Download Ongoing work Yes - Carbon Finance at the World Bank

The Science and Politics of Climate Change
Outcomes of CoP6 in The Hague and Bonn
and
Implications for the Bank and Bank Clients
The Resumed CoP6 Negotiations
Failure at the Hague due to:
– Accounting for “sinks” towards targets in OECD
– “Supplementarity” of carbon trade to domestic action
• Other big issues:
– adequacy of funds for G77;
– Consequences of Non-Compliance: Financial Penalty?
– eligibility of sinks/nuclear in CDM
• Less high profile but key issues were:
– Transferability and fungibility of ERUs, CERs, AAUs
– Rules on additionality and baselines
Elements of the Deal
• Funding/Adaptation: Predictable and Reliable - $410 mm/yr
commitment by 2005. Adds (but not all NEW Funds):
– Special CC Fund (adaptation/tech transfer/compensation)
– Least Developed Country Fund: Adaptation for LDCs (Cn$10mm so far)
– KP Adaptation Fund: 2% of CDM proceeds for adaptation (NEW
Funds)
• Supplementarity: “..domestic action shall constitute a
significant element of the effort by each Party..”
• Compliance: No financial penalty. But 1: 1.3 make-up ratio
• Sinks (LULUCF) in Annex I: new Annex with caps on use of
domestic “sinks” to meet targets e.g. 13 Mt C/year for Japan,
12/Canada, 17.63/Russia (28/USA)
• Sinks in CDM: only afforestation and reforestation, rules by
CoP9/2003, cap of 1% times 5 of Parties 1990 emissions
• Nuclear in CDM: Parties are to “refrain from using..”
Other Key Breakthroughs
• Transferability and Fungibility: ERs achieved in each
mechanism are largely fungible (“commodity” benefit)
• Streamlining of Procedures for Small Projects: agreed
to have simplified procedures for:
– Renewables up to 15MW
– Energy efficiency with reductions of 15GWh equivt./year
– Other projects that emit and reduce emissions less than
15,000 t/CO2 per year
– To be agreed by CoP8/2002
• Baselines and Additionality: (close to PCF approach)
– Only environmental additionality
– Conservative and transparent
– Crediting periods 1X10yr, or 7yrs renewable X 3 =21yrs
Carbon Market Impact
• “Hot Air” and Annex I Sinks depresses CDM/JI market
– W/o US, all OECD needs may be met by Emissions Trading
plus new sink inventory allowances.
• Both CDM/JI “project-based” Market and “Hot –Air”
(emissions trading) market will be “policy-driven”
– Emissions Trading is cheap option but not attractive to all
– CDM/JI expensive/complex but hi quality, tangible impact
• With full competition, market analysis (DEC) suggests:
– CDM trades down to $0-25/tC ($7-11t/C more likely)
– PCF pays $10-15/tC, other drivers may yield $7-15/tC
• Non-KP Market drivers are significant: OECD domestic
regimes and Corporate Voluntary market
Greenhouse gases emission reductions:
an unusual commodity
Emission Reduction
=
Hypothetical baseline emissions - effective
emissions
• ERs become a commodity after certification.
• Before certification ERs are very heterogeneous
depending on the plausibility of their baseline.
Current or projected national policies
Trading?
Start-up
Project-based
mechanism?
EU
Yes
2005
At least from 2008
UK
Yes
.
2001
Yes
France
Yes
2003?
Yes
Norway Yes
2005 or earlier
Yes
Germany
No

Later
Denmark
Yes
2001
Yes
Sweden
Yes
2005 or later
Yes
Netherlands
Ongoing work

Yes
Finland Ongoing work

Yes
Ireland
Ongoing work

Ongoing work
Australia
Yes
US dependent
Yes
USA
Yes
?
Yes
Canada
Yes
US dependent

Japan
Ongoing work

Yes
New Zealand Yes
Not decided
Yes
Russia
No

Yes
`
Regional regulations in the US
• Oregon: CO2 emissions standard for new energy utilities.
Price cap: $0.57/tCo2. Utilities can offset emissions using
project based mechanisms.
• Washington: New plants must demonstrate the use of best
available techniques for CO2 emissions control.
• Massachusetts: CO2 emissions cap for energy utilities
effective in 2005. Utilities can offset excess emissions using
project-based mechanisms.
• New England and Canadian Eastern Provinces: 10%
voluntary reduction of GHG emissions below 1990 levels by
2020
Voluntary corporate commitments
• Rapid survey indicates 52 major companies representing
1 billion tCO2e emissions in 1999 have pledged to reduce
GHG emissions by 2010.
• Resulting demand depends on the baseline. If we set
baseline at 1999 emissions, we obtain a total demand of
500 MtCO2e over the next decade.
• At least eight have said they would use project based
mechanisms.
Corporate voluntary commitments
1999
Emissions
Commitment
Internal
Trading CDM/JI
Alcoa
-25% below 1990 in 2010
BP Amoco
79.8
Cumulative 2%/year below 1990
Chubu EPCo.
51.3
0.410 kgCo2/kWh in 2005
Dupont 44.4
65% below 1990 in 2010
Kodak
-20% below 1990 in 2004
Fortum
9
0.5 MtCo2e below baseline in 2010
IBM
4.1
Cumulative 4%/year below 1998 until 2004
Intel
3.3
10% below 1995 in 2010 (PFCs)
Johns. & John,
1.5
7% below 1990 in 2010
Motorola
-50% below 1995 in 2010 (PFCs)
Ontario Pow.Gen. 26
6% below 1990 in 2010
PEMEX 177
-1% per year until 2010

Shell
99
103 MtCo2e in 2002

Statoil
8.3
1.5 MtCo2e below baseline in 2010
Suncor
5
-1.5%/year until 2002 (-1%/year for 2003-2008)
Transalta 38.5
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Chicago Climate Exchange
• 25 Midwestern firms will agree on emission targets by
the end of 2001 and start trading in 2002.
• -2% below 1998 level in 2002, additional –1% period
year between 2003 and 2005.
• Allows for offsets through project-based mechanisms.
Current Bank Strategy and Programs
(Environment Strategy and “Fuel for Thought”)
• Mitigating Greenhouse Gas Emissions
 Policy reform – on subsidies, internalizing local and regional
pollution costs into energy prices (Fuel for Thought)
 Promote renewable energy and energy efficiency; utilize the GEF
and PCF
 Develop the international carbon market through e.g., the PCF
• Adapting to Climate Change
 Promote practices and policies that reduce vulnerability in water,
agriculture, forestry, health sectors to natural climate variability and
 which increase resilience to long-term climate change, eg:
o -watershed management and appropriate water pricing policies
o -incorporate modern scientific forecasts of ENSO events into
sector management decisions
• Capacity Building
 Build institutional capacity for mitigation and adaptation
 Access to the emerging carbon market
Implications for Bank/Clients
Adaptation
• Projects in pipeline
• Mainstreaming Adaptation in the Caribbean
• Impact of Climate Change on Agriculture in Africa
• Adaptation in the Pacific Islands
• Short-term Vulnerability Reduction
• Collaboration with Disaster Management Fund (DMF) to
create more resilient infrastructure and institutions
• Long-term Vulnerability Reduction
• Integration in water, agriculture and forestry projects – e.g.,
Bangladesh, Malawi
• Vulnerability Assessment
• Identify and assess adaptive interventions
• Capacity Building
• Human and institutional capacity building through projects and
knowledge development and dissemination
Implications for Bank/Clients
Mitigation and Role of PCF
Key Demonstration Effects of PCF
… that investments under CDM/JI can:
• Earn export revenue for Developing
Countries/Transition Economies engaging in the new
ER commodity trade
• Increase the profitability of cleaner more efficient
technology in energy, industry, and transport sectors
• Contribute to sustainable development
… and how private sector and governments can implement
the CDM/JI project cycle and compete in emerging carbon
market
Host Country PCF Representation
Joined (through MoU or Project Endorsement)
Considering
Africa (9)
Benin, Burkina Faso, Ghana,
Kenya, Morocco, Senegal,
Swaziland, Uganda, Togo,
Zimbabwe
Bhutan,
Belarus,
Bangladesh,
Egypt,
Sri Lanka,
Thailand
Asia (1)
India
Eastern Europe/ C Asia (7)
Bulgaria, Czech R.,
Hungary, Kazakhstan,
Latvia, Poland, Romania
Latin America (13)
Argentina, Brazil, Chile, Colombia,
Costa Rica, El Salvador, Guatemala,
Guyana, Honduras, Mexico,
Nicaragua, Peru, Uruguay
PCF Status and Focus
Deal flow far exceeds funding - several carbon contracts now
under negotiation
• >50 deals with $350m+ carbon purchases under review
• Targeting signed Emissions Reductions Purchase
Agreements (ERPAs)
• by end Jan 2002: 12 deals of $45-50mm in Chile, Costa
Rica, Brazil, Uganda, Romania, Morocco and
Uzbekistan
• by July 2002 ~$40mm in Nicaragua, India, Guatemala,
Argentina, Honduras, Thailand, Czech, and Kazakstan;
• Under active review as FY02 reserves ~$25mm: Guyana,
Hungary, Poland, El Salvador and Colombia
• Constraints: FMU and country capacity, quality of asset
Capacity Building and Carbon Finance
Strategy?
• One pilot carbon finance deal is not enough
• Full service provision requested by Host Countries
– Help build local market capacity
– Develop a “carbon investment office”, legislation and
regulation
– Develop private sector portfolio and public-partnerships
– Take portfolios of ERs to market
• Activity catalyzed by first carbon finance but as part of
wider technical assistance delivered by
– Bank programs (e.g. CDM-Assist for Africa, PCF+/WBI etc)
– Partnerships with bilateral donors
Carbon Finance and Capacity Building
Beyond PCF?
• Unmet Demand for Learning through a commercial
transaction
• Proposals for “first-of-a-kind” strategy
– By country, by application, by delivery mechanism
– Crowding-in private sector: first rights to private
sector, helps make marginal projects viable, right of
first refusal
• Two carbon finance models proposed for Bank
– Carbon finance manager: direct placement ( through
Bank Trust Funds, as per PCF)
– “arranger” on fee for service basis
Role for a “Forest Carbon Fund”
(Adaptation and Mitigation)
• Follows acceptance of Afforestation and Reforestation
in CDM
• Rules of Game to be established at CoP9/2003
• Draft Forest Strategy proposes a Prototype Forest
Carbon Fund to enhance learning-by-doing
• Key issues:
– Environmental and social impacts;
– Permanence and leakage?
– Cost-effective monitoring and verification
• Build on PCF business practice
• Important Public-Private Partnership Opportunity