1

A Low-Carbon Development Facility (LCDF)

To leverage an Initial Capital To finance a growing Portfolio

of Low-carbon Development ProjectsTo stabilize the GHGs concentration in the atmosphere

Christophe de GOUVELLO, the World BankThe Rio Climate Challenge, Rio de Janeiro, Oct 28, 2013

The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent.

1. Potential for low-carbon development projects is huge

2. How to finance them ?

Proposal for a Low-Carbon Development Facility

2

3

Mitigation Potential in

Non-Annex 1

A gap to fill to stabilize concentrations Emission Reductions in Annex 1

countries alone will not be enough to meet GHG concentration targets (while their historical responsibility remains)

Potential for mitigation projects in Non-Annex 1 countries is huge

•Reductions in Non-Annex 1 countries require investments, not only soft policies

•Many of these investments enhance development (energy, transport etc.)

Tens of thousands of potential Low-carbon Development projects

2030

WorldBaseline

30

Annex 1

20 Target For

Stabilization

In GtCO2e / Year

60

Up to 25Gt CO2e/year(Sources: UNFCCC, McKinsey, Low-carb Studies, etc.)

- 25

2030

Rest of the

World

As a consequence: Emission Reductions brought by Non-Annex 1 countries in the form of offsets will not be enough either

Scaling up the Emission Reduction effort in Non-Annex 1 beyond offsets is a necessity

Some basic facts

4

Inventory of potential Low-carbon Projects in Brazil

5 Sectors : Fossil Fuels for Industry Use Waste Management Electricity Transportation and Vehicular Fuel Other Industrial Inputs

3 Assessments GHG Emission and CER

generating potential Required Investment Contribution to Energy Matrix

Fuel production BR. World Transport/Distribution BR. World Consumption/Use BR. WorldFlaring, recovery of flared gas(FO)0 20 EE in fuel transport 0 0 Fuel switch 17 168

AM0009* Recovery of flared gas from oil wells0 17 AM0053* Biogenic CH4 injection to gas distrib. Grid0 0 AM0049* Gas-based elec. Generation in industrial facility0 0AM0037* Flare reduction and gas utilization at O&G processing plant0 3 Reduction of pipeline leaks 0 0 AMS-III.B* Swithcing fossil fuels 7 37AMS-III.K* CH4 from charcoal avoided through mechanized charcoaling process0 0 AM0023* Leak reduction from natural gas pipeline compressors or gate stations0 0 AM0007* Cogen offseason switch from least cost biomass0 0

EE refineries (FO) 0 0 AM0043* Leak reduction by pipe replacement from grid0 0 AMS-II.D* EE and fuel switch measures for industrial facilities1 99AM0055* Recovery and utilization of waste gas in refinery0 0 ACM0009* Fuel witch coal/oil to gas 2 11AMS-III.P* Waste gas recovery and utilization in refinery0 0 AM0036* fuel switch fossil to biomas residues in boilers for heat gen.1 4

CMM destruction (coal) 0 26 AM0008* Ind. Fuel switch - CONSOLIDATED IN ACM00096 17ACM0008* CBM CMM to flaring or heat or power0 26 EE (steam traps, etc.) 2 216

ACM0012* Waste heat/gas/pressure Cogen1 15AMS-III.M* Reduced elec. Consumption through paper manufacturing soda recovery0 2AM0032* Waste gas/heat to power Cogen0 2ACM0004* Waste gas/heat to power generation1 181AM0017* Steam traps 0 0AM0018* Steam optimization systems 0 15AM0038* Electric arc furnace EE 0 1AM0054* Boiler improv. Oil/water emulsion tech0 0AM0056* Fossil fue-fired steam boiler replac./rehab and fuel switch0 0AM0060* Replac. By EE chillers 0 0

Fuel production Transport

Thermal Use/

Consumption

88% of available CDM methodologies

UNUSED in Brazil(as of the date of beginning of the project)

Example: Fossil Fuels for Industry Use(4 other sectors were also scanned)

Top the iceberg is the 300+ CDM projects in Brazil “Scan” the bottom part of the iceberg

Use the CDM as a lens to track potential low carbon energy projectsHow many potential Low-carbon projects in Brazil similar to projects developed in other countries with approved CDM methodologies ?

Look for data base of facilities or sites in Brazil that are similar to the ones that are already implementing a CDM project somewhere else in the world (or in Brazil)

Methodology to inventory projects

61 types of Low-carbon projects

Count facilities in these databases, which could implement same technologies / industrial processes

Use CDM methodologies to estimate achievable emissions reductions in these facilities or sites

Estimate Investment costs and Energy Development outputs associated to these potential low-carbon projects

Example: Fossil Fuels for Industry Use(4 other sectors were also scanned)

Elo 1 - Produção Elo 2 - Distribuição/ transporte

Número de Sites Identificados Número de Sites Identificados52 2

Potencial de Redução de Emissões em 10 anos (MtCO2e)

Potencial de Redução de Emissões em 10 anos (MtCO2e)

20 0,2

Elo 3 - Consumo/Uso Térmico

Número de Sites Identificados449

Potencial de Redução de Emissões em 10 anos (MtCO2e)

141

Example: Fuel-switch from Fossil to Biomass: Pulp and Paper IndustryDescription Value Unit

Annual Emissions Reductions 635.539 tCO2e / year

Number of Projects 122 projects

Potential Carbon Revenue(CER at US$ 5) 3.177.695 US$/year

Investment Cost 48.030.976 US$

Fuel production Transport

Thermal Use/

Consumption

Synthesis of Results per Sectors

Number of Projects pre-identified : 18,480 : 2/3 green field and 1/3 incremental projects

on existing installations Fossil Fuels for Industry: 2.204 projects/sites Other Industry Inputs: 706 projects/sites Transportation (Vehicular Fuels): 344 projects/sites Waste Management : 3.124 projects/sites (10 GW) Electricity: 12.102 projects/sites (452

GW)

Synthesis:

Over 18.000 potential mitigation projects and sites Potential GHG Emissions Reductions : 450 MtCO2e/year Corresponding investment need: US$ 1,284 billion +

(annual investment in Brazil is arount $225 billion) Potential value of GHG in 10 years ($10/tCO2): US$ 45.6 billion

9

Antecedentes Same inventory was done in Brazil and 44 Sub-Saharan African countries

3,227Number of Potential Projects 109 % of current emissions 740 MtCO2 /yearPotential GHG reductions 225 % of current

capacity 155 GWPotential of additional power generation capacity $ 97.8 billion (10 or 21 years, base 10 US$/tCO2)Value of the GHG reductions over crediting period

$ 157,6 billionInvestment cost (only for projects for which cost data is available)

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PROPOSAL:

Create a Low-Carbon DevelopmentFacility (LCDF) to provide financing

A Need for a New Financing Mechanism to support Emission Reduction investments

Many clean infrastructure projects cannot achieve financial closure(lack of liquidity, too short maturity, risk adversity, etc.)

Even if eligible to sale carbon credits(as evidenced by CDM pipeline)

PROBLEM:

Bottleneck

Limited access to financing

To scale-up financing by tapping on large international capital markets pools(pension funds, insurance funds, sovereign funds, etc.)

To unlock economically viable low-carbon development projects (energy projects, transport project, industrial projects, etc. that generate commercial revenues)

To harvest the large mitigation potential

Main issue is financing

Initial LCDF Capital sized to sustain AAA rating while …

…raising large volumes of resources from financial markets through AAA rated bonds…

…to provide cheap AAA-conditions financing to low-carbon investments, which ratings are far lower (ranging from C to AA)

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The Low-Carbon Development Facility:LCDF Principles

Diversified Portfolio of BBB Loans to Low-Carbon Investment Projects in Developing Countries

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AAA-Rated Facility with $100Bn annual financing power

AAA Bonds Issuance

Libor – 20bp

Global

Capital

Markets

Clean Development

NewLoans

Libor + 10bp

INITIAL CAPITAL:

$68Bn

Capital is enough to sustain the AAA rating

Capital Paid by Annex -1 Countries

$100Bn/y$100Bn/y

$50Bn/y Public and Private Sources for 1/3 co-Financing

LCDF PRINCIPLES

$100Bn/y

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Low Carbon Development Facility: facts and perspective LCDF Profile

$100Bn international annual financing brought through LCDFcompares to FDI flows of $600Bn/year and ODA of $75Bn/year

LCDF finances an abatement capacity of circa 10 GtCO2eq per year in 2030 (increases progressively)

Initial capital of $68Bn by Annex 1 to sustain the AAA rating by weathering default on loans in 99.9996% of cases

Concessional rate of Libor + 10bp on 2/3rd of financing; a BBB emerging government borrows at Libor + 300bp

Average financial cost of the abatement effort “seen” by Annex 1 countries of $1.1/tCO2e

Private and public banks bring their loan screening, origination and financial analysis in a public-private partnership with LCDF

LCDF PRINCIPLES

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Origination and Monitoring/Reporting/Verification of the Environmental Performance

The CDM has already been a powerful magnet (already 7,000+ projects, LCDF would boost attractiveness)

Available studies show that the potential number of projects is huge (Low Carbon studies, Africa Study)

Private banks would work as partners with the LCDF: Bring their screening and loan origination capacity to increase LCDF regional penetration and world scope

Other entities (ESCOs, etc.) can originate projects.

Voluntary Standards can also work as channels to identify projects

Worldwide Projects Screening and Loan Origination

Environmental Performance & MRVThe LCDF can use the MRV system of the CDM, seen

as a public “Methodology Asset” (In the context of an enhanced CDM). Also Voluntary Standards methodologies can be used for activities not covered by CDM

Loan interest rate to increase for projects failing to perform or to comply with MRV.

LCDF PRINCIPLES

1515

Complementarity with the Carbon Market

Only projects still unviable after enjoying LCDF financing conditions would be eligible to tradable CERs(would solve current loophole generating hot air in CDM)

Projects applying to LCDF will have to open their books for LCDF to perform financial due diligences (not the case today for CDM)

To prevent conflict of interest, LCDF shall limit to 20% the share of its portfolio eligible to tradable CERs (this % can be revised regularly on the basis of experience)

Avoid overflowing of carbon market Carbon Price can remain high: good for projects which really need additional carbon revenue does not jeopardize Annex1 National Policies

LCDF PRINCIPLES

What is the basis for these numbers?

based on LCDF SIMUL

to simulate LCDF at different scales and different contexts (illustrative simulation for China)

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State of the art Credit Risk Model→ Integrate financial industry standards used in risk management→ Credit rating transition probabilities provided by rating agencies (S&P,

Moody’s, etc.)

Uses real projects databases (UNFCCC) and prospective inventories of low-carbon investment opportunities (Africa-NTF, Brazil-PHRD, etc)

Provide a transparent, user-friendly tool to respond to specific questions …(How much $$ needed, pipeline financing capacity, maturity, design of portfolio, credit rating, emissions reductions delivered, main co-development benefits (MW), etc.)

… under specific constrains or preferences (size of initial capital available, countries/region preferences, sector / technology criteria, etc.)

Can differentiate countries and sectors:→ adjusting capital intensity, size of projects, sector/technology mix, etc.→ exploring applicability to different country context and porfotlio

Development of “LCDF SIMUL”Main Objectives

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1. Portfolio parameters (simulating realistic mix of low-carb projects)

2. Loan characteristics(working with real projects financial parameters)

3. Credit Rating(computing risks at project and portfolio level)

Main Inputs

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UNFCCC Secretariat database :

3,000+ registered CDM projects

Inputs based on Real Projects Data Base

20

Loans/Projects Characteristics

On the basis of the accumulated knowledge of potential low-carb development projects, it is possible to build portfolios of projects in different sectors to target simultaneously (i) development objectives and (ii) GHG reductions volumes.

These portfolios of projects can be tested, adjusted, etc. depending on national priorities.

Please do not circulate

21

Credit rating

The financial behavior of the portfolio is anticipated through the rating of these projects, individually and as a portfolio:

- Individual probability of losses associated to a specific type of project: rating degradation rated from rating AAA to AA to A, … to failure and reciprocally (improvement) (matrix above)

- Cross sectoral contamination of risks : projects are not totally independent from each-other

Please do not circulate

22

1. Capital required to fund LCDF and sustain AAA

2. Projection of net income, profit and loss of LCDF

3. Environmental performance (MtCO2 reductions /year)

4. Development co-benefits and indicators

Main Outputs

23

Capital needed is calculated as a the minimum amount required to cover the loss in XX % of all cases (e.g. XX = 99.9996 % or probability of losses exceeding initial capital = 0.0004%).

Capital Required to sustain AAA

Please do not circulate

24

Size of Portfolio and GHG Abatement Potential

Please do not circulate

2010 2015 2020 2025 2030 2035 2040 20450

5,000

10,000

15,000

20,000

25,000

30,000

0

200

400

600

800

1000

1200

Loans Annual avoided emissionsUSD

'000

000

tCO

2 '0

00 0

00 /

yr

2010 2015 2020 2025 2030 2035 2040 20450

10,000

20,000

30,000

40,000

50,000

installed electrical power (MW)

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No way to stabilize GHG concentrations without low-carbon development in Developing Countries

Potential of project-based GHG mitigation does exist, is known and is huge

Carbon Markets are not sufficient : Investment financing is needed to unleash this potential

Financial characteristics, environmental performance of Low-Carbon Projects are known

Financial Engineering and Project Portfolio management allow for a LOW-CARBON DEVELOPMENT FACILITY (LCDF), which can leverage limited public funds on the international financial market via the issuance of bonds

Financial, development and environmental performance of LCDF is predictable

Ex: $70bn of equity $100bn financing /year 10GtCO2 in 2030

Conclusions