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Bio. Carbon Fund Rules of Engagement Bio. CF Project Training Seminar Washington, DC July Bio. Carbon Fund Rules of Engagement Bio. CF Project Training Seminar Washington, DC July 13, 2005 Harnessing the carbon market to sustain ecosystems and alleviate poverty

Key Milestones n All contracts (Emission Reduction Purchase Agreements or “ERPA”) to be signed Key Milestones n All contracts (Emission Reduction Purchase Agreements or “ERPA”) to be signed by June 30, 2006 n Purchasing period: up to 2017 (60% of ERs delivered by 2012 for Window 1) n Bio. CF will maximize 2006 -2012 portion of ERs delivered by each project to Window 1 n Bio. CF will require that projects ensure permanence until 2037

Validation n Previous presentations by Lasse, Bernhard, Sandra n Assumption: Bio. CF Fund Management Validation n Previous presentations by Lasse, Bernhard, Sandra n Assumption: Bio. CF Fund Management Unit (FMU) adds value to the project, especially in terms of methodological input n FMU requests to be involved in the methodological process n Before ERPA is signed n Methodologies must have been submitted to CDM Executive Board by Operational Entity hired by the FMU n FMU must have reviewed the draft submissions n Pre-validation report by Operational Entity must be available n Pre-validation assumes that submitted methodologies are approved

Permanence n Unlike climate change mitigation through energy activities, the climate impact of LULUCF Permanence n Unlike climate change mitigation through energy activities, the climate impact of LULUCF activities only lasts as long as carbon is sequestered n “Permanence” = sequestration for the very long term n Bio. CF looks for long-term carbon sequestration n Bio. CF will pay annually based on increments in carbon stocks, but never above the long-term average storage n Co. P 9 rules on temporary crediting n Prices diverge from Co. P 9 implications (see later) n Liability for replacement: n Project bears replacement responsibility until 2037 n Bio. CF bears replacement responsibility thereafter

Co-benefits n n Bio. CF wants to buy “green carbon with human face” Social: Co-benefits n n Bio. CF wants to buy “green carbon with human face” Social: Improve livelihoods People receive carbon payments n New job creation n Additional income from alternative activities n Know-how n n Environmental n n n n Conserve biodiversity Expand natural habitat Reconnect forest fragments Protect soil against erosion Fight against desertification Moisture retention Stabilize radionuclides in biomass

Price: Basics n To be attractive to investors, Bio. CF must be costeffective: buy Price: Basics n To be attractive to investors, Bio. CF must be costeffective: buy low-cost climate change mitigation opportunities n Price assumes quasi-permanence, so can approach that of CERs or ERUs from energy/infrastructure projects n n Full price paid when the sequestration is achieved (unlike the “rental” mode provided for under CDM/Co. P 9 rules) Indicative contract price ranges (to be negotiated): n n $4/t CO 2 e (ERUs) n n max $4/t CO 2 e (t. CERs/l. CERs) < $3/t CO 2 e (Window 2) Bio. CF pays on delivery of Verified Emission Reductions (VERs)

Pricing n Little or no LULUCF market reference: Bio. CF is breaking new ground Pricing n Little or no LULUCF market reference: Bio. CF is breaking new ground n Mostly voluntary or retail transactions, not Kyoto grade or large volumes n Energy and infrastructure projects generate permanent ERs n To determine offer price to project within ranges, FMU factors in perceived benefits and risks. Pricing is a n positive function of co-benefits n negative function of risks

Benefit and Risk Analysis (1) n Several categories of risks n Regulatory risks n Benefit and Risk Analysis (1) n Several categories of risks n Regulatory risks n Project risks n Country risks n Market risks n Principle: allocate risk to party best able to bear it (seller or buyer) n Most risks affect both the seller and buyer

Benefit and Risk Analysis (2) n Regulatory risks At methodology submission: methodology rejected (Seller Benefit and Risk Analysis (2) n Regulatory risks At methodology submission: methodology rejected (Seller + Buyer) n At project registration: project found not to be additional (Buyer) n n Project risks n Lower-than-expected ER potential (Seller + Buyer, depending on ERPA) n Technological failure n Non-permanence n Leakage n n No financial closure (Seller + Buyer) Country risks Legal challenges to sale of ERs (Buyer + Seller) n Host Country rejection: no Letter of Approval (Seller + Buyer) n Expropriation of assets (Seller + Buyer) n n Market risks n n Lack of tradability (CDM, EU ETS) (Buyer) Reputational risks Environmental (Buyer + Seller) n Social (Buyer + Seller) n

Benefit and Risk Analysis (3) n Co-benefits n Environmental n Social n Need to Benefit and Risk Analysis (3) n Co-benefits n Environmental n Social n Need to include a couple of relevant but simple indicators of environmental and social improvements in the Monitoring Plan and track them during project implementation n Benefits command premium embedded in the price of an ER n To the extent possible, co-benefits will be disclosed in the ER certificate to educate buyers

Benefit and Risk Analysis (4) n Need to achieve some consistency in ER pricing Benefit and Risk Analysis (4) n Need to achieve some consistency in ER pricing across the Bio. CF portfolio n FMU will quantify the perceived co-benefits and risks of each project n Quantification will be discussed with project entity as prelude to ERPA negotiations and within limits of provisions of Letter of Intent

Cost Recovery n 100% of project preparation costs pre-financed by the Bio. CF will Cost Recovery n 100% of project preparation costs pre-financed by the Bio. CF will be charged back to projects in the form of withholdings from ER payments n Negotiated item n Never a negative transfer back to Bio. CF n Costs capped in the Letter of Intent and ERPA n If Bio. CF also prefinances implementation costs (supervision and certification) these will also be charged back n Same rule as for preparation costs n Apply for Japanese PHRD grant or other grants to finance some preparation costs

Payment Schedule n On delivery, not in advance: annual payments (in accordance with Monitoring Payment Schedule n On delivery, not in advance: annual payments (in accordance with Monitoring Plan) upon receipt of a verification report that a certain number of tons of CO 2 have been sequestered = Verified Emission Reductions (VERs) n Other resources must be found to cover the investment cost n Bio. CF will pay for VERs even if project is not registered by the market regulator n If project entity requested an advance payment n Proof would have to be given that there is no alternative n Would be limited to max 25% of the ERPA value n Price per ton would be discounted to reflect the risk of non-delivery n Bank guarantee would be requested

Communication with Regulator n CFB reserves right to communicate with CDM Executive Board and Communication with Regulator n CFB reserves right to communicate with CDM Executive Board and Art. 6 Supervisory Committee VERs on behalf of project entities to increase chance of VER conversion to t. CERs/l. CERs, ERUs n Logical corollary of payment for VERs

Project Cycle 1 Preparation • Project Idea Note (PIN) and reviewed by Fund Management Project Cycle 1 Preparation • Project Idea Note (PIN) and reviewed by Fund Management Unit (FMU) • Carbon Finance Document (CFD) prepared by project sponsor • CFD reviewed by Fund Management Committee and Participants’ Committee • Start of World Bank technical, financial, environmental and social due diligence (identification + preparation) • Host Country endorsement (letter of no-objection) • Inclusion in portfolio • FMU signals intention to purchase ERs: Letter of Intent 6 m

Project Cycle 2 Methodology • Project Design Document (sponsor/FMU) • Baseline Study (BLS) & Project Cycle 2 Methodology • Project Design Document (sponsor/FMU) • Baseline Study (BLS) & Monitoring Plan (MP) for carbon, environmental and social benefits and ER calculation prepared by project sponsor/consultant + FMU quality control • [FMU submits new methodology submission (NMB and NMM through Operational Entity)] • World Bank due diligence continues (preparation) 6 m 6 m

Project Cycle 3 Validation • [Pre-validation of BLS / MP for carbon, environmental and Project Cycle 3 Validation • [Pre-validation of BLS / MP for carbon, environmental and social benefits by Operational Entity (DOE/AE) (before methodologies are approved)] • Pre-validation Report • DOE/AE assesses ERS • Host Country Letter of Approval • Validation Report (after methodologies are approved) • World Bank appraisal 6 m 6 m 2 m

Project Cycle 4 Negotiation • • • 6 m [FMU drafts Term Sheet (main Project Cycle 4 Negotiation • • • 6 m [FMU drafts Term Sheet (main clauses of a future contract in plain English)] Consultations/negotiations with sponsor Term Sheet signature World Bank lawyers draft contract (Emission Reductions Purchase Agreement, or ERPA) ERPA negotiations ERPA signature (by June 2006) 6 m 2 m 3 m

Project Cycle 5 Project Start-Up • • 6 m Project registration Start of activities Project Cycle 5 Project Start-Up • • 6 m Project registration Start of activities (at the latest – planting may have started earlier) Independent Initial Verification to ensure that MP is fully operational Start of monitoring 6 m 2 m 3 m 1 -5 y

Project Cycle 6 Implementation • • • 6 m Periodic verification & certification reports Project Cycle 6 Implementation • • • 6 m Periodic verification & certification reports (sponsor + DOE/AE, in accordance with MP and contract) Bio. CF pays project sponsor for verified ERs distributed to Bio. CF investors pro rata to their share of the fund Bio. CF buys a certain tonnage, not for a certain period of time Purchase up to 2017 World Bank supervision (until forest established) 6 m 2 m 3 m 1 -5 y 12 y

Long-term average storage Long-term average storage

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