creating investment grade redd projects and reducing investors risk ieta latin american carbon forum...
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Creating Investment Grade REDD Projects
and Reducing Investors’ Risk
IETA Latin American Carbon ForumSeptember 2011
Leslie Durschinger
Terra Global Capital, LLC
REDD projects present a unique set of risks Implementation risk Financial risk Political risk Natural disturbance risk Methodological risk (conversion from project to jurisdictional accounting)
Investors need to assess and minimize these risks Projects must be “investment ready” Actors responsible for generating emission reductions must be engaged
Reducing risk to create investment grade REDD projects: Strong project design Detailed financial arrangements Contractual arrangements and carbon rights Use of insurance Instruments
REDD Risks Mitigation key to private investment
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Clearly defined project activities Address all drivers and agents of deforestation Scope and scale of each activity is clearly defined Aligned with capacity of implementing partners Supported by activity-based budget
Leakage mitigation Project activities effectively target activity-shifting Alternative income streams developed
Project plan is sustainable and adaptable Documented in workplans and contracts with implementing partners Activities can be can replicated over project life Process for adaptation to reflect changing conditions
Strong Project DesignPrimary method of risk mitigation for REDD projects
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Financial projections for crediting period Reliable carbon estimates (conservative, after buffers) Carbon development budget (conservative 1st verification date) Project implementation budget (activity-based tied to project plan)
Investment terms meet project needs Size of up-front cash based on project breakeven Carbon price, vintages, profit share Balances project profits with investor’s return
Funds flow to appropriate partners Benefits sharing mechanisms in place Tied to specific activities with supporting disbursement mechanisms
Importance of Donor Funding Capacity building and carbon readiness Closes funding gap for projects (from carbon readiness credit issuance) Supports development jurisdictional REDD MRV
Detailed Financial ArrangementsDetermines funding needs and financial viability
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Clearly defined rights Land tenure structure must be clarified prior to implementation Tenure often secured as part of implementation (requisite for investment) Conflicting claims require resolution
Agreements between implementing partners Includes forest management plans, project actions, and technical service
providers Assigns roles and responsibilities over project lifetime Ties project workplans and budgets to legal agreements
Agreements to secure carbon rights Seller’s entity defined and established “Belt and Suspenders” approach to securing carbon rights Driven by tenure and government position Government must be included, even with lack of regulatory clarity
Contractual Arrangements & Carbon RightsEnsures legal enforceability
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Political risk insurance Terra - OPIC Insurance agreement for REDD, covering:
Expropriation: e.g., government grants tenure but later revokes Political violence: e.g., civil war or unrest causes deforestation
Catastrophic risk insurance Fire, weather, disease
VCS Buffer insures issued credits Already-issued credits insured using risk buffer Future issuance is what is at risk
REDD Insurance InstrumentsReduces risk of loss for projects and investors
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Thank you
Name Leslie DurschingerFounder, Managing Director
Email [email protected]
www.terraglobalcapital.com
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