2 - Luis Chaparro

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World Bank Carbon Finance Experience,

Strategy and New Funds Workshop How to develop CDM

projects in Central America,

March 27-28, 2003

Rodrigo Chaparro


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CarbonFund

CarbonFund

$$ $$

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Emission ReductionPurchase Agreement

BanksInvestor

DebtEquity

Power Purchase Agreement

$$

Main Producte.g: electricity$$

CarbonCredits

Nature of Carbon Finance Projects

Promote Sustainabledevelopment


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Bank Carbon Finance BusinessFamily of Products

PCF as flagship:$180 millionNetherlands Clean Development Facility CDM only,$30 million/year over 2002-2005Community Development Carbon Fund (CDCF): tostart May/June 2003 at $40-50 millionBioCarbon Fund (BioCF):to start by Sept 2003 at $30-

40 millionClimate Neutral Bank ; starting March 12th


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Public Sector (6)

Governments of Netherlands, Finland, Sweden,

Norway, Canada, and Japan Bank forInternational Cooperation

Private Sector: (17)

RWE - Germany, Gaz de France, Tokyo ElectricPower, Deutsche Bank, Chubu Electric, Chugoku

Electric, Kyushu Electric, Shikoku Electric,Tohoku Electric, Mitsui, Mitsubishi, Electrabel,NorskHydro- Norway, Statoil -Norway, BP,Fortum, RaboBank, NL

PCF Shareholders

($180 million)


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Banks Carbon Finance Business at a Glance

Value of Emissions Reductions Purchase Agreements (ERPAs)negotiated: 15, $38m

Number and value of approved PCF projects: 28, $119.2m

Number and value of NDCF projects : 13, US$ 157.1m

Total estimated investment in 30 approved projects: US$ 1.081 billion


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U nbundled Services in Carbon FinanceTraining and Knowledge Management: World Bank Institute (governments, private sector, Bank Group staff)

1500 training days in FY03 Help desk, briefings, targeted awareness-raising Internships and Fellowships: PCF+ and shareholderprivelages (20 + to date)Staff Exchange Program in CF: 6 on strength

Institutional Strengthening:CF-Assist, PCF+, CDCF+Research and Policy Analysis:Market intelligence,technical benchmarking, baseline and monitoring methods, policy research.


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Most Important Findings

1. Regulatory uncertainty remains post- Marrakesh:CDM Executive Board still to review and approve methods for carbon assetcreationNo Entry into Force of Kyoto Protocol

2. CDM/J I Carbon Asset Creation remains complex and lengthy: lead timesof 3-7 years for project design through delivery of first ERs.

3. Private Sector is not buying directly in CDM/J I on a significant scale4. Capacity Building is Urgent

first carbon purchase in each country and sector is key to build awarenessCarbon finance and TA for capacity building must go hand in hand to support

carbon market development5. Small projects and hence smaller countries and poorer communities will

lose out unless risks and costs are managed by intermediaries, despitestreamlining

6. LULU CF Sink Assets are high value to sustainable development but poorly understood and at risk as an asset class


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A nnex II JI Countries CDM Countries

V o

l u m e o

f E R P r o j e c t s

( M t C o

2 e )

Carbon Finance flows 2001-2002

Source: Authors own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon

USA

Canada

A ustralia

Latin A merica

A sia

A frica


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Certifying Sustainable Development Outcomes

Bank has shown that it is feasible and cost effectiveto create and certify local environmental andcommunity development benefits along with carbonExamples from P CF: Colombia Jepirachi Wind Power Plant (19 M W) also

certifies :potable water,electricity for schools/clinics andsmall fishing port for local indigenous peoples;

Plantar Project in Brazil (23,400ha fuelwood plantation)also certifies:

Worker health improvementABRINQ certification of no child labor or exploitationBiodiversity benefits

FSC certification of improved forest management


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Preparation and review of the Project

Baseline Study and Monitoringand Verification Plan (MVP)

Validation process

Project Appraisal and Negotiation

Periodic verification &certification

Construction and start up

Project completion Upstream Due Diligence, carbon riskassessment and documentation: $ 40K

Baseline : $20 KMonitoring Plan: $20K

Contract, Processingand documentation: $30k

Consultation and Project Appraisal: $105KNegotiations and Legal documentation: $50K

Carbon Asset Creation and MaintenanceManufacturing Process and Costs based on Bank experience

Total through NegotiationsAll expenses: $265 K

Initial verification at start-up: $25K

Verification: $10-25 KSupervision: $10-20K


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Technology ( IRR

Hydro 0.8-2.6 Wind 1.0-1.3Bagasse 0.4-3.6Energy Eff.-District Heating ~ 2.0

Gas Flare Reduction 2-4Biomass 2-7Municipal Solid Waste 5-10

Impact of Carbon Finance on FIRR

($3/ tCO2e)


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Sample of Prices in PCF DealsCountry / Project Class Price US$

/ tCO2e Volume000tCO2e

ValueUS$m

U ganda: Small Hydro (2001) CDM 3.00 1,300 3.90

Poland: Geo. & Biomass (2) JI : no HCA 3.00 555 1.67

Brazil: Seq. & Biomass CDM 3.50 1,514 5.30

Chile: Small Hydro firm CDM 3.50 1,000 3.50

Chile: Small Hydro option CDM 3.50+0.75 750 3.19

Costa Rica: Wind (2) CDM : umbrella 3.50 547 1.92

Costa Rica: Small Hydro CDM : umbrella 3.50 172 0.60

Nicaragua: Rice Husk CDM : umbrella 3.50 142 0.50Colombia: Wind CDM + social bens 3.50+0.50 800 3.20

Bulgaria: Biomass JI : HCA 3.50 1,000 3.50

Romania: Afforestation JI : HCA* 3.60 1,018 3.66

Czech Republic: EE JI : State Agency 4.00 1,300 5.20

Latvia LFGTE (2000) JI : Guaranteed min. 4.11-6.39 388-602 2.47


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World Bank Carbon Finance Strategy:Carbon Finance Beyond P CF1. Expand Carbon Market Development

Provide First-of-a-kind opportunities : Introduce morecountries and companies to carbon marketBenchmark carbon asset creation and Crowd-In private

sector: Increase certainty and lower entry barriersExpand access to CDM/J I assets in early market: Bank intermediation is critical to expand supply

2. Strengthen TA /C apacity Building

3. Demonstrate credible forestry / agriculture sinksactivities

4. Open Markets for small projects and small countries :5. Build Credibility in AAU Market: Greening of AAUs


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Small projects are burdened by high transactioncostsSmall and poorer countries will miss out on privatesector carbon finance

Need special efforts to: mitigate risk, bundle small transactions standardize both CDM/JI requirements and business

procedures


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Carbon Sequestration has important rural development, poverty alleviation, sustainable natural resource management and global

environment implicationsPCF carbon sinks projects demonstrate how to create and certify biodiversity improvements and contributions to rural welfare, butPCF can only do 3-4 projectsNeed dedicated fund to demonstrate and benchmark carbon sinksassets in support of sustainable agriculture and forestry, watershedmanagement and biodiversity conservation.


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Benchmarking and Securing Supply of High

Quality ERs includes.Reducing Risk and Uncertainty in Supply : Preparing Standardized baselines/monitoring plans for replicablecarbon projects which lower risk in carbon asset creationfor host countries and buyersGreening Hot Air: helping transition economiesmarket their assigned amount units by helping designinvestment programs which utilize revenues from AA U sale to invest in clean technology to create actualemissions reductions


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Respond to Host Country demand for carbon financeExtend carbon finance to the smaller, poorer countriesand rural communitiesDemonstrate carbon finance for carbon sinksStrengthen and expand capacity building for mitigationand adaptationExplore practical arrangements for greening AAU sFY03 business plan targets:

negotiated ERPAs, $155m (P CF on track; N CD F ahead) ;

cumulative approved projects for negotiation, $250m ;

Carbon Finance Strategy: Summary


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Market Development Initiatives

Intermediation Agreements: India (IDFC), Brazil(A2R), South Africa (DBSA)..Project financing (debt, equity, mezzanine):European Banks, .Insurance and risk management products:

covering risk in carbon currency, country risk management, guarantee facilities


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Benefits to New Funds Participants

High quality ERs for compliance and trading Cheaper : expertise of established carbon financeteam at incremental cost

Risk mitigation via diversification, hedge futurecostsKnowledge of carbon asset creation, marketintelligence: internships, training, advice

Marketing : Corporate social responsibility

Origination Options : Bring projects to fund

Parallel Purchase : Access to additional CO2e togrow carbon portfolios at low risk and effort

2 - Luis Chaparro

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