Carbon Finance in Gas Flaring and Venting Reduction

Veronique BishopCarbon Finance Business

The World Bank

OPEC – GGFR WorkshopVienna, June 30-July 1, 2005

• Kyoto Protocol basics

• Impact of carbon finance

• Securing financing

• Examples

Outline

• 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

• 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

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

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

• 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

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

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) ( )

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%

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

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

$

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

$

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

$

• 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

Host Country

Sponsor/ Project

CF

ERPA

Engagements re:• Regulation (e.g. tariffs)• Kyoto Protocol compliance

ERs

Ltr. of Approval

ER pmt

Securing Underlying Finance

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 ??

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

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

Ecuador

Project

NCDF

ERPA

Ltr. of Approval

ERs

Future flow structure: Abanico

CER pmt $4.03

Sub

Hidrobanico

PPA?

Loan ?IIC

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

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

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

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

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

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

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

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

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