1. Carbon Finance at the World Bank Workshop on Large Project Finance Maputo, Mozambique 31 May & June 1, 2007 Antonio Nucifora, Senior Economist, World Bank (in collaboration with Andrea Pinna, Karan Capoor, Benoit Bosquet, and Noreen Beg, CFU World Bank)

2. Structure of the Presentation I.The Basics of Carbon Finance and key CDM Principles II.Latest Market Evolution III.CDM Project Cycle, and role of the World Bank

3. Structure of the Presentation I.The Basics of Carbon Finance and key CDM Principles II.Latest Market Evolution III.CDM Project Cycle, and role of the World Bank

4. Carbon Finance gives value to Carbon Credits (CERs) generated by ‘Clean Development Mechanism’ Eligible Investment Projects

5. 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

6. Carbon Fund $ $ $ $ 22 Emission Reduction Purchase Agreement (ERPA) BanksInvestor DebtEquity Power Purchase Agreement $$ Electricity $$ Carbon Credits Upfront payment as “Equity” Less than 25% of contract Collateralization of ERPA Role of carbon finance in project financing

7. Key Features of Carbon Finance Payment on Delivery: payments made upon annual independent verification that ER have occurred. Other resources must be found to cover the investment cost If project entity requests an advance payment –Proof would have to be given that there is no alternative –Would be limited to max 25% of the ERPA value –Price per ton would be discounted to reflect the risk of non-delivery –Bank guarantee would be requested –No upfront payment has been granted for any of the 22 projects cleared Payment stream is in hard currency, reducing financing risk for foreign lenders

8. Debt Equity Cash out Cash in Yrs 0 1 2 3 4 5 6 7 8 …………………………………….15-20 Carbon finance: payments for a stream of emission reductions Emission Reductions (ER) created only after project is implemented and operational. Carbon revenues Operating revenues = annual carbon payments = other sources of revenue from service or production = debt servicing Construction

9. A key concept: 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  Example: an already commissioned hydro power plant that displaces CO2 emissions from diesel generation would not be considered additional. The CDM must be a deciding factor in the decision to go ahead with the project ADDITIONALITY Additionality established on the basis of: Financial Analysis : Additional cost, lower IRR, etc… OR: 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 – –Social / market acceptability (scavengers resettlement for landfill gas to power) – –Etc.

10. Hydroelectric power offsetting the need for coal- or gas- fired generation Extending grid to reach customers currently using diesel or kerosene Reducing CO2 and possibly methane (a potent greenhouse gas) by generating energy and bio-fuels from sugar industry by-products -- bagasse and molasses Replacing firewood/kerosene/cowdung with biogas from livestock and human wastes Extracting methane from landfills or avoiding its generation trough composting organic waste in urban dumpsites Extracting methane from disposal of sewage sludge Capturing N20, a powerful greenhouse gas, from fertilizer production Sequestering CO2 by tree planting, small plantations, land restoration (limited capacity to buy though) Types of Carbon Projects

11. TechnologyDelta IRR financial Hydro, Wind, Geothermal 0.5-3.5% Crop/Forest Residues 3-7% Municipal Solid Waste 5-15+% Carbon economics Increases in Project Rates of Return as a result of additional revenues from sales of Emissions Reductions (“Carbon”) at $4/tCO 2 e

12. Structure of the Presentation I.The Basics of Carbon Finance and key CDM Principles II.Latest Market Evolution III.CDM Project Cycle, and role of the World Bank

13. Latest Market Evolution Source: State and Trends of the Carbon Market 2006, The World Bank 0 50 100 150 200 250 300 350 400 19981999200020012002200320042005Jan-Nov'06 Annual Volume of Project-basedTransactions (Million tCO2 e ) 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Average price (US$ per tCO2 e ) US$ 10.47 US$ 7.25 US$ 4.99 Carbon is mainly a financial trading market Over US$27 billion in 2006, mainly from trading Market value arises from trading: sale, re-sale for hedging, arbitrage + compliance Project-based market stabilizes Current/expected transactions in 2006 likely to equal 2005 volumes (US$11 billion) Biggest Primary CER Sellers: China (69%) and India (10%) Growth rate of new CDM pipeline slows as 2012 looms Already more than $5 billion of North-South net transfer before end of 2012

14. CDM Asset classes Share of Clean Energy Rises (share of volumes) Jan. 2005 to Dec. 2005 Jan. 2006 to Dec. 2006 Clean energy: 11% Clean energy: 25%

15. Structure of the Presentation I.The Basics of Carbon Finance and key CDM Principles II.Latest Market Evolution III.CDM Project Cycle, and role of the World Bank

16. 2. Validation of project documentation by environmental auditor accredited by CDM EB 5. Certification and Issuance: Acceptance of verified emission reductions and issuance of credits by CDM EB 4. Verification of generated emission reductions by an accredited verifier 1. Project Design Document: Preparation of project documentation applying an approved methodology for calculating emission reductions 3. Registration : Acceptance of project by the CDM EB CDM project cycle Project sponsorAccredited auditorCDM Executive Board The CDM Executive Board (EB) oversees the CDM project activity cycle:

17. The World Bank’s Objectives in the Carbon Market Contribute to Sustainable Development –Support Developing Countries To Maximize Gains from Carbon Finance –Add Value to CDM Projects Catalyze the Carbon Market –Develop new markets and sectors for carbon finance –Build Capacity in Client Countries –Provide Liquidity to the Market

18. World Bank Carbon Funds & Facilities Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose. Netherlands Clean Development Mechanism Facility. $268.3 million (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects. Community Development Carbon Fund. $128.6 million (closed). Multi- shareholder. Small-scale CDM energy projects. BioCarbon Fund. $77.4 million (Tranche 1 closed @ $53.8 million; tranche 2 open). Multi-shareholder. CDM and JI LULUCF projects. Italian Carbon Fund. $155.6 million (closed). Multi-shareholder (from Italy only). Multipurpose. Netherlands European Carbon Facility. $56.6 million (closed). Netherlands Ministry of Economic affairs. JI projects. Spanish Carbon Fund. $282.4 million (closed). Multi-shareholder (from Spain only). Multipurpose. Danish Carbon Fund. $69.4 million (closed). Multi-shareholder (from Denmark only). Multipurpose. Umbrella Carbon Facility. $737.6 million (Tranche 1 closed – 2 HFC-23 destruction projects in China). Carbon Fund for Europe. $65 million. Multi-shareholder. Multi-purpose. Managed with EIB. Total funds pledged = US$ 2.02 billion (16 governments, 65 firms)

19. 4. Validation 9. Certification and Issuance 8. Verification 6. Registration World Bank CDM project cycle Project sponsorAccredited auditorCDM Executive BoardWB-CF 1. Project identification & inclusion PIN submission by sponsor PIN acceptance and fund allocation Agreement with region Letter of Intent 5. Negotiate and sign Emission Reductions Purchase Agreement (ERPA) 7. Construction and start up 10. End of contract period (may be post-2012) 2. Carbon asset due diligence Evaluate methodology and additionality Project Design Document Quality control of project documentation 3. Project due diligence (e.g., environmental and social safeguards)

20. THANK YOU ! www.carbonfinance.org Antonio Nucifora anucifora@worldbank.org tel: +258 21 482371www.carbonfinance.org anucifora@worldbank.org

21. CDM Executive Board ► ► Approves Baseline and Monitoring Methodologies ► ► Accredits the Certifiers (Operational Entities) Designated 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

22. 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 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