Carbon Finance Carbon Finance Strategy at the World Strategy at the World

BankBank

CHARLES CORMIERCHARLES CORMIER

JULY 2005JULY 2005

United Nations Framework United Nations Framework Convention Convention

on Climate Change (UNFCCC)on Climate Change (UNFCCC)

Ultimate objective of Ultimate objective of stabilizingstabilizing global global greenhouse gas concentrations in the greenhouse gas concentrations in the atmosphereatmosphere

Developed countries (Annex I countries) Developed countries (Annex I countries) aimaim to to restorerestore GHG emissions to 1990 levels GHG emissions to 1990 levels

Support Support capacity buildingcapacity building in, and facilitate in, and facilitate technology transfertechnology transfer to developing countries to to developing countries to mitigate, and to adapt to climate change mitigate, and to adapt to climate change

Meet as a “Conference of Parties” in the future, Meet as a “Conference of Parties” in the future, consider progressconsider progress

The Kyoto ProtocolThe Kyoto Protocol36 Developed Countries and Economies in Transition 36 Developed Countries and Economies in Transition

(namely Canada, Japan, EU15 and economies in (namely Canada, Japan, EU15 and economies in transition) agreed in 1997 to: transition) agreed in 1997 to:

reduce GHG emissions by 5.2 % below 1990 levels reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012in the commitment period 2008-2012

Total demand created for GHG Reductions: ~5 to Total demand created for GHG Reductions: ~5 to 5.5 billion 5.5 billion

Marrakech Accord: agreed in Nov 2001 sets rules Marrakech Accord: agreed in Nov 2001 sets rules of implementationof implementation

Status: Status: came into force in February 2005 came into force in February 2005 Coming into force: requires ratification of 55 Coming into force: requires ratification of 55

Parties to UNFCCC representing 55 % of CO2 Parties to UNFCCC representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) emissions (US constitutes 36 %; Russia 17% )

As of September 2005, 156 states ratified As of September 2005, 156 states ratified representing 66.1% of developed countriesrepresenting 66.1% of developed countries

US / Australia will not ratify, but Australia will meet US / Australia will not ratify, but Australia will meet targetstargets

How can Developed How can Developed Countries/EITs meet their Countries/EITs meet their obligations under Kyoto?obligations under Kyoto?

Domestic ReductionsDomestic Reductions Carbon SinksCarbon Sinks: direct human-induced land use : direct human-induced land use

change and forestry activities (limited to ~330 change and forestry activities (limited to ~330 Mt/C02e)Mt/C02e)

International CreditsInternational Credits (Kyoto Mechanisms): (Kyoto Mechanisms):• International Emissions TradingInternational Emissions Trading• Project –Based: Project –Based: Joint ImplementationJoint Implementation • Project – Based: Project – Based: Clean Development MechanismClean Development Mechanism

SupplementaritySupplementarity: : “..“..domestic action shall constitute a domestic action shall constitute a significant significant

element of the effort by each Party..”element of the effort by each Party..”

Structure of the Carbon Structure of the Carbon MarketMarket

Allowance Markets

UK ETS

EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates

Project-Based Transactions

JI and CDM

Voluntary

RetailOther

Compliance

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005

Known Estimated

Total Value of Contracts Total Value of Contracts over 1 b$ over 1 b$ (data in million U.S.$, nominal)(data in million U.S.$, nominal)

(Jan-Apr)

Main Buyers: European Main Buyers: European Governments and Firms Governments and Firms In percent of volume purchased From Jan.04 to Apr.05In percent of volume purchased From Jan.04 to Apr.05

Other EU32%

UK12%

Gov. Netherlands16%

Japan21%

New Zealand7%

Canada5%

Australia3%

USA4%

World Bank purchases (22 % of total) attributed pro-rata to each participant in various carbon funds

Supply Concentrated in Supply Concentrated in Middle-Income CountriesMiddle-Income CountriesIn percent of volume sold from January 2004 to April In percent of volume sold from January 2004 to April

20052005

OECD14%

TransitionEconomies

6%

Africa0%

India31%

Rest of Asia14%

Brazil13%

Rest of Latin America22%

Prices Depend on RisksPrices Depend on Risks(weighted average prices from Jan. 2004 to April 2005 in U.S.$ (weighted average prices from Jan. 2004 to April 2005 in U.S.$

per metric tonne of COper metric tonne of CO22e)e)

$0.00

$2.00

$4.00

$6.00

$8.00

ER VER CER ERU

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

The World Bank’s ObjectivesThe World Bank’s Objectivesin the Carbon Market in the Carbon Market

Contribute to Sustainable Contribute to Sustainable DevelopmentDevelopment• Support Developing Countries To Support Developing Countries To

Maximize Gains from Carbon Finance Maximize Gains from Carbon Finance • Add Value to CDM ProjectsAdd Value to CDM Projects

Catalyze the Carbon MarketCatalyze the Carbon Market• Develop new markets and sectors for Develop new markets and sectors for

carbon financecarbon finance• Build Capacity in Client CountriesBuild Capacity in Client Countries• Provide Liquidity to the MarketProvide Liquidity to the Market

The World Bank’s ObjectivesThe World Bank’s Objectivesin the Carbon Market IIin the Carbon Market II

Address Market Distortions:Address Market Distortions: demonstrate credible demonstrate credible

forestry/agriculture “sinks” activitiesforestry/agriculture “sinks” activities Open Markets for small projects and Open Markets for small projects and

small countriessmall countries

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

World Bank Policy in Carbon World Bank Policy in Carbon FinanceFinance

Pay Market Prices corrected for risk, Pay Market Prices corrected for risk, purchase either VERs or CERspurchase either VERs or CERs

Always contribute beyond the purchase of Always contribute beyond the purchase of the CDM emission reductionthe CDM emission reduction

While Building Capacity Of Clients Through While Building Capacity Of Clients Through Support and TrainingSupport and Training

Give Full Information – Transparency and Give Full Information – Transparency and IntegrityIntegrity

Bring the Full Instruments of the World Bring the Full Instruments of the World Bank Group to Support ClientsBank Group to Support Clients

World Bank Carbon Finance Products~$940 million under management

$80 million committed - Italian multi-participant

$220 million – Spanish Government; will be open to private sector

Bio Carbon Fund: $53.8 million; multi-shareholder;second tranche opened 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

~$40 million. Economies in Transition only (with IFC)

$172 million – single government participant (Dutch Government)

$64million – 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

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

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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