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MDG Carbon Facility Mobilizing Carbon Finance for the Millennium Development Goals Vladimir Litvak RBEC Energy and Environment Practice Leader UNDP/GEF Regional Coordinator RBEC Energy and Environment Practice Meeting Wednesday 27 th September, 2006 Bratislava, Slovakia

MDG Carbon Finance 2 2 Presentation Overview 1.Part I: MDG Carbon 1.MDG Carbon Objectives 2.MDG Carbon Strategy 3.MDG Carbon Cost Recovery

MDG Carbon Finance 3 3 Carbon Finance This emerging environment finance provides unprecedented opportunities to developing countries but also pose new challenges.  Access: Carbon finance put high demands on planning, legal, and financial institutions of developing countries. Presently, carbon finance and its benefits are clustered in only a few developing countries.  Underlying Finance: The revenues from carbon trade only provide an additional revenue stream that can enhance the return on the investment. Traditional project finance is needed to realize the carbon mitigation project.  Combining/sequencing different instruments: Given the need for policy change and long-term capacity development to access new environment funding and to mobilize underlying finance, different financial instruments will need to be combined/sequenced to achieve specific national targets (ODA, public transfers, direct private investments, environmental commodity markets, etc.).

MDG Carbon Finance 4 4

5 5 Core objectives of MDG Carbon Facility Increase access to carbon finance to a broader range of developing countries and project types through providing a one- stop shop service in carbon finance from project identification to revenue generation to enable project developers in pre-market situations. Maximize the carbon development dividend through developing a MDG Carbon portfolio that strike a balance between cost-effective projects (landfill methane recovery projects, etc.) and high development impact projects (small community renewable energy projects, etc.); Develop Capacity of programme countries to combine/sequence different funding sources to achieve specific national targets.

MDG Carbon Finance 6 6 Strategic Roadmap in the CDM Carbon Finance Market MDG Impact of Carbon Finance Projects Number of Countries with access to CDM carbon finance market Low High Low High Objective for UNDP MDG Carbon Facility Current CDM Market* (without MDG Carbon Facility) * 60% of CDM projects in 4 countries; projects from the LDCs constitute only 1% of the CDM pipeline

MDG Carbon Finance 7 7 Biodiversity projects Education projects Gender projects HIV/AIDS projects Other What is MDG Carbon: The Short Answer (Not All Kyoto Projects Are Created Equal) MDG Carbon Projects Poverty alleviation projects Biodiversity projects Education projects Gender projects HIV/AIDS projects Other Renewable Energy projects Energy Efficiency projects Methane Mitigation projects Biosequestration projects Other CDM projectsMDG projects

MDG Carbon Finance 8 8 UNDP’s Comparative Advantage in Developing Carbon Projects Through its GEF programme, UNDP is one of the world’s largest sources of technical assistance for climate change We have the experience from our GEF portfolio of 1,000 medium & large projects and over 7,000 small-scale projects. UNDP is supporting a number of capacity development initiatives for JI/CDM throughout the world (establishment of DNAs, skills development, etc.) as well as the formulation of some pilot CDM projects. One of the only two LDC project registered by the CDM Executive Board (Bangladesh) was developed with UNDP support By managing ODA, GEF, MLF, Carbon Finance and adaptation funds under one roof, UNDP will help programme countries sequence/combine these different sources of funds to address the existing policy, capacity and financing gaps to implement the Multilateral Environment Agreements and to meet the MDG targets.

MDG Carbon Finance 9 9 UNDP’s Challenges in Developing Carbon Projects As a technical assistance agency, UNDP does not have the mandate to trade carbon emission reductions and take on carbon market risks; UNDP does not have a dedicated due diligence infrastructure to manage carbon investment risks ; UNDP will need to mobilize some working capital to meet start-up costs; MDG Carbon supports commercial project developers and operates on a full cost-recovery basis. This is a major departure from UNDP’s traditional business model; MDG Carbon fee policies must be supported by an ongoing, rigorous and transparent financial modeling process.

MDG Carbon Finance 10 UNDP’s Strategy in Developing Carbon Projects UNDP will provide this one-stop shop service in partnership with the World Bank and existing commercial financial institution; MDG Carbon expects to be in a position to deliver supply aggregation benefits to project developers. By aggregating the supply of carbon credits by different project developers and ensuring due diligence of these credits, UNDP will be able to reduce risks and transaction costs for carbon funds. These savings will translate into the funds being able to offer a higher price to UNDP, and for UNDP, in turn, to offer a higher price to project developers. MDG Carbon due diligence policies and procedures build on the existing GEF due diligence framework, including clear risk sharing responsibilities between UNDP Country Offices, UNDP-GEF Regional Technical Advisers (RTAs) and headquarters.

MDG Carbon Finance 11 Partnership with a Financial Institution CER and VER Projects Financial institution (CERs or VERs) CERs and VERs Cost Recovery Fees Project Development &Technical Services $ € CER/VER Purchasers* CERS VERS UNDP Project Development $ ERPA $

MDG Carbon Finance 12 MDG Carbon Accounting and Cost Recovery Atlas Management Project For MDG Carbon COs RSCs/RCUs MDG Carbon Expenditure MDG Carbon Expansion Fund Cost Recovery from project investors upon project registration Income CDM Institutions & Consultants

MDG Carbon Finance 13 Start-Up Funds Fiscal YearStart-up Funds 2007BDP and Regional Programmes; TA services recovered upon project registration. 2008Bilateral Assistance; TA services recovered upon project registration onwardsMDG – Carbon Expansion Fund

MDG Carbon Finance 14 Roles of UNDP Country Offices Upon carbon training certification of CO EFPs, COs will: Identify/mainstream carbon project proposals into UNDP country programming; Carry out project design’s pre-appraisal, including MDG impact; Carry out developer appraisal (legal title to future CERs; track record, etc.); Assist RTA in PIN/PDD formulation process at the country level; Help project developer to understand and navigate the existing regulatory framework to secure DNA endorsement; Resolve project non-performance issues due to a construction or contractual dispute; Ensure that project operation data are collected and archived in accordance with monitoring plan, including MDG impact; Mobilize/manage ODA to provide policy and technical advisory services to relevant national institutions (DNA, etc.) and project developers.

MDG Carbon Finance 15 Roles of Regional Technical Advisers Upon carbon training certification, RTAs will: –Conduct core Appraisal of project design (eligibility, technical feasibility, economic viability, etc.); –Evaluate applicability of existing baseline methodologies to proposed projects; –Manage the PIN/PDD formulation process; –Selection of optimum crediting period depending on non-renewal risk associated with policy change that could negate project’s additionality; –Advise project proponents on structuring and financing of CDM/JI projects –Advise on how to combine/sequence carbon finance with other environment sources (ODA, GEF, MP, TREC, etc.)

MDG Carbon Finance 16 Roles of Regional Service Centers/Regional Bureaux Develop a regional CDM/JI strategy; Incorporate Carbon Finance into Regional Policy Dialogue and Programming; Participate in semi-annual meetings of MDG-Carbon Supervisory Board; Contract consultants to assist in formulating PINs/PDDs; As required, organize validation/verification missions of DOEs Organize regional carbon training workshops for UNDP programme officers Mobilize ODA for carbon finance capacity development at the regional level.

MDG Carbon Finance 17 MDG Carbon Central Unit (located in BDP/EEG) Assist RTAs in evaluating applicability of existing baseline methodologies to proposed projects at the PID/PIN stages and coordinate the development of new methodologies, as required Pre-validate PDDs and project monitoring reports prior to transmittal for validation; Develop and maintain financial model of MDG Carbon’s cost position, monitor costs, and develop a fee strategy that finances all UNDP costs, a reserve fund, a risk management reserve, an expansion fund and other essential business activities; Manage relationship with financial partners in designing and issuing Emission Reduction Purchase Agrements (ERPAs); Advise COs and RTAs on legal negotiations with project proponents in collaboration with financial partners. Advise RTAs on project structuring and financing, and associated contractual arrangements; Develop partnership arrangements through RFP process with financial firms for the MDG Carbon Compliance and Voluntary Programmes; Reports to MDG Carbon Supervisory on Facility performance on a semi- annual basis; Implement Supervisory Board’s meeting decisions

MDG Carbon Finance 18 MDG Carbon Supervisory Board Review MDG Carbon Annual Business Plan and approve MDG Carbon cost recovery and fee allocation policies; Appraise MDG-Carbon performance, including regional and sub-regional distribution of CDM/JI/VER projects; climate change and MDG impacts; risk management strategy; human resource development plan; partnerships; and financial performance; Assess whether the annual business strike a balance between climate change and MDG impacts, and between opportunities and risks.