Transcript this file - Carbon Finance at the World Bank

Workshop on CDD-CDCF Synergy
Washington D.C.
19 April 2006
Andrea Pinna
Presentation Outline
• International Climate Change Regime and
Carbon Market
• The World Bank Carbon Finance Program,
the Carbon Funds and the Community
Development Carbon Fund
• Carbon Finance and Carbon Economics
• Project Cycle
IPCC Third Assessment Report (2001)
Earth climate is
warming and human
activities are the
primary cause
• Global projections (100 years):
– Warming of 1.4 a 5.8°C with BAU
– Middle of road scenario with
mitigation measures 2.5 to 3°C
• 04/14/06 UK’s chief scientific
adviser:
– Global temperatures likely to rise
by 3 degrees Celsius by the end of
the century with atmospheric
carbon dioxide level of 550 ppm
Climate Change Impacts
• While industrialized countries are responsible for the
majority of historic emissions, the impact of climate
change and of increasingly violent extreme whether
events fall disproportionably on those least able to adapt:
the poor and LDCs especially those whose ecosystems
are already stressed and Africa in particular
• Examples
– Mozambique 02/2000 floods: 700 dead, 490,000 homeless,
140,000 Ha flooded, 48 hospitals and clinics and 500 schools
destroyed (200,000 children affected)
– Honduras, 10/1998 hurricane Mitch: 9000 dead, 1 m homeless,
70% of roads destroyed
– 1 billion at risk from desertification and soil degradation – 65% of
which in rural Africa. Niger 2000-2005 drought
– One third of world population (1.7 billion) has no access to clean
water, going to 5 billion in 2025! Climate change exacerbates
this problem
International Response to Climate Change
• 1992 Climate Convention adopted. Objective of stabilizing
GHG concentrations at safe levels
• 1997 Kyoto Protocol adopted
– 36 Developed Countries and Economies in Transition (namely
Canada, Japan, EU15 and economies in transition) agreed in 1997
to:
– Reduce GHG emissions by 5.2 % below 1990 levels in
the commitment period 2008-2012
– Total demand created for GHG Reductions: ~5 to 5.5
billion
• 2005 (February) Kyoto enters into force.
• As of April 2006, 162 states ratified representing 61.6% of
developed countries
– US / Australia will not ratify, but Australia will meet targets
How can Developed Countries/EITs meet their
obligations under Kyoto?
• Domestic Reductions
• Carbon Sinks: direct human-induced land use
change and forestry activities (limited to ~330
Mt/C02e)
• International Credits (Kyoto Mechanisms):
– International Emissions Trading
– Project –Based: Joint Implementation
– Project – Based: Clean Development Mechanism
How the CDM works (I)
GHG
Reductions
Emission
Reductions
Project Emissions
time
How the CDM works (II)
Annex I Party or
company which
has an emission
cap
Host Party which
does not have an
emission cap
Specific place in
host party
Emission
Reduction
CER
GHG emission
GHG emission projection
Baseline Scenario
Specific place in
host party
Project Scenario
Host Party
benefits
From technology
and financial
flows
Acquired
CERs are
added to the
allowed
emissions
Main Buyers: European
Governments and Firms
In percent of volume purchased From Jan.04 to Apr.05
USA
4%
World Bank
purchases (22 % of
total) attributed prorata to each
participant in various
carbon funds
Japan
21%
Australia
3%
Canada
5%
New Zealand
7%
Gov. Netherlands
16%
Other EU
32%
UK
12%
Supply Concentrated in MiddleIncome 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%
The World Bank Carbon Finance Program,
the Carbon Funds and the Community
Development Carbon Fund
The World Bank’s main Objectives
in the Carbon Market
• Contribute to Sustainable Development
– Support All Developing Countries To Maximize Gains from
Carbon Finance
– Add Value to CDM Projects through safeguard policies/additional
sustainable development value
• Catalyze the Carbon Market
– Address market imbalances (e.g. poor countries, sequestration
projects)
– Support the regulatory framework
– Expand the capacity of other FDIs through cooperation with
other development banks
– Provide opportunities for ER purchases by private sector
• Strengthen capacity in developing countries to benefit
from the emerging carbon market
World Bank Carbon Funds & Facilities
Total funds pledged: ~ US$ 1.8 billion
• Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose.
• Netherlands Clean Development Mechanism Facility. $170 million (closed). Netherlands Ministry of
Environment. CDM energy, infrastructure and industry projects.
• Community Development Carbon Fund. $128.6 million (closed). Multi-shareholder. Small-scale CDM
energy projects.
• BioCarbon Fund. $53.8 million (Tranche One closed). Multi-shareholder. CDM and JI LULUCF
projects.
• Italian Carbon Fund. $45 million (open to Italian participation). Multi-shareholder (from Italy only).
Multipurpose.
• Netherlands European Carbon Facility. $40 million managed jointly with IFC (closed). Netherlands
Ministry of Economic affairs. JI projects.
• Spanish Carbon Fund. $220 million (open to Spanish participation). Multi-shareholder (for from Spain
only). Multipurpose.
• Danish Carbon Fund. $75 million (open to Danish participation). Multi-shareholder (for from Denmark
only). Multipurpose.
• Umbrella Carbon Facility. [$930 million] (Tranche One). 2 HFC-23 projects in China.
Under development: Carbon Fund for Europe
How Carbon Funds Work
Technology
$
Industrialized
Governments
and
Companies
Technology
$
Finance
Bank Managed
Carbon Fund
Finance
Developing
Countries and
Communities
CO2 Equivalent
CO2 Equivalent
Emission Reductions
Emission Reductions
Payment on delivery of emissions reductions, not up-front
capital costs
CDCF Main Features
• Concretely seeks to address CDM market failure, i.e. investors’
preference for large projects in middle-income, large, lower-risk
developing countries.
• CDCF:
–
–
–
–
Invests only in CDM projects
Gives preference to small-scale projects (UNFCCC definition)
> 25% of resources invested in LDCs and other poor developing countries
Special effort to purchase credits from projects in sub-Saharan Africa
• Carbon + Development: projects must demonstrably improve the
quality of life of host communities. Community Benefit Plans
• Tranche One closed at $128.6 million. Tranche 2 may be possible
• All CFs administered by WB pay fair, risk-adjusted market prices for
emission reductions. CDCF typically pays a premium for projects in
poor countries and with strong community benefits
CDCF: 13 Projects in Advanced Stage of
Preparation. 33 projects in pipeline in total
Argentina:
Colombia:
Honduras:
Moldova:
Peru:
Cambodia:
China:
Guyana:
India:
India:
India:
Nepal:
Philippines:
Olavarría Landfill Gas Recovery
Rio Frio Waste Water Treatment
La Esperanza Hydroelectric Project
Energy conservation
Santa Rosa Hydroelectric Project
National Biodigestor Program
Guangrun Hydropower Development Project
Skeldon Sugar Modernization Project
FaL-G Brick Units in Micro Sector
Karnataka Municipal Water Pumping Improvements
VSBK Cluster Brick Project
Biogas Program
Laguna De Bay Watershed Community Carbon
(wastewater, MSW, pig waste)
CDCF: Wide range of projects supported
• Crop-residue to energy conversion (sugar-cane bagasse, wood
waste, rice straw/husk, peanut shells for co-generation or as fuels in
cement production)
• Cooking stoves (rice hull, palm oil, etc, e.g. Nigeria Mayon Turbo
Stove project)
• Biogas (animal production waste to energy conversion, e.g. biogas
projects in Nepal and Cambodia)
• Mini hydro (10 to 20 MW range). Bundling necessary for projects
with installed capacity of less than 10 MW
• Medium-to-large scale wind (20 MW and higher). Bundling
necessary for projects with installed capacity of less than 20 MW
• Waste management (landfill gas flaring, composting, LFG-to-energy,
human waste)
• Wastewater treatment (e.g. CH4 and N2O emission abatement in
Colombia Rio Frio project)
• Fuel switch heavy fuels to gas in SMEs (with technology
improvements)
• Energy efficiency, e.g efficient brick-making
• Geothermal, passive solar
CDCF Project Criteria
• Desirable minimum ER quantity = 500,000 ERs over ERPA life. Very
rough rules of thumb for estimating quantities in some technologies:
–
–
–
–
–
–
Hydro, 10 MW installed capacity, 0.6 EF = ~40,000 ERs/yr
Wind, 20 MW installed capacity, 0.6 EF = ~35,000 ERs/yr
Composting, 200 t/day of sorted untreated organic matter = ~40,000 ERs/yr
LFG flaring, 250 t/day of unsorted MSW (70% organic) = ~40,000 ERs/yr
Biogas, 150K household-size biodigestors = ~35,000/yr
Energy efficient brick-making, 70 VSBK plants (1.8 m bricks/yr each) =
~35,000/ERs/yr
• Hydro projects <20 MW. Bundles of mini-hydros, which in aggregate
exceed the 20MW threshold, are also acceptable as long as each single
plant in the bundle is within the 20MW limit
• No afforestation/reforestation projects (for the moment)
• Start ER generation in 2008 latest
• All projects should directly benefit the poor, e.g. they provide energy to
the un- or under-served, improve health, provide income and
employment, etc. (a separate community benefits package may be
agreed and paid for in projects lacking this attribute)
Basic Elements of Carbon Finance and
Carbon Economics
Role of carbon finance in project financing
Investor
Upfront payment
as “Equity”
Banks
Equity
Debt
Less than 25% of
contract
Collateralization
of ERPA
Waste Management Agreement
$$
Service
$
$
Carbon
Credits
Carbon
Fund
2
$$
2
Emission Reduction
Purchase Agreement
Understanding the impact of carbon finance on
project financing and financial sustainability
Construction Capital for underlying c limate friendly project
World Bank Emissions Reductions Purchase Agree ment is bankable
and additional revenue commitment helps bring projects to financ ial closure
Cash
in
= annual payments under carbon purc hase agreement
= annual payments under power purchase or other
source of revenues to underlying proje ct
Carbon Revenues for
10-21 years
Debt
Equity
Operation
Construc ti on
Yrs
Cash
out
0
1
2 3
4
5 6
7 8 …………………………………….15-20
Carbon sales revenues are commonly
in the range from 10-50% of total
revenues for power and waste
management projects
8
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
Carbon Economics
SUMMARY
ANALYSIS
SUMMARY SENSITIVITY
SENSITIVITY ANALYSIS
Incremental
IRR
ContributionsOF
ofCARBON
CarbonFINANCE
Finance
INCREMENTAL
IRR Results
RESULTS–- CONTRIBUTION
Impact (%) @ price = $6.5/ton CO2e
CF impact
Purchase 7y Purchase 10y Purchase 14y Purchase 21y
(% range)
Sector
Landfill
5.5 - 46.8%
13.9 - 48.8%
17.6 - 49.3%
20.3 - 49.3%
5.5 - 50
7.6%
9.7%
10.8%
11.5%
7 - 12
Biomass
1.9 - 3.5%
2.3 - 5.1%
2.6 - 6.3%
2.9 - 7.1%
2-8
Forestry
0.4 - 4.6%
0.9 - 5.7%
1.7 - 6.3%
2.6 - 6.8%
0.5 - 7
Renewable energy
0.2 - 1.7%
0.3 - 2.2%
0.5 - 2.6%
0.6 - 2.9%
0.2 - 3
0.5%
0.6%
0.6%
0.7%
0.5 - 1
CH4 from coal
District Heating
Project Cycle
World Bank/CDM Project Cycle – The
Manufacturing Process for Emissions Reductions
Project completion
Preparation and review of the Project
• Project Idea Note
• Carbon Finance Document
Project Design Document
Periodic
verification &
certification
• Verification and certification
• Supervision
Construction/Implementation and start up
• Initial verification report
• Baseline Study
• ER estimates
• Monitoring Plan
Validation process
• Validation by independent
Accredited Operation Entity
•Submission of new method
to CDM EB if needed
Negotiation of Project
Agreements
• Project Appraisal and related documentation
• Emission Reduction Purchase Agreement
• Project registration
ECA Carbon Finance Operations
Draft Approval Procedures (JI and CDM Projects)
PIN Review
Project Idea Note (PIN) Submission
Prepared and revised by sponsor
PIN Review (ENVCF)
Technical, financial, baseline and additionality review by ENVCF within 10-15 business days of receipt
ENVCF request for Regional clearance of PIN
Recommendation on Fund
allocation
Consistency check with sector and
country policies
ENVCF Convenes Fund Coordinators Committee
(3 day, no objections)
Virtual ECA Review and clearance
(one week, no objection)
Information Flow
ECA Sector/Country Unit
Designation of Fund Manager (ENVCF)
CF Operation entered in country portfolio (AIS)
following No Objective/ clearance by carbon funds
Appointment of Deal Manager
(DM) (ENVCF)
Confirmation of Task Team Leader (TTL)
Preparation of budget proposal
ECA CF Coordinator Informs
ENVCF of TTL’s name and AIS
code, and sends budget request
Information Flow
ENVCF Manager Informs ECA of
DM’s name and finalizes budget
transfer to managing sector unit
ECA CF Operations - Draft Approval Procedures (JI and CDM Projects)
PIN to Emission Reduction Purchase Agreement
CF Operation Included in a New Bank Financed Project
Task Team Leader
Deal Manager
prepares PCN and ISDS
Prepares risk matrix
Information Flow
TTL and Deal Manager help Sponsor
prepare Carbon Finance Document (CFD)
CFD Review by ENVCF
Regional Review of PCN and ISDS
Deal Manager oversees Fund approval process
Information Flow
TTL and Deal Manager assist sponsor to prepare
Project Design Document and monitoring plan, and
ensure completion of independent project validation
Task Team Leader prepares and
processes PAD/MOP, including CF
Operation, and organizes Safeguard
Review
Country Director and Sponsor sign Emission
Reduction Purchase Agreement (ERPA)
Deal Manager registers ERPA
Project Implementation and Supervision
CF Operations - ECA Draft Approval Procedures (JI and CDM Projects)
From PIN to Emission Reduction Purchase Agreement (ERPA)
Existing Bank Financed Project Restructured to Include CF Operation (Minor Project Restructuring)
Deal Manager
Task Team Leader
Prepares risk matrix
decides with Lawyer and OPCS that inclusion of
CF operation implies “minor” project restructuring
TTL and Deal Manager
help Sponsor
prepare Carbon Finance Document (CFD)
Information Flow
CFD Review by ENVCF
Deal Manager oversees Fund approval process
Information Flow
Task Team Leader updates and obtains
clearance of ISDS for CF Operation
TTL and Deal Manager assist sponsor to prepare
Project Design Document and monitoring plan, and
ensure completion of independent project validation
Task Team Leader
circulates Restructuring Memorandum to Country Director
Country Director and Sponsor Sign ERPA
Deal Manager Registers ERPA
CF Operation Implementation and Supervision
More Information about CDCF
and Carbon Finance at the
World Bank…
www.carbonfinance.org
www.carbonfinance.org/cdcf
Technological Distribution of Carbon Finance Unit
Portfolio (Total $629 million)
Land Use, LandUse Change and
Forestry, 7%
Coal Mine
Methane, 10%
Energy
Efficiency, 10%
N2O Removal,
2%
Transportation,
<1%
Renewables 22%
Hydro, 14%
Waste
Management,
18%
Wind , 3%
Biomass, 2%
Biogas, 1%
Geothermal, 1%
HFC-23
Destruction, 32%
Bagasse, <1%
Geographic Distribution of Carbon Finance Unit
Portfolio (Total $629 million)
Europe &
Central Asia
9%
Latin America
& Caribbean
19%
East Asia &
Pacific
52%
Middle East &
North Africa
3%
South Asia
10%
Africa
7%