Prototype Carbon Fund

Training Workshop: Project Formulation for the Clean Development Mechanism

Hanoi, VietnamSeptember 30- October 2, 2002

Eduardo Dopazo Prototype Carbon Fundedopazo@worldbank.org www.prototypecarbonfund.org

The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions

The PCF and other World Bank Carbon Funds Pioneering Greenhouse Gas Emission

Reductions

Outline of the presentation

• Introduction on the PCF• PCF project portfolio development update• Key features of PCF emission reduction

purchase contracts

• Lessons learnt from the PCF• World Bank’s strategy beyond the PCF

– Netherlands Clean Development Facility– Community Development Carbon Fund– BioCarbon Fund – CF-assist

Introduction on the PCF

PCF Objectives

Pioneering CDM and JI Emissions Reductions market development to demonstrate:

… that investments under CDM/JI can:• Earn export revenue for Developing

Countries/Transition Economies engaging in the new ER commodity trade

• Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors

• Contribute to sustainable development

… how private sector and governments can implement the CDM/JI project cycle and compete in emerging global carbon market

Features of the PCF

• Closed-end Mutual Fund structure with diverse portfolio: 30-35 projects and carbon purchase contracts

• Shareholding: Governments $10 m; Companies $5 m• Total Capital: $180 million (following June decision of 9

shareholders to expand participation by $35 million) • PCF Products:

– Competitively priced, high quality emissions reductions

• purchase price range: $3.0-4.0/tCO2• Target portfolio wide price outcome ~$5/tCO2

– High value knowledge asset: create competitive advantage for corporate investors; efficient market regulation; leverage for sustainable development for UNFCCC Parties

Public Sector (6)

Governments of Netherlands, Finland, Sweden, Norway, Canada, and 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

PCF Subscribers ($180 million)

How the PCF Benefits Host Countries?

• Capture resource rents for the new commodity (ERs)

• Stimulate private investment in key sectors

• Demonstrate that trade in ERs will result in transfer of cleaner, more efficient technology

• Provide local and regional pollution abatement and health benefits

• Improve capacity to compete in the emerging market

• Better inform them to pursue their interests in convention negotiations

Host Country Committee

• Formal element of PCF Governance Structure independent of Bank

• Bank has proposed PCF HCC become CF HCC –ie all products.

• Now 43 host countries; Formed HC Steering Committee to cope with growth

• Functions: Advise on PCF operations and on technical assistance needs

– Vital source of advice, feedback and outreach for CF Strategy and capacity building

Host Country Committee Members

Members (through an MOU or submission of a project idea note)

Latin America (13)Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Perú, Uruguay

Africa (10)Benin, Burkina Faso, Ghana, Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe

Eatern Europe/ Central Asia (8)Bulgaria, Czech R., Hungary, Kazakhstan, Latvia, Poland, Romania, Uzbekistan

Asia (1)India

Project Portfolio Development Update

Projects Portfolio Development

• Project selection and Portfolio development criteria– Bank and Kyoto Protocol standards– Focus on renewables and energy efficiency– Carbon purchase: $ 3-15 m (total investment: $15-100 m)– Geo-political diversity in projects

• Pipeline development strategy– Responding to demand in Latin America – Developing a deal flow in Africa, Eastern Europe and, of late, in

South Asia– Increasing emphasis on developing deal flow in East Asia

• Current Pipeline– 45 projects under development with potential carbon financing of

$300-350 million– As of June 2002, over $ 90 million in 21 project approved by

investment committee

Wind19%

Pico1%

Small hydro12%

Geo-thermal

6%

Gas flare Reduction

7%

Energy Efficiency

11%

Biomass (e.g. Wood Waste, Rice Husks)

18%

Sugar-Cane Bagasse

Cogeneration6%

Municipal Waste to Energy

20%

FY02 Pipeline Technology Distribution

Latin America

Eastern and Central Europe

Africa Central and South Asia

East

Asia

Wind C Rica, Colombia, Honduras, Mexico

Morocco Sri Lanka

Hydro Chile, CRica, Guatemala, Colombia

Uganda

Waste Brazil Latvia, CzechR

Mauritius India

Bagasse El Salvador, Guyana, Mexico

Kenya, Swaziland

India Thailand, Vietnam

Biomass Brazil, Nicaragua

Bulgaria, Poland

Thailand

EE CzechR, Poland, Bulgaria, Romania

Uzbekistan

Gas Flar. Peru Kazakhstan

PCF – Project Distribution

Status of Carbon Purchase Agreements Negotiated as of July 02

(ERPA = Emissions Reduction Purchase Agreement:

Validation = key step in CDM asset creation process)

• 14 ERPAs with completed Validation:• Latvia, Brazil, Chile, Uganda, Romania, Poland (Stargard

and Pisz) and Czech Republic (Thomayer and Rozmital), Costa Rica, Nicaragua.

• Nearing Completion: 4 more deals by end October, 2002.• Bulgaria Svilosa Wood Waste to Energy, Durban MSW,

Poland Kolo Geothermal, Guatemala Hydro.

• Pipeline exceeds $150 million of carbon purchases under preparation.

Key features of PCF emission reduction purchase contracts

Knowledge Asset Creation and Use

Reducing the learning costs of CDM/JI for Public and Private Sector entities by

• Establishing benchmarks and templates for regulator and market players in business process of creating Kyoto Protocol quality carbon assets:– Validation Protocol, benchmarks for baselines/Monitoring

and Verification methods for technologies and policy contexts;

– Carbon Purchase Contracts, business processes (generic terms and templates)

• Research on Methods, Markets and Process to streamline and reduce costs

Host Country

PCF Trustee

Project Entity

1. Letter of Project Endorsement

National Legislative Framework / Agreement / Authorization

3. Host Country Agreement

4. Emission Reductions Purchase Agreement

Legal Agreements for PCF Projects

2. Letter of Intent

Impact of Carbon Finance on Project Financing at $3/t CO2e

Technology IRR

Energy Eff.-District Heating

~2.0

Wind 1.0 -1.3

Hydro 0.8-2.6

Bagasse 0.4 – 3.6

Gas Flare Reduction 2 – 4

Biomass with methane kick

2 - 7

Municipal Solid Waste with methane kick

>5.0

Note: data are preliminary

Project, Not Equity, FIRR.

• Methane-capture projects: carbon finance can turn marginal projects into bankable ones

• “Traditional” renewables: boost return by 0.5-2.5%– Makes some marginal deals bankable– Increases profitability and reduces investor risk– Often reduces Government subsidy required

• Improves project’s access to capital markets thru:– Secure contracted flow of ForeX from reliable

counterparty– Improved Quality of cash flows as well as volume– Payment of CF in dollars to lender mitigates country

risk– Advance payments can be critical to financial closure

Sponsor can borrow against contract (like PPA)

Impact of Carbon Finance: Quality and Quantity (at $3/t CO2e)

Lessons Learnt from the PCF

Findings

1. CDM/JI Carbon Asset Creation is complex and difficult with long lead teams for projects and ER delivery

2. Regulatory uncertainty remains post-Marrakesh

3. Minimal direct private investment in CDM/JI

4. First real carbon deal is key to Private and Govt. capacity building

5. Small projects/small countries lose out

World Bank’s strategy beyond the PCF

World Bank Response:Carbon Finance Beyond PCF

1. Expand Carbon Market Development (PCF Expansion, Dutch-VROM, others)– Provide First-of-a-kind opportunities: Introduce

more countries and companies to carbon market – Benchmark carbon asset creation: Increase

certainty and lower entry barriers for private capital

2. Integrate and strengthen TA/Capacity Building: CF - assist

3. Demonstrate credible forestry/agriculture “sinks” activities: BioCF

4. Open Markets for small projects and small countries: CDCF

Buying Carbon for the Netherlands

• Features of the Netherlands Clean Development Facility– Euro 35 million/year contracted volumes for each of 4

years– Minimum of 8 million tons CO2 per year– Price range Euro 3.5-4.5 per ton CO2

• Deal Flow – Size and Source– Average deal size of greater that 1.5 million tons

(about 6 million Euro in carbon finance)– 5-6 deals per year but will seek larger deals– Developing Countries (CDM) only– Kyoto-Ratifying Countries or pay only after ratification– No carbon sequestration before CoP9

Benchmarking and Securing High Quality ERs

• Sectoral and Standardized baselines/monitoring for significant Carbon Assets

• Creating secure pools of environmentally credible carbon assets for private market

Examples:– Mexico: PEMEX – Gas Flare Reduction/Oil Field Efficiency;

Wind and Hydro Assets; Sugar Mill Cogen– South Africa: LandFill Gas and Sugar Mill Cogen– Brazil: LandFill Gas to Power

Development + Carbon = Carbon with a human face

Overview

• Developed with International Emissions Trading Association (IETA)

• Objective: Purchase ERs + create community development benefits

• Small-scale projects in small countries and poor, rural areas in all developing countries

• US$ 100 m funding target• Private & public sector participants• Managed as a World Bank Trust Fund

How the Fund Works

Industrialized Governments

and Companies

Developing Countries and Communities

Community DevelopmentCarbon Fund

Community DevelopmentCarbon Fund

$$Technology

Finance $$Technology

Finance

CO EquivalentCO Equivalent22

Emission Reductions

CO EquivalentCO Equivalent22

Emission Reductions

Rationale

• Carbon finance now bypasses small countries:– Small projects = high transaction costs, high risks

• Market for high value “development + carbon” ERs

• UNFCCC’s drive to cut costs through streamlining procedures and bundling projects

Design Challenge: Lowering Cost of Delivering Small Projects to CDCF

• Applying CDM streamlined procedures • Using Bank “umbrella” legal agreements and project

appraisal documents for financial intermediaries (SMEs, micro-finance credits, development banks, NGOs)

• Grooming financial and other intermediaries to deliver carbon finance to lines of business (small/micro power supply, crop processors, rural industry)

• Taking costs off the balance sheet for upstream costs:– raising pools of Bilateral ODA and Foundation funds for TA– Optional up-front payment of Fund shares to generate net

income for

CDCF Portfolio Criteria

• Compatibility with UNFCCC definition of “small scale”

• Only CDM• No more than 10%-20% of capital in one

country• A minimum of 25% of portfolio in LDCs and

other poor smaller developing countries• Up to 25% of capital for small-scale agroforestry

• Local+Global environmental benefits + improve local livelihoods

BioCarbon Fund

Harnessing the carbon market to sustain ecosystems and alleviate poverty

Fund Overview

Three equally important goals• Carbon sequestration or conservation• Promotes environmental protection and

biodiversity conservation• Promotes poverty alleviation and improved

livelihoods

Fund Overview

Basic structure• Projects under Art 6 (JI) and Art 12 (CDM)

– Second window : Projects that meet the three goals but are not Kyoto compliant in the First Commitment Period

• Private & public sector participants• Target size US$ 100 million• Managed as World Bank Trust Fund• Parallel funds for technical assistance

Rationale

• Demonstrate technical and policy issues of Land use, land-use change and forestry (LULUCF) activities

• Extend carbon finance to agriculture and forestry sectors

• Meet the demand for cost-effective ERs from mandatory and voluntary markets

• Provide a source of funds for proper land management and land rehabilitation practices

Parallel Resources

• Capacity building– Training, Workshops, Fellowships, Dissemination

• Research– Cost effective measurement & monitoring– Policy issues (additionality, permanence, leakage)– Terms of implementation

• Project Preparation

The Big Lessons The Role of TA

• Integrating learning-by-doing from transactions and capacity building is essential– Can’t have a “buy and goodbye” approach

• First real carbon purchase deal is key to Private Sector and Govt. capacity building

• All New Funds/Facilities must combine capacity building and carbon purchases– PCF had to retrofit with PCF+

• PCF has generated unique knowledge assets– Must vigorously disseminate this knowledge

• Must create internal and external centers of excellence through partnership

A New Initiative on Capacity Building

Responding to the evolution of the Carbon Market and the need for assistance for developing countries and economies in transition to build capacity and institutions for JI/CDM and implement their carbon market strategy

CF - assist

Objectives of the CF-Assist

•To follow the evolution of he KP process

•To respond to WB clients need for technical assistance

•To facilitate host countries access to the carbon market

•To enhance the opportunity to develop JI/CDM projects

•To strengthen technical assistance for JI/CDM in the WB

•To build on and replicate the success of the NSS program

•To strengthen the links with other WB and donors programs

In summary…

• PCF well under implementation– $ 32 million contracted in 12 projects– business target of placing $120 million by June 2003– Range of baseline methodologies and monitoring plans

developed and “validated”

• Strategy of the Carbon Finance Business of the World Bank• Expand Core Carbon Market Development

• About $320 million (including PCF) in hand

• Demonstrate credible forestry/agriculture “sinks” activities• Greatest convergence of development and climate mitigation• Learning-by-doing prototype fund – the BioCarbon Fund

• Open Markets for small projects and small countries: • Renewable energy for rural poor and poorest countries• Core business of the Bank – the $50-100 million rolling CDCF

• Expand the capacity Building and Technical Assistance activities (CF assist)

Prototype Carbon Fund

Training Workshop: Project Formulation for the Clean Development Mechanism

Hanoi, VietnamSeptember 30- October 2, 2002

Eduardo Dopazo Prototype Carbon Fundedopazo@worldbank.org www.prototypecarbonfund.org

The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions

The PCF and other World Bank Carbon Funds Pioneering Greenhouse Gas Emission

Reductions