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World Bank Carbon Finance Experience,
Strategy and New Funds Workshop How to develop CDM
projects in Central America,
March 27-28, 2003
Rodrigo Chaparro
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CarbonFund
CarbonFund
$$ $$
22 22
Emission ReductionPurchase Agreement
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Main Producte.g: electricity$$
CarbonCredits
Nature of Carbon Finance Projects
Promote Sustainabledevelopment
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Bank Carbon Finance BusinessFamily of Products
PCF as flagship:$180 millionNetherlands Clean Development Facility CDM only,$30 million/year over 2002-2005Community Development Carbon Fund (CDCF): tostart May/June 2003 at $40-50 millionBioCarbon Fund (BioCF):to start by Sept 2003 at $30-
40 millionClimate Neutral Bank ; starting March 12th
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Public Sector (6)
Governments of Netherlands, Finland, Sweden,
Norway, Canada, and Japan Bank forInternational Cooperation
Private Sector: (17)
RWE - Germany, Gaz de France, Tokyo ElectricPower, Deutsche Bank, Chubu Electric, Chugoku
Electric, Kyushu Electric, Shikoku Electric,Tohoku Electric, Mitsui, Mitsubishi, Electrabel,NorskHydro- Norway, Statoil -Norway, BP,Fortum, RaboBank, NL
PCF Shareholders
($180 million)
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Banks Carbon Finance Business at a Glance
Value of Emissions Reductions Purchase Agreements (ERPAs)negotiated: 15, $38m
Number and value of approved PCF projects: 28, $119.2m
Number and value of NDCF projects : 13, US$ 157.1m
Total estimated investment in 30 approved projects: US$ 1.081 billion
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U nbundled Services in Carbon FinanceTraining and Knowledge Management: World Bank Institute (governments, private sector, Bank Group staff)
1500 training days in FY03 Help desk, briefings, targeted awareness-raising Internships and Fellowships: PCF+ and shareholderprivelages (20 + to date)Staff Exchange Program in CF: 6 on strength
Institutional Strengthening:CF-Assist, PCF+, CDCF+Research and Policy Analysis:Market intelligence,technical benchmarking, baseline and monitoring methods, policy research.
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Most Important Findings
1. Regulatory uncertainty remains post- Marrakesh:CDM Executive Board still to review and approve methods for carbon assetcreationNo Entry into Force of Kyoto Protocol
2. CDM/J I Carbon Asset Creation remains complex and lengthy: lead timesof 3-7 years for project design through delivery of first ERs.
3. Private Sector is not buying directly in CDM/J I on a significant scale4. Capacity Building is Urgent
first carbon purchase in each country and sector is key to build awarenessCarbon finance and TA for capacity building must go hand in hand to support
carbon market development5. Small projects and hence smaller countries and poorer communities will
lose out unless risks and costs are managed by intermediaries, despitestreamlining
6. LULU CF Sink Assets are high value to sustainable development but poorly understood and at risk as an asset class
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0
2
4
6
8
10
12
14
16
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A nnex II JI Countries CDM Countries
V o
l u m e o
f E R P r o j e c t s
( M t C o
2 e )
Carbon Finance flows 2001-2002
Source: Authors own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
USA
Canada
A ustralia
Latin A merica
A sia
A frica
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Certifying Sustainable Development Outcomes
Bank has shown that it is feasible and cost effectiveto create and certify local environmental andcommunity development benefits along with carbonExamples from P CF: Colombia Jepirachi Wind Power Plant (19 M W) also
certifies :potable water,electricity for schools/clinics andsmall fishing port for local indigenous peoples;
Plantar Project in Brazil (23,400ha fuelwood plantation)also certifies:
Worker health improvementABRINQ certification of no child labor or exploitationBiodiversity benefits
FSC certification of improved forest management
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Preparation and review of the Project
Baseline Study and Monitoringand Verification Plan (MVP)
Validation process
Project Appraisal and Negotiation
Periodic verification &certification
Construction and start up
Project completion Upstream Due Diligence, carbon riskassessment and documentation: $ 40K
Baseline : $20 KMonitoring Plan: $20K
Contract, Processingand documentation: $30k
Consultation and Project Appraisal: $105KNegotiations and Legal documentation: $50K
Carbon Asset Creation and MaintenanceManufacturing Process and Costs based on Bank experience
Total through NegotiationsAll expenses: $265 K
Initial verification at start-up: $25K
Verification: $10-25 KSupervision: $10-20K
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Technology ( IRR
Hydro 0.8-2.6 Wind 1.0-1.3Bagasse 0.4-3.6Energy Eff.-District Heating ~ 2.0
Gas Flare Reduction 2-4Biomass 2-7Municipal Solid Waste 5-10
Impact of Carbon Finance on FIRR
($3/ tCO2e)
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Sample of Prices in PCF DealsCountry / Project Class Price US$
/ tCO2e Volume000tCO2e
ValueUS$m
U ganda: Small Hydro (2001) CDM 3.00 1,300 3.90
Poland: Geo. & Biomass (2) JI : no HCA 3.00 555 1.67
Brazil: Seq. & Biomass CDM 3.50 1,514 5.30
Chile: Small Hydro firm CDM 3.50 1,000 3.50
Chile: Small Hydro option CDM 3.50+0.75 750 3.19
Costa Rica: Wind (2) CDM : umbrella 3.50 547 1.92
Costa Rica: Small Hydro CDM : umbrella 3.50 172 0.60
Nicaragua: Rice Husk CDM : umbrella 3.50 142 0.50Colombia: Wind CDM + social bens 3.50+0.50 800 3.20
Bulgaria: Biomass JI : HCA 3.50 1,000 3.50
Romania: Afforestation JI : HCA* 3.60 1,018 3.66
Czech Republic: EE JI : State Agency 4.00 1,300 5.20
Latvia LFGTE (2000) JI : Guaranteed min. 4.11-6.39 388-602 2.47
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World Bank Carbon Finance Strategy:Carbon Finance Beyond P CF1. Expand Carbon Market Development
Provide First-of-a-kind opportunities : Introduce morecountries and companies to carbon marketBenchmark carbon asset creation and Crowd-In private
sector: Increase certainty and lower entry barriersExpand access to CDM/J I assets in early market: Bank intermediation is critical to expand supply
2. Strengthen TA /C apacity Building
3. Demonstrate credible forestry / agriculture sinksactivities
4. Open Markets for small projects and small countries :5. Build Credibility in AAU Market: Greening of AAUs
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Small projects are burdened by high transactioncostsSmall and poorer countries will miss out on privatesector carbon finance
Need special efforts to: mitigate risk, bundle small transactions standardize both CDM/JI requirements and business
procedures
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Carbon Sequestration has important rural development, poverty alleviation, sustainable natural resource management and global
environment implicationsPCF carbon sinks projects demonstrate how to create and certify biodiversity improvements and contributions to rural welfare, butPCF can only do 3-4 projectsNeed dedicated fund to demonstrate and benchmark carbon sinksassets in support of sustainable agriculture and forestry, watershedmanagement and biodiversity conservation.
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Benchmarking and Securing Supply of High
Quality ERs includes.Reducing Risk and Uncertainty in Supply : Preparing Standardized baselines/monitoring plans for replicablecarbon projects which lower risk in carbon asset creationfor host countries and buyersGreening Hot Air: helping transition economiesmarket their assigned amount units by helping designinvestment programs which utilize revenues from AA U sale to invest in clean technology to create actualemissions reductions
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Respond to Host Country demand for carbon financeExtend carbon finance to the smaller, poorer countriesand rural communitiesDemonstrate carbon finance for carbon sinksStrengthen and expand capacity building for mitigationand adaptationExplore practical arrangements for greening AAU sFY03 business plan targets:
negotiated ERPAs, $155m (P CF on track; N CD F ahead) ;
cumulative approved projects for negotiation, $250m ;
Carbon Finance Strategy: Summary
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Market Development Initiatives
Intermediation Agreements: India (IDFC), Brazil(A2R), South Africa (DBSA)..Project financing (debt, equity, mezzanine):European Banks, .Insurance and risk management products:
covering risk in carbon currency, country risk management, guarantee facilities
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Benefits to New Funds Participants
High quality ERs for compliance and trading Cheaper : expertise of established carbon financeteam at incremental cost
Risk mitigation via diversification, hedge futurecostsKnowledge of carbon asset creation, marketintelligence: internships, training, advice
Marketing : Corporate social responsibility
Origination Options : Bring projects to fund
Parallel Purchase : Access to additional CO2e togrow carbon portfolios at low risk and effort