World Banks Know How on CDM

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World Banks Know How on CDM
Claudia Croce Carbon Finance Unit The World Bank
Group
March 13, 2009 Milano
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Todays discussion
Why are carbon markets important?
How do carbon markets work?

• The CF in 2008 onwards (within Kyoto)

And beyond mainstream to the CC Agenda
Carbon finance at the WB
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The Kyoto Protocol (adopted in 1997 and entered
into force in 2005)

• Kyoto commitments
• A total reduction of about 5.0-5.5 billion tCO2e
  over the 2008-2012 period
• Kyoto targets may be achieved by
• Industrialized countries reducing domestic
  emissions
• Trading emission permits (allowances) among
  companies and Assigned Amounts Units (AAUs)
  among governments
• Purchasing emission reductions credits from
  projects
• In developing countries (Clean Development
  Mechanism CDM)
• In economies in transition (Joint Implementation
  JI)

Carbon Funds
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How does the CDM work?

• Important Methodological Issues
• Baselines are counterfactual/hypothetical
• -Determining Additionality

emissions
time
The difference between the actual project
emissions and the emission baseline constitutes
the volume of emission credits If project
baseline ? no credits
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Carbon Trade
Developing country with no emissions target
Industrialized country with emissions target
Emissions cap
Domestic Action
Emission Reductions
ERs
sale/purchase
ERs
Actual emissions (1990 level)
Emission Reductions (ERs) are commodities in the
carbon market
Allowed emissions
Business As Usual
Improved Technology
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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
• Payment stream is in hard currency, reducing
  financing risk for foreign lenders

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The World Banks role in the carbon market the
first 10 years

• Climate change hurts poor countries and
• undermines their development.
• Catalyze the carbon market (early participant)
• Learning by doing
• Provide information for negotiating Parties
• 25 of all approved methodologies in 2005
• Crowd in private sector
• Develop business models in the carbon market
• E.g., programmatic CDM
• Promote sustainable development and flow of new
  financial resources
• Buy emission reductions for compliance as trustee
  of carbon funds

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How carbon funds work
ER payments ()
Fund resources ()
World Bank- managed carbon funds
Industrialized governments and companies
Developing countries/ Economies in transition
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Typical Project Structure
Investor
Bank
Equity
Debt
Revenues
Revenues
WB Carbon Funds as Trustee
Emission Reductions Purchase Agreement (ERPA)
Waste Management Service Agreement
Emission Reductions
Waste Management Service
Collateralization of ERPA In some cases, the
World Bank makes an upfront payment as
Equity. This participation is always less than
25 of contract.
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World Bank Carbon Funds FacilitiesTotal funds
pledged US 2.30 billion (16 governments, 66
firms)
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World Bank Carbon Funds FacilitiesTotal funds
pledged US 2.30 billion (16 governments, 66
firms)
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Typical Project Cycle Generating Emission
Reductions

• 1. Project identification
• Project Idea Note (PIN) submission by sponsor and
  reviewed by ENVCF
• PIN acceptance and fund allocation
• Agreement with Region

9. End of contract period (may be post-2012)
8. Acceptance of verified emission reductions and
issuance of credits by CDM EB (Certification and
Issuance)
2. Preparation of project documentation applying
an approved methodology for calculating emission
reductions (Project Design Document)
7. Verification of generated emission reductions
by an accredited verifier
6. Construction and start up
3. Validation of project documentation by
environmental auditor accredited by Clean
Development Mechanism Executive Board (CDM EB)
5. Acceptance of project by the CDM EB
(Registration)
4. Negotiate and sign Emission Reductions
Purchase Agreement (ERPA)
Project sponsor
Accredited auditor
CDM Executive Board
WB Carbon Finance Unit (ENVCF)
Note In prompt start projects, registered
before end 2005, Step 6 may precede Steps 3 and 5
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World Bank Assessment of Carbon Finance Projects

• All projects (more than 400) considered by the WB
  have gone through PIN (Project Idea Note) review
  by internal committee
• World Bank Due Diligence
• Projects in WB portfolio may or may not have
  underlying WB Group financing
• All projects in WB portfolio are subject to WB
  environmental and social safeguards
• Carbon Finance Assessment
• Technical risks (proven technology
  implementation capacity)
• Institutional risks (letters of approval JI/CDM
  requirements)
• Financial risks (financial closure)
• Regulatory risks (e.g. methodology,
  validation/determination)

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The World Bank and its Partners
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WB CFU Signed ERPAs111 ERPAs signed, US1,735
million
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Regional Distribution of CFU Portfolio
By number of projects
By capital committed in US
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Technology Distribution of CFU Portfolio
By number of projects
By capital committed in US
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Insights from CF project implementation experience

• Carbon finance is an important source of new and
  additional development finance
• US16 billion leveraged for clean energy in
  developing countries since 2002
• Large transaction costs in methodology
  development
• Sustainable development and additionality
  demonstration
• Significant time and effort needed to develop
  carbon assets
• Largely limited to stand-alone project-based
  initiatives, though door for programmatic CDM
  is now open
• Uncertainty and delays in the regulatory regime

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Special Features of World Bank Carbon Funds

• Able to push technology envelope
• New sectors, technologies
• Assist project owners to enter market
• Can take more Kyoto risk than most other buyers
• Can agree to pay even if the project is not
  approved in Kyoto Protocol
• Can purchase longer than most other buyers, i.e.
  beyond 2012
• Committed to building the capacity of host
  country and project owners to replicate projects
• Good strategic partner
• Most experienced carbon fund manager, extensive
  staff and resources
• Reliable investors (i.e. highly secure payments)
• Banks dialogue with host governments
• May be combined with World Bank loans, grants and
  technical assistance

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WBG role in the carbon market

• REGULATION
• Pilot initiatives
• First carbon fund PCF
• Specialty funds CDCF, BioCF
• New pilot initiatives (CPF, FCPF) to inform
  negotiations
• Green investment schemes (GIS) in ECA
• New methodologies and CDM business model
  (programmatic approaches, REDD methodologies)
• Process support for the UNFCCC, national climate
  change authorities, etc.

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WBG role in the carbon market

• 2. TRADING
• Asset creation for parallel buyers
• IFC delivery guarantee / credit enhancement, MIGA
  guarantee for a CDM project
• WB carbon asset registry, project administration
  and supervision (back office)
• Annual report State and Trends of the Carbon
  Market
• Organization of Carbon Expo
• New initiatives Treasury COOL bonds, work on
  auction systems in Brazil and India,
  capitalization of UNFCCC adaptation fund using
  CDM credits

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WBG role in the carbon market

• 3. DEMAND
• Carbon Funds fund raising, trust, convening
  power, reliable buyer
• Capacity building for buyers
• New business models

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WBG role in the carbon market

• 4. SUPPLY
• Projects programs CDM/JI, GIS, project
  development, pioneering new market segments
• ERPAs WB trusted buyer, payment guarantee for
  verified ERs.
• Financial engineering monetization of ERPAs,
  up-front payments, blending with IBRD/IDA, due
  diligence
• WB standards safeguards, sust. dev. benefits
  (CDCF)
• Capacity building and training CF Assist, work
  with DOEs, partnership with intermediaries
  (banks, IFIs )
• Policy advice market strategy studies,
  low-carbon development studies, CASs, sector
  strategies,

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Bank work on Methodologies and Business Models
as of March 2008

• WB work on CDM modalities
• General definition of baseline and monitoring
  methodologies
• Definition of validation and verification
  services
• Bundling of small-scale projects
• Programs of Activities under the CDM
• CDM support for demand side energy efficiency
  (expert network)

• Next phase
• Simplification, standardization of methodologies
• Methodologies for complex, underserved sectors
  (transport, urban, )
• Synergy projects (Carbon Finance, Montreal
  Protocol, GEF, Adaptation Fund)
• Avoided deforestation (FCPF)
• Sector and program approaches (CPF)
• Carbon finance sector strategies

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The next 10 years
Use the carbon market to tackle mitigation

• Support long-term investments for transition to
  low-carbon economy integrate carbon finance into
  public and private investment decisions
• Build on project-by-project approach to move
  towards systematic programs of investments in a
  strategic way
• Establish a long-term regulatory framework that
  provides certainty of a carbon price signal
• Provide incentives for development of low-carbon
  technology
• Create incentives for avoiding deforestation

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Two new carbon facilities

• The Carbon Partnership Facility (CPF)
• Use carbon finance / carbon markets to catalyze a
  transformation toward low-carbon economic
  development
• Partnership between buyers and suppliers of
  carbon credits.
• Scaling-up of carbon finance
• Programs and sector interventions
• Long-term emissions from all sources
• Low-carbon technologies.
• The Forest Carbon Partnership Facility (FCPF)
• Reduce emissions from deforestation and
  degradation
• Pilot an output-based payment system for carbon
  credits derived from protection of forests.
• Both approved by the World Bank Board in 2007.
• FCPF launched in Bali (December 2007)
• CPF launch October 2008

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CPF Objectives and Features

• Objectives
• Target long-term emissions
• Scaling up
• Strategic, transformational interventions in
  sectors
• Features
• Programs, away from individual projects
• Partnership between buyers and sellers
• Fostering both demand and supply in uncertain
  market

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CPF - Buyers and Sellers in a Partnership
Program development Carbon Asset Development
Fund (CADF)
BUYERS (governments, companies) Minimum
financial contributions Willingness to purchase
emission reductions generated over the long term
SELLERS (governments, companies) ER
contribution Willingness to develop and
implement specified emission reduction programs
and sell Ers
ER sale and purchase Carbon Fund (with tranches)
Partners (advisory role) Host Governments,
Donors, other
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FCPF - Forest Carbon Partnership Facility

• Testing and piloting mechanisms under Reducing
  Emissions from Deforestation and Degradation
  REDD
• Build on experience garnered with BioCarbon Fund
• Developing countries have expressed huge interest
  (Technical Assistance, capacity building and
  piloting)
• Additional benefits sought in water management,
  biodiversity, poverty reduction, adaptation

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Two Mechanisms

• Readiness
• READINESS FUND
• Capacity
• Building
• 100 million

• Carbon Finance
• CARBON
• FUND
• Payments for Emission Reductions
• 200 million

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Documentation available atwww.carbonfinance.org

• Grazie!
• ccroce_at_worldbank.org