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Spotlight: Launching Climate Trust Capital
Patrick Maloney, Sean Penrith, and Peter Weisberg
Conservation Finance Practiti...
Building a “Market”, Phases, Deliverables & Roles
Development Emerging Market
Early Market
(scaling)
• Defining the market...
Objective: Moving from emerging/early market to mainstream
3
• Risk mitigation
• Pilot Auction
Facility
• Buyer of last
re...
4
Trading on our core competency; bullish on carbon
5
Climate Trust model: Late stage projects
Due diligence
Active project ...
What other models could The Climate Trust draw from as it launches a for-profit
investment fund? What resources exist to h...
Domestic Carbon Markets – $2.89 billion total demand through 2025
7
$0
$50,000,000
$100,000,000
$150,000,000
$200,000,000
...
California Air Resource
Board Protocols:
1. Livestock digesters
2. Forestry
3. Ozone depleting
substances
4. Coal mine met...
Problem: Risk causes lenders to significantly or completely
discount future carbon revenues.
Digester Offset Revenue - $2....
Digester Offset Revenue (CTC Financing) - $1.43 million
Digester Offset Revenue (No CTC Financing) - $2.09 million
$- $-
$...
“The data is consistent
with the plucking of
low-hanging fruit, and
also suggests starting
surpluses will drop – if
less d...
Financial innovation particularly powerful with high-capital cost,
long-term savings projects.
Source: Climate Bonds. Pool...
Market risk mitigation: Put option or buyer of last resort
13
Climate Trust Capital
(fund)
The
Climate
Trust
(NGO)
Packard...
Market risk mitigation: Put option gives Climate Trust Capital
the right, but not the obligation, to sell verified credits...
Fund Concept: Finance projects that will rely upon revenues
from carbon markets.
Problem: Lenders are unwilling to value r...
Financing Tool: Upfront investment based on anticipated carbon
credit generation.
• Guarantee minimum carbon value.
• Reve...
Digester Offset Revenue (CTC Financing) - $1.43 million
Digester Offset Revenue (No CTC Financing) - $2.09 million
$- $-
$...
Value Proposition: Manage the long-term execution and market
risks associated with nascent carbon markets.
Market Risk Mit...
Grassland conservation: Place prairie under an imminent threat of conversion into
cropland under a conservation easement.
...
Target: Scale fund investments to be directed at identified sectors
Goals:
1. Pilot $15 million fund
2. Scale to a $100 mi...
Mitigating Delivery Risk: Protocols are public goods, and
therefore require significant investment of public dollars.
21
A...
Future Symbiotic Structure
The Climate Trust
Climate Trust Capital
Investments made in
environmental credits
Fund 1, 2, 3 ...
What division of roles have worked well/poorly between non-profits and for-profits? What financial
relationships have work...
Mitigating Market Risk: Replace grant funding with market risk
mitigation like buyers of last resort.
24
What opportunities exist to replicate World Bank’s Pilot Auction Facility
for domestic environmental markets in the United...
Expanding Voluntary Buyer Commitment: Council on
Environmental Quality
26
Executive Order 13693 (March 2015):
Federal agen...
Grassland conservation: Place prairie under an imminent threat of conversion into
cropland under a conservation easement.
...
Creative Instruments/approaches
28
• Green (ASB) bonds
• PRI syndicated put option/bond guarantee
• NGO cooperative bond i...
Carbon price is an indication of the ambition of a cap-and-trade
system
29
Source: Jenkins and Karplus. “Carbon pricing
un...
THANK YOU!
Peter Weisberg
Senior Investment Manager
The Climate Trust
pweisberg@climatetrust.org
(503)238-1915 x207
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Climate Trust Capital Spotlight

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The most recent information on Climate Trust Capital's investment fund—straight from the Conservation Finance Practitioner Roundtable, May 2016.

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Climate Trust Capital Spotlight

  1. 1. Spotlight: Launching Climate Trust Capital Patrick Maloney, Sean Penrith, and Peter Weisberg Conservation Finance Practitioner Roundtable Portland, OR May 18th, 2016
  2. 2. Building a “Market”, Phases, Deliverables & Roles Development Emerging Market Early Market (scaling) • Defining the market opportunity • Developing the cash flows & benefits flows. • Defining returns opportunities • Developing protocols & regulations • Defining & negotiating the unit of measure • Building data and processes to support the “unit of measure” • Often involving regulatory agencies • Innovation often in an NGO • First pilots transactions, often one-off deals • Modifying & testing the regulations • Testing the “unit of measure” • Validating the cash flows, benefits flows and returns model • Build market rules - TLC • Risk assessment • Returns models and sources • Pricing & valuation • Underwriting standards • Structures • Stabilized regulations • Scalable & repeatable transactions (market size) • Defining risk & returns expectations • Decreased deal friction & transaction costs • Multiple entrants along the full value chain • Investor becoming educated on the asset & strategy • First intermediaries that monitor and validate the strategy • NO RETURNS • Return of capital • “Market rate” based on risk & asset class • Grants • Grants • PRI’s • Impact/mission driven investors • Credit enhancements & guarantees • Early adopters in mainstream • Niche investors Mainstream Can you apply this MODEL to other examples of market evolution? • Micro finance • Carbon cap-trade • SIBs Making a Market: TLC • Transparency • Liquidity • Consistency
  3. 3. Objective: Moving from emerging/early market to mainstream 3 • Risk mitigation • Pilot Auction Facility • Buyer of last resorts/put option contracts • Bond guarantees/credit enhancements • Buyer commitments • Protocol design Source: 2016 GIIN Annual Impact Investor Survey $15.2 billion in impact investing in 2015
  4. 4. 4
  5. 5. Trading on our core competency; bullish on carbon 5 Climate Trust model: Late stage projects Due diligence Active project management support Credit generation / commercialization Special Purpose Fund via CO2 Standard 18 years Climate Trust Capital: Early stage projects Due diligence Active project management support Credit generation / commercialization Impact Capital Fund 2016 >>
  6. 6. What other models could The Climate Trust draw from as it launches a for-profit investment fund? What resources exist to help non-profits create for-profits? 6
  7. 7. Domestic Carbon Markets – $2.89 billion total demand through 2025 7 $0 $50,000,000 $100,000,000 $150,000,000 $200,000,000 $250,000,000 $300,000,000 $350,000,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Voluntary and Compliance Market Demand, 2015-2025 Voluntary Market Value Complaince Market Value California compliance market key assumptions • California’s cap-and-trade system is extended beyond 2020. From 2021 through 2025, the California Air Resource Board continues to decline the cap at 2% per year. • Compliance entities in California purchase offsets to cover only 5% of their annual compliance obligation (the maximum available to entities is 8%). • Offsets are traded at an assumed minimum price, discounted 28% from the estimated regulated floor price for allowances. Voluntary market key assumptions: • Demand for voluntary offsets grows at 5% per year. • Prices start at $5 per voluntary credit in 2015 and grow by 2% per year to $6.09 in 2025.
  8. 8. California Air Resource Board Protocols: 1. Livestock digesters 2. Forestry 3. Ozone depleting substances 4. Coal mine methane capture 5. Rice cultivation Climate Action Reserve Protocols: 1. Grassland conservation 2. Nutrient management 3. Landfill 4. Composting Verified Carbon Standard Protocols: 1. Weatherization 2. Campus clean energy and energy efficiency 3. Wetlands 4. Avoided deforestation of tropical forests American Carbon Registry Protocols: 1. Forestry aggregation 2. Livestock management 3. Compost additions to grasslands 4. Wetland restoration 5. Carbon capture and storage California Compliance Market $2.18 billion demand through 2025 Voluntary Market $714 million demand through 2025 Compliance and Voluntary Carbon Market Supply and Demand 8
  9. 9. Problem: Risk causes lenders to significantly or completely discount future carbon revenues. Digester Offset Revenue - $2.09 million $- $- $156,276 $164,881 $174,041 $185,145 $198,660 $213,162 $228,723 $245,420 $263,336 $263,336 $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 0 1 2 3 4 5 6 7 8 9 10 11 CarbonRevenue Year Key risks: • Market risk. When delivered, what will credits be worth? • Delivery risk. Will the number of credits anticipated at the time of investment/lender be delivered? 9
  10. 10. Digester Offset Revenue (CTC Financing) - $1.43 million Digester Offset Revenue (No CTC Financing) - $2.09 million $- $- $156,276 $164,881 $174,041 $185,145 $198,660 $213,162 $228,723 $245,420 $263,336 $263,336 $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 0 1 2 3 4 5 6 7 8 9 10 11 CarbonRevenue Year $771,050 $- $- $- $- $- $53,977 $106,581 $114,362 $122,710 $131,668 $131,668 $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 0 1 2 3 4 5 6 7 8 9 10 11 CarbonRevenue Year 10 10
  11. 11. “The data is consistent with the plucking of low-hanging fruit, and also suggests starting surpluses will drop – if less dramatically – over time.” California Carbon’s “California 2030 Offset Supply Forecast – Forest Carbon Projects.” December 2015. Forestry: Focus on bump/flush/surplus projects due to low risk 11
  12. 12. Financial innovation particularly powerful with high-capital cost, long-term savings projects. Source: Climate Bonds. Pooling EE/RE Projects. DG Clima. March 2013. 12
  13. 13. Market risk mitigation: Put option or buyer of last resort 13 Climate Trust Capital (fund) The Climate Trust (NGO) Packard Foundation CTC receives a put-option to sell credits at a minimum over the ten year life of the fund. Commitment to Purchase AgreementLoan Agreement Project 1 Project 2 Project 4 Project 3 Project 5 Carbon Investment Agreements
  14. 14. Market risk mitigation: Put option gives Climate Trust Capital the right, but not the obligation, to sell verified credits to The Climate Trust at $6/credit. 14
  15. 15. Fund Concept: Finance projects that will rely upon revenues from carbon markets. Problem: Lenders are unwilling to value revenues from carbon markets (and require projects to be profitable in their absence). Forestry, biogas, and agricultural projects therefore struggle to raise the necessary capital to build and develop new projects. Solution: Climate Trust Capital will finance projects that will depend upon revenues from carbon markets, through an upfront investment. 15
  16. 16. Financing Tool: Upfront investment based on anticipated carbon credit generation. • Guarantee minimum carbon value. • Revenue share rewards project developers as carbon prices increase. Investment • Climate Trust Capital “pre-purchases” ten years of the carbon offsets a project is anticipated to generate. • Capital is made available upfront for the construction of new projects. Active management • Climate Trust Capital will work with a project to develop a carbon monitoring plan and commercialize credits. Revenue share • After carbon sales have repaid the pre-purchase, 50% of future carbon revenues are paid to the project and 50% are paid to Climate Trust Capital and its investors. 16
  17. 17. Digester Offset Revenue (CTC Financing) - $1.43 million Digester Offset Revenue (No CTC Financing) - $2.09 million $- $- $156,276 $164,881 $174,041 $185,145 $198,660 $213,162 $228,723 $245,420 $263,336 $263,336 $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 0 1 2 3 4 5 6 7 8 9 10 11 CarbonRevenue Year $771,050 $- $- $- $- $- $53,977 $106,581 $114,362 $122,710 $131,668 $131,668 $- $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000 0 1 2 3 4 5 6 7 8 9 10 11 CarbonRevenue Year 17 17
  18. 18. Value Proposition: Manage the long-term execution and market risks associated with nascent carbon markets. Market Risk Mitigation. Investments guarantee a minimum value for carbon credits over the 10 year crediting period of a project. • Allows projects to leverage The Climate Trust’s existing programs, which have $22 million under management and must purchase and retire credits regardless of what happens in emerging markets. Execution Risk Mitigation. We develop a carbon monitoring plan that sets up the methods for data collection, data aggregation and verification. We then commercialize credits on behalf of the project in the compliance and voluntary markets. • Monitoring plan allows projects to benefit from The Climate Trust’s 18 years of experience investing in and managing offset projects. • Commercialization gives project developers access to The Climate Trust’s existing buyer network. Projects benefit from portfolio approach since this aggregation minimizes risks (execution & invalidation) that buyers currently face. 18
  19. 19. Grassland conservation: Place prairie under an imminent threat of conversion into cropland under a conservation easement. Source: Climate Action Reserve, revised 2015. Evaluation of Avoided Grassland Conversion and Cropland Conversion to Grassland as Potential Carbon Offset Project Types. 1Assumes linear growth such that 30% of acres converted every year into cropland are instead conserved by 2025. Climate benefit Enhanced carbon sequestration in soils. Carbon market Voluntary market (does not yet qualify for California compliance) Anticipated greenhouse gas reduction associated with new projects1 built between 2015 and 2025 902,564 mtCO2e Greenhouse gas reductions purchased by The Climate Trust to date 39,384 mt CO2e What types of forestry projects are likely to find turning long-term carbon revenues into upfront capital attractive? Should Climate Trust Capital target land acquisition, avoided conversion projects, projects that are currently at common practice values? 19
  20. 20. Target: Scale fund investments to be directed at identified sectors Goals: 1. Pilot $15 million fund 2. Scale to a $100 million fund 3. Reduce 20 million tons of greenhouse gas emissions 4. Demonstrate carbon offsets are an investible and reliable asset class Conservation Finance Gap. Credit Suisse estimates the quantity of conservation finance must multiply by 20 to 30 times to meet global conservation needs. Source: Credit Suisse, World Wildlife Fund, McKinsey. Conservation Finance. January 2014. 20
  21. 21. Mitigating Delivery Risk: Protocols are public goods, and therefore require significant investment of public dollars. 21 American Carbon Registry’s “Avoided Conservation of Grasslands” relies on Denitrificiation-Decomposition Biogeochemical Process Model Climate Action Reserve’s “Grasslands Protocol” does modeling for US, provides lookup table (Development and implementation of both protocols supported by Conservation Innovation Grants)
  22. 22. Future Symbiotic Structure The Climate Trust Climate Trust Capital Investments made in environmental credits Fund 1, 2, 3 …. Technical Assistance Debt & equity investors Foundation, philanthropic, grant support Development Facility Project 1 Project 2 Project 3 Project 4LLC NGO New sector development Sector 1 Sector 2 ….......
  23. 23. What division of roles have worked well/poorly between non-profits and for-profits? What financial relationships have worked well/poorly? 23
  24. 24. Mitigating Market Risk: Replace grant funding with market risk mitigation like buyers of last resort. 24
  25. 25. What opportunities exist to replicate World Bank’s Pilot Auction Facility for domestic environmental markets in the United States? 25
  26. 26. Expanding Voluntary Buyer Commitment: Council on Environmental Quality 26 Executive Order 13693 (March 2015): Federal agencies must reduce GHG emissions 40% below 2008 levels by 2025. CEQ Guidance on Federal GHG Accounting and Reporting (June 2012) “… carbon offsets are not allowed to be applied as an adjusted against a Federal agency’s emissions... More time and deliberate focus is necessary to understand how the market for carbon offsets and use of those offsets could be applied consistently across the Federal community.” Allowing agencies to meet 8% of the anticipated reductions using offsets (rather than just RECs) could grow the voluntary market by 15% (~1.35 million offsets per year).
  27. 27. Grassland conservation: Place prairie under an imminent threat of conversion into cropland under a conservation easement. Source: Climate Action Reserve, revised 2015. Evaluation of Avoided Grassland Conversion and Cropland Conversion to Grassland as Potential Carbon Offset Project Types. 1Assumes linear growth such that 30% of acres converted every year into cropland are instead conserved by 2025. Climate benefit Enhanced carbon sequestration in soils. Carbon market Voluntary market (does not yet qualify for California compliance) Anticipated greenhouse gas reduction associated with new projects1 built between 2015 and 2025 902,564 mtCO2e Greenhouse gas reductions purchased by The Climate Trust to date 39,384 mt CO2e If federal agencies are enabled to buy offsets to meet reduction requirements, in what way should they structure their program to generate the largest impact? 27
  28. 28. Creative Instruments/approaches 28 • Green (ASB) bonds • PRI syndicated put option/bond guarantee • NGO cooperative bond issuance • EPA CWA SRF guarantee facility
  29. 29. Carbon price is an indication of the ambition of a cap-and-trade system 29 Source: Jenkins and Karplus. “Carbon pricing under binding political constraints.” WIDER Working Paper. April 2016.
  30. 30. THANK YOU! Peter Weisberg Senior Investment Manager The Climate Trust pweisberg@climatetrust.org (503)238-1915 x207

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