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BioCarbon Fund Rules of Engagement BioCF Project Training Seminar Washington, DC July 13, 2005

BioCarbon Fund Rules of Engagement BioCF Project Training Seminar Washington, DC July 13, 2005. Harnessing the carbon market to sustain ecosystems and alleviate poverty. Key Milestones. All contracts (Emission Reduction Purchase Agreements or “ ERPA ” ) to be signed by June 30, 2006

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BioCarbon Fund Rules of Engagement BioCF Project Training Seminar Washington, DC July 13, 2005

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  1. BioCarbon Fund Rules of EngagementBioCF Project Training SeminarWashington, DCJuly 13, 2005 Harnessing the carbon market to sustain ecosystems and alleviate poverty

  2. Key Milestones • All contracts (Emission Reduction Purchase Agreements or “ERPA”) to be signed by June 30, 2006 • Purchasing period: up to 2017 (60% of ERs delivered by 2012 for Window 1) • BioCF will maximize 2006-2012 portion of ERs delivered by each project to Window 1 • BioCF will require that projects ensure permanence until 2037

  3. Validation • Previous presentations by Lasse, Bernhard, Sandra • Assumption: BioCF Fund Management Unit (FMU) adds value to the project, especially in terms of methodological input • FMU requests to be involved in the methodological process • Before ERPA is signed • Methodologies must have been submitted to CDM Executive Board by Operational Entity hired by the FMU • FMU must have reviewed the draft submissions • Pre-validation report by Operational Entity must be available • Pre-validation assumes that submitted methodologies are approved

  4. Permanence • Unlike climate change mitigation through energy activities, the climate impact of LULUCF activities only lasts as long as carbon is sequestered • “Permanence” = sequestration for the very long term • BioCF looks for long-term carbon sequestration • BioCF will pay annually based on increments in carbon stocks, but never above the long-term average storage • CoP9 rules on temporary crediting • Prices diverge from CoP9 implications (see later) • Liability for replacement: • Project bears replacement responsibility until 2037 • BioCF bears replacement responsibility thereafter

  5. Co-benefits • BioCF wants to buy “green carbon with human face” • Social: Improve livelihoods • People receive carbon payments • New job creation • Additional income from alternative activities • Know-how • Environmental • Conserve biodiversity • Expand natural habitat • Reconnect forest fragments • Protect soil against erosion • Fight against desertification • Moisture retention • Stabilize radionuclides in biomass

  6. Price: Basics • To be attractive to investors, BioCF must be cost-effective: buy low-cost climate change mitigation opportunities • Price assumes quasi-permanence, so can approach that of CERs or ERUs from energy/infrastructure projects • Full price paid when the sequestration is achieved (unlike the “rental” mode provided for under CDM/CoP9 rules) • Indicative contract price ranges (to be negotiated): • max $4/t CO2e (tCERs/lCERs) • $4/t CO2e (ERUs) • < $3/t CO2e (Window 2) • BioCF pays on delivery of Verified Emission Reductions (VERs)

  7. Pricing • Little or no LULUCF market reference: BioCF is breaking new ground • Mostly voluntary or retail transactions, not Kyoto grade or large volumes • Energy and infrastructure projects generate permanent ERs • To determine offer price to project within ranges, FMU factors in perceived benefits and risks. Pricing is a • positive function of co-benefits • negative function of risks

  8. Benefit and Risk Analysis (1) • Several categories of risks • Regulatory risks • Project risks • Country risks • Market risks • Principle: allocate risk to party best able to bear it (seller or buyer) • Most risks affect both the seller and buyer

  9. Benefit and Risk Analysis (2) • Regulatory risks • At methodology submission: methodology rejected (Seller + Buyer) • At project registration: project found not to be additional (Buyer) • Project risks • Lower-than-expected ER potential (Seller + Buyer, depending on ERPA) • Technological failure • Non-permanence • Leakage • No financial closure (Seller + Buyer) • Country risks • Legal challenges to sale of ERs (Buyer + Seller) • Host Country rejection: no Letter of Approval (Seller + Buyer) • Expropriation of assets (Seller + Buyer) • Market risks • Lack of tradability (CDM, EU ETS) (Buyer) • Reputational risks • Environmental (Buyer + Seller) • Social (Buyer + Seller)

  10. Benefit and Risk Analysis (3) • Co-benefits • Environmental • Social • Need to include a couple of relevant but simple indicators of environmental and social improvements in the Monitoring Plan and track them during project implementation • Benefits command premium embedded in the price of an ER • To the extent possible, co-benefits will be disclosed in the ER certificate to educate buyers

  11. Benefit and Risk Analysis (4) • Need to achieve some consistency in ER pricing across the BioCF portfolio • FMU will quantify the perceived co-benefits and risks of each project • Quantification will be discussed with project entity as prelude to ERPA negotiations and within limits of provisions of Letter of Intent

  12. Cost Recovery • 100% of project preparation costs pre-financed by the BioCF will be charged back to projects in the form of withholdings from ER payments • Negotiated item • Never a negative transfer back to BioCF • Costs capped in the Letter of Intent and ERPA • If BioCF also prefinances implementation costs (supervision and certification) these will also be charged back • Same rule as for preparation costs • Apply for Japanese PHRD grant or other grants to finance some preparation costs

  13. Payment Schedule • On delivery, not in advance: annual payments (in accordance with Monitoring Plan) upon receipt of a verification report that a certain number of tons of CO2 have been sequestered = Verified Emission Reductions (VERs) • Other resources must be found to cover the investment cost • BioCF will pay for VERs even if project is not registered by the market regulator • If project entity requested an advance payment • Proof would have to be given that there is no alternative • Would be limited to max 25% of the ERPA value • Price per ton would be discounted to reflect the risk of non-delivery • Bank guarantee would be requested

  14. Communication with Regulator • CFB reserves right to communicate with CDM Executive Board and Art. 6 Supervisory Committee VERs on behalf of project entities to increase chance of VER conversion to tCERs/lCERs, CERs, ERUs • Logical corollary of payment for VERs

  15. Project Cycle 1 Preparation • Project Idea Note (PIN) and reviewed by Fund Management Unit (FMU) • Carbon Finance Document (CFD) prepared by project sponsor • CFD reviewed by Fund Management Committee and Participants’ Committee • Start of World Bank technical, financial, environmental and social due diligence (identification + preparation) • Host Country endorsement (letter of no-objection) • Inclusion in portfolio • FMU signals intention to purchase ERs: Letter of Intent 6 m

  16. Project Cycle 2 Methodology • Project Design Document (sponsor/FMU) • Baseline Study (BLS) & Monitoring Plan (MP) for carbon, environmental and social benefits and ER calculation prepared by project sponsor/consultant + FMU quality control • [FMU submits new methodology submission (NMB and NMM through Operational Entity)] • World Bank due diligence continues (preparation) 6 m 6 m

  17. Project Cycle 3 Validation • [Pre-validation of BLS / MP for carbon, environmental and social benefits by Operational Entity (DOE/AE) (before methodologies are approved)] • Pre-validation Report • DOE/AE assesses ERS • Host Country Letter of Approval • Validation Report (after methodologies are approved) • World Bank appraisal 2 m 6 m 6 m

  18. Project Cycle 4 Negotiation • [FMU drafts Term Sheet (main clauses of a future contract in plain English)] • Consultations/negotiations with sponsor • Term Sheet signature • World Bank lawyers draft contract (Emission Reductions Purchase Agreement, or ERPA) • ERPA negotiations • ERPA signature (by June 2006) 2 m 6 m 6 m 3 m

  19. Project Cycle 5 Project Start-Up • Project registration • Start of activities (at the latest – planting may have started earlier) • Independent Initial Verification to ensure that MP is fully operational • Start of monitoring 2 m 6 m 6 m 3 m 1-5 y

  20. Project Cycle 6 Implementation • Periodic verification & certification reports (sponsor + DOE/AE, in accordance with MP and contract) • BioCF pays project sponsor for verified ERs • ERs distributed to BioCF investors pro rata to their share of the fund • BioCF buys a certain tonnage, not for a certain period of time • Purchase up to 2017 • World Bank supervision (until forest established) 2 m 6 m 6 m 3 m 1-5 y 12 y

  21. Long-term average storage

  22. www.biocarbonfund.org www.carbonfinance.org

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