The World Bank s Carbon Finance Business Options for Thailand September 29, 2004
Climate Change and the World Bank The Bank s mission: poverty alleviation, sustainable development The Bank accepts IPCC conclusions that less developed countries more vulnerable; Poor have the least capacity to adapt to climate change, especially in rural areas the CDM offers an unprecedented opportunity to increase private and public investment in clean technologies in developing countries, thereby contributing to sustainable development
What is the Clean Development Mechanism? Three Kyoto instruments for emissions transactions 1. Clean Development Mechanism (CDM) credit for emission reduction investments in projects in developing countries applicable to Thailand Emission reductions must be real and measurable (verified by third party or Operational Entities) 2. Joint Implementation (JI) credit for emission reduction investments in projects in EIT countries (NOT APPLICABLE TO EAST ASIA) 3. International Emissions Trading (IET) trading of emission reduction credits among developed countries (NOT UNDERTAKEN BY WORLD BANK) 3
World Bank s specific focus To help create a market for project-based carbon offsets under the Kyoto Protocol by: provide learning by doing experience for Parties to the Protocol on key policy issues (for example, defining and validating baselines) demonstrate how CDM projects can work to contribute to sustainable development while reducing emissions build confidence that CDM projects can benefit both developing countries and buyers of emission reductions 4
World Bank Carbon Finance (CF) Products Total funds under current management: $400-450 million Prototype Carbon Fund. $180 million. Multishareholder, including JBIC Community Development Carbon Fund. $40 million >$100 million; Multi-shareholder $30 million > $60 million; Multi-shareholder $125 million>$180 million: Dutch Government $95 million>$200 million; Italian Multi-shareholder Staff Climate Protection Program $80,000-100,000 per year; voluntary/internal
How a Fund Works Technology Technology $ $ Finance Finance Industrialized Governments and Companies Community Development Carbon Fund Developing Countries and Communities CO 2 Equivalent Emission Reductions CO 2 Equivalent Emission Reductions
Status of the Project Development in the PCF Value of Projects in US$ Million Status of Project Development Stage of Development 0 50 100 150 200 250 300 350 ERPAs Signed 14 50.2 13.33 MtCO 2 Term Sheets Agreed/ Validation Completed 18 96.8 24.97 MtCO 2 PDD Under Preparation/ Termsheet Under Discussion 32 172.6 46.35 MtCO 2 PCNs Taken Forw ard 46 257.0 71.19 MtCO 2 PCNs Cleared by FMC &PC 55 298.0 83.96 MtCO 2 PCNs Under Development 97 PINs Submitted 420 0 50 100 150 200 250 300 350 400 450 Number of Projects Number of PCF Projects Value of PCF Projects Volume of PCF Projects
Regional Distribution of Active Pipeline Projects for Carbon Financing Regional (PCF, Distribution NCDF, and CDCF) Total of Approx. US$323 Million Africa 15% Latin America 34% South and Central Asia 17% Eastern Europe 10% East Asia 24%
Technological Distribution of Active Pipeline Projects for Carbon Financing (PCF, NCDF, and CDCF) Total of Approx. Technology Distribution US$323 Million Photo Voltaics 0.2% Coal Methan Bed 4.0% Biogas 4.1% Bagasse 4.0% Biomass 7.5% Wind 8.0% Energy Efficiency 8.6% Geothermal 8.0% LULUCF 2.6% Small Hydro 25.6% N20 Removal 5.9% Waste Management 16.9%
Who is buying? (percent of volume purchased) PCF 21% USA 9% PCF 26% USA 4% Canada 13% Australia & New Zealand 1% Canada 31% Japan 23% 29% Netherlands 29% Japan 6% Other EU 3% Australia & New Zealand 1% Netherlands 30% 2001-2002 2002-2003 Other EU 3%
Who is Selling? (million tco 2 e sold from 2002 to Q3 2003) 60 40 Africa Latin America 20 Asia 0 OECD Transition Economies Developing Countries
Prices in 2003 (in U.S.$ per metric tonne of CO 2 e) $6.00 $4.00 $2.00 $0.00 ER Not Kyoto Pre-Compliance Buyer takes Registration Risk Seller takes Registration Risk Kyoto Pre-Compliance
What to Expect of the Market in 2004 Contracted value is likely to double ( ~ 150 million TCO2e) EU ETS will create enormous potential carbon liabilities for European firms drive the carbon market in 2004 Current institutional buyers (like PCF and the Dutch) will lose dominant position European corporate buyers will finally enter the market Japanese activity in the market will further strengthen Spain and Italy will enter the market Large sellers (China, India, Brazil, Indonesia and Mexico) will start shaping the market Long term viability of the market will be questioned if Russia does make moves to ratify the Kyoto Protocol in 2004
Key Price Determinants Guarantee of delivery of registered ERs Creditworthiness of project sponsor Viability of underlying project, and liabilities of seller in case it under-performs ER vintage: pre or post 2012 Cost of validation and potential certification Host country support Additional environment and social benefits
Verification: $10-25 K Supervision: $10-20K Carbon Asset Creation and Maintenance Typical Manufacturing Process and Costs Project completion Periodic verification & certification Up to 21 years 1-3 years 3 months Preparation and review of the Project Upstream Due Diligence, carbon risk assessment and documentation: $ 25K 3 months 2 months 2 months Baseline Study and Monitoring and Verification Plan (MVP) Baseline : $30 K Monitoring Plan: $25K Validation process Contract, Processing and documentation: 25k Construction and start up Initial verification at start-up: $25K Project Appraisal and Negotiation Consultation and Project Appraisal: $60K Negotiations and Legal documentation: $100K Total through Negotiations All expenses: $265 K For Large Scale Project
Impact of Carbon Finance on FIRR ($3/tCO2e) Technology IRR Hydro 0.8-2.6% Wind 1.0-1.3% Bagasse 0.4-3.6% Energy Eff.-District Heating ~ 2.0% Gas Flare Reduction 2.0-4.0% Biomass 2.0%-7.0% Municipal Solid Waste 5.0%-10.0%
Impact of Carbon Finance: Quality and Quantity Methane-capture projects: carbon finance can turn marginal projects into bankable ones Traditional renewables: boost return by 0.5-2.6% Makes some marginal deals bankable Increases profitability and reduces investor risk Improves project s access to capital markets through: Secure contracted flow of foreign resources from reliable counterparty Improved Quality of cash flows as well as volume Payment of CF in hard currency ($/ /Yen) to lender mitigates country risk Sponsor can borrow against contract (like PPA)
Projects under development in East Asia China Coal Mine Methane capture for energy Run-of-River Hydro Energy Efficiency at Steel Plant Philippines Biomass (2 projects) Wind Farms Community SW Indonesia: Energy Efficiency Under discussion: Geothermal District heating Forestry (sequestration) 18
Possible opportunities in Thailand SWM 450,000 Expected Carbon Revenues, Bangkok Ratchathewa landfill, 2005-2025 US$3.9-4.5 million 400,000 350,000 US$/year (@$4/TCO2e) 300,000 250,000 200,000 150,000 100,000 50,000-2004 2009 2014 2019 2024 2029 High Low 19
Assumptions for Bangkok Ratchathewa CH 4 recovery from LFG = 50% 1 m 3 CH 4 = 714 grams 1 ton CH 4 = 21 Tons CO 2 1 Ton CO 2 = $ 4 CF Revenue Two scenarios present lower and higher generation rates 20
Important Issues for CF Business 1. Regulatory uncertainty (Russia etc) 2. Challenge of CDM Carbon Asset Creation: lead times of 3-7 years from project identification through delivery of first ERs. 3. Direct private investment in CDM still slow 4. The first commercial carbon purchase transaction is key to success 5. CDM capacity building essential (governments and private sector); CF and TA for capacity building must go hand in hand to support market development 6. small projects will lose - hence also smaller countries and poorer communities. CDCF aims to address that.
World Bank Carbon Finance Strategy: Carbon Finance Beyond PCF 1. Expand Carbon Market Development (PCF Expansion, Dutch-VROM, other OECD Governments and industry consortia on demand) Provide First-of-a-kind opportunities: Introduce more countries and companies to carbon market Benchmark carbon asset creation: Increase certainty and lower entry barriers for private capital ( crowd-in private sector ) Expand access to CDM/JI assets: Bank intermediation is critical to expand supply 2. Integrate and strengthen TA/Capacity Building 3. Demonstrate credible forestry/agriculture sinks activities: BioCF 4. Open Markets for small projects and small countries: CDCF
Questions? npinnoi@worldbank.org www.carbonfinance.org