1. 100 Queen Street, Suite 1350. Ottawa. Ontario. K1P 1J9. Canada tel: 1.613.742.7829 fax: 1.613.742.7099 www.g-capitaladvisors.com info@g-capitaladvisors.com Financing the Development Dividend IISD Task Force Meeting Copenhagen, Denmark October 19, 2006

2. 2 Objective of Chapter 3 To explore ways to increase available financing for CDM projects which yield a development dividend.

3. 3 The Financing Challenge  Review Finance Support Mechanisms Including Role of Carbon Credits: See Section 2 and 3  Identifying and Weighing Financing Risks Project Financing Risks including Cases: See Section 4 Cases: 2 in Kenya and 2 in South Africa: See Annexes  The Financing Challenge Bridging the Finance Gaps: See Section 5  Increase the Financing for SD Projects Supply Side and Demand Side: See Section 6  Conclusions: Key Players and Potential Impact of Development Dividend: see section 7

4. 4 Understanding the Challenge Project proponents face several key financing challenges:  Seeking financing from a variety of local and international sources  Understanding what investors and lenders are looking for in a “bankable” project  Thinking like a banker, investor or buyer of carbon credits  Finding the right risk/reward balance for each project funder

5. 5 Understanding the Challenge Project funders assess “traditional” risk/rewards but must now understand CDM risk/rewards:  Investment environment in host country traditional project risk analysis plus commitment to environment  Project viability traditional project risk analysis plus new technology, non-traditional feedstock, non-traditional purchasers and new stakeholder communities  Carbon credit revenues New potential source of finance, security enhancement, and contribution to equity ROI

6. 6 Understanding the Financing Gaps Projects in CDM Countries with a significant SD often give rise to financing “gaps” between sources and users due to:  Need for both to better understand, define and balance risk with reward  Need for users to identify new CDM SD risk takers  Need for sources to value the risk mitigating effects in CDM SD

7. 7 Case Studies  Four projects were reviewed, each having a strong development dividend but difficulty sourcing financing: 1.Low cost housing energy upgrade project in South Africa 2.Bellville South landfill gas recovery project in South Africa 3.The Vanilla Jatropha project in Kenya 4.Solar technology for electricity provision in Kenya  Case study analysis included country, project, and carbon credit challenges

8. 8 Case Studies: Country Challenges  Many CDM Countries must improve their investment environment to attract financing for good CDM projects identify and prioritize SD CDM projects, Provide support and funding for building knowledge of financing structures and sources for local project proponents and local stakeholders, including carbon credit markets as additional source Provide local financing support where appropriate and links to Annex 1 countries sources of financing

9. 9 Case Studies: Project Challenges Project Proponents, including local developers should seek to Improve local supplier capacity and credit risks Improve knowledge of sources of financing, both local and international, equity and debt, grant and advisory Optimize sale of small carbon credit to improve cash flow Address issues of carbon credit ownership and delivery Improve knowledge of Kyoto- CDM process and carbon credit benefits and potential of voluntary buyers of carbon credit buyers Seek support of host countries provision of more flexible, timely and adequate local financing

10. 10 Case Studies: Carbon Credit Challenges Project proponents and other stakeholders must address Carbon Credit issues such as: Volume may be too small to justify costs and attract buyers Voluntary market buyers are not aware of good projects with high SD value Uncertain ownership of carbon credits Delivery risk should be mitigated to acceptable level for buyers (political and project risks) Pooling of carbon credits by host country and project sponsors may help to address some of above issues

11. 11 Supply and Demand Gaps  Suppliers of Funding are not SD “driven” ECAs focus on “export” benefits Banks, equity, insurers prefer large scale projects where transaction costs can be absorbed more easily Carbon funds focus on compliant CERs  Users do not address supplier needs, such as Equity ROI based on risk stage Debt term, interest rate and security  Suppliers, Users and Other Key Stakeholders scarce technical and resource capacity to handle “one off” or more complex projects, particularly small scale

12. 12 Bridging the CDM Financing Gap  Demand-side project proponents seek: More flexible, risk tolerant debt & equity sources Up-front purchases of carbon credits Compliant and Voluntary Carbon Credits ODA/grants Sustainable development funds  Supply-side sources of financing need: Good “bankable” projects regardless of the DD Credible, timely, cost-effective CDM and host country approval processes Risk sharing

13. 13 Possible Solutions: Country Level  Build CDM capacity within host country governments to make better use of carbon finance for projects  Link projects with high SD potential to national priorities and grant finance sources  Expand role and risk capacity of rural and community development banks to leverage financing  Engage ODA to catalyze CDM projects with high SD potential

14. 14  Demystify the financing process for local project developers in terms of potential carbon credit revenue streams  Improve capacity building on small volume project commercialization in host countries  Develop tool to screen cost/benefit of developing projects with high SD potential  Develop risk mitigation financing instruments to enhance the attractiveness of projects with high SD potential Possible Solutions: Project Level

15. 15  Local development banks, IFIs and Annex 1 public sector programs to take leadership role for supporting SD projects for capacity building of local, small scale project proponents and local sources of financing  Voluntary carbon credit buyers could be a factor if internationally accepted standard for determining SD benefits in projects can be developed along with a registry system  A credible method for determining the SD benefits introduced to the credit decision process as an acceptable risk mitigant Conclusions