Carbon finance for climate mitigation and development: CDM achievements, challenges and needed change

Transcription

1 Carbon finance for climate mitigation and development: CDM achievements, challenges and needed change Insights from the World Bank s 10 years of experience in carbon finance Jose Andreu, Carbon Finance Unit, The World Bank V Latin American Carbon Forum Santo Domingo, Dominican Republic October 13-15, 2010

2 Disclaimer This presentation is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

3 Table of Contents I. Where we come from: the World Bank s involvement in carbon finance II. The big picture, the success of carbon finance III. Current context IV. Insights from experience I. Key risks II. Rising CDM-transaction costs III. Methodologies IV. Additionality V. Procedures VI. Geographic distribution & LDCs V. Concluding recommendations: need for reform

4 The World Bank s involvement in carbon finance An early market entrant and helped drive innovation Objectives Impact Strengthen capacity of developing countries to benefit from carbon market Assist in building, sustaining & expanding carbon market Ensure CF contributes to sustain. development Increasing carbon fund volume over time: from $160 million in 2000 to ~$2.5 billion -- now 16 sovereign governments and 66 private sector participants from 3 continents Developer of and contributor to new methodologies Means Pioneer: The Prototype Carbon Fund (2000) Global reach 200 projects in 56 countries Learning-by-doing approach & diversification Model: create demand through carbon funds and then originate projects Often purchase post-2012 vintages WB s environmental & social safeguards Investing in capacity building

5 The World Bank carbon finance activities 10 carbon funds and 2 facilities; with 16 governments and 66 firms participating Specialty funds/facilities Prototype Carbon Fund: pioneering Kyoto mechanisms since 2000 Community Development Carbon Fund: Focused on small projects that measurably benefit poor communities BioCarbon Fund: Focused on land-use, land-use change, and forestry projects Country funds/facilities Netherlands Clean Development Mechanism Facility Netherlands European Carbon Facility (jointly managed with IFC) Spanish Carbon Fund Umbrella Carbon Facility Tranche 1: Focused on two China HFC 23 projects Italian Carbon Fund Danish Carbon Fund Plus 2 new facilities focused on post-2012 Carbon Fund for Europe (jointly managed with European Investment Bank) FCPF focused on reduced emission from deforestation and degradation (REDD) CPF focused on long-term investments programs and technologies for transition to low-carbon economy

6 Table of Contents I. Where we come from: the World Bank s involvement in carbon finance II. The big picture, the success of carbon finance III. Current context IV. Insights from experience I. Key risks II. Rising CDM-transaction costs III. Methodologies IV. Additionality V. Procedures VI. Geographic distribution & LDCs V. Concluding recommendations: need for reform

7 The benefits of market mechanisms to combat climate change The CDM has supported GHG mitigation and sustainable development Contribution to meeting GHG commitments Significant developmental benefits Expected overall emission reductions from CDM & JI ( 08-12) Expected total country emissions over the period ( 08-12) Raised awareness about low carbon solutions Provided opportunities for supporting basic development needs (socio-economic co-benefits), e.g.: energy access and energy services; development of local resources; solid waste management solutions; reductions of local pollution; and employment generation 0 CDM and JI projects have mitigated GHG emissions and will mitigate more Contributed to technology transfer and technology diffusion Grass roots capacity building and local empowerment Leveraged capital for projects in host countries *Source: UNEP RISØ; **Source: UNFCCC & World Bank projections N.B. CDM & JI transactions reached close to $25 billion between 2002 and 2009 PLUS: Increased awareness + capacity development

8 How carbon finance works back to the basics The system requires predictability on the future carbon payments Carbon revenues provide an additional revenue stream that can help: reward more GHG-friendly investment and purchase decisions, create incentive for good management / operational practices to sustain emission reductions over time, enhance the financial viability of the project, leverage capital for underlying investments by addressing the initial investment barrier; providing incentives to overcome social inertia, lack of awareness, transaction costs and financing of programs, etc.

9 Carbon finance on the ground: incentivizing climate action Sparking the imagination of entrepreneurs Transforming solid waste management Carbon finance is providing critical incentives across the developing world to recover otherwise released methane gas. It is providing solutions for solid waste management, a problem for many developing countries with increasing urbanization rates. Micro projects in Africa and LDCs Carbon finance can make the difference to overcome first investment barrier and finance local energy efficiency programs (e.g., Uganda Municipal Waste Composting PoA; Rwanda - CFL Energy Efficiency Project; and Nepal - Biogas Program). Construction sector Carbon finance has been the driver for greening this sector, characterized by small plant holders (e.g., Bangladesh - HHK Kiln Efficiency Project). Use of renewable energy in the iron and steel industry in Brazil Carbon finance was critical in supporting the Brazil Plantar Project consisting of 3 CDM projects covering the supply chain in becoming the only one producing pig iron entirely from renewable plantations. It is a sustainable development model that authorities now seek to replicate in Brazil.

10 Features of successful CDM and JI projects Key elements found in successful carbon finance projects mirror those for development projects 1. A committed project champion Champion should be within project proponent company or ministry. External technical assistance also necessary when low capacity 2. Strong project design & planning at start (feasibility, financial, methodology assessments) Detailed upstream (financial & technical) due diligence on project ideas Important to consider monitoring requirements early on 3. Underlying financials must be strong Projects must make financial as well as technical - sense to lead to real, measurable and longterm benefits related to mitigation of climate change (Kyoto Protocol, Article 12) 4. Potential to reduce emissions Projects that can reduce large volumes of GHG reductions relative to their baseline will be more attractive to investors and carbon buyers The possibility of earning significant amounts of carbon revenues through certified emission reductions incentivizes performance over time

11 Table of Contents I. Where we come from: the World Bank s involvement in carbon finance II. The big picture, the success of carbon finance III. Current context IV. Insights from experience I. Key risks II. Rising CDM-transaction costs III. Methodologies IV. Additionality V. Procedures VI. Geographic distribution & LDCs V. Concluding recommendations: need for reform

12 After robust growth the CDM market is decreasing And losing momentum Size of primary market transactions 2012 demand fell to 1.22 billion tco2e, 25% down from last year, as a consequence of the global economic downturn Projects entering CDM pipeline down significantly * Started Validation Requested Registration *to date

13 2009 Overall, market showed resilience Allowances up, offsets down (in Billion US$) JI.35 Assigned Amount Units % RGGI % +626% CDM % Secondary CDM % EU ETS Allowances Voluntary Chicago Climate Exchange New South Wales Certificates

14 Table of Contents I. Where we come from: the World Bank s involvement in carbon finance II. The big picture III. Current context IV. Insights from experience I. Key risks II. Rising CDM-transaction costs III. Methodologies IV. Additionality V. Procedures VI. Geographic distribution & LDCs V. Concluding recommendations: need for reform I. Scaling-up and extending reach

15 Key risks in developing carbon finance projects Host country & implementation risk Carbon finance (CF) projects subject to underlying host country risks Enabling environment needed to attract carbon finance Capacity of developer to implement as per project design document (monitoring) Impact of technology performance on CERs and cash flows CDM regulatory risk Lack of visibility post-2012 Additionality & methodologies: interpretation & frequent changes CDM project cycle (~12 months for validation & 6 months for registration; ~9-12 months for each verification & issuance) too long for private sector decision-making too long for payments to reach project entities

16 Thousands Rising CDM-transaction costs are dampening impact Delays increasing for the majority Regulatory costs increasing Impacts 1. Loss of revenues for project entities Insufficient capacity; duplications 2. Reduced Months to achieve registration Aim: automatic registration of validated projects (work towards more uniform perceptions confidence of and requirements between the EB & DOEs) interest in CDM Estimate of To maintain confidence in environmental overall cost integrity: of spot checks & CER discount 3. Environmental 6 increased delay correction ~ 0.8 billion (avoided nonadditional 3 tons): Sample size $40 $30 $20 $10 Cost of validations $ Validation Registration Large scale Small scale tco2e affected at registration & issuance: small

17 Methodologies: calculating & monitoring GHG reductions There has been significant learning and development of methodologies. Once approved, a methodology is a public good. World Bank CDM methodology submissions World Bank Facts: 52 new meths. submitted. 64% accepted, 23% rejected, 13% currently being processed. Approx. $125,000 per methodology. Time: 2 years for development & approval New Meths 350 Total cumulative CDM methodologies (approved; withdrawn/rejected; and pending) Approved CDM methodologies by sectoral scope Approved Withdrawn Pending

18 Methodology development: opportunities and challenges Despite impressive increases in the numbers of methodologies, broad applicability remains a challenge Bottom-up approach provides flexibility & real project examples, but can be costly Developing methodologies demands resources and time Top-down guidance from regulators can increase efficiency & certainty without compromising environmental integrity (via collaborative process with host countries & relevant stakeholders & experts) Need to move to standardization with ambitious yet realistic levels of stringency & clear review process Active CDM Methodologies % 60% 2 Too few methodologies have broad applicability 2 CDM methodologies (large & small renewable energy) used by 60% of registered projects; 21 large scale methodologies have never been used (to date)* Insufficient incentive to submit & defend a broadly applicable methodology Insufficient flexibility in methodologies to accommodate evolving project designs Methodology not used by its own developer is red flag *Source: UNEP RISØ Defining sufficient conservativeness in the face of uncertainty Perfect accuracy is not possible or too costly, so methodologies need to be conservative to ensure environmental integrity. Need definition of what is acceptably conservative. Tools to control risks & define uncertainty (as in accounting or insurance fields) can help streamline assessment of project and enhance consistency and predictability. Clear materiality guidance developed in collaboration with DOEs - is needed.

19 Clearing the additionality hurdle Environmental integrity is key, but proving a project is additional remains challenging Environmental 1 integrity. is essential Environmental integrity preserved through additionality for both the overall climate regime and the carbon market.while an attractive concept in theory, demonstrating and assessing additionality remains challenging in practice the without project scenario cannot be verified by definition individual investment decisions (and assumptions) are difficult to generalize assessment of individual investment decisions inherently qualitative & a matter of judgment Clear, practical and predictable rules and criteria are needed to clarify & streamline requirements for demonstrating additionality greater certainty in interpretation of additionality to strengthen carbon finance impact (enhance bankability) move to standardized baselines with automatic additionality for activities meeting clear criteria and/or with specific circumstance collaborative process with host countries, relevant stakeholders & experts important to ensure practicality and instill confidence need clear, transparent & predictable review process

20 The CDM (lack of) reach to least developed countries Only 1.2% of all CDM projects are in LDCs 18 projects are registered and only 3 LDC projects have issued CERs (16,000) representing % of all CERs issued to date Part of the reason is not related to CDM rules and regulations Good governance and enabling environment is key CDM capacity and awareness in host countries Availability and costs of CDM consultants and DOEs Lack of potential for large emission reduction projects LDCs share of global power consumption --1% Generally compared to projects in other parts of the world, projects in LDCs Have longer implementation delays Their average project size is smaller Their unit cost of generating one CER (excl. investment) is significantly higher (upwards of $7 / ton for very small projects!) Comparison of developing world emissions to share of CDM

21 Some decisions and rules create barriers in LDCs Addressing them could help improve LDCs attractiveness under the CDM Difficulty in integrating situations of suppressed demand Baselines tend to assume continued low / poor quality of energy services which is not compatible with sustainable development Treatment of projects that replace non-renewable biomass Conservative decision on treatment of non-renewable biomass disproportionally affected sub-saharan Africa and projects in poor communities Treatment of forestry projects and exclusion of agriculture Sectors relatively more important for LDCs are not well covered under the CDM and are excluded from some markets Transaction costs & onerous requirements Streamlined methodologies and registration procedures are crucial for LDCs. Documentation requirements should recognize differences in practices and contexts

22 Table of Contents I. Where we come from: the World Bank s involvement in Carbon Finance II. The big picture, the success of carbon finance III. Current context IV. Insights from experience I. Key risks II. Rising CDM-transaction costs III. Methodologies IV. Additionality V. Procedures VI. Geographic distribution & LDCs V. Concluding recommendations: need for reform

23 months Key challenges currently constraining impact of CDM Registration delays Estimate of ~800 overall million cost of increased delay ~ 0.8 billion Leveraging potential not fully exploited: in need of clarity & predictability Lack of post-2012 policy clarity limits demand and increases risk: dampening leveraging of carbon finance revenues Need to better exploit synergies between carbon finance & other financial instruments CDM regulatory risks starting to consume CDM benefits 2. Long & costly project cycle w/ increased transaction costs Transaction costs increasing for both small & large projects Delays cause loss of carbon finance revenues: Do costs buy commensurate environmental benefits? Diminishing CDM impact Methodologies and additionality: in need of simplified & pragmatic approaches Additionality: attractive in theory but challenging to implement & evaluate objectively in practice Many approved methodologies, but too few have broad applicability Monitoring is key for implementation, but requirements often not practical; need capacity Too frequent changes 4. Implementation & scaling-up Some countries (esp. LDCs) by-passed by the mechanisms Full implementation of projects is taking longer than expected in many cases Scaling up with programmatic approaches need rule clarification, capacity & testing

24 What is needed to build on experience with market mechanisms? Scaling up carbon finance to make it more efficient and effective in meeting the climate change and development challenges 1. Policy clarity 2 Sustained capacity building Clarity on the global post-2012 regime to establish demand and price signal Need longer-term commitment period Clarity on countries domestic use of market-based mechanisms Necessary to mobilize significant financial flows Without clarity, danger of losing momentum and capacity Capacity needs to be sustained & expanded to provide enabling environment Enhance engagement from developing countries in the evolution of mechanism design Strong host country policies & complementary financial instruments needed to leverage carbon finance for low carbon development 3. Mechanism reform Urgent! (See separate slide)

25 Concluding remarks Carbon finance: building on experience and looking forward Market mechanisms and carbon finance: a proven tool to support GHG mitigation Can help leverage low carbon investments, address barriers and help sustain projects over time CDM has potential to deliver, but reform is needed. Opportunity to build confidence. Consolidation of learning, streamlining and predictability enhancement (for greater consistency & lower transaction costs) Scaling-up carbon finance to meet the climate challenge Project cycle Methodologies, additionality, monitoring While maintaining environmental integrity Longer term visibility to enhance long-term carbon revenues and help sustained viability of projects Examine regulatory structure/institutions for processing larger volumes, build consistency, and coherency Extend reach of carbon finance: address technical issues with reasonable solutions Address practical hurdles for Programs of Activities (PoAs) => stepping stone for NAMAs Sustaining and enhancing capacity & capacity building in host countries Market readiness, taking into account country s circumstances, priorities and timelines.

26 Ideas for reforming the CDM Consolidate learning to increase efficiency and effectiveness Streamlining registration and issuance procedures Absolutely necessary for extending reach of CDM! Enhancing DOE performance and trust: building capacity, communication, and clear incentive & penalty system Eliminate current costly and lengthy reviews at EB and Secretariat level: e.g., accept DOE validations and verification, impose environment integrity levy combined with random project spot checks Start of crediting date of submission for registration (instead of currently date of project registration) Move towards predictable and objective determination of additionality Clear, simple and pragmatic methodologies Strong and rich methodology basis on which to build Revise, streamline and simplify methodologies + clarify triggers and frequency for methodology revisions Move to multi-project/sector-based standardized baselines Deemed (default) values & benchmarking Methodologies need to better reflect practical realities (e.g. suppressed energy demand in LDCs) Pragmatic data and monitoring requirements critical for extending reach of CDM! Guidance on materiality Provide opportunity for real testing of programmatic approach Additionality to be compatible with financially solid projects to ensure real, measurable and long term reductions Move toward transparent and objective approaches, e.g.,pre-defined additionality w objective additionality checkpoints Balance with reasonable conservativeness: environmentally-ambitious yet realistic baselines + predictable reviews Clarify role of CDM assisting host countries in meeting climate change-related objectives & policies (address E+/E- issue) Clearly define extent of liability provisions Recognize capacity needs for competent coordinating entity Important for integration with host country climate change strategies Review governance structure to separate functions, build trust & enhance confidence in due process

27 Muchas gracias! Jose Andreu For more information, please visit: