Carbon Finance in Gas Flaring and Venting Reduction

1. Carbon Finance in Gas Flaring and Venting Reduction Veronique Bishop Carbon Finance Business The World Bank OPEC – GGFR Workshop Vienna, June 30-July 1, 2005

2. Outline • Kyoto Protocol basics • Impact of carbon finance • Securing financing • Examples

3. Kyoto Protocol • UN Framework Convention on Climate Change • Industrialized countries (except US, Australia) commit to reduce GHG emissions by 5.2% on average in 2008-12 (vs. 1990) • Target can be met by: • Reducing emissions: CO2, CH4, N2O, HFCs, PFCs, SF6 • CO2 “sequestration” via land use change and forestry • Purchasing ERs from other ratifying countries • “Joint Implementation” – Industrialized countries (EEur, FSU) • “Clean Development Mechanism” – Developing countries • “International Emissions Trading” • Entered into force on 2/16/05

4. Kyoto Compliance Market • Internalizes the climate externality (partly) • “Polluter pays” principle • Modeled on US SO2, NOX market • Free trade lowers the cost of compliance: • OECD: $25-150 per tonne CO2e (marginal abatement cost) • LDCs: <$10 / tCO2e • OECD shortfall of ~ 2.8-4.8 billion tCO2equiv. • Funds established to diversify risk, share cost • World Bank’s role: jump-start market, disseminate lessons, catalyze LDC investment, support host countries .

5. Technology $ Finance CO Equivalent CO Equivalent 2 2 Emission Reductions Emission Reductions World Bank Carbon Funds Technology $ Finance Industrialized Governments and Companies Developing Countries and Companies Carbon Fund

6. World Bank Carbon Funds Prototype Carbon Fund $180 m $128.6 m to date Community Development Carbon Fund. $ 43.8 m to date BioCarbon Fund Netherlands CDM Facility $ 180 m $ 80 m to date Italian Carbon Fund Netherlands Europe and CentraI Asia Facility (with IFC) Netherlands ECAF $ 35 m $ 200 m Spanish Carbon Fund Danish Carbon Fund $ 30 m

7. Impact of Carbon Finance • Emission reductions are calculated relative to a baseline • Key elements: • CO2 reduced by displacing fossil fuels • Mitigation of methane, nitrous oxide, other GHGs • CO2 “sequestered” eg through agroforestry • Impact depends on technology, ER price • Price depends on: • Risk and risk-sharing • Supply and demand within market segment

8. Carbon Prices (Jan. 2004 - April 2005 in $US/tCO2e) Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon

9. Impact by Technology

10. Fossil Fuel Displacement ER cash flows improve IRRs by 0.5 – 3.0%

11. Methane Mitigation Impact on IRR can be >15 percentage points * at US$4/tCO2e

12. Impact for Flaring Reduction at $4/tCO2e

13. Impact for Venting Reduction(flaring only), $4/tCO2e

14. Impact for Venting Reduction(commercial use), $4/tCO2e

15. Impact of Carbon Finance • Revenue boost: • ~$ 6/ 000m3 for flaring reduction • +~$52/ 000m3 for venting reduction • High quality cash flow: • OECD - sourced • Investment-grade payor • $- or €- denominated • Eliminate FX risk • Financial engineering helps tap capital

16. Securing Underlying Finance Host Country Ltr. of Approval • Engagements re: • Regulation (e.g. tariffs) • Kyoto Protocol • compliance CF ERPA ER pmt ERs Sponsor/ Project

17. Securing Underlying Finance Host Country Ltr. of Approval • Engagements re: • Regulation (e.g. tariffs) • Kyoto Protocol • compliance CF ERPA ER pmt ERs Sponsor/ Project Lender? Loan ??

18. Future flow structure: Plantar Brazil Ltr. of Approval PCF ER pmts $5 m ERPA ERs SPV Financing Agr. Rabobank Project Loan $5 m ER payments placed in offshore escrow

19. Brazil Plantar Sust. Fuelwood ER payments amortized 100% of commercial loan principal

20. Future flow structure: Abanico Ecuador Ltr. of Approval NCDF Hidrobanico ERPA ERs CER pmt $4.03 IIC Project Loan ? PPA? Sub

21. Future flow structure: Abanico Ecuador Ltr. of Approval NCDF Hidrobanico CER pmt $4.03 ERPA ERs SPV Financing Agr. IIC Project Loan $7 m PPA Sub CER payments placed in offshore escrow

22. Flaring reduction: Rang Dong • First GFR methodology approved • Additionality: • Cash flows with and without carbon • Project must demonstrate that carbon finance raises IRR above sponsor’s hurdle rate

23. Venting reduction: FSU • FSU republic that transits gas and receives share of gas + royalty • Leaky transmission pipeline: 5% losses • Poor financial condition due to low collections, theft

24. Venting reduction: case • $45m investment to reduce losses to 2% over 3 years • Negative IRR without carbon due to low gas price • IRR increases to 37% with carbon • Financing by oil co, MCM, World Bank • Revenue in hard currency will enable sponsor to repay loan

25. Working with the World Bank Group • World Bank Group’s role in carbon market: • Ensure liquidity in CDM, JI • Benchmark new methodologies • Introduce new countries, sectors, technologies • Learning by doing projects • Support to host countries: • Capacity building • Support in bringing CDM/JI projects to market

26. Working with the World Bank Group • Carbon Finance support: • Purchase of emission reductions • Assistance throughout the project cycle • Project design document • Validation • Project approval, registration • Verification • Flexible structuring: • VERs, CERs, beyond 2012 … • Help in securing underlying financing

27. Conclusions • Carbon finance: • Lowers compliance costs • Improves returns on climate-friendly projects • Provides a bankable revenue stream • Is taking off: Kyoto enters into force 1/4/05 • World Bank Group can help: • Provide a combination of carbon finance and underlying financing • Handle CDM registration process • Help develop capacity

28. Carbon Market Structure Project-Based Transactions Allowance Markets UK Emission Trading Scheme Kyoto Pre-Compliance EU Emission Trading Scheme Chicago Climate Exchange Not for Kyoto Compliance New South Wales Certificates Retail

30. Traded Volumes 60 Kyoto Pre-Compliance Not Kyoto Pre-Compliance 40 20 0 1996 1997 1998 1999 2000 2001 2002 2003 Q1-Q3 Volume traded in project-based transactions, m tCO2e