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The views expressed in this presentation are the views of the author(s) and do not necessarily reflect the

views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make any representation concerning the same.

Making the Carbon Market work for Development Finance

ADB Carbon Market Initiative
Jiwan Acharya
Climate Change Specialist Asian Development Bank Building Capacity to Respond to Climate Change in South Asia 29-30 June 2010, Kathmandu, Nepal

CDM Concept
Industrialized Country (Annex B)
② Carbon Credits

Developing Country (non-Annex B)

Entity A
GHG

Entity B
Project

Emissions
① Finance Technology (Capacity Building)

Activity Emission Reduction

CDM Reality
Industrialized Country (Annex B)
① Carbon Credits

Developing Country (non-Annex B)

Entity A
GHG

Entity B
Activity Emission Reduction ② Payment
Project

Emissions

CDM Status

Total 2,264 projects registered 75% is from Asia and the Pacific Out of this, over 530 projects are from South Asia  2800 projects at validation, out of which approximately 800 projects from South Asia   

Carbon Market

Source: Point Carbon

 The global carbon market is expected to reach €121billlion (US$170billion) in 2010, up by 33% from 2009.

Carbon Market: CDM is only one part
Voluntary Market
CCX Over-The-Counter

CDM / JI projects

1) Primary carbon credit supply via Emission Reduction Purchase Agreements (ERPAs) 2) Secondary trade either on forward basis or spot market

US ETS?

Large Final Emitters

Canada

Europe

EU-ETS

Japan

Keidanren Voluntary Agreement

AUS ETS

NZL ETS

AAU supply via Green Investment Scheme (GIS)? Russia, Ukraine, Former Eastern Bloc countries
CCX = Chicago Climate Exchange; CDM = Clean Development Mechanism; ETS = Emissions Trading Scheme GHG = greenhouse gas; RGGI = Regional Greenhouse Gas Initiative

Global CDM Slowdown?
     
EU ETS total Brokered OTC exchanges auctions Direct bilateral options CDM total primary secondary options JI AAU RGGI Other total Sum Source: Mt 362 207 55 100 401 397 4 28 2005 Final figures €m 7,218 4,269 1,131 1,818 2,038 1,985 50 96 2006 Final figures Mt 1,017 627 190 200 563 523 40 21 €m 18,143 11,180 3,395 3,568 3,920 3,349 571 95 2007 Final figures Mt 1,643 1,009 434 200 947 597 350 38 €m 28,133 17,278 7,431 3,425 11,737 5,984 5,753 326 2008 Final figures Mt 3,091 1,516 1,152 42 300 80 1,609 549 1,037 23 72 18 71 34 4,895 €m 66,993 33,553 25,488 965 6,495 492 24,172 6,039 17,944 189 720 179 178 119 92,365 Mt 3,823 1,331 1,997 75 300 120 1,510 300 1,160 50 40 95 339 59 5,866 2009 Forecast €m 45,170 15,974 23,962 900 3,600 734 4,704 2,700 11,600 404 450 942 933 380 62,580

   
8 799 Point Carbon

   
52 9,401

   
31 1,632

   
300 22,458

   
48 2,676

   
186 40,382

Issues
 Kyoto Protocol commitments ending in 2012; no agreed international framework yet on post-2012

Lack of long-term price signal to give incentive for economies to invest in low-carbon alternatives

 Lack of investment/equity – carbon market contributing to cash flow of approved projects, but rarely contribute to project financing

Issue 1: Post-2012
End of Kyoto Commitments
Few buyers

Carbon Credit Volume

Project Project Approval Completion

Emission reduction portfolio (e.g. 10 year period)

?
17

Year:

2009

10

11

12

13

14

15

16

18

19

20

21

Credits from Registered Projects

Issue 2: CDM only provides additional cash flow to people with money in the Top first place? countries by issued CERs
70.0 Millions of issued CERs 60.0 50.0 40.0 30.0 20.0 10.0 0.0 China India South Korea Brazil Mexico Chile Tunisia Malaysia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Share of all issued CERs

Source: UNEP Riso Centre

Programme of Activities (PoA)

 Small-scale CDM (SSC) projects aggregated as a single CDM project  3 PoAs registered so far – 2 related to household energy efficiency (EE)/ lighting and 1 methane avoidance  45 in the pipeline but just 11 from South Asia

Small-scale CDM (SSC) Projects
 Projects types that can be eligible as SSC are:  Type I: Renewable energy projects with maximum output capacity of up to 15 MW (or an appropriate equivalent)  Type II: Efficiency improvements projects which reduce energy consumption by an equivalent of 60 GWh /yr  Type III: Other project activities that reduce emissions by less than 60 kt of CO2e/yr

Additionality for projects < 5MW & EE projects with energy savings <=20 GWH per year (1)
 Automatic additionality to renewable energy projects up to 5MW, subject to at least 1 of the following conditions: located located in LDCs/SIDs or special underdeveloped zone off off grid activity supplying energy to households/ communities distributed distributed energy generation renewable renewable energy technologies recommended recommended by the DNA and approved by EB as additional in the host country

Additionality for projects < 5MW & EE projects with energy savings <=20 GWH per year (2)
 An outstanding development as it removes a significant barrier to developing high quality, but small renewable energy projects.  Countries in South Asia should take the benefit of this development to register more SSC projects.

Country/sector limitation: contributing causes
  

Focus on “low hanging fruit”

Limited capacity in host countries Restriction in international rules (carbon capture, avoided deforestation, transport?) Lack of finance for GHG reduction benefits
  

Most buyers offer “pay-on-delivery” contracts Some offer upfront payment but with strict penalties for under-delivery Such schemes do not share project risks – remains almost entirely with project sponsors Projects heavily skewed towards countries/sectors already with capital and/or favorable to foreign direct investment

ADB Response: Carbon Market Initiative

1. Underlying Finance: Run-of-River Hydro Power Project
 98 MW run-of-river type hydro project (Xiaogushan Hydro) in Gansu Province, PRC  Displaces 109 MW coal-fired power generation  ADB Loan: $35 million (approved in 2003)  Total Project Cost: $87 million -------------------------------------------------------------------- Total volume of ERs expected (10 year): 3.7 million tCO2  Also avoids annual emissions of 240 tons of particulate matter and 1,910 tons of SO2  Contracted ER volume (with World Bank): 2 million tCO2  Total Contract value: US$8.50 million  Contract price: US$4.25/tCO2 VER basis

1. Underlying Finance: Ongoing projects (sample)
Country Indonesia India Lao, PDR Bangladesh China, PR Pakistan Philippines Thailand Mongolia Uzbekistan China, PR Project Type Geothermal power Wind power Small hydropower Waste composting Geothermal space heating Hydropower Energy-saver bulb distribution Biomass power Boiler efficiency improvement Small hydropower Urban transport system

2. Technical Support for CDM
 Upstream support in project preparation phase
     

Due diligence: technical, financial, legal, safeguards, governance Capacity building trainings Carbon credit valuation Documentation preparation for credits (PIN, PDD, methodology) Obtaining host country approvals Facilitating project Validation & Registration

 Downstream support in project execution and commercialization
  

Implementation / commissioning Monitoring & Verification Certification & Issuance of CERs to sponsor/developer & fund

3. Credit Marketing Service

4. Carbon Co-Finance: Carbon Funds
 Asia Pacific Carbon Fund (APCF) for credits up to end of 2012, and Future Carbon Fund (FCF) for post-2012  Co-finances projects alongside ADB to help fill project financing gap  Purchase of credits generated from now up to 2020  Can purchase 25-75% of expected carbon credits on upfront payment basis and the remaining credits via payment on delivery  Lower transaction cost if debt/equity financier is ADB

ADB’s Attempt: Turning Cash Flow into Financing
ADB Modality Standard “Pay-on-Delivery”

Financing

1. $/€

1. Tech Asst

2. Carbon Credits

1. Carbon Credits

2. $/€

Cash Flow

Project phase:

Development

Commercial Operation

Year:   0       1       2       3       4       5          7       8

Carbon Market Initiative

Carbon   Funds

Sample CMI Project Type
 Energy Efficiency
 

Industrial technology Supply-side efficiency (e.g. upgrade of generation equipment)

 Renewable Energy
   

Biomass energy Small to mid-scale run-of-river hydropower Wind power Geothermal power

 Methane Capture and Utilization
 

Coalmine methane Municipal waste management (landfill methane)

Sample Project Financing Plan

Credit Marketing Facility

Additional KP1 Credits Additional post-2012 Credits First KP1 credits

Carbon Credits (over 7 to 21 yrs)

First post2012 credits

ADB Project with GHG Abatement Illustrative Financing Plan - Debt Source of Finance ADB Loan Finance APCF Future Others Carbon Fund Others Total Total % 50 10 10 40 100 30 100

Asia Pacific Carbon Fund

Future Carbon Fund
Credits up to end of 2012 (KP1) Credits generated beyond 2012

Impact on project finance: Example 1
Run-of-River Hydropower plant
Emission reductions and carbon credit value Annual CERs 2010-20 Emissions reduction (tCO2e) 134,811 Potential revenue $ 674,055 $5/ton $10/ton $ 1,348,110 $ 2,022,165 $15/ton Total CERs up to end-2012 404,433 $ $ $ 2,022,165 4,044,330 6,066,495 $ $ $ Total CERs Post 2012 943,677 4,718,385 9,436,770 14,155,155

Indicative project financing plan (with volume and pricing examples) $5-10/ton $10-15/ton Total Investment Cost $ 49,090,000 $ 49,090,000 Financing Sources Government & Other $ 21,529,046 $ 16,979,175 ADB $ 22,000,000 $ 22,000,000 APCF (50% of CERs) $ 2,022,165 3,033,248 FCF (75% of CERs) $ 3,538,789 7,077,578 Ratio (APCF&FCF/Total) 11.3% 20.6%

Impact on project finance: Example 2
Wind Power project
Emission reductions and carbon credit value Annual CERs 2010-20 Emissions reduction (tCO2e) 63,794 Potential revenue $ 318,970 $5/ton $10/ton $ 637,940 $ 956,910 $15/ton Total CERs up to end-2012 191,382 $ $ $ 956,910 1,913,820 2,870,730 $ $ $ Total CERs Post 2012 446,558 2,232,790 4,465,580 6,698,370

Indicative project financing plan (with volume and pricing examples) $5-10/ton $10-15/ton Total Investment Cost $ 55,422,222 $ 55,422,222 Financing Sources Equity $ 13,995,164 $ 11,842,117 ADB loan $ 38,795,556 $ 38,795,556 APCF (50% of CERs) $ 956,910 1,435,365 FCF (75% of CERs) $ 1,674,593 3,349,185 Ratio (APCF&FCF/Total) 4.7% 8.6%

Impact on project finance: Example 3
Small Waste-to-Energy projects
Emission reductions and carbon credit value Annual CERs 2010-20 Emissions reduction (tCO2e) 43,840 Potential revenue $ 219,200 $5/ton $10/ton $ 438,400 $ 657,600 $15/ton Total CERs up to end-2012 131,520 $ $ $ 657,600 1,315,200 1,972,800 $ $ $ Total CERs Post 2012 306,880 1,534,400 3,068,800 4,603,200

Indicative project financing plan (with volume and pricing examples) $5-10/ton $10-15/ton Total Investment Cost $ 30,851,000 $ 30,851,000 Financing Sources Government & Other $ 13,647,951 $ 12,168,351 ADB $ 15,394,649 $ 15,394,649 APCF (50% of CERs) $ 657,600 986,400 FCF (75% of CERs) $ 1,150,800 2,301,600 Ratio (APCF&FCF/Total) 5.9% 10.7%

Impact on project finance: Example 4
Biomass (rice husk) Power project
Emission reductions and carbon credit value Annual CERs 2010-20 Emissions reduction (tCO2e) 420,000 Potential revenue $ 2,100,000 $5/ton $10/ton $ 4,200,000 $ 6,300,000 $15/ton Indicative project financing plan (with volume and $5-10/ton Total Investment Cost $ 172,000,000 Financing Sources Equity $ 39,675,000 ADB loan $ 115,000,000 APCF (50% of CERs) $ 6,300,000 FCF (75% of CERs) $ 11,025,000 Ratio (APCF&FCF/Total) 10.1% Total CERs up to end-2012 1,260,000 $ $ $ 6,300,000 12,600,000 18,900,000 $ $ $ Total CERs Post 2012 2,940,000 14,700,000 29,400,000 44,100,000

pricing examples) $10-15/ton $ 172,000,000 $ 25,500,000 $ 115,000,000 9,450,000 22,050,000 18.3%

Carbon Market Beyond 2012
 Demand and supply in the future carbon markets is expected to be there.  Determined by domestic and regional emissions reductions policies that will develop regardless of what happens in the global stage, e.g., the EUETS will still continue to generate CDM credit demands post 2012.

Post 2012 Negotiations
 Although inconclusive of a global negotiation, the COP15 demonstrated a generic support to CDM.  Some achievements of COP 15: various CDM reforms with special focus on promoting projects in under represented countries; many nations pledged emission commitments; these countries account for some 90% of global emissions; and brought renewed attention to forest preservation, technology transfer and funding for developing countries.  ADB remains hopeful that an agreement will be reached resulting to a global framework.

Post 2012 Negotiations Update (1)
 International negotiations is as challenging as in 2009.  But it recently entered into a constructive mode during the talks in Bonn.  Some parts of the negotiations such as on REDD is uncontroversial and could be decided upon in Cancun.  Progress has also been made on issues related to finance, institutional frameworks for adaptation, mitigation technology and capacity building.

Post 2012 Negotiations Update (2)
 On post 2012 framework, the Secretariat has been asked to identify options and possible solutions in case there is a gap between 2008-12 and subsequent commitment periods.  This sends a positive signal to the market players.  This may imply that some solutions could be found for the flexible mechanisms to continue in some form until an agreement is reached.  There are speculations that negotiations will most likely continue throughout 2010 and at least until the end of 2011.

CMI Summary: Main Advantages for Project Developers/Sponsors
 Certain funds today, for commodity with uncertain value in the future  Reduced budget commitments to close the financing plan of projects  Comprehensive technical and implementation support  Extra credits from successful project implementation can be marketed with ADB support for further financial upside

THANK YOU!
Jiwan Acharya Sustainable Infrastructure Division Tel: +63 2 632 6207 jacharya@adb.org