Prototype Carbon Fund

1. Prototype Carbon Fund The PCF and other World Bank Carbon Funds Pioneering Greenhouse Gas Emission Reductions The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions Training Workshop: Project Formulation for the Clean Development Mechanism Hanoi, Vietnam September 30- October 2, 2002 Eduardo Dopazo Prototype Carbon Fund edopazo@worldbank.org www.prototypecarbonfund.org

2. Outline of the presentation • Introduction on the PCF • PCF project portfolio development update • Key features of PCF emission reduction purchase contracts • Lessons learnt from the PCF • World Bank’s strategy beyond the PCF • Netherlands Clean Development Facility • Community Development Carbon Fund • BioCarbon Fund • CF-assist

3. Introduction on the PCF

4. PCF Objectives Pioneering CDM and JI Emissions Reductions market development to demonstrate: … that investments under CDM/JI can: • Earn export revenue for Developing Countries/Transition Economies engaging in the new ER commodity trade • Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors • Contribute to sustainable development … how private sector and governments can implement the CDM/JI project cycle and compete in emerging global carbon market

5. Features of the PCF • Closed-end Mutual Fund structure with diverse portfolio: 30-35 projects and carbon purchase contracts • Shareholding: Governments $10 m; Companies $5 m • Total Capital: $180 million (following June decision of 9 shareholders to expand participation by $35 million) • PCF Products: • Competitively priced, high quality emissions reductions • purchase price range: $3.0-4.0/tCO2 • Target portfolio wide price outcome ~$5/tCO2 • High value knowledge asset: create competitive advantage for corporate investors; efficient market regulation; leverage for sustainable development for UNFCCC Parties

7. PCF Subscribers ($180 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. How the PCF Benefits Host Countries? • Capture resource rents for the new commodity (ERs) • Stimulate private investment in key sectors • Demonstrate that trade in ERs will result in transfer of cleaner, more efficient technology • Provide local and regional pollution abatementand health benefits • Improve capacity to compete in the emerging market • Better inform them to pursue their interests in convention negotiations

9. Host Country Committee • Formal element of PCF Governance Structure independent of Bank • Bank has proposed PCF HCC become CF HCC –ie all products. • Now 43 host countries; Formed HC Steering Committee to cope with growth • Functions: Advise on PCF operations and on technical assistance needs • Vital source of advice, feedback and outreach for CF Strategy and capacity building

10. Host Country Committee Members Members (through an MOU or submission of a project idea note) Africa (10) Benin, Burkina Faso, Ghana,Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe Asia (1) India Eatern Europe/ Central 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, Perú, Uruguay

11. Project Portfolio Development Update

12. Projects Portfolio Development • Project selection and Portfolio development criteria • Bank and Kyoto Protocol 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, Eastern Europe and, of late, in South Asia • Increasing emphasis on developing deal flow in East Asia • Current Pipeline • 45 projects under development with potential carbon financing of $300-350 million • As of June 2002, over $ 90 million in 21 project approved by investment committee

13. FY02 Pipeline Technology Distribution

14. PCF – Project Distribution

15. Status of Carbon Purchase Agreements Negotiated as of July 02 (ERPA = Emissions Reduction Purchase Agreement: Validation = key step in CDM asset creation process) • 14 ERPAs with completed Validation: • Latvia, Brazil, Chile, Uganda, Romania, Poland (Stargard and Pisz) and Czech Republic (Thomayer and Rozmital), Costa Rica, Nicaragua. • Nearing Completion: 4 more deals by end October, 2002. • Bulgaria Svilosa Wood Waste to Energy, Durban MSW, Poland Kolo Geothermal, Guatemala Hydro. • Pipeline exceeds $150 million of carbon purchases under preparation.

16. Key features of PCF emission reduction purchase contracts

17. Knowledge Asset Creation and Use Reducing the learning costs of CDM/JI for Public and Private Sector entities by • Establishing benchmarks and templates for regulator and market players in business process of creating Kyoto Protocol quality carbon assets: • Validation Protocol, benchmarks for baselines/Monitoring and Verification methods for technologies and policy contexts; • Carbon Purchase Contracts, business processes (generic terms and templates) • Research on Methods, Markets and Process to streamline and reduce costs

18. Legal Agreements for PCF Projects 3. Host Country Agreement Host Country National Legislative Framework / Agreement / Authorization 1. Letter of Project Endorsement 2. Letter of Intent PCF Trustee Project Entity 4. Emission Reductions Purchase Agreement

19. Impact of Carbon Finance on Project Financing at $3/t CO2e Project, Not Equity, FIRR. Note: data are preliminary

20. Impact of Carbon Finance: Quality and Quantity (at $3/t CO2e) • Methane-capture projects: carbon finance can turn marginal projects into bankable ones • “Traditional” renewables: boost return by 0.5-2.5% • Makes some marginal deals bankable • Increases profitability and reduces investor risk • Often reduces Government subsidy required • Improves project’s access to capital markets thru: • Secure contracted flow of ForeX from reliable counterparty • Improved Quality of cash flows as well as volume • Payment of CF in dollars to lender mitigates country risk • Advance payments can be critical to financial closure • Sponsor can borrow against contract (like PPA)

21. Lessons Learnt from the PCF

22. Findings • CDM/JI Carbon Asset Creation is complex and difficult with long lead teams for projects and ER delivery • Regulatory uncertainty remains post-Marrakesh • Minimal direct private investment in CDM/JI • First real carbon deal is key to Private and Govt. capacity building • Small projects/small countries lose out

23. World Bank’s strategy beyond the PCF

24. World Bank Response:Carbon Finance Beyond PCF • Expand Carbon Market Development (PCF Expansion, Dutch-VROM, others) • Provide First-of-a-kind opportunities: Introduce more countries and companies to carbon market • Benchmark carbon asset creation: Increase certainty and lower entry barriers for private capital • Integrate and strengthen TA/Capacity Building: CF - assist • Demonstrate credible forestry/agriculture “sinks” activities: BioCF • Open Markets for small projects and small countries: CDCF

25. Buying Carbon for the Netherlands • Features of the Netherlands Clean Development Facility • Euro 35 million/year contracted volumes for each of 4 years • Minimum of 8 million tons CO2 per year • Price range Euro 3.5-4.5 per ton CO2 • Deal Flow – Size and Source • Average deal size of greater that 1.5 million tons (about 6 million Euro in carbon finance) • 5-6 deals per year but will seek larger deals • Developing Countries (CDM) only • Kyoto-Ratifying Countries or pay only after ratification • No carbon sequestration before CoP9

26. Benchmarking and Securing High Quality ERs • Sectoral and Standardized baselines/monitoring for significant Carbon Assets • Creating secure pools of environmentally credible carbon assets for private market Examples: • Mexico: PEMEX – Gas Flare Reduction/Oil Field Efficiency; Wind and Hydro Assets; Sugar Mill Cogen • South Africa: LandFill Gas and Sugar Mill Cogen • Brazil: LandFill Gas to Power

27. Development + Carbon = Carbon with a human face

28. Overview • Developed with International Emissions Trading Association (IETA) • Objective: Purchase ERs + create community development benefits • Small-scale projects in small countries and poor, rural areas in all developing countries • US$ 100 m funding target • Private & public sector participants • Managed as a World Bank Trust Fund

29. Technology $ Finance CO Equivalent CO Equivalent 2 2 Emission Reductions Emission Reductions How the Fund Works Technology $ Finance Industrialized Governments and Companies Developing Countries and Communities Community Development Carbon Fund

30. Rationale • Carbon finance now bypasses small countries: • Small projects= high transaction costs, high risks • Market for high value “development + carbon” ERs • UNFCCC’s drive to cut costs through streamlining procedures and bundling projects

31. Design Challenge:Lowering Cost of Delivering Small Projects to CDCF • Applying CDM streamlined procedures • Using Bank “umbrella” legal agreements and project appraisal documents for financial intermediaries (SMEs, micro-finance credits, development banks, NGOs) • Grooming financial and other intermediaries to deliver carbon finance to lines of business (small/micro power supply, crop processors, rural industry) • Taking costs off the balance sheet for upstream costs: • raising pools of Bilateral ODA and Foundation funds for TA • Optional up-front payment of Fund shares to generate net income for

32. CDCF Portfolio Criteria • Compatibility with UNFCCC definition of “small scale” • Only CDM • No more than 10%-20% of capital in one country • A minimum of 25% of portfolio in LDCs and other poor smaller developing countries • Up to 25% of capital for small-scale agroforestry • Local+Global environmental benefits + improve local livelihoods

33. BioCarbon Fund Harnessing the carbon market to sustain ecosystems and alleviate poverty

34. Fund Overview Three equally important goals • Carbon sequestration or conservation • Promotes environmental protection and biodiversity conservation • Promotes poverty alleviation and improved livelihoods

35. Fund Overview Basic structure • Projects under Art 6 (JI) and Art 12 (CDM) • Second window : Projects that meet the three goals but are not Kyoto compliant in the First Commitment Period • Private & publicsector participants • Target sizeUS$ 100 million • Managed as World Bank Trust Fund • Parallel funds for technical assistance

36. Rationale • Demonstratetechnical and policy issues of Land use, land-use change and forestry (LULUCF) activities • Extendcarbon finance to agriculture and forestry sectors • Meet the demandfor cost-effective ERs from mandatory and voluntary markets • Providea source of funds for proper land management and land rehabilitation practices

37. Parallel Resources • Capacity building • Training, Workshops, Fellowships, Dissemination • Research • Cost effective measurement & monitoring • Policy issues (additionality, permanence, leakage) • Terms of implementation • Project Preparation

38. The Big Lessons The Role of TA • Integrating learning-by-doing from transactions and capacity building is essential • Can’t have a “buy and goodbye” approach • First real carbon purchase deal is key to Private Sector and Govt. capacity building • All New Funds/Facilities must combine capacity building and carbon purchases • PCF had to retrofit with PCF+ • PCF has generated unique knowledge assets • Must vigorously disseminate this knowledge • Must create internal and external centers of excellence through partnership

39. A New Initiative on Capacity Building CF - assist Responding to the evolution of the Carbon Market and the need for assistance for developing countries and economies in transition to build capacity and institutions for JI/CDM and implement their carbon market strategy

40. Objectives of the CF-Assist • To follow the evolution of he KP process • To respond to WB clients need for technical assistance • To facilitate host countries access to the carbon market • To enhance the opportunity to develop JI/CDM projects • To strengthen technical assistance for JI/CDM in the WB • To build on and replicate the success of the NSS program • To strengthen the links with other WB and donors • programs

41. In summary… • PCF well under implementation • $ 32 million contracted in 12 projects • business target of placing $120 million by June 2003 • Range of baseline methodologies and monitoring plans developed and “validated” • Strategy of the Carbon Finance Business of the World Bank • Expand Core Carbon Market Development • About $320 million (including PCF) in hand • Demonstrate credible forestry/agriculture “sinks” activities • Greatest convergence of development and climate mitigation • Learning-by-doing prototype fund – the BioCarbon Fund • Open Markets for small projects and small countries: • Renewable energy for rural poor and poorest countries • Core business of the Bank – the $50-100 million rolling CDCF • Expand the capacity Building and Technical Assistance • activities (CF assist)

42. Prototype Carbon Fund The PCF and other World Bank Carbon Funds Pioneering Greenhouse Gas Emission Reductions The PCF and other World Bank Carbon Funds - Pioneering Greenhouse Gas Emission Reductions Training Workshop: Project Formulation for the Clean Development Mechanism Hanoi, Vietnam September 30- October 2, 2002 Eduardo Dopazo Prototype Carbon Fund edopazo@worldbank.org www.prototypecarbonfund.org