carbon finance at the world bank workshop on large project finance maputo, mozambique 31 may &...
TRANSCRIPT
Carbon Finance at the World Bank
Workshop on Large Project FinanceMaputo, Mozambique 31 May & June 1, 2007
Antonio Nucifora, Senior Economist, World Bank
(in collaboration with Andrea Pinna, Karan Capoor, Benoit Bosquet, and Noreen Beg, CFU World Bank)
Structure of the Presentation
I. The Basics of Carbon Finance and key CDM Principles
II. Latest Market Evolution
III. CDM Project Cycle, and role of the World Bank
Structure of the Presentation
I. The Basics of Carbon Finance and key CDM Principles
II. Latest Market Evolution
III. CDM Project Cycle, and role of the World Bank
Carbon Finance
gives value to
Carbon Credits (CERs)
generated by
‘Clean Development Mechanism’
Eligible Investment Projects
How Carbon Funds Work
Industrialized Governments
and Companies
Developing Countries and Communities
Bank Managed Carbon Fund
Bank Managed Carbon Fund
$$Technology
Finance $$Technology
Finance
CO Equivalent22
Emission Reductions
CO Equivalent22
Emission Reductions
Payment on delivery of emissions reductions, not up-front capital costs
Carbon Fund
Carbon Fund
$$ $$
22 22
Emission ReductionPurchase Agreement
(ERPA)
BanksInvestor
DebtEquity
Power Purchase Agreement
$$
Electricity
$$
CarbonCredits
Upfront payment as “Equity”
Less than 25% of contract
Collateralization of ERPA
Role of carbon finance in project financing
Key Features of Carbon Finance
• Payment on Delivery: payments made upon annual independent verification that ER have occurred.
• Other resources must be found to cover the investment cost
• If project entity requests an advance payment– Proof would have to be given that there is no alternative– Would be limited to max 25% of the ERPA value– Price per ton would be discounted to reflect the risk of non-delivery– Bank guarantee would be requested – No upfront payment has been granted for any of the 22 projects cleared
• Payment stream is in hard currency, reducing financing risk for foreign lenders
Debt
Equity
Cash out
Cash in
Yrs 0 1 2 3 4 5 6 7 8 …………………………………….15-20
Carbon finance: payments for a stream of emission reductions
Emission Reductions (ER) created only
after project is implemented and operational.
Carbon revenuesOperating revenues
= annual carbon payments
= other sources of revenue from service or production
= debt servicing
Construction
A key concept:• 1 CER = 1 more ton CO2 emitted in Annex 1 countries
• Only emission reductions that are ADDITIONAL to emission reductions that would have occurred without CDM
Example: an already commissioned hydro power plant that displaces CO2 emissions from diesel generation would not be considered additional. The CDM must be a deciding factor in the decision to go ahead with the project
ADDITIONALITY
Additionality established on the basis of:• Financial Analysis : Additional cost, lower IRR, etc… OR:
• Barriers preventing the “clean” project to take place:– Difficulties to achieve financial closure (no long term commercial loans)
– Technology Risk: first of kind in the country– Social / market acceptability (scavengers resettlement for landfill gas to power)
– Etc.
• Hydroelectric power offsetting the need for coal- or gas-fired generation
• Extending grid to reach customers currently using diesel or kerosene• Reducing CO2 and possibly methane (a potent greenhouse gas) by
generating energy and bio-fuels from sugar industry by-products -- bagasse and molasses
• Replacing firewood/kerosene/cowdung with biogas from livestock and human wastes
• Extracting methane from landfills or avoiding its generation trough composting organic waste in urban dumpsites
• Extracting methane from disposal of sewage sludge• Capturing N20, a powerful greenhouse gas, from fertilizer production• Sequestering CO2 by tree planting, small plantations, land
restoration (limited capacity to buy though)
Types of Carbon Projects
Technology Delta IRR
financial
Hydro, Wind, Geothermal
0.5-3.5%
Crop/Forest Residues
3-7%
Municipal Solid Waste
5-15+%
Carbon economicsIncreases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO2e
Structure of the Presentation
I. The Basics of Carbon Finance and key CDM Principles
II. Latest Market Evolution
III. CDM Project Cycle, and role of the World Bank
Latest Market Evolution
Source: State and Trends of the Carbon Market 2006, The World Bank0
50
100
150
200
250
300
350
400
1998 1999 2000 2001 2002 2003 2004 2005 Jan-Nov'06
Annual Volume of Project-based Transactions
(Million tCO2e)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Average price(US$ per tCO2e)
US$ 10.47
US$ 7.25
US$ 4.99
Carbon is mainly a financial trading market • Over US$27 billion in 2006, mainly from trading• Market value arises from trading: sale, re-sale for hedging, arbitrage + compliance
Project-based market stabilizes • Current/expected transactions in 2006 likely to equal 2005 volumes (US$11 billion)• Biggest Primary CER Sellers: China (69%) and India (10%)• Growth rate of new CDM pipeline slows as 2012 looms• Already more than $5 billion of North-South net transfer before end of 2012
CDM Asset classes Share of Clean Energy Rises
(share of volumes)
Jan. 2005 to Dec. 2005 Jan. 2006 to Dec. 2006
HFC67%
Animal Waste2%
LFG8%
CMM7%
Other5%
Hydro3%Wind2%
EE+Fuel s.1%
Other Renewables 2%
Biomass3%
Hydro6%
Wind5%
EE+Fuel s.9%
HFC34%
Other13%
Agro-forestry1%
CMM7%
LFG5%
N2O
13%
Animal Waste2%
Biomass3%
Other Renewables 2%
Clean energy: 11% Clean energy: 25%
Structure of the Presentation
I. The Basics of Carbon Finance and key CDM Principles
II. Latest Market Evolution
III. CDM Project Cycle, and role of the World Bank
2. Validation of project documentation by environmental auditor accredited by CDM EB
5. Certification and Issuance: Acceptance of verified emission reductions and issuance of credits by CDM EB
4. Verification of generated emission reductions by an accredited verifier
1. Project Design Document: Preparation of project documentation applying an approved methodology for calculating emission reductions
3. Registration : Acceptance of project by the CDM EB
CDM project cycle
Project sponsor Accredited auditor CDM Executive Board
The CDM Executive Board (EB) oversees the CDM project activity cycle:
The World Bank’s Objectivesin the Carbon Market
• Contribute to Sustainable Development– Support Developing Countries To Maximize Gains
from Carbon Finance – Add Value to CDM Projects
• Catalyze the Carbon Market– Develop new markets and sectors for carbon
finance– Build Capacity in Client Countries– Provide Liquidity to the Market
World Bank Carbon Funds & Facilities
• Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose.
• Netherlands Clean Development Mechanism Facility. $268.3 million (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects.
• Community Development Carbon Fund. $128.6 million (closed). Multi-shareholder. Small-scale CDM energy projects.
• BioCarbon Fund. $77.4 million (Tranche 1 closed @ $53.8 million; tranche 2 open). Multi-shareholder. CDM and JI LULUCF projects.
• Italian Carbon Fund. $155.6 million (closed). Multi-shareholder (from Italy only). Multipurpose.
• Netherlands European Carbon Facility. $56.6 million (closed). Netherlands Ministry of Economic affairs. JI projects.
• Spanish Carbon Fund. $282.4 million (closed). Multi-shareholder (from Spain only). Multipurpose.
• Danish Carbon Fund. $69.4 million (closed). Multi-shareholder (from Denmark only). Multipurpose.
• Umbrella Carbon Facility. $737.6 million (Tranche 1 closed – 2 HFC-23 destruction projects in China).
•Carbon Fund for Europe. $65 million. Multi-shareholder. Multi-purpose. Managed with EIB.
Total funds pledged = US$ 2.02 billion (16 governments, 65 firms)
4. Validation
9. Certification and Issuance
8. Verification
6. Registration
World Bank CDM project cycle
Project sponsor Accredited auditor CDM Executive Board WB-CF
1. Project identification & inclusion• PIN submission by sponsor• PIN acceptance and fund allocation• Agreement with region• Letter of Intent
5. Negotiate and sign Emission Reductions Purchase Agreement (ERPA)
7. Construction and start up
10. End of contract period (may be post-2012)
2. Carbon asset due diligence• Evaluate methodology
and additionality• Project Design
Document• Quality control of
project documentation
3. Project due diligence (e.g., environmental and
social safeguards)
CDM Executive Board
►Approves Baseline and Monitoring Methodologies
►Accredits the Certifiers (Operational Entities)
Designated Operational Entities
Project Host
Country
►Forwards the Application for Validation and Registration
►validation report and registration application
Project Developer
►Letter(s) of Approval by Participant Countries
►Calculates "Baseline" and prepares a PDD (Project Design Document) using an Approved Methodology
►Registers projects validated by OEs
►Validate proposed CDM projects and forward applications to EB for registration
Cycle Before Project
CDM Executive Board
►Approves Baseline and Monitoring Methodologies
►Accredits the Certifiers (Operational Entities)
Designed Operational Entities
Project Host
Country
►Forwards the Application for Validation and Registration
►validation report and registration application
Project Developer
►Letter of Approval
►Calculates "Baseline" and prepares a PDD using approved Methodology
►Monitor Emissions during the project and calculates Emissions Reductions
►Requests validation of Emission Reductions to get the CERs
►Registers projects validated by OEs
►Issues the Certificates (CERs)
►verification & certification report and request issuance of credits (CERs)
►Validate proposed CDM projects and forward applications to EB for registration
►Verify and certify emissions reductions
Cycle during Project