Financial Solutions Unit, FEU Treasury Department PROPOSAL FOR CARBON MARKET DEVELOPMENT GUARANTEE Energy Unit, LCR Carbon Finance Unit 1 05/30/2011, HCC Meeting, Barcelona.

I NTRODUCTION & O BJECTIVE Key Challenge for Low Carbon Energy Investments 2 The objective: propose new financial products that monetizes future flows of CERs to raise finance today for investments Cashflow + - Time Investments in EE or RE projects require funding before they can generate returns Key challenge: raising funds today for investment in EE / RE projects Investment e.g., energy savings for EE; GWh for RE) Time Returns

I NTRODUCTION & O BJECTIVE Carbon Credits or Emission Reductions ( for example “CERs”) – a co-product 3 e.g., energy savings for EE; GWh for RE) Cashflow + - Time CERs Carbon credits contributes to cash-flow but NOT to the financing… Investment Returns

I NTRODUCTION & O BJECTIVE Monetizing Carbon Credits today to help finance the investment 4 e.g., energy savings for EE; GWh for RE) Cashflow + - Time CERs Investment Returns Objective: monetize today future flow of Carbon Credits (CERs etc.) to support the financing phase.

C OPENHAGEN A CCORD - F INANCE Copenhagen Accord - Finance 5 Will vary according to CO2 prices… At $15/tCO2: $10 to 20 billion per annum in 2020 Will vary according to CO2 prices… At $15/tCO2: $10 to 20 billion per annum in 2020 Grant MDBs Private Capital Invest Carbon Markets Sales  Developed countries shall raise $30 billion through 2010 to 2012 of new and additional resources … and to mobilize $100 billion per year by 2020 from a variety of sources

N ATURE OF A C ARBON F INANCE C ONTRACT 6 Nature of Carbon Financing Contract CERs Power Purchase Agreement $$$ Energy Project Finance – “Day 1” electricity DebtEquity Investor Banks Energy sales – “Day 2” $$$ ERPA CER sales – “Day 2’”

N ATURE OF A C ARBON F INANCE C ONTRACT 7 Bridging the Gap CERs Power Purchase Agreement $$$ electricity DebtEquity Investor Banks $$$ ERPA Challenge: ways to monetize on Day 1 the future stream of carbon revenues – similar to what we see with receivables. e.g., energy savings for EE; GWh for RE) Cashflow + - Time CERs Investment Returns Day 2Day 1

WB G UARANTEED CER S ALES C ONTRACT WB Carbon Guarantee contract – How it works Proposal to help monetize future Carbon Credits (CERs, etc.) through the ‘Carbon Guarantee’: Objective: facilitate an upfront payment for CER forward sales Contract (i.e., selling today future CER flows) Application: a developing country seller (investor in EE/RE) sells CERs to an Annex 1 country buyer (compliance buyers, etc.) Guarantee: the Bank guarantees government payment obligations (under its shortfall agreement), effectively guaranteeing CER delivery risk for projects in developing countries

CO2 M ARKET D EVELOPMENT G UARANTEE 9 CO2 Market Development Guarantee – How it works Host Country Pool of CDM Projects CERs $ energy savings $ Carbon Aggregator

CO2 M ARKET D EVELOPMENT G UARANTEE 10 CO2 Market Development Guarantee – How it works Host Country Pool of CDM Projects CERs energy savings $ Carbon Aggregator Compliance Buyer [Sovereigns, Private or Public entities] $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA ) WB Guarantee of Shortfall Agreement “Off-Shore” Day 1 Day 2 Host Country Government Indemnity Agreement

CO2 M ARKET D EVELOPMENT G UARANTEE 11 CO2 Market Development Guarantee – How it works Host Country CERs $ Carbon Aggregator Compliance Buyer [Sovereigns, Private or Public entities] $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA ) WB Guarantee of Shortfall Agreement “Off-Shore” Day 1 Day 2 Host Country Government Indemnity Agreement If things go well…

CO2 M ARKET D EVELOPMENT G UARANTEE 12 CO2 Market Development Guarantee – How it works Host Country CERs Carbon Aggregator Compliance Buyer [Sovereigns, Private or Public entities] $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA ) WB Guarantee of Shortfall Agreement “Off-Shore” Day 1 Day 2 Host Country Government Indemnity Agreement If things go well…

CO2 M ARKET D EVELOPMENT G UARANTEE 13 CO2 Market Development Guarantee – How it works Host Country CERs Carbon Aggregator Compliance Buyer [Sovereigns, Private or Public entities] $ (ERPA ) “Off-Shore” Day 1 Day 2 If things go wrong…

CO2 M ARKET D EVELOPMENT G UARANTEE 14 CO2 Market Development Guarantee – How it works Host Country CERs Carbon Aggregator Compliance Buyer [Sovereigns, Private or Public entities] $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA ) WB Guarantee of Shortfall Agreement “Off-Shore” Day 1 Day 2 Host Country Government Indemnity Agreement Loan If things go wrong …

R ISK A LLOCATION RiskSellerBuyer Project Market/ Price Regulatory Allocation of Risk between the Buyer and Seller. Back-stopping by the Guarantor 15  The project owner takes all project risks, including completion risk and project performance risk  The Buyer takes all Carbon Credit price risk  The Seller takes the risk that the Carbon Credits are not eligible in a pre-specified market (for e.g. EU Emissions Trading System).  The non-eligible CERs are considered as “not delivered” triggering the Guarantee if the Seller does not pay the Buyer for the shortfall.

CO2 M ARKET D EVELOPMENT G UARANTEE 16 CO2 Market Development Guarantee – How it works Host Country CERs Carbon Aggregator Compliance Buyer [Sovereigns, Private or Public entities] $ ‘Shortfall’ Agreement [for failure to deliver] $ (ERPA ) WB Guarantee of Shortfall Agreement “Off-Shore” Day 1 Day 2 Host Country Government Indemnity Agreement MDB Trust Guarantor “Climate Fund/ Annex I” $

C ONCLUSIONS  Carbon Guarantee is possible financial product to allow developing countries to help finance low-carbon investment from the proceeds of the forward sale of Carbon Credits to buyers in industrialized countries;  Provides funding today in exchange for a future flow of carbon credits to be generated from an EE/RE investment  Donor funds or other “climate fund” back-stopping Bank guarantee allows The carbon guarantee instrument to have wider application Participation of private sector project owner and sellers Public sector projects in countries where governments are not interested in providing guarantees to benefit. Conclusions 17

Thank you! 18 Chandra Shekhar Sinha