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Potential for Carbon Finance in Agriculture and Forestry
Katoomba V, TokyoForest Trends
November 5th, 2002
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26 transactions at advanced stage
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Technology distribution of approved projects
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Sustainable Development Deep Green Carbon
• Certifying local environmental and community development benefits with emissions reductions:
• Examples from PCF:– Colombia Jepirachi Wind Power Plant (19MW) providing:
• potable water,• electricity for schools/clinics and• small fishing port for local indigenous peoples;
– Plantar Project in Brazil (23,400ha fuelwood plantation): •Worker health improvement•ABRINQ certification of no child labor or exploitation•Biodiversity benefits•FSC certification of improved forest management
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Important Findings1.Learning-by-doing works2.CDM/JI Carbon Asset Creation is
complex with long ER delivery lead times
3.Regulatory uncertainty remains post-Marrakesh, especially in Land Use, Land Use Change and Forestry
4.Very small direct private CDM investment
5.Small projects/small countries lose out
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The Carbon Market
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Summary of carbon markets currently in operation
Project-based Emission Reduction purchases
Allowance Trading
Within National trading systems
Intra-Firm tradingRetail
UK
DK
Shell
BP
“Pre-Compliance”
From voluntary
To Kyoto Pre-Compliance
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Major Market Findings• 2002 is most active year. Prices ranged from
$1 (project-based) to $17 (UK allowance)
• Market Activity since 1996
•Total Trades, all vintages = 200 MtCO2e
•157 MtCO2e 1996 to 2002
•Expected 2002 contract volumes = 60-67 MtCo2e
•OR over 5 times 2001 volume of 12 MtCo2e
•2002 volumes would be ~1/3 of all estimated market volume since 1996.
• private sector bought most of ERs traded within OECD countries.
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Number of trades has increased
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
0
10
20
30
40
50
60
70
80
90
100
1996 1997 1998 1999 2000 2001 2002(to date)
Nb
of
Tran
sact
ion
s
National Markets
ER Transaction
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Buyers are more diverse
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
1996-2000 2001-2002
Canada
USA
Netherlands
Other WEU
Japan PCF
Australia
Canada
USA
Other WEU
Japan
Australia
PCF
Netherlands
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Balance in Asset Classes Emerging
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
0%
10%
20%
30%
40%
50%
60%
70%
Fuel-Switching EnergyEfficiency
Renewables Industrial Transportation LFG LULUCF GeologicalSequestration
1996-2000
2001-2002
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0
2
4
6
8
10
12
14
16
18
Annex II JI Countries CDM Countries
Vo
lum
e o
f E
R P
roje
cts
(MtC
o2e
)
Carbon Finance flows 2001-2002
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
USA
Canada
Australia
Latin America
AsiaAfrica
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Who’s buying where? (2001-2002)
Source: Authors’ own calculation, based on transaction database assembled with Natsource, Co2e.com and PointCarbon
0
2
4
6
8
10
12
14
16
18
20
Annex II JI CDM
Vo
lum
e (M
tCo
2e)
Private
Private/Public partnerships
Public
In 2001-2002, private companies acting alone have purchased only 13% of their reductions in developing countries.
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BioCarbon Fund:Key Design Parameters
• Size: $100m target; $40-50m to close mid-2003• Share Price: $2.5 million and up• Target Contract Price Range: $2.5-$5/tCO2e• Term: 17 years (3 yrs investment, 14 yrs
maintenance)• Structure: Two Windows – Kyoto and Non-Kyoto• Focus: Sustainable Agriculture, Forestry and Land
Management, Biodi Conservation, Poverty Reduction• Deal Attributes: Certified ERs and Biodiversity • Parallel Grant Fund: for project preparation and
capacity building. Implementation Partnerships.
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Potential Early Deal Flow
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000
Quantity (tCO2e)
Pri
ce (
$/t
CO
2e)
Afforestation/Reforestation
Plantations
Forest Management
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Bank’s Experience of Carbon Finance in Forestry
• PCF Projects under implementation:– Brazil Plantar Fuelwood and Restoration Forestry– Romania Danube Delta: Restoration Forestry and
Conservation on degraded lands (7000ha)
• PCF Projects approved by Shareholders– Moldova Land and Forest Restoration (14,300ha)
• Characteristics of LULUCF Deals to date: – create Biodiversity Assets.– support sustainable livelihoods and rural
deveelopment– Prices contracted in range of $3.25-3.50/tCO2
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Early Insights on Opportunities
• Private/Public CF for sinks can support conservation, sustainable natural resource use and poverty reduction!
• Payment for Carbon as it is sequestered provides unique early cash flow key to:– Financial closure in private deals and– Leveraging State Forest Administration Budgets
• Biodiversity Assets can be certified which:– Increase carbon asset value: “green premium”– Sheds light on how a global biodiversity market can function
• Carbon Stocks in “avoided deforestation” can leverage up-front payment enabling land purchase– Non-kyoto and retail markets offer cash forward potential for
high profile conservation assets
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Brazil Biomass/Pig Iron Project
-4000
-2000
0
2000
4000
6000
1 2 3 4 5 6 7
Year
Cash
Flo
ws (
$000)
LoanDisbursementPCF Payments
LoanAmortization
ER payments are used to amortize commercial loan.
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Early Insights on Managing “Permanence” Risk
Bank/BioCF offers “mitigation equivalent” assetsPortfolio Level Permanence Risk Management• Hedging high permanence risk assets with low
permanence risk assets • Using Mitigation Reductions to offset
sequestration asset risks – within the portfolio using Biofuel project mitigation
component reductions and– Buying options in Bank-managed mitigation reduction
portfolios (e.g. CDCF)
• Blending JI, AAU-backed assets with CDM assets
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Early Insights on Managing “Permanence” Risk
Project Level Permanence Risk Management• Encouraging “mosaics” of low and high
permanence risk assets within the project e.g. conservation and production landscapes
• Using Conservative estimates of ER potential to create within project hedge
• Negotiating seller liability clauses wherever feasible
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Pre-requisites for Carbon Sink Asset Management
• Mutual Fund type structures to manage risks
• Institutions capable of long term asset maintenance – 20+ years
• Capability to build public-private partnerships to mitigate risk, especially with global insurance and banking industry
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Annexes
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Potential Early Deal Flow
• Proposals exist for both Windows• Average price = $3.88/tCO2• Deal flow exists below $4/tCO2• Some attractive projects (cobenefits,
permanence) > $4/tCO2• Total ER volume = 117 MtCO2• Many projects request upfront payment• 7 early project candidates (high ranking)