Carbon Finance at the World Bank Workshop on Large Project Finance Maputo, Mozambique 31 May & June 1, 2007 Antonio Nucifora, Senior Economist, World Bank (in collaboration with Andrea Pinna, Karan Capoor, Benoit Bosquet, and Noreen Beg, CFU World Bank)
Structure of the Presentation I. The Basics of Carbon Finance and key CDM Principles II. Latest Market Evolution III. CDM Project Cycle, and role of the World Bank
Structure of the Presentation I. The Basics of Carbon Finance and key CDM Principles II. Latest Market Evolution III. CDM Project Cycle, and role of the World Bank
Carbon Finance gives value to Carbon Credits (CERs) generated by ‘Clean Development Mechanism’ Eligible Investment Projects
How Carbon Funds Work Technology $ Industrialized Governments and Companies Technology $ Finance Bank Managed Carbon Fund Finance Developing Countries and Communities CO Equivalent 2 Emission Reductions Payment on delivery of emissions reductions, not up-front capital costs
Role of carbon finance in project financing Investor Upfront payment as “Equity” Banks Equity Debt Less than 25% of contract Collateralization of ERPA Power Purchase Agreement $$ Electricity $ $ Carbon Credits Carbon Fund 2 $$ 2 Emission Reduction Purchase Agreement (ERPA)
Key Features of Carbon Finance • Payment on Delivery: payments made upon annual independent verification that ER have occurred. • Other resources must be found to cover the investment cost • If project entity requests an advance payment – – – Proof would have to be given that there is no alternative Would be limited to max 25% of the ERPA value Price per ton would be discounted to reflect the risk of non-delivery Bank guarantee would be requested No upfront payment has been granted for any of the 22 projects cleared • Payment stream is in hard currency, reducing financing risk foreign lenders
Carbon finance: payments for a stream of emission reductions Cash in = annual carbon payments = other sources of revenue from service or production = debt servicing Debt Carbon revenues Operating revenues Equity Construction Yrs 0 1 2 3 4 5 6 7 8 …………………. 15 -20 Cash out Emission Reductions (ER) created only after project is implemented and operational.
A key concept: ADDITIONALITY • 1 CER = 1 more ton CO 2 emitted in Annex 1 countries • Only emission reductions that are ADDITIONAL to emission reductions that would have occurred without CDM Example: an already commissioned hydro power plant that displaces CO 2 emissions from diesel generation would not be considered additional. The CDM must be a deciding factor in the decision to go ahead with the project Additionality established on the basis of: • Financial Analysis : Additional cost, lower IRR, etc… OR: • Barriers preventing the “clean” project to take place: – – Difficulties to achieve financial closure (no long term commercial loans) Technology Risk: first of kind in the country Social / market acceptability (scavengers resettlement for landfill gas to power) Etc.
Types of Carbon Projects • Hydroelectric power offsetting the need for coal- or gasfired generation • Extending grid to reach customers currently using diesel or kerosene • Reducing CO 2 and possibly methane (a potent greenhouse gas) by generating energy and bio-fuels from sugar industry by-products -- bagasse and molasses • Replacing firewood/kerosene/cowdung with biogas from livestock and human wastes • Extracting methane from landfills or avoiding its generation trough composting organic waste in urban dumpsites • Extracting methane from disposal of sewage sludge • Capturing N 20, a powerful greenhouse gas, from fertilizer production • Sequestering CO 2 by tree planting, small plantations, land restoration (limited capacity to buy though)
Carbon economics Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/t. CO 2 e Technology Hydro, Wind, Geothermal Crop/Forest Residues Municipal Solid Waste Delta IRR financial 0. 5 -3. 5% 3 -7% 5 -15+%
Structure of the Presentation I. The Basics of Carbon Finance and key CDM Principles II. Latest Market Evolution III. CDM Project Cycle, and role of the World Bank
Latest Market Evolution Carbon is mainly a financial trading market • Over US$27 billion in 2006, mainly from trading • Market value arises from trading: sale, re-sale for hedging, arbitrage + compliance Project-based market stabilizes • Current/expected transactions in 2006 likely to equal 2005 volumes (US$11 billion) • Biggest Primary CER Sellers: China (69%) and India (10%) • Growth rate of new CDM pipeline slows as 2012 looms • Already more than $5 billion of North-South net transfer before end of 2012 400 12. 00 Annual Volume of T 350 Project-based ransactions (Million t. CO 2 ) e US$ 10. 47 10. 00 300 250 US$ 7. 25 200 Average price US$ 4. 99 (US$ per t. CO 2 e) 150 8. 00 6. 00 4. 00 100 2. 00 50 0 1998 1999 2000 2001 2002 2003 2004 0. 00 2005 Jan-Nov'06 Source: State and Trends of the Carbon Market 2006, The World Bank
CDM Asset classes Share of Clean Energy Rises (share of volumes) Clean energy: 11% Jan. 2005 to Dec. 2005 Clean energy: 25% Jan. 2006 to Dec. 2006
Structure of the Presentation I. The Basics of Carbon Finance and key CDM Principles II. Latest Market Evolution III. CDM Project Cycle, and role of the World Bank
CDM project cycle The CDM Executive Board (EB) oversees the CDM project activity cycle: 5. Certification 1. Project Design Document: Preparation and Issuance: Acceptance of verified emission reductions and issuance of credits by CDM EB of project documentation applying an approved methodology for calculating emission reductions 4. Verification of generated emission reductions by an accredited verifier 2. Validation of project documentation by environmental auditor accredited by CDM EB 3. Registration : Acceptance of project by the CDM EB Project sponsor Accredited auditor CDM Executive Board
The World Bank’s Objectives in the Carbon Market • Contribute to Sustainable Development – Support Developing Countries To Maximize Gains from Carbon Finance – Add Value to CDM Projects • Catalyze the Carbon Market – Develop new markets and sectors for carbon finance – Build Capacity in Client Countries – Provide Liquidity to the Market
World Bank Carbon Funds & Facilities Total funds pledged = US$ 2. 02 billion (16 governments, 65 firms) • Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose. • Netherlands Clean Development Mechanism Facility. $268. 3 million (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects. • Community Development Carbon Fund. $128. 6 million (closed). Multishareholder. Small-scale CDM energy projects. • Bio. Carbon Fund. $77. 4 million (Tranche 1 closed @ $53. 8 million; tranche 2 open). Multi-shareholder. CDM and JI LULUCF projects. • Italian Carbon Fund. $155. 6 million (closed). Multi-shareholder (from Italy only). Multipurpose. • Netherlands European Carbon Facility. $56. 6 million (closed). Netherlands Ministry of Economic affairs. JI projects. • Spanish Carbon Fund. $282. 4 million (closed). Multi-shareholder (from Spain only). Multipurpose. • Danish Carbon Fund. $69. 4 million (closed). Multi-shareholder (from Denmark only). Multipurpose. • Umbrella Carbon Facility. $737. 6 million (Tranche 1 closed – 2 HFC-23 destruction projects in China). • Carbon Fund for Europe. $65 million. Multi-shareholder. Multi-purpose. Managed with EIB.
World Bank CDM project cycle 10. End of contract period (may be post-2012) 1. Project identification & inclusion • PIN submission by sponsor • PIN acceptance and fund allocation • Agreement with region • Letter of Intent 2. Carbon asset due diligence • Evaluate methodology and additionality • Project Design Document • Quality control of project documentation 9. Certification and Issuance 8. Verification 3. Project due diligence (e. g. , environmental and social safeguards) 7. Construction and start up 4. Validation 6. Registration 5. Negotiate and sign Emission Reductions Purchase Agreement (ERPA) Project sponsor Accredited auditor CDM Executive Board WB-CF
THANK YOU ! www. carbonfinance. org Antonio Nucifora anucifora@worldbank. org tel: +258 21 482371
CDM Executive Board Project Host ►Registers projects validated by OEs Country ►Approves Baseline and Monitoring Methodologies ►Accredits the Certifiers (Operational Entities) ►Letter(s) of Approval by Participant Countries Cycle Before Project ►Forwards the Application for ►Calculates "Baseline" and Validation and prepares a PDD (Project Registration Project Developer Design Document) using an Approved Methodology ► validation report and registration application Designated Operational Entities ►Validate proposed CDM projects and forward applications to EB for registration
Project Host Country ►Letter of Approval CDM Executive Board ►Registers projects validated by OEs ►Issues the Certificates (CERs) ►Approves Baseline and Monitoring Methodologies ►Accredits the Certifiers (Operational Entities) Cycle during Project ►Forwards the Application for ►Calculates "Baseline" and Validation and prepares a PDD using Registration Project Developer approved Methodology ►Monitor Emissions during the project and calculates Emissions Reductions ►Requests validation of Emission Reductions to get the CERs ► validation report and registration application ►verification & certification report and request issuance of credits (CERs) Designed Operational Entities ►Validate proposed CDM projects and forward applications to EB for registration ►Verify and certify emissions reductions
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