proposal for a carbon guarantee instrument chandra shekhar sinha carbon finance coordinator latin...
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PROPOSAL FOR A CARBON GUARANTEE INSTRUMENT
Chandra Shekhar SinhaCarbon Finance CoordinatorLatin America and the Caribbean Region
1November 15, 2010
INTRO
DU
CTION
& O
BJECTIVEKey Challenge
2
The objective: propose new financial products that monetizes future flows of CERs to raise finance today for investments
Ca
shflo
w+
-
Time
Investments in EE or RE projects require funding before they can generate returnsKey challenge: raising funds today for investment in EE / RE projects
Investment e.g., energy savings for EE; GWh for RE)
Time
Returns
INTRO
DU
CTION
& O
BJECTIVECertified Emission Reductions (“CERs”) – a by-product
3
e.g., energy savings for EE; GWh for RE)
Ca
shflo
w+
-
Time
CERs
CER (carbon credit) is a “by-product” which is typically not monetized…
Investment
Returns
INTRO
DU
CTION
& O
BJECTIVEMonetizing CERs today
4
e.g., energy savings for EE; GWh for RE)
Ca
shflo
w+
-
Time
CERs
Investment
Returns
We will show you a product which can monetize today future flow of CERs to support the financing phase.
WB G
UARAN
TEED CER SALES CO
NTRACT
WB Guaranteed CER Sales Contract – How it works
Proposal to monetize future CERs (the ‘Carbon Guarantee’):•an upfront payment for forward sales CER Contract (i.e., selling today future CERs)
•to a seller (investor in EE/RE) to an Annex 1 buyer
•where CER volume delivery is guaranteed by the WB (or other similar financial institution)
WB G
UARAN
TEED CER SALES CO
NTRACT
6
WB Guaranteed CER Sales Contract – How it works
Compliance Buyer[Sovereigns, Private or Public entities]
LAC Country Carbon Promoter
$ ‘Shortfall’ Agreement [for failure to deliver]
$ m (ERPA)
LAC
Indemnity Agreement
WB Guarantee of Shortfall Agreement
“Off-Shore”
Pool of CDM Projects
CERs
$
Day 1
Day 2
energy savings $
energy savings $
WB G
UARAN
TEED CER SALES CO
NTRACT
7
WB Guaranteed CER Sales Contract – How it works
Compliance Buyer[Sovereigns, Private or Public entities]
LAC Country Carbon Promoter
$ ‘Shortfall’ Agreement [for failure to deliver]
$ m (ERPA)
LAC
Indemnity Agreement
WB Guarantee of Shortfall Agreement
“Off-Shore”
Pool of CDM Projects
CERs
$
Day 1
Day 2
If things go well…
energy savings $
WB G
UARAN
TEED CER SALES CO
NTRACT
8
WB Guaranteed CER Sales Contract – How it works
Compliance Buyer[Sovereigns, Private or Public entities]
LAC Country Carbon Promoter
$ ‘Shortfall’ Agreement [for failure to deliver]
$ m (ERPA)
LAC
Indemnity Agreement
WB Guarantee of Shortfall Agreement
“Off-Shore”
Pool of CDM Projects
CERs
$
Day 1
Day 2CER = $ m + interest
CERs
energy savings $
WB G
UARAN
TEED CER SALES CO
NTRACT
9
WB Carbon Guarantee Sales Contract – How it works
Compliance Buyer[Sovereigns, Private or Public entities]
LAC Country Carbon Promoter
$ ‘Shortfall’ Agreement [for failure to deliver]
$ m (ERPA)
LAC
Indemnity Agreement
WB Guarantee of Shortfall Agreement
“Off-Shore”
Pool of CDM Projects
CERs
$
Day 1
Day 2
Even if things go wrong with CER delivery…
energy savings $
WB G
UARAN
TEED CER SALES CO
NTRACT
10
WB Guaranteed CER Sales Contract – How it works
Compliance Buyer[Sovereigns, Private or Public entities]
LAC Country Carbon Promoter
$ ‘Shortfall’ Agreement [for failure to deliver]
$ m (ERPA)
LAC
Indemnity Agreement
WB Guarantee of Shortfall Agreement
“Off-Shore”
Pool of CDM Projects
CERs
$
Day 1
Day 2
energy savings $
WB G
UARAN
TEED CER SALES CO
NTRACT
11
WB Guaranteed CER Sales Contract – How it works
LAC Country Carbon Promoter
LAC
Indemnity Agreement
Pool of CDM Projects
$
Loan $ m
“Off-Shore”
Loan Repayment $
RISK ALLOCATIO
N
Risk Seller Buyer Guarantor
Project
Market/ Price
Regulatory
Allocation of Risk between the Buyer and Seller. Back-stopping by the Guarantor
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The project owner takes all project risks, including completion risk and project performance risk
The Buyer takes all CER price risk The Seller takes the risk that the CERs are not eligible in a pre-
specified market (for e.g. EU Emissions Trading System). The non-eligible CERs are considered as “not delivered” triggering the
Guarantee if the Seller does not pay the Buyer for the shortfall.
PROD
UCT 2: O
FF BALANCE SH
EET CER-G
UARAN
TEE
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Product 2: Off Balance Sheet Carbon Guarantee – How it works
Compliance Buyer[Sovereigns, Private or Public entities]
LAC Country Carbon Promoter
$ ‘Shortfall’ Agreement [for failure to deliver]
$ m (ERPA)
LAC
Guarantee of Shortfall Agreement
“Off-Shore”
Pool of CDM Projects
CERs
$
Day 1
Day 2
energy savings $
MDB
Trust Guarantor
GEF
$
Indemnity Agreement
CON
CLUSIO
NS
Carbon Guarantee is possible financial product to allow developing countries to sell CO2 emission reductions to Annex 1 countries; an open market sale of a good
Provides funding today in exchange for a future flow of an EE/RE investment by-product, namely the CERs
If GEF or a Annex I funded climate fund could back-stop the World Bank/ MDB guarantee• The carbon guarantee instrument would have wider application
• Private sector project owner and sellers could participate
• Public sector in countries where governments are not interested in providing guarantees can also benefit.
Conclusions
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Gracias, Thank you, Merci, Obrigado
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Philippe Benoit, Chandra Shekar Sinha, Eduardo FerreiraThe World BankSustainable Development, Energy UnitLatin America and the Caribbean Region