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Learning from the Implementation of the Prototype Carbon Fund:
www.PrototypeCarbonFund.org
Features of the PCF
• Portfolio or fund structure– Minimize Project Risks– Reduce Transactional Costs– Enhance the Learning Experience
• Governments: $10 m; Companies: $5 m• Total: US$145 million to be used in 15-20 projects
• PCF Products:– Competitively priced, high quality emissions reductions
• target price: $4-5/ton/CO2 (= $20/tC)• target cost of generating ERs: $10/tC
– High value knowledge asset to help create competitive advantage for corporate investors, host countries, and efficient market regulation for Parties
Key PCF Demonstration Effects
…that investments under CDM/JI can:• Earn important “resource rents” for Developing
Countries/Transition Economies engaging in ER trade
• Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors
• Contribute to sustainable development and improve the quality of life of low-income groups
..and how to implement the CDM(JI?) project cycle
PCF Participants
Governments: (6)
Netherlands, Finland, Sweden, Norway, Canada, Japan (through Japan Bank for International Cooperation)
Private Sector: (17)
RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP-Amoco, Fortum, RaboBank, NL
Fund Subscribers at Second Closing ($145 million)
Host Country CommitteeMembers
JOINED PROCESSING
Latvia, Czech Republic
Argentina, Costa Rica, Guatemala,Brazil, Mexico, El Salvador, GuyanaNicaragua, Honduras, Peru, Uruguay
Russia, Slovenia
Colombia,
Senegal, Burkina Faso, Togo,Zimbabwe, Uganda
Morocco
Kenya, Ghana
Indonesia,Bangladesh
Plus those countries with Projects
Project Selection and Portfolio Criteria
Generic: Adhering to UNFCCC, Bank standards, with emphasis on renewable energy projects
• Broad balance between CDM and JI • Not less than 2% or more than 10% of Fund’s assets • Not more than 20% in the same host country• Not more than 10% in forest-based sinks (only in EITs)• Emphasis on renewable energy technology and efficiency (3:2
ratio)• No more than 25% in any one technology
Current Pipeline
• over 25 projects; greater than $100 million• 6 endorsed by host country as CDM or JI
– Latvia: Liepaja Region Solid Waste Management ($2.5m)
– Costa Rica: Facility for Renewable Energy Resources ($10m)
– Uganda: Small Hydro Power in West Nile Region ($5m)
– Guyana: Bagasse-based Cogeneration at Skeldon ($5+m)
– Czech Republic: Energy Efficiency projects ($5-10m)
– Morocco: Wind Power ($14.5m + carbon co-financing)
Prospective Projects under Review ($Million in Carbon finance)
• Caribbean: Wind power ($3m)
• Southern Cone: Fund for Renewables (IDB/MIF/A2R: $5+m)
• Central America (5 countries, $10m): crop residue biomass, geothermal, small hydro, wind
• EE: process energy efficiency ($5+m)
• East Africa: municipal waste-to-energy ($5-10m)
• South Asia: Waste-to-Energy facility and bagasse cogeneration (tbd)
• East Asia: small hydro power and district heating efficiency
• Forest Carbon projects in Eastern Europe ($7-14m)
Project selection and baseline validation
Periodic independent verification/ certification
Registration Protocol
Transfer Emission
Reductions
Project approval and implementation
Projects to Emissions Projects to Emissions ReductionsReductions
Ensuring Environmental Ensuring Environmental CredibilityCredibility
Assign emissions reductions to
Participants Account
Contributions to a CDM Tool Kit?
• Baseline Template
• Monitoring and Verification Protocol Template
• Validation Manual
• Emissions Reductions Purchase Agreement
Helping investors and Host Countries by reducing learning costs to do CDM Projects
Project identification Project identification and preparationand preparation
Preparation of Monitoring Preparation of Monitoring and Verification Protocoland Verification Protocol
Negotiation of Carbon Negotiation of Carbon Purchase AgreementPurchase Agreement
Project Project approvalapproval
Validation process Validation process and opinionand opinion
Baseline Study as part of Baseline Study as part of Feasibility Study Feasibility Study
““Ensuring Ensuring Environmental Environmental
Credibility”Credibility”
3-4 weeks effortCost: $20,000
4-5 weeks effortCost: $40,000
4 weeksCost: $30,000
Total Front-EndCosts ~ $150-200k= Sum of “ValidationProcess+unique CDManalysis and dialogue+negotiations
Cost of CDM-like procedures
• Total procedural cost: $200-400K– PCF Front end procedures (Baseline, Monitoring & Verification,
Validation, legal fee, etc.): $100-200K
– Procedures after project commissioning (lifetime supervision, verification and certification): $100-200K
– NOT including CDM fees
– NOT including additional CDM registration and review requirements
• Compare with medium sized project with ER purchase from project: $2 million and total financing of ~$10 million (power projects ~5-10MW)
Heavy Burden of Transaction Costs on small projects/small countries
• CDM requirements make small projects too costly!• Small projects such as PV, micro- wind, biomass, micro-
hydro – have higher unit costs due to small size
– displace lower carbon intensity end-uses
– operate in riskier environments (e.g. remote areas)
• BUT represent majority of CDM opportunites for small developing countries incl. small islands
• Need streamlined procedures in negotiating text;• Need help in accessing CDM market
Need for Intermediation for Small projects/small countries
• Smaller-scale project sponsors in small countries and riskier investment environments lack ready access to carbon finance;
• need “bundling” of small projects by financial intermediaries to tap global carbon market and deliver benefits to small project sponsors and communities;– use of “Multi-project” or standardized baselines using
performance standards for medium scale projects and
– agree on standard emission factors for particular end-uses and technologies in micro-projects
Transferability
• Intermediation and bundling of small projects requires transferability – insisting on once-and-for-all designation of Annex I recipient will reduce
incentives for investment and– secondary market development is key to mobilize investment capital in
CDM
• Environmental credibility/additionality does not require specifying destination of ERs;
• flexibility in assigning ERs between Annex I countries and Annex II countries is essential to distributing benefits of carbon market development widely
Critical Capacity Constraints
• Host country government and private sector capacity is an important factor limiting the volume of investment and technology transfer. – Effective private sector capacity is key to lowering
transaction costs of developing, negotiating and implementing CDM/JI projects
– Efficient arrangements across government agencies are key to oversee CDM/JI, build investor confidence and protect Governments’ interests
– The most effective capacity building is through real projects and emission reduction purchases
Indicative Costs of Carbon Credits under Different Crediting Period Validity Conditions
-
5
10
15
20
25
30
35
Efficient Lighting Wind Landfill Gasw ith CH4
BagasseCogeneration
Small Hydro
$/To
nne
CO2
Project Life 2001-2012 2008-2012
Engaging the Private Sector
• Private Sector Capacity exists in both Annex I and some non-Annex I countries for V/V/C– With clear guidance, industry can develop and regulate for
ensuring environmental credibility
• Challenge for Parties to ensure private investment– keep project cycle short and predictable
– avoid ex ante, open-ended approval process at pre-investment stage
– create transparency and predictability (validation protocol, accreditation criteria)
Lessons from experience of applying CDM-like procedures
1. CDM Reference Manual
ʘuniqueness and diversity of projects difficult to anticipate
ʘattempting to provide an initial set of methodological guidelines covering all project types may
ʘdelay start-upʘincrease complexity of procedures and costsʘreduce CDM transaction volume
ʘHence, CDM Reference Manual design should be evolutionary, building on precedence