Screening Projects for Carbon Finance Lessons Learned from the Bank’s Portfolio www. carbonfinance. org
What we look for during PIN Review: • Clear description of project activities and type of technology • Identification of project participants and Institutional arrangement for project implementation o Roles of participants and their technical and financial capability to undertake them. o Identification and status of the third party involvement such as PPA negotiation in case of a electricity generation project or an agreement with municipal government regarding ownership of the waste in case of a landfill project • Demonstration of additionality and determination of baseline Scenario and Emission Reductions o why the project should not happen on its own? o What could have happened in the absence of the project? o Sources of emission reductions and total ER volume Contd. . .
What we look for during PIN Review: • Project Financing o Determination of project costs o Identification of underlying finances and expected financing gap o Financial analysis -- How will the carbon financing impact on the implementation of the project? • Demonstration of Environmental sustainability o The status of EIA and/or acquisition of relevant environment certificates such as FSC (Forest Steward Council) certificate for a biomass project o Compliance with social and environmental safeguard requirements plus relevance to the sustainable development priorities of the host country • Community Benefit (if a project is small scale and is eligible under the CDCF) – Type of benefits the project can generate for local communities
Basis for the PIN Selection: • Commercially viable technology • Credible baseline scenario and adequate ERs volume o the ER volume must be big enough to make a project viable under the CDM -- for example, a small-scale project should generate a minimum threshold of 30, 000 t. CO 2/year. • Competent Project participants and clear institutional arrangement o Technically experienced and sound project developers with clear division of functions. o Demonstration of sound legal arrangement -- for example, who owns, who operates, and what type of agreement between project participants as well as with third party (e. g. power purchase agreement, ownership agreement, water right) • Viable business and operation model that help reduce transaction costs o Potential for scale up o Involvement of intermediaries who can invest, bundle, and implement project-related CDM services locally Contd. .
Basis for the PIN Selection: • Sound financing structure o Sound financial health of project sponsors and co-financiers. o The sooner the project can achieve financial closure, the better the chances of selection are • CDM/JI eligibility o Has the host country ratified KP or expressed its intention to ratify KP in due course? • Environment impact and sustainability of the project o In consistent with the WB’s social and environmental safeguard requirements AND the host Country’s overall sustainable development framework • Sizable community benefits o Most eligible criteria for small-scale project under the CDCF
Types of Information Necessary to Convert the Project to a PCN Same types of Information as in the PIN but in more details. A number of additional requirements are as follows: • Sector background – government policy and programs, sectoral structure, legal framework, etc. • Credible argument on additionality and a summary of plausible baseline scenario with identification of the baseline methodology and calculations of ERs flow. • On the design of project implementation and finance: o Finalization of the business and operation model o Completion or near-to-completion of negotiation with project cofinanciers or the third party if involved o Detailed financial analysis – a clear demonstration of how carbon revenues contribute to the implementation of a project? o Preparation of risk matrix • Detailed implementation plan of community development component including demonstration of community benefits and the possible indicators of measurement (if a project is small-scale and is being considered under the CDCF)
What Doesn’t Work: • Insufficient state of project preparation. – Underlying projects must be well prepared (feasibility study, risk assessment, financing). – The project must be viable business proposition. – Committed project equity partners should be identified. – The sector must be competitive if a project is to be viable. • Claimed baseline contradicts other information. – Baseline claim must be credible and consistent with government policy etc. – Consistency with guidelines on baselines and additionality.
What Else Doesn’t Work: • Project contradicts social and environmental safeguards. – World Bank due diligence must show that project meets World Bank safeguard policies. – Project must meet domestic social, environmental and development requirements and policies. • Project inconsistent with policy and good public governance. – Project must be comply with government sector policy. – Project must be consistent with World Bank sector and country assistance strategy.
Why Some Sectors Lack Representation in the CF Project Portfolio? Transportation • At current prices, large investments to reduce emissions compared to potential carbon revenue for transportation projects • Difficulties in determining baseline emissions -- monitoring difficulty and leakage Photo Voltaic • Low potential for scale up due to barriers in large market penetration, hence small ER reductions • Expensive • Difficulty in monitoring because of large sample of PVs Industrial processes • Lack of knowledge and supply
Business Environment Required for Successful Projects ü A credible project sponsor to mobilize financing. ü Early involvement of credible technical, financial, and economic specialists to establish that all project selection criteria are in place. ü Pool of in-house resources to bring to completion projects that are technically sound and sustainable. ü Upstream due diligence on carbon asset and financial risk. ü Early review of credibility of baselines and determination of project additionality.
Regulatory Environment Required for Successful Projects ü CDM/ JI is a competitive market ü To attract investments in CDM /JI countries, private sector more likely to invest if host country has: – Clear and consistent approach to sustainable development – Clear procedures for project approval (or refusal!) with specific timelines – Single window approach: DNA to assist project proponents in complying with all applicable laws, including those regarding environmental impact assessment – Designated a national authority (that has sustained funding) ü Above all, approving a project under the CDM/JI should not be more complicated than approving a regular project
A key instrument for success: Intermediation Intermediaries help to • Identify project opportunities at lower cost • Get equity and debt financing when the intermediary is a financial institution • More effectively design and/or evaluate projects • Reduce transaction costs Example of Infrastructure Development Finance Corporation (IDFC), India • The most successful intermediaries agreement • More than 10 project opportunities identified/ evaluated • Substantial reduction in transaction costs
What is the WB doing to help? ü Project sponsors are now asked to be more pro-active in delivering financing and in preparing technical assessments. ü CF team, World Bank Institute and World Bank Operations and Regional Offices will continue to provide support to Bank and thirdparty projects ü Lessons learned are being integrated into training modules.
Screening Projects for Carbon Finance Lessons Learned from the Bank’s Portfolio Introduction to Carbon Finance Task Team Training Carbon Finance March 10, 2004 www. Carbonfinance. org
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