Learning from the Implementation of the Prototype Carbon Fund:

Features of the PCF Portfolio or fund structure –Minimize Project Risks –Reduce Transactional Costs –Enhance the Learning Experience Governments: $10 m; Companies: $5 m Total: US$145 million to be used in projects PCF Products: –Competitively priced, high quality emissions reductions target price: $4-5/ton/CO2 (= $20/tC) target cost of generating ERs: $10/tC –High value knowledge asset to help create competitive advantage for corporate investors, host countries, and efficient market regulation for Parties

Key PCF Demonstration Effects …that investments under CDM/JI can: Earn important “resource rents” for Developing Countries/Transition Economies engaging in ER trade Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors Contribute to sustainable development and improve the quality of life of low-income groups..and how to implement the CDM(JI?) project cycle

PCF Participants Governments: (6) Netherlands, Finland, Sweden, Norway, Canada, Japan (through Japan Bank for International Cooperation) Private Sector: (17) RWE - Germany, Gaz de France, Tokyo Electric Power, Deutsche Bank, Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Mitsui, Mitsubishi, Electrabel, NorskHydro- Norway, Statoil -Norway, BP-Amoco, Fortum, RaboBank, NL Fund Subscribers at Second Closing ($145 million)

Host Country Committee Members Plus those countries with Projects

Project Selection and Portfolio Criteria Generic: Adhering to UNFCCC, Bank standards, with emphasis on renewable energy projects Broad balance between CDM and JI Not less than 2% or more than 10% of Fund’s assets Not more than 20% in the same host country Not more than 10% in forest-based sinks (only in EITs) Emphasis on renewable energy technology and efficiency (3:2 ratio) No more than 25% in any one technology

Current Pipeline over 25 projects; greater than $100 million 6 endorsed by host country as CDM or JI –Latvia: Liepaja Region Solid Waste Management ($2.5m) –Costa Rica: Facility for Renewable Energy Resources ($10m) –Uganda: Small Hydro Power in West Nile Region ($5m) –Guyana: Bagasse-based Cogeneration at Skeldon ($5+m) –Czech Republic: Energy Efficiency projects ($5-10m) –Morocco: Wind Power ($14.5m + carbon co-financing)

Prospective Projects under Review ($Million in Carbon finance) Caribbean: Wind power ($3m) Southern Cone: Fund for Renewables (IDB/MIF/A2R: $5+m) Central America (5 countries, $10m): crop residue biomass, geothermal, small hydro, wind EE: process energy efficiency ($5+m) East Africa: municipal waste-to-energy ($5-10m) South Asia: Waste-to-Energy facility and bagasse cogeneration (tbd) East Asia: small hydro power and district heating efficiency Forest Carbon projects in Eastern Europe ($7-14m)

Project selection and baseline validation Periodic independent verification/ certification Registration Protocol Transfer Emission Reductions Project approval and implementation Projects to Emissions Reductions Ensuring Environmental Credibility Assign emissions reductions to Participants Account

Contributions to a CDM Tool Kit? Baseline Template Monitoring and Verification Protocol Template Validation Manual Emissions Reductions Purchase Agreement Helping investors and Host Countries by reducing learning costs to do CDM Projects

Project identification and preparation Preparation of Monitoring and Verification Protocol Negotiation of Carbon Purchase Agreement Project approval Validation process and opinion Baseline Study as part of Feasibility Study “EnsuringEnvironmentalCredibility” 3-4 weeks effort Cost: $20, weeks effort Cost: $40,000 4 weeks Cost: $30,000 Total Front-End Costs ~ $ k = Sum of “Validation Process+unique CDM analysis and dialogue+negotiations

Cost of CDM-like procedures Total procedural cost: $ K –PCF Front end procedures (Baseline, Monitoring & Verification, Validation, legal fee, etc.): $ K –Procedures after project commissioning (lifetime supervision, verification and certification): $ K –NOT including CDM fees –NOT including additional CDM registration and review requirements Compare with medium sized project with ER purchase from project: $2 million and total financing of ~$10 million (power projects ~5-10MW)

Heavy Burden of Transaction Costs on small projects/small countries CDM requirements make small projects too costly! Small projects such as PV, micro- wind, biomass, micro-hydro –have higher unit costs due to small size –displace lower carbon intensity end-uses –operate in riskier environments (e.g. remote areas) BUT represent majority of CDM opportunites for small developing countries incl. small islands Need streamlined procedures in negotiating text; Need help in accessing CDM market

Need for Intermediation for Small projects/small countries Smaller-scale project sponsors in small countries and riskier investment environments lack ready access to carbon finance; need “bundling” of small projects by financial intermediaries to tap global carbon market and deliver benefits to small project sponsors and communities; –use of “ Multi-project” or standardized baselines using performance standards for medium scale projects and –agree on standard emission factors for particular end- uses and technologies in micro-projects

Transferability Intermediation and bundling of small projects requires transferability –insisting on once-and-for-all designation of Annex I recipient will reduce incentives for investment and –secondary market development is key to mobilize investment capital in CDM Environmental credibility/additionality does not require specifying destination of ERs; flexibility in assigning ERs between Annex I countries and Annex II countries is essential to distributing benefits of carbon market development widely

Critical Capacity Constraints Host country government and private sector capacity is an important factor limiting the volume of investment and technology transfer. –Effective private sector capacity is key to lowering transaction costs of developing, negotiating and implementing CDM/JI projects –Efficient arrangements across government agencies are key to oversee CDM/JI, build investor confidence and protect Governments’ interests –The most effective capacity building is through real projects and emission reduction purchases

Engaging the Private Sector Private Sector Capacity exists in both Annex I and some non-Annex I countries for V/V/C –With clear guidance, industry can develop and regulate for ensuring environmental credibility Challenge for Parties to ensure private investment –keep project cycle short and predictable –avoid ex ante, open-ended approval process at pre- investment stage –create transparency and predictability (validation protocol, accreditation criteria)

Lessons from experience of applying CDM-like procedures 1. CDM Reference Manual ʘ uniqueness and diversity of projects difficult to anticipate ʘ attempting to provide an initial set of methodological guidelines covering all project types may ʘ delay start-up ʘ increase complexity of procedures and costs ʘ reduce CDM transaction volume ʘ Hence, CDM Reference Manual design should be evolutionary, building on precedence