Carbon Finance Strategy at the World Bank

1. Carbon Finance Strategy at the World Bank CHARLES CORMIER JULY 2005

2. United Nations Framework Convention on Climate Change (UNFCCC) • Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere • Developed countries (Annex I countries) aim to restore GHG emissions to 1990 levels • Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change • Meet as a “Conference of Parties” in the future, consider progress

3. The Kyoto Protocol 36 Developed Countries and Economies in Transition (namely Canada, Japan, EU15 and economies in transition) agreed in 1997 to: • reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012 • Total demand created for GHG Reductions: ~5 to 5.5 billion • Marrakech Accord: agreed in Nov 2001 sets rules of implementation Status: came into force in February 2005 • Coming into force: requires ratification of 55 Parties to UNFCCC representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) • As of September 2005, 156 states ratified representing 66.1% of developed countries • US / Australia will not ratify, but Australia will meet targets

4. How can Developed Countries/EITs meet their obligations under Kyoto? • Domestic Reductions • Carbon Sinks: direct human-induced land use change and forestry activities (limited to ~330 Mt/C02e) • International Credits (Kyoto Mechanisms): • International Emissions Trading • Project –Based: Joint Implementation • Project – Based: Clean Development Mechanism Supplementarity: “..domestic action shall constitute a significant element of the effort by each Party..”

5. Project-Based Transactions Allowance Markets EU Emission Trading Scheme JI and CDM UK ETS Voluntary New South Wales Certificates Other Compliance Chicago Climate Exchange Retail Structure of the Carbon Market

6. Total Value of Contracts over 1 b$ (data in million U.S.$, nominal) (Jan-Apr)

7. Main Buyers: European Governments and Firms In percent of volume purchased From Jan.04 to Apr.05 World Bank purchases (22 % of total) attributed pro-rata to each participant in various carbon funds

8. Supply Concentrated in Middle-Income CountriesIn percent of volume sold from January 2004 to April 2005

9. Prices Depend on Risks(weighted average prices from Jan. 2004 to April 2005 in U.S.$ per metric tonne of CO2e)

10. Key Features of Carbon Finance • Both public and private capital – new and additional sources for sustainable development financing • Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred. • Unlike most buyers in the market, Participants in Bank Funds agree to take Kyoto regulatory risk: Hence, our carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk remained open. • Payment stream is in hard currency, reducing financing risk for foreign lenders

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12. Technology DIRR financial Hydro, Wind, Geothermal 0.5-2.5% 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/tCO2e

13. The World Bank’s Objectivesin 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

14. The World Bank’s Objectivesin the Carbon Market II Address Market Distortions: • demonstrate credible forestry/agriculture “sinks” activities • Open Markets for small projects and small countries Integrate and strengthen Technical Assistance and Capacity Building:to assist participating countries to access market

15. World Bank Policy in Carbon Finance • Pay Market Prices corrected for risk, purchase either VERs or CERs • Always contribute beyond the purchase of the CDM emission reduction • While Building Capacity Of Clients Through Support and Training • Give Full Information – Transparency and Integrity • Bring the Full Instruments of the World Bank Group to Support Clients

16. World Bank Carbon Finance Products • ~$940 million under management Prototype Carbon Fund: $180 million, multi-shareholder Community Development Carbon Fund: multi-shareholder. First tranche closed at $128.6 million; second tranche to open once Portfolio for first tranche is well developed Bio Carbon Fund: $53.8 million; multi-shareholder; second tranche opened in September 05 $172 million – single government participant (Dutch Government) $80 million committed - Italian multi-participant Netherlands JI ~$40 million. Economies in Transition only (with IFC) Facility $220 million – Spanish Government; will be open to private sector $64million –Danish multi-participant • Under development: Carbon Fund for Europe

17. Technology $ Finance CO Equivalent CO Equivalent 2 2 Emission Reductions Emission Reductions How Carbon Funds Work Technology $ Finance Industrialized Governments and Companies Developing Countries and Communities Bank Managed Carbon Fund Payment on delivery of emissions reductions, not up-front capital costs

20. Strategic Issues in CDM Market Development Potentially Competing Interests • CDM needs to deliver high volumes to keep cost of Kyoto compliance affordable • Developing country government preferences going into 2nd Commitment Period negotiations is that CDM helps modernize and de-carbonize infrastructure • “Sustainability” concerns constrains asset choice in many OECD governments, and some corporations Market Inflection Points to Watch • Post-2012 market signal by EU and/or KP Parties on long lead time assets • Second phase ETS review of sequestration/ LULUCF assets

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