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    Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Carbon Finance for Carbon Finance Sustainable Development Annual Report 2005 35156


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    Contents: 3 Carbon Finance for Sustainable Development 27 Report on Business: The Work of the Carbon Funds 81 Making Carbon Finance a Reality: Projects in Progress 99 Annexes This is the first consolidated annual report of the carbon funds managed by the World Bank, covering the period from July 1, 2004 through August 31, 2005. An online version of this report is available on the carbon finance website: www.carbonfinance.org Notes: All $ = U.S. dollars (unless otherwise indicated). One ton = 1000 kilograms (one metric tonne). All greenhouse gas emission reductions are measured in tons of carbon dioxide equivalent (tCO2e). This report is provided for informational purposes only. The carbon funds reported on are not legal partnerships. No warranties or representations are made as to the accuracy, reliability or completeness of any information herein.


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    Our mission is to catalyze a global carbon market that supports sustainable development, reduces transaction costs and reaches and benefits the poorest communities of the developing world. Carbon Finance for Sustainable Development 1


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    2 Carbon Finance Annual Report 2005


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    Carbon Finance for Sustainable Development 4 The Carbon Funds 6 Letter from the World Bank 7 Letter from the Chair of the Host Country Committee 8 The Global Context 12 Carbon Finance at the World Bank 14 From the Senior Manager of Carbon Finance 15 Carbon Finance Highlights 2005 16 Report on Carbon Finance Operations 18 Creating the Carbon Asset 20 Transaction Structuring and Risk Management 23 Financial Performance 24 Capacity Building Carbon Finance for Sustainable Development 3


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    The Carbon Funds Prototype Carbon Fund Community Development BioCarbon Fund (BioCF) (PCF) Carbon Fund (CDCF) The mission of the Operational since July The BioCarbon Fund is a Prototype Carbon Fund is to 2003, the CDCF is a public/private initiative that pioneer the market for proj- public/private fund initiated was established in May ect-based greenhouse gas by the World Bank in 2004 as a trust fund admin- emission reductions within collaboration with the istered by the World Bank. the framework of the Kyoto International Emissions The fund is piloting projects Protocol and to contribute Trading Association (IETA) in developing countries, as to sustainable development. and the United Nations well as in countries with Climate Change Secretariat. economies in transition, that Operational since April 2000 sequester and conserve as the first carbon fund to The single feature that carbon in forest and agro- be established globally, the defines this fund and ecosystems. PCF is an innovative pub- differentiates it from other lic/private partnership aimed World Bank managed car- The emerging carbon at mitigating climate bon funds is the generation market represents an change. Six governments of community benefits by unprecedented opportunity and 17 companies, all from the projects it finances. for development based on industrialized countries, CDCF projects are an competition and trade. have contributed US$180 opportunity for small com- Land-use projects offer a million to the PCF which munities in poorer countries valuable, and maybe the currently has 28 projects to obtain clean water, only, opportunity for some under preparation. improve health conditions of the poorest countries and create jobs for women, and their rural communities See page 29 as much as they are an to participate in the carbon investment in clean tech- market and reap its devel- nologies that help reduce opment benefits. greenhouse gas emissions and mitigate climate change. See page 51 See page 39 4 Carbon Finance Annual Report 2005


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    The Netherlands CDM and Italian Carbon Fund (ICF) Danish Carbon Fund Spanish Carbon Fund JI Facilities (NCDMF) (NECF) (DCF) (SCF) The Netherlands Clean The Italian Carbon Fund The Danish Carbon Fund The Spanish Carbon Fund Development Mechanism was established in early became operational in was created in 2005 to Facility was established in 2004 based on an agree- January 2005 and involves purchase greenhouse gas April 2002. The agreement, ment between the World the participation of Danish emission reductions from signed between the World Bank and the Government public and private sector projects developed under Bank and the Ministry of of Italy. The ICF supports a entities. The DCF will pur- the Kyoto Protocol to miti- Housing, Spatial Planning and wide range of technologies chase emission reductions gate climate change. It is the Environment of the and activities in China, from renewable energy one of the initiatives imple- Netherlands (VROM), supports India, Central and South projects, combined heat mented by the Government projects in developing coun- America, the Balkans, East and power projects and of Spain to achieve its emis- tries in exchange for emission Asia, the Mediterranean and landfill projects, among sion reduction target under reductions under the Clean the Middle East. others, that are implemented the Protocol. The SCF will Development Mechanism in developing countries and promote renewable energy (CDM) of the Kyoto Protocol. The ICF will promote and in countries with economies and energy efficiency proj- facilitate Italian industry’s in transition. ects in developing countries The Netherlands European engagement in the carbon and countries with Carbon Facility started opera- market by providing knowl- The Danish Carbon Fund’s economies in transition. tions in August 2004 and is co- edge about maximizing target is to place approxi- managed by the World Bank project-based opportunities mately $70 million in a first The fund, which started and the International Finance for cost-effective acquisition portfolio of 10 to 12 projects operations using financial Corporation (IFC, the private of emission reductions and with a total reduction of resources provided by the sector arm of the World Bank clean technology transfer. 10 to 12 million tons of Spanish Government, will Group). The target of the facility carbon dioxide equivalent soon be open to the partici- is to purchase 10 million tons See page 67 (tCO2e). pation of Spanish public of emission reductions from and private entities. Joint Implementation projects See page 71 located in Central and Eastern See page 75 Europe. See page 61 Carbon Finance for Sustainable Development 5


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    Letter from the World Bank We all saw first hand in the last few months the terrible impact of extreme climate variability. Vulnerable populations everywhere are hardest hit, and those with the least, suffer the most. From Southern Africa to Central America and from Bangladesh to Afghanistan, poor people are the ones in the frontlines of severe droughts and floods. In the past decade, 2.5 billion people in developing countries have been affected by climate disasters. This is of concern to the World Bank whose partner countries run the real risk of seeing their development gains of the last decades threatened. But real progress can be made in sustaining development efforts and conserving our planet if governments, the business community, international institutions and civil society mobilize their resources towards the long term objective of a lower carbon economy. The G8 Gleneagles Summit kick-started a new and broader dialogue on climate change based on practical solutions and results. The Bank is working with partners in the creation of a new, long term oriented investment framework for clean energy and sustainable development that better aligns all potential financial sources. All countries and especially developing countries have a stake in integrating climate concerns into policy planning and improving governance in key sectors such as energy, water and transport. Helping vulnerable countries to adapt to this threat is a key priority. Rich countries need to set the example by taking the lead and moving towards environmentally-friendly technical solutions that lower emissions and at the same time maximize the use of market mechanisms such as carbon trading to buy reductions of greenhouse gases from developing countries and countries with economies in transition. The countries and companies who have partnered with the World Bank in establishing the eight carbon funds that the Bank manages have shown foresight and courage. Many of these carbon fund participants have obligations for carbon emission reductions under regulatory or voluntary regimes. But all of them have perceived the value added of purchasing some of those greenhouse gas emission reductions from projects in developing countries or from countries with economies in transition, bringing development dollars and clean energy technology to communities and countries that would have been otherwise left out of this emerging market. Ian Johnson Vice President for Sustainable Development The World Bank 6 Carbon Finance Annual Report 2005


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    Letter from the Chair of the Host Country Committee Most developing countries are very vulnerable to climate change. Their hope is to improve climate conditions and to mitigate their vulnerability through international joint efforts. The Kyoto Protocol’s Clean Development Mechanism allows developed countries to obtain green- house gas emission reductions by implementing CDM projects in developing countries, while assisting developing countries to achieve sustainable development—a win-win solution. The Host Country Committee (HCC), with its current 54 member countries, was organized to promote CDM devel- opment through building capacity for member countries, engaging in the creation of international CDM and carbon market policies, and sharing information, experience and lessons, among other things. The effective functioning of the Host Country Committee is important for the success of the CDM and the Kyoto Protocol. 2005 is proving to be a remarkable year for carbon market development and for improving HCC functions. The continuing increase in both trade and volume of the European Union Emissions Trading Scheme (EU ETS), which started on January 1, 2005, has sent a strong signal to the Host Country Committee that there are opportunities to take advantage of this market for CDM project development. On February 15 and 16, auspicious because it happened to be the date that the Kyoto Protocol came into force, 48 members of the Host Country Committee attended the HCC annual meeting in Washington, DC. Key among the decisions made was to establish a pricing committee, to consider the price of carbon in the market and provide advice to the World Bank on pricing policies for carbon. Both the volume of CDM projects submitted for validation and registration and methodologies submitted for approval by the CDM Executive Board increased significantly this year, resulting in a tremendous challenge for the board and its methodology panel to deal with the sheer number of projects. The Host Country Committee and its members are encouraged to provide advice to the Executive Board and its panel on how they could improve CDM management. A significant message on CDM in 2005 was the call by Parties and stakeholders for CDM reform, including CDM governance and streamlining of CDM regulations. This reform is critical in order to facilitate CDM implementation and to make the CDM an effective instrument to meet Kyoto Protocol targets. The Carbon Finance Unit of the World Bank has been entrusted to manage eight carbon funds, because of its excellent carbon business management and good reputation. The Bank also manages the CF-Assist program that is supporting capacity building for CDM/JI host countries. With the support of CF-Assist, the number of countries that have submitted CDM projects for validation and registration has greatly increased. It is expected that the CDM market will grow considerably in the coming years. We should be confident that this will happen, and I would encourage all HCC members to make their best effort to promote this market development. Lu Xuedu Chair Host Country Steering Committee Carbon Finance for Sustainable Development 7


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    The Global Context The Impact of Climate Change 2005 is turning out to be a predicted for years as a result of momentous year, both for the inter- global warming. Our climate is pro- national agreements on climate jected to change even more in the change that have come into force, coming decades. In short, what we and also for the warnings that nature are seeing is only the beginning of is sending our way on the havoc that an apparently unstable period with climate change could wreak, both in largely unpredictable economic and human and economic terms. In the human consequences. aftermath of the weather disasters that we witnessed all over the world Most scientists agree that these in 2005, it is evident that poor com- changes are mostly due to our own munities anywhere are the most activities. We are in effect tinkering vulnerable, and the damage is borne with the natural thermostat of the most heavily by those with the fewest planet. The gases we are pumping resources to cope. into the atmosphere from our coal- and oil-burning industries and According to climate records, the last lifestyles are increasing, and pushing several years have been the hottest the world into a climatic regime on record. Precipitation patterns have unprecedented in the era of civiliza- changed, sea levels have risen and tion. The extent of warming this cen- most non-polar glaciers are retreat- tury will be determined in part by the ing. Last summer, floods devastated development pathways we choose. parts of Central Europe, Central Asia, We must take swift action to lower India and southern China, while long- our emissions of greenhouse gases. term drought withered parts of the In the words of the G8 leaders, we United States, Western Europe and must move towards a “low-carbon” East Africa. All of these extreme economy, and both governments and events represent a trend of increasing business have a central role to play. intensity that climate scientists have The long-term challenge is to meet the goal of the United Nations Framework Convention on Climate Change (UNFCCC), that is, stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous human-caused interference with the climate system, and in a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner. 8 Carbon Finance Annual Report 2005


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    Carbon Finance for Sustainable Development 9


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    The Global Context International Agreements to Tackle Climate Change Reducing greenhouse gas emissions carbon emission reductions became caused by our oil- and coal-driven international commitments by most economies is critical to tackling industrialized countries. Signatories to climate change. With both the the Protocol are obligated to reduce European Union Emissions Trading their greenhouse gas emissions by Scheme which began on January 1, an average of 5.2 percent compared 2005 and the Kyoto Protocol which with 1990 emissions during the came into force on February 16, period 2008 to 2012. May 1992 Adoption of the United Nations Framework Convention on Climate Change (UNFCCC) The ultimate objective of the Convention is stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous human-caused interference with the climate system March 1994 Entry into force of the UNFCCC International negotiations for setting quantified emission reduction targets of Annex I Parties for post-2000 have started December 1997 Adoption of the Kyoto Protocol at the Third Conference of the Parties (COP3) International negotiations for establishing operational rules for the Protocol, including the Kyoto Mechanisms have started July 2001 Political agreement on outline rules of the Protocol (Bonn Agreement) at COP6 The United States administration announced its withdrawal from the Protocol in March 2001 November 2001 Adoption of legal documents of operational rules of the Protocol (Marrakesh Accords) at COP7 First meeting of the CDM Executive Board December 2003 Adoption of operational rules for the Land Use and Forestry CDM at COP9 February 2005 Entry into force of the Kyoto Protocol 10 Carbon Finance Annual Report 2005


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    Flexible Mechanisms Through the first two mechanisms, for Emission Reductions the Kyoto Protocol enables countries Under the Kyoto Protocol, Annex I and companies in countries that (industrialized) countries may achieve have committed to reductions to these reductions either domestically supplement their domestic efforts to or through three international market- reduce emissions by purchasing based mechanisms: greenhouse gas emission reductions generated by projects in developing • Joint Implementation (JI), or pur- countries and countries with chasing greenhouse gas emission economies in transition. These are reductions from projects in other countries where emissions can be Annex I countries (generally, coun- reduced at lower cost, while con- ties with economies in transition); tributing to sustainable development. • Clean Development Mechanism The emerging global carbon market (CDM), or purchasing emission is predicated on the fact that green- reductions from projects in house gases mix uniformly in the developing countries; and atmosphere, which makes it possible • Emissions trading among Annex I to reduce carbon emissions at any countries. point on the planet and have the same effect. All those things have given impetus to the growing carbon market for emission reductions. State of the Carbon Market 2005 The fifth annual World Bank carbon market intelligence study, co-sponsored by the International Emissions Trading Association, IETA, released in May 2005, showed that the carbon finance market is expanding steadily—107 million tons of carbon dioxide equivalent were exchanged through projects in 2004, a 38 percent increase compared with 2003 (78 million). The report estimated that the volume exchanged halfway through 2005 was 43 million tCO2e. According to the report, volumes exchanged on the allowance markets, such as the European Union Emissions Trading Scheme, have increased dramati- cally compared to the previous year, and are now comparable to the volumes exchanged through project-based transactions. The total amount exchanged on all the allowance markets from January 2004 to March 2005 was about 56 million tCO2e. This is mostly driven by the entry into force of the EU ETS in January 2005. The report says that private and public entities in Europe now represent 60 percent of the volume of emission reductions purchased through project-based transactions. (Jan. 2004 to April 2005). Carbon Finance for Sustainable Development 11


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    Carbon Finance at the World Bank Why the World Bank Cares about Climate Change In the past decade, 2.5 billion people At the G8 summit in Gleneagles base. Through the carbon funds it in developing countries have been Scotland in June 2005, the World manages the World Bank sees its affected by climate disasters. The Bank was asked to create a new role as ensuring that the benefits of human and the economic costs are framework for mobilizing investment carbon finance are spread wide and staggering. In the aftermath of in clean energy and development. deep, that the carbon market Hurricane Katrina alone, estimates are Carbon finance is one instrument in becomes an instrument to help that damage to buildings, businesses, that framework. achieve sustainable development in and infrastructure could be as much its client countries and that the least as 100 billion dollars, with billions Carbon Finance for developed reap the benefits of the more in private insurance claims. Sustainable Development emerging market. Imagine the aftermath in countries Sustainable development is the key with less capacity to cope, with fragile reason for Bank engagement in car- Pioneers in Every institutions, with rudimentary emer- bon finance operations. The carbon Sense of the Word gency systems. According to World market is emerging as a new form of In the last six years the World Bank Bank research, about $4 billion a year international trade—that is trade in a involvement in carbon finance has of World Bank investments are new product that can also deliver grown from the initial conception and exposed to climate-related risks and benefits to developing countries, that development of the pioneering $180 $500 million a year is spent on man- could use carbon finance to improve million Prototype Carbon Fund to aging or recovering from climate- energy efficiency, improve landfill eight carbon funds and facilities related disasters. It is the impact that operations, improve forest cover and today that represent almost a billion climate change could have on the biodiversity. If given the opportunity dollars, with more than 42 private Bank’s developing country partners developing countries could partici- sector companies and 15 govern- that has the World Bank concerned. pate in the carbon market, either ments as participants. through their manufacturing or rural Carbon Finance at the World Bank: From Vision to Reality In 1996, Ken Newcombe introduced the concept of the first carbon fund at the World Bank, the Prototype Carbon Fund. Although it was only a dream then, today Ken can look around and see the growth, not only of the carbon funds managed by the Bank, but of a carbon market that has the potential to bring more than $25 billion in new financing for sustainable development to the developing world and the poorest countries. Ken is now applying the same passion and tenacity that he brought to carbon finance operations to his role in helping to shape the Bank’s work on climate change. At the request of the Gleneagles Summit, the Bank is facilitating a broader dialogue on climate change and is working with partners to develop an investment frame- work for clean energy and sustainable development. 12 Carbon Finance Annual Report 2005


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    Challenging Times gets. That means there is less than There are challenges but there is for Reducing Emissions two years to have projects up and good news too. In October 2005, the These are challenging times for the running in parts of the world where CDCF’s La Esperanza Hydroelectric business of carbon finance. There is project development can be cumber- Project in Honduras became the first the uncertainty of the post-Kyoto some at the best of times. project under the CDM to be issued period—what kind of emission reduc- certified emission reductions (CERs). tions regime will be put in place after The World Bank’s main challenge (For more information on La 2012 and how quickly will it happen? now with carbon finance lies in deliv- Esperanza and other carbon fund There is the challenge of spreading ering the emission reductions. There projects please go to page 81.) the benefits of carbon finance to are strong partners to help make that Africa. The State of the Carbon happen. China, India and other rapid- Market 2005 reported just one large ly developing countries for example carbon finance transaction in Africa, are intensifying their efforts to tackle “The issuance of the first although as you will read in this annu- climate change. They are showing certified emission reduc- al report, the numbers are going the foresight needed to deal with the tions is another vital step up—encouraging, but still not fast looming reality of global warming. In in the implementation of enough for Africa’s needs. There is a particular, China’s plans for a Clean the Kyoto Protocol. These major challenge to deliver CDM Development Fund to utilize some of first CERs issued further assets to the market. The window of the resources that will come from its opportunity is small—CDM projects carbon emission reductions projects demonstrate the concrete have to begin delivering emission is an example that other developing way in which CDM proj- reductions by 2008 to make them countries could follow. ects can contribute to worthwhile to help fulfill Kyoto tar- both [cost effective] miti- gation of climate change and to the sustainable development of the CDM project countries. La Esperanza says clearly to small communities all over the developing world that they have a very real opportunity to participate in the carbon market. The World Bank is proud to have played a role in help- ing to make this happen through the CDCF.” Warren Evans Director of Environment The World Bank Carbon Finance for Sustainable Development 13


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    From the Senior Manager of Carbon Finance With the Kyoto Protocol coming into force, the market for emission reductions has expanded rapidly with the sale of emission reductions from developing countries reaching over $400 million annually.1 Despite considerable contribution by the World Bank Carbon Finance Unit and significant progress with the carbon market, it is still very much an emerg- ing market with the institutional structure underlying it still weak and only a few, though increasing, number of countries benefiting from the growing flow of carbon finance. Despite the slow start and the institutional weaknesses in the international regulatory regime, the promise of carbon trading remains substantial. While many developing countries have become actively engaged in carbon finance, others have barely recognized the opportunity to earn carbon emission reduction credits and exploit them as export “commodities.” Furthermore, sectors with considerable potential for carbon finance such as coal thermal power plant re-powering, rehabilitation and modernization have not been touched by the carbon market. The potential of carbon finance to support investments in efficient energy production and end-use efficiency, urban waste management, forestry and agriculture is huge and still largely unexploited. The Bank and other international lending institutions have the opportunity to use carbon finance to increase investment in efficient fossil fuel plants, support renewable energy, deal with poorly managed landfills and other waste streams that pose serious public health risks to large populations, build sustainable forest management, improve land use practices in agriculture, and increase efficiency in transportation—all while setting up a cost-effective mechanism to deal with climate change. In the last year significant progress has been made both at the international level and in many of our client countries. But much still needs to be done and time is of the essence. In the coming year, institutional structures must be strengthened. Delivery of CDM and JI projects needs to be substantially increased. For our part, the World Bank must continue to deliver on our commitments, to our host countries and to our fund participants. Recognizing the opportunities created by carbon finance, the Bank has proposed to further strengthen its role, based on three inter-related objectives: (i) To ensure that carbon finance contributes substantially to sustainable development, beyond its contribution to global environmental efforts; (ii) To assist in building, sustaining and expanding the international market for carbon emission reductions and its institutional and administrative structure; and (iii) To further strengthen the capacity of developing countries to benefit from the emerging market for emission reduction credits. In coming years we look forward to working together with all those who have committed themselves to sustainable development and a sound global environment. Odin Knudsen Senior Manager, Carbon Finance Unit The World Bank 1 State and Trends of the Carbon Market, 2005; World Bank and International Emissions Trading Association, Washington D.C. 14 Carbon Finance Annual Report 2005


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    Carbon Finance Highlights 2005 The Prototype Carbon Fund is expected to have signed emission reductions purchase agreements for most of its projects by December 31, 2005. Tranche One of the BioCarbon Fund closed on August 31, 2005 with a total of $53.8 million in contributions, which is higher than expected. One-third of the Tranche One portfolio may consist of projects in Africa. At the end of two years, the capitalization of the Community Development Carbon Fund stands at $128.6 million. The CDCF now has four emission reductions purchase agreements signed and has the first ever certified emission reductions issued by the CDM Executive Board. The Danish Carbon Fund was established in January 2005. As of August 31, 2005 the fund had two public sector participants (the Danish Ministry of Foreign Affairs and the Danish Ministry of Environment) and five private sector participants. As of August 31, 2005 commitments to the Italian Carbon Fund had risen from $15 million to $45 million. The fund is currently being opened to private sector investors. Commitments are expected in late 2005, and the fund is expected to be closed in spring 2006 with over $100 million capitalization. As of fall 2005, the Netherlands CDM Facility had a diversified portfolio consisting of signed emission reductions purchase agreements for a total volume of 2.9 million tons of carbon dioxide equivalent, and approved carbon finance documents with a total potential volume of 31 million tons of carbon dioxide equivalent emission reductions. The NCDMF had the first project ever registered under the CDM. Three projects were approved for the World Bank project portfolio of the Netherlands European Carbon Facility which focuses on the joint implementation countries and is administered in coopera- tion with the International Finance Corporation. Two projects in the facility entered the validation and emission reductions purchase negotiation stage. The Spanish Carbon Fund has approved carbon finance documents for a number of projects totaling over $68 million. The fund will purchase about 11.5 million tons of carbon dioxide equivalent from these projects. Carbon Finance for Sustainable Development 15


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    Report on Carbon Finance Operations Carbon Finance Unit Figure 1A. Status of Project Development in the Carbon Finance Unit Portfolio Development Approximately 800 project proposals Stage of Development Number of Projects/Value of Projects in US$ Millions have been reviewed by the Carbon Total Emission Finance Unit as of August 31, 2005 Emission Reductions Purchase Million Tons Of Carbon Reductions Agreements Signed and Active 28 $139 Dioxide Equivalent (Figure 1A). Of these, 128 have 33.5 MtCO2e as of August 31, 2005 proceeded to the carbon finance Carbon Finance Documents document (CFD) stage and been Taken Forward/ Emission 88 $629 125.7 MtCO2e Reductions Purchase approved for further development. Agreements Under Negotiation Of these 128 projects, 88 remain Carbon Finance 128 $854 179.6 MtCO2e active and have progressed to the Documents Approved emission reductions purchase agreement (ERPA) negotiation phase. Project Idea Notes Submitted 800 Twenty-eight projects have active 0 100 200 300 400 500 600 700 800 900 signed emission reductions purchase Indicative ERPA agreements totaling $139 million2, of Number of Projects value in US$ millions which 13 were signed in fiscal year 2005 with a total value of $62.6 million. Note: The above figures exclude options purchases. Peru: CDCF’s Santa Rosa Hydro Registered Under the CDM The CDCF’s four megawatt Santa Rosa Hydroelectric Project has been officially recognized as a CDM activity—it was registered by the Executive Board of the Clean Development Mechanism in October 2005. The project is a mile- stone for Peru as the first small-scale CDM project to be developed in the country. Registration is the final step in the Kyoto Protocol’s CDM process that recognizes the project as a CDM activity. The proposed project is a bun- dle of three run-of-river hydropower hydropower are limited because most period. Community benefits from this plants located in the Santa Rosa irriga- of the best locations for hydroelectric project include electricity to a local tion area of Sayán District. The project plants have already been granted to orphanage, a new community center, will assist the national grid to reduce private firms, and the barriers and risks increased economic activity, road and use of thermal plants, thereby displac- in investing in hydro are high. irrigation canal maintenance and about ing expensive heavy fuel—diesel, coal- The Community Development 125 new jobs in concrete work and and gas-fired generation, and reducing Carbon Fund intends to purchase emis- equipment installation. carbon dioxide emissions to the atmos- sion reductions of 88,300 tons of car- phere. In Peru the options for bon dioxide equivalent over a ten-year 2 The World Bank’s carbon funds have signed 30 emission reductions purchase agreements. One ERPA has been terminated. Two ERPAs are part of an umbrella project and are counted here as one project. 16 Carbon Finance Annual Report 2005


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    Geographic diversity is presented in Figure 1B. The geographic distribution across the funds has seen a continued shift towards East Asia, particularly China, over the past year. The East Asia and Pacific region accounts for a total value of $329.4 million. The Latin Figure 1B. Geographic Distribution of Carbon Finance Unit Portfolio America and Caribbean region, while (Total $629 million) maintaining the lead in number of Latin America projects with 35 active CDM projects, Middle East & Caribbean: 19% & North Africa: 3% accounts for less than half as much in Europe & South Asia: 10% expected contract value with $120.8 Central Asia: 9% million. The Middle East and North Africa: 7% Africa region has seen its first projects enter the portfolio in fiscal year 2005 and Africa, a priority for the East Asia & Pacific: 52% Community Development Carbon Fund, has seen an increase in project submissions, although this is not reflected in the distributional break- down due to East Asia’s increased presence. The Europe and Central Asia region continues not to generate JI projects at the level anticipated. The entry into the carbon market of Russia and Ukraine in particular is expected to increase the flow of JI projects in coming years. Technological diversity is a prefer- ence of several of the funds of the Figure 1C. Technological Distribution of Carbon Finance Unit Portfolio Carbon Finance Unit and is exhibited (Total $629 million) in Figure 1C. In fiscal year 2005, Bagasse: <1% HFC-23 destruction captured a large Geothermal: 1% Renewable share (32 percent) of the portfolio Biogas: 1% Energy: 21% Biomass: 2% Wind: 3% pipeline. Waste management and renewable energy continue to be HFC-23 Destruction: 32% Hydro: 14% well-represented, accounting for 18 percent and 21 percent of the portfolio Transportation: <1% Nitrous Oxide Removal: 2% respectively. Energy efficiency projects, including cement and other construc- Coal Mine Methane: 10% tion material efficiency improvements, district heating, steel waste gas Waste Management: 18% Land Use, Land-Use recovery and others, represent a Change and Forestry: 7% Energy Efficiency: 10% further 10 percent of the portfolio. Forestry projects, mainly through the BioCarbon Fund, account for seven percent of the portfolio. Carbon Finance for Sustainable Development 17


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    Creating the Carbon Asset Carbon Finance Unit methodologies represent some 30 percent of all approved methodologies The Carbon Finance Unit (CFU) at Contributing to New Methodologies progress for some sectors. The CFU the World Bank, is heavily involved in In the past year, several CFU has shifted attention to energy efficien- the creation of the carbon asset. methodologies were approved by cy (district heating), fugitive methane The term carbon asset refers to the the Executive Board. As of September capture (coal bed methane) and greenhouse gas emission reductions 2005, CFU methodologies represent nitrous oxide (N2O) projects. The unit that a project generates when com- some 30 percent of all approved also promotes methodologies for fuel paring its emissions to emissions methodologies and 17 percent of switching in cement production, bio- that would occur in a baseline sce- all submitted new methodologies. mass use in heat generation (residen- nario, which would prevail without The first ever registered project, the tial and industrial) and low emission the project. The Kyoto Protocol has Nova Gerar landfill in Brazil (see charcoal production. The CFU has established an Executive Board to page 63), was prepared with the proposed a methodology to calculate oversee the CDM, to approve base- assistance of the Carbon Finance methane emissions from hydropower line and monitoring methodologies, Unit. An increasing number of CFU reservoirs and is preparing methodolo- and to register CDM projects. For projects are now in the process of gies for waste composting, methane Joint Implementation projects, a sim- being validated and registered. capture from gas pipelines and lower ilar institution will be set up by the emissions in the transport sector. first Meeting of the Parties (MOP) to Despite the approval of methodologies A CFU methodology is likely to be the Kyoto Protocol. for several important project types, the among the first to be approved for approval process has made insufficient forest projects. Indonesia: Indocement Sustainable Cement Production The PCF’s Indocement Sustainable Cement Production Project focuses on two activities to reduce carbon dioxide emissions: production of cement with reduced amount of clinker (blended cement) and increased use of alternative fuels (biomass fuels). As a pioneer within the cement industry in taking advantage of the Clean Development Mechanism of the Kyoto Protocol, Indocement with the PCF had to develop two new methodologies, one for each project component. These methodologies were forwarded to the CDM Executive Board in January 2004. The alternative fuels methodology was approved by the Executive Board in July 2005 and the blended cement method- ology was approved in September 2005. 18 Carbon Finance Annual Report 2005


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    In the past year, the CFU contributed some projects failing to register Although progress has been made several notes and policy papers on before the registration deadline for by the CDM regulatory body, much methodologies and promoted discus- early projects, which the Parties had needs to be done. In addition, sion of methodological approaches set for the end of 2005. If this hap- regulatory challenges are shifting in with inter alia project sponsors and pens, some projects may lose the unforeseen ways. developers, designated operational credits for emission reductions they entities, fund participants, the had already generated. With the The CFU team is spending consider- Executive Board and UNFCCC Parties. recent steep increase in CDM activity, able resources and time addressing The CFU proposed several small-scale the capacity of the CDM Executive the challenges coming from this shifting methodologies, reiterating the impor- Board to guide project participants and uncertain regulatory environment. tance of flexible bundling rules for small and of the UNFCCC Secretariat to projects and developed case examples process the increasing workload is The CFU team has significantly of programmatic small-scale CDM being tested. expanded its capacity. While greater projects (Nepal Biogas and India FaL-G methodological certainty should lead Brick Units). A study on program- The CFU will continue to disseminate to cost reductions, there is still a con- based CDM activities, which would experience to the Executive Board siderable need for clarifying regulatory employ incentive schemes to mitigate and other market participants. In the uncertainties and achieving greater emissions, is under way. past year, the CFU reported on the standardization. status of the emerging regulatory Concerns over the CDM Process system for the CDM. By now, it has There are some concerns over the become quite clear that the chal- decision-making process for CDM lenges surrounding the creation of projects. Some methodologies are the carbon asset remain formidable. taking longer than anticipated for approval. This could contribute to India: FaL-G Brick Units The FaL-G project aims to replace environmentally damaging burnt clay building bricks in India’s construction sector, with fly ash brick which is manufactured in an environmentally sound way. The objective of the proposed project is to catalyze the proliferation of the fly ash brick market by leveraging the FaL-G technology’s car- bon credits earning potential. The project would facilitate setting up about 300 micro industrial plants in different parts of the country by micro enterprises to manufacture fly ash bricks using the FaL-G technology. The volume of emission reductions generated by an individual plant is clearly not sufficient to treat individ- ual plants as separate small-scale CDM projects—the transaction costs largely outweigh the expected CDM benefits. Only by bundling a large number of these tiny plants will it be possible to enable poor entrepreneurs in India to benefit from carbon finance. The project has been significantly affected by the present bundling rules of the CDM Executive Board. In order to meet the requirements of the Executive Board, the project is now required to be processed as several small-scale bundling projects—increasing the number of project design documents—which leads to increased transaction costs and reduced benefits for the small and tiny enterprises engaged in FaL-G activities. Carbon Finance for Sustainable Development 19


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    Transaction Structuring and Risk Management The Carbon Finance Unit’s finance team remains at the cutting edge of innovation in carbon transaction structuring and risk management Structuring innovative deals. The purchase agreement terms is key to CFU continued to deliver innovation this ability to accommodate project in carbon finance transactions, devel- sponsors’ needs and to facilitate oping tailored structures that enable financing for the underlying project. project sponsors to borrow against carbon cash flows while maintaining Streamlining transaction develop- acceptable terms and appropriate ment. The CFU upgraded and risk allocation. Innovative financial streamlined project financial screen- structuring of the emission reductions ing and transaction processing, purchase agreement for the Abanico resulting in lower preparation costs run-of-river hydropower project in and improved quality at entry. It Ecuador, for example, enabled the standardized the initial financial due project sponsor to use its emission diligence documentation, enabling reductions purchase agreement with the team to screen out projects that the Netherlands CDM Facility to are unlikely to secure financing and/or secure financing from the Inter- achieve sustainability. It developed, American Investment Corporation disseminated and provided training (IIC) for the country’s first privately on standard contractual terms, to financed hydroelectric power plant streamline project structuring and (see Box below). The CFU’s innovation negotiation. in structuring emission reductions Ecuador: Abanico Hydro Plant Abanico, a 30 megawatt run-of-river hydro plant in Ecuador, sought financing from the Inter-American Investment Corporation (IIC) in 2002. The project had strong fundamentals, but power purchase agreements fell short of IIC’s investment criteria, which required over 50 percent of sales to be under contract and assigned to the lender to secure the loan’s debt serv- ice. With the involvement of the World Bank’s Carbon Finance Unit in 2004, IIC agreed to consider the proceeds of Hidroabanico’s certified emission reductions sales in its investment analysis, allowing the borrower to comply with the IIC’s covenant. 20 Carbon Finance Annual Report 2005


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    “The IIC participation in the capital structure of Hidroabanico with a loan of $7 million is a recognition of the important contribution of the project to generate clean energy in Ecuador. The intervention of the World Bank as trustee of the NCDMF as purchaser of the emission rights of the project, and the corresponding revenue resulting from the emission reductions purchase agreement lowered the risk level of the project and had an impact on the financial costs of the project.” Jacques Rogozinski, General Manager Inter-American Investment Corporation, IIC Securing underlying financing. renewable energy and energy Innovation in portfolio risk Carbon finance has continued to pro- efficiency. The team worked with management. The team introduced vide measurable benefits to investors multi-lateral, bi-lateral and private innovations in risk management, and stakeholders in climate-friendly financial institutions to raise aware- articulated in strategies for PCF, projects. However, the true catalytic ness of the impact of carbon finance CDCF and the Danish Carbon Fund. effect has not fully materialized. As a on climate-friendly investment, and to These strategies provide the frame- result, the CFU’s finance team contin- encourage lending against carbon work for risk management in project ues to focus on how to use carbon revenue streams, by convening and/or selection and screening, transaction finance as a catalyst for securing participating in numerous conferences, structuring and pricing, portfolio underlying project finance. The CFU’s training and dissemination events such management and insurance. finance team has led efforts to pro- as the World Renewable Energy mote investment in climate-friendly Congress, United Nations Environment projects in developing and transition Program (UNEP) Sustainable Energy countries. These efforts, funded Finance, and Hydropower 2005. largely through trust funds such as These efforts are bearing fruit for the CF-Assist and the Public-Private CFU as additional financial institutions Infrastructure Advisory Facility, a are now more aware of the carbon multi-donor technical assistance finance risk profile and are actively facility managed by the World Bank, engaged in developing products to were leveraged by the World Bank lend against the cash flows generated Group’s broader efforts to combat by the CFU’s emission reductions climate change and promote purchase agreements. Carbon Finance for Sustainable Development 21


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    The Carbon Finance Unit of the World Bank experienced significant growth…effectively doubling the business from $415 million in funding to about $915 million. 22 Carbon Finance Annual Report 2005


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    Financial Performance Carbon Funds Financial Performance 915 In fiscal year 2005, the Carbon specific countries and regions to Finance Unit of the World Bank experi- optimize travel and leverage local enced significant growth. There were expertise, while preserving the three new carbon funds launched— financial integrity of each fund by the Netherlands European Carbon allocating individual project costs to Facility, the Danish Carbon Fund and the fund pipeline where the project the Spanish Carbon Fund. These belongs. This complexity is further three funds together added more than elevated by the use of staff from mul- $280 million in additional funding for tiple organizational units in the Bank. operations and purchases of green- In the past, with two or three funds house gas emission reductions. In this has not been a major challenge, 415 January 2005 the CDCF dramatically but with eight funds this leads to a increased its capitalization to $128.6 350 complex matrix of labor and funding million and by the end of August the that has to be maintained. 290 BioCF also expanded to $53.8 million. This expansion coupled with increased Two, the business operation had to funding of other existing funds such as be elevated from a model where indi- 145 145 the NCDMF and the Italian Carbon vidual attention to projects had been Fund effectively more than doubled possible and for reasons of learning the Carbon Finance Unit’s business quite welcome, to an environment from $415 million in funding to about where volumes of projects are high $915 million. and processes must carry projects ’00 ’01 ’02 ’03 ’04 ’05 forward with little ‘handholding’. This Funds under management This dramatic increase has been second challenge has been particu- (million $) welcomed by the community of larly difficult to tackle as the sponsors and client countries that increased work-program has led to a Although fragmented administrative have long been hoping for a broader large number of staff and units that budgets are not optimal for the unit’s carbon market and more demand for need to be informed of changing operation, the resources have been projects and emission reductions. processes. Additionally, challenges in adequate and the Bank has been At the same time the new funding the area of human resources such as able to adjust to the larger number of increased operational pressure on the the speed of hiring and management funds and manage costs within World Bank and the Carbon Finance transitions have put further strain on respective administrative budgets. Unit in particular to develop a broad the Carbon Finance Unit. Project resources fund the develop- project pipeline that would subse- ment of project pipeline and project quently deliver the contract volume In line with the growth in overall supervision. The funding for project required by participants. funding, administrative and project preparation mirrors the high demand preparation resources have expanded for project delivery. At this point the The operational challenge of dramatic correspondingly. Annual administra- World Bank is not constrained in business growth has been most pro- tive resources support management, delivery by limited project resources, nounced in two particular aspects. administrative, legal and financial but rather by developing market con- One is the enhancement of the matrix services for individual funds as well as ditions and by its ability to staff up to environment, where teams focus on allow interactions with participants. a higher operational level. Carbon Finance for Sustainable Development 23


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    Capacity Building CF-Assist continues to benefit from the knowledge gained from the Bank’s experience as a trustee of carbon funds As the carbon business grows inter- projects under the Clean Development tions, the premise of CF-Assist is that nationally, the World Bank continues Mechanism or Joint Implementation, the best way to build capacity is by to play a key role to enable the full or to access International Emissions completing projects in priority areas, engagement of developing countries Trading of the Kyoto Protocol. The building required government under- and economies in transition in the program incorporates lessons standing and approval capabilities, carbon market, and to contribute to learned from the National Strategies facilitating initial project identification comprehensive upstream assistance Studies Program, and places the and preparation activities, building to broaden the carbon market. other ‘Plus’ capacity building efforts local expertise and providing targeted of PCF, CDCF, and BioCF under a analysis to overcome market and A One-Window Approach common program framework. information barriers. The majority of the Bank’s carbon finance capacity building activities Learning by Doing Supporting Participating Countries have been consolidated within CF-Assist continues to benefit from Designed to be modular in its delivery CF-Assist, a one-window approach the knowledge gained from the approach and information content, to the capacity building and technical Bank’s experience as a trustee of CF-Assist typically takes a 3-Phase assistance program established by carbon funds, and through ongoing approach in countries, with measura- the World Bank in fiscal year 2004. dialogue with members of the Bank’s ble indicators to trigger progress to CF-Assist is aimed at assisting inter- Host Country Committee on carbon the subsequent phase. CF-Assist ested countries in the development of finance. Building on the Bank’s provides support to participating institutions and local expertise that ‘learning by doing’ approach it has countries by supporting upstream will lead to the implementation of taken with its carbon finance opera- policy and analytical activities that Carbon Expo 2005 The second Carbon Expo, a unique Germany, from May 11 to 13, 2005, in more than 150 journalists) from 87 business platform for bringing togeth- cooperation with IETA and Koelnmesse, countries (a 50 percent increase from er buyers and sellers in the emerging the local trade event host. The Expo the previous year). There were 134 carbon market, was held in Cologne, included 1,500 participants (including exhibitors (a 168 percent increase from the previous year) from 50 countries presenting their methods and technologies for reducing carbon emissions and promoting trading in emissions rights and certificates. At least 100 deals for the purchase of carbon emission reductions from developing countries and economies in transition were reached or advanced during the event. There was record par- ticipation from developing countries: 29 high-level representatives from developing countries participated in the carbon trade fair. 24 Carbon Finance Annual Report 2005


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    cannot be adequately addressed CF-Assist Financial Performance in 2004, and currently is supporting solely through project-based activity. As of September 2005, CF-Assist activities in seven countries: Brazil, CF-Assist also helps transition has $10.2 million under management, Bolivia, Gambia, Kenya, Senegal, economies by building institutional and contributions are expected to South Africa and Uganda. capacity for developing and imple- reach $15.5 million within the fiscal menting projects eligible under Joint year (ending on June 30, 2006). CF-Assist Progress as of Implementation and designing effec- September 2005 tive Green Investment Schemes— Direct Donor Contributions: • CF-Assist programs have been which would then use the proceeds • Danish Carbon Fund: $425,000 initiated in 16 countries, of which of the sale of assigned amount units • Government of Spain: €5 million nine are in Africa. Sub-Saharan and pursuant to International Emissions over five years Northern Africa are key targets for Trading in a transparent manner to • PCF plus: $300,000 per year CF-Assist to ensure that the conti- support climate-friendly activities that • CDCF plus/UNEP/UNF: $1 million nent is not overlooked by the car- result in measurable emission reduc- bon market and that sustainable tions. CF-Assist support includes Japan PHRD Grants Climate development benefits of the CDM grants for capacity building work, Change Window: are equitably distributed. analysis to establish sector baselines, • approximately $500,000 • A successful Carbon Expo was consultant services to identify and per country delivered in May 2005 in partner- advance projects, development of The Japan Policy and Human ship with IETA. generic project design documents, Resources Development Fund • Training workshops were held in building expertise of local intermedi- (PHRD) is operated in partnership Zambia and Cameroon (July 2005), aries and engaging the financial sec- between the World Bank and the and Georgia, Zambia and Mali tor to replicate project activity. Government of Japan. It opened a (September 2005). Climate Change Window for projects Learning the Carbon Language in Lusaka With the goal of assisting the Ndeson Nzowa opened the event, CDCF for spearheading the CF-SEA Government of Zambia and different announcing the Government of program, which “would contribute to private and civil society actors to build Zambia’s intention to ratify the Kyoto the achievement of sustainable devel- their capacity for implementing CDM Protocol “as soon as possible,” and opment and reduce poverty in Africa.” projects, the first of a series of training commending the World Bank and the workshops was held in Lusaka on September 22 and 23, 2005. Developers and local banks interested in learning how carbon finance could help realize projects in the areas of bagasse cogeneration, industrial ener- gy efficiency, biofuel production and off-grid hydroelectric power stations benefited from a two-day course under the “CF-SEA” partnership between the CDCF, UNEP, and UNEP-Risoe Centre. Deputy Minister for Tourism, Environment and Natural Resources Carbon Finance for Sustainable Development 25


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    26 Carbon Finance Annual Report 2005


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    Report on Business: The Work of the Carbon Funds 29 Prototype Carbon Fund 39 Community Development Carbon Fund 51 BioCarbon Fund 61 The Netherlands CDM and JI Facilities 67 Italian Carbon Fund 71 Danish Carbon Fund 75 Spanish Carbon Fund Carbon Finance for Sustainable Development 27


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    Hungary Pannongreen Project: coal-fired boilers to biomass 28 Carbon Finance Annual Report 2005


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    Prototype Carbon Fund Prototype Carbon Fund The mission of the Prototype Carbon Fund (PCF) is to pioneer the market for project-based greenhouse gas emission reductions within the framework of the Kyoto Protocol and to contribute to sustainable development. Carbon Finance for Sustainable Development 29


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    Letter from the Chair of the Prototype Carbon Fund PCF Participants’ Committee Undoubtedly, 2005 has been a brilliant year for climate change policies. It started with the nascent European Union Emissions Trading Scheme on the 1st of January, immediately followed by the entry into force of the Kyoto Protocol. It has seen the first-ever registered CDM projects, the first designated operational entities accredited, the first real tons of greenhouse gas emission reductions exchanged against real cash. The PCF has also recorded several breakthroughs in 2005, the most important being in my view the realization of projects in China. A lot of commitment has been devoted to a better understanding of the market and a deeper knowledge of the mutual interests at stake. It is especially rewarding to see results materializing after so much effort. Now we are at the eve of closing the PCF portfolio. We can look with satisfaction at the achievements we have accomplished since year 2000, but this does not distract us from looking at the progress that remains to be made. Quite frankly, the increase in interest from potential buyers has not been enough to significantly increase the project pipeline. This is certainly a tricky situation, because when higher prices cannot trigger higher production, no market is likely to function properly. Annex I governments, host countries, project sponsors, documentation developers, potential buyers, brokers and traders are well aware of the importance of this problem. But not much can be done in a situation that has such a complex set of rules and processes. The irony is that when facing this high level of uncertainty, project investors and sponsors have a natural tendency to compensate by reducing other risks, becoming increasingly more prudent where more boldness would be needed. If we want to move forward, a lot of pragmatism will be needed. Can we have the same (blind) courage as for the allowance market that was not designed to be perfectly ‘perfect’ from its conception? The success of this first Kyoto period in all its facets is a necessary condition to a serious commitment after 2012, which is itself a necessary condition to adequately respond to the climate change challenge in the longer term. 2005 also saw Ken Newcombe leaving as manager of the Bank’s carbon finance initiatives, to take on other challenges, and I can’t let him go without expressing the PCF participants’ gratitude and admiration for his vision and his quiet and stubborn persistence to make it happen—which made his success, and ours. Jean Claude Steffens Chair PCF Participants’ Committee 30 Carbon Finance Annual Report 2005


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    The Prototype Carbon Fund: A Global Pioneer Prototype Carbon Fund Operational since April 2000 as the Six governments and 17 companies, first carbon fund to be established all from industrialized countries, have globally, the Prototype Carbon Fund contributed $180 million in funds to is an innovative public/private the PCF, which currently has 28 partnership aimed at mitigating projects under preparation covering a climate change. The PCF has been variety of technologies including pioneering the development of proj- renewable energy, energy efficiency, ect-based mechanisms to generate solid waste management and indus- potential credits for reductions in trial gas emissions abatement. emissions of greenhouse gases. The PCF uses funds in projects The 26 megawatt Chile designed to produce high quality Chacabuquito run-of-river hydroelec- greenhouse gas emission reduc- tric project, commissioned on July 2, tions, which PCF participants may 2002, was the first PCF project to be able to use in compliance with generate emission reductions. The their expected greenhouse gas PCF is expected to have signed reduction obligations. emission reductions purchase agree- ments for most of its projects by December 31, 2005. About one-third of these will be submitted for registra- tion by the CDM Executive Board by that same date. China: Huitengxile Wind Farm The Huitengxile wind farm is located on the Huitengxile prairie near Wulanchabu city of the Inner Mongolia Autonomous Region of the People’s Republic of China. The area has rich wind resources with 1,000 megawatts of wind power potential for development. The project sponsor, Inner Mongolia North Long Yuan Wind Power Company, will undertake the design, procurement, construction and operation of a 100 megawatt wind farm. Selected under international competitive bidding, around 50 to 100 wind turbines of one to two megawatt capacity will be installed to provide 245 gigawatt hours of annual clean electricity to the North China Power Grid. Currently the North China Power Grid is dominated by fossil-fuel based power plants. The proposed wind farm will displace an equal amount of fossil-fuel based power and thus reduce over 220,000 tons of human caused greenhouse gas emissions every year. The PCF plans to purchase one million tons of emission reductions from the project. Carbon Finance for Sustainable Development 31


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    Who is the PCF? Prototype Carbon Fund conviction that rules and guidelines must reflect high standards of environmental GOVERNMENT OF CANADA GOVERNMENT OF THE NETHERLANDS integrity, as well as practical experience, is The Canadian International Development The Dutch government is very committed to also reflected in our participation in the PCF.* Agency and Canada’s Clean Development tackling the problem of global warming. The Mechanism and Joint Implementation Ministry of Economic Affairs, the representa- Office, housed within Foreign Affairs tive of the Dutch government in the PCF, Canada, have represented Canada in the finds it of utmost importance that carbon PCF since its inception in 2000. Canada dioxide emissions now have a price on the BP P.L.C. has been rewarded from participation in international market. It allows the market BP is one of the world’s largest energy the PCF with a wealth of information on mechanisms to tackle an environmental companies. BP aims to demonstrate envi- developing and implementing greenhouse problem in a cost-effective way. The entering ronmental leadership and work with others gas emission reduction projects.* into force of the Kyoto Protocol and the start to support and develop climate change of the European Union Emissions Trading policy, mitigating technologies and flexible Scheme from January 1, 2005 had a very mechanisms. The PCF has been outstand- positive effect to this end. The European ing in developing carbon markets, and Union’s linking directive will provide an communicating its market-leading knowl- GOVERNMENT OF FINLAND incentive to the development of CDM and JI.* edge. Participation has provided BP with The Finnish Government regards the Kyoto valuable experience which aligns with BP’s Protocol as a landmark agreement. JI and goals in this area.* CDM are essential parts in the implementa- tion of the Protocol. Finland has estab- lished a Pilot Programme to create the GOVERNMENT OF NORWAY capacity to utilize JI and CDM. The official In 1996, following the creation of the pilot role of the mechanisms will be defined in phase on Activities Implemented Jointly CHUBU ELECTRIC POWER CO., INC., Finland’s forthcoming energy and climate (AIJ) at the first Conference of the Parties to Chubu Electric Power Co. Inc. (Chubu change strategy. The PCF accounts for the UNFCCC, i.e. COP-1 in Berlin, Norway Electric) is sharing environmental con- almost half of the program’s €20 supported the creation of an AIJ program at sciousness and coordinating not only with million budget. The rest will be used for the World Bank. The program emphasized its partners in Japan but also with those bilateral activities and another carbon fund learning, client-country engagement, overseas—such as investing in a biomass investment. The PCF has played a major methodological development, private sector project in Thailand, and in the Japan role in developing the global carbon market participation and the identification and Greenhouse Gas Reduction Fund (JGRF), a and in capacity building.* selection of projects. These experiences fund to improve energy efficiency in Asian directly influenced the development of the countries, among other initiatives. Chubu carbon funds in the World Bank, and the Electric joined the PCF at its founding and participation of Norway in the PCF.* has committed $10 million—among the largest contributions from a private sector JAPAN BANK FOR participant.* INTERNATIONAL COOPERATION The Japan Bank for International Cooperation (JBIC) is a policy-based GOVERNMENT OF SWEDEN financing institution responsible for con- Sweden strives to be a forerunner in global ducting Japan’s external economic policy cooperation to curb climate change. THE CHUGOKU ELECTRIC POWER CO., INC. and economic cooperation. JBIC highly Sweden has made great efforts to ensure The Chugoku Electric Power Co., Inc. was commends the PCF for accumulating that the Kyoto Mechanisms evolve into effi- established in 1951 and supplies electricity know-how on CDM/JI project formulation cient, reliable and fair tools for international to the Chugoku region in western Japan. and intends to utilize such know-how to cooperation in the field of climate change To prevent global warming, the company is provide assistance to projects that con- mitigation. Sweden joined the PCF with a taking various measures including promo- tribute to sustainable development and view to influence the policy of the fund tion of nuclear power generation and climate change mitigation in developing towards high-quality projects, interesting expanding the use of renewable energy. countries.* methodological challenges, and a just Participation in the PCF is one of the com- geographical distribution of projects. Our pany’s measures to address the global 32 Carbon Finance Annual Report 2005


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    Prototype Carbon Fund warming issue and to contribute to sustainable development.* MITSUI & CO., LTD. GAZ DE FRANCE Mitsui is one of Japan’s leading general With 13 million customers and 7.3 billion trading companies. Mitsui is undertaking kilowatt hours of natural gas carried, Gaz such commerce-oriented approaches as DEUTSCHE BANK de France is one of the leading European compliance with international tradable Deutsche Bank, one the world’s largest gas groups and is active throughout the emissions programs, participation in bro- financial services groups, recognizes the world. Gaz de France is actively looking at kerage of carbon credits through invest- fundamental importance of the sustainabili- sustainable development issues related to ment in the broker CO2e.com, LLC, and ty oriented implications of climate change. energy and climate change. Started early promotion of emission reductions projects, The company strongly endorses the on, its many actions currently go from afforestation business and alternative ener- approach and methodology undertaken by major research programs to voluntary gy sources. Mitsui’s participation in the the PCF. Deutsche Bank’s ability to meet reduction of its own emissions. Participation PCF provides knowledge and experience to representatives of host governments, in the PCF is part of this effort.* promote the Kyoto Mechanisms, which industry and the finance sector has been contribute to fostering a global carbon particularly welcome in the framework of market, climate-change mitigation and sus- the ongoing process of implementing the tainable development.* concept of the Prototype Carbon Fund.* KYUSHU ELECTRIC POWER CO., INC. Kyushu Electric Power Company is one of the electric utility companies in Japan, and supplies electricity to the Kyushu region in NORSK HYDRO ELECTRABEL southwestern Japan. Kyushu Electric is Norsk Hydro manufactures aluminum and Electrabel is active in the generation, trad- endeavoring to utilize its accumulated petrochemicals and has activities in the oil, ing and supply of electricity in 10 countries know-how on the reduction of greenhouse gas and electricity sectors. The group has of the European Union. The company rec- gases in activities to prevent global warm- businesses in approximately 40 countries. ognized the importance of climate policy ing. As a part of such efforts, the company Norsk Hydro’s investment in the PCF has very early, and the investment in the participated in the PCF upon its establish- been an important element in the compa- Prototype Carbon Fund was considered a ment in 2000.* ny’s build-up of knowledge and position, unique opportunity to learn about carbon as it prepares for the emissions trading friendly projects. This knowledge has con- system within the European Union.* tributed to the development of several CDM projects by other branches of SUEZ, which Electrabel is part of.* MITSUBISHI CORPORATION Mitsubishi Corporation has been active, not only in the trading area, but also in devel- RABOBANK opment of commercial opportunities, from The Rabobank Group is the world’s leading product marketing to distribution, project bank in the food and agri-business sectors FORTUM coordination, sourcing of raw materials, with offices in 34 countries. Sustainable Fortum is a leading energy company in the capital investment and development of resource management and effective climate Nordic countries and the other parts of the sales channels. Mitsubishi Corporation’s change policies are key to the business of Baltic Rim. The company has systematical- participation in the PCF contributes to the Rabobank clients and hence to Rabobank’s ly developed its business towards low-car- establishment of risk mitigation systems long-term interest. Participation in the PCF bon production and better management of for those who are potentially liable for the was just a first step into the emerging car- greenhouse gases. Part of that, besides climate change problem.* bon market. Today, Rabobank offers a suite Fortum’s own investments, is the utilization of products and services to help its clients of the Kyoto Mechanisms. In this respect interact effectively with environmental the PCF has been Fortum’s flagship.* asset markets.* Carbon Finance for Sustainable Development 33


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    Who is the PCF? continued Prototype Carbon Fund RWE STATOIL ASA TOKYO ELECTRIC POWER COMPANY INC. RWE’s core business centers on the Statoil is an integrated oil and gas compa- Tokyo Electric Power Company Inc., generation and sale of energy and water ny, headquartered in Norway, with almost (TEPCO) supplies electricity to the Tokyo services. Its markets are Germany, the 24,000 employees and activities in 29 Metropolitan area and has been very active United Kingdom, Central and Eastern countries. The company is one of the in addressing climate change issues. Europe and the American water sector. world’s most environmentally-efficient pro- TEPCO makes every effort to meet its vol- RWE joined the PCF as part of its climate ducers and transporters of oil and gas. untary target of reducing carbon dioxide protection strategy and in order to gain Statoil participated in the PCF to help kick- emissions by enhancing the use of nuclear experience with project-based generation start the implementation of the Kyoto facilities and supporting high efficiency of carbon credits. Participating in the PCF Mechanisms and to enable Statoil to meet appliances. In addition to domestic meas- gave RWE the opportunity to better under- future obligations for greenhouse gas ures, with the experience gained through stand the emerging global carbon market.* emission limitations cost-effectively.* its PCF participation, TEPCO has been involved in CDM/JI activities, as supple- mental actions.* SHIKOKU ELECTRIC POWER CO., INC. TOHOKU ELECTRIC POWER COMPANY Shikoku Electric Power Co., Inc. (YON- INCORPORATED DEN), which is one of 10 electric utilities in Tohoku Electric Power Company now sup- Japan, provides high-quality, low cost, sta- plies electricity to about 7.7 million cus- * The information in the participants’ writeups in this ble electricity service for more than four tomers in its service areas of the north- annual report was provided by the participants of the million people of Shikoku region. As miti- eastern region of Japan’s main island. various carbon funds managed by the World Bank, and with the exception of minor editorial changes, is gating climate change is one of Yonden’s Involvement in the PCF gives the company reproduced in the same form in which it was provid- major corporate concerns, the company a great opportunity to acquire know-how in ed. The views and opinions expressed in the partici- pants’ writeups are those of the participants providing expects the PCF to economically create implementing the Kyoto Mechanisms, and the information, and do not represent the views and high-quality greenhouse gas emission also a chance to demonstrate its strong opinions of the World Bank or the Trustee. Neither the World Bank, nor the Trustee take any responsibility reduction credits while it contributes to capability to address climate change issues for the information contained, or the representations sustainable development in the future.* all over the world.* made in the participants’ writeups. Bulgaria: Svilosa Biomass The Bulgaria Svilosa Biomass project was commissioned in February 2004. Initial problems with the roof of the furnace of the 11 megawatt biomass-fired heat-only boiler house were fixed and the project started generating emission reductions in May 2004. The performance test conducted in February established a boiler efficiency of 77.7 percent. From May until December 2004 the project generated 18,935 tons of carbon dioxide equivalent (tCO2e) of emission reductions, an amount which was verified by the operational entity Japan Consulting Institute. The PCF made its first payment to Svilosa AD, the project entity, within 60 days of the report delivery. The project is now operating at full capacity. Because the stockpiles of wood waste burned down in the summer of 2003, the project will not be able to claim credits from most methane emission reductions, which will reduce the project to 500,000 tons of carbon dioxide equivalent of emission reductions by 2012. Nevertheless, even with the reduced emission reductions, this project is still a good example of energy cost savings, local pollution abate- ment and climate change mitigation. Biomass Boiler 34 Carbon Finance Annual Report 2005


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    PCF Portfolio Status Prototype Carbon Fund PCF Contract Total Project Country/Project Name Project Description ERs (tCO2e) ERs (tCO2e) Emission Reductions Purchase Agreements (ERPA’s) Signed Brazil: Plantar Sequestration and Charcoal produced from sustainably harvested plantation replacing coke for pig iron 1,514,286 10,251,564 Biomass Use manufacture Bulgaria: District Heating District heating system upgrades for the cities of Sofia and Pernik 1,241,000 1,539,715 Bulgaria: Svilosa Biomass 11 megawatt biomass-based boiler to utilize wood waste produced at the Svilosa 450,000 500,000 pulp and cellulose plant to replace coal Chile: Chacabuquito Hydro 26 megawatt run-of-river hydro to replace coal or gas in the grid 1,000,000 2,752,000 China: Jincheng Capture of coal mine methane (CMM) associated with coal mining operation and 4,500,000 15,735,530 Coal Mine Methane utilization of CMM for power generation by installing steam turbine-gas engine combined cycling power plant of 120 megawatts China: Xiaogushan Hydropower 98 megawatt peaking run-of-river hydroelectric plant located on the Heihe River in 3,000,000 6,540,000 the Sunan Yugur Colombia: Jepirachi Wind Farm 19.5 megawatt wind farm in the northern part of Colombia to displace a mix of 800,000 1,168,000 coal- and gas-based power generation Costa Rica: Cote Hydro 6.3 megawatt hydro to replace thermal power generation 172,110 215,138 Czech Republic: Energy efficiency measures and renewables through the Czech Energy Agency 500,000 500,000 Czech Energy Agency (CEA) Energy (CEA) Efficiency (Umbrella) Guatemala: 43 megawatt peaking run-of-river hydroelectric plant in the west coast of Guatemala 2,000,000 2,883,600 El Canada Hydro to displace thermal power plants Hungary: Pannongreen Pécs Fuel Conversion of Pécs Power plant’s existing coal-fired boilers to biomass 1,193,000 2,645,500 Conversion Project Indonesia: Indocement Energy efficiency measures in Indocement plants by reducing clinker contents in the * 11,313,017 Sustainable Cement Production produced cement, burning alternative fuels for clinker formation, utilizing heat power generation in three locations at Citeureup, Cirebon and Tarjun Latvia: Liepaja Solid Methane capture from waste management and carbon dioxide reduction from power 387,933 864,600 Waste Management generation Mexico: Umbrella Waste Seven bundled waste-to-energy projects with 21 megawatt capacity 2,000,000 3,513,000 Management Project Moldova: Soil Conservation Afforestation of 14,494 hectares of degraded and eroded state-owned and commu- 1,300,000 3,215,296 nal agricultural lands throughout Moldova Philippines: NorthWind Bangui 25 megawatt capacity wind farm on a strip of land on the foreshore of Bangui Bay 356,000 400,000 Bay Project—Phase I in Ilocos Norte Romania: Afforestation Afforestation of 6,033 hectares of degraded public land in seven counties 854,985 1,360,183 South Africa: 10 megawatt gas-fired generator to produce electricity from 3,800,000 8,780,034 Durban Municipal Solid Waste landfill-collected methane Uganda: West Nile 1.5 and 5.1 megawatt hydro to replace a number of diesel generator sets in West * 500,000 Electrification Project Nile region *Project sponsor does not wish to disclose project information. Carbon Finance for Sustainable Development 35


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    PCF Portfolio Status continued Prototype Carbon Fund PCF Contract Total Project Country/Project Name Project Description ERs (tCO2e) ERs (tCO2e) Projects Under Negotiation Brazil: Alta Mogiana Increase efficiency in manufacturing processes and install new facilities to gener- 110,000 130,000 Bagasse Cogeneration ate surplus electricity to be commercialized Brazil: Lages Cogen Facility Installed capacity of 28 megawatt electricity plus 25 tons per hour of steam, 750,000 2,415,000 fueled by wood waste from the sawmill industries of the region Chile: Sustainable Waste Build and operate a composting plant for biodegradable waste and sludge from 2,000,000 2,609,280 Management in Santiago water treatment plants China: HFC-23 Destruction Destruction of HFC-23 produced as a byproduct of 5,000,000 98,000,000 HCFC-22 production in China China: Huitengxile Wind Farm Construct and operate a 100 megawatt wind farm in Inner Mongolia in China. The 1,000,000 4,207,500 project will consist of around 50 to 100 wind turbines of one to two megawatt capacity with a net annual generation of 245 gigawatt hours per year India: Municipal Solid Wastes 5.6 megawatt electricity and 75 tons per day of organic waste from municipal 1,000,000 1,898,649 solid wastes (MSW) in Lucknow in Uttar Pradesh India: Nitrous Oxide Removal Removal of a minimum of 80 percent of the nitrous oxide produced as a side 3,000,000 6,000,000 reaction in the production of nitric acid in the facilities of Rashtriya Chemicals & Fertilizers Ltd. and National Fertilizers Limited Iran: Tehran Landfill Capture and flare landfill gas at the Kahrizak landfill outside of Tehran City; car- 4,000,000 5,023,767 Gas Capture bon finance will be used to carry out site remediation in an environmentally sound manner Poland: Stargard Geothermal District heating system to utilize geothermal energy to replace coal in the city of 240,000 300,000 Stargard PCF Portfolio Development At the end of its fifth year of opera- agreements (ERPAs) with 20 projects tion, the PCF has reviewed more than (one of them has subsequently been 490 project proposals (see Figure 2A). terminated) with a total value of Of these, 63 have been presented to $117.2 million ($114.3 million after the PCF Participants’ Committee and termination of the one ERPA) and is have received its approval. The now negotiating another nine projects process of identification of the proj- with a total value of $84.7 million. ects for the placement phase was The PCF is expected to have signed completed in June 2005. The final emission reductions purchase agree- portfolio of the PCF is expected to ments for most of its projects by include 28 projects. The PCF has December 31, 2005. signed emission reductions purchase 36 Carbon Finance Annual Report 2005


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    PCF Portfolio Development continued Prototype Carbon Fund Figure 2A. Status of Project Development in the PCF Stage of Development Number of Projects/Value of Projects in US$ Millions Total Emission Million Tons Of Carbon Reductions Emission Reductions Purchase Agreements Dioxide Equivalent 28.69 MtCO2e Signed and Active as of August 31, 2005 19 $114.3 Carbon Finance Documents Taken Forward/ Emission Reductions 28 $198.9 45.79 MtCO2e Purchase Agreements Under Negotiation Carbon Finance Documents Approved 63 $387.8 99.67 MtCO2e Project Idea Notes Submitted 495 0 100 200 300 400 500 Number of Projects Indicative ERPA value in US$ millions Note: The above figures exclude options purchases. Geographic diversity of the proj- Figure 2B. Geographic Distribution of PCF Portfolio ects of the final portfolio is presented (Total $198.9 Million) in Figure 2B. Consistent with the Middle East & North Africa: 10% evolution from previous years, the South Asia: 9% East Asia and Pacific pipeline has Latin America & Caribbean: 21% Africa: 8% become stronger. It will dominate the portfolio with the Latin America and Caribbean pipeline, while the distribu- tion of projects among the other Europe & Central Asia: 12% regions is more balanced. East Asia & Pacific: 40% Figure 2C. Technological Distribution of PCF Portfolio Technological diversity has again (Total $198.9 Million) been increased with the integration of Geothermal: <1% the India Nitrous Oxide Removal Hydro: 14% Nitrous Oxide Removal: 8% Project and the China HFC-23 Wind: 5% Destruction Project. These two Biomass: 7% Coal Mine Methane: 10% projects use new technologies to Bagasse: <1% reduce emissions during the industrial process. As intended, renewable Energy Efficiency: 9% energy and waste management tech- Waste Management: 28% nologies will still dominate the final HFC-23 Destruction: 15% portfolio pipeline by representing 54 Land Use, Land-Use Change percent of total emission reduction and Forestry: 4% purchases. Carbon Finance for Sustainable Development 37


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    PCF Financial Performance Prototype Carbon Fund In fiscal year 2005, the PCF closed The PCF continued its effort in fiscal In fiscal year 2005 the fund manage- its pipeline to new projects. The year 2005 to keep its operating cash ment unit operated above its placement phase will conclude upon flow needs at low levels. As a result the approved budget by $43,000 due signing of emission reductions pur- PCF drew funds from participants at a to higher than expected legal costs. chase agreements for the available lower rate than originally envisaged. The table below shows the summary balance of emission reductions pur- The original drawdown schedule out- of administrative resources over the chases. The PCF is expected to have lined in the information memorandum life of the fund. Investment income signed emission reductions purchase assumed that by fiscal year 2005 about earned by the fund in fiscal year 2005 agreements for most of its projects 63 percent of contributions would have represented $105,000. by December 31, 2005. The fund been drawn. The current level of funds management unit will now focus on drawn is at 16 percent of total contri- project implementation and portfolio butions. In fiscal year 2006 the annu- management. al drawdown will represent about seven percent and will bring the level of contribution to about 23 percent. Budget Actual Year (US$ in thousands) (US$ in thousands) FY00 350 286 FY01 1,728 1,291 FY02 1,692 1,661 FY03 1,904 1,467 FY04 1,804 1,820 FY05 1,461 1,504 Total use of administrative resources 8,939 8,029 Moldova: Soil Conservation The Moldova Soil Conservation Project photo, around an existing natural fragment in the background to the has now planted more than the 14,494 forest, all the way to another forest left of the photo. hectares planned under the emission reductions purchase agreement. The PCF made its first payment to Moldsilva in 2004. Moldsilva is Moldova’s national forest agency. The project also carries one of the very first baseline methodologies expected to be approved by the CDM Executive Board. Afforestation of degraded land can help connect forest fragments: a belt of 62 hectares of mixed plantations extends from the foreground of the 38 Carbon Finance Annual Report 2005


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    Community Development Carbon Fund Community Development Carbon Fund The Community Development Carbon Fund (CDCF) will purchases greenhouse gas emission reductions from projects that contribute to poverty reduction and help to improve the quality of life of local communities in the least developed countries as well as poor areas of developing countries. Carbon Finance for Sustainable Development 39


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    Letter from the Outgoing Chair of the CDCF Community Development Carbon Fund Participants’ Committee The Community Development Carbon Fund remains firm in its commitment to become a reference point in the global fight against climate change, particularly in the development and implementation of the flexible mechanisms of the Kyoto Protocol; in the achievement of sustainable development, especially in the most disadvantaged countries; and finally in the social and economic assistance and support to disadvantaged communities. Through the CDCF, governments and companies, together with the World Bank, are able to mobilize resources and direct their actions towards obtaining reductions in greenhouse gas emissions, which can be used by companies and administra- tions to fulfill their reduction commitments. On the other hand, these greenhouse gas reductions will help improve the living conditions of the people and communities who are going to coexist directly or indirectly with the project. The CDCF’s second year of progress and development has generated an important number of benefits. Firstly, it’s important to mention that membership in the CDCF has exceeded expectations with the fund reaching capitalization of $128.6 million, which has allowed the satisfactory closing of the first tranche. Secondly, we have witnessed the registration of several projects by the UNFCCC Executive Board, including the La Esperanza Hydroelectric Project, which was the first proj- ect to be issued certified emission reductions, and the Santa Rosa Hydroelectric Project in Peru. Other CDCF projects are very close to being registered, such as the landfill project in Olavarría, Argentina. These projects have significantly contributed to the process of clarification of the registration process, opening the path for a dialogue with the relevant United Nations institutions. Finally, the signing of a number of emission reductions purchase agreements is a strong indicator of the solid progress that is being made by the CDCF. We would like to highlight the work undertaken by the World Bank on the CDCF. Fund participants have witnessed first hand, in visits to various project sites, the commitment of the Bank’s carbon finance team to identify the best initiatives that can substantially and positively contribute to the improvement of the quality of life of the most disadvantaged communities. With the risk of not mentioning everybody, we have to say “à bientôt” to Bank carbon funds’ manager Ken Newcombe, whom we must thank for the passion, vision, enthusiasm and tenacity he has shown over the last several years. These impressive qualities have provided the impetus for the World Bank managed carbon funds, and particularly the CDCF, to be pioneers in this new carbon reduction economy. Moreover, we have welcomed with high expectations Odin Knudsen, the new senior manager of the carbon funds managed by the World Bank. We wish him the best in this new task and responsibility, and we are happy to cooperate with him in attaining the important objectives pursued by the CDCF. David Corregidor Sanz Outgoing Chair CDCF Participants’ Committee 40 Carbon Finance Annual Report 2005


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    The CDCF: Carbon with a Human Face Community Development Carbon Fund The CDCF, operational since July 2003, is a public/private fund initiated by the World Bank in collaboration with the International Emissions Trading Association (IETA) and the United Nations Climate Change Secretariat. The single feature that defines this fund and differentiates it from the other World Bank managed Making the Least and develop viable CDCF projects. carbon funds is the generation of Developed a Priority As a result, 13 of the 33 projects in community benefits by the projects Twenty-five percent of CDCF resources the CDCF pipeline as of September it finances. CDCF projects are an are intended to be invested in purchas- 2005 are located in Sub-Saharan opportunity for small communities in ing emission reductions generated African countries—Ethiopia, Nigeria, poorer countries to obtain benefits from projects located in priority coun- Rwanda, Tanzania, Uganda and such as clean water, improved health tries. These are defined as (i) World Zambia. conditions and jobs for women, as Bank’s International Development well as an investment in clean Association (IDA) list of countries; (ii) Delivering Community Benefits technologies that help reduce green- countries commonly referred to as The unique feature of all CDCF house gas emissions and mitigate “IDA blend” with a population of less projects is that they provide signifi- climate change. than 75 million; or (iii) countries desig- cant and measurable development nated as least developed countries by benefits to communities living in the Contributors to the CDCF support the United Nations. Presently, priority immediate project vicinity or with a projects that measurably benefit poor countries account for about 41 percent historical, cultural or economic affilia- communities and their local environ- of the portfolio in terms of carbon tion to the project. ment and will receive in return verified finance commitments, with projects emission reductions from these proj- located in Guyana, Honduras, Moldova Community benefits may arise from ects. Resources from donors are and Nepal. the project itself such as village or mobilized to support technical assis- neighborhood electrification, improved tance and CDCF project preparation. A Focus on Africa air quality or increased employment With a capitalization of $128.6 million, CDCF projects cover all the major and income, or they may be addition- the CDCF was closed to further sub- regions. However, a special effort on al to the project and include basic scription in January 2005. Africa is being made to rapidly identify social services such as schools or health centers, or basic infrastructure such as water, irrigation, local roads or markets. For all projects CDCF emphasizes community dialogue and consensus building, to ensure that individuals, community leaders, existing commu- nity organizations and local govern- ment officials agree on the benefits to be provided. Carbon Finance for Sustainable Development 41


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    Who is the CDCF? Community Development Carbon Fund GOVERNMENT OF AUSTRIA GOVERNMENT OF CANADA GOVERNMENT OF LUXEMBOURG JI and CDM projects play an important role Canada is represented in the CDCF by the Luxembourg’s commitment under the in fulfilling Austria’s Kyoto target. The Clean Development Mechanism and Joint Kyoto Protocol is to reduce greenhouse gas Austrian JI/CDM Programme, which is Implementation Office, Foreign Affairs emissions by 28 percent as compared to managed by Kommunalkredit Public Canada. The Office promotes the Kyoto 1990 levels. This is by far the most ambi- Consulting, enables the government to pur- flexible mechanisms by providing financial tious reduction target of a Member State of chase emission reductions from mitigation and technical assistance to Canadian com- the European Union. Therefore, additional projects and through investing in carbon panies and supporting capacity-building in to domestic actions, Luxembourg’s engage- funds. Austria joined the CDCF in 2003 host countries. Through the CDCF, Canada ment in the CDCF will help the country to with a view to purchase certified emission benefits from new market opportunities reach its reduction target. We consider the reductions from high-quality projects espe- and from project development experience CDCF as an opportunity for poorer develop- cially from least developed countries, in with strong community benefits, especially ing countries to participate in the CDM, and addition to the project portfolio within the in poorer regions.* for Luxembourg to receive cost-effective Austrian JI/CDM Programme.* and high quality emission reductions.* GOVERNMENT OF DENMARK REGIONAL GOVERNMENT The Danish Carbon Fund—comprised of GOVERNMENT OF THE NETHERLANDS OF BRUSSELS (BELGIUM) participants from industry and government The Netherlands is a small and densely The Brussels-Capital Region, with a wide in Denmark—is now a participant in the populated industrialized country with an range of competencies in the fields of Community Development Carbon Fund, and ambitious emission reduction target under environment and energy, has its own Kyoto looks forward to sharing in the experiences the Kyoto Protocol and has been construc- target. Its participation in the CDCF will help gained by the CDCF. The participants expect tively active in climate change negotiations the Region meet its targets through sustain- this fund to provide valuable assistance to for more than 20 years. The Dutch govern- able projects in poor developing countries.* the development and implementation of ment joined the CDCF because it felt that CDM projects in countries where small- small-scale projects and projects in least scale projects are of special importance. At developed countries deserve a much better the same time the CDCF is an important chance to benefit from the CDM, particular- element in developing the width and breadth ly because these projects are usually close- REGIONAL GOVERNMENT of the CDM, thus ensuring further develop- ly linked to the sustainable development of OF WALLOON (BELGIUM) ment of this important tool for the long-term the communities involved.* To reach the regional Kyoto target, the protection of the global environment.* Walloon Region of Belgium has decided to work with the World Bank. The Government believes that the CDCF is a good opportuni- ty to implement small-scale CDM projects GOVERNMENT OF SPAIN in developing countries including African GOVERNMENT OF ITALY The Government of Spain has adopted a countries. Additionally, it believes that the Italy has seized the opportunity to demon- broad strategy to facilitate the fulfillment of CDCF has a crucial role to play in proving strate its commitment to greenhouse gas its Kyoto Protocol commitments. The that small-scale projects have a place in the emission reductions, as well as to sustain- Ministry of Environment jointly with the international carbon market.* able development worldwide. Italy in fact Ministry of Economy and Finance are was a founding member of the CDCF, working together to take advantage of the which it sees as an efficient mechanism for Flexible Mechanisms, especially the CDM. extending the reach of carbon finance and In 2004, Spain became a participant in the the Clean Development Mechanism to CDCF, through which Spain expects to developing countries that would otherwise ensure that investments in CDM project be potentially excluded from their benefits.* activities reach the smallest and poorest communities in developing countries.* 42 Carbon Finance Annual Report 2005


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    Community Development Carbon Fund BASF ENDESA GÖTEBORG ENERGI AB BASF has implemented sustainable devel- As part of its Strategic Plan for the Göteborg Energi is western Sweden’s lead- opment through its strategy “BASF 2015.” Environment and Sustainable Development, ing energy company, with product areas The company sees this as a long-term Endesa participates in various types of ini- including district heating, ready heat, energy competitive advantage to achieving BASF’s tiatives and activities dealing with climate services, gas, cooling, data and telecommu- goal to remain the world’s leading chemical change. One of its most important is par- nications, electricity supply networks and company. Therefore, BASF specifically sup- ticipation in the Community Development electricity production. The company has ports the CDCF, since it is not only focus- Carbon Fund. On one hand, it helps in joined the CDCF to help comply with the 40 ing on greenhouse gas mitigation projects, achieving the company’s emission reduc- percent emission reduction target imposed but on projects that result in environmental tion commitments and on the other Endesa on the new combined heat and power (CHP) protection and development.* is happy to help foster an international plant. The CDCF enables Göteborg Energi to investment framework that promotes the meet obligations and at the same time make development of CDM projects contributing a worthwhile contribution to sustainable to the economic and social development of development in developing countries.* the least advantaged communities.* DAIWA SECURITIES SMBC PRINCIPAL INVESTMENTS CO., LTD. Daiwa Securities SMBC Principal Investments (DSMBCPI), a Japanese pri- HC ENERGIA vate equity firm, is aiming to explore busi- FUJI PHOTO FILM CO., LTD. HC Energia is a company whose main ness opportunities in carbon finance, by FUJIFILM aims to make innovative use of activity is to produce and distribute elec- utilizing know-how gained through the the most advanced technologies to create tricity and gaseous combustibles within the CDCF, and through its abundant experience beautiful images and wide-ranging informa- Spanish market, reaching one million cus- in wide-ranging financial technology. tion, and provide the imaging, information tomers. Since 2004, HC Energia is part of DSMBCPI is currently developing its activi- and document solutions that will best meet EDP Group, the largest electricity company ties in CDM/JI projects as well as providing the increasingly sophisticated needs of the in Portugal. Sustainability is a key policy in finance to businesses, which will fight world community. By being a participant in HC Energia which regards its participation against global warming and help imple- the CDCF, FUJIFILM would like to contribute in the CDCF as a unique opportunity to ment sustainable development.* to the social and environmental sustainabili- provide poor communities in developing ty of the world community as well.* countries with projects that enable them to grow in a sustainable manner by using renewable energy and clean technology.* ELECTRICIDADE DE PORTUGAL (EDP) For generations EDP has built a portfolio GAS NATURAL SDG, SA that upholds the value of environmental The Gas Natural Group is an energy services sustainability which is one of the pillars of multinational whose activities focus on the IDEMITSU KOSAN CO., LTD. its corporate strategy. EDP’s participation supply, distribution and commercialization Founded in 1911, Idemitsu Kosan is a in the CDCF is a unique opportunity for the of natural gas in Spain, Latin America and Japanese integrated energy company work- company to take part in an initiative that Italy, where it has almost 10 million cus- ing mainly in petroleum refining, chemicals supports sustainable development in areas tomers. The company’s participation in and plastics production and marketing. of the world that are most in need, and at the CDCF is motivated by its ecological Idemitsu has put into practice the concept the same time contributes to its compli- concerns and its commitment to sustain- of respect for human dignity in the conduct ance with the new European Union able development. The Gas Natural Group of business and has sought to be a compa- Emissions Trading Scheme.* conducts its business with a strategic ny that lives up to the high expectations and horizon that goes beyond any immediate trust of society. Participation in the CDCF economic interests, thus contributing to gives Idemitsu a great opportunity for gain- economic, environmental and social devel- ing knowledge and experience in the global opment, both in the short and long term.* carbon market, and also for contributing to sustainable development in the world.* Carbon Finance for Sustainable Development 43


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    Who is the CDCF? continued Community Development Carbon Fund KREDITANSTALT FÜR WIEDERAUFBAU (KfW) RAUTARUUKKI OYJ SWISS RE KfW Group ranks among the ten largest Rautaruukki Oyj (Ruukki) supplies metal Swiss Re is one of the world’s leading rein- banks in Germany. KfW Group is committed based components, systems and turnkey surers and the world’s largest life and to protect the environment and the climate deliveries to the construction and mechani- health reinsurer. Swiss Re offers a wide by offering a broad range of promotional cal engineering industries. The company variety of products to manage capital and programs. For this reason the KfW Carbon has a wide selection of metal products and risk. With its participation in the CDCF, Fund was created as a purchase program services. Ruukki has operations in 21 Swiss Re joins a committed group of gov- for cost-effective emission certificates to be countries and employs 11,000 people. ernments and companies who see a triple used by affected companies in the frame- Participation in the CDCF is part of win in the CDCF: greenhouse gas emission work of the European Union Emissions Ruukki’s carbon dioxide risk management reductions, poverty reduction and corpo- Trading Scheme. KfW’s participation in the activities. More information can be found rate social responsibility.* CDCF provides a unique opportunity to ben- at www.ruukki.com* efit from the vast experience and the lead- ing role the World Bank has acquired in this challenging new field of activities.* STATKRAFT CARBON INVEST AS The Statkraft Group is the third largest producer of electricity in the Nordic region, NIPPON OIL CORPORATION (NOC) and the second largest producer of elec- Nippon Oil Corporation is one of Japan’s tricity based on renewable energy sources leading oil companies as well as a compre- in Europe. The group engages in power hensive energy enterprise. NOC is promot- trading from offices in the Nordic region ing corporate social responsibility-oriented and on the Continent. The CDCF’s portfolio management based on its basic corporate combined with the experience that the social responsibility policy. NOC partici- World Bank has gained with CDM projects pates in the CDCF because the primary through the Prototype Carbon Fund made purpose of the CDCF is to achieve sustain- Statkraft Carbon confident that the CDCF able development, which concurs with was the best alternative available, accord- NOC’s goals.* ing to Statkraft’s CEO Bård Mikkelsen.* THE OKINAWA ELECTRIC STATOIL ASA POWER COMPANY, INC. Statoil is an integrated oil and gas company, One of Japan’s ten electric power utility headquartered in Norway, with almost companies, the Okinawa Electric Power 24,000 employees and activities in 29 Company, Inc. (OEPC), supplies power countries. It is one of the world’s most throughout Okinawa Prefecture, an island environmentally-efficient producers and chain located at the southernmost tip of transporters of oil and gas. Statoil sees its * The information in the participants’ writeups in this the Japanese archipelago with a population investment in the CDCF as an interesting annual report was provided by the participants of the various carbon funds managed by the World Bank, of approximately 1.3 million. Participation combination of social investment and with the exception of minor editorial changes, is in the CDCF, as well as the construction of engagement and achieving cost-effective reproduced in the same form in which it was provid- ed. The views and opinions expressed in the partici- the LNG-fueled Yoshinoura Thermal Power CDM credits.* pants’ writeups are those of the participants providing the information, and do not represent the views and Plant, as part of our initiative to reduce opinions of the World Bank or the Trustee. Neither the carbon dioxide emissions, is a counter- World Bank, nor the Trustee take any responsibility for the information contained, or the representations measure we can take proactively against made in the participants’ writeups. global warming.* 44 Carbon Finance Annual Report 2005


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    CDCF Advisory Group Annual Review Community Development Carbon Fund Report from the Chair The unexpectedly high capitalization of the CDCF—$128.6 million compared with $80 million budgeted—indicates the success of the fund concept. It gives rise to a correspondingly tougher delivery challenge before the end of 2012, when the Kyoto Protocol’s first commitment period closes. Data from the current portfolio and pipeline indicate that the distributional criteria, aiming to diversify the location of the fund’s projects, are likely to be met or surpassed. Evidence of the identification and delivery of community benefits to poorer communities has started to come in. Persistent efforts by the fund management and their host country counterparts will be needed to achieve this core objective at an affordable cost. The Advisory Group responded to requests from the CDCF Participants’ Committee for advice on the inclusion of sequestration projects in the CDCF and on criteria for hydro projects. Coordination with the CDCF Participants’ Committee has been improved in fiscal year 2005 through the institution of joint meetings of the two bodies, in order to share information and views. Each body, however, remains master of its own decisions and recommendations. The Advisory Group joins me in wishing well to Ken Newcombe and Asif Faiz in their important new functions within the World Bank. Without doubt, Ken’s commitment has been one of the main drivers of the CDCF’s initial impact. We look forward to working with the new management team in meeting the challenges facing the CDCF in the year ahead. Michael Zammit Cutajar Chair Advisory Group to the CDCF The CDCF Advisory Group The CDCF Advisory Group is composed of independent experts appointed in their personal capacity by the World Bank, as the fund’s trustee, plus a representative of the International Emissions Trading Association, one of the initiators of the CDCF. In the interest of coordination, the group also includes observers nominated by the participants in the fund and the Bank’s Host Country Committee, while its chairperson observes the work of the CDCF Participants’ Committee. Carbon Finance for Sustainable Development 45


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    CDCF Portfolio Status Community Development Carbon Fund CDCF Total Country/ Contract Project Project Name Project Description Community Benefits ERs tCO2e ERs tCO2e Emission Reductions Purchase Agreements (ERPAs) Signed Argentina: Capture methane and carbon A potable water distribution network and a pilot solar water heating sys- 131,000 206,559 Olavarría dioxide generated at Olavarría tem in Espigas, a rural community located 80 kilometers from Olavarría. Landfill Gas municipal landfill and use the The potable water network will connect more than 80 percent of the Recovery methane as a renewable source homes, the local schools, and the Espigas Municipal Hospital to a supply for supplying electricity to rural of clean water, helping to reduce gastrointestinal disease, a major prob- villages in the region lem in the community. The water solar heating system to be installed at the hospital will reduce the current high energy cost Colombia: Rio Collect methane and nitrous Reduction of local air pollution and offensive odors by improving biogas 250,000 534,670 Frio Waste oxide from waste water treat- capture and effluent treatment. Improvements in the quality of the receiving Water ment plant of Rio Frio waters (Rio Frio and Rio Oro Rivers) with positive impacts on the aquatic Treatment biota. A social program will address overall health conditions (including sexually transmitted diseases and HIV/AIDS), and employment among the poorest youth Honduras: La Install 12.7 megawatt run-of- Improved electricity service in the town of La Esperanza (about 10,000 310,000 441,491 Esperanza river hydropower plant inhabitants). As a result of the project, 60 households and 200 people Hydropower now have electricity. A $12,000 contribution was made to electrify San Fernando Community, a town of 450 people. Electrification of the com- munity of Santa Anita by the end of 2007. To date 148 people have been employed in the construction phase alone (the target was 70) and at least 20 more will be employed during the operational phase. Afforest and reforest land in the project area and in the water basin, planting at least 25,000 seedlings each year through 2012 Peru: Santa Three run-of-river hydro proj- A trash rack cleaner will be installed in the irrigation canal to help clean 88,300 328,900 Rosa Hydro ects in Lima, Peru in the Santa the water used for agriculture purposes. During construction 125 direct Rosa irrigation area (4.1 new jobs will be created. During operation 15 new jobs will be created. megawatts total) Other community benefits include, a new fence for the school, two new classrooms, a computer room (with 10 computers) and a community center for La Merced 46 Carbon Finance Annual Report 2005


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    Community Development Carbon Fund CDCF Total Country/ Contract Project Project Name Project Description Community Benefits ERs tCO2e ERs tCO2e Projects Under Negotiation China: Construct and operate three 20 percent of carbon revenue will be earmarked for a poverty alleviation 500,000 1,190,00 Guangrun hydropower plants with total fund to be used by the county government to reach its social develop- Hydropower capacity of 28 megawatts (10, ment objectives. Other benefits include increased water supply, upgraded Project 10, and eight megawatts) on the flood control and availability of water for 1,000 hectares of irrigated farm- Guangrun River land Guyana: Use bagasse as fuel to provide a Improved electrical service in the Berbice Region; at least 10 megawatts 500,000 674,875 Skeldon Sugar sugar factory with high thermal of electricity produced by the Guysuco provided to the national grid. Modernization efficiency and export excess Also, job creation and improved economic activity Project electricity to the national grid India: FaL-G 200 brick production units Personal accident insurance and health insurance to cover workers at 800,000 2,066,980 Brick Units in based on FaL-G technology to FaL-G sites backed by carbon revenue. Health risks will be mitigated by Micro Sector save energy and nitrous oxide the reduced air pollution compared with areas where traditional kilns are emissions used India: Reduce the energy required for Better management of water and energy resources by water utilities, 250,000 401,820 Karnataka water service delivery in six improved and expanded access to clean water, and more reliable services Water Pumping municipalities in the State of to consumers. Also, reduction in the time spent collecting water, a func- Karnataka in Southern India tion typically carried out by the women in a household India: VSBK Use energy efficient Vertical Joint bank account for women. Possible life and health insurance (against 340,000 393,340 Kiln Cluster Shaft Brick Kiln (VSBK) technol- work related injuries and hospitalization due to accidents or illness) with Project ogy for fired clay brick produc- the premiums (or part) being paid by the Fund under Group Insurance tion, saving 30 percent in coal schemes now available for the rural poor. It is predicted that approximately consumption 40 persons would be insured at each site. Hand pumps for clean drinking water, a day care for children below 5 years, and community stoves Moldova: Improve quality and efficiency in Improved heating service, increased number of days buildings are heated 375,000 985,158 Energy the supply and distribution of and a decrease in the per unit cost of heat production. Heating improve- Conservation heat in over 115 public buildings ments and energy efficiency increase will have a positive impact on in 12 municipalities Moldovan forests, which currently supply fuelwood Nepal: Biogas Commercial dissemination of Biogas for cooking and lighting. Significant reduction in kitchen smoke, 1,000,000 5,267,000 Program 200,000 additional household additional latrines attached to biogas plants; and reduced incidence of biogas plants using animal diseases such as eye infections, respiratory disease, cough, diarrhea, wastes in rural Nepal between dysentery, and parasites. Productivity improvement in crops; and saving 2004 and 2009 of $37 annually per household on fertilizer. Creation of approximately 12,000 skilled jobs in marketing, construction, manufacturing, mainte- nance and credit-lending. Reduced firewood consumption by about 50 percent after the biogas installation, saving 2,600 kilograms of firewood per household annually Philippines: Mitigate greenhouse gas emis- Reduced pollution in rivers and lakes from better wastewater and solid 344,000 476,890 Laguna De Bay sions through solid waste and waste management. There is currently no waste water treatment system, Watershed waste water management small- and limited treatment of pigfarm and industrial waste Project scale projects in Laguna de Bay watershed South Africa: Construct a total of four The project developer is preparing a community benefits plan for com- 200,000 347,449 Bethlehem megawatts of hydro capacity at munities in the immediate vicinity of the project. In addition, 40 skilled Hydroelectric two generation facilities in the jobs and between 100 to 160 unskilled job opportunities will be created Project Free State Province during the project construction phase. Semi-skilled staff will be recruited locally and preference will be given to previously disadvantaged groups and women Carbon Finance for Sustainable Development 47


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    CDCF Portfolio Development Community Development Carbon Fund As of the end of August 2005, the a carbon finance value of $25.1 Approximately one-fifth ($25.1 million) CDCF had 33 project idea notes million. Of these, four emission of the initial capitalization of the CDCF (PINs) in its pipeline. Of these, 13 reductions purchase agreements ($128.6 million) is in an advanced have an active carbon finance docu- have been signed for 779,300 tons stage of placement as of the end of ment representing in total 5.1 million of carbon dioxide equivalent with a August 2005. Over 75 percent of the tons of carbon dioxide equivalent and carbon finance value of $3.6 million. emission reductions from projects in the present portfolio are expected to be generated by 2012. Figure 3A. Status of Project Development in the CDCF Stage of Development Number of Projects/Value of Projects in US$ Millions Total Emission Million Tons Of Carbon Reductions Dioxide Equivalent Emission Reductions Purchase 4 $3.6 0.8 MtCO2e Agreements Signed and Active as of August 31, 2005 Carbon Finance Documents Taken Forward/ Emission Reductions Purchase Agreements 13 $25.1 5.1 MtCO2e Under Negotiation Project Idea Notes Active 33 $86.6 17.6 MtCO2e Project Idea Notes Submitted 120 0 20 40 60 80 100 120 Number of Projects Indicative contract value in US$ millions Note: The above figures exclude options purchases. South Africa: Bethlehem Hydroelectric The purpose of this project is to unskilled job opportunities in the the savings to the local authority generate hydroelectricity, which will be construction phase and technology would allow them to deliver other distributed to the South African grid transfer. It is expected that this project basic services to the community. that currently heavily relies on coal. will supply power at a lower price, and The project will support the develop- ment of renewable energy in the coun- try, and assist South Africa in meeting its renewable energy target of 10,000 gigawatt hours by 2013. The CDCF intends to purchase emission reduc- tions of 200,000 tons of carbon diox- ide equivalent over a ten-year period from this project. At a community level this project will provide several benefits such as local economic growth, the creation of 40 skilled and 100 to 160 48 Carbon Finance Annual Report 2005

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