World Bank Carbon Finance: Experience, Strategy and New Products Addis Ababa 21 October 2003 .
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Transcript of World Bank Carbon Finance: Experience, Strategy and New Products Addis Ababa 21 October 2003 .
World Bank Carbon Finance:
Experience, Strategy and
New ProductsAddis Ababa
21 October 2003
www.carbonfinance.org
The Bank’s Mission and Climate Change
Bank’s Mission:
Poverty reduction and sustainable development
Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impacts Poor countries will be worse off and poorest people have
the least capacity to adapt, especially the rural poor
Private Capital and Technology Transfer: Kyoto’s flexible mechanisms and lower marginal cost of
abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies
World BankCarbon Finance Vehicles
BioCarbon Fund
Netherlands CDM Facility
Italian Carbon Fund
How the Funds Work
Industrialized Countries
and Companies
Host Countries
and Communities
$ Finance $Technology
Finance
CO Equivalent2
Emission Reductions
PCF
Other project fundingPayment on
delivery
Source: PCF calculations, based on database assembled with Natsource,Co2e.com and PointCarbon
0
10
20
30
40
50
60
70
1996 1997 1998 1999 2000 2001 2002(est.)
Est
imat
ed v
olu
mes
tra
nsa
cted
(M
tCO
2e)
Vintages up to 2012 only
Carbon Trades: est. volumes
Buyers are becoming more diverse
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
1996-2000 2001-2002
Canada
USA
Netherlands
Other WEU
Japan PCF
Australia
Canada
USA
Other WEU
Japan
Australia
PCF
Netherlands
0
2
4
6
8
10
12
14
16
18
Annex II JI Countries CDM Countries
Volu
me
of
ER
Pro
ject
s (M
tCo
2e)
Carbon Finance flows 2001-2002
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
USA
Canada
Australia
Latin America
AsiaAfrica
Market Intelligence:“Few Countries Benefiting, Little Private Sector Buying”
Market: cumulative 200 million tonnes CO2 traded ($500 million) since 1996
Five-fold increase between 2001 and 2002
But … Only 43% of all carbon transactions made in CDM/JI (2001-
2002), dominated by Dutch and PCF
Only 13% of the private sector’s purchases were in CDM (2001-2002)
African countries, smaller countries and small-scale projects are largely bypassed
Public Sector (6)
Governments of Netherlands, Finland, Sweden, Norway, Canada, and Japan Bank for International Cooperation
Private Sector: (17)
RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP, Fortum, RaboBank, NL
PCF ShareholdersSubscribed $180 million for
Learning-by-Doing
0
5 0 0
1 0 0 0
1 5 0 0
2 0 0 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2
Y e a r
$ i
n 0
00
's
P C F P o r t f o l i o
0
5 0
1 0 0
1 5 0
2 0 0
2 5 0
3 0 0
2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2
Y e a r
US
$ M
illi
on
s
P o r t f o l i o
P C F A d m i n i s t r a t i v e B u d g e t
I n v e s t m e n t P h a s e
I m p l e m e n t a t i o n P h a s e
M a i n t e n a n c e P h a s e
P i p e l i n e
PCF’s investment Phase is almost over. 100% of contracts have to be agreed and 75% signed by June 2004
Technological Distribution of Active PCF Pipeline ProjectsTotal of Approx. US$ 227 Million
Bagasse6% Biomass
8%
Energy Efficiency
18%
Geothermal12%
LULUCF4%
Waste Management
21%
N20 Removal5%
Small Hydro12%
Wind14%
Preparation and review of the Project
Baseline Study and Monitoring and Verification Plan (MVP)
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: $ 40K
• Baseline : $20 K• Monitoring Plan: $20K
• Contract, Processing •and documentation: $30k
• Consultation and Project Appraisal: $105K• Negotiations and Legal documentation: $50K
Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience
Total through Negotiations• All expenses: $265 K
• Initial verification at start-up: $25K
• Verification: $10-25 K• Supervision: $10-20K
Technology IRR
Hydro, Wind, Geothermal 0.8-2.6
Methane Kick
Crop/Forest Residues 3-7
Municipal Solid Waste 5-10+
Impact of Carbon Finance on Impact of Carbon Finance on Project Financial Rate of Project Financial Rate of ReturnReturn
•Revolution in Solid Waste Management
•Important impact on small-holder crop-processors and animal production
Lead Time and Uncertainty Constraints on CDM Projects
2006
2003
2008
2012
Operating
Operating
Wind, Efficiency, Waste to Energy
Large Hydro, Geothermal, Coal to Gas Power
Second Commitment Period Rules and Targets Need to be decided by 2006 to ensure continuity in CDM Market Development
5 year average
Pre-feasibility
Pre-feasibility
= Start Construction
CDM as a Source of Compliance Assets CDM/JI will fall far short of the 2 billion ton plus
cumulative “compliance gap” Even at 50% compound per annum in CDM activity,
CDM is unlikely to deliver more than 350 million tons ERs before 2012
Aggressive Chinese CDM participation may increase this by 150-250 tons CO2e million maximum
“Hot Air” is key to Kyoto compliance but is politically inaccessible
“Greening” hot air is essential to making AAUs acceptable to OECD buyers
World Bank Carbon Finance Strategic Objectives Beyond PCF Expand core carbon market development:
“crowd in” private sector: OECD Country Funds (Netherlands, Italy)
Extend carbon finance to poorer communities in developing countries and smaller, poorer countries CDCF
Demonstrate sustainable development impact of carbon finance for sinks BioCarbon Fund
Build capacity of Host Countries for Carbon Trade PCFplus, CDCFplus, BioCFplus
Capacity Building Services Capacity Building Services in Carbon Financein Carbon Finance Training and Knowledge Management: World Bank
Institute (governments, private sector, Bank Group staff) – 2200 training days in FY03 Help desk, briefings, targeted awareness-raising
Internships and Fellowships: PCF+ and shareholder privileges (20 + to date)
Staff Exchange Program in CF: 7 currently on staff Institutional Strengthening: CF-Assist, PCF+,
CDCF+ Research and Policy Analysis: NSS, Market
intelligence, technical benchmarking, baseline and monitoring methods, policy research.
CF
Carbon Finance Products of the World Bank
New FundsDevelopment
BioCarbon Fund
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Summary
CF to small projects in small CDM countries, poor areas
Generate high value ERs “Development + Carbon” ($3 to $6 = $7/t/CO2e)
Catalyze private capital to alleviate poverty
Local intermediaries Highly replicable Multiple tranches Developed with IETA
Community Development Community Development Carbon Fund (CDCF)Carbon Fund (CDCF)
BioCarbon FundBioCarbon Fund
Extend CF to agricultural, forestry sectors
Generate cost-effective ERs from sequestration and conservation ($3 to $4=?)
Support projects that conserve biodiversity, combat desertification, alleviate poverty, explore adaptation options
CDM and JI
Learn by doing prototype
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Who is contributing (investing)?
Committed contributions
Canada, Italy & Netherlands; others expected
Seven companies so far, mostly Japanese, but North American and European companies expected
Community Development Community Development Carbon Fund (CDCF)Carbon Fund (CDCF)
BioCarbon FundBioCarbon Fund
MoU stage only
Canada
Japanese & European “finance” companies
Japanese energy companies
Major NGOs
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Benefits
Private capital flows for projects that help reduce poverty
Investment in cleaner technologies and best practices Ongoing partnerships Capacity building for communities and intermediaries
Host Countries and ProjectsHost Countries and Projects
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Benefits
Acquire high value ERs for compliance, trading, insurance
Cheaper transaction costs: expertise of World Bank carbon finance team
Risk mitigation via diversification, hedge future costs
Knowledge of carbon asset creation, market intelligence:
internships, training, advice
Demonstrate social responsibility
Access to additional CO2e in each deal
Leverage private investment for sustainable development
Influence future regulations
Participants Participants (Companies & Governments)(Companies & Governments)
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Development + Carbon = Carbon with a human face
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
CDCF Rationale Extend CF to small projects in small CDM countries,
poor areas
Generate high value ERs “development + carbon” ($3-$6=$7/t/CO2e)
Catalyze private capital to alleviate poverty
Use local intermediaries, streamlined procedures, replicable projects
Multiple tranches
Developed with International Emissions Trading Association (IETA)
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
CDCF Portfolio Criteria Small projects (UNFCCC definition: less than
15MW or equivalent)
CDM countries only
No more than 10% of capital in one country
Minimum of 25% of capital in LDCs and other poor smaller developing countries
Limit of 10% of capital in small-scale afforestation, reforestation
Measurable, certifiable community benefit from ER project
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Project Technology Distribution from PCF Experience
Technology Distribution of PCF ProjectsTechnology Distribution of PCF ProjectsUnder Development for FY 03Under Development for FY 03
Bagasse cogen
15%
Biomass
5%
Energy efficiency
17%
MSW
19%
LULUCF
2%
Small hydro
14%
Wind
16%
Geothermal/ EE
4%Gas flaring
8%
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
CDCF Potential Early Deal Flow 22 project proposals/ ideas in hand:
Africa: 5
Asia: 9
Latin America: 8
More than half of proposals are from IDA countries
Togo, Ghana, Kenya, Sri Lanka, Bangladesh, Nepal, Vietnam, Honduras, Nicaragua.
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
CDCF Potential Early Deal Flow Wide variety of technologies represented:
Hydro power: 6
Energy efficiency: 5
Bagasse/ Sawmill Cogeneration: 2
Biomass: 4;
Wind: 2;
Solar: 1; Geothermal: 1
Fuel-switching in transport sector: 1
All fit CDM definition of “small-scale projects”
Capacity ranges from 0.1 MW – 15 MW
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
BioCarbon Fund
Harnessing the carbon market to sustain ecosystems and alleviate poverty
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
BioCarbon Fund Rationale Demonstrate technical and policy issues of Land use, land-
use change and forestry (LULUCF) activities: learn by doing prototype
Extend carbon finance to agriculture and forestry sectors – particularly in countries with limited opportunities for energy projects
Multiple goals: Atmospheric benefit, local environmental benefits, social benefits and, where possible, explore adaptation options
Meet demand for cost-effective ERs from mandatory and voluntary markets (buy at $3-6/ton/CO2e)
CDM and JI
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
BioCF 1st WindowKyoto-Eligible Examples
Afforestration/ Reforestration
CDM & JI CountriesSustainable Forest
Management
JI onlyJI only
Reduced tillage
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
BioCF - Biofuels – First Window
Projects where new trees or crops are established to provide biofuels as part of a wider social and landscape management goal.
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
BioCF 2nd Window
Landscape Management
CDM Host countriesRevegetation Soil Carbon
Management
Currently have about 90 project proposals (PINs)Includes a strong set from AfricaSeeking more dryland projects
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Technical Assistance Trust Funds
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Implementation Partnerships
Objective = build local capacity needed to make the CDM a reality in LDCs and poorer rural areas and communities of the developing world
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
How IPs work Multi-donor Technical Assistance Funds from IP participants, as well as
investment income from full upfront payments by CDCF participants and some special grants to the Trust funds
IPs are part of the WB’s CF-assist, ensuring coordination among the various assistance initiatives of the WB in the area of carbon finance
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Implementation Partnership Activities
Identify and prepare projects Identify, train and collaborate with local intermediaries
to prepare project proposals Develop their capacities to bundle and deliver projects Develop simplified baseline and monitoring
methodologies Develop local capacity to undertake baseline,
monitoring, and verification studies Encourage and support the participation of local
stakeholders in CDCF projects
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
The Case for Capacity Building
Experience with PCF (lessons learned):
Learning by doing: 1st and 2nd transaction key to existence of supportive approval system and capacity of agencies, sponsors, intermediaries, NGOs
Substantial front-end expenses to reduce investment risks, facilitate project development and replication, and streamline project procedures. Project validation costs also significant
EcoSecurities for DFID, 09/2002 study: “… without robust frameworks for implementing the CDM […] distributional inequity […] losers being the poorer people in smaller countries.”
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
The Case for Capacity Building
Point Carbon Market Analyst (12/02) - survey: The single most critical factor determining the attractiveness of a CDM investment is a supportive CDM approval system in the host country
PCFplus Study (11/02): The main challenge in reducing transaction costs of small projects is reducing operational entities (OEs) costs. This could be addressed by promoting accreditation of
local OEs charging local rates (US$200 per day) instead of international rates (US$1000 per day)
CF
Carbon Carbon
Finance Finance
Products Products
of the of the
World World
BankBank
Concessional development finance is key to project development and preparation
LDCs and poorer rural areas and communities will only become players in the emerging carbon market if the international donor community helps them develop local capacity and expertise to prepare and manage carbon projects
The Case for Capacity Building
The Bank’s Mission and Climate Change
Bank’s Mission:
Poverty reduction and sustainable development
Heavy Engagement in Climate Change because: Accept IPCC predictions on trends and impacts Poor countries will be worse off and poorest people have
the least capacity to adapt, especially the rural poor
Private Capital and Technology Transfer: Kyoto’s flexible mechanisms and lower marginal cost of
abatement provide unprecedented incentives for private investment in clean technology, agriculture and forestry in developing and transition economies