviate poverty

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

BioCarbon Fund Rationale Demonstrate technical and policy issues of Land use, land-

use change and forestry (LULUCF) activities: learn by doing prototype

Extend carbon finance to agriculture and forestry sectors – particularly in countries with limited opportunities for energy projects

Multiple goals: Atmospheric benefit, local environmental benefits, social benefits and, where possible, explore adaptation options

Meet demand for cost-effective ERs from mandatory and voluntary markets (buy at $3-6/ton/CO2e)

CDM and JI

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

BioCF 1st WindowKyoto-Eligible Examples

Afforestration/ Reforestration

CDM & JI CountriesSustainable Forest

Management

JI onlyJI only

Reduced tillage

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

BioCF - Biofuels – First Window

Projects where new trees or crops are established to provide biofuels as part of a wider social and landscape management goal.

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

BioCF 2nd Window

Landscape Management

CDM Host countriesRevegetation Soil Carbon

Management

Currently have about 90 project proposals (PINs)Includes a strong set from AfricaSeeking more dryland projects

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Technical Assistance Trust Funds

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Implementation Partnerships

Objective = build local capacity needed to make the CDM a reality in LDCs and poorer rural areas and communities of the developing world

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

How IPs work Multi-donor Technical Assistance Funds from IP participants, as well as

investment income from full upfront payments by CDCF participants and some special grants to the Trust funds

IPs are part of the WB’s CF-assist, ensuring coordination among the various assistance initiatives of the WB in the area of carbon finance

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Implementation Partnership Activities

Identify and prepare projects Identify, train and collaborate with local intermediaries

to prepare project proposals Develop their capacities to bundle and deliver projects Develop simplified baseline and monitoring

methodologies Develop local capacity to undertake baseline,

monitoring, and verification studies Encourage and support the participation of local

stakeholders in CDCF projects

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

The Case for Capacity Building

Experience with PCF (lessons learned):

Learning by doing: 1st and 2nd transaction key to existence of supportive approval system and capacity of agencies, sponsors, intermediaries, NGOs

Substantial front-end expenses to reduce investment risks, facilitate project development and replication, and streamline project procedures. Project validation costs also significant

EcoSecurities for DFID, 09/2002 study: “… without robust frameworks for implementing the CDM […] distributional inequity […] losers being the poorer people in smaller countries.”

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

The Case for Capacity Building

Point Carbon Market Analyst (12/02) - survey: The single most critical factor determining the attractiveness of a CDM investment is a supportive CDM approval system in the host country

PCFplus Study (11/02): The main challenge in reducing transaction costs of small projects is reducing operational entities (OEs) costs. This could be addressed by promoting accreditation of

local OEs charging local rates (US$200 per day) instead of international rates (US$1000 per day)

CF

Carbon Carbon

Finance Finance

Products Products

of the of the

World World

BankBank

Concessional development finance is key to project development and preparation

LDCs and poorer rural areas and communities will only become players in the emerging carbon market if the international donor community helps them develop local capacity and expertise to prepare and manage carbon projects

The Case for Capacity Building

The Bank’s Mission and Climate Change

Bank’s Mission:

Poverty reduction and sustainable development

Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impacts Poor countries will be worse off and poorest people have

the least capacity to adapt, especially the rural poor

Private Capital and Technology Transfer: Kyoto’s flexible mechanisms and lower marginal cost of

abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies