1. © ESD 2003 IRIS KYOTO Achieving Carbon Finance: Carbon Funds and key issues (Including European Emissions Trading Scheme) Jeremy Doyle ESD, UK European Commission

2. © ESD 2003 Summary 1. CDM and Risk Buyers & Investors Risk 2. European Emissions Trading Scheme What is it? How does it Link with JI/CDM?

3. © ESD 2003 1. CDM and Risk

4. © ESD 2003 Who Buys the CERs? 1999 – World Bank: PCF (USD 180m) 2000 – Finnish Government – pilot scheme 2001 – Dutch Government: CERUPT 2002 – Swedish Energy Agency: SICLIP 3-5 projects 2002 – World Bank: CDCF: priority to LDCs, public and private shareholders Now – Private Sector (multinationals) Now – Austria, Denmark… etc

5. © ESD 2003 Important financial actors Global Environment Facility >Strategies and projects that may be more innovative and experimental than regular development projects >Projects from USD 50,000 to USD 5,500,000 Regional Development Banks >ADB, EBRD, EIB, IDB Environmental Funds and Trusts >Triodos Bank, CDC Capital Partners, etc - Mandated to support sustainable projects Export credit and finance agencies Insurance and reinsurance providers

6. © ESD 2003 CDM Project Costs Transaction costs >Baseline, MVP, ERPA negotiation >Estimates and perceptions vary >Typically USD 60,000 – 100,000 (majority of costs in pre-implementation phase) Reducing and Sharing Transaction Costs >Learning Curve, institutional capacity >Standardised contracts, procedures >Streamlined rules for Small Scale Projects >Partnerships - Service providers are innovating

7. © ESD 2003 Economic Policy Political Financial Foreign Exchange War, Civil Unrest and Expropriation Traditional Project Risk

8. © ESD 2003 Kyoto Protocol Ratification Local UNFCCC Focal Point Capacity Local Key Stakeholder Capacity and Awareness Host Approval & Agreement to Transfer CERs Executive Board Approval Recipient Country and Purchaser Approval Baseline Emission Red’n Purchase Agreement (term risk) CDM Risk

9. © ESD 2003 Achieving Carbon Finance Must be a very good project – no such thing as a bad project made “good” by CDM CDM Risk is rapidly changing Recognise project specific CDM risks, develop partnerships “Transaction costs” – look for cost recovery or sharing

10. © ESD 2003 2. CDM & the EU Emissions Trading Scheme (ETS)

11. © ESD 2003 An entity-based domestic cap and trade emissions allowance programme Governed by Community Law using a special unit of trade - allowances - within the EU Compatible with international emissions trading under Kyoto, contributing towards Kyoto targets What is the European Emissions Trading Scheme (ETS)?

12. © ESD 2003 European Emissions Trading Scheme (ETS) JI/CDM Directive Agreed July 2003 Phase 1: 2005-07 Phase 2: 2008 -12 Further phases to suit UN progress Covers the EU 15 & the 2004 Accession States Possible that OTHER domestic schemes may link

13. © ESD 2003 Increase compliance options for entities Reduce compliance costs Host countries’ Sustainable Development Promotion of environmentally sound technologies Stimulate the demand for JI/CDM credits Improve liquidity of ET market within the EU Drive environmental policy integration in EU Source - Climate Change Unit – DG ENV Desirability of linking JI/CDM

14. © ESD 2003 Energy – combustion installations over 20MW Ferrous Metals Minerals – kilns, glass, ceramic, cement Other >(Pulp and Paper) Renewables, transport & other sectors are not included The Directive provides a “bridge” between two very different frameworks >Timing, regulatory context, certainty, unit of trade, etc. European Emissions Trading Scheme (ETS) JI/CDM Directive: categories

15. © ESD 2003 National Allocation plans by 31-Mar 04 In Phase 1 – 2005-07, penalty of Euro 40/tCO2e, thereafter Euro 100/tCO2e Must comply AND pay penalty! 2 ways that credits from CDM (and JI) can be used: A) Directly by member states to meet obligations B) By companies in order to meet ETS obligations “CAP” of 6% JI and CDM credits – review process ETS: How does JI/CDM fit in?

16. © ESD 2003 JI opportunities have been reduced (due to risk of double counting) >most major energy sector projects receive an allocation CDM: CERs fully compatible and accepted Effect on general interest in CDM is still unknown, but likely to be positive Can the ETS still happen in the absence of Kyoto? ETS: What is the impact?

17. © ESD 2003 Thank you Contact: Jeremy Doyle Email:Jeremy@esd.co.uk Tel:+44 1225 816 840