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World Bank Carbon Finance: Experience, Strategy and New Products

World Bank Carbon Finance: Experience, Strategy and New Products. Addis 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:

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World Bank Carbon Finance: Experience, Strategy and New Products

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

  2. 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

  3. World Bank Carbon Finance Vehicles Netherlands CDM Facility Italian Carbon Fund BioCarbonFund

  4. Other project funding CO Equivalent 2 Emission Reductions How the Funds Work Payment on delivery Technology $ $ Finance Finance PCF Industrialized Countries and Companies Host Countries and Communities

  5. Carbon Trades: est. volumes 70 60 Vintages up to 2012 only 50 Estimated volumes transacted (MtCO2e) 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 (est.) Source: PCF calculations, based on database assembled with Natsource,Co2e.com and PointCarbon

  6. Buyers are becoming more diverse 2001-2002 1996-2000 Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

  7. Carbon Finance flows 2001-2002 Australia Canada Asia Africa USA Latin America Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

  8. 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

  9. PCF Shareholders Subscribed $180 million for Learning-by-Doing 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

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

  11. Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience Preparation and review of the Project Project completion • Upstream Due Diligence, carbon risk assessment and documentation: $ 40K 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years • Baseline : $20 K • Monitoring Plan: $20K Periodic verification & certification 2 months • Verification: $10-25 K • Supervision: $10-20K Validation process 1-3 years 2 months • Contract, Processing • and documentation: $30k 3 months Construction and start up Project Appraisal and Negotiation • Initial verification at start-up: $25K • Consultation and Project Appraisal: $105K • Negotiations and Legal documentation: $50K Total through Negotiations • All expenses: $265 K

  12. Impact of Carbon Finance on Project Financial Rate of Return • Revolution in Solid Waste Management • Important impact on small-holder crop-processors and animal production

  13. Lead Time and Uncertainty Constraints on CDM Projects 5 year average Wind, Efficiency, Waste to Energy Pre-feasibility Operating Large Hydro, Geothermal, Coal to Gas Power Pre-feasibility Operating 2006 2008 2003 2012 Second Commitment Period Rules and Targets Need to be decided by 2006 to ensure continuity in CDM Market Development = Start Construction

  14. 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

  15. 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

  16. Capacity Building Services in 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.

  17. C F Carbon Finance Products of the World Bank New Funds Development BioCarbonFund

  18. Summary Community Development Carbon Fund (CDCF) BioCarbon Fund • 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 • 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

  19. Who is contributing (investing)? Community Development Carbon Fund (CDCF) BioCarbon Fund • Committed contributions • Canada, Italy & Netherlands; others expected • Seven companies so far, mostly Japanese, but North American and European companies expected • MoU stage only • Canada • Japanese & European “finance” companies • Japanese energy companies • Major NGOs

  20. Benefits Host Countries and Projects • Private capital flows for projects that help reduce poverty • Investment in cleaner technologies and best practices • Ongoing partnerships • Capacity building for communities and intermediaries

  21. Benefits Participants (Companies & Governments) • 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

  22. Development + Carbon = Carbon with a human face

  23. 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)

  24. 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

  25. Bagasse cogen Wind 15% 16% Biomass Small hydro 5% 14% Energy efficiency LULUCF 17% 2% Geothermal/ EE MSW Gas flaring 4% 19% 8% Project Technology Distribution from PCF Experience Technology Distribution of PCF Projects Under Development for FY 03

  26. 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.

  27. 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

  28. BioCarbonFund Harnessing the carbon market to sustain ecosystems and alleviate poverty

  29. 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

  30. JI only CDM & JI Countries JI only Afforestration/ Reforestration Sustainable Forest Management Reduced tillage BioCF 1st WindowKyoto-Eligible Examples

  31. 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.

  32. Landscape Management Revegetation Soil Carbon Management BioCF 2nd Window CDM Host countries Currently have about 90 project proposals (PINs) Includes a strong set from Africa Seeking more dryland projects

  33. Technical Assistance Trust Funds

  34. 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

  35. 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

  36. 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

  37. 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.”

  38. 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)

  39. The Case for Capacity Building • 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

  40. 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

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