Carbon Finance


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Presentation of Josefo Tuyor to the Midanao Conference on Climate Change

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  • Carbon Finance

    1. 1. Introduction to the World Bank Carbon Finance Business Joe B. Tuyor Senior Operations Officer World Bank East Asia and the Pacific Region
    2. 2. Projected Impacts of Climate Change Source: Stern Review, 2006
    3. 3. Opportunity Costs Mitigation Costs <ul><li>The Costs of doing nothing : the damages from business-as-usual would be equivalent to at least 5 and up to 20% of consumption a year, depending on the types of risks and effects included. </li></ul><ul><li>The costs of removing most of that risk , getting to 550 ppm or below, are around 1% of GDP per year. The cost could be above or below 1% depending on policies, technological progress and ambitions but would be in this region. </li></ul>Source: Stern Review, 2006
    4. 4. Global Emissions by Sector Source: Stern Review, 2006
    5. 5. <ul><li>1992 Climate Convention adopted. Objective of stabilizing GHG concentrations at safe levels </li></ul><ul><li>1997 Kyoto Protocol adopted </li></ul><ul><ul><li>36 Developed Countries and Economies in Transition (namely Canada, Japan, EU15 and economies in transition) agreed in 1997 to : </li></ul></ul><ul><ul><li>Reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012 </li></ul></ul><ul><ul><li>Total demand created for GHG Reductions: ~5 to 5.5 billion </li></ul></ul><ul><li>2005 (February) Kyoto enters into force. </li></ul><ul><li>As of April 2006, 162 states ratified representing 61.6% of developed countries </li></ul><ul><ul><li>US / Australia will not ratify, but Australia will meet targets </li></ul></ul>International Response to Climate Change
    6. 6. How can Developed Countries/EITs meet their obligations under Kyoto? <ul><li>Domestic Reductions </li></ul><ul><li>Carbon Sinks : direct human-induced land use change and forestry activities (limited to ~330 Mt/C02e) </li></ul><ul><li>International Credits (Kyoto Mechanisms): </li></ul><ul><ul><li>International Emissions Trading </li></ul></ul><ul><ul><li>Project –Based: Joint Implementation </li></ul></ul><ul><ul><li>Project – Based: Clean Development Mechanism </li></ul></ul>
    7. 7. Emission Reductions time GHG Reductions How the CDM works (I) Baseline Emissions Project Emissions
    8. 8. How the CDM works (II)
    9. 9. <ul><li>The World Bank Carbon Finance Program, Family of the Carbon Funds </li></ul>
    10. 10. The World Bank’s main Objectives in the Carbon Market <ul><li>Part of the larger global effort to combat climate change </li></ul><ul><li>Go hand in hand with the Bank’s mission of reducing poverty </li></ul><ul><li>Contribute to Sustainable Development </li></ul><ul><li>Catalyze the Carbon Market </li></ul><ul><ul><li>Address market imbalances (e.g. poor countries, sequestration projects) </li></ul></ul><ul><ul><li>Support the regulatory framework </li></ul></ul><ul><ul><li>Expand the capacity of other FDIs through cooperation with other development banks </li></ul></ul><ul><ul><li>Provide opportunities for ER purchases by private sector </li></ul></ul><ul><li>Strengthen capacity in developing countries to benefit from the emerging carbon market </li></ul>
    11. 11. World Bank Carbon Funds & Facilities <ul><li>Bank start with the first carbon fund , in 1999 (US$ 180 million, Prototype Carbon Fund) to purchase carbon credits. </li></ul><ul><li>The WB portfolio is about US$ 2 billion </li></ul><ul><li>71% ($1.3 billion in East Asia and Pacific Region) </li></ul><ul><li>The WB purchases carbon emission reductions on behalf of our Fund Participants </li></ul><ul><li>Focus in on energy efficiency, industrial gas emission reduction, waste management, reforestation </li></ul>
    12. 12. How Carbon Funds Work Industrialized Governments and Companies Developing Countries and Communities Bank Managed Carbon Fund $ Technology Finance Payment on delivery of emissions reductions, not up-front capital costs $ Technology Finance CO Equivalent 2 Emission Reductions CO Equivalent 2 Emission Reductions
    13. 13. <ul><li>Basic Elements of Carbon Finance and Carbon Economics </li></ul>
    14. 14. Banks Investor Debt Equity Waste Management Agreement $$ Service $$ Carbon Credits Role of carbon finance in project financing Carbon Fund $ $ 2 2 Emission Reduction Purchase Agreement Upfront payment as “Equity” Less than 25% of contract Collateralization of ERPA
    15. 15. Key Features of Carbon Finance <ul><li>Both public and private capital – new and additional sources for sustainable development financing </li></ul><ul><li>Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred. </li></ul><ul><ul><li>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. </li></ul></ul><ul><li>Payment stream is in hard currency , reducing financing risk for foreign lenders </li></ul>
    16. 16. Carbon Economics SUMMARY SENSITIVITY ANALYSIS Incremental IRR Results – Contributions of Carbon Finance
    17. 17. <ul><li>Project Cycle </li></ul>
    18. 18. Preparation and review of the Project Project Design Document Validation process Negotiation of Project Agreements Periodic verification & certification Construction/Implementation and start up Project completion 3 months 2 months 2 months 3 months 1-3 years Up to 21 years <ul><li>Project Idea Note </li></ul><ul><li>Carbon Finance Document </li></ul><ul><li>Letter of Endorsement from Host Country </li></ul><ul><li>Baseline Study </li></ul><ul><li>ER estimates </li></ul><ul><li>Monitoring Plan </li></ul><ul><li>Validation by independent Accredited Operation Entity </li></ul><ul><li>Submission of new method to CDM EB if needed </li></ul><ul><li>Project Appraisal and related documentation </li></ul><ul><li>Letter of Approval from Host Country </li></ul><ul><li>Emission Reduction Purchase Agreement </li></ul><ul><li>Project registration </li></ul>World Bank/CDM Project Cycle – The Manufacturing Process for Emissions Reductions <ul><li>Initial verification report </li></ul><ul><li>Verification and certification </li></ul><ul><li>Supervision </li></ul>
    19. 19. Philippine Projects supported by the World Bank Carbon Finance Facilities <ul><li>Northwind Wind Power Project – ERPA signed December 2004 </li></ul><ul><li>Nasulo Geothermal Project – ERPA signed December 2005 </li></ul><ul><li>Laguna de Bay Solid Waste Management – ERPA signed June 30, 2006 </li></ul><ul><li>Laguna de Bay Reforestation – ERPA signed June 30, 2006 </li></ul><ul><li>Northern Negros Geothermal Project – ERPA signed February 2007 </li></ul><ul><li>Ethanol Plant Wastewater Treatment Project – ERPA signed on January 14, 2009 </li></ul>
    20. 20. Pipeline WB Carbon Finance Projects in the Philippines <ul><li>EDSA Bus Dispatch and Tracking System Project </li></ul><ul><li>Methane Capture from Pig Waste and Landfills </li></ul>
    21. 21. Other potential Projects <ul><li>Wastewater treatment : anaerobic system/ </li></ul><ul><li>methane capture, biogas </li></ul><ul><li>Landfills : waste to energy, gas flaring </li></ul><ul><li>Community Projects : composting, reforestation, agro-forestry </li></ul><ul><li>Renewable energy : cogen, wind, geothermal, hydro, biomass </li></ul><ul><li>energy efficiency, fuel switch </li></ul><ul><li>Industrial processes that produce and reduce N20 </li></ul>
    22. 22. A Sample of an Institutional Arrangement for A Carbon Finance Program in Laguna de Bay Laguna Lake Development Authority Private Sector LGU 2 LGU 1 SUB-ERPA ERPA Piggery owner
    23. 23. Carbon Finance Program in Mindanao??? <ul><li>Need a MANAGING ENTITY/PMO </li></ul><ul><li>Sizable number of projects under the program to generate high volume of emission reduction (ERs) </li></ul><ul><li>Carbon finance will not finance the project; it will only purchase the ERs </li></ul><ul><li>One program to adopt one methodology approved by the UNFCCC EB </li></ul>
    24. 24. <ul><li>Thank you!!! </li></ul><ul><li>For more information, visit our website: </li></ul><ul><li> </li></ul>