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Carbon Finance in Gas Flaring and Venting Reduction
Veronique BishopCarbon Finance Business
The World Bank
OPEC – GGFR WorkshopVienna, June 30-July 1, 2005
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• Kyoto Protocol basics
• Impact of carbon finance
• Securing financing
• Examples
Outline
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• UN Framework Convention on Climate Change
• Industrialized countries (except US, Australia) commit to reduce GHG emissions by 5.2% on average in 2008-12 (vs. 1990)
• Target can be met by:
– Reducing emissions: CO2, CH4, N2O, HFCs, PFCs, SF6
– CO2 “sequestration” via land use change and forestry– Purchasing ERs from other ratifying countries
• “Joint Implementation” – Industrialized countries (EEur, FSU)• “Clean Development Mechanism” – Developing countries• “International Emissions Trading”
• Entered into force on 2/16/05
Kyoto Protocol
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• Internalizes the climate externality (partly)
– “Polluter pays” principle– Modeled on US SO2, NOX market
• Free trade lowers the cost of compliance:– OECD: $25-150 per tonne CO2e (marginal abatement cost)– LDCs: <$10 / tCO2e
• OECD shortfall of ~ 2.8-4.8 billion tCO2equiv.
• Funds established to diversify risk, share cost
• World Bank’s role: jump-start market, disseminate lessons, catalyze LDC investment, support host countries
.
Kyoto Compliance Market
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World Bank Carbon Funds
Industrialized Governments
and Companies
Developing Countries and
Companies
Carbon Fund
Carbon Fund
$$Technology
Finance $$Technology
Finance
CO Equivalent22
Emission Reductions
CO Equivalent22
Emission Reductions
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World Bank Carbon Funds
Italian Carbon Fund
Netherlands CDM Facility $ 180 m
$ 43.8 m to date
Community Development Carbon Fund. $128.6 mto date
Prototype Carbon Fund $180 m
Netherlands Europe and CentraI Asia Facility (with IFC)
BioCarbon Fund
$ 80 mto date
$ 35 m Netherlands ECAF
Spanish Carbon Fund $ 200 m
$ 30 m Danish Carbon Fund
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• Emission reductions are calculated relative to a baseline
• Key elements:
– CO2 reduced by displacing fossil fuels– Mitigation of methane, nitrous oxide, other GHGs – CO2 “sequestered” eg through agroforestry
• Impact depends on technology, ER price
• Price depends on:
– Risk and risk-sharing– Supply and demand within market segment
Impact of Carbon Finance
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Carbon Prices(Jan. 2004 - April 2005 in $US/tCO2e)
Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon
$0.00
$2.00
$4.00
$6.00
$8.00
ER VER CER ERU
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Impact by Technology
Energy Sector Fossil fuel displacement
Methane mitigation
Renewables Energy efficiency Biomass cogeneration ( )Gas flaring reduction Gas venting reduction ( ) Coalmine methane ( ) Landfill gas (to energy) ( )
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Fossil Fuel Displacement
Fuel Displaced Generic Emissions Factor
(tCO2e/MWh)
Carbon Revenue at US$4/tCO2e
(US$/MWh)
Gas 0.40 $1.60
Coal 0.85-1.0 $3.40-$4.00
Diesel 0.75-1.50 $3.00-$6.00
ER cash flows improve IRRs by 0.5 – 3.0%
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Methane Mitigation
Carbon Revenue* (methane only)
US$/tcm CH4 US$/MWh
Biomass cogen, landfill methane
up to $60 up to $16
Venting reduction, coalmine methane
up to $52 up to $14
* at US$4/tCO2e
Impact on IRR can be >15 percentage points
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Impact for Flaring Reduction at $4/tCO2e
Fossil fuel displacement
[Coal]Gas
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
per 1000 m3 CH4 per MWh
US
$
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Impact for Venting Reduction(flaring only), $4/tCO2e
CH4 destruction
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
per 1000 m3 CH4 per MWh
US
$
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Impact for Venting Reduction(commercial use), $4/tCO2e
CH4 destruction
Fossil fuel displacement
[Coal]Gas
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
per 1000 m3 CH4 per MWh
US
$
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• Revenue boost:
– ~$ 6/ 000m3 for flaring reduction – +~$52/ 000m3 for venting reduction
• High quality cash flow:
– OECD - sourced – Investment-grade payor– $- or €- denominatedEliminate FX riskFinancial engineering helps tap capital
Impact of Carbon Finance
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Host Country
Sponsor/ Project
CF
ERPA
Engagements re:• Regulation (e.g. tariffs)• Kyoto Protocol compliance
ERs
Ltr. of Approval
ER pmt
Securing Underlying Finance
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Host Country
Sponsor/ Project
CF
ERPA
Engagements re:• Regulation (e.g. tariffs)• Kyoto Protocol compliance
ERs
Ltr. of Approval
ER pmt
Securing Underlying Finance
Lender?Loan ??
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Brazil
Rabobank Project
PCF
ERPA
Financing Agr.
Ltr. of Approval
ERs
Future flow structure: Plantar
ER pmts $5 m
Loan $5 m
SPV
ER payments placed in offshore escrow
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Brazil Plantar Sust. Fuelwood
-4000
-2000
0
2000
4000
6000
1 2 3 4 5 6 7
Year
Cash
Flo
ws (
$000)
LoanDisbursementPCF Payments
LoanAmortization
ER payments amortized 100% of commercial loan principal
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Ecuador
Project
NCDF
ERPA
Ltr. of Approval
ERs
Future flow structure: Abanico
CER pmt $4.03
Sub
Hidrobanico
PPA?
Loan ?IIC
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Ecuador
IIC Project
NCDF
ERPA
Financing Agr.
Ltr. of Approval
ERs
Future flow structure: Abanico
CER pmt $4.03
Loan $7 m
SPV
CER payments placed in offshore escrowSub
Hidrobanico
PPA
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Flaring reduction: Rang Dong
• First GFR methodology approved
• Additionality:
– Cash flows with and without carbon– Project must demonstrate that carbon
finance raises IRR above sponsor’s hurdle rate
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Venting reduction: FSU
• FSU republic that transits gas and receives share of gas + royalty
• Leaky transmission pipeline: 5% losses
• Poor financial condition due to low collections, theft
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Venting reduction: case
• $45m investment to reduce losses to 2% over 3 years
• Negative IRR without carbon due to low gas price
• IRR increases to 37% with carbon
• Financing by oil co, MCM, World Bank
• Revenue in hard currency will enable sponsor to repay loan
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Working with the World Bank Group
• World Bank Group’s role in carbon market:
Ensure liquidity in CDM, JIBenchmark new methodologiesIntroduce new countries, sectors, technologies Learning by doing projects
Support to host countries:Capacity building Support in bringing CDM/JI projects to market
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Working with the World Bank Group
• Carbon Finance support:
Purchase of emission reductionsAssistance throughout the project cycle
Project design documentValidationProject approval, registrationVerification
Flexible structuring: VERs, CERs, beyond 2012 …Help in securing underlying financing
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Conclusions• Carbon finance:
Lowers compliance costsImproves returns on climate-friendly projectsProvides a bankable revenue streamIs taking off: Kyoto enters into force 1/4/05
• World Bank Group can help:Provide a combination of carbon finance and
underlying financingHandle CDM registration processHelp develop capacity
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Carbon Market Structure
Project-Based Transactions
Allowance Markets
UK Emission Trading Scheme
EU Emission Trading Scheme
Chicago Climate Exchange
Retail
Kyoto Pre-
Compliance
Not for Kyoto Compliance
New South Wales Certificates
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0
20
40
60
1996 1997 1998 1999 2000 2001 2002 2003Q1-Q3
Kyoto Pre-ComplianceNot Kyoto Pre-Compliance
Traded Volumes
Volume traded in project-based transactions, m tCO2e