Carbon Finance Strategy at the World Bank Carbon Finance Strategy at the World Bank CHARLES CORMIER December 2005

The Kyoto Protocol 36 Developed Countries and Economies in Transition (namely Canada, Japan, EU15 and economies in transition) agreed in 1997 to: reduce GHG emissions by 5.2 % below 1990 levels in the commitment period reduce GHG emissions by 5.2 % below 1990 levels in the commitment period Total demand created for GHG Reductions: ~5 to 5.5 billion Total demand created for GHG Reductions: ~5 to 5.5 billion Marrakech Accord: agreed in Nov 2001 sets rules of implementation Marrakech Accord: agreed in Nov 2001 sets rules of implementation Status: came into force in February 2005 Coming into force: requires ratification of 55 Parties to UNFCCC representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) Coming into force: requires ratification of 55 Parties to UNFCCC representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) As of November 2005, 157 states ratified representing 66.1% of developed countries As of November 2005, 157 states ratified representing 66.1% of developed countries US / Australia will not ratify, but Australia will meet targets US / Australia will not ratify, but Australia will meet targets

How can Developed Countries/EITs meet their obligations under Kyoto? Domestic Reductions Domestic Reductions Carbon Sinks: direct human-induced land use change and forestry activities (limited to ~330 Mt/C02e) Carbon Sinks: direct human-induced land use change and forestry activities (limited to ~330 Mt/C02e) International Credits (Kyoto Mechanisms): International Credits (Kyoto Mechanisms): International Emissions TradingInternational Emissions Trading Project –Based: Joint ImplementationProject –Based: Joint Implementation Project – Based: Clean Development MechanismProject – Based: Clean Development Mechanism “..domestic action shall constitute a significant element of the effort by each Party..”

Structure of the Carbon Market Allowance Markets UK ETS EU Emission Trading Scheme Chicago Climate Exchange New South Wales Certificates Project-Based Transactions JI and CDM Voluntary Retail Other Compliance

Total Value of Contracts over 1 b$ (data in million U.S.$, nominal) (Jan-Apr)

Main Buyers: European Governments and Firms In percent of volume purchased From Jan.04 to Apr.05 World Bank purchases (22 % of total) attributed pro- rata to each participant in various carbon funds

Supply Concentrated in Middle-Income Countries In percent of volume sold from January 2004 to April 2005 Top three countries (India, Brazil and Chile) account for 58% of volume; Top five (which also includes Bulgaria and Romania) account for 70%

Non-CO 2 Gases Dominate In percent of volume purchased from Jan.04 to Apr.05

Prices Depend on Risks (weighted average prices from Jan to April 2005 in U.S.$ per metric tonne of CO 2 e)

Climate Change and the World Bank Mission What we work for: poverty alleviation and sustainable development What we work for: poverty alleviation and sustainable development We accept IPCC conclusions that We accept IPCC conclusions that least developed countries stand to lose mostleast developed countries stand to lose most the poorest have the least capacity to adapt to climate change, especially in rural areasthe poorest have the least capacity to adapt to climate change, especially in rural areas Carbon finance offers an unprecedented opportunity to increase private and public investment in clean technologies in developing countries, thus contributing to sustainable development Carbon finance offers an unprecedented opportunity to increase private and public investment in clean technologies in developing countries, thus contributing to sustainable development

The World Bank’s Objectives in the Carbon Market Contribute to Sustainable Development Contribute to Sustainable Development Support Developing Countries To Maximize Gains from Carbon FinanceSupport Developing Countries To Maximize Gains from Carbon Finance Add Value to CDM Projects through safeguard policies/ additional sustainable development valueAdd Value to CDM Projects through safeguard policies/ additional sustainable development value Catalyze the Carbon Market Catalyze the Carbon Market Supporting the regulatory framework – developing new tools, collaboration with the regulatorSupporting the regulatory framework – developing new tools, collaboration with the regulator Expanding the capacity of other financial and development institutions through cooperation with other development banksExpanding the capacity of other financial and development institutions through cooperation with other development banks Providing opportunities for purchases by the private sectorProviding opportunities for purchases by the private sector Increasing market liquidity by creating projects with large volumes with a portion available to the private sectorIncreasing market liquidity by creating projects with large volumes with a portion available to the private sector

 Strengthen the capacity of developing countries to benefit from the emerging market for emission reduction credits (CF- Assist) $10 million Bank administered trust fund for capacity building and technical assistance program established in FY05.$10 million Bank administered trust fund for capacity building and technical assistance program established in FY05. Assists interested developing countries and economies in transition to develop and implement CDM projectsAssists interested developing countries and economies in transition to develop and implement CDM projects Three to five year program to develop sound structures, where local institutions gain the capacity to prepare and review projects for approval.Three to five year program to develop sound structures, where local institutions gain the capacity to prepare and review projects for approval. The World Bank’s Objectives in the Carbon Market II

World Bank Carbon Finance Products ~$950 million under management $80 million committed - Italian multi-participant $220 million – Spanish Government; will be open to private sector Bio Carbon Fund: $53.5 million; multi-shareholder; second tranche opened in September 05 Community Development Carbon Fund: multi-shareholder. First tranche closed at $128.6 million; second tranche to open once Portfolio for first tranche is well developed Prototype Carbon Fund: $180 million, multi-shareholder Netherlands JI Facility ~$40 million.Economies in Transition only (with IFC) $180 million – single government participant (Dutch Government) $75 million – Danish multi-participant Under development: Carbon Fund for Europe

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 Equivalent2 Emission Reductions CO Equivalent2 Emission Reductions Payment on delivery of emissions reductions, not up-front capital costs

Preparation and review of the Project Carbon Asset Due Diligence Validation process Project Appraisal and Negotiation Periodic verification & certification Construction and start up Project completion 3 months 2 months 3 months 1-3 years Up to 21 years Upstream Due Diligence, carbon risk assessment and documentation: $ 25K For new methodologies Baseline : $30 K Monitoring Plan: $25K Contract, Processing and documentation: 25k Consultation and Project Appraisal: $60K Negotiations and Legal documentation: $100K Carbon Asset Creation and Maintenance Manufacturing Process and Costs based on Bank experience Total through Negotiations All expenses: $265 K for regular size projects $150 K for small scale projects Initial verification at start-up: $25K Verification: $10-25 K Supervision: $10-20K

Strategic Issues in CDM Market Development Potentially Competing Interests CDM needs to deliver high volumes to keep cost of Kyoto compliance affordable CDM needs to deliver high volumes to keep cost of Kyoto compliance affordable Developing country government preferences going into 2 nd Commitment Period negotiations is that CDM helps modernize and de-carbonize infrastructure Developing country government preferences going into 2 nd Commitment Period negotiations is that CDM helps modernize and de-carbonize infrastructure “Sustainability” concerns constrains asset choice in many OECD governments, and some corporations “Sustainability” concerns constrains asset choice in many OECD governments, and some corporations Market Inflection Points to Watch Post-2012 market signal by EU and/or KP Parties on long lead time assets Post-2012 market signal by EU and/or KP Parties on long lead time assets Second phase ETS review of sequestration/ LULUCF assets Second phase ETS review of sequestration/ LULUCF assets

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