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Prototype Carbon Fund

Prototype Carbon Fund. Structure of the presentation Part 1 Kyoto Protocol and the Clean Development Mechanism The Prototype Carbon Fund and carbon financing Part 2 The PCF project cycle PCF projects under development PCF and China.

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Prototype Carbon Fund

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  1. Prototype Carbon Fund Structure of the presentation • Part 1 • Kyoto Protocol and the Clean Development Mechanism • The Prototype Carbon Fund and carbon financing • Part 2 • The PCF project cycle • PCF projects under development • PCF and China

  2. Prototype Carbon FundIntroduction to the Kyoto Protocol, Clean Development Mechanism and the PCF PCF and Climate Change Synergy Workshop, Beijing, November 30, 2001

  3. Expected Demand for GHG Creditsbefore US announced decision not to ratify • 39 Developed Countries and Economies in transition: • Agreed to “differentiated” and binding emission limitations • Reduction of greenhouse gases by 5.2 % below 1990 levels in the commitment period 2008-2012 (~2800 - 4800 MtCO2, including US) • Most of the OECD countries are unlikely to meet their commitments under Kyoto Protocol and emission will exceed their commitments: • North America by 21% to 30% • Pacific OECD by 19% to 29% • Western Europe by 16% to 27% • The projected non-compliance is • Low of 620 MtC/yr in 2010 • High of 1,300 MtC/yr in 2010 • The marginal cost of domestic abatement will drive the demand for external GHG credits.

  4. The Kyoto Mechanisms sustainable development and lower cost of compliance • Clean Development Mechanism (CDM) • credit for emission reduction investments in projects in developing countries • Emission reductions must be real and measurable (verified by third party or Operational Entities) • Joint Implementation (JI) credit for emission reduction investments in projects in EIT countries • International Emissions Trading (IET) • trading of emission reduction credits among developed countries PCF DOES NOT deal with International Emissions Trading (IET)

  5. Purpose of the PCF To help create a market for project-based carbon offsets under the Kyoto Protocol by: • providing “learning by doing” experience for Parties to the Protocol on key policy issues (for example, defining and validating baselines) • demonstrating how CDM and JI projects can contribute to sustainable development • building confidence that the CDM and JI can benefit both developing countries and buyers of emission reduction credits from projects

  6. Features of the PCF • Closed-end Mutual Fund structure with diverse portfolio to: • Enhance the Learning Experience • Reduce Transactions Costs • Minimize Project Risks • Shareholding: Governments, $10 m; Companies, $5 m • Total Capital: US$145 million to be used in ~ 30 projects • PCF Products: • High value knowledge asset: • to facilitate understanding of how CDM and JI can be operationalized • facilitate efficient market regulation and • leverage for sustainable development for Parties • Competitively priced, high quality emissions reductions • target portfolio wide outcome price: ~$5/tCO2 ($20/tC) • target deal price: $2.5-3.5/tCO2 (~$9-12tC)

  7. PCF Subscribers ($145 million) 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

  8. Host Country Committee Joined (through MoU or Project Endorsement) Considering Africa (10) Benin, Burkina Faso, Ghana,Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe Bangladesh, Bhutan, Belarus, Egypt, Philippines, Sri Lanka, Thailand Asia (1) India Eastern Europe/ C Asia (8) Bulgaria, Czech R., Hungary, Kazakhstan, Latvia, Poland, Romania, Uzbekistan Latin America (13) Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Peru, Uruguay

  9. Organizational Structure of the PCF PCF Participants - 17 companies and - 6 Governments World Bank As the “PCF Trustee” PCF Fund Management Committee - 5 Sector Managers Host Country Committee Fund Management Unit Fund Manager + 8 specialists Participants Committee - 4 companies - 3 Governments Technical Advisory Group

  10. Unique Legal Agreements CDM/JI oversight Host government (transferring country) Annex 1 Government (acquiring country) World Bank /PCF Project entity Participant

  11. Impact of Carbon Finance on Project Assuming a revenue stream based on emission Reduction (at US$ 3/TCO2e) the change in internal rate of return (IRR) of projects: Project, Not Equity, IRR.

  12. Carbon prices on past transactions Source: Natsource

  13. Uncertainties in Emission Trajectories: Percentage change in emissions from 1990 to 2010 Source: IPCC

  14. Post-Bonn, Best Estimates:Demand/supply balance Annex I Gap between targets and emission projections (2008-2012) Russia Ukraine EU candidates OECD Australia Canada Japan EU15 -8000 -6000 -4000 -2000 0 2000 4000 Mton CO 2 Source: CO2e.com

  15. Emission forecasts for Russia 1990 1995 2000 2005 2010 2015 Data / target -5 NC2 ref -15 Strategy Emissions (% from 1990) -25 IEA EIA -35 EIA 2001 -45 Source: CO2e.com

  16. Volumes and Prices of Emission Reduction without the US Gross annual demand for ERs 1400 – 2400 MtCO2 (between 2008 and 2012) - Credits for hot air 950 – 2150 MtCO2 - Credits for Annex B Sinks » 330 ( 200) MtCO2 = Net demand 0 – 1800 MtCO2 With full competition, our market analysis suggests: • CDM trades from near zero up to $8/tCO2 • Range of $1.50-4/tCO2 more likely in our view • PCF currently pays $3-4/tCO2

  17. ? www.PrototypeCarbonFund.org

  18. Prototype Carbon Fund The PCF Project Cycle, Documentation and Current Portfolio of Projects PCF and Climate Change Synergy Workshop, Beijing, November 30, 2001 Integrating Carbon Finance in Bank’s Work  November 19, 2001 Location: JB1-080

  19. Project selection and baseline validation Main steps in the Project Cycle Project approval and implementation Periodic independent verification/ certification with specified distribution agreement Transfer of emissions reductions to Participants Account/ National Registry Transfer/ use within National Registry

  20. Preparation and review of the Project Project completion 1. Project ideas reviewed by PCF 2. PCN prepared by project sponsor 3. Host country endorsement sought 4. Further work authorized by FMC and Participants 5. PCF signals intention to purchase ERs 3 months Up to 21 years Baseline Study and Monitoring and Verification Plan (MVP) Periodic verification & certification 2 months Validation process 1-3 years 2 months 3 months Negotiation of Project Agreements Construction and start up

  21. Project completion Preparation and review of the Project 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years 1. Baseline study and MVP prepared 2. PCF quality control of results 3. Documents for Validation prepared by PCF and sponsor Periodic verification & certification 2 months Validation process 1-3 years 2 months 3 months Negotiation of Project Agreements Construction and start up

  22. Project completion Preparation and review of the Project 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years Periodic verification & certification 2 months Validation process 1. PCF contracts the validator and submits documents 2. Validator studies project design, baseline and MVP and consults with PCF and project participants 4. Validator issues a report and opinion 1-3 years 2 months 3 months Construction and start up Negotiation of Project Agreements

  23. Project completion Preparation and review of the Project 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years Periodic verification & certification 2 months Validation process 1-3 years 2 months 3 months Construction and start up Negotiation of Project Agreements 1. PCF prepares terms sheets and draft legal documents. 2. Pre-negotiations workshop for project participants (optional) 3. Negotiations completed and project agreement initialed 4. Project participants achieve financial closure and formal approval 5. Signing of project agreements

  24. Project completion Preparation and review of the Project 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years Periodic verification & certification 2 months Validation process 1-3 years 2 months 3 months Negotiation of Project Agreements Construction and start up 1. At construction completion, verifier contracted by PCF 2. Verifier checks that specifications of the MVP are met (“initial verification”) 3. Project implementation starts 4. Project entity monitors in accordance to the MVP

  25. Project completion Preparation and review of the Project 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years Periodic verification & certification 2 months 1. Verifier periodic verification report 2. PCF pays project sponsor for ERs certified 3. Certified ERs issued as per distribution agreement 4. Verification undertaken annually or as deemed appropriate Validation process 2 months 3 months Negotiation of Project Agreements Construction and start up

  26. Project completion Preparation and review of the Project • Crediting period either • 10 years fixed or • 7 year renewable (maximum 21 years) 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years Periodic verification & certification 2 months Validation process 1-3 years 2 months 3 months Negotiation of Project Agreements Construction and start up

  27. PCF Project Documentation Preparation and review of the Project Project completion • Project Idea Note • Project Concept Note • Project Concept Document (or equivalent) 3 months Baseline Study and Monitoring and Verification Plan (MVP) Up to 21 years • Project Design Document • Baseline study and ER projections • Monitoring and Verification Plan Periodic verification & certification 2 months • Verification report • Supervision report Validation process 1-3 years 2 months • Validation protocol and report 3 months Construction and start up Negotiation of Project Agreements • Initial verification report • Project Appraisal and related documentation • Term sheet • Emission Reduction Purchase Agreement

  28. Projects Portfolio Development • Project selection and Portfolio development criteria • Bank and UNFCCC 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 and Eastern Europe • Outreach and consultations in East and South Asia • Current Pipeline • 45 projects with potential carbon financing of $300-350 million • 28 projects ($ 150-200 million in ERs) in the current pipeline targeted for FY 02 • 20 of 28 are host country endorsed projects • $ 70 million in 16 project approved by investment committee

  29. Status of Approved Projects (1) • Latvia: $2.5 million PCF Purchase • anaerobic decomposition of about 20,000 tons of garbage a year • ERs from the existing landfill site gas recovery by June 2002 • Uganda: $3.9 million PCF purchase • a 5.1 MW and 1.5 MW small hydro generating facilities in the West Nile region • Displaces >200 small and few large public diesel gensets • Chile: $3.5 mm PCF Purchase • 25MW run-of-river hydro generating 175 GWh to replace coal/gas • Brazil: $5 mm of PCF Purchase • Substituting coal/coke by sustainably produced charcoal in pig iron production, plus afforestation and ecosystem restoration, biodiversity and health benefits

  30. Status of Approved Projects (2) • India: PCF Purchase $8 million • waste to energy project: 220,000 tons per year of waste to generate 14.8 MW of power • Morocco: PCF Purchase $7 million • 140-300MW wind farms in Tangiers and Tarfaya replacing light oil and or coal • Costa Rica: $10 million PCF Purchase • Consists of 5 hydro (of which 2 are hydro rehab) 2 windfarms (total of 18 MW). One hydro rehab found non-additional • Sectoral baseline and MVP to be finalized and validated in November, 2001 • Nicaragua: $700,000 PCF purchase • 1.4MW rice-husk fired power plant displacing diesel power • Honduras : $5 million PCF purchase • 60MW windfarm displacing oil/coal on national and regional grid

  31. Status of Approved Projects (3) • Kazakhstan: Kumkol gas flaring reduction • To generate 40MW of power • PCF purchase of $ 10 million • Kenya Busia bagasse cogen • 20MWe of generation – 13.6 MWe for export • PCF purchase of $ 4 million • Romania: Cluj-Napoca district heating • 430 MWt and 35MWe combined heat and power project • PCF purchase of $6-8 million • Uzbekistan: Andijan district heating • Rehabilitation of 8 of the 22 new regions in Andijan • PCF purchase of $ 5 million

  32. Possible Project Ideas for China • Anshang bio-coal briquette project in Liaoning province • $100M bio-briquette production line for heat supply boilers, $10M worth CO2 in 20 yrs • Guitang bagasse co-generation projects in Guanxi Province • 12 MW, $6M, $0.5M worth CO2 in 10 yrs • Guangzhou rice hull gasification • 1.5 MW, $2M, $0.4M worth CO2 in 15 yrs • Zhenjian City rice straw gasification project in Jiangsu Province • 3MW, $4M, $0.8M worth CO2 in 15 yrs • Beijing city: replacement of coal with natural gas in plaster factory • $ 10 million total; $ 3.5 million; 1.2 MTCO2e • Coal to natural gas power generation • 6x400MW; $ 1.15 billion; 40MTCO2e (= $ 120 million) • Other proposals in waste management, coal bed methane, etc.

  33. Next steps… • PCF would welcome the participation of China • PCF Participants have a indicated that $10 million can be set aside till June 2002 for project(s) in China • Suggestions on strategy to utilize the PCF resources by choosing projects for • Learning the business • Leveraging private sector financing • The PCF/ World Bank would welcome suggestions of the way forward to utilize $10-15 million in PCF projects over the next 1 year

  34. ? www.PrototypeCarbonFund.org

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