State, Trends and Barriers to Carbon Finance in RBEC Marina Olshanskaya Regional Energy/Kyoto Protocol Specialist RBEC Energy and Environment Practice Meeting Wednesday 27 th September, 2006 Bratislava, Slovakia

1 RBEC Energy and Environment Practice Meeting: Carbon Finance September Presentation Overview 1.JI versus CDM 2.EU Emission Trading Scheme (EU ETS) 3.Green Investment Scheme (GIS) 4.Current status and potential for carbon finance 5.Key problems and barriers 6.Some good news and examples

2 RBEC Energy and Environment Practice Meeting: Carbon Finance September CDM and JI Host countries Countries listed in Annex I to UNFCCC: potential JI hosts (ERUs sellers) or CDM/JI investors (CERs/ERUs buyers) With quantified GHG emission reduction targets: by 5.2% as compared to the baseline emission in 1990; New EU member States, Bulgaria, Romania, Belarus, Russia, Ukraine, Croatia and Turkey Non-Annex I to UNFCCC: potential CDM hosts (CERs sellers): No quantified GHG emission reduction targets South Caucasus, Moldova, Western Balkan, Central Asia, Cyprus Kazakhstan – not ratified KP, would like to be included in the list of Annex I

3 RBEC Energy and Environment Practice Meeting: Carbon Finance September CDM and JI: Similarities Project-based mechanisms: a CDM/JI host country implements project, generates and sells CERs/ERUs to a CDM/JI investor (Annex I) country which use them to meet its national Kyoto target Similar project development cycles (next presentation) Same eligibility criteria: CDM/JI project should result in measurable GHG emission reductions that are additional to what would have occurred in the business-as-usual scenario

4 RBEC Energy and Environment Practice Meeting: Carbon Finance September CDM and JI: Differences JI hosts are limited by their Kyoto target (amount of allocated Assigned Amount Units, AAUs) for ERUs they can sell, while CDM hosts are not CERs can be issued for project implemented from 2000 through 2012, while ERUs only during Country eligibility criteria for participation in JI are more stringent than for CDM: CDM: ratification of Kyoto Protocol and establishment of DNA JI: CDM criteria plus calculation of AAUs, establishment of national registry (Track II), submission of national inventory, system for calculation of GHG emission/sinks (Track I)

5 RBEC Energy and Environment Practice Meeting: Carbon Finance September RBEC JI Hosts and their Kyoto targets, 1mlntCO2eq CountryAnnual Assigned Amount GHG EmissionsKyoto Units Base Year Demand2010 Supply Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Russia Slovakia Slovenia Ukraine

6 RBEC Energy and Environment Practice Meeting: Carbon Finance September Green Investment Scheme (GIS) Annex I countries with surplus AAUs can sell part of it to other Annex I countries; Several Annex I parties indicated their willingness to buy provided the revenues from AAU sales are earmarked for “green” purposes (GHG mitigation project or other environmental projects) Potential GIS hosts: Bulgaria, Ukraine, Russia, Belarus, Poland Key issues to consider for GIS: Need to meet Track I JI eligibility requirements (no country yet) Need to design and establish GIS (governance structure, project development and implementation capacities, monitoring system, etc) Calculation and justification of AAUs that can be sold through GIS

7 RBEC Energy and Environment Practice Meeting: Carbon Finance September EU Emission Trading Scheme: Motivation Germany: - 21 % Industrialised countries: - 5,2 % EU 15: - 8 % Reduction targets for Kyoto gases over 1990 (base year) Kyoto Protocol (since in force) To fulfil the national GHG reduction obligations, the EU has implemented the EU Emission trading scheme in 2005, involving companies from the industry and energy supply sectors Within the EU, approx. 11,400 plants are obliged to take part in EU ETS. Since 2005, these plants have received fixed quotas of CO2 certificates on which they must manage in future. Buying of EU Allowances Purchasing certificates from CDM and JI projects Alternatives for compliance Emission Reduction e.g. plant modernisation

8 RBEC Energy and Environment Practice Meeting: Carbon Finance September EU Emission Trading Scheme Emissions in reporting year Allocated allowances (EUA) Surplus of certificates Deficit of certificates From 2008: further reduction of allocated allowances 2005 Sale Purchase EU ETS* Market CDM / JI ?? Banking 2008 ? 1st trading period of EU ETS*2nd trading period of EU ETS* EUA (EU Allowances) CER (Certificates from CDM projects) ERU (Certificates from JI projects)

9 RBEC Energy and Environment Practice Meeting: Carbon Finance September EU Emission Trading Scheme Eligibility among RBEC countries: All EU member states, Romania, Bulgaria, Croatia (after EU accession); Preparation of National Allocation Plan (NAP) which assign GHG emission quotas to key GHG emitting facilities in country CERs/ERUs can be used by EU ETS participants to meet their target under NAP (EU Linking Directive) EU Linking Directive provides for legal basis for EU companies to use CERs/ERUs for compliance within the EU ETS: Once CERs/ERUs are physically available, the should have the value of EUAs (EU Allocated Allowances) Member States can set a maximum for the use of CERs CERs have to fulfil certain additional conditions for EU ETS compliance use (e.g. Investor country approval, “World Commission on Dams” rules for hydropower, no Afforestration / Reforestration projects)

10 RBEC Energy and Environment Practice Meeting: Carbon Finance September EU Green and White Energy Certificates White/green Energy Certificates – market mechanisms introduced by EU to help countries meet their energy efficiency (white) or renewable energy (green) targets No formal linkages with Kyoto/carbon market, unless special regulation is introduced by a host country Different institutional arrangement, monitoring and verification protocols In theory: one facility (e.g. Wind Park in Hungary) can generate and sell both ERUs (under JI ) and EU green energy certificates if the project meets the requirement of each mechanisms

11 RBEC Energy and Environment Practice Meeting: Carbon Finance September Current status: RBEC’s share in CDM/JI market (# projects – September 06) RBEC CDM projects (Moldova, Armenia, Kyrgyzstan and Tajikistan) 119 – JI projects (Bulgaria, Romania, Czech and Slovak Republics, Poland, Hungary, Lithuania, Estonia, Ukraine, Russia)

12 RBEC Energy and Environment Practice Meeting: Carbon Finance September Current status: RBEC’s share in CDM/JI market volume (tCO2 eq - September 06)

13 RBEC Energy and Environment Practice Meeting: Carbon Finance September RBEC GHG Reduction Potential CountryMtCO2World Rank % of World Total Russian Federation1,915.2(4)5.69% Ukraine481.9(17)1.43% Poland380.6(21)1.13% Turkey355.4(22)1.06% Uzbekistan180.8(31)0.54% Kazakhstan161.0(34)0.48% Czech Republic143.0(37)0.42% Romania124.7(41)0.37% Belarus78.7(51)0.23% Hungary75.7(54)0.22% Turkmenistan64.1(63)0.19% Bulgaria61.8(66)0.18% Serbia 60.3(67)0.18% Azerbaijan55.4(72)0.16% Slovakia45.4(78)0.13%

14 RBEC Energy and Environment Practice Meeting: Carbon Finance September RBEC: Carbon Intensity of GDP (tCO2eq/mln$GDPintl) CountryCarbon intensity of GDPWorld rank Uzbekistan 3, Kazakhstan 1, Turkmenistan 1, Ukraine 1, Russia 1, Belarus 1, Moldova 1, Azerbaijan 1, Tajikistan Bulgaria Czech Republic FYR Macedonia Kyrgyzstan Romania Slovakia BiH

15 RBEC Energy and Environment Practice Meeting: Carbon Finance September Country Carbon intensity of GDPWorld rank Turkey Croatia Slovenia Hungary Lithuania Armenia Georgia Latvia Albania RBEC: Carbon Intensity of GDP (tCO2eq/mln$GDPintl), cont

16 RBEC Energy and Environment Practice Meeting: Carbon Finance September Why: key issues and barriers Poor investment climate and lack of underlying financing for implementation of projects Carbon finance only marginally improves economics of potential projects, especially those with strong development dividend: SectorCarbon Finance Impact: change in IRR, % (at 6.5$/tCO2eq) Industrial gases (HFCs) and NOx 100 – 500 Landfill gas5.5 – 50 Coal-mine methane7-12 Biomass2-8 Forestry0.5 –7 Renewable energy0.2 – 3 District heating

17 RBEC Energy and Environment Practice Meeting: Carbon Finance September Why: key issues and barriers, cont Limited knowledge of carbon finance, especially in national investment/banking sector Lack of data and methodologies for estimation of baseline emissions (e.g. no approved CDM methodology for projects in district heating) Absence/weakness of national institutional framework for JI/CDM (see How-to Guide) Small/medium countries (most countries in RBEC) have scarce supply of project with large volume (above 100tCO2eq/yr) of CERs/ERUs, thus difficult to compete with large CDM/JI hosts Low baseline GHG emission due to under-consumption of energy (lack of access or high costs)

18 RBEC Energy and Environment Practice Meeting: Carbon Finance September There are good news – barriers are possible to overcome Armenia: Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan (Japan) Moldova: Moldova biomass heating in rural communities project (World Banks’ Community Development Carbon Fund) Tajikistan: Pamir Energy – Pamir I Hydropower Generation (14 MW) (Unilateral – Aga-Han Foundation)

Thank you!