Transcript this file - Carbon Finance at the World Bank

Managing Climate Change Risk
in Africa: The Carbon Market
Karan Capoor
The World Bank Africa Region
CDM in Africa Workshop
Jinja, Uganda, November 11 2005
This presentation reflects the findings expressed in ‘State & Trends of the Carbon Market’ by Franck Lecocq and Karan Capoor, April 2005, The World Bank and the International
Emissions Trading Association (IETA). These views are the sole responsibility of the authors. They do not necessarily reflect the views of the International Emissions Trading
Association (IETA) or of IETA member companies, who cannot be held responsible for the accuracy, completeness, reliability of the content of this study or non-infringement of third
parties’ intellectual property rights. The findings and opinions expressed in this paper also do not necessarily reflect the views of the World Bank, its executive directors, or the
countries they represent; nor do they necessarily reflect the views of the World Bank Carbon Finance Business Team, or of any of the participants in the Carbon Funds managed by the
World Bank. Finally, findings and opinions expressed in this paper do not necessarily represent the views and opinions of Evolution Markets LLC or of Natsource LLC. The CF-Assist
program of the World Bank Carbon Finance Business funded this research.
Major Global Risk
Global Climate Change
• Scientists believe that the earth’s atmosphere is warming
and that this is partly caused by human-induced release
of carbon dioxide and related warming gases into the
atmosphere from activities basic to human survival, ie
combustion of fossil fuels for energy, transport and
industry, from agriculture, land use and
• The objective of the Rio Climate Convention (UNFCCC)
is to reduce concentrations of greenhouse gases to a
level required to prevent “dangerous” warming
• What is “dangerous”? Still undefined. Warming is
thought to be impacted by both the “stock” of GhGs in
atmosphere as well as the “rate” of temperature change
Assessing the Risk
Impacts of Climate Change
• Many scientists believe that global warming is underway
• Although industrialized countries have emitted the most
historically, the greatest impacts of warming will fall on
those least able to adapt: the poor in the poorest
countries and on already stressed ecosystems
• Expected impacts include increased likelihood of:
extreme weather events; melting of polar caps leading to
a rise in sea levels impacting coastal development;
ocean warming; changes in hydrological patterns;
increased desertification; increase in infectious diseases
• Likely to add stresses on water resources, food security,
human health and infrastructure and constrain
development in Africa
Complex Risk with Large Stakes
• Climate change: Global, Inter-generational equity issue
• Industrial countries are historically responsible for causing
the Earth’s climate to change, but poor people in
developing countries are most vulnerable
• Today’s development choices will affect future generations
• Risk can be ASSESSED
Assessment can use the best available science to help
assess the risk of climate change as it can potentially
impact human loss, biodiversity, natural resources, sectors,
entire economies or regions
• Risk can be QUANTIFIED
Various Tools can be employed, e.g.
• Expected Value = Probability of Event X Loss from Event
• Or, Monte Carlo Simulation
• Tools presume reliable, relevant data exists or can be obtained
Managing Risk
• If deemed substantial, Risk can be MANAGED
in a manner that is flexible, efficient and
creates value
• Climate Change: A complex Risk
– Assessing the Risk: Global, national & local levels
– Vulnerability: people, ecosystems, commodity prices, growth
– Mitigating the Risk: UNFCCC, KP, carbon finance
– Adapting to the Risk: Ecosystems, Institutions,
society
Managing Climate Risk
Response to Climate Change
• 1992 UNFCCC Rio Climate Convention
– Mitigating the Risk that Climate Change Will Occur
– Adapting to minimize the impacts of climate change
• 1997 Kyoto Protocol requires Industrialized countries to reduce
emissions an average of 5.2% below 1990 levels
– In some countries, emissions are up by 30% since 1990.
– How would such countries reduce emissions by more than 1/3
by 2012
• Shut down production by 1/3?
• Mandatory energy efficiency at any cost?
• Off-shore industrial jobs?
• Tax all energy consumption?
– In a globalized world economy this becomes an issue of trade
competitiveness, especially for industrial sectors
– This creates the case for flexible mechanisms including CDM
Why a Carbon Market?
• Regulation creates constraints on
greenhouse gas (GHG) emissions of
governments, firms (e.g. Kyoto Protocol
obligates industrial Parties to reduce
emissions by avg 5 % below their 1990
emissions over 2008-12)
• Since GHGs mix in the atmosphere, it does
not matter where emissions are reduced
• Compliance with regulation can be achieved
through in-house (“make”) or flexibly through
purchase (“buy”) “GHG commodities”, giving
rise to the  Carbon Market
The Kyoto Protocol
Annex B
Non-Annex B
• Assigns
GHG emission
targets to Annex B
countries between 2008
and 2012
• 3 Flexibility
Mechanisms
- Emissions
Allowance
Market
- Joint
Implementation
- Clean Development
Mechanism
EU Emissions Trading
Scheme
• Caps over 40% of EU CO2
emissions
• 2 phases : 05-07 and 08-12
• JI and CDM authorized…
• But NOT LULUCF
(review in 2006)
Methodology
• Limited information on carbon transactions is
publicly available
• This study is based on material provided by
Evolution Markets LLC, Natsource LLC,
and on interviews with many market players
• Database of 487 project-based transactions
(signed or advanced stage of negotiation) +
aggregated data on allowance markets
Allowance Markets
Exploding (in million tCO e)
2
40
35
30
25
20
15
10
5
0
2002
2003
2004
2005
(Jan.-March)
Volume Traded Through
Projects: Growing (in million tCO e)
2
120
100
80
60
40
20
0
1998
1999
2000
2001
2002
2003
2004
2005
(Jan-Apr)
Main Buyers: European
Governments and Firms
In percent of volume purchased From Jan.04 to Apr.05
USA
4%
Japan
21%
Australia
3%
Canada
5%
New Zealand
7%
Gov. Netherlands
16%
Other EU
32%
UK
12%
Supply Concentrated in
Middle-Income Countries
In percent of volume sold from January 2004 to April 2005
Rest of Latin America
22%
OECD
14%
Transition
Economies
6%
Africa
0%
Brazil
13%
India
31%
Rest of Asia
14%
Non-CO2 Dominate
In percent of volume purchased from Jan.04 to Apr.05
Landfill Gas
Capture
10%
Other
N2O
7%
4%
Hydro
12%
HFC
25%
Wind
7%
Forestry
(LULUCF)
4%
Energy
Efficiency
2%
Biomass
11%
Animal
Waste
18%
600
Total Value of Contracts
over 1 b$ (data in million U.S.$, nominal)
500
Known
Estimated
400
300
200
100
0
1998
1999
2000
2001
2002
2003
2004
2005
(Jan-Apr)
Prices Depend on Risks
(weighted average prices from Jan. 2004 to April 2005 in
U.S.$ per metric tonne of CO2e)
$8.00
$6.00
$4.00
$2.00
$0.00
ER
VER
CER
ERU
Insights on Price
Differential
• Large price differential:
– EU Allowances: 7 up to 27 euros / tCO2e (spot and
forward contracts)
– Project-based: 3 to 8+ dollars / tCO2e (forward
contracts on expected CERs)
• Allowances and project-based contracts have
very different risk profiles:
– Project risks: high in CDM, none in EUAs
– Regulatory risks: high in CDM, none in EUAs
– Delivery risks: higher in CDM; both actual
delivery and timing of delivery
Outlook
• The market has responded to regulatory
signals – now a real compliance market
• Volumes should increase rapidly for both
project and allowance segments…..
• … although important uncertainties still need
to be addressed
• Overall supply / demand picture (e.g. under
Kyoto Protocol) is still unclear:
– How much volume will JI/CDM deliver? Issue of
projects lead-time and when?
– How many allowances will Russia and Ukraine
bring to market?
– What happens after 2012?
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
The World Bank’s Objectives
• Contribute to Sustainable Development
– Support Developing Countries To Maximize Gains
from Carbon Finance
– Add Value to CDM Projects, e.g. sustainable
development opportunities
• Help Catalyze the Carbon Market
– Develop new markets, sectors for carbon finance
to provide liquidity to the Market
– Add Value to Project Developers: Reduce Risks,
Buy VERs and CERs; Provide upfront resources
for project preparation and upfront financing
– Build Capacity in Client Countries
Case Study: Biomass
Cogeneration
• This case combines information about
two potential bagasse cogeneration
projects in Uganda as an illustration
• All numbers are fictional
Case Study: Generic Biomass
Project
• Sugar Company in Uganda; Commercially-oriented
management and sugar production; secures cane from own
estate and from out-growers
• Currently generating 3 MW electricity for own production and
selling 6 MW to grid for 6 peak hours a day; no carbon
• Proposing to expand generation: negotiating to sell 6 MW (from
above capacity) to grid for additional 12 hours a day and an
additional 6 MW to sell for 18 hours a day
• Additional 1 MW to be generated and distributed to rural
population on and around estate, including out-growers.
• Case Question: Is there a carbon opportunity here?
Q1: Is there a baseline?
•
Uganda, with about 5% annual economic growth, has about 300 MW of installed
hydro capacity
•
Due to variable rainfall, approximately 200 MW worth of output has been
generated over the past 2 to 3 years, resulting in rolling black-outs in Uganda.
•
A new 51 MW diesel generating facility has been commissioned for the grid
•
Applying Combined Margin approach (Average of Operating & Built Margins)
•
Operating Margin (EF of grid minus hydro and renewables: EF of 51 MW diesel
= 0.7 tonnes/MwH)
•
Built Margin (EF of 20% of newest output added to the grid): EF of diesel again
or .0.7
•
Combined Margin = (0.7 + 0.7)/2 = 0.7
•
Baseline exists at 0.7 tonnes/MwH for Grid Sales
•
For off-grid sales, a survey of kerosene and diesel use in rural Uganda is used.
It is estimated that rural residents typically consume electricity for lighting etc
from highly inefficient carbon-intensive fuels. Baseline emissions estimated at
1.2 tonnes/MwH.
Q1: Is there a Project?
• Sugar Company to provide:
– 6 MW for 12 hours a day for 300 days to grid = 21,600 MwH * 0.7
= 15,120 t
– 6 MW for 18 hours a day for 300 days to grid = 32,400 MwH * 0.7 =
22,680 t
– 1 MW for 18 hours a day for 300 days off-grid = 5,400 MwH *1.2 =
6,480
•
•
•
•
Estimated ERs from project = 44, 280 t
This is below CDCF threshold of 50,000 annually
Might there be some potential for ethanol production - biofuel?
Might the sugar factory be in a position to generate more
electricity?
Q3: Is there a Likely Successful
CDCF Project?
•
Do the project economics work?
–
–
–
–
–
•
Is the project sponsor strong?
–
–
•
Do No Wrong: Meet WB Env/social safeguards
Community Benefits
–
•
Track record of sponsor, including credit-worthiness, financial health and direction
Experience in doing projects, raising funds, getting clearances, implementing investments, making
things happen
Social & Environmental Safeguards
–
•
Investment Costs (Can they be limited considering this is not a greenfield development?)
Likelihood of a Power Purchase Agreement from the UETCL? What is the tariff likely?
Given potential for rural generation, is there a potential grant or subsidy likely from Rural Electricity
Agency? How quickly can that be accessed?
How much additional leverage is possible from Carbon finance?
Are these together sufficient to generate a return so that a bank can feel confident to lend to the
Project?
Do some Good: Benefit the local community, e.g. rural electricity access; contribution to Out-growers
Fund etc.
Strong, Efficient DNA
–
Timely clearances
IF these come together in a timely and cost-effective
fashion, THEN we have a successful CDCF project!
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