Carbon Finance Strategy the World Bank Carbon Finance Strategy the World Bank CHARLES CORMIER Sept 2005

Key Features of Carbon Finance Both public and private capital – new and additional sources for sustainable development financing Both public and private capital – new and additional sources for sustainable development financing Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred. Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred. Unlike most buyers in the market, Participants in Bank Funds agree to take Kyoto regulatory risk: Hence, our carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk remained open.Unlike most buyers in the market, Participants in Bank Funds agree to take Kyoto regulatory risk: Hence, our carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk remained open. Payment stream is in hard currency, reducing financing risk for foreign lenders Payment stream is in hard currency, reducing financing risk for foreign lenders

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Technology  IRR financial Hydro, Wind, Geothermal % Crop/Forest Residues3-7% Municipal Solid Waste5-15+% Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO 2 e Carbon Economics

Improve Liquidity in the Carbon Market Benchmark carbon asset creation: Increase certainty and lower entry barriers for private capital (“crowd-in private sector”) Benchmark carbon asset creation: Increase certainty and lower entry barriers for private capital (“crowd-in private sector”) Expand frontiers of the market: expanding the benefit of carbon finance to countries, poorer regions and technologies not yet benefiting from carbon trade, and to sectors where Bank intermediation is critical to expand supply Expand frontiers of the market: expanding the benefit of carbon finance to countries, poorer regions and technologies not yet benefiting from carbon trade, and to sectors where Bank intermediation is critical to expand supply Address Market Distortions: demonstrate credible forestry/agriculture “sinks” activities demonstrate credible forestry/agriculture “sinks” activities Open Markets for small projects and small countries Open Markets for small projects and small countries Integrate and strengthen Technical Assistance and Capacity Building: to assist participating countries to access market Carbon Finance Strategy

World Bank Carbon Finance Products ~$900 million under management $80 million committed - Italian multi-participant 170 million euro – Spanish Government; will be open to private sector – Bio Carbon Fund: $51.3 million; multi-shareholder; second tranche opened to contributions 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 $35 million.Economies in Transition only (with IFC) $180 million – single government participant (Dutch Government) $35 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

Carbon Finance Assist A Single-Purpose Multi-Donor Trust Fund for all WB Carbon Finance Capacity Building and Technical Assistance CF Assist Umbrella FIREWALL Enhance capacity of participating countries to fully participate in the carbon market World Bank Carbon Funds is a buyer of last resort PCF BioC Direct Donor Contributions Carbon Finance Business Carbon Finance Business $ Interest Earnings on CFB Funds (Implemented By Countries & Regions w/CF-A Assistance) Experience Exchange CDCF (pledged as of Aug05) (Carbon Asset Purchases) (Coordination of all Technical Assistance and Capacity Building) PHRD $10M “Plus TA Funds

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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