Carbon Finance Carbon Finance Strategy at the World Strategy at the World

BankBank

CHARLES CORMIERCHARLES CORMIER

December 2005December 2005

The Kyoto ProtocolThe Kyoto Protocol36 Developed Countries and Economies in Transition 36 Developed Countries and Economies in Transition

(namely Canada, Japan, EU15 and economies in (namely Canada, Japan, EU15 and economies in transition) agreed in 1997 to: transition) agreed in 1997 to:

reduce GHG emissions by 5.2 % below 1990 levels reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012in the commitment period 2008-2012

Total demand created for GHG Reductions: ~5 to Total demand created for GHG Reductions: ~5 to 5.5 billion 5.5 billion

Marrakech Accord: agreed in Nov 2001 sets rules Marrakech Accord: agreed in Nov 2001 sets rules of implementationof implementation

Status: Status: came into force in February 2005 came into force in February 2005 Coming into force: requires ratification of 55 Coming into force: requires ratification of 55

Parties to UNFCCC representing 55 % of CO2 Parties to UNFCCC representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) emissions (US constitutes 36 %; Russia 17% )

As of November 2005, 157 states ratified As of November 2005, 157 states ratified representing 66.1% of developed countriesrepresenting 66.1% of developed countries

US / Australia will not ratify, but Australia will meet US / Australia will not ratify, but Australia will meet targetstargets

How can Developed How can Developed Countries/EITs meet their Countries/EITs meet their obligations under Kyoto?obligations under Kyoto?

Domestic ReductionsDomestic Reductions Carbon SinksCarbon Sinks: direct human-induced land use : direct human-induced land use

change and forestry activities (limited to ~330 change and forestry activities (limited to ~330 Mt/C02e)Mt/C02e)

International CreditsInternational Credits (Kyoto Mechanisms): (Kyoto Mechanisms):• International Emissions TradingInternational Emissions Trading• Project –Based: Project –Based: Joint ImplementationJoint Implementation • Project – Based: Project – Based: Clean Development MechanismClean Development Mechanism

““..domestic action shall constitute a significant ..domestic action shall constitute a significant element of the effort by each Party..”element of the effort by each Party..”

Structure of the Carbon Structure of the Carbon MarketMarket

Allowance Markets

UK ETS

EU Emission Trading Scheme

Chicago Climate Exchange

New South Wales Certificates

Project-Based Transactions

JI and CDM

Voluntary

RetailOther

Compliance

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005

Known Estimated

Total Value of Contracts Total Value of Contracts over 1 b$ over 1 b$ (data in million U.S.$, nominal)(data in million U.S.$, nominal)

(Jan-Apr)

Main Buyers: European Main Buyers: European Governments and Firms Governments and Firms In percent of volume purchased From Jan.04 to Apr.05In percent of volume purchased From Jan.04 to Apr.05

Other EU32%

UK12%

Gov. Netherlands16%

Japan21%

New Zealand7%

Canada5%

Australia3%

USA4%

World Bank purchases (22 % of total) attributed pro-rata to each participant in various carbon funds

Supply Concentrated in Supply Concentrated in Middle-Income CountriesMiddle-Income CountriesIn percent of volume sold from January 2004 to April In percent of volume sold from January 2004 to April

20052005OECD14%

TransitionEconomies

6%

Africa0%

India31%

Rest of Asia14%

Brazil13%

Rest of Latin America22%

Top three countries (India, Brazil and Chile) account for 58% of volume; Top five (which also includes Bulgaria and Romania) account for 70%

Non-CONon-CO22 Gases Dominate Gases DominateIn percent of volume purchased from Jan.04 to Apr.05In percent of volume purchased from Jan.04 to Apr.05

Landfill GasCapture

10%

Hydro12%

Wind7%

Biomass11%

AnimalWaste18%

EnergyEfficiency

2%

Forestry(LULUCF)

4%

HFC25%

N2O4%

Other7%

Prices Depend on RisksPrices Depend on Risks(weighted average prices from Jan. 2004 to April 2005 in U.S.$ (weighted average prices from Jan. 2004 to April 2005 in U.S.$

per metric tonne of COper metric tonne of CO22e)e)

$0.00

$2.00

$4.00

$6.00

$8.00

ER VER CER ERU

Climate Change and the Climate Change and the World Bank MissionWorld Bank Mission

What we work for: What we work for: poverty alleviation and poverty alleviation and sustainable developmentsustainable development

We accept IPCC conclusions thatWe accept IPCC conclusions that• least developed countries stand to lose mostleast developed countries stand to lose most• the poorest have the least capacity to adapt to the poorest have the least capacity to adapt to

climate change, especially in rural areasclimate change, especially in rural areas Carbon finance offers an unprecedented Carbon finance offers an unprecedented

opportunity to opportunity to increase private and increase private and public investment in clean technologies public investment in clean technologies in developing countriesin developing countries, thus contributing , thus contributing to sustainable developmentto sustainable development

The World Bank’s ObjectivesThe World Bank’s Objectivesin the Carbon Market in the Carbon Market

Contribute to Sustainable DevelopmentContribute to Sustainable Development• Support Developing Countries To Maximize Gains from Support Developing Countries To Maximize Gains from

Carbon Finance Carbon Finance • Add Value to CDM Projects through safeguard policies/ Add Value to CDM Projects through safeguard policies/

additional sustainable development valueadditional sustainable development value Catalyze the Carbon MarketCatalyze the Carbon Market

• Supporting the regulatory framework – developing new Supporting the regulatory framework – developing new tools, collaboration with the regulatortools, collaboration with the regulator

• Expanding the capacity of other financial and Expanding the capacity of other financial and development institutions through cooperation with other development institutions through cooperation with other development banksdevelopment banks

• Providing opportunities for purchases by the private Providing opportunities for purchases by the private sectorsector

• Increasing market liquidity by creating projects with Increasing market liquidity by creating projects with large volumes with a portion available to the private large volumes with a portion available to the private sectorsector

Strengthen the capacity of developing Strengthen the capacity of developing countriescountries to benefit from the emerging to benefit from the emerging market for emission reduction credits (CF-market for emission reduction credits (CF-Assist)Assist)

• $10 million Bank administered trust fund for capacity $10 million Bank administered trust fund for capacity building and technical assistance program established in building and technical assistance program established in FY05. FY05.

• Assists interested developing countries and economies Assists interested developing countries and economies in transition to develop and implement CDM projectsin transition to develop and implement CDM projects

• Three to five year program to develop sound structures, Three to five year program to develop sound structures, where local institutions gain the capacity to prepare and where local institutions gain the capacity to prepare and review projects for approval.review projects for approval.

The World Bank’s ObjectivesThe World Bank’s Objectivesin the Carbon Market IIin the Carbon Market II

World Bank Carbon Finance Products~$950 million under management

$80 million committed - Italian multi-participant

$220 million – Spanish Government; will be open to private sector

Bio Carbon Fund: $53.5 million; multi-shareholder;second tranche opened in September 05

Community Development Carbon Fund: multi-shareholder. Firsttranche closed at $128.6 million; second tranche to open once Portfolio for first tranche is well developed

Prototype Carbon Fund: $180 million, multi-shareholder

Netherlands JI

Facility

~$40 million. Economies in Transition only (with IFC)

$180 million – single government participant (Dutch Government)

$75 million – Danish multi-participant

Under development: Carbon Fund for Europe

How Carbon Funds WorkHow Carbon Funds Work

Industrialized Governments

and Companies

Developing Countries and Communities

Bank Managed Carbon Fund

Bank Managed Carbon Fund

$$Technology

Finance $$Technology

Finance

CO Equivalent22

Emission Reductions

CO Equivalent22

Emission Reductions

Payment on delivery of emissions reductions, not up-front capital costs

Preparation and review of the Project

Carbon Asset Due Diligence

Validation process

Project Appraisal and Negotiation

Periodic verification & certification

Construction and start up

Project completion

3 months

2 months

2 m

onth

s

3 months

1-3 years

Up

to 2

1 ye

ars

• Upstream Due Diligence, carbon risk assessment and documentation: $ 25K

For new methodologies•Baseline : $30 K• Monitoring Plan: $25K

• Contract, Processing •and documentation: 25k

• Consultation and Project Appraisal: $60K• Negotiations and Legal documentation: $100K

Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience

Total through Negotiations

All expenses: $265 K for regular size projects$150 K for small scale projects

• Initial verification at start-up: $25K

• Verification: $10-25 K• Supervision: $10-20K

Bagasse1% Energy

Efficiency4%

LULUCF4%

Geothermal1%

Cement Manufacturing

6%

Biomass8%

N20 Removal

7%Coal Mine Methane

11%

Wind6%

Waste Management

37%

Small Hydro15%

PCF TECHNOLOGICAL DISTRIBUTIONACTIVE PCF PORTFOLIO PROJECTS - TOTAL OF APPROX US$176 MILLION

Strategic Issues in CDM Market Strategic Issues in CDM Market DevelopmentDevelopment

Potentially Competing InterestsPotentially Competing Interests CDM needs to deliver high volumes to keep cost of CDM needs to deliver high volumes to keep cost of

Kyoto compliance affordableKyoto compliance affordable Developing country government preferences going Developing country government preferences going

into 2into 2ndnd Commitment Period negotiations is that Commitment Period negotiations is that CDM helps modernize and de-carbonize CDM helps modernize and de-carbonize infrastructureinfrastructure

““Sustainability” concerns constrains asset choice in Sustainability” concerns constrains asset choice in many OECD governments, and some corporationsmany OECD governments, and some corporations

Market Inflection Points to WatchMarket Inflection Points to Watch Post-2012 market signal by EU and/or KP Parties on Post-2012 market signal by EU and/or KP Parties on

long lead time assetslong lead time assets Second phase ETS review of sequestration/ LULUCF Second phase ETS review of sequestration/ LULUCF

assetsassets

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