Carbon Finance at Carbon Finance at the World Bank the World Bank

Host Country Committee MeetingHost Country Committee MeetingOctober 2005October 2005

www.CarbonFinance.orgwww.CarbonFinance.org

The Big Picture: Why we are The Big Picture: Why we are all here todayall here today• The Earths climate has changed, and is predicted The Earths climate has changed, and is predicted

to continue to change, globally and regionally:to continue to change, globally and regionally:• Warmer temperaturesWarmer temperatures• Changing precipitation patternsChanging precipitation patterns

• More floods, droughtsMore floods, droughts

• Higher sea levelsHigher sea levels• Retreating glaciersRetreating glaciers• Reduced arctic sea iceReduced arctic sea ice• More frequent extreme weather eventsMore frequent extreme weather events

• More heat wavesMore heat waves

Observed change can be explained onlyObserved change can be explained onlywhen man-made factors are includedwhen man-made factors are included

Tem

per

atu

re c

han

ge

ºC

1.0

0.5

0.0

-0.51850 1900 1950 2000

observed

model simulation

OBSERVED AND SIMULATED CHANGESGlobal mean surface temperature

Land Areas Warm More Than the Oceans with the Land Areas Warm More Than the Oceans with the Greatest Warming at High LatitudesGreatest Warming at High Latitudes

Annual mean temperature change, 2071 to 2100 relative to 1990: Global Average in 2085 = 3.1oC

Some Areas are Projected to Become Some Areas are Projected to Become Wetter, Others DrierWetter, Others Drier

Annual Mean Precipitation Change: 2071 to 2100 Relative to 1990

The Bottom-Line:The Bottom-Line:

• Developing Countries are not the Developing Countries are not the cause of global warmingcause of global warming

• But they will suffer the brunt of the But they will suffer the brunt of the effects of climate changeeffects of climate change

• Two keys:Two keys:– AdaptationAdaptation– Carbon FinanceCarbon Finance

Today Our Focus is on Today Our Focus is on Carbon FinanceCarbon Finance

But we must not forget:But we must not forget: Adaptation must be the other Adaptation must be the other

component of a developing component of a developing country strategycountry strategy

Major Regulatory Major Regulatory DevelopmentsDevelopments

• October 2004: Russia decidesOctober 2004: Russia decides to ratify the Kyoto Protocolto ratify the Kyoto Protocol

• January 2005January 2005: : The EU Emissions The EU Emissions Trading Scheme Trading Scheme begins begins operationoperation

• February 2005February 2005: : Kyoto ProtocolKyoto Protocol comes into forcecomes into force

• But no CERs Issued to DateBut no CERs Issued to Date

Structure of the Carbon Structure of the Carbon MarketMarket

Allowance Markets

UK ETS

EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates

Project-Based Transactions

JI and CDM

Voluntary

RetailOther

Compliance

Main Buyers: European Main Buyers: European Governments and Firms Governments and Firms In percent of volume purchased From Jan.04 to Apr.05In percent of volume purchased From Jan.04 to Apr.05

Other EU32%

UK12%

Gov. Netherlands16%

Japan21%

New Zealand7%

Canada5%

Australia3%

USA4%

Supply Concentrated in Supply Concentrated in Middle-Income CountriesMiddle-Income CountriesIn percent of volume sold from January 2004 to April In percent of volume sold from January 2004 to April 20052005

OECD14%

TransitionEconomies

6%

Africa0%

India31%

Rest of Asia14%

Brazil13%

Rest of Latin America22%

Non-CONon-CO22 Gases Dominate Gases DominateIn percent of volume purchased from Jan.04 to Apr.05In percent of volume purchased from Jan.04 to Apr.05

Landfill GasCapture

10%

Hydro12%

Wind7%

Biomass11%

AnimalWaste18%

EnergyEfficiency

2%

Forestry(LULUCF)

4%

HFC25%

N2O4%

Other7%

Insights on Price DifferentialInsights on Price Differential

• Large price differential:Large price differential:– EU Allowances: 7 up to close to 30 euros / EU Allowances: 7 up to close to 30 euros /

tCOtCO22e (spot and forward contracts)e (spot and forward contracts)– Project-based: 3 to 10+ dollars / tCOProject-based: 3 to 10+ dollars / tCO22e e

(forward contracts on expected CERs) (forward contracts on expected CERs)

• Allowances and project-based contracts Allowances and project-based contracts have have very different risk profilesvery different risk profiles::– Project and country risksProject and country risks: high in CDM, : high in CDM,

none in allowancesnone in allowances– Compliance/regulatory risks:Compliance/regulatory risks: high in CDM, high in CDM,

none in allowancenone in allowance– Delivery risksDelivery risks: higher in CDM: higher in CDM

OutlookOutlook• The market has responded to the The market has responded to the

regulatory signals and is now a real regulatory signals and is now a real compliance marketcompliance market

• Volumes should increase rapidly for both Volumes should increase rapidly for both project and allowance segments…..project and allowance segments…..

• … … although important uncertainties still need although important uncertainties still need to be addressedto be addressed

• Overall supply / demand picture (e.g. under Overall supply / demand picture (e.g. under Kyoto Protocol) is still unclear:Kyoto Protocol) is still unclear:– How much volume will JI/CDM deliver? Issue of How much volume will JI/CDM deliver? Issue of

projects lead-timeprojects lead-time– How many allowances will Russia and Ukraine bring How many allowances will Russia and Ukraine bring

to market?to market?

The World Bank’s ObjectivesThe World Bank’s Objectives

• Contribute to Sustainable DevelopmentContribute to Sustainable Development– Support Developing Countries To Maximize Support Developing Countries To Maximize

Gains from Carbon Finance Gains from Carbon Finance – Add Value to CDM Projects Add Value to CDM Projects

• Catalyze the Carbon MarketCatalyze the Carbon Market– Develop new markets and sectors for Develop new markets and sectors for

carbon financecarbon finance– Build Capacity in Client CountriesBuild Capacity in Client Countries– Provide Liquidity to the MarketProvide Liquidity to the Market

Evolution of World Bank Carbon

-

200

400

600

800

1,000

1,200

1,400

1,600

CY2000 CY2001 CY2002 CY2003 CY2004 CY2005

Europe CF

Danish CF

Spanish CF

Dutch JI

Italian CF

BioCF

CDCF

NCDF

PCF

Carbon Funds

Million US$

Commitment of Fundings about$1,000 million as of JOctober 1, 2005

80% of funds are from governments (non-ODA)80% of funds are from governments (non-ODA)

World Bank Policy in Carbon World Bank Policy in Carbon FinanceFinance

• Be a lead buyer or a buyer of last resortBe a lead buyer or a buyer of last resort

• Pay Market Prices corrected for riskPay Market Prices corrected for risk

• Always contribute beyond the purchase of the Always contribute beyond the purchase of the CDM emission reductionCDM emission reduction

• While Building Capacity Of Clients Through While Building Capacity Of Clients Through Support and TrainingSupport and Training

• Give Full Information – Transparency and Give Full Information – Transparency and IntegrityIntegrity

• Bring the Full Instruments of the World Bank Bring the Full Instruments of the World Bank Group to Support ClientsGroup to Support Clients

IssuesIssues

• How to keep a balanced portfolio yet How to keep a balanced portfolio yet deliver carbon finance to a wide variety deliver carbon finance to a wide variety of developing countries and sectorsof developing countries and sectors

• How to help ensure that the regulatory How to help ensure that the regulatory mechanism works effectively and mechanism works effectively and efficientlyefficiently

• How to approach the post-2012 periodHow to approach the post-2012 period

The StrategyThe Strategy

• Three pronged approach:Three pronged approach:1.1. Innovative, widely dispersed projectsInnovative, widely dispersed projects

2.2. Mainstream projects that add value to Mainstream projects that add value to sustainable developmentsustainable development

3.3. Mega projects that bring large volumes Mega projects that bring large volumes of carbon finance to developing of carbon finance to developing countries for sustainable developmentcountries for sustainable development

New IssuesNew Issues

• Balance between three prongsBalance between three prongs• Implementing pricing policyImplementing pricing policy• How much liquidity for the marketHow much liquidity for the market• Bringing into the play other Bringing into the play other

stakeholders – NGOs and Private stakeholders – NGOs and Private Sector, particularly for AfricaSector, particularly for Africa

• Being non-politically in political Being non-politically in political arenas such as MOParenas such as MOP