Brazil PLANTAR Project Sustainable Fuelwood and Charcoal Production

Brazil: “PLANTAR” Project Sustainable Fuelwood and Charcoal Production and Substitution of Coke in Pig Iron Production Sao Paulo November 21, 2002

PROJECT SPONSOR The Plantar S/A is privately held family company founded in 1967. Silviculture: Forest services - plantation & seedling production supporting 25, 000 ha/yr (>400, 000 ha so far) Charcoal production: Charcoal from sustainable harvested sources for lump charcoal export market and for Pig Iron production Pig iron production: 180, 000 t/yr < 1% of country’s foundry pig iron production, but represents 4% of the independent producers using charcoal

SECTOR BACKGROUND Without carbon finance, plantation, charcoal based pig iron production cannot survive and their market share will be taken over. Steel producers (coal based) Pig iron producers Foundry pig iron Pig iron export 25, 212, 570 t 2, 665, 000 t Coal based industries 18, 833, 000 t Charcoal based integrated independent producers 1, 617, 000 t Indigenous forest 4, 762, 570 t Plantation

EMISSION REDUCTIONS BY COAL SUBSTITUTION IMPORTED COKE from CHINA, POLAND, JAPAN

Project Objective: To make sustainable charcoal production a viable alternative to coke in pig iron production Project: Four Components Sustainably managed Eucalyptus plantations (FSC certified) on land that was pasture in 1989: 23, 100 ha (3, 300 ha x 7 years); Project lifetime 21 years (3 harvesting cycles of Eucalyptus) Restoration Forestry: Reforestation of pasture land with native Cerado forest: 478 ha Improved Charcoal production: (reducing methane and local pollution) Charcoal displacing Coal/Coke in Pig iron production and produced for lump charcoal market in Europe

Project Financing Required Investment for Core Proposal Entire investment (for newly established plantation): US$38. 8 million PCF contribution at $3. 50/t. CO 2 e = $5. 3 million Other carbon finance potential = ~$10 -20 million Financial Structure and IRR Plantar Equity: $33. 9 million injected over seven years Debt financing: $4. 9 million up front IRR without Carbon finance, 12. 5%; with CF, 20. 7%

Project ERs Category of ERs (t/CO 2) by source over project life Substitution of Coke in Blast Furnace 7, 903, 262 Sequestration in Plantations and Forest Ecosystem Rehabilitation 4, 545, 398 Methane Emissions Reductions 437, 325 Totals 12, 885, 985

Component 1: Sequestration ERs 23 100 ha of Eucalyptus Plantations Based on Advanced Clones

CARBON STORED IN THE PLANTATION

Biodiversity and Land Management Certifiable Benefits • Production and Conservation Landscape – 4600 ha of set-aside managed for restoration of Cerado dry forest – no carbon credit – 478 ha of additional restoration forest – for carbon credit – Biodiversity, soil and water quality baseline validated with monitoring protocol • Forestry Stewardship Council (FSC) certification in place for existing plantations – Must be obtained and maintained for future plantations • Biodiversity Asset Certified and bundled with Carbon

Component 2: Carbonization ERs Reduction of Methane Emissions from Charcoal Production 0. 4 million CERs

Traditional Brazilian Brick Beehive Kiln used in about 90% of Brazilian charcoal operations Efficiency: about 4 m 3 wood for 1 m 3 Charcoal

Improved Brazilian Brick Kiln: < 2 m 3 wood to 1 m 3 charcoal (The baseline for charcoal production)

The Project’s Charcoal Production Flares Methane with automatic spark ignition device, collects tars/oils in smoke – minimizes local air pollution.

Social and Health Benefit Certified • Charcoal Worker Respiratory Health – Monitoring protocol established and validated • Certification of good labor practices and no use of child labor – ABRINQ independent certification standard in place – To be maintained under carbon purchase contract

Component 3: Industrial ERs Substitution of Charcoal in Pig Iron Production 7. 9 million CERs

Environmental Standards for Plant Emissions • Minas Gerais State licence in place that plant is is operating under loal environmental requirements • Upgraded charcoal dust filtration system installed to mitigate health hazard • ISO 14000 certification process in train for approval by mid-2003

Component 4: Cerrado Forest Restore native Cerrado forest to enhance biodiversity ~ 80, 000 CERs

Brazil Plantar Project in Overview Environmentally sustainable industry Certified Outcomes: Biodiversity restored in native forests. Worker heath improves Use of imported coal-coke in pig iron and forest loss Cost: $38. 8 million Energy: lower cost sustainable charcoal replacing imported coal PCF Project $5. 3 mm from PCF; ~$10 -20 mm from other carbon sales Outcomes: small pig iron sector survives, rural employment increases Baseline Project Biodiversity Impact: end of small pig iron loss, land producers, loss of rural degradation employment, out migration

BaselineMVP Approach for Plantar • Fuel-Switching Component – Scenario analysis based on historical trends – Investment constraints (most plausible approach cannot be financed without carbon) – Monitor industry wide production to detect leakage • Charcoal Production Emissions Reductions – Historical and current charcoal-making technology – Control group of 10 peers in pig iron industry; included in MP for revalidation (>50% rule) • “Cerrado” Rehabilitation – Scenario analysis based on historical trends: deforestation – Investment analysis (if needed)

Issues in Validation • • 1. 2. 3. 4. Final Validation Opinion issued. Preliminary only with respect to Co. P 9 rules on A/R sinks Key issues were: Eligibility of end-of-life plantation lands for CERs Leakage of “deforesting” pig iron industry to other Brazilian states to avoid charcoal raw material resource crunch Emissions Coefficients for Pig Iron Coal/Coke baseline “Double-counting” of methane emissions from charcoal kilns

Plantar: Issues in Validation Eligibility of “sequestration reductions” from replanting end-oflife eucalyptus plantations Issue: DNV claimed that it was “conservative and reasonable” to assume that Parties would make eligible at Co. P 9 only those ERs from land that was pasture in Dec 1989 • Response: Plantar had to commit to buy all new land that can be proven to be pasture in December 1989 • Response: To avoid “leakage”, Plantar had to assume all former end-of-life plantations were deforested and deduct these “losses” from sequestration on new pasture land; • Response: To further avoid leakage, Plantar must monitor the former land-owners to assure that they don’t deforest!

Plantar: Issues in Validation Coefficients for displacement of coal/coke emissions by climate-neutral charcoal from plantations during pig iron production. Issue: DNV proposed either use of IPCC default values which were ~20% lower than claimed or detailed proof of proposed coefficients • Response: Detailed engineering process analysis new was commissioned and agreed with DNV proposed submitting the process to IPCC to create new default value for this process

Plantar: Issues in Validation Claiming Methane Emissions Reductions from flaring methane in exhaust gases from charcoal production after charcoal is produced from new plantations Issue: DNV noted that such ERs could not be claimed after 2008 when new plantations were converted to charcoal as it would be “double-counting” baseline emissions as per agreed carbon emissions coefficient. • Response: Plantar/PCF agreed. Claims eliminated for charcoal produced for pig iron production and claimed only for lump charcoal trade production • Response: Plantar agreed to continue flaring methane after 2008 in pig iron charcoal kilns

Plantar: Issues in Validation Leakage of small scale blast furnace operations from Minas Gerais to Carajas State as plantation estate declined due to lack of replanting in Minas Gerais (baseline case). Issue: DNV claimed that such leakage may occur despite impending shortage of native forest in Carajas and lack of investment capital for new blast furnace construction. Response: Plantar will maintain detailed record of pig iron production from plantation and native charcoal sources in Minas Gerais and Carajas, with and without benefit of carbon finance

Emission Reduction Purchase Agreement PCF Purchase - 1. 51 million ERs at cost of $5. 3 million - Or $3. 50 per tonne CO 2 e - PCF purchase planned for 2004 -2008 - Replacement CERs planned for 2008 -2012 - PCF purchase enables Sponsor to secure $4. 9 million loan to enable planting

Brazil Biomass/Pig Iron Project ER payments are used to amortize commercial loan.

PCF Emissions Reduction Purchase Options OPTION 1 OPTION 2 2002 -2008 2002 -2012 Sequestration ERs 1, 300, 402 213, 884 274, 389 Carbonization ERs Industrial ERs TOTAL ERs 1, 239, 897 1, 514, 286 $3. 50 per tonne CO 2 e

OPTION 1: PCF Emissions Reduction Purchase

OPTION 2: PCF Emissions Reduction Purchase

Emission Reduction Purchase Agreement • Allocation of Kyoto Protocol Risk - Brazil has ratified Protocol - Seller covers eligibility risk of sequestration reductions with obligation to substitute with Carbonization and Industrial ERs - Host Country to issue Letter of Approval within 180 days of entry into force

Management of Project Performance Risk • Market—ERPA paying on delivery of early sequestration ERs and carbonization CERs makes project feasible (early cash flow). • Environmental-- Sponsor to maintain quality assurance program, continue to qualify forestry certification, and operate in conformance with local environmental regulations and World Bank safeguard policies • Social--sponsor to maintain certification for sound labor practices

Conditions of Default and Remedies Kyoto • Failure to secure and plant land that was pasture in 1989 Environmental and Social • Failure to: - maintain FSC certification and certify new land - maintain Abrinq certification - comply with MP, permits, environmental and social law