Proposal for Carbon market development guarantee

1. Proposal for Carbon market development guarantee Financial Solutions Unit, FEU Treasury Department Energy Unit, LCR Carbon Finance Unit

2. Key Challenge for Low Carbon Energy Investments Introduction & Objective The objective: propose new financial products that monetizes future flows of CERs to raise finance today for investments Investments in EE or RE projects require funding before they can generate returns Key challenge: raising funds today for investment in EE / RE projects Cashflow + Returns - Investment Time Time e.g., energy savings for EE; GWh for RE)

3. Carbon Credits or Emission Reductions ( for example “CERs”) – a co-product Introduction & Objective Carbon credits contributes to cash-flow but NOT to the financing… Cashflow + CERs Returns - Investment Time e.g., energy savings for EE; GWh for RE)

4. Monetizing Carbon Credits today to help finance the investment Introduction & Objective Objective: monetize today future flow of Carbon Credits (CERs etc.) to support the financing phase. Cashflow CERs + Returns Investment Time e.g., energy savings for EE; GWh for RE) -

5. Copenhagen Accord - Finance Copenhagen Accord - Finance • Developed countries shall raise $30 billion through 2010 to 2012 of new and additional resources … and to mobilize $100 billion per year by 2020 from a variety of sources Grant MDBs Carbon Markets Sales Private Capital Invest • Will vary according to CO2 prices… • At $15/tCO2: $10 to 20 billion per annum in 2020

6. Nature of Carbon Financing Contract Nature of a Carbon Finance Contract Energy Project Finance – “Day 1” Investor Banks Equity Debt CER sales – “Day 2’” Energy sales – “Day 2” electricity CERs Power Purchase Agreement ERPA $$$ $$$

7. Bridging the Gap Nature of a Carbon Finance Contract Challenge: ways to monetize on Day 1 the future stream of carbon revenues – similar to what we see with receivables. Investor Banks Equity Debt Cashflow CERs electricity + Power Purchase Agreement ERPA Returns $$$ CERs $$$ Investment Time e.g., energy savings for EE; GWh for RE) - Day 1 Day 2

8. WB Carbon Guarantee contract – How it works WB Guaranteed CER Sales Contract • Proposal to help monetize future Carbon Credits (CERs, etc.) through the ‘Carbon Guarantee’: • Objective: facilitate an upfront payment for CER forward sales Contract (i.e., selling today future CER flows) • Application: a developing country seller (investor in EE/RE) sells CERs to an Annex 1 country buyer (compliance buyers, etc.) • Guarantee: the Bank guarantees government payment obligations (under its shortfall agreement), effectively guaranteeing CER delivery risk for projects in developing countries

9. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee Host Country CERs Carbon Aggregator $ energy savings $ Pool of CDM Projects

10. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee “Off-Shore” Host Country CERs Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA) Day 1 Carbon Aggregator Host Country Government WB Guarantee of Shortfall Agreement Indemnity Agreement energy savings $ Pool of CDM Projects

11. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee Host Country “Off-Shore” Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ (ERPA) $ ‘Shortfall’ Agreement [for failure to deliver] CERs If things go well… Day 1 Carbon Aggregator Host Country Government $ WB Guarantee of Shortfall Agreement Indemnity Agreement

12. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee Host Country “Off-Shore” Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ (ERPA) $ ‘Shortfall’ Agreement [for failure to deliver] CERs Day 1 If things go well… Carbon Aggregator Host Country Government WB Guarantee of Shortfall Agreement Indemnity Agreement

13. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee “Off-Shore” Host Country Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ (ERPA) If things go wrong… CERs Day 1 Carbon Aggregator

14. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee Host Country “Off-Shore” Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ (ERPA) $ ‘Shortfall’ Agreement [for failure to deliver] If things go wrong… CERs Day 1 Carbon Aggregator Host Country Government Loan WB Guarantee of Shortfall Agreement Indemnity Agreement

15. Allocation of Risk between the Buyer and Seller. Back-stopping by the Guarantor Risk Allocation • The project owner takes all project risks, including completion risk and project performance risk • The Buyer takes all Carbon Credit price risk • The Seller takes the risk that the Carbon Credits are not eligible in a pre-specified market (for e.g. EU Emissions Trading System). • The non-eligible CERs are considered as “not delivered” triggering the Guarantee if the Seller does not pay the Buyer for the shortfall.

16. CO2 Market Development Guarantee – How it works CO2 Market Development Guarantee Host Country “Off-Shore” Compliance Buyer [Sovereigns, Private or Public entities] Day 2 $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA) CERs Day 1 Carbon Aggregator WB Guarantee of Shortfall Agreement Host Country Government MDB Indemnity Agreement Trust Guarantor $ “Climate Fund/ Annex I”

17. Conclusions Conclusions • Carbon Guarantee is possible financial product to allow developing countries to help finance low-carbon investment from the proceeds of the forward sale of Carbon Credits to buyers in industrialized countries; • Provides funding today in exchange for a future flow of carbon credits to be generated from an EE/RE investment • Donor funds or other “climate fund” back-stopping Bank guarantee allows • The carbon guarantee instrument to have wider application • Participation of private sector project owner and sellers • Public sector projects in countries where governments are not interested in providing guarantees to benefit.

18. Thank you! Chandra ShekharSinha csinha@worldbank.org +1-202-458-4197