Carbon Finance and the Chemical Industry

Workshop Exploring Linkages Between Chemicals and Climate Change Agendas

Lasse Ringius. Carbon Finance Unit, ENV.

World Bank. Washington DC.June 14, 2006

U.N. Framework Convention on Climate Change (UNFCCC)

• Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere

• Developed countries (Annex I countries) aim to restore GHG emissions to 1990 levels

• Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change

The Kyoto Protocol

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

• The total demand created for GHG Reductions: ~5 to 5.5 billion • Marrakech Accords agreed in Nov. 2001 sets the rules of implementationStatus: Kyoto Protocol came into force in February 2005• Coming into force: requires ratification of 55 Parties to UNFCCC

representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) • As of April 18, 2006, 163 states ratified, representing 66.1% 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 (“Flexible Mechanisms”):

– International Emissions Trading– Project–Based activities: Joint Implementation – Project–Based activities: Clean Development Mechanism

Supplementarity: “...domestic action shall constitute a significant element of theeffort by each Party..”

World Bank Carbon Funds & Facilities

• Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose.• Netherlands Clean Development Mechanism Facility. $249.2 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. $45.4 million (open to Italian participation). Multi-shareholder (from Italy only). Multipurpose.• Netherlands European Carbon Facility. $38 million (closed). Netherlands Ministry of Economic affairs. JI projects.• Spanish Carbon Fund. $202.7 million (open to Spanish participation). Multi-shareholder (for from Spain only). Multipurpose.• Danish Carbon Fund. $64.1 million (closed). Multi-shareholder (for from Denmark only). Multipurpose.• Umbrella Carbon Facility. [$677.1 million] (Tranche One closed). 2 HFC-23 projects in China.

Total funds pledged = US$ 1.6 billion (13 governments, 56 firms)

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

How 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

EmissionReduction

Specific place in host party

GH

G em

ission projection

GH

G em

ission Project Scenario

Annex I Party (e.g EU country) which has an

emission cap

CER

Acquired CERsare added to the allowed emissions

Host Party benefits from technology and financial flows

$$

Emissions Trading under the KP

Baseline Scenario

Specific place in host party

Host Party which does not have an emission

cap

Contents

• General overview of sources of GHG from chemical sector.

• Review of CDM Methodologies for the chemical sector

• Assessment of impact of carbon finance on investment costs for registered projects

• Conclusions and comments on Post 2012• Pushing the agenda forward

Sources of GHG Emissions from the Chemical Sector

The chemical sector is energy intensive due to: – Energy intensive processes e.g. steam cracking to

produce ethylene, benzene, propylene etc. – Feedstock choice: gas and increasingly coal due to high

oil prices. Use of acetylene in VCM production. – Refrigeration, heating, etc. – Not energy efficient

CDM Status - Approved CDM Methsby Sector

Scopes: 1:Energy Industries 2: Energy Distribution 3: Energy demand 4: Manufacturing5:Chemical Industry 6: Construction 7: Transport 8: Mining and Minerals 9: Metal 10: Fugitive emissions from fuels 11: Fugitive emissions from HFCs/SF6 12: Solvent Use 13: Waste handling and disposal 14: Afforestation/Reforestation 15: Agriculture

Status of CDM projectslytic

N2O

destruction

in

the

tail

gas

of

Nitric

Ac

AM0028

Existing Methodologies for the Chemical Sector (Scope:5)

AM0001 Incineration of HFC23 waste streams ( 6 projects registered, 1 under review)

AM0021 Baseline Methodology for the decomposition of N20 from existing adipic acid production plants. (2 projects registered with method)

AM0027 Substitution of CO2 from fossil or mineral origin by CO2 from renewable sources in the production of inorganic compounds. (0 projects registered with method)

AM0028 Catalytic N20 destruction in the tail gas of Nitric Acid Plants. (2 projects at validation stage)

Understanding CDM Methodologies: The Baseline

time

emis

sion

s

Project emissions

baseline

Certified emissionreductions

The difference between the actual project emissions and the emission baselineconstitute the volume of CERs

Power sector projects and CERs depend upon an unknown counterfactual baseline: there is no “right answer”

Understanding CDM Methodologies: The Baseline Calculation

• In general baseline calculations:Production of chemical product X emission factor(tCO2/MWh)

• Different possible methodologies to calculate emission factor (tCO2e/MWh)

The challenge

NOTE: Exception to this approach when it is possible to measure GHG emissions directly e.g. for N20

Summary of Methodology Status

• There are few methodologies for the chemical sector. New methodologies are required

• Energy efficiency methodologies exist but more need to be submitted.

• Limited experience to date with the existing methodologies. (Only two projects registered under chemical sector methodologies and three under one of the large scale energy efficiency methodologies).

CF impact on investment costs

0.8453,752,80064,050,000N2O Emission Reduction in Onsan, Republic of Korea

0.4217,583,20041,700,000N20 emission reduction in Paulina (adipic acid) Sao Paulo.

Average abatement cost

(€/t CO2eq)

Total Costs crediting period

(Investment+ Operation)

Total CO2eq

crediting period

(7 years)

Registered Project Name

NOTE: Registered projects using AM0001 & AM0018 did not include investment information. Reasons: HFC23 destruction is end of pipe and clearly additional. The main barriers to EE projects

are not financial.

Insights Regarding Submission of New Methodologies – General

• Well-prepared chemical and E.E. sector methodologies can receive CDM Executive Board approval

• Very few chemical and E.E. methodologies approved, despite huge potential.

• Need to assess “what works” and “what doesn’t”(consistency, predictability)

• Quality of proposals submitted has varied widely

Rejected Methodologies - Common Problems

• Failure to:– Provide method to select baseline scenario– Justify appropriateness of benchmarking period– Take into account factors unrelated to EE measures that can affect

future emissions (e.g., product palette)– Consider autonomous EE improvements, equipment lifetime– Distinguish between discretionary retrofit and planned

replacement (“lost opportunity”) or new equipment markets– Justify/document assumptions (e.g., load factor, hours of

operation)– Give full consideration to leakage– Provide adequate guidance on developing a monitoring plan

Pushing the agenda forward

• Need to overcome initial barriers, e.g. PINs, pre-feasibility studies, development of methodologies…– Links with other MEAs like POPs Convention may

broaden the financing scope in the short term, while CF provides long term revenues

– Strengthen capacity on these links at local level during preparation of chemicals management strategies

– Private sector expertise is critical – Pilot projects for preparation of a menu of methodologies

in the chemical sector

Lead Time and Uncertainty Constraints on CO2/CH4 Segment of

CDM Market

2006 20082003 2012

OperatingWind, Efficiency, Waste to Energy and Small-scale projects

Large Hydro, Geothermal, Coal to Gas PowerCDM Investment Window: 3years

Window closes end 2006 unless there is a clear signal that a post-Kyoto post 2012 regime will buy emissions reductions from developing countries.

Operating

= Start of Construction

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THANK YOU

For more information please contact:Lasse Ringius lringius@worldbank.orgRoberto Aiello raiello@worldbank.org