The World Bank Climate Change Program: Recent Initiatives and Developments

1. The World Bank Climate Change Program:Recent Initiatives and Developments • WB Office Bangkok • December 14, 2007

2. Mitigation Background - What is needed now? • As we enter post-Bali phase of climate change challenges, urgent need to take action and scale up mitigation efforts. • Support long-term investments for transition to low-carbon economy; integrate carbon finance into public and private investment decisions • Shift away from a project-by-project approach to systematic programs of investments in a strategic way • Establish a long-term regulatory framework that provides certainty of a carbon price signal • Provide incentives for development of low-carbon technology • Create incentives for avoiding deforestation

3. The Carbon Partnership Facility

4. The Carbon Partnership Facility: main focus • Align itself with the Regions’ long-term strategies of assistance to the Bank’s client countries • Integrate carbon finance as an instrument to support the Bank’s operational programs. • Focus on mitigation opportunities in multiple sectors with long-term, large-scale impact on emission trajectories at the country level. All countries are targeted. • Mainly focus on the regulatory period beyond 2012, or the end of the Kyoto Protocol’s first commitment period. Flexible with regards to climate policy regime. • Start now, before long-term investments (e.g., power development, transport systems) have locked in future emissions. • Promote technology and leverage finance for low-carbon investments.

5. CPF - Buyers and Sellers in a Partnership BUYERS (governments, companies) Minimum financial contributions Willingness to purchase emission reductions when generated over the long term (Can focus on specific programs, countries, …) SELLERS (governments, companies) Minimum ER contribution Willingness to develop and implement specified emission reduction programs and sell ERs Supported by Carbon Asset Development Fund (CADF)

6. What would “scaling up” entail? • Support national, sub-national (e.g., provincial level, large cities) or sectoral low-carbon development strategies. • Move from custom-made mitigation projects to programs of low-carbon investments. • Aggregate small sources of emissions in mitigation programs, such as end-use energy efficiency through demand-side management. • Develop simpler, standardized, and more cost-effective methodological approaches and administrative procedures, e.g., programmatic, sectoral, cross-sectoral, wholesale. • Eliminate regulatory impediments and improve enabling environment for low-carbon development. • Broadenscope of carbon finance by opening up new opportunities, e.g., carbon capture and storage.

7. What types of programs would it support? • Renewable energy • Fuel substitution to lower or zero carbon fuels • Supply-side energy efficiency, process energy improvement, and demand-side management: • New power generation using advanced technologies • Rehabilitation of old, inefficient power plants • Industrial process efficiency • Lighting efficiency • Transport systems • Waste management systems • Gas flaring and leak reduction • Carbon sequestration and storage

8. CPF: Basic portfolio and “opt-in” to Special Windows Commits to purchase from all of the basic portfolio Buyer 1 Energy Generation • Basic portfolio • established when Facility becomes operational • all Buyers participate in them • Consultative groups of buyers • and sellers may be established • to advice the Bank Energy Efficiency Buyer 2 Waste Management Oil and Gas Transport Buyer provides an additional $ contribution if wants to participate • Special Windows • proposed by Trustee during operational phase as neededand based on buyer interest • Buyer Participants opt-in to the Tailored Windows CCS? Forestry? Voluntary market?

9. Carbon Asset Development Fund • New feature compared to existing WB funds • Benefits Sellers and host country entities by providing resources for: • ER program development • Carbon related feasibility studies • Methodology work • Enabling environment • Benefits Buyers by enhancing the quality and timeliness of the ER Programs • Funded by • fees from Buyers (upfront and annually over time) and Sellers (ERPA payment deductions) • Donor contributions

10. Minimum participation levels • Sellers: • commitment to develop one or more Programs for the Facility and to sell ERs to the Carbon Fund • Further criteria to be established based on consultations • Buyers: • €[70] million for governments • €[35] million for private sector • promissory note or pre-payment; cash drawn down over time • if participates in Special Window, an additional contribution • Donors to the CADF: minimum of €2 million

11. Methodologies • May use CDM/JI methodologies, CDM Program of Activities approach • Other programmatic/sectoral approaches would be explored, e.g., • A common baseline for, e.g., power or a product, expressed as a carbon intensity/emission per unit of production • “Deemed savings” approach (pre-determined emission credit per activity) in lieu of tracking over time • Agreed “automatic” eligibility of certain technologies/ activities to claim credits (in a country and timeframe) • Standardization, benchmarks

12. Pricing approach • Objective to agree to an approach that is transparent, coherent, and able to adjust to changing market conditions • Needs to reflect the transaction risk profile, e.g., • asset type and market segment • length of the contract • risk sharing between the Sellers and Buyers • It may use, as appropriate: • both fixed and variable pricing elements • indexation and inflation/currency devaluation-based corrections • Such an approach would imply that some ERPAs defined in fixed € terms rather than fixed volume • delivered ER volume becomes the variable • The pricing approach will be developed in consultation with the Participants and approved by the Partnership Committee

13. What is an ER Program? • A series of the same and/or associated activities for which a common approach can be developed • Involves scale-up through replication and “mass-production” • May include multiple entities undertaking the investments, and involve one or several ERPAs • May be undertaken through a program implementing agent • Would support sectoral strategies and transformation • May include elements that help create or improve the enabling environment, and assist with technology dissemination

14. Examples from China:I. Biogas program Rationale for engagement Min. of Agri. is targeting an increase of household bio-digester installation by 18 million units by 2010 and 20 million by 2015 (China Biogas program). Existing Bank Dialogue Already five provinces in the Bank’s China eco-farming project, targeting installation of over 580,000 bio-digesters. Pilot project (Hubei) well advanced in CDM validation process and will establish a standardized procedure for quick replication. Potential Scope for pilot and scale-up, including Household Bio-digester Program, Large-scale farm biogas program, Biomass gasification Program to all five provinces. • Danish Energy Authority/Foreign Ministry keen on associated TA support

15. II. Provincial EE program Rationale for engagement Provinces are allocated 20% of national Energy Intensity Reduction target and have to achieve this via concrete regulations, policies and programs. Existing Bank dialogue Bank in discussions with 3-4 provinces (highest energy consumers) on a package including loans, CF, TA to support their EE programs. Potential areas of engagement • green lighting, public building retrofitting, building codes, Labeling, mandated higher energy performance standards for household Electric appliances • Conversion of existing power plant to CHP to supply heat to new primary district heating systems • Key industrial companies to undertake process integration and optimization (steel, oil refinery, ammonia) • Government procurement program to make procurement decision based on life-time cost (more energy efficient) rather than least upfront cost Carbon Bundling Arrangement: Can be bundled through FI involved in financing program, or other coordinating entity to blend government subsidy with CF and commercial loans • Shandong wants Bank to provide TA to establish a CDM center for this.

16. What’s different from current carbon finance operations? • Firmly anchored and “driven” by CAS/CPF, Region and client priorities • More transactions based on Bank lending and other operations • Sellers have more say in governance, pipeline development, pricing and other contract terms • Counterparts on seller side more likely to be in the public sector than in current CF • Project development/preparation TA facility (Carbon Asset Development Fund)

17. Business implications • Targets: • CPF operational April/May 2008 • Capitalize at a rate of $1bn/year over FY09-FY13 • Each $1bn would support 10-20 major programs* • Pilot program development in FY08 • Scale up in operations from FY09 onwards, with roughly 1-4 programs/Region/year* * assuming 5m tons/program and $10-$20/ton of emission reduction

18. FCPFForest Carbon Partnership FacilityPiloting a System of Positive Incentives for Reducing Emissions from Deforestation and Degradation

19. Context Context • “Avoided deforestation” excluded from the Clean Development Mechanism • World Bank CF experience in forestry sector: • BioCarbon Fund: LULUCF pioneer since 2004, including W2 for avoided deforestation at project level • Request from G8 Heiligendamm Communiqué to design forest carbon partnership • 26 IBRD and IDA countries have already expressed interest in participating • Extensive consultations over the past year+ with donors, international organizations, NGOs, private sector • Australia and Japan have made public announcements of financing; at least 5 other donors have indicated financing will be likely

20. Proposed Response Proposed response: FCPF main focus Prepare for a system of positive incentives post-2012 that includes REDD through • Capacity building: readiness for a future system • Pilot performance-based payments > $1 b Pilots: $200 m Readiness: $100 m

21. Characteristics of the Facility Features of the Facility • South-North Partnership • Both sellers and buyers will be represented in the governance structure • NGOs, Int’l orgs., Indigenous Peoples groups and non-contributing private sector will have observer status • Not pre-empt negotiations • Close cooperation with parties and UNFCCC secretariat • Learning by doing • Pilot different approaches • Test different implementation strategies • Include all actors and stakeholders • Seek guidance from private investors • Reach out directly to the drivers of deforestation during implementation

22. Eligibility of countries Subtropics Limit Subtropics Limit

23. Expressions of Interest Received Expressions of interest received ($165 m. committed) • Argentina Indonesia • Bolivia Kenya • Cameroon Laos • Central African Republic Liberia • Colombia Mexico • Costa Rica Nicaragua • Democratic Republic of Congo Pakistan • Ecuador Panama • El Salvador Papua New Guinea • Gabon Paraguay • Ghana Peru • Guatemala Republic of Congo • Guyana Vanuatu

24. Two mechanisms Carbon Finance CARBON FUND Purchase of Emission Reductions Readiness READINESS FUND Capacity building

25. Readiness Mechanism • Build the capacity of countries to access a future system of incentives • Components (“Readiness Package”): • Reference scenario • Historical emissions • + Future emissions? • Emission reduction strategy • Monitoring system • Target: $100 million • ~ 20 countries • Competitive selection + balance

26. Carbon Finance Mechanism • Pilot carbon finance transactions for “ready” countries before post-2012 regime is in place • Target: $200 million • ~ 5 countries • Competitive selection + balance

27. Expressions of Interest Received Next steps for both facilities Carbon Partnership Facility • December 2007: Announcement at CoP13 (Bali) • January – March 2008: Joint consultative meetings with potential buyer and seller participants to finalize detailed design and governance of CPF; release of Information Memorandum • Spring 2008: CPF could start operations, if $500 million in purchase commitments has been reached by then. Forest Carbon Partnership Facility • November (8 – 9) 2007: Additional consultations with NGOs and International organizations • November (12 - 13) 2007: Final Consultation Round on the Term Sheet and Information Memorandum (potential donors, sellers and buyers) • December 2007: Launch at CoP13 (Bali) • March/April 2008: FCPF declared operational

28. Expressions of Interest Received Key contact persons Carbon Partnership Facility • Johannes Heister Senior environmental economist, Methodology and Policy Team • Jari Vayrynen Senior environmental specialist, Operations Forest Carbon Partnership Facility • Benoit Bosquet Senior Natural Resources Management Specialist (LCSEN) • Werner Kornexl Senior Technical Specialist • Eliza Winters Senior Environmental Specialist