Workshop on CDD-CDCF Synergy

Washington D.C.19 April 2006Andrea Pinna

Presentation Outline

• International Climate Change Regime and Carbon Market

• The World Bank Carbon Finance Program, the Carbon Funds and the Community Development Carbon Fund

• Carbon Finance and Carbon Economics

• Project Cycle

IPCC Third Assessment Report (2001)

• Global projections (100 years):– Warming of 1.4 a 5.8°C with BAU– Middle of road scenario with

mitigation measures 2.5 to 3°C

• 04/14/06 UK’s chief scientific adviser:

– Global temperatures likely to rise by 3 degrees Celsius by the end of the century with atmospheric carbon dioxide level of 550 ppm

Earth climate is warming and human activities are the primary cause

• While industrialized countries are responsible for the majority of historic emissions, the impact of climate change and of increasingly violent extreme whether events fall disproportionably on those least able to adapt: the poor and LDCs especially those whose ecosystems are already stressed and Africa in particular

• Examples – Mozambique 02/2000 floods: 700 dead, 490,000 homeless, 140,000

Ha flooded, 48 hospitals and clinics and 500 schools destroyed (200,000 children affected)

– Honduras, 10/1998 hurricane Mitch: 9000 dead, 1 m homeless, 70% of roads destroyed

– 1 billion at risk from desertification and soil degradation – 65% of which in rural Africa. Niger 2000-2005 drought

– One third of world population (1.7 billion) has no access to clean water, going to 5 billion in 2025! Climate change exacerbates this problem

Climate Change Impacts

• 1992 Climate Convention adopted. Objective of stabilizing GHG concentrations at safe levels

• 1997 Kyoto Protocol adopted– 36 Developed Countries and Economies in Transition (namely

Canada, Japan, EU15 and economies in transition) agreed in 1997 to:

– Reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012

– Total demand created for GHG Reductions: ~5 to 5.5 billion

• 2005 (February) Kyoto enters into force. • As of April 2006, 162 states ratified representing 61.6% of

developed countries– US / Australia will not ratify, but Australia will meet targets

International Response to Climate Change

How can Developed Countries/EITs meet their obligations under Kyoto?

• Domestic Reductions• Carbon Sinks: direct human-induced land use

change and forestry activities (limited to ~330 Mt/C02e)

• International Credits (Kyoto Mechanisms):– International Emissions Trading– Project –Based: Joint Implementation – Project – Based: Clean Development Mechanism

Baseline Emissions

Project Emissions

Emission Reductions

time

GHG Reductions

How the CDM works (I)

EmissionReduction

Specific place in host party

Specific place in host party

GH

G em

ission projection

GH

G em

ission Baseline Scenario Project Scenario

Host Party which does not have an

emission cap

Annex I Party or company which has an emission

cap

CER

Acquired CERs are added to the allowed emissions

Host Party benefits From technology and financial flows

$$

How the CDM works (II)

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

Other EU32%

UK12%

Gov. Netherlands16%

Japan21%

New Zealand7%

Canada5%

Australia3%

USA4%

World Bank purchases (22 % of total) attributed pro-rata to each participant in various carbon funds

Supply Concentrated in Middle-Income Countries

In percent of volume sold from January 2004 to April 2005

OECD14%

TransitionEconomies

6%

Africa0%

India31%

Rest of Asia14%

Brazil13%

Rest of Latin America22%

The World Bank Carbon Finance Program, the Carbon Funds and the Community

Development Carbon Fund

The World Bank’s main Objectivesin the Carbon Market

• Contribute to Sustainable Development– Support All Developing Countries To Maximize Gains from Carbon Finance

– Add Value to CDM Projects through safeguard policies/additional sustainable development value

• Catalyze the Carbon Market– Address market imbalances (e.g. poor countries, sequestration projects)

– Support the regulatory framework

– Expand the capacity of other FDIs through cooperation with other development banks

– Provide opportunities for ER purchases by private sector

• Strengthen capacity in developing countries to benefit from the emerging carbon market

World Bank Carbon Funds & Facilities

• Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose.

• Netherlands Clean Development Mechanism Facility. $170 million (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects.

• Community Development Carbon Fund. $128.6 million (closed). Multi-shareholder. Small-scale CDM energy projects.

• BioCarbon Fund. $53.8 million (Tranche One closed). Multi-shareholder. CDM and JI LULUCF projects.

• Italian Carbon Fund. $45 million (open to Italian participation). Multi-shareholder (from Italy only). Multipurpose.

• Netherlands European Carbon Facility. $40 million managed jointly with IFC (closed). Netherlands Ministry of Economic affairs. JI projects.

• Spanish Carbon Fund. $220 million (open to Spanish participation). Multi-shareholder (for from Spain only). Multipurpose.

• Danish Carbon Fund. $75 million (open to Danish participation). Multi-shareholder (for from Denmark only). Multipurpose.

• Umbrella Carbon Facility. [$930 million] (Tranche One). 2 HFC-23 projects in China.

Total funds pledged: ~ US$ 1.8 billion

Under development: Carbon Fund for Europe

How Carbon Funds Work

Industrialized Governments

and Companies

Developing Countries and Communities

Bank Managed Bank Managed Carbon FundCarbon Fund

Bank Managed Bank Managed Carbon FundCarbon Fund

$$Technology

Finance $$Technology

Finance

CO Equivalent22

Emission Reductions

CO Equivalent22

Emission Reductions

Payment on delivery of emissions reductions, not up-front capital costs

CDCF Main Features

• Concretely seeks to address CDM market failure, i.e. investors’ preference for large projects in middle-income, large, lower-risk developing countries.

• CDCF:– Invests only in CDM projects – Gives preference to small-scale projects (UNFCCC definition)– > 25% of resources invested in LDCs and other poor developing countries– Special effort to purchase credits from projects in sub-Saharan Africa

• Carbon + Development: projects must demonstrably improve the quality of life of host communities. Community Benefit Plans

• Tranche One closed at $128.6 million. Tranche 2 may be possible• All CFs administered by WB pay fair, risk-adjusted market prices for

emission reductions. CDCF typically pays a premium for projects in poor countries and with strong community benefits

CDCF: 13 Projects in Advanced Stage of Preparation. 33 projects in pipeline in total

Argentina: Olavarría Landfill Gas Recovery Colombia: Rio Frio Waste Water Treatment Honduras: La Esperanza Hydroelectric Project Moldova: Energy conservation Peru: Santa Rosa Hydroelectric Project Cambodia: National Biodigestor Program China: Guangrun Hydropower Development Project Guyana: Skeldon Sugar Modernization Project India: FaL-G Brick Units in Micro Sector India: Karnataka Municipal Water Pumping Improvements India: VSBK Cluster Brick Project Nepal: Biogas Program Philippines: Laguna De Bay Watershed Community Carbon

(wastewater, MSW, pig waste)

CDCF: Wide range of projects supported• Crop-residue to energy conversion (sugar-cane bagasse, wood

waste, rice straw/husk, peanut shells for co-generation or as fuels in cement production)

• Cooking stoves (rice hull, palm oil, etc, e.g. Nigeria Mayon Turbo Stove project)

• Biogas (animal production waste to energy conversion, e.g. biogas projects in Nepal and Cambodia)

• Mini hydro (10 to 20 MW range). Bundling necessary for projects with installed capacity of less than 10 MW

• Medium-to-large scale wind (20 MW and higher). Bundling necessary for projects with installed capacity of less than 20 MW

• Waste management (landfill gas flaring, composting, LFG-to-energy, human waste)

• Wastewater treatment (e.g. CH4 and N2O emission abatement in Colombia Rio Frio project)

• Fuel switch heavy fuels to gas in SMEs (with technology improvements)

• Energy efficiency, e.g efficient brick-making • Geothermal, passive solar

CDCF Project Criteria

• Desirable minimum ER quantity = 500,000 ERs over ERPA life. Very rough rules of thumb for estimating quantities in some technologies:– Hydro, 10 MW installed capacity, 0.6 EF = ~40,000 ERs/yr– Wind, 20 MW installed capacity, 0.6 EF = ~35,000 ERs/yr– Composting, 200 t/day of sorted untreated organic matter = ~40,000 ERs/yr– LFG flaring, 250 t/day of unsorted MSW (70% organic) = ~40,000 ERs/yr– Biogas, 150K household-size biodigestors = ~35,000/yr– Energy efficient brick-making, 70 VSBK plants (1.8 m bricks/yr each) =

~35,000/ERs/yr

• Hydro projects <20 MW. Bundles of mini-hydros, which in aggregate exceed the 20MW threshold, are also acceptable as long as each single plant in the bundle is within the 20MW limit

• No afforestation/reforestation projects (for the moment)• Start ER generation in 2008 latest• All projects should directly benefit the poor, e.g. they provide energy to the un- or

under-served, improve health, provide income and employment, etc. (a separate community benefits package may be agreed and paid for in projects lacking this attribute)

Basic Elements of Carbon Finance and Carbon Economics

Carbon Fund

Carbon Fund

$$ $$

22 22

Emission ReductionPurchase Agreement

BanksInvestor

DebtEquity

Waste Management Agreement

$$

Service

$$

CarbonCredits

Upfront payment as “Equity”Less than 25% of contract

Collateralization of ERPA

Role of carbon finance in project financing

Cashout

Cashin

Equity

Debt

Construction Capital for underlying c limate fr iendly project

Yrs 0 1 2 3 4 5 6 7 8 …………………………………….15-20

Carbon Revenues for10-21 years

World Bank Emissions Reductions Purchase Agree ment is bankable and additional revenue commitment helps bring projects to financ ial closure

= annual payments under carbon purc hase agreement

= annual payments under power purchase or othersource of revenues to underlying proje ct

Carbon sales revenues are commonly in the range from 10-50% of total revenues for power and waste management projects

Construc tion

Operation

Understanding the impact of carbon finance on project financing and financial sustainability

8

Key Features of Carbon Finance

• Both public and private capital – new and additional sources for sustainable development financing

• Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred. – Unlike most buyers in the market, Participants in Bank

Funds agree to take Kyoto regulatory risk: Hence, our carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk remained open.

• Payment stream is in hard currency, reducing financing risk for foreign lenders

Carbon Economics

CF impact

Purchase 7y Purchase 10y Purchase 14y Purchase 21y (% range)

Landfill 5.5 - 46.8% 13.9 - 48.8% 17.6 - 49.3% 20.3 - 49.3% 5.5 - 50

CH4 from coal 7.6% 9.7% 10.8% 11.5% 7 - 12

Biomass 1.9 - 3.5% 2.3 - 5.1% 2.6 - 6.3% 2.9 - 7.1% 2 - 8

Forestry 0.4 - 4.6% 0.9 - 5.7% 1.7 - 6.3% 2.6 - 6.8% 0.5 - 7

Renewable energy 0.2 - 1.7% 0.3 - 2.2% 0.5 - 2.6% 0.6 - 2.9% 0.2 - 3

District Heating 0.5% 0.6% 0.6% 0.7% 0.5 - 1

SectorImpact (%) @ price = $6.5/ton CO2e

SUMMARY SENSITIVITY ANALYSISINCREMENTAL IRR RESULTS - CONTRIBUTION OF CARBON FINANCE

SUMMARY SENSITIVITY ANALYSISSUMMARY SENSITIVITY ANALYSIS

Incremental IRR Results – Contributions of Carbon FinanceIncremental IRR Results – Contributions of Carbon Finance

Project Cycle

Preparation and review of the Project

Project Design Document

Validation process

Negotiation of Project Agreements

Periodic verification &

certification

Construction/Implementation and start up

Project completion

3 months

2 months

2 m

onth

s

3 months

1-3 years

Up

to 2

1 ye

ars

• Project Idea Note• Carbon Finance Document

• Baseline Study • ER estimates• Monitoring Plan

• Validation by independent Accredited Operation Entity•Submission of new method to CDM EB if needed

• Project Appraisal and related documentation• Emission Reduction Purchase Agreement• Project registration

World Bank/CDM Project Cycle – The Manufacturing Process for Emissions Reductions

• Initial verification report

• Verification and certification

• Supervision

ECA Carbon Finance Operations

Draft Approval Procedures (JI and CDM Projects) PIN Review

Project Idea Note (PIN) Submission Prepared and revised by sponsor

PIN Review (ENVCF) Technical, financial, baseline and additionality review by ENVCF within 10-15 business days of receipt

ENVCF Convenes Fund Coordinators Committee

(3 day, no objections)

Recommendation on Fund allocation

Designation of Fund Manager (ENVCF) following No Objective/ clearance by carbon funds

ECA Sector/Country UnitCF Operation entered in country portfolio (AIS)

Appointment of Deal Manager (DM) (ENVCF)

Virtual ECA Review and clearance (one week, no objection)

Consistency check with sector and country policies

Confirmation of Task Team Leader (TTL)

Preparation of budget proposal

ECA CF Coordinator Informs ENVCF of TTL’s name and AIS

code, and sends budget request

ENVCF Manager Informs ECA of DM’s name and finalizes budget transfer to managing sector unit

ENVCF request for Regional clearance of PIN

Information Flow

Information Flow

ECA CF Operations - Draft Approval Procedures (JI and CDM Projects) PIN to Emission Reduction Purchase Agreement

CF Operation Included in a New Bank Financed ProjectTask Team Leader prepares PCN and ISDS

Regional Review of PCN and ISDS

Task Team Leader prepares and processes PAD/MOP, including CF Operation, and organizes Safeguard

Review

Country Director and Sponsor sign Emission Reduction Purchase Agreement (ERPA)

Deal Manager registers ERPA

Project Implementation and Supervision

Information Flow

Information Flow

CFD Review by ENVCF

Deal Manager oversees Fund approval process

Deal Manager Prepares risk matrix

TTL and Deal Manager assist sponsor to prepare Project Design Document and monitoring plan, and

ensure completion of independent project validation

TTL and Deal Manager help Sponsor prepare Carbon Finance Document (CFD)

CF Operations - ECA Draft Approval Procedures (JI and CDM Projects)

From PIN to Emission Reduction Purchase Agreement (ERPA) Existing Bank Financed Project Restructured to Include CF Operation (Minor

Project Restructuring)

Country Director and Sponsor Sign ERPA

Deal Manager Registers ERPA

CF Operation Implementation and Supervision

Task Team Leader updates and obtains clearance of ISDS for CF Operation

Task Team Leader circulates Restructuring Memorandum to Country Director

Information Flow

Task Team Leader decides with Lawyer and OPCS that inclusion of CF operation implies “minor” project restructuring

Information Flow

CFD Review by ENVCF

Deal Manager oversees Fund approval process

Deal Manager Prepares risk matrix

TTL and Deal Manager assist sponsor to prepare Project Design Document and monitoring plan, and

ensure completion of independent project validation

TTL and Deal Manager help Sponsor prepare Carbon Finance

Document (CFD)

More Information about CDCF and Carbon Finance at the World Bank…

www.carbonfinance.org

www.carbonfinance.org/cdcf

Technological Distribution of Carbon Finance Unit Portfolio (Total $629 million)

HFC-23 Destruction, 32%

Waste Management,

18%

Energy Efficiency, 10%

Land Use, Land-Use Change and

Forestry, 7%

Wind , 3%

Biomass, 2%

Biogas, 1%

Bagasse, <1%

Geothermal, 1%

Transportation, <1%

Hydro, 14%

Coal Mine Methane, 10%

N2O Removal, 2%

Renewables 22%

Geographic Distribution of Carbon Finance Unit Portfolio (Total $629 million)

Africa7%

Latin America & Caribbean

19%

Middle East & North Africa

3%

East Asia & Pacific

52%

Europe & Central Asia

9%

South Asia10%