Financing the Destruction of Unwanted ODS through the Voluntary Carbon

Market

Potential Options for Mobilizing Funds

Steve GormanGEF Coordination / Montreal Protocol OperationsThe World Bank

14 May 2010Geneva

Seminar on the Environmentally Sound Management of ODS Banks

Potential Options for Mobilizing Funds

Study on Financing the Destruction of Unwanted ODS thru the Voluntary Carbon Market (VCM) Context for the Study Objectives and Planned Outcomes of the Study Study Findings Options for Article 5 Countries

Another Resource Mobilization Option to Complement Multilateral Fund Financing for Wider ODS Financing Challenges

Conclusions

2

Context of the Study

Montreal Protocol has significantly reduced production/consumption of ODS

Emissions of ODS “banks” in equipment, products, and stockpiles – not controlled

IPCC/TEAP has estimated that: One-third of ODS banks in 2002 would be vented

by 2015 unless action was taken This venting would result in emissions of almost 7

billion tCO2e

End-of-life ODS banks need to be recovered, consolidated, transported, and destroyed using technologies approved by the Parties

End-of-life management of ODS banks can result in significant human health and climate benefits

Pictures courtesy of ICF International

3

Context of the Study

The voluntary carbon market is an important opportunity to finance the destruction of ODS because: ODS destruction is not covered under CDM and to date, the

Executive Committee has decided to provide funding only for pilot ODS disposal projects (in accordance with Decision XX/7)

Financial incentives are needed to ensure proper disposal of unwanted ODS, since the process is costly

The high GWPs of ODS can generate significant carbon credits

ICF was contracted by the World Bank on behalf of the MLF Executive Committee to undertake a study on these opportunities, guided by the Terms of Reference approved in Decision 55/34.

4

Objectives and Planned Outcomes

Determine opportunities for financing the destruction of unwanted ODS by:

Conducting financial and technical feasibility assessments on financing ODS destruction thru the VCM (volume, impact, costs);

Reviewing existing methodologies for validation and verification of ODS disposal and recommend to ExCom;

Applying practical experience from case studies;

Consulting with stakeholders to develop understanding of benefits and challenges of VCM.

ObjectivesObjectives

5

Strengthened and expanded carbon voluntary market for ODS destruction offsets;

Streamlined project cycles for ODS disposal;

Value of carbon credits from ODS disposal enhanced;

ODS disposal market in Article 5 countries created;

Revenue sharing to support transaction costs, and;

Art. 5 countries enabled to identify additional external assistance if required.

Objectives and Planned Outcomes

OutcomesOutcomes

6

Study Findings Significant opportunity exists for ODS destruction projects

under the VCM but depends on a number of factors including among others: Attractiveness and value of an ODS offset Growth of the voluntary market Rates of ODS recovery Development of capacity (project dev., monitoring, verification)

A global market platform has been created with three standards offering ODS destruction credits – including for projects in Art. 5 countries Chicago Climate Exchange (CCX) Climate Action Reserve (CAR) Voluntary Carbon Standard (VCS)

Demand for ODS destruction credits is affected by the relationship between future VCM size and volume of ODS for destruction:

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1% Destruction 1% Destruction 1% Destruction10% Destruction 10% Destruction 10% Destruction

50% Destruction

50% Destruction

50% Destruction

180

347

476

0

50

100

150

200

250

300

350

400

450

500

2010 2015 2020

OD

S Po

tenti

ally

Ava

ilabl

e fo

r D

estr

ucti

on (B

ars)

and

Pro

ject

ed V

olum

e of

th

e Vo

lunt

ary

Mar

ket

(Dia

mon

ds),

in M

illio

n tC

O2e

Note: This figure does not include ODS recovered in the EU Member States, nor HCFCs. Source for voluntary market projected transaction volumes: Hamilton et al. (2009). 2010 volume is estimated by sight from Figure 35 of this report.

Projected volume of voluntary market ODS potentially available for destruction

1) ODS Potentially Available and Eligible for Destruction (Bars) with the Projected Volume of the Voluntary Market ( )

In In millions ofmillions oftons of COtons of CO22

equivalentequivalent

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

2010 2015 2020 2025 2030 2035 2040 2045 2050

OD

S Re

cove

rabl

e fr

om E

quip

men

t at

EO

L, in

Mill

ion

tCO

2e

A5: Fire Protection (Halon)

A5: Foams (CFC)

A5: Ref/AC (CFC)

Other Non-A5: Fire Protection (Halon)

Other Non-A5: Foams (HCFC)

Other Non-A5: Foams (CFC)

Other Non-A5: Ref/AC (HCFC)

Other Non-A5: Ref/AC (CFC)

EU: Fire Protection (Halon)

EU: Foams (HCFC)

EU: Foams (CFC)

EU: Ref/AC (HCFC)

EU: Ref/AC (CFC)

US: Fire Protection (Halon)

US: Foams (HCFC)

US: Foams (CFC)

US: Ref/AC (HCFC)

US: Ref/AC (CFC)

2) ODS Potentially Available for Destruction from Retired Equipment in Millions of tCO2eq, assuming a 10% Recovery Rate (2010-2050)

Study Findings (cont.) ODS destruction credits are unlikely to flood the market or

negatively impact compliance markets Solid, draft methodologies/protocols exist Challenges and gaps remain:

Some ODS are not covered by the VCM (halon)

Weak country capacity in carbon finance; lack of experienced bodies/structures; lack of upfront capital

Can an adequate system be put in place to prevent gaming and perverse incentives?

Many Art. 5 countries will have low volumes of ODS for destruction

ODS projects can be costly depending on “effort” level and project size and price of credit per tCO2 equivalent - how to manage revenue at the country level?

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Costs of ODS destruction projects

Example project profitability calculations

10 tons CFC-12 example yields profits of ~US$184,000 Minimum amount of ODS needed to result in a financially viable

project can be estimated using equations

Project Revenue

= Amount of ODS destroyed

x GWP of ODS

x Emission reduction discount*

x Trading price of credit

$383,680 = 10 tons x 10,900 x 88% (12% discount) x $4/tCO2e

Project Costs

= Fixed project transaction costs**

+ Issuance / registration fee***

+ Project implementation costs****

$200,184 = $81,000 + $19,184 + $100,000

* Determined by equations in selected methodology

** Includes project preparation, validation, verification, annual and project fees

*** Based on selected voluntary standard, and equal to number of credits issued multiplied by fee per credit (tCO2e)

**** Includes collection, transportation, storage, testing, and destruction

ODS Destruction Project Break-even Costs Compared to Average Price for an Industrial Gas Carbon Credit

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.001,

000

unit

s co

llect

ed

10,0

00 u

nits

colle

cted

100,

000

unit

sco

llect

ed

0.5

tons

des

troy

ed

1 to

n de

stro

yed

10 t

ons

dest

roye

d

1 to

ns p

ersy

stem

/fac

ility

1,00

0 to

ns p

ersy

stem

/fac

ility

10,0

00 t

ons

per

syst

em/f

acili

ty

US$

/tCO

2e

Refrigerator Collection ODS Stockpiles Large Stationary Air Conditioning

Average price for an industrial gas carbon credit in the voluntary market = US$4.6/tCO2e

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Options for Art. 5 Countries: Markets and Methodologies

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For all options see Table 6 of the ICF Study

Options for Art. 5 Country Governments

15

Upfront Financing Multilateral Fund

Dec. 58/19 - ODS Pilot Projects (collection, storage, transport, destruction) Demonstrated savings from national ODS phaseout plans

might be used New financial mechanisms (?)

Revenue from the voluntary carbon market Directly

Government Role = Facilitator Government Role = Project Developer

Indirectly (taxation, auctions, etc.) from the private sector

Options for Art. 5 Country Governments

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Integrating ODS destruction into waste management programs or energy efficiency programs through appliance replacement and “take back” schemes

Aggregating voluntary carbon market offset projects (within a country and/or a regional country grouping)

Establishing producer responsibility schemes which rely on levies or licensing fees from import of ODS containing equipment or rebates for surrendering recovered ODS

Leveraging private sector finance and using market mechanism to augment funding available for the global environment: Voluntary carbon market to finance ODS destruction for

carbon and ozone benefits is one model Others are needed for short-term funding requirements,

including HCFC phaseout…where there could be an MLF financing gap on the global level to meet the 2015 Montreal Protocol phaseout requirements

Another Option for Wider ODS Challenges

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HCFC Funding Demand and Availability

Required funding to meet 10% reductions for all Art. 5 countries in 2015

Expected MLF funding (current and next replenishment)

Unavoidable, non-incremental costs

Climate + Ozone Benefits

Global Funding Global Funding Requirements Requirements Extrapolated from Extrapolated from China HCFC China HCFC consumption and consumption and production figures production figures (total phaseout (total phaseout required: 150,428 MTrequired: 150,428 MTtotal funding required: total funding required: US$902 million) US$902 million)

Additional Financing for non-incremental costs

Market Mechanisms to Scale-up Donor Funding

+Carbon Assets Investors

Capital Market

InvestorsCapital Market

++Positive impact on environment

Positive impact on environment

DonorsMLFProjects

for ex. “sustainable investing” bonds

Monetizationof Commitments

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Three Levels of Priority in Scaling-UpThree Levels of Priority in Scaling-Up1.1.Meeting the MP HCFC Phaseout Obligations (filling the funding gap)Meeting the MP HCFC Phaseout Obligations (filling the funding gap)2.2.Future carbon assets generated by projects could also be monetized and Future carbon assets generated by projects could also be monetized and channeled to projects for frontloading fundingchanneled to projects for frontloading funding3.3.Using carbon assets to lower the cost of project financing with ozone-Using carbon assets to lower the cost of project financing with ozone-climate co-benefitsclimate co-benefits

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Year

150

Alternative 1: Donors scale up

300

Current funding model

Alternative 2: Market Alternative 3: Market +

Carbon Market + Carbon accelerated

US$ Million

20

Market Mechanisms to Scale-up Donor Funding

Conclusions

Opportunities exist to utilize alternative sources of funding for ODS activities where MLF funding is not sufficient or not available.

Innovative financial engineering model to monetize future commitments to support up-front investment exists and could be applied to future commitments (MLF contributions) and, possibly future carbon revenues.

Strategic thinking is necessary to piece together puzzle and maximize global benefits.

Cooperation and synergies are necessary to leverage large impacts and benefits.

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Final study is available at the 30th OEWG Meeting as an information document to the 61st

Executive Committee in PDF format at:

www.worldbank.org/montrealprotocol

For more information from the authors, please contact:

Mark WagnerSenior Vice PresidentICF InternationalPhone:  +1.202.862.1155Fax:  +1.202.862.1144E-mail:  mwagner@icfi.comWebsite:  www.icfi.com

Thank you

Montreal Protocol OperationsThe World BankWashington, DC

worldbank.org/montrealprotocol