Carbon Finance Strategy the World Bank

1. Carbon Finance Strategy the World Bank CHARLES CORMIER Sept 2005

2. Key Features of Carbon Finance • Both public and private capital – new and additional sources for sustainable development financing • Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred. • Unlike most buyers in the market, Participants in Bank Funds agree to take Kyoto regulatory risk: Hence, our carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk remained open. • Payment stream is in hard currency, reducing financing risk for foreign lenders

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4. Technology DIRR financial Hydro, Wind, Geothermal 0.5-2.5% Crop/Forest Residues 3-7% Municipal Solid Waste 5-15+% Carbon Economics Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO2e

5. Carbon Finance Strategy Improve Liquidity in the Carbon Market • Benchmark carbon asset creation: Increase certainty and lower entry barriers for private capital (“crowd-in private sector”) • Expand frontiers of the market: expanding the benefit of carbon finance to countries, poorer regions and technologies not yet benefiting from carbon trade, and to sectors where Bank intermediation is critical to expand supply Address Market Distortions: • demonstrate credible forestry/agriculture “sinks” activities • Open Markets for small projects and small countries Integrate and strengthen Technical Assistance and Capacity Building: to assist participating countries to access market

6. World Bank Carbon Finance Products • ~$900 million under management Prototype Carbon Fund: $180 million, multi-shareholder Community Development Carbon Fund: multi-shareholder. First tranche closed at $128.6 million; second tranche to open once Portfolio for first tranche is well developed Bio Carbon Fund: $51.3 million; multi-shareholder; second tranche opened to contributions in September 05 $180 million – single government participant (Dutch Government) – $80 million committed - Italian multi-participant Netherlands JI $35 million. Economies in Transition only (with IFC) Facility 170 million euro – Spanish Government; will be open to private sector $35 million –Danish multi-participant • Under development: Carbon Fund for Europe

7. Technology $ Finance CO Equivalent CO Equivalent 2 2 Emission Reductions Emission Reductions How Carbon Funds Work Technology $ Finance Industrialized Governments and Companies Developing Countries and Communities Bank Managed Carbon Fund Payment on delivery of emissions reductions, not up-front capital costs

8. 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: $ 25K 3 months Carbon Asset Due Diligence Up to 21 years • For new methodologies • Baseline : $30 K • Monitoring Plan: $25K Periodic verification & certification 2 months • Verification: $10-25 K • Supervision: $10-20K Validation process 1-3 years 2 months • Contract, Processing • and documentation: 25k 3 months Construction and start up Project Appraisal and Negotiation • Initial verification at start-up: $25K • Consultation and Project Appraisal: $60K • Negotiations and Legal documentation: $100K Total through Negotiations All expenses: $265 K for regular size projects $150 K for small scale projects

10. CF Assist Umbrella Carbon Finance AssistA Single-Purpose Multi-Donor Trust Fund for all WB Carbon Finance Capacity Building and Technical Assistance Carbon Finance Business Experience Exchange (Coordination of all Technical Assistance and Capacity Building) (Carbon Asset Purchases) • FIREWALL • Enhance capacity of participating countries to fully participate in the carbon market • World Bank Carbon Funds is a buyer of last resort PHRD Direct Donor Contributions “Plus TA Funds (Implemented By Countries & Regions w/CF-A Assistance) PCF + $10M BioC + (pledged as of Aug05) CDCF + $ Interest Earnings on CFB Funds

12. Strategic Issues in CDM Market Development Potentially Competing Interests • CDM needs to deliver high volumes to keep cost of Kyoto compliance affordable • Developing country government preferences going into 2nd Commitment Period negotiations is that CDM helps modernize and de-carbonize infrastructure • “Sustainability” concerns constrains asset choice in many OECD governments, and some corporations Market Inflection Points to Watch • Post-2012 market signal by EU and/or KP Parties on long lead time assets • Second phase ETS review of sequestration/ LULUCF assets

13. THANK YOU! www.carbonfinance.org