TRANSACTION TYPES TRANSACTION TYPES and FINANCINGand FINANCING

Architecture of CDM transactionsArchitecture of CDM transactionsBy Steve Thorne By Steve Thorne SouthSouthSouthSouthNorthNorth

Addis Ababa 21Addis Ababa 21stst October 2003 October 2003

Contents of presentationContents of presentationCDM rationale overviewCDM rationale overviewContribution of CDM to projects Contribution of CDM to projects Example of cash flowsExample of cash flowsTypes of transactionsTypes of transactionsExamples of types of transactionsExamples of types of transactionsWhat kind of finance is aroundWhat kind of finance is aroundWho is in the marketWho is in the market

Emitter in NORTH Emitter in SOUTH

Target level ofemissions

Achieved level of emissions

COST $

COST $

Investment funds

EmissionReduction

credits

The Clean Development Mechanism

ENERGY PROJECTDEVELOPED BY THE

PARTICIPANT(e.g. Delivering of low-cost

houses)

CDM PROJECT ACTIVITY (e.g. retrofitting by installing energy efficient technologies.)

COST OF PROJECT AS WHOLE

COST

VALUE BROUGHTFROM PROCEEDSOF SALE OFCER’s

PRICE

ENERGY PROJECTDEVELOPED BY THE

PARTICIPANT(e.g. Delivering of low-cost

houses)

CDM PROJECT ACTIVITY (e.g. landfill projects.)

COST OF PROJECT AS WHOLE

COST

VALUE BROUGHTFROM PROCEEDSOF SALE OFCER’s

PRICE

Let’s look at a CDM landfill…Let’s look at a CDM landfill…

December 2003:CDM registered

with EB

This creates a setof registered and

un-transactedCertified Emission

Reduction Certificates

CER’s

The lifetime of the project is say 8 years, and in the MVP you verify every two years (optional)…

Year 2

Year 4

Year 6

Completion

These issued CER’s are now commodities which can besold, at a price the market dictates….

December2005: $6/t

December2007: $11/t

December2009: $23/t

December2011: $21/t

TOTAL CDM

REVENUE

The block of CER’s can be transacted along The block of CER’s can be transacted along three broad choices…three broad choices…

1: self develop the project

andsell forward the

predictedCER’s via an option

or2: bring in an

investor

Self developThe project and

sell the CER’s as they are

issued at prevailingmarket price

1: get a partner to help with the

development of theentire project

In return for saleof the CER’s

Option 1:Option 1:

1: get a partner to help with the

development of theentire project

In return for an option on the CER’s

RISK:here the risk is zero: you get

help to put together the project and you get money

REWARD:the reward is financed and

transacted project

PRICE:will obviously be

greatly discounted againstrisk

Option 2:Option 2:

1: sell forward the predictedCER’s via an option

2: bring in an investor

RISK:here the risk is how to cover

underperformance and future market uncertainty

REWARD:the reward is flow of

capital or letter of credit

PRICE:will obviously be

discounted againstrisk

Option 3:Option 3:

Sell the CER’s as they areissued at prevailing

market price

RISK:here the risk is the market

price at time of going tomarket (issuance or beyond)

REWARD:have to self finance, but rewards could be great

PRICE:prevailing price,

Maximum benefit if price is good

Sources of CDM financeSources of CDM finance Donor Funds for frictional costs (capacity Donor Funds for frictional costs (capacity

development, institutional development, non-development, institutional development, non-validation and verification transaction costs; validation and verification transaction costs; establishment of African DOEs etc.)establishment of African DOEs etc.)

Buyers of “off-the-shelf” CERs;Buyers of “off-the-shelf” CERs; Investors in project technologies (equity, forward Investors in project technologies (equity, forward

purchase etc.);purchase etc.); Mixtures of types;Mixtures of types; Multinational internal trading;Multinational internal trading; Others?Others?

Who is in the market?Who is in the market?Donor funds: Dutch, British, US, Germans, Donor funds: Dutch, British, US, Germans,

Danes etc.Danes etc.World Bank e.g. PCF, CDCF, bio-carbon World Bank e.g. PCF, CDCF, bio-carbon

fund…fund…CERUPT (Dutch funding)CERUPT (Dutch funding)Finnish, Danish, Govt. purchasersFinnish, Danish, Govt. purchasersPrivate sector: Eco-securities etc.Private sector: Eco-securities etc.

Emission trading

Carbon markets under KyotoCarbon markets under KyotoKyoto

Protocol

Annex I Annex I Non-Annex I

JI project CDMProject

Company Company

Expected sizes EU Emission Trading Scheme: Eur 8

billion/year; CDM/JI: Max 6-8% (600 mln/year)

CDM institutional buyers: PCF, CDCF,Bio Carbon Fund; Cerupt: Eur 200 mln Danes/Austrians/France (Eur 20 - 80 mln?) Japanese / Canadians