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Stock-taking on GEF Engagement in Carbon Markets

UNDP MDG Carbon (Part I)

Marcel Alers, PTA, Climate Change Mitigation

GEF Case Studies / Removing Barriers (Part II)

John O’Brien, RTA, Climate Change Mitigation

Meeting on GEF-5 and Carbon Finance Washington DC,

15 November 2010

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UNDP and Climate Finance

MDG Carbon

Montreal Protocol Unit

GEF UnitClimate Change

UNREDD

Portfolio of climate change mitigation[and adaptation] projects

Capacity building, technical assistance and commercialization of carbon projects

Avoided deforestation pilotsand support to international dialogue

Combining and Sequencing Climate FinanceAdditional platforms include: Territorial Approach, Community Based Adaptation,

Green Commodities Facility, & others

Portfolio of ozone depleting substance projects with large climate benefits

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Today’s UNDP Team

Robert Kelly UNDP GEF, Arab States

John O’BrienUNDP GEF, Europe and CIS

Noel SorianoUNDP GEF, Asia Pacific

Oliver Waissbein MDG Carbon, Finance & Legal

MDG Carbon

GEF UnitClimate Change

Marcel Alers Principal Technical Advisor, Climate Change Mitigation

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MDG CarbonMission

Mission:

• Create market-enabled environments • Develop proof-of-concept, demonstration carbon finance

activities

3 core objectives:• Access. Expanding to under-represented developing countries• MDGs. Promoting sustainable development outcomes• Scale. Promoting replication and solutions at scale

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MDG Carbon Focus Areas and Activities

Activity Pillar I

Policy Dialogue

Activity Pillar II

Capacity Building

Activity Pillar III

NewMeths &

Instruments

Activity Pillar IV

Project Development

Activities

Market EnablingGrant Based Model

Project DevelopmentCost-Recovery Model

GEF-5Climate Change

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MDG Carbon: 3 Thematic Areas

• Discrete project activities• Addressing existing imbalances in CDM/JI• Well suited to LDCs• Opportunity to develop programmatic approaches

• Emerging modality for carbon finance at scale,addressing entire national sectors (cement, buildings)

• Forerunner to domestic market mechanisms• Well suited to MICs and EITs

• Sources and sinks of emissions currently not covered by international agreements

• Examples: ozone depleting substances, peatlands• Voluntary carbon markets as a stepping stone

Syn

ergi

es /

Link

ages

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Energy Efficient Market Transformation/

Early RetirementCurrent Funding Sources:

• GEF• MLF (pilots)• Innovative financing

mechanisms

Industrial Conversion/Manufacture of ODS-Free,

Low-GWP Appliances

Current Funding Sources:• MLF• CERs (HFC 134a)• VERs (HCFC 141b)

End of Life/ODS Destruction

Current Funding Sources: • VERs • MLF (pilots)• Innovative financing

mechanisms

ODS Life-Cycle

UsagePhase

Waste Management

Replacement of unit

Combining and Sequencing Climate Finance: Life Cycle Management of Refrigerators

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Removing Barriers to enable private sector carbon markets to work properly

John O’Brien

John O’Brien, Regional Technical AdvisorClimate Change Mitigation

John.obrien@undp.org

Washington D.C., November 15th 2010

Part II

Case Studies

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Carbon Market has grown and grown but has it been a success?

1. Why the private sector carbon market has not fully worked over the period 2003-2010

2. What are the barriers to a full functioning private sector carbon market

3. Case Studies – Kyrgyzstan Small Hydro & Other

4. Concluding Thoughts

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Only FOUR countries make up 70% of the private sector carbon market!

Location of CDM Projects • 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012

• 50% of all issued CERs are from 50 projects (over 2000 projects registered to date)

• Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to 2012

• Africa has largely been forgotten by the CDM

Ex: Geographical imbalance in the CDM

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The CDM was supposed to stimulate billions of dollars of investment in emission reduction projects – What happened in reality?

HFC23

SF6

N2O

CH4

HFC22 Production

Nitric & Adipic Acid Production

Landfills, Coal-mines, Gas Networks, Biogas

Magnesium Production

These CDM Projects havequick pay-back periods: Normally 3 years or less

Carbon pays for 50% to 100% of project cost!Typically high IRR

CO2 ForestryEnergy-efficiency

Typically longer payback periods:5 years and greater

Larger upfront capital requirements

GHG Project Sector

Renewable Energy

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Despite high potential carbon finance for EE has not taken off …

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Barrier Barrier Explained …

Awareness Barriers Lack of awareness of the benefits of carbon finance at local/sub-regional level. Not well understood. 2/3 of countries with less than 10 CDM projects.

Policy Barriers Lack of Government Policies to favor CDM or JI – or to attract investment in general. Policies need to create a favorable investment environment.

Regulatory Barriers Lack of Approval Mechanisms – DNA not always established or effective. Approvals take time. (Government approval and CDM EB approval)

Opportunity Cost Barriers Carbon Finance is only a small part of project revenues in most co2 reduction type projects.

Senior management needs to focus on other issues, not on generating CERs/ERUs.

A number of barriers have stopped carbon market from really flourishing …

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Barrier Barrier Explained …

Risk Guarantee Risk guarantee insurance is either very difficult or very expensive to obtain.

Transaction Cost Barriers Transaction costs in the carbon market are too high. It simply should not cost $150-200,000 usd plus to develop and register one single project.

Financial Barriers Carbon Market was lots of trading and little financing. With few exceptions, an ERPA does not provide sufficient collateral to obtain a bank guarantee - debt markets look for traditional guarantees. Equity wants a higher return to compensate for the higher level of risk.

Uncertainty Barriers Would you invest your money in a carbon finance project in 2010 when there is so much uncertainty surrounding the future of the carbon market post-2012.

A number of barriers have stopped carbon market from really flourishing … (Part 2)

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Market EnablingProject Development

UNDP Barrier Removal Activites to Overcome Carbon Market Barriers in Europe & CIS region incl. Central Asia fall into two categories …

Ukraine - Lugansk Landfill Gas – Methane Capture Project

Uzbekistan - Gas Recovery from Pipeline Projectwith UzTransGaz

Kyrgyzstan - Small Hydro Project(pending due to political reasons)

New CDM Project Ideas Programmatic CDM for Small Hydro in Georgia(GEF Renewable Energy project)

Programmatic JI : EE Lighting in the RussianFederation (3 x GEF EE Projects (new))

PoA EE Buildings (Uzbekistan & Kyrgzstan)

Kazakhstan – Roundtable on Kyoto & 1 dayTraining seminar to Kaztransgaz (GEF EE lightingand EE buildings project and wind project)

Kyrgystan – Discussions on carbon financeopportunities and elaboration of project ideas (GEFEE Buildings & Small Hydro)

Tajikstan – Roundtable on carbon financeopportunities and identification of possible projects(GEF Renewable Energy project)

Turkmenistan – Discussions on carbon financeopportunities and elaboration of project ideas (GEFEE Buildings)

Uzbekistan – Assistance with establishing the DNAand elaboration of project ideas (GEF EE Buildings) UNDP employed a Full-Time carbon

specialist for Central Asia for 2 years

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Lessons Learned by UNDP in developing Carbon Finance projects

Project Development (CDM, JI) moves much slower than you might expect as many projects face unexpected problems and delays;

The actual number of emission reductions achieved by projects can often by much less than originally estimated - strong due diligence is critical;

New types of staff with experience in carbon finance are required in UNDP (typical grant model that UNDP is used to does not apply to carbon finance – cost recovery model is more service oriented);

It is critical to select project partners very carefully (i.e – no large multi-national companies but also no ‘one man and a dog’ companies);

UNDP should work in countries where the private sector carbon market does not work and with project types that are not widely implemented in these countries;(i.e – no 51st landfill gas project in Brazil or 60th wind project in China)

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Where is the overlap?

Carbon Finance Market Enabling

GEFRemoving Barriers to Energy-Efficiency, Renewable Energy, Sustainable TransportLULUCF

Carbon Finance Project Development

Awareness

Policies

Regulations

Legislation

Opportunity Cost

Finance - Debt

Finance - Equity

Finance – Revolving Fund

Financing – ERPA prepayment

Financing – Risk Guarantee

Business Plans

Feasibility Studies

Studies & Reports on carbon finance

What goes here?

ProjectsCapacity Building

New Approaches- PoA- NAMAs- Sectoral Trading- REDD

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Conclusion : Now is an ideal time to get involved in the post-2012 carbon markets

Thank You!