The Science and Politics of Climate Change Outcomes of CoP6 in The Hague and Bonn and Implications for the Bank and Bank Clients

The Resumed CoP6 Negotiations Failure at the Hague due to: –Accounting for “sinks” towards targets in OECD –“Supplementarity” of carbon trade to domestic action Other big issues: – adequacy of funds for G77; –Consequences of Non-Compliance: Financial Penalty? – eligibility of sinks/nuclear in CDM Less high profile but key issues were: –Transferability and fungibility of ERUs, CERs, AAUs –Rules on additionality and baselines

Elements of the Deal Funding/Adaptation: Predictable and Reliable - $410 mm/yr commitment by Adds (but not all NEW Funds): –Special CC Fund (adaptation/tech transfer/compensation) –Least Developed Country Fund: Adaptation for LDCs (Cn$10mm so far) –KP Adaptation Fund: 2% of CDM proceeds for adaptation (NEW Funds) Supplementarity: “..domestic action shall constitute a significant element of the effort by each Party..” Compliance: No financial penalty. But 1: 1.3 make-up ratio Sinks (LULUCF) in Annex I: new Annex with caps on use of domestic “sinks” to meet targets e.g. 13 Mt C/year for Japan, 12/Canada, 17.63/Russia (28/USA) Sinks in CDM: only afforestation and reforestation, rules by CoP9/2003, cap of 1% times 5 of Parties 1990 emissions Nuclear in CDM: Parties are to “refrain from using..”

Other Key Breakthroughs Transferability and Fungibility: ERs achieved in each mechanism are largely fungible (“commodity” benefit) Streamlining of Procedures for Small Projects: agreed to have simplified procedures for: –Renewables up to 15MW –Energy efficiency with reductions of 15GWh equivt./year –Other projects that emit and reduce emissions less than 15,000 t/CO2 per year –To be agreed by CoP8/2002 Baselines and Additionality: (close to PCF approach) –Only environmental additionality –Conservative and transparent –Crediting periods 1X10yr, or 7yrs renewable X 3 =21yrs

Carbon Market Impact “Hot Air” and Annex I Sinks depresses CDM/JI market –W/o US, all OECD needs may be met by Emissions Trading plus new sink inventory allowances. Both CDM/JI “project-based” Market and “Hot –Air” (emissions trading) market will be “policy-driven” –Emissions Trading is cheap option but not attractive to all –CDM/JI expensive/complex but hi quality, tangible impact With full competition, market analysis (DEC) suggests : –CDM trades down to $0-25/tC ($7-11t/C more likely) –PCF pays $10-15/tC, other drivers may yield $7-15/tC Non-KP Market drivers are significant: OECD domestic regimes and Corporate Voluntary market

Greenhouse gases emission reductions: an unusual commodity ERs become a commodity after certification. Before certification ERs are very heterogeneous depending on the plausibility of their baseline. Emission Reduction = Hypothetical baseline emissions - effective emissions

Current or projected national policies Trading?Start-upProject-based mechanism? EU Yes 2005 At least from 2008 UK UK Yes Yes France Yes 2003? Yes Norway Yes 2005 or earlier Yes Germany No  Later Denmark Yes 2001 Yes Sweden Yes 2005 or later Yes Netherlands Netherlands Ongoing work  Yes Finland Ongoing work  Yes Ireland Ongoing work  Ongoing work Australia Yes US dependent Yes USA Yes ? Yes Canada Yes US dependent  Japan Ongoing work  Yes New Zealand Yes Not decided Yes Russia No  Yes `

Regional regulations in the US Oregon: CO 2 emissions standard for new energy utilities. Price cap: $0.57/tCo2. Utilities can offset emissions using project based mechanisms. Washington: New plants must demonstrate the use of best available techniques for CO 2 emissions control. Massachusetts: CO 2 emissions cap for energy utilities effective in Utilities can offset excess emissions using project-based mechanisms. New England and Canadian Eastern Provinces: 10% voluntary reduction of GHG emissions below 1990 levels by 2020

Voluntary corporate commitments Rapid survey indicates 52 major companies representing 1 billion tCO 2 e emissions in 1999 have pledged to reduce GHG emissions by Resulting demand depends on the baseline. If we set baseline at 1999 emissions, we obtain a total demand of 500 MtCO 2 e over the next decade. At least eight have said they would use project based mechanisms.

Alcoa --25% below 1990 in 2010 BP Amoco 79.8Cumulative 2%/year below 1990  Chubu EPCo kgCo2/kWh in 2005 Dupont % below 1990 in 2010 Kodak --20% below 1990 in 2004 Fortum 90.5 MtCo2e below baseline in 2010  IBM 4.1Cumulative 4%/year below 1998 until 2004 Intel 3.310% below 1995 in 2010 (PFCs) Johns. & John, 1.57% below 1990 in 2010 Motorola -- 50% below 1995 in 2010 (PFCs) Ontario Pow.Gen. 26 6% below 1990 in 2010  PEMEX 177-1% per year until 2010  Shell MtCo2e in 2002  Statoil MtCo2e below baseline in 2010  Suncor 5-1.5%/year until 2002 (-1%/year for )  Transalta  1999 Emissions Commitment Internal Trading CDM/JI Corporate voluntary commitments

Chicago Climate Exchange 25 Midwestern firms will agree on emission targets by the end of 2001 and start trading in % below 1998 level in 2002, additional –1% period year between 2003 and Allows for offsets through project-based mechanisms.

Current Bank Strategy and Programs (Environment Strategy and “Fuel for Thought”) Mitigating Greenhouse Gas Emissions  Policy reform – on subsidies, internalizing local and regional pollution costs into energy prices (Fuel for Thought)  Promote renewable energy and energy efficiency; utilize the GEF and PCF  Develop the international carbon market through e.g., the PCF Adapting to Climate Change  Promote practices and policies that reduce vulnerability in water, agriculture, forestry, health sectors to natural climate variability and  which increase resilience to long-term climate change, eg: o-watershed management and appropriate water pricing policies o-incorporate modern scientific forecasts of ENSO events into sector management decisions Capacity Building  Build institutional capacity for mitigation and adaptation  Access to the emerging carbon market

Implications for Bank/Clients Adaptation Projects in pipeline Mainstreaming Adaptation in the Caribbean Impact of Climate Change on Agriculture in Africa Adaptation in the Pacific Islands Short-term Vulnerability Reduction Collaboration with Disaster Management Fund (DMF) to create more resilient infrastructure and institutions Long-term Vulnerability Reduction Integration in water, agriculture and forestry projects – e.g., Bangladesh, Malawi Vulnerability Assessment Identify and assess adaptive interventions Capacity Building Human and institutional capacity building through projects and knowledge development and dissemination

Implications for Bank/Clients Mitigation and Role of PCF Key Demonstration Effects of PCF … 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 … and how private sector and governments can implement the CDM/JI project cycle and compete in emerging carbon market

Host Country PCF Representation Joined (through MoU or Project Endorsement) Latin America (13) Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Peru, Uruguay Africa (9) Benin, Burkina Faso, Ghana, Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe Eastern Europe/ C Asia (7) Bulgaria, Czech R., Hungary, Kazakhstan, Latvia, Poland, Romania Considering Bhutan, Belarus, Bangladesh, Egypt, Sri Lanka, Thailand Asia (1) India

PCF Status and Focus Deal flow far exceeds funding - several carbon contracts now under negotiation  >50 deals with $350m+ carbon purchases under review Targeting signed Emissions Reductions Purchase Agreements (ERPAs)  by end Jan 2002: 12 deals of $45-50mm in Chile, Costa Rica, Brazil, Uganda, Romania, Morocco and Uzbekistan  by July 2002 ~$40mm in Nicaragua, India, Guatemala, Argentina, Honduras, Thailand, Czech, and Kazakstan; Under active review as FY02 reserves ~$25mm: Guyana, Hungary, Poland, El Salvador and Colombia Constraints: FMU and country capacity, quality of asset

Capacity Building and Carbon Finance Strategy? One pilot carbon finance deal is not enough Full service provision requested by Host Countries –Help build local market capacity –Develop a “carbon investment office”, legislation and regulation –Develop private sector portfolio and public-partnerships –Take portfolios of ERs to market Activity catalyzed by first carbon finance but as part of wider technical assistance delivered by –Bank programs (e.g. CDM-Assist for Africa, PCF+/WBI etc) –Partnerships with bilateral donors

Carbon Finance and Capacity Building Beyond PCF? Unmet Demand for Learning through a commercial transaction Proposals for “first-of-a-kind” strategy –By country, by application, by delivery mechanism –Crowding-in private sector: first rights to private sector, helps make marginal projects viable, right of first refusal Two carbon finance models proposed for Bank –Carbon finance manager: direct placement ( through Bank Trust Funds, as per PCF) –“arranger” on fee for service basis

Role for a “Forest Carbon Fund” (Adaptation and Mitigation) Follows acceptance of Afforestation and Reforestation in CDM Rules of Game to be established at CoP9/2003 Draft Forest Strategy proposes a Prototype Forest Carbon Fund to enhance learning-by-doing Key issues: –Environmental and social impacts; –Permanence and leakage? –Cost-effective monitoring and verification Build on PCF business practice Important Public-Private Partnership Opportunity