carbon finance strategy the world bank
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Carbon Finance Carbon Finance Strategy the World Strategy the World
BankBank
CHARLES CORMIERCHARLES CORMIER
Sept 2005Sept 2005
Key Features of Carbon FinanceKey Features of Carbon Finance Both public and private capitalBoth public and private capital – new and – new and
additional sources for sustainable development additional sources for sustainable development financingfinancing
Payment on DeliveryPayment on Delivery – payments are made – payments are made upon annual independent verification that upon annual independent verification that emissions reductions have occurred. emissions reductions have occurred. • Unlike most buyers in the market, Participants in Bank Unlike most buyers in the market, Participants in Bank
Funds agree to take Kyoto regulatory risk:Funds agree to take Kyoto regulatory risk: Hence, our Hence, our carbon fund contracts are “bankable”, allowing more carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk projects to get financing than if regulatory risk remained open. remained open.
Payment stream is in hard currency, reducing Payment stream is in hard currency, reducing financing risk for foreign lendersfinancing risk for foreign lenders
Cashout
Cashin
Equity
Debt
Construction Capital for underlying c limate fr iendly project
Yrs 0 1 2 3 4 5 6 7 8 …………………………………….15-20
Carbon Revenues for10-21 years
World Bank Emissions Reductions Purchase Agree ment is bankable and additional revenue commitment helps bring projects to financ ial closure
= annual payments under carbon purc hase agreement
= annual payments under power purchase or othersource of revenues to underlying proje ct
Carbon sales revenues are commonly in the range from 10-50% of total revenues for power and waste management projects
Construc tion
Operation
Understanding the impact of carbon finance on project financing and financial sustainability
8
Technology IRRfinancial
Hydro, Wind, Geothermal
0.5-2.5%
Crop/Forest Residues 3-7%
Municipal Solid Waste 5-15+%
Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO2e
Carbon Economics
Improve Liquidity in the Carbon Market Improve Liquidity in the Carbon Market Benchmark carbon asset creationBenchmark carbon asset creation: : Increase certainty Increase certainty
and lower entry barriers for private capital (“crowd-in and lower entry barriers for private capital (“crowd-in private sector”)private sector”)
Expand frontiers of the market: Expand frontiers of the market: expanding the benefit expanding the benefit of carbon finance to countries, poorer regions and of carbon finance to countries, poorer regions and technologies not yet benefiting from carbon trade, and to technologies not yet benefiting from carbon trade, and to sectors where Bank intermediation is critical to expand sectors where Bank intermediation is critical to expand supply supply
Address Market Distortions: Address Market Distortions: demonstrate credible forestry/agriculture “sinks” demonstrate credible forestry/agriculture “sinks”
activitiesactivities Open Markets for small projects and small countriesOpen Markets for small projects and small countries
Integrate and strengthen Technical Assistance and Integrate and strengthen Technical Assistance and Capacity Building: Capacity Building: to assist participating countries to assist participating countries to access market to access market
Carbon Finance StrategyCarbon Finance Strategy
World Bank Carbon Finance Products~$900 million under management
$80 million committed - Italian multi-participant
170 million euro – Spanish Government; will be open to private sector
–
Bio Carbon Fund: $51.3 million; multi-shareholder; second tranche opened to contributions in September 05
Community Development Carbon Fund: multi-shareholder. Firsttranche closed at $128.6 million; second tranche to open once Portfolio for first tranche is well developed
Prototype Carbon Fund: $180 million, multi-shareholder
Netherlands JI
Facility
$35 million. Economies in Transition only (with IFC)
$180 million – single government participant (Dutch Government)
$35 million – Danish multi-participant
Under development: Carbon Fund for Europe
How Carbon Funds WorkHow Carbon Funds Work
Industrialized Governments
and Companies
Developing Countries and Communities
Bank Managed Carbon Fund
Bank Managed Carbon Fund
$$Technology
Finance $$Technology
Finance
CO Equivalent22
Emission Reductions
CO Equivalent22
Emission Reductions
Payment on delivery of emissions reductions, not up-front capital costs
Preparation and review of the Project
Carbon Asset Due Diligence
Validation process
Project Appraisal and Negotiation
Periodic verification & certification
Construction and start up
Project completion
3 months
2 months
2 m
onth
s
3 months
1-3 years
Up
to 2
1 ye
ars
• Upstream Due Diligence, carbon risk assessment and documentation: $ 25K
For new methodologies•Baseline : $30 K• Monitoring Plan: $25K
• Contract, Processing •and documentation: 25k
• Consultation and Project Appraisal: $60K• Negotiations and Legal documentation: $100K
Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience
Total through Negotiations
All expenses: $265 K for regular size projects$150 K for small scale projects
• Initial verification at start-up: $25K
• Verification: $10-25 K• Supervision: $10-20K
Bagasse1% Energy
Efficiency4%
LULUCF4%
Geothermal1%
Cement Manufacturing
6%
Biomass8%
N20 Removal
7%Coal Mine Methane
11%
Wind6%
Waste Management
37%
Small Hydro15%
PCF TECHNOLOGICAL DISTRIBUTIONACTIVE PCF PORTFOLIO PROJECTS - TOTAL OF APPROX US$176 MILLION
Carbon Finance AssistCarbon Finance AssistA Single-Purpose Multi-Donor Trust Fund for all A Single-Purpose Multi-Donor Trust Fund for all
WB Carbon Finance Capacity Building and Technical WB Carbon Finance Capacity Building and Technical AssistanceAssistance
CF Assist Umbrella
FIREWALL
• Enhance capacity of participating countries to fully participate in the carbon market
• World Bank Carbon Funds is a buyer of last resort
PCF
BioC
Direct Donor Contributions
Carbon Finance Business
Carbon Finance Business
$ Interest Earnings on CFB Funds
(Implemented By Countries
& Regions w/CF-A Assistance)
Experience Exchange
CDCF
(pledged as of Aug05)
+
+
+
(Carbon Asset Purchases)
(Coordination of all Technical Assistance and Capacity Building)
PHRD
$10M
“Plus TA Funds
Challenge of the Closing Window to Deliver Projects for First Commitment Period
(CO2/CH4 Segment of CDM Market)
2006 20082003 2012
Operating
Wind, Efficiency, Waste to Energy and Small-scale projects
Large Hydro, Geothermal, Coal to Gas PowerCDM Investment Window: 3years
Window closes in 2006 if there is no decision on 2nd
Commitment Period of KP or ETS as there is no incentive to buy beyond 2012 and little demand
Operating
= Start of Construction
You are here
Strategic Issues in CDM Market Strategic Issues in CDM Market DevelopmentDevelopment
Potentially Competing InterestsPotentially Competing Interests CDM needs to deliver high volumes to keep cost of CDM needs to deliver high volumes to keep cost of
Kyoto compliance affordableKyoto compliance affordable Developing country government preferences going Developing country government preferences going
into 2into 2ndnd Commitment Period negotiations is that Commitment Period negotiations is that CDM helps modernize and de-carbonize CDM helps modernize and de-carbonize infrastructureinfrastructure
““Sustainability” concerns constrains asset choice in Sustainability” concerns constrains asset choice in many OECD governments, and some corporationsmany OECD governments, and some corporations
Market Inflection Points to WatchMarket Inflection Points to Watch Post-2012 market signal by EU and/or KP Parties on Post-2012 market signal by EU and/or KP Parties on
long lead time assetslong lead time assets Second phase ETS review of sequestration/ LULUCF Second phase ETS review of sequestration/ LULUCF
assetsassets
THANK YOUTHANK YOU !!
www.carbonfinance.org www.carbonfinance.org
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