A Low-Carbon Development Facility (LCDF) To leverage an Initial Capital

1. A Low-Carbon Development Facility (LCDF) To leverage an Initial Capital To finance a growing Portfolio of Low-carbon Development Projects To stabilize the GHGs concentration in the atmosphere Christophe de GOUVELLO, the World Bank The Rio Climate Challenge, Rio de Janeiro, Oct 28, 2013 The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent.

2. Potential for low-carbon development projects is huge How to finance them ?Proposal for a Low-Carbon Development Facility

3. Some basic facts Emission Reductions in Annex 1 countries alone will not be enough to meet GHG concentration targets (while their historical responsibility remains) Mitigation Potential in Non-Annex 1 In GtCO2e / Year World Baseline 60 Annex 120 - 25 As a consequence: Emission Reductions brought by Non-Annex 1 countries in the form of offsets will not be enough either Target For Stabilization 30 Rest of the World Scaling up the Emission Reduction effort in Non-Annex 1 beyond offsets is a necessity 2030 2030 • Reductions in Non-Annex 1 countries require investments, not only soft policies • Many of these investments enhance development (energy, transport etc.) • Tens of thousands of potential Low-carbon Development projects Potential for mitigation projects in Non-Annex 1 countries is huge Up to 25Gt CO2e/year (Sources: UNFCCC, McKinsey, Low-carb Studies, etc.) A gap to fill to stabilize concentrations

4. Inventory of potential Low-carbon Projects in Brazil 5 Sectors : • Fossil Fuels for Industry Use • Waste Management • Electricity • Transportation and Vehicular Fuel • Other Industrial Inputs 3 Assessments • GHG Emission and CER generating potential • Required Investment • Contribution to Energy Matrix

5. Example: FossilFuels for Industry Use(4 othersectorswerealsoscanned) Thermal Use/ Consumption Fuel production Transport 88% of available CDM methodologies UNUSED in Brazil(as of the date of beginning of the project) Top the iceberg is the 300+ CDM projects in Brazil “Scan” the bottom part of the iceberg

6. Methodology to inventory projects Use the CDM as a lens to track potential low carbon energy projects How many potential Low-carbon projects in Brazil similarto projects developed in other countries with approved CDM methodologies ?  61 types of Low-carbon projects  Lookfor data base of facilities or sites in Brazil that are similar to the ones that are already implementing a CDM project somewhere else in the world (or in Brazil)  Count facilities in these databases, which could implement same technologies / industrial processes  Use CDM methodologies to estimate achievable emissions reductions in these facilities or sites  Estimate Investment costs and Energy Development outputs associated to these potential low-carbon projects

7. Example: FossilFuels for Industry Use(4 othersectorswerealsoscanned) Thermal Use/ Consumption Fuel production Transport Example: Fuel-switch from Fossil to Biomass: Pulp and Paper Industry

8. Synthesis of Results per Sectors Number of Projects pre-identified : 18,480 : 2/3 green field and 1/3 incremental projectson existing installations Fossil Fuels for Industry: 2.204 projects/sites Other Industry Inputs: 706 projects/sites Transportation (Vehicular Fuels): 344 projects/sites Waste Management : 3.124 projects/sites (10 GW) Electricity: 12.102 projects/sites (452 GW) Synthesis: Over 18.000 potential mitigation projects and sites Potential GHG Emissions Reductions : 450 MtCO2e/year Corresponding investment need:US$ 1,284 billion + (annual investment in Brazil is arount $225 billion) Potential value of GHG in 10 years ($10/tCO2): US$ 45.6 billion

9. Sameinventorywasdone in Braziland 44 Sub-SaharanAfrican countries Antecedentes Number of Potential Projects 3,227 Potential GHG reductions 740 MtCO2 /year 109 % of current emissions 225 % of current capacity 155 GW Potential of additional power generation capacity $ 97.8 billion (10 or 21 years, base 10 US$/tCO2) Value of the GHG reductions over crediting period $ 157,6 billion Investment cost (only for projects for which cost data is available)

10. Main issue is financing PROPOSAL: Create a Low-Carbon DevelopmentFacility (LCDF) to provide financing PROBLEM: Bottleneck Limited access to financing Many clean infrastructure projects cannot achieve financial closure(lack of liquidity, too short maturity, risk adversity, etc.) Even if eligible to sale carbon credits(as evidenced by CDM pipeline) To scale-up financing by tapping on large international capital markets pools(pension funds, insurance funds, sovereign funds, etc.) To unlock economically viable low-carbon development projects (energy projects, transport project, industrial projects, etc. that generate commercial revenues) To harvest the large mitigation potential A Need for a New Financing Mechanism to support Emission Reduction investments

11. The Low-Carbon Development Facility:LCDF Principles • Initial LCDF Capital sized to sustain AAA rating while … • …raising large volumes of resources from financial markets through AAA rated bonds… • …to provide cheap AAA-conditions financing to low-carbon investments, which ratings are far lower(ranging from C to AA)

12. LCDF PRINCIPLES Clean Development Capital Paid by Annex -1 Countries INITIAL CAPITAL: $68Bn Diversified Portfolio of BBB Loans to Low-Carbon Investment Projects in Developing Countries Capital is enough to sustain the AAA rating Global Capital Markets NewLoans Libor+ 10bp AAA Bonds Issuance Libor – 20bp $100Bn/y $100Bn/y $100Bn/y $50Bn/y Public and Private Sources for 1/3 co-Financing AAA-Rated Facility with $100Bn annual financing power

13. LCDF PRINCIPLES LCDF Profile LCDF finances an abatement capacity of circa 10 GtCO2eq per year in 2030 (increases progressively) $100Bn international annual financing brought through LCDFcompares to FDI flows of $600Bn/year and ODA of $75Bn/year Initial capital of $68Bn by Annex 1 to sustain the AAA rating by weathering default on loans in 99.9996% of cases Concessional rate of Libor + 10bp on 2/3rd of financing; a BBB emerging government borrows at Libor + 300bp Average financial cost of the abatement effort “seen” by Annex 1 countries of $1.1/tCO2e Private and public banks bring their loan screening, origination and financial analysis in a public-private partnership with LCDF Low Carbon Development Facility: facts and perspective

14. LCDF PRINCIPLES Origination and Monitoring/Reporting/Verification of the Environmental Performance Worldwide Projects Screening and Loan Origination The CDM has already been a powerful magnet (already 7,000+ projects, LCDF would boost attractiveness) Available studies show that the potential number of projects is huge (Low Carbon studies, Africa Study) Private banks would work as partners with the LCDF: Bring their screening and loan origination capacity to increase LCDF regional penetration and world scope Other entities (ESCOs, etc.) can originate projects. Voluntary Standards can also work as channels to identify projects Environmental Performance & MRV The LCDF can use the MRV system of the CDM, seen as a public “Methodology Asset” (In the context of an enhanced CDM). Also Voluntary Standards methodologies can be used for activities not covered by CDM Loan interest rate to increase for projects failing to perform or to comply with MRV.

15. LCDF PRINCIPLES Projects applying to LCDF will have to open their books for LCDF to perform financial due diligences (not the case today for CDM) Only projects still unviable after enjoying LCDF financing conditions would be eligible to tradable CERs(would solve current loophole generating hot air in CDM) To prevent conflict of interest, LCDF shall limit to 20% the share of its portfolio eligible to tradable CERs (this % can be revised regularly on the basis of experience) • Avoid overflowing of carbon market • Carbon Price can remain high: • good for projects which really need additional carbon revenue • does not jeopardize Annex1 National Policies 15 Complementarity with the Carbon Market

16. What is the basis for these numbers?  based on LCDF SIMULto simulate LCDF at different scales and different contexts (illustrative simulation for China)

17. Development of “LCDF SIMUL”Main Objectives • State of the art Credit Risk Model • Integrate financial industry standards used in risk management • Credit rating transition probabilities provided by rating agencies (S&P, Moody’s, etc.) • Uses real projects databases (UNFCCC) and prospective inventories of low-carbon investment opportunities (Africa-NTF, Brazil-PHRD, etc) • Provide a transparent, user-friendly tool to respond to specific questions …(How much $$ needed, pipeline financing capacity, maturity, design of portfolio, credit rating, emissions reductions delivered, main co-development benefits (MW), etc.) • … under specific constrains or preferences(size of initial capital available, countries/region preferences, sector / technology criteria, etc.) • Can differentiate countries and sectors: • adjusting capital intensity, size of projects, sector/technology mix, etc. • exploring applicability to different country context and porfotlio

18. Main Inputs • Portfolio parameters (simulating realistic mix of low-carb projects) • Loan characteristics(working with real projects financial parameters) • Credit Rating(computing risks at project and portfolio level)

19. Inputs based on Real Projects Data Base UNFCCC Secretariat database :3,000+ registered CDM projects

20. Loans/Projects Characteristics On the basis of the accumulated knowledge of potential low-carb development projects, it is possible to build portfolios of projects in different sectors to target simultaneously (i) development objectives and (ii) GHG reductions volumes. These portfolios of projects can be tested, adjusted, etc. depending on national priorities. Please do not circulate

21. Credit rating The financial behavior of the portfolio is anticipated through the rating of these projects, individually and as a portfolio: • Individual probability of losses associated to a specific type of project: rating degradation rated from rating AAA to AA to A, … to failure and reciprocally (improvement) (matrix above) • Cross sectoral contamination of risks : projects are not totally independent from each-other Please do not circulate

22. Main Outputs • Capital required to fund LCDF and sustain AAA • Projection of net income, profit and loss of LCDF • Environmental performance (MtCO2 reductions /year) • Development co-benefits and indicators

23. Capital Required to sustain AAA Capital needed is calculated as a the minimum amount required to cover the loss in XX % of all cases (e.g. XX = 99.9996 % or probability of losses exceeding initial capital = 0.0004%). Please do not circulate

24. Size of Portfolio and GHG Abatement Potential Please do not circulate

25. Conclusions • No way to stabilize GHG concentrations without low-carbon development in Developing Countries • Potential of project-based GHG mitigation does exist, is known and is huge • Carbon Markets are not sufficient : Investment financing is needed to unleash this potential • Financial characteristics, environmental performance of Low-Carbon Projects are known • Financial Engineering and Project Portfolio management allow for a LOW-CARBON DEVELOPMENT FACILITY (LCDF), which can leverage limited public funds on the international financial market via the issuance of bonds • Financial, development and environmental performance of LCDF is predictable • Ex: $70bn of equity  $100bn financing /year 10GtCO2 in 2030