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Proposal for a Carbon guarantee instrument

Proposal for a Carbon guarantee instrument. Chandra Shekhar Sinha Carbon Finance Coordinator Latin America and the Caribbean Region. Key Challenge. Introduction & Objective.

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Proposal for a Carbon guarantee instrument

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  1. Proposal for a Carbon guarantee instrument Chandra ShekharSinha Carbon Finance Coordinator Latin America and the Caribbean Region

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

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

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

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

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

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

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

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

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

  12. Allocation of Risk between the Buyer and Seller. Back-stopping by the Guarantor Risk Allocation • 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. Product 2: Off Balance Sheet Carbon Guarantee – How it works Product 2: Off Balance Sheet CER-Guarantee LAC “Off-Shore” CERs Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ ‘Shortfall’ Agreement [for failure to deliver] $ m (ERPA) LAC Country Carbon Promoter Day 1 Guarantee of Shortfall Agreement $ Indemnity Agreement MDB Trust Guarantor energy savings $ $ Pool of CDM Projects GEF

  14. Conclusions Conclusions • 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.

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

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