COMBINING  CARBON  MARKET  AND  FINANCIAL  INSTRUMENTS  FOR  CITY‐WIDE  APPROACH  TO  MITIGATION

Chandra Shekhar Sinha, Lead Finance Specialist/Carbon Finance CoordinatorSustainable Development DepartmentLatin America and the Caribbean Region

STA

TUPerformance of offset market mixed; regulatory uncertainty continues

USOFTH

E

• Current status of CDM– Low CER issuance due to EB bottleneck– Registered projects set to reduce by 1,862 million by 2012 C

ARBO

NO

– Issuance: 138Mt  in 2008, 123 in 2009, 132 in 2010 (Total ~ 500 Mt)– PointCarbon estimates close to 1,000 million CERs to be issued by 2012

• Recent UNFCCC Secretariat clarifications on CDM post 2012

OFFSET

MA

• Recent UNFCCC Secretariat clarifications on CDM post‐2012 – Although the emission targets of Annex I Parties are negotiated on a commitment 

period by commitment period basis, the CDM itself is a long‐term mechanism that continues from one period to the next, and is not tied to specific commitment periods This continuity applies to all aspects of the CDM

ARKETS

periods. This continuity applies to all aspects of the CDM.

• Inflow of new projects continues but investors and compliance buyers perceive CERs as more risky due to post‐2012

• Increasing interest in new instruments such as Program of Activities, NAMAs, Sectoral Crediting, etc.

OFFSE

Post‐2012 CERs have risks; push towards offsets from countries with commitmentsETELIG

IBIL

UNFCCC / CDM Eligibility EU ETS Eligibility

International negotiations

CDM is expected to continue regardless of binding post‐2012

Restrictions on eligibility more likely under a 20% reduction targets for EU ITY

POST‐2

negotiations regardless of binding post 2012 commitment but CER value dependent on compliance needs

under a 20% reduction targets for EU countries in comparison to a 30% target 

Project type Current project types expected to ti I d t i l ( h

Renewable project are safest. Large h d j t l f I d t i l

2012

continue. Industrial gases (such as HFC23) may be excluded and be covered by other mechanisms (e.g. Montreal Protocol)

hydro projects are less safe. Industrial gases (HFC23, N2O) are the least safe

Vintage Reductions before 2013 are safest. Value of later reductions is uncertain.

Reductions pre‐2013 are safest. Projects Registered before 2013 are less safe and projects Registered after 2012 are least safe.

Host Country Advanced developing countries (e.g. Mexico, South Korea, BaSIC) are likely to be phased out of CDM

LDCs and other developing countries taking commitments (NAMAs, Sectoral targets, etc.) are safest

POST‐

Price for offsets will depend on regulatory decisions; EU position will dominate‐2012   PR

Price drivers for post‐2012 CDM CERs

• Policy– CDM until 2012: Framework known, still uncertainties but 2nd commitment period Kyoto 

seems unlikely

RICEOUTL

seems unlikely

– EU eligibility, e.g HFC23, N2O, large hydro projects

– EB policy, e.g. Chinese wind projects

– Several non‐binding treaties will create flexibility on LOOK

g y• Targets (how binding, absolute vs relative, how MRV should be carried out)

• Which offsets to use

• But UNFCCC likely to continue to play a role in approving commitments and ”DOEs” 

CDM will survive bother offset types that can be used for commitments (look to– CDM will survive bother offset types that can be used for commitments (look to Japan...)ut we will see

• CDM reform– CDM after 2012: Framework unknown, policy signals/scenarios being revised continously 

– Eligibility under UNFCCC

– Eligibility in existing and upcoming trading schemes • Will CERs be eligible in upcoming US, Japan, Australia, New Zealand and even  S Korea  

CARBO

N

DEM

AND

AND

PRICE

OUTLO

O

KFO

R

2013‐2020 ‐

ASSU

MING

AN

INTERN

AT

ONAL

AGREEM

E

NT‐Carbon price stability depends on EU; future evolution depends on the US

7000

NDOGTIE

Demand for CERs MT CO2 across Phase III

Mt CO2

€/t

5000

6000

7000CO2 30

EUA prices = 20 - 40€/t

CER Price

432

2,635

3000

4000

5000

CERs and international credits = 10 - 20€/t

15

1 681

701

43561

1000

2000

1,681

0EU Japan New Zealand Australia Canada USA

0

Source: New Energy Finance, J.P.Morgan

NEWEmergence of new offset categories for the carbon market…

OFFSET

M

• CDM CERs, including PoAs will be replaced by new offset products• NAMAs (Nationally Appropriate Mitigation Actions)

– Countries get credit for policies and measures rather than specific projectsUncertain: what actions are “creditable” and create NAMA credits ECH

ANISM

– Uncertain: what actions are  creditable  and create NAMA credits• Sectoral credits for advanced developing countries 

– Set targets or benchmarks by sector (e.g. steel, cement, electricity)– Step toward national targets for China, India, Brazil, Mexico, etc.

h b l b h k b d d d

S

– Uncertain: how are baselines or  benchmarks or binding targets determined• How will NAMAs and Sectoral Credits be operationalized?• What is the role for the private sector?

– Verifiers– Finance– Project developers

• What is lead‐in time? – NAMA pilots by end 2011? Role of the PMRp ots by e d 0 ? o e o t e– If crediting, then start in 2013…?– If eligible for compliance, from 2014…?

• Early mover advantage (but with increased risk)

NEED

… move to a cap‐and‐trade system in advanced developing countriesFO

RA

• Design of a Cap‐and‐Trade system• Accurate emission inventory is the starting point

• Preparation of national emission inventory• Design of legal frameworks to collect, store and verify data

h h f ll / CAP‐A

ND‐

• Assigning coherent targets to sectors and within sectors to specific installations/operations• Development of guidelines for monitoring, reporting, verification, enforcement and 

compliance• Development of registry of transactions• Making the business community aware ‐T

RADE

S

Making the business community aware• Legally embed trading rules

• Offset credits – create additional flexibility S

YSTEM

– maintain overall efficiency– create additional revenue streams for non‐ETS sectors

• Requirements for integration of project credits integrity of projects– integrity of projects

– low data uncertainties– appropriate baselines (safeguarding additionality)

THE

G

World energy‐related CO2 emission savings by technology in the 450 Scenario relative to the Current Policies Scenario

GLO

BALM

45

40

45

Gt

Share of cumulative abatement between 2010-2035

42.6 GtCurrent Policies Scenario

MITIG

ATIO

N

30

35

Efficiency 53%Renewables 21%Biofuels 3%Nuclear 9%

20.9 Gt

CHALLEN

G

In the 450 Scenario, compared with the Current Policies Scenario, efficiency measures provide 53% of the necessary 

25

30CCS 15%

21 7 Gt450 Scenario

GE

abatement, but renewables, CCS & nuclear are also crucial20

2008 2015 2020 2025 2030 2035

21.7 Gt

Source: IEA 2010

MAP Scenario 2050

EEMISS

MISSMAP Scenario – 2050

32 Gt CO2 ReductionMaterials & products efficiency 1% Energy & feedstock efficiency 6%

C ti & t 2%Pocess innovation 1%

Industry 10%

SION

SIONRREDED

Fossil fuel gen eff 1%Nuclear 6%

Coal to gas 5%

CCS 12%Power Gen

End-use efficiency

45%

Cogeneration & steam 2%

Space heating 3%

Lighting, misc. 3.5%Air conditioning 3%

Buildings 18%

DUCTIO

NS

DUCTIO

NS

Other renewables 6%Biomass 2%Hydro 2%

CCS 12%Power Gen34%Appliances 7.5%

Water heat. cooking 1%

Transport 17%

BYBYTTECHECH

Bi f l i 6%

CCS in fuel transformation 3%CCS in industry 5%

Fuel economy in transport 17%

HNOLO

GY

HNOLO

GY‐‐

Improved end-use energy efficiency is critical

Fuel mix in building 5% and industry 2%Biofuels in transport 6%

‐‐TYPETYPE

Source: IEA 2009

World energy‐related CO2 emission savings by country in the 450 Scenariorelative to the Current Policies Scenario

45t

40

45

Gt

China 33%United States 15%

Share of cumulative abatement between 2010-2035

42.6 GtCurrent Policies Scenario

30

35 United States 15%European Union 9%India 8%Middle East 5%

20.9 Gt

I h 450 S i d i h h

20

25

2008 2015 2020 2025 2030 2035

Russia 3%

Rest of world 24%Japan 3%

21.7 Gt450 Scenario

In the 450 Scenario, compared with the Current Policies Scenario, China & the US account for 48% of the cumulative emission abatement that is needed in 2010‐2035

2008 2015 2020 2025 2030 2035

Source: IEA 2010

GREEN

Road transport and solid waste are the biggest source of GHGs in RioNHOUSE

GGASINVENN

TORY

FORRIO

DEJAANEIRO

MIT

IGA

TIO

NMEA

SUR

ESAND

SUIT

ABIL

ITY

OF

INST

RUME

NTS

Transport system mitigation is important for Rio

CDM‐type activities are difficult for this sector; NAMA‐type offsets better fit? 

TRANSPORT Voluntary offsets (e.g. VCS, 

Project‐based  Offsets (e.g. 

Program‐based offsets

NAMAs/ Sector‐wide 

Cap‐and‐Trade

yp ; yp

Gold Standard CDM) credits

Increasing level of “commitment”

Bike path

Non‐motorized transport  

Modal shift (e.g.  Public transport)

Fuel switch

Zoning/ smart  planning

1. CDM type activities have worked for landfill‐gas recovery type solid waste management projects

MITIG

2. PoA and NAMAs are likely to be better fit for composting, recycling and waste‐water treatment projects

GATIO

NIN

WASTE MANAGEMENT

Voluntary offsets (e.g. VCS, Gold Standard

Project‐based  Offsets (e.g. CDM)

Program‐based offsets

NAMAs/ Sector‐wide credits

Cap‐and‐Trade

Increasing level of “commitment”

THE

WAS

Municipal landfill

Composting

Recycling

STEMANA

Recycling

Integrated solidwaste management

W t t

AGEM

ENTS

Waste water treatment

SECTO

R

ENERG1. PoA type activities seem to be attractive for lighting and appliance efficiency 

programs;  Project‐based CDM type activities have failed to take off. GY

EFFICIE

2. NAMAs and Cap‐and‐Trade  are likely to be effective for industrial consumers and building energy efficiency 

ENERGY EFFICIENCY

Voluntary offsets (e.g. VCS, Gold Standard

Project‐based  Offsets (e.g. CDM)

Program‐based offsets

NAMAs/ Sector‐wide credits

Cap‐and‐Trade

Increasing level of “commitment”

ENCY

MEA

Sg

Lighting efficiency

Appliance efficiency

I d t i l

SURES

FOR

Industrial energy efficiency

Building energy efficiency

RMITIG

AT

efficiency ION

Carbon Linked Financial Products

Design objective is to utilize limited public sector financial resource flows (e.g. from “Fast‐Start” resources committed at Copenhagen in 2009 or the Green Climate Fund established atCopenhagen in 2009 or the Green Climate Fund established at Cancun) to leverage much larger private sector investments for low carbon infrastructure investments

Selection of possible products:• Guarantees

– Product 1: WB Carbon Market Development Guarantee (“Carbon p (Guarantee”)

– Product 2: Off‐Balance Sheet Carbon Guarantee

• BondsBonds– Product 3: Country Issued Carbon‐linked Bond with WB Guarantee

• Product 4: Carbon Price Support fund

15

WB   

Product 1: Carbon Market Development Guarantee– How it works

LAC“Off Shore” CARBO

N

Buyer of Carbon Credits[S i P i t P bli titi ]

LACOff‐Shore

CERs GUARA

NT

[Sovereigns, Private or Public entities]

$ ‘Shortfall’ Agreement [for failure to deliver]

$ m

Day 2

TEE

LAC Country Carbon Promoter

$ m (ERPA)

Day 1

Indemnity Agreement

WB Guarantee of Shortfall Agreement $ 

energy savings $ 

16

Pool of Low‐carbon Projects

OFFB

Product 2: Off Balance Sheet Carbon Guarantee – How it works

LAC“Off Shore”

BALANCE

SBuyer of Carbon Credits[S i P i t P bli titi ]

LACOff‐Shore

CERs HEET

CAR

[Sovereigns, Private or Public entities]

$ ‘Shortfall’ Agreement [for failure to deliver]

$ m

Day 2

BONGUA

LAC Country Carbon Promoter

$ m (ERPA)

Day 1

ARA

NTEE

Guarantee of Shortfall Agreement $ 

MDB

Indemnity Agreement

energy savings $ 

MDB

Trust Guarantor

$

17

Pool of  Low‐carbon Projects“Climate Fund/ 

Annex I”

$

VARIA

Product 4: Country Issued Bond with WB Guarantee – How it works

LAC“Off Shore”

ATIO

N3: CCompliance Buyer

[S i P i t P bli titi ]

LACOff‐Shore

CERsCERs C

OUNTRY

IS

[Sovereigns, Private or Public entities]

$ Principal repayment

$ m

SSUED

BON

Bond Issuer      LAC Country

$ m (Principal)

NDWITH

W

Indemnity Agreement

WB Guarantee of Principal $ Net Bond 

proceeds  WB G

UARA

$ energy savings

ANTEE

18

Pool of CDM Projects

CERs

Product 4: Emission Reduction Price Support Facility

TRE Auction Facility

CERs$price

CERs $price

Price Support FacilityGreen Fund$

$upside share

If $price < $minGreen Fund pays the

Carbon Reduction projects

CERs $min

p ydifference If $price >$min

Seller receives share of upside

Carbon Reduction projects

Key Challenge: Determining $min• Minimum price should be based on generating minimum IRRMinimum price should be based on generating minimum IRR

will depend on emission factor and project technology

SUMM

New carbon instruments for the carbon market are emerging and are important for mitigation financing in large cities of important developing countries M

ARY

AND

• Market based instruments have established their usefulness for mitigation action– However, carbon market regulations are in a state of flux– Early mover advantage in the market comes with risk D

CONCLU

y g

• Newer carbon instruments such as PoAs, NAMAs, Sectoral Credits are just beginning to be defined– Move seems to be to move towards cap‐and‐trade systems U

SIONS

p y

• For large cities, range of carbon assets will be attractive– Starting point for the appropriate carbon instrument is a good inventory of 

greenhouse gas emissions g g

• Financing instruments linked to the carbon asset will be important to generate financing for the investments that will reduce the greenhouse has emissions

• In a period of regulatory uncertainty, the Bank will have important role to pilot new carbon instruments and carbon‐linked financial  products