Harnessing the carbon market to sustain ecosystems and alleviate poverty

BioCarbon Fund Rules of BioCarbon Fund Rules of EngagementEngagementBioCF Project Training Seminar

Washington, DCJuly 13, 2005

Key MilestonesKey Milestones

All contracts (Emission Reduction Purchase Agreements or “ERPA”) to be signed by June 30, 2006

Purchasing period: up to 2017 (60% of ERs delivered by 2012 for Window 1)

BioCF will maximize 2006-2012 portion of ERs delivered by each project to Window 1

BioCF will require that projects ensure permanence until 2037

ValidationValidation

Previous presentations by Lasse, Bernhard, Sandra

Assumption: BioCF Fund Management Unit (FMU) adds value to the project, especially in terms of methodological input

FMU requests to be involved in the methodological process

Before ERPA is signed Methodologies must have been submitted to CDM Executive

Board by Operational Entity hired by the FMU FMU must have reviewed the draft submissions Pre-validation report by Operational Entity must be available Pre-validation assumes that submitted methodologies are

approved

PermanencePermanence

Unlike climate change mitigation through energy activities, the climate impact of LULUCF activities only lasts as long as carbon is sequestered

“Permanence” = sequestration for the very long term

BioCF looks for long-term carbon sequestration

BioCF will pay annually based on increments in carbon stocks, but never above the long-term average storage

CoP9 rules on temporary crediting

Prices diverge from CoP9 implications (see later)

Liability for replacement: Project bears replacement responsibility until 2037 BioCF bears replacement responsibility thereafter

Co-benefitsCo-benefits

BioCF wants to buy “green carbon with human face” Social: Improve livelihoods

People receive carbon payments New job creation Additional income from alternative activities Know-how

Environmental Conserve biodiversity Expand natural habitat Reconnect forest fragments Protect soil against erosion Fight against desertification Moisture retention Stabilize radionuclides in biomass

Price: BasicsPrice: Basics

To be attractive to investors, BioCF must be cost-effective: buy low-cost climate change mitigation opportunities

Price assumes quasi-permanence, so can approach that of CERs or ERUs from energy/infrastructure projects

Full price paid when the sequestration is achieved (unlike the “rental” mode provided for under CDM/CoP9 rules)

Indicative contract price ranges (to be negotiated): max $4/t CO2e (tCERs/lCERs)

$4/t CO2e (ERUs)

< $3/t CO2e (Window 2)

BioCF pays on delivery of Verified Emission Reductions (VERs)

PricingPricing

Little or no LULUCF market reference: BioCF is breaking new ground

Mostly voluntary or retail transactions, not Kyoto grade or large volumes

Energy and infrastructure projects generate permanent ERs

To determine offer price to project within ranges, FMU factors in perceived benefits and risks. Pricing is a

positive function of co-benefits negative function of risks

Benefit and Risk Analysis (1)Benefit and Risk Analysis (1)

Several categories of risks Regulatory risks

Project risks

Country risks

Market risks

Principle: allocate risk to party best able to bear it (seller or buyer)

Most risks affect both the seller and buyer

Regulatory risks At methodology submission: methodology rejected (Seller + Buyer) At project registration: project found not to be additional (Buyer)

Project risks Lower-than-expected ER potential (Seller + Buyer, depending on ERPA)

Technological failure Non-permanence Leakage

No financial closure (Seller + Buyer)

Country risks Legal challenges to sale of ERs (Buyer + Seller) Host Country rejection: no Letter of Approval (Seller + Buyer) Expropriation of assets (Seller + Buyer)

Market risks Lack of tradability (CDM, EU ETS) (Buyer)

Reputational risks Environmental (Buyer + Seller) Social (Buyer + Seller)

Benefit and Risk Analysis (2)Benefit and Risk Analysis (2)

Co-benefits Environmental

Social

Need to include a couple of relevant but simple indicators of environmental and social improvements in the Monitoring Plan and track them during project implementation

Benefits command premium embedded in the price of an ER

To the extent possible, co-benefits will be disclosed in the ER certificate to educate buyers

Benefit and Risk Analysis (3)Benefit and Risk Analysis (3)

Need to achieve some consistency in ER pricing across the BioCF portfolio

FMU will quantify the perceived co-benefits and risks of each project

Quantification will be discussed with project entity as prelude to ERPA negotiations and within limits of provisions of Letter of Intent

Benefit and Risk Analysis (4)Benefit and Risk Analysis (4)

Cost RecoveryCost Recovery

100% of project preparation costs pre-financed by the BioCF will be charged back to projects in the form of withholdings from ER payments

Negotiated item Never a negative transfer back to BioCF Costs capped in the Letter of Intent and ERPA

If BioCF also prefinances implementation costs (supervision and certification) these will also be charged back

Same rule as for preparation costs

Apply for Japanese PHRD grant or other grants to finance some preparation costs

Payment SchedulePayment Schedule

On delivery, not in advance: annual payments (in accordance with Monitoring Plan) upon receipt of a verification report that a certain number of tons of CO2 have been sequestered = Verified Emission Reductions (VERs)

Other resources must be found to cover the investment cost

BioCF will pay for VERs even if project is not registered by the market regulator

If project entity requested an advance payment Proof would have to be given that there is no alternative Would be limited to max 25% of the ERPA value Price per ton would be discounted to reflect the risk of non-delivery Bank guarantee would be requested

CFB reserves right to communicate with CDM Executive Board and Art. 6 Supervisory Committee VERs on behalf of project entities to increase chance of VER conversion to tCERs/lCERs, CERs, ERUs

Logical corollary of payment for VERs

Communication with RegulatorCommunication with Regulator

1 Preparation• Project Idea Note (PIN) and reviewed by Fund Management

Unit (FMU)• Carbon Finance Document (CFD) prepared by project

sponsor • CFD reviewed by Fund Management Committee and

Participants’ Committee• Start of World Bank technical, financial, environmental and

social due diligence (identification + preparation)• Host Country endorsement (letter of no-objection)• Inclusion in portfolio• FMU signals intention to purchase ERs: Letter of Intent

Project CycleProject Cycle

6 m

2 Methodology

• Project Design Document (sponsor/FMU)• Baseline Study (BLS) & Monitoring Plan (MP) for

carbon, environmental and social benefits and ER calculation prepared by project sponsor/consultant + FMU quality control

• [FMU submits new methodology submission (NMB and NMM through Operational Entity)]

• World Bank due diligence continues (preparation)

Project CycleProject Cycle

6 m6 m

3 Validation

• [Pre-validation of BLS / MP for carbon, environmental and social benefits by Operational Entity (DOE/AE) (before methodologies are approved)]

• Pre-validation Report• DOE/AE assesses ERS• Host Country Letter of Approval• Validation Report (after methodologies are approved)• World Bank appraisal

6 m6 m 2 m

Project CycleProject Cycle

4 Negotiation

• [FMU drafts Term Sheet (main clauses of a future contract in plain English)]

• Consultations/negotiations with sponsor• Term Sheet signature• World Bank lawyers draft contract (Emission

Reductions Purchase Agreement, or ERPA)• ERPA negotiations• ERPA signature (by June 2006)

6 m6 m 2 m 3 m

Project CycleProject Cycle

5 Project Start-Up

• Project registration• Start of activities (at the latest – planting may have

started earlier)• Independent Initial Verification to ensure that MP is

fully operational• Start of monitoring

6 m6 m 2 m 3 m 1-5 y

Project CycleProject Cycle

6 Implementation

• Periodic verification & certification reports (sponsor + DOE/AE, in accordance with MP and contract)

• BioCF pays project sponsor for verified ERs • ERs distributed to BioCF investors pro rata to their

share of the fund• BioCF buys a certain tonnage, not for a certain period

of time• Purchase up to 2017• World Bank supervision (until forest established)

6 m6 m 2 m 3 m 1-5 y 12 y

Project CycleProject Cycle

Long-term average storageLong-term average storage

0

10000

20000

30000

40000

50000

60000

70000

80000

900001 5 9

13

17

21

25

29

33

37

41

45

49

Year

tCO

2e

Potential ER

BioCF Purchase

Long-term average storage

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