World Bank Carbon Finance and Emerging Strategy Public Side Event, CoP8, New Dehli, October 24 th, 2002

26 transactions at advanced stage

Technology distribution of planned projects

Preparation and review of the Project Baseline Study and Monitoring and Verification Plan (MVP) 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: $ 40K Baseline : $20 K Monitoring Plan: $20K Contract, Processing and documentation: $30k Consultation and Project Appraisal: $105K Negotiations and Legal documentation: $50K Carbon Asset Creation and Maintenance Manufacturing Process and Costs Total through Negotiations All expenses: $265 K Initial verification at start-up: $25K Verification: $10-25 K Supervision: $10-20K

Sustainable Development Deep Green Carbon Feasible to cost-effectively create and certify local environmental and community development benefits with emissions reductions: Examples from PCF: –Colombia Jepirachi Wind Power Plant (19MW) providing: potable water, electricity for schools/clinics and small fishing port for local indigenous peoples; –Plantar Project in Brazil (23,400ha fuelwood plantation): Worker health improvement ABRINQ certification of no child labor or exploitation Biodiversity benefits FSC certification of improved forest management

Findings/Confirmations 1.CDM/JI Carbon Asset Creation is complex and difficult with long lead times for projects and ER delivery 2.Regulatory uncertainty remains post- Marrakesh 3.First real carbon purchase deal is key to Private Sector and Govt. capacity building 4.Minimal direct private investment in CDM/JI 5.Small projects/small countries lose out

The Carbon Market

Summary of carbon markets currently in operation Project-based Emission Reduction purchases Allowance Trading Within National trading systems Intra-Firm trading Retail UK DK Shell BP “Pre-Compliance” From voluntary To Kyoto Pre-Compliance

Major Market Findings 2002 is most active year. Prices ranged from $1 (project- based) to $17 (UK allowance) Market Activity since 1996 Total Trades, all vintages = 200 MtCO2e 157 MtCO2e 1996 to 2002 Expected 2002 contract volumes = MtCo2e OR over 5 times 2001 volume of 12 MtCo2e 2002 volumes would be ~1/3 of all estimated market volume since private sector bought most of ERs traded within OECD countries.

Market Volume has increased Source: Authors’ own calculation, as above, volume projection by PointCarbon

Market Finding #1: Carbon Market is firming up Diversity of Buyers –European and Japanese buyers join in 2002 what has been a predominantly North American buyers market –Public buyers now dominate CDM/JI transactions Diversity of Contract Types –Transition switch from call options to more balanced option, spot and forward market in 2002 Emergence of Small Secondary Market Transaction Volume –Some companies experiment with liquidating small quantities of reductions from their portfolio; demonstrate possible emergence of secondary market Emergence of Small Retail Market for High Quality Tons

Number of trades has increased Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

Buyers are more diverse Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

Balance in Asset Classes Emerging Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

Market Finding #2: Limited Number of JI/CDM Transactions Only 43% of all carbon transactions in the past 2 years have been made in CDM/JI Only 13% of the private sector’s purchases in were in CDM (2002=16%) Most 2002 CDM/JI transactions were Dutch and PCF African countries, smaller countries and small-scale projects were largely bypassed by carbon finance in 2002, as in the past

Market Drivers Near Term Kyoto Protocol Entry into force to drive sharp increases in carbon transactions in OECD, including in US Non-Kyoto Regimes emerging rapidly: mostly voluntary and regiponal/state level such as in US EU decision on Emissions Trading in December

Carbon Finance flows Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon USA Canada Australia Latin America Asia Africa

Who’s buying where? ( ) Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon In , private companies acting alone have purchased only 13% of their reductions in developing countries.

Factors constraining private capital flows to JI/CDM –Linked to overall decline in foreign direct investment –Higher risks perceived in macro-economic climate in many developing countries –Long lead-time to prepare projects –Transaction Costs perceived to be higher

Public-Private Initiatives: Example of the World Bank –Focused on its role to help alleviate poverty and encourage sustainable development in its client countries. Sees potential opportunity to help mobilize and direct private capital to key sectors and projects that promote sustainable development and benefit communities in client countries –Strategy to “crowd in” private sector Mobilization of new public-private funds that help to reduce risks of operating in developing countries and transition economies, e.g. Prototype Carbon Fund, Community Development Carbon Fund (See Partnerships to reduce transaction costs of doing JI and CDM projects benefiting its client countries, e.g. Infrastructure Development Finance Corporation (India), Development Bank of Southern Africa

Annex: Methodology for Study

Overcoming Data Limitations Our study is based on public and generic confidential transaction data provided to the PCFplus Research program by Natsource LLC, CO2e.com LLC and Point Carbon. We also interviewed international companies active in this market and obtained data that has been aggregated for this study. We merged data obtained from various sources and corrected for double-counting. The data has been standardized and analyzed to reflect transacted vintages until Our coverage, although extensive, is likely still incomplete. Some transactions, for example, are likely confidential, and others difficult to verify. As a result, we may have underestimated the size of the market.