Climate Change Issues and Strategy Development March 14, 2007 Ministry of Environment (MoE), Korea Tae Yong JUNG The World Bank, USA

Contents I. Basic Approaches II. Negotiation: UNFCCC and Beyond Kyoto III. CDM IV. Strategic Challenges V. For Your Information oClean Investment Framework (WB) oJapan Carbon Finance, Ltd. (JFC)

I. Basic Approaches

Basic Approaches  To lead paradigm shift Climate Policy  Sustainable DevelopmentClimate Policy  Sustainable Development From Cost  To Economic Benefit (‘Win-Win’)From Cost  To Economic Benefit (‘Win-Win’)  To minimize inter-ministry conflicts To focus Non-Energy Sectors, Non-CO2 GHGsTo focus Non-Energy Sectors, Non-CO2 GHGs To emphasize Co-benefitsTo emphasize Co-benefits  To highlight Impact & Adaptation To support basic researches on scienceTo support basic researches on science To support IPCC WGI & WG II ActivitiesTo support IPCC WGI & WG II Activities  To play a coordinating role To design a structure of stakeholders’ participationTo design a structure of stakeholders’ participation To enhance environmental education (School/Society)To enhance environmental education (School/Society)

II. Negotiation: UNFCCC and Beyond Kyoto

Negotiation: UNFCCC/Beyond Kyoto  New Developments Change of US Position  Still, it takes time.Change of US Position  Still, it takes time. UN Headquarter  New Initiative (Earth Summit?)UN Headquarter  New Initiative (Earth Summit?) EU’s initiative  G8 Summit (2008 in Tokyo)EU’s initiative  G8 Summit (2008 in Tokyo) APP  Expansion ?APP  Expansion ? More focus on Impact & AdaptationMore focus on Impact & Adaptation  Positioning UNFCCC Discussions for Beyond KyotoUNFCCC Discussions for Beyond Kyoto Bilateral Negotiation with Major CountriesBilateral Negotiation with Major Countries

III. CDM

Reduction of Emissions achieved by a Project compared to the scenario without CDM Years of operation of the project CO 2 Emissions (in kt CO ) Baseline Emissions (to be determined ex ante) Emissions of the CDM project (to be monitored along crediting period) Volume of Certified Emissions Reductions (CER) Methodologies required for : Determination of Baseline Emissions Monitoring CDM Project Emissions Calculation of Emission Reductions

A key concept: 1 CER = 1 more ton CO 2 emitted in Annex 1 countries 1 CER = 1 more ton CO 2 emitted in Annex 1 countries Only emission reductions that are ADDITIONAL to emission reductions that would have occurred without CDM Only emission reductions that are ADDITIONAL to emission reductions that would have occurred without CDM  Not all “Emission Reductions” are eligible to CDM Ex: least cost hydro may or may not be eligible Ex: least cost hydro may or may not be eligible ADDITIONALITY

A key concept: ADDITIONALITY Additionality established on the basis of: Financial Analysis : Additional cost, lower IRR, etc… Financial Analysis : Additional cost, lower IRR, etc… OR: Barriers preventing the “clean” project to take place: Barriers preventing the “clean” project to take place: –Difficulties to achieve financial closure ( no long term commercial loans) –Technology Risk: first of kind in the country (high pressure boilers Cogen) –Social / market acceptability (scavengers resettlement for landfill gas to power) –Etc.

CDM Executive Board ► Approves Baseline and Monitoring Methodologies ► Accredits the Certifiers (Operational Entities) Designed Operational Entities Project Host Country ► Forwards the Application for Validation and Registration ► validation report and registration application Project Developer ► Letter(s) of Approval by Participant Countries ► Calculates "Baseline" and prepares a PDD (Project Design Document) using an Approved Methodology ► Registers projects validated by OEs ► Validate proposed CDM projects and forward applications to EB for registration Cycle Before Project

CDM Executive Board ► Approves Baseline and Monitoring Methodologies ► Accredits the Certifiers (Operational Entities) Designed Operational Entities Project Host Country ► Forwards the Application for Validation and Registration ► validation report and registration application Project Developer Project Developer and Host Country ► Shares issued CERs according to the agreement between ► Letter of Approval ► Calculates "Baseline" and prepares a PDD using approved Methodology ► Monitor Emissions during the project and calculates Emissions Reductions ► Requests validation of Emission Reductions to get the CERs ► Registers projects validated by OEs ► Issues the Certificates (CERs) ► verification & certification report and request issuance of credits (CERs) ► Validate proposed CDM projects and forward applications to EB for registration ► Verify and certify emissions reductions Cycle during Project

Project Host Country Project Developer Project Developer and Host Country ► Shares issued CERs according to the agreement between ► Letter of Approval ► Calculates "Baseline" and prepares a PDD using approved Methodology ► Performs Monitoring of Emissions during the project and calculates emissions reductions Carbon Market Place (outside WB) Carbon Funds >30, 10 inside WB Direct Sales Purchase Agreements CERs $ $ + Technical Assistance for CDM project cycle WB Comparative Advantage Credits (CERs) for Sale

Cumulative Number of CDM Projects per Methodology (projects that officially began validation process) /1/03 2/1/044/1/04 6/1/048/1/04 10/1/0412/1/04 2/1/054/1/056/1/058/1/05 10/1/0512/1/05 2/1/06 4/1/06 Nb Proj under ACM0002 Nb Proj under ACM0003 Nb Proj under ACM0004 Nb Proj under ACM0005 Nb Proj under ACM0006 Nb Proj under ACM0007 Nb Proj under ACM0008 Nb Proj under AM0001 Nb Proj under AM0002 Nb Proj under AM0003 Nb Proj under AM0004 Nb Proj under AM0005 Nb Proj under AM0006 Nb Proj under AM0008 Nb Proj under AM0009 Nb Proj under AM0011 Nb Proj under AM0013 Nb Proj under AM0014 Nb Proj under AM0015 Nb Proj under AM0016 Nb Proj under AM0018 Nb Proj under AM0021 Nb Proj under AMS-I.C Nb Proj under AMS-I.D Nb Proj under AMS-II.B Nb Proj under AMS-II.C Nb Proj under AMS-II.D Nb Proj under AMS-III.B Nb Proj under AMS-III.D Nb Proj under AMS-III.E The Y axis has been truncated at 50 Nb Proj under ACM0001 Each new approved methodology unleashes a new segment of CDM projects potential

Cumul Nb CDM Proj that have already applied for Validation 01-Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb-06 Nb Proj under ACM0008 Nb Proj under ACM0007 Nb Proj under ACM0006 Nb Proj under ACM0005 Nb Proj under ACM0004 Nb Proj under ACM0003 Nb Proj under AM0021 Nb Proj under AM0018 Nb Proj under AM0016 Nb Proj under AM0013 Nb Proj under AM0008 Nb Proj under AMS-III.D Nb Proj under AMS-III.B Nb Proj under AMS-III.E Nb Proj under AM0015 Nb Proj under AM0014 Nb Proj under AM0011 Nb Proj under AM0009 Nb Proj under ACM0002 Nb Proj under ACM0001 Nb Proj under AM0006 Nb Proj under AM0005 Nb Proj under AM0004 Nb Proj under AM0003 Nb Proj under AM0002 Nb Proj under AM0001 Nb Proj under AMS-II.D Nb Proj under AMS-II.C Nb Proj under AMS-II.B Nb Proj under AMS-I.D Nb Proj under AMS-I.C Ch. de Gouvello - WB / AFTEG - May 2006 Member of the MethPanel Source: UNFCCC data The exponential growth of the number of projects is a direct reflect of the timing of the processing and release of new approved methodologies by the EB/MethPanel. As a result, it can be expected that this growth may continue for a while.

Expected average Annual CERs

CDM Projects by Scope

Annual value of project-based Emission Reductions Transactions (million USD) (up to 2012 vintages) Jan - March (Source: State and Trends of the Carbon Market 2006, Ph. Ambrsoi and K. Capoor, World Bank, 2006) Already more than 5 billion dollars of North-South net transfer before end of 2012 However still some uncertainties for post 2012 (second commitment period)

CDM Issues  Focused Areas Waste DisposalWaste Disposal Sink (Afforestation/Reforestation)Sink (Afforestation/Reforestation) Small scale HydroSmall scale Hydro  Unilateral CDM Who will be Host Countries?Who will be Host Countries? How to finance?How to finance?  Beyond Kyoto Mechanism Policy-based CDMPolicy-based CDM Sectoral ApproachSectoral Approach

IV. Strategic Challenges

Strategic Challenges  Institutional Arrangement How to play coordinating role?  Develop logics & functionsHow to play coordinating role?  Develop logics & functions How to secure budget and HR?  Explore new resources (ex. Energy Special Account)How to secure budget and HR?  Explore new resources (ex. Energy Special Account) How to expand supporting organizations?  Give legal mandates and functionsHow to expand supporting organizations?  Give legal mandates and functions  Domestic PAMs How to develop PAMs?How to develop PAMs? Develop SD indicators (CO2 intensity,…) Develop SD indicators (CO2 intensity,…) Research on embodied CO2 (Carbon Contents in products) Research on embodied CO2 (Carbon Contents in products) Emphasize Co-benefits Analysis Emphasize Co-benefits Analysis More Economic Analysis More Economic Analysis

Strategic Challenges  Domestic PAMs How to implement PAMs?How to implement PAMs? Develop concrete targets and monitor them (CO2 intensity,…) Develop concrete targets and monitor them (CO2 intensity,…) Work closed with local authorities (capacity building, local initiatives..) Work closed with local authorities (capacity building, local initiatives..)  Promotion of Env. Industries Find target markets (less developing countries)Find target markets (less developing countries) Technology transfer (both hardware and software)Technology transfer (both hardware and software) Private & Public Partnership (PPP)Private & Public Partnership (PPP) Link with CDM activitiesLink with CDM activities

V. For Your Information 0 Clean Investment Framework (WB) 0 Japan Carbon Finance, Ltd. (JFC)

Clean Investment Framework (WB)   Pillar 1: Energy for Development and Access for the Poor   Pillar 2: Policies and Financial Requirements to Support a Transition to a Low Carbon Economy   Pillar 3: Need for Investments to Reduce Vulnerability to Climate Variability and Risk

Clean Investment Framework (WB)  G8 Meeting in 2005  WB/IEA  Development Committee of the WB  Accept the clean investment framework (Sept. 2006)  2 nd Stage: Case Study on +5 countries (China/India/Brazil/Mexico/South Africa)  Report to G8 Meeting in 2008 (Japan)

Clean Investment Framework (WB) Pillar 1  Energy for Development and Access for the Poor  1.4 billion people will not have access to electricity by (IEA estimates)  Electricity supply needs $165 billion p.a.  Current private and public sector resources fund $80 billion p.a.  Energy has an important role in economic growth and poverty alleviation  The challenges are  to provide the poor with access to modern clean energy  to enable these financial instruments to bridge financial gap

Clean Investment Framework (WB) Pillar 2  Transition to a Low Carbon Economy  Multi-Gas/Multi-Sector Strategies and International Emission Trading  Reducing Financial Needs  Technologies (currently available and will be)  Requires tens of billions of dollars p.a. of Incremental Investments in energy sector (especially Power Sector)  Scaling up  Energy Efficiency Improvement Programs  Renewable Energy  Financial Instruments

Clean Investment Framework (WB) Pillar 3  Adaptation to Climate Risk  Tens of billions dollars per year of ODA & concessional finance investments are exposed to climate risks – at least $1 billion per year is needed to climate-proof the development portfolio  Response by private sector constrained by  Lack of information on the nature of the risks and adaptation options  Insufficient risk spreading mechanisms – e.g. insurance  Funding  ODA  GEF Special Funds for Adaptation  CDM (2% for Adaptation Funds)

Population without electricity, 2005 Source: World Energy Outlook (WEO), 2006, International Energy Agency (IEA),

Oil 21% Electricity 56% Coal 3% Gas 19% Investment in Energy Sector ( ) Just over half of all investment needs to 2030 are in developing countries, 18% in China alone. Just over half of all investment needs to 2030 are in developing countries, 18% in China alone. Source: WEO2006, IEA Cumulative Investment in Energy-Supply Infrastructure, = $20.2 trillion (in $2005) Power generation 54% 46% Other Refining 73% 18% 9% LNG chain Transmission and distribution 56% 37% 7% Mining Shipping & ports 11% 89% $4.3 trillion $11.3 trillion $3.9 trillion $0.6 trillion Biofuels 1% Exploration & development Transmission & distribution Exploration & development

JCF: Company Profile (1) Main Business Objective: To purchase CERs and ERUs （ ERs ） To purchase CERs and ERUs （ ERs ） issued until 2012 from CDM/JI Projects issued until 2012 from CDM/JI Projects (2) Fund Pool: Called “Japan GHG Reduction Fund (JGRF)”, all amount of which JCF can utilize to purchase CERs Called “Japan GHG Reduction Fund (JGRF)”, all amount of which JCF can utilize to purchase CERs (3) Committed Fund Amount: Approx. US$ 140 million Approx. US$ 140 million (4) Establishment: December 1, 2004 December 1, 2004 (5) Location: Tokyo, Japan Tokyo, Japan

(6) Fund Providers: 2 Policy-lending Institutions (Governmental Banks) 2 Policy-lending Institutions (Governmental Banks) & 31 Major Japanese Private Enterprises Utility Tokyo Electric Power Co., Inc. Kansai Electric Power Co., Ltd. Chubu Electric Power Co., Inc. Tohoku Electric Power Co., Inc. Hokkaido Electric Power Co., Inc. Hokuriku Electric Company The Chugoku Electric Power Co., Inc. Shikoku Electric Power Co., Inc. Kyushu Electric Co., Inc. The Okinawa Electric Power Co., Inc. Electric Power Development Co., Ltd. (J-Power) Tokyo Gas Co., Ltd. Policy-lending Institution Japan Bank for International Cooperation (JBIC) Development Bank of Japan (DBJ) SectorFund Providers 10 Major Powers & the Largest Gas Firms

SectorFund Providers Oil & Manufacturing Nippon Oil Corp. Idemitsu Kosan Co. Ltd. Japan Energy Corp. Kyushu Oil Corp. Sony Corp. Toshiba Corp. Sharp Corp. Fuji Xerox Co., Ltd. The Japan Iron and Steel Federation Taiheiyo Cement Corp. Toyota Motor Corp. Terumo Corp. Trading Mitsubishi Corp. Mitsui & Co., Ltd. Sumitomo Corp. Itochu Corp. Marubeni Corp. Sojitz Corp. Engineering JGC Corp. (6) Fund Providers: Major Companies in Oil, IT, Steel, Cement, Automobile & Medical Equipment fields 6 Major Investing & Trading Companies

(1) Assistance for Project Development: JCF are ready to bear following costs for development of CDM/JI projects in principle with a certain ceiling amount: (No Need to Refund in principle) (No Need to Refund in principle)  PDD Preparation  Validation  Initial Verification Services (2) Purchase of Carbon Credits (CERs, ERUs): JCF commits purchase of carbon credits under ERPA (Emission Reduction Purchase Agreement) (at a fixed price). * Payment on Delivery in principle * Purchase Price: to be decided on project-by-project basis

Services (3) Upfront Payment: Upfront Payment for carbon credits can be considered on case-by-case basis. (depending on necessity and risks etc.)

Merits for Projects (1) Additional Cash Flow:  Improvement of Project Viability with additional Cash Inflow by selling CERs in US$  Securing of Stable Profitability by getting commitment for purchase of CERs  Front-loaded Revenue in Sweep Method (2) Assistance in Development:  Saving of Development Costs (PDD, Validation, Initial Verification etc.)  Getting of Assistance and Orientation for development of CDM projects

Merits for Projects (3) Possibility of Parallel-purchase / Equity participation:  A part or all of the remaining Carbon Credits may be purchased by our Fund Providers in collaboration with JCF.  Participation as investors by some our Fund Providers may be possible.

(4) Collaboration with and Support from JBIC & DBJ:  Strong ties with Japanese Government issuing Written Approvals for CDM/JI Projects  Cooperation and strong ties with Host Governments and Development Financial Institutions  Underlying Financing from JBIC, such as; A) Export Loan A) Export Loan B) Overseas Investment Loan B) Overseas Investment Loan C) Untied Loan C) Untied Loan D) ODA Loan, etc. D) ODA Loan, etc. Merits for Projects

CDM/JI Projects Example Model for Underlying Finance provided for CDM /JI Projects by JBIC Underlying Finance （ On-Lending Scheme ） Fund Provision Purchase of CER (Carbon Finance) Direct Loan Underlying Sponsorship Finance (Equity, etc.) (Japanese) Companies in Power /Energy Sector, etc. Intermediary Financial Institution Cash Inflow during Construction Period Cash Inflow during Crediting Period JBIC JCF

Operational Flowchart JCF Project Planning Feasibility Study Other Participants of Project Project Entity Stake Holders Host Country DNA Exclusive Negotiation Period Conclusion of MoU defining basic terms & conditions Project Preparation DOE Consultant Host Country DNA Assistance for Project Development Bearing of PDD Preparation Cost PDD Preparation Validation Bearing of Validation Cost Due Diligence Clarification & Screening of PIN Evaluation & Selection of Project Submission of PIN Conclusion of ERPA

Operational Flowchart JCF Host Country DNA Project Entity Stake Holders Registration CDM -EB Japan DNA DOE CERs Payment on Delivery DOE CDM-EB Verification Certification & CERs Issuance Project Implementation Effecting of Sale/Purchase Obligation Upfront Payment Assistance for Project Development Validation Conclusion of ERPA Bearing of Initial Verification Cost Monitoring

Project Description and Project Participants Project Description and Project Participants Fulfillment of Kyoto Rules: Fulfillment of Kyoto Rules:  Methodology (Baseline Study & Monitoring Plan)  Validation (Methodology Applicability, Data, Quality Control, etc.)  Possibility of Authorization & Approval by Host Country  Stakeholders’ Comments Additionality Additionality  Investment Analysis/Barrier Analysis and Common Practice Analysis, etc. Environmental & Social Safeguard Requirements: Environmental & Social Safeguard Requirements:  Compliance with Laws & Regulations, etc. Key Criteria: Screening of PINs/PDDs * Red: High Priority

Project Feasibility: Project Feasibility:  Construction Plan, Business Plan and Fund-raising Plan  Project-related Contracts  Concession/License & Permits  Creditworthiness and Competence of Project Sponsors  Experiences of Management and/or Project Operator  Commercially Viable Proven Technology  Financial Viability (Cash Flow Projection, Sensitivity Analysis, etc.) Contribution to Sustainable Development of Host Country Contribution to Sustainable Development of Host Country  Environmental, Social & Economic Impacts, Technology Transfer Effects, etc. * Red: High Priority

*Sector: “Sectoral Scopes” listed in UNFCCC web site which include A) Renewable Energy, B) Waste Handling and Disposal, C) Manufacturing Industries (Energy Efficiency, Fuel Switching, etc.), D) Fugitive Emissions, E) Chemical Industries, F) Agriculture, etc. ERs to be purchased from: approx. in USD, million a Single ProjectUp to 25 a Single Host CountryUp to 37 a Single Sector *Up to 41  Portfolio Guideline  Purchase Conditions  Price  Volume More than 50,000t-CO2e/year is preferable.  Delivery Schedule etc. Early commissioning project is preferable. * Red: High Priority