Carbon Finance at the World Bank Host Country Committee Meeting October

The Big Picture: Why we are all here today The Earths climate has changed, and is predicted to continue to change, globally and regionally: The Earths climate has changed, and is predicted to continue to change, globally and regionally: Warmer temperaturesWarmer temperatures Changing precipitation patternsChanging precipitation patterns More floods, droughts More floods, droughts Higher sea levelsHigher sea levels Retreating glaciersRetreating glaciers Reduced arctic sea iceReduced arctic sea ice More frequent extreme weather eventsMore frequent extreme weather events More heat waves More heat waves

Observed change can be explained only when man-made factors are included Temperature change º C observed model simulation OBSERVED AND SIMULATED CHANGES Global mean surface temperature

Land Areas Warm More Than the Oceans with the Greatest Warming at High Latitudes Annual mean temperature change, 2071 to 2100 relative to 1990: Global Average in 2085 = 3.1 o C

Some Areas are Projected to Become Wetter, Others Drier Annual Mean Precipitation Change: 2071 to 2100 Relative to 1990

The Bottom-Line: Developing Countries are not the cause of global warming Developing Countries are not the cause of global warming But they will suffer the brunt of the effects of climate change But they will suffer the brunt of the effects of climate change Two keys: Two keys: –Adaptation –Carbon Finance

Today Our Focus is on Carbon Finance But we must not forget: Adaptation must be the other component of a developing country strategy Adaptation must be the other component of a developing country strategy

Major Regulatory Developments October 2004: Russia decides to ratify the Kyoto Protocol October 2004: Russia decides to ratify the Kyoto Protocol January 2005: The EU Emissions Trading Scheme begins operation January 2005: The EU Emissions Trading Scheme begins operation February 2005: Kyoto Protocol comes into force February 2005: Kyoto Protocol comes into force But no CERs Issued to Date But no CERs Issued to Date

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

Main Buyers: European Governments and Firms In percent of volume purchased From Jan.04 to Apr.05

Supply Concentrated in Middle-Income Countries In percent of volume sold from January 2004 to April 2005

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

Insights on Price Differential Large price differential: Large price differential: –EU Allowances: 7 up to close to 30 euros / tCO 2 e (spot and forward contracts) –Project-based: 3 to 10+ dollars / tCO 2 e (forward contracts on expected CERs) Allowances and project-based contracts have very different risk profiles: Allowances and project-based contracts have very different risk profiles: –Project and country risks: high in CDM, none in allowances –Compliance/regulatory risks: high in CDM, none in allowance –Delivery risks: higher in CDM

Outlook The market has responded to the regulatory signals and is now a real compliance market The market has responded to the regulatory signals and is now a real compliance market Volumes should increase rapidly for both project and allowance segments….. Volumes should increase rapidly for both project and allowance segments….. … although important uncertainties still need to be addressed … although important uncertainties still need to be addressed Overall supply / demand picture (e.g. under Kyoto Protocol) is still unclear: Overall supply / demand picture (e.g. under Kyoto Protocol) is still unclear: –How much volume will JI/CDM deliver? Issue of projects lead-time –How many allowances will Russia and Ukraine bring to market?

The World Bank’s Objectives Contribute to Sustainable Development Contribute to Sustainable Development –Support Developing Countries To Maximize Gains from Carbon Finance –Add Value to CDM Projects Catalyze the Carbon Market Catalyze the Carbon Market –Develop new markets and sectors for carbon finance –Build Capacity in Client Countries –Provide Liquidity to the Market

Evolution of World Bank Carbon 80% of funds are from governments (non-ODA)

World Bank Policy in Carbon Finance Be a lead buyer or a buyer of last resort Be a lead buyer or a buyer of last resort Pay Market Prices corrected for risk Pay Market Prices corrected for risk Always contribute beyond the purchase of the CDM emission reduction Always contribute beyond the purchase of the CDM emission reduction While Building Capacity Of Clients Through Support and Training While Building Capacity Of Clients Through Support and Training Give Full Information – Transparency and Integrity Give Full Information – Transparency and Integrity Bring the Full Instruments of the World Bank Group to Support Clients Bring the Full Instruments of the World Bank Group to Support Clients

Issues How to keep a balanced portfolio yet deliver carbon finance to a wide variety of developing countries and sectors How to keep a balanced portfolio yet deliver carbon finance to a wide variety of developing countries and sectors How to help ensure that the regulatory mechanism works effectively and efficiently How to help ensure that the regulatory mechanism works effectively and efficiently How to approach the post-2012 period How to approach the post-2012 period

The Strategy Three pronged approach: Three pronged approach: 1.Innovative, widely dispersed projects 2.Mainstream projects that add value to sustainable development 3.Mega projects that bring large volumes of carbon finance to developing countries for sustainable development

New Issues Balance between three prongs Balance between three prongs Implementing pricing policy Implementing pricing policy How much liquidity for the market How much liquidity for the market Bringing into the play other stakeholders – NGOs and Private Sector, particularly for Africa Bringing into the play other stakeholders – NGOs and Private Sector, particularly for Africa Being non-politically in political arenas such as MOP Being non-politically in political arenas such as MOP