27468 Su PROTOTYPE CARBON FUND A PUBLIC I PRIVATE PARTNERSHIP In Innovation - ~ ANNUAL REPORT 2002 C Carbon - .. , ing Markets for Cliimate Protectioin &. Sustaitnable Development An.- -. *, ; ------- w - 1 A.Af -. .. . ;.. .. CD - , . !* - r,,, - it * I -Kr CD- Fa Z A- b - } , +-. E- Ji V4 - ,. . * , 't -> I- '___ ___ __.__ ;rK. "'2 L ; - -t-1 . . 1- ;n . ,- , -. 00 . . -S.- - , .: 0 .. .J-* w *. 4.: f. 'M.. ** S * - D 0 c,o co 0 0 L )c - 0 C L * *- 5- 0- A ,I U 4 A i In11I InnovationI -w - < - - i -a i | Kl --lSX Ip i | * . -- - <-4 1 | e - . F r ---. - Iiiii * I*-iiiLii i LETTER FROM THE WORLD BANK In 2002. we have witnessed extreme climate events wreak havoc in both rich anci poor countries. impact of these events hias fallen most -. . i on the poorest. who are the least able to recover from such shocks. Thle World E i, recognizes that integrating climate change within long- term development strate- gies is central to achieving sustainable development, anid povertv reduction. The s Carbon Fuind (PCF) was established to noi-:; - public and private investment to catalyze the market for greeiihouse gas emissioni reductions. Over the two and a half years it has been in opera- tion, it has also provided a critical capacity building role. showing that the V Protocol can work - the application of the Clean Or i:ol ,l- il Mechanism (CDM) and Joint Implementation (JI). A pioneer in the carbon asset creation and managemenit business, the PCF has simultaneously promoted projects leading to greenhouse gas reduction, and built a unique knowledge platform used by poor couin- tries and those interested in investing in CDM and JI projects in the developing world. Over the past year, the PCF has developed 26 transactions to ani advanced stage. The excellent progress to date resulted in governmenits and companies :. rie additional capital to the Funid. In the next twelve months, the PCF plans to triple the volume of carbon purchases and expand the formal cleared pipeline of projects, while diversifying the portfolio to enhance its geographical mix. I wish all participants the best of success for the future. Sincerely, IAN JOHNSON Vice President, Environmentally and Socially Sustainable Development The World Bank LETTER FROM THE INCOMING CHAIRMEN It Is astonishitig to think about the date of birth of the PCF: it is so youLng and yet it feels as if it has been there for mnany years, For bothi the participants and the host counitries, the decision to come aboard the PCF was risky and can only be uniderstood in the coritext of a clear commitnenit to sustainable development and to the combat against climate change. Many events in recent history have confirmed that they were right in their evaluations. yet we cannot say that the uncertainty has disappeared. We are still living in ani unpredictable political climate and the lack of capacity in the adniin1istrations of most Parties to the Protocol (Annex I as well as non-Annex I countries) remains a major difficulty withi a deterrent effect oin early investinenits in CDM and JI. In our view, the aim of the PCF is to play a catalytic role in the market for emission reductions. It has never been to dominiate or to have an Lindue influenice on the market itself. hut to salow the way forward, to overcome barriers for the benefit of all actors. and to provide host countries with an opportunity to better uniderstanid the CDM and JI pr ocesses !hi sl -i- ,- by doing . The projects that have been supported and which currenitly generate emis- sion reductions are the best proof tttat this works. With time, the visibility of our action has triggered much attention and we can only congratulate the openness and transparenicy of the Fund Management Unit in its r Governments and businesses alike understand that the integration of sustainable development in their strategies is an essential element for their long-termii growtli and wealth. To support this, the inclusionl of environmental tar- gets in the econonmy via dedicateri markets confers three advantages: first, it prices the externalities at the least cost, anid triggers sound investnmenits; - -'i.. it allows the economy to finiance the growing requirements for the quiality of our environ1ment; anid i 1i it gives the end-use-s the righlt iicentives to progressively chiaige their coni- suniption patterils. In tile year to come, the decisions of the CDM Executive Board will certainly be a big step forward in the learniing process. In addition, host countries in particular welcome the new funds tnIe World Bank is developing: the Community Development Carbon Fund anid the BioCarbon Funld, wlicth will allow greater involvement of small counitries and rural areas in carboin fiinance. JEAN-CLAUDE STEFFENS AYITE-LO AJAVON Chairman Chairman Participants' Committee Host Country Steering Committee i1k f - - -- - - --- - - - LETTER FROM THE OUTGOING CHAIRMEN The extreme weather evenlts in Asia. Africa, and Central anid Eastern Europe in the past year have- the importance of - .. -, n level of greenlhouse gases i the atmosphere and minlimizing futire emissions. it is importatit that we achieve climate chanige mitigation targets in a cost-effective way using the nmodaiiiies and instrmerents provided by the Uiiited Nations Framework Convenition-i on Climate and the Kyoto Protocol. ln DO2 , the meetings of the UNFCCC Conference of the Paities in Bonn and Marrakesh) were surccessful in adopt- ,ng the rudles of implementationi for the CDM aiid JI. The PCF was able to infor-m the Parties about its pr actical experience, thereby providing insights which were helpful in further developing the ruLies on thte basis of those iessorns earned. While much has been accomplished. ini our view. some barriers and dlifficulties remain, which restrain the development of smnall CDM and JI projects. The PCF lias proven to be a uniique platforn from which to discuss matters and effect charige related to CDM and JI mechanismris. It brings together flost and participant couiitry representatives, as well as the private secor- aild techniical experts from the PCF team. providing the opportuiiity to exchaiige views and advance the kiiowledge base for both mechanisms. The PCF lias made significant progress this year by developing 26 carboni purchase transactions woridwide, of whil:h 14 were tiegotiated. Experience salows that we can achieve emissiorn reductions at relatively low cost, rein- forcing the poiiit that cost should not be a barrier for a ciimate change mitigationi policy. The positive results aclievedl by the PCF contributed to the participants' decision to place an additional sUmIl of US$35 niiliioii in tIle PCF'. increasirig thIe total subscription to US$180 itiillioii. The PCF's experinice shows the market's strong need for techiiical assistanice which should be part of a coil- tiniLuious and coordlinated process. Such assistance will play a critical role iti ' - tranisactioni costs and investment risks associated with .-n': -: ou projects. ',! those in smaller countries. Thls; year has also '.. -. 1 i.. i. PCFplus prograni, whicil was created to respond to , L'i.i using three differeiit toois: the PCFplus fellowship program; PCFpILis outreach and training activities' arld PCFplus research, which analyzes the techiiical challenges of project developnient. carbon markets. and the relation- ship betweeni COM/Ji and sustainable developnetit. The activities of the PCF have stimulated other governimenits atid companies to become niore active in tlte car- boil market. The PCF team's kniowledge has enabled the World Batik tO create rtew funds, oiie focusing oni small projects and rural areas that mteasurably demnonstrate direct or inidirect local commuinity benefits, and the other conceritratinig oni forestry atid agriculture projects. We support this developomeiit and more competitioti mn this market because we requiire a substantial number of CDM and JI projects to realize the ' . targets and stim- ulate sustainable developmtlent. It is ilpor-taiit to recognize tfte efforts aiid commitment of thIe PCF teani, whichl show ani extraordinary level of .. - We would also like to express our gratitude for the help and support provided by our colleagues in the Participants' Comimniittee atid Host Countrv Comntittee, withi wlioii we remaiii comtimitted to work ai'id increased co-operation in the further development of the - .-*. Carhon Fund. EDUARDO DOPAZO MAURITS BLANSON HENKEMANS Chairman Chairmatn Host Country Committee Participants' Committee 7 NOTE FROM THE FUND MANAGER Dear Friends, It is my pleasure to share some insights on carbon finance and sustainable development based on the PCF's experi- ence after two and a half years of implementation. To begin with, it is encouraging that carbon market transaction volumes have grown since the Marrakesh Accords were adopted in November 2001, exceeding 200 million tonnes of CO2 equivalent assets transacted since 1996 through a greater diversity of carbon assets and market players. I am also grateful that PCF Participants have decided to increase total funding to the approved cap of $180 million, enabling PCF's emission reductions purchase phase and its rich learning value to extend until mid-2004. Our experience from 26 transactions developed to an advanced stage in the past year reinforces our view that the potential of CDM and JI to increase the profitability and volume of renewable energy and energy efficiency projects globally is significant. More impressive still is the impact of carbon finance on the bankability of clean technology investments in municipal solid waste, crop waste-to-energy conversion, and soil fertility condition- ing. Even at low carbon prices. these applications demonstrate the power of carbon finance as a driver of sustainable development, mitigating local pollution in a socially responsible way, and creating reliable energy sup- ply for burgeoning developing country populations while mitigating global climate change. We recognize that without targeted and focused assistance in mitigating business risks and lowering transaction costs, carbon finance will reach only the larger developing economies, which already benefit from private capital flows. The PCF has demonstrated how to channel carbon finance to small-scale renewable energy and energy con- servation activities which provide measurable, independently certifiable development benefits at the community level. This experience has led the World Bank to promote new carbon funds, such as the Community Development Carbon Fund (CDCF) which was launched in Johannesburg in September 2002 at the World Summit on Sustainable Development. The CDCF will extend the reach of the Clean Development Mechanism to the smaller, poorer countries and remote rural communities. Over the coming year the PCF Fund Management Unit is pledged to triple the volume of carbon purchases under the PCF and grow the formal cleared pipeline of projects to the equivalent of US$200 million in carbon purchase. We also intend to substantially increase our carbon purchases in the Asian region to balance the PCF's portfolio geographically. Meeting these targets will expand our contribution to "learning by doing" in exciting ways. KEN NEWCOMBE Fund Manager '' ' '' "~~~~% ''sf.-..' . '.-,¾ . t' HIGHLIGHTS 2002 2 -I- l) >1 wr - I Ir - Xv Suo!ss!iw OH9H 10 uo!ionpaj pIue UO!S!AoJd JaMod 'S4t,!J J2uM :joa8 -ojd auo u! slasse aaJt{ sajnJde 'ojinbnqe3et, aL!C Li pea!ojd ino W-L -Y. C - - - -i Pr - - paqol- y The cost-effective reduction of greenhouse gas emissions to avert the most severe impacts of climate change remains one of the widely accepted priorities for global action. The Kyoto Protocol, adopted under the United Nations Framework Convention on Climate Change (UNFCCC) in 1997, was designed to address this priority while promoting sustainable development. Under the Protocol, industrialized countries (defined as Annex I countries) must reduce their carbon emissions by an average of 5.2 percent below their 1990 levels in the period 2008-2012. To meet these commitments in the most importance of bringing the Kyoto Protocol cost-effective manner, the Protocol contains into force and to begin serious efforts to provisions allowing Annex I countries some reduce carbon emissions. flexibility to meet their obligations through projects generating emission reductions PIONEERING CHANGE (ERs) elsewhere. Two provisions are par- Launched in 2000 by the World Bank, the ticularly important: Prototype Carbon Fund (PCF) is a public- private partnership aimed at catalyzing the ) Article 6 allows for the Joint Implement- market for project-based greenhouse gas ation (JI) of projects by industrialized ERs. Funded by six governments and sev- countries, including those with economies enteen private sector companies, with a in transition. Under this provision, an total capitalization of $180 million, the PCF entity in one country finances or pur- is pioneering ER purchase transactions chases ERs from a project in another; under the emerging rules of the CDM and JI, demonstrating how such transactions can ) Article 12 provides for a similar project- lower the cost of compliance with the Kyoto based mechanism, the Clean Development Protocol, and sharing its practical experi- Mechanism (CDM), under which an entity ence with decisionmakers, host countries in an industrialized country purchases ERs and market players. from a project in a developing country. The PCF has identified many opportunities The purpose of both mechanisms is to assist to reduce greenhouse gas emissions in host countries with sustainable development developing countries at a price of $3-4 per through the transfer of cleaner technology tonne of CO, equivalent (tCO2e). This com- and financial resources for specific projects, pares very favorably with a marginal while at the same time contributing to the abatement cost of more than $15/tCO.e in objectives of the UNFCCC by lowering emis- most industrialized economies, and sub- sions of greenhouse gases. stantially higher levels in the most energy-efficient economies. It is the differ- This critical priority continues to take shape ence in cost between industrialized and through ongoing global initiatives. At the developing countries that provides the occasion of the 7th session of the opportunity for mutually beneficial trading Conference of the Parties to the UNFCCC, relationships. By supporting climate-friendly held in November 2001 in Marrakesh, the investments, the PCF also addresses the Parties to the Convention reached agree- root cause of climate change in developing ment on many of the outstanding issues countries. relating to the implementation of project- based mechanisms under the Kyoto In terms of adverse impacts, the Intergov- Protocol. The impact of the so-called ermmental Panel on Climate Change (IPCC) Maorrkesli Accords on the PCF will be dis- estimated in 1995 that the cost of climate cussed in greater detail in subsequent change could be as high as 5 to 9 percent of chapters of this year's report. Most recently, GDP in developing countries. This is several the Johannesburg Plan of Implementation times higher than the costs that would be of the September 2002 World Summit on borne by industrialized countries. Among Sustainable Development reiterated the the World Bank's member countries, the 1:J The PCF allows developing countries to COMPETE in the emerging global carbon market. IPCC also concluded that the poorest would 3. Public-Private Partnerships: to demon- be at the greatest disadvantage. strate how the World Bank can work in partnership with the public and private Over the two and a half years since its launch, sectors to mobilize new resources for its the PCF has provided a critical capacity borrowing member countries while building role and contributed practical learn- addressing global environmental problems ing experience as the guidelines and the through market-based mechanisms. modalities of the market for project-based ERs continue to develop. Furthermore, as the PROGRESS THROUGH PCF applies the fundamentals of carbon STRUCTURED PARTNERSHIPS finance in the field, it continues to demon- In 2002 nine participants in the PCF commit- strate the power of the carbon market to ted additional capital to the PCF, bringing the drive sustainable development in a socially subscription in the Fund to $180 million. An responsible way. allocation mechanism has been applied to finalize the new shareholding quotas under STRATEGIC OBJECTIVES the now fully subscribed Fund. All compa- From its inception, the PCF has followed nies and governments contributing to the three primary strategic objectives: PCF will receive a pro rata share of the ERs gained from projects, verified and certified in 1. High Quality ERs: to show how project- accordance with the Kyoto Protocol. based greenhouse gas ER transactions can promote and contribute to sustainable Countries hosting PCF projects participate development and lower the cost of com- actively in the PCF as a formal element of its pliance with the Kyoto Protocol; governance, providing advice and receiving technical assistance in preparing to partici- 2. Knowledge Dissemination: to provide the pate in the CDM and JI. Membership in the Parties to the UNFCCC, the private sector, Host Country Committee has grown steadily and other interested parties with an oppor- to over 40 by mid-2002. Over the last year, the tunity to 'learn by doing" in the development number of countries with Participant of policies, rules, and business processes for Committee-cleared projects in the pipeline the achievement of ERs under CDM and JI; has more than doubled. Cai)i fl -a+ce L~~ - -.| !-. : rXlernentation of can accclerate thc lr0l1 ellirlitatltotl off nierlgy-efficlcert -echtiologics (PCF prolect i i PCF is a closed-ended fund, with all funds to LOOKING AHEAD be placed by 2004. However, the positive In the next twelve months, the PCF will con- response to carbon finance engendered by tinue to advance its ongoing goals of the PCF's success has moved the World encouraging public-private partnerships, Bank to diversify its carbon finance busi- generating high quality ERs through sus- ness by developing new products to extend tainable development, and providing a the benefits of CDM to poorer, smaller coun- global for-um for the sharing of knowledge. tries and rural comniunities. More specifically, in the coming year, the PCF has committed to: BRINGING IDEAS INTO ACTION Over the past year, the PCF has developed ) Triple the volume of carbon purchases 26 transactions to an advanced stage, bring- and expand the formal cleared pipeline of ing ideas into action with positive impact. projects, to the equivalent of US$200 mil- This year's report will provide a road map of lion in carbon purchase. the PCF's progress during 2002, beginning with a closer look at progress in project ' Diversify the PCF's portfolio. To diversify portfolio development in Chapter 2. In sub- geographically, the PCF will substantially sequent chapters, we review three key increase our carbon purchases in the components of structuring projects, exam- Asian region, while balancing growth in ining the PCF's advances in building the other regions. To diversify technologi- legal framework of transactions, our cally, the PCF will pursue a suitable progress in refining the financial structure, balance of both renewable energy and and in the methodology behind creating the energy efficiency projects. carbon asset. Finally, we will explore the progress made in the PCFs mission to dis- > Enhance efficiencies through the pursuit seminate knowledge to participants and of larger transactions, and streamlined stakeholders. processing and origination. PCF MILESTONES JULY 1997 JULY 20,1999 JANUARY 18, 2000 APRIL 10, 2000 PARTICIPANTS GOVERNMENTS CORPORATIONS Goverer, ent o1 Canada British Petroleum Untied Kinigdfom Mitsu!Ilshi Corp. Japau Governi mert (if Flniatid Ch0lIU Electric Power Co.. Japain Mitsui & Co. Ltd., Japan Japan Bank for International Cooporation C Electric Power Co .. Norsk Hydro. Norway Government of The Netherlatrls Japan-i RabeBank The Nethealands Government of Norway Deutsclie Bank. RWE Governmrent of Sweden Electraoel, Belgiumrr Shikoke Powei Co.. Japan FortuLIm . Filiand Staton. Gaz de France. France TohokL Electric Power Co. Japan Electric Power Co.. Japan Tokyo Electric Power Co.. Japan i~--i ---- ®m JBIC ,ii MAY 15,2000 OCTOBER 2001 JUNE 19, 2002 OCTOBER 2001 JULY 2002 JUNE 2000 OCTOBER 31, 2000 bp ) *a ¢3t;j p b Deutsche Bank 0 ELECTRABEL e Fortum / fKYUSHU ELECIHIC POWER COINC. 1A. Mitsubishi Corporation * AITSUI & CO., LTD. Rabobank RVAVE RWE gNE STATOIL 3 TEPCO 17 HOST COUNTRIES, PROJECT PIPELINE AND TRAINING ,- - -~ , . MEXICO -~r- B-m-s Us 4 wNf -,- 1--'4 "'' This too. p w;ns pi enlaced lby the Map Desipin boilt of Thc Won it Pain Tine l,oeatdarnes color-s donnoonluiratnoes aind a0ey othelIlon inf, annool ohowit ool thio Iittp do elon reply oil tine pon t of TIne World Book Gi oonn soly nn.deonenncit em thoe loga otattin of asoy ten nlton y 01 anty entdon seitneiit or acceptanice of soncln oooldrn IeCS IBRD 31609R OCTOBER 2002 i * . 4-i;, tSA .ra,tA- - ,- - - . t i,.!; '1- { 7 ,e3t L ,. * 5 *.: % IC.At±AA!.' ,1 . -.,A4* - - - - BEAR-7 - -' :riree Mii") t qA D. KAZAKHSTAN'4 -~~~~~i .4 '-',-,- (,*,9 IDIAi .) -'----A A jiAiN - . . -w F-SO . , 3. i;r= A.t -. A.v:, $ - ..<.- ; 4- i ' . -.-RICAN REP "* W -r WG1i.6YA 1I41Z -Ni .. ~ - ,S DEM REP . CONCO ..L-- 'F' | ;IJ r , . *"- i ~'4 IF- - I -- >CcL The PCF has built strateaic coalitions with both the public and private sectors to mobilize new resources for sustainable dev el- opment and to address alobal environmental problems throu"h - Imarket based imechanisms. Throuah increases in funding this vear. the P(F is now positioned to coommit US$180 mOiillion. pur- chatsing ERs from appr.oximately 30 to 40 projects, and it intends to identify, prepare. and approve these transactions by mid-2004. Various stakeholders including PCF partic- ) Project Concept Note (PCN), which if ipants, host country governments and non- cleared by the Fund Management Commit- governmental organizations (NGOs), were tee (FMC) and the Participants Committee involved in the design of the PCF's project (PC) may proceed to the final stage selection and portfolio development crite- ria, which are described in the Insttrumenet ) Project Design Document (PDD). Establishing the Prototype Carboni Fund. Over the past year, the PCF has continued to As of the end of August 2002, the PCF had work towards a balanced portfolio, aiming received close to 240 Project Idea Notes. for technological and geo-political diversity Project Concept Notes were prepared and for projects undertaken in economies in cleared for 34 of these projects to date. transition and in developing countries. The Excluding 8 projects that are currently on PCF is supporting projects in the areas of hold or have been dropped, 26 projects with both renewable energy and energy effi- ER purchases totaling approximately tTS$106 ciency. A small number of forestry, land use nilijon are at various stages of preparation or and land-use-change projects that meet the completion. Of these 26 projects, 14 have eligibility criteria of the Kyoto Protocol and progressed to advanced stages of the PCF the Marrakesh Accords will also be identi- project cycle to date, including Prqject fied and implemented. Design Document, baseline study, monitor- ing plan, validation, and agreement of tenn STATUS OF PROJECT sheet for Emission Reductions Purchase PORTFOLIO DEVELOPMENT Agreements (ERPAs). The 26 MW Chile The PCF Project Cycle begins with three Chacabuquito run-of-river hydroelectric proj- separate stages of preparation and review: ect, commissioned on July 2, 2002, is the first PCF project to begin generating ERs. ) Project Idea Note (PIN), which if cleared by the Fund Management Unit (FMU) may lead to F--.-- ------- ----------------------- -----.-.--- ------.- -....- 74 ar1e 5777 DEVELOPMENT OF PROJECT IDEAS SUBMITTED TO PCF (as of August 30, 2002) PD0/Validation and agreed 14 i term sheet for ERPA ) PCNs taken forward 26 O a Underby FM PCP 4 iPCNs Under Dvelopment 54 PINs Submitted 238 ! 0 50 loo 150 200 250 Number of Documents Submitted COUNTRY/ PCF CONTRACT PCF ERPA TOTAL ER FOR PROJECT NAME PROJECT DESCRIPTION (in million us$) ERs tCO2e PROJECT tCO2e PDD/VALIDATION AND AGREED TERM SHEET FOR ERPA LATVIA: Methane capture from waste management and C02 reduction 2.5 368,101 368,101 Liepaja Solid Waste Management from power generation CHILE: S 26 MW run-of-river hydro to replace coal or gas in the grid 6.7 1,750,000 2,597,400 Chacabuquito Small Hydro UGANDA: 1.5 and 5.1 MW small hydro to replace a number of diesel gen- 3.9 1,300,000 1,884,102 West Nile Small Hydro erator sets in West Nile region BRAZIL: Charcoal produced from sustainably harvested plantation 5.3 1,514,286 12,885,986 Plantar Sequestration replacing coke for pig iron manufacture and Biomass Use ROMANIA: Afforestation of 6,728 ha of public land 3.7 1,018,000 1,018,159 Afforestation COSTA RICA: 8.4 MW wind farm to displace thermal power capacity addition 0.9 262,660 302,800 Chorotega Wind Farm COSTA RICA: 9.6 MW wind farm to displace thermal power generating units 1.0 284,660 329,100 Vara Blanca Wind Farm in the provinces of Heredia and Alajuela COSTA RICA: 6.3 MW hydro to replace thermal power generation 0.6 172,120 173,700 Cote Small Hydro COLOMBIA: 19.5 MW wind farm in the northern part of Colombia to displace 3.2 800,000 1,168,247 Jepirachi Wind Farm a mix of coal- and gas-based power generation. NICARAGUA: 1.43 MW capacity power plant utilizing rice husk waste to supply Rice Husk power to the Chinandega rice and flour mill 0.5 141,600 212,395 CZECH REPUBLIC: Energy efficiency measures and renewables through the Czech CEA Energy Efficiency Energy Agency (CEA) 2.6 650,000 650,000 CZECH REPUBLIC: Energy efficiency measure and renewables through the State . SEF Energy Efficiency Environmental Fund (SEF) 2.6 650,000 650,000 i POLAND: District heating system to utilize geothermal energy to replace Stargard Geothermal coal in the city of Stargard 1.1 364,553 364,553 POLAND: Plywood industry to meet part of its energy need using biomass Pisz Biomass waste. Local district heating system to utilize part of the heat 0.6 190,630 190,630 I : PCNS CLEARED BY FMC & PC GUATEMALA: 49 MW peaking run-of-river hydroelectric plant in the west 75 2,000.000 2,100,000 El Canada Small Hydro coast of Guatemala to displace thermal power plants SOUTH AFRICA: 10 MW gas-fired generator to produce electricity from landfill- 10.0 3,350,000 6,790,000 Durban Municipal Solid Waste collected methane BULGARIA: District heating system upgrades for the cities of Sofia and Pernik 8.2 2,774,973 2,774,973 District Heating BULGARIA: 13.4 MW biomass-based boiler to utilize wood waste produced 2.7 897,293 897,293 Svilosa Biomass at the Svilosa pulp and cellulose plant to replace coal-fired boiler POLAND: Geothermal-based heating system to replace coal-fired system 0.6 208,971 208,971 Kolo Geothermal in the city of Kolo POLAND: 164 MW Circulated Fluidized Bed (CFB) boiler to replace coal 3.5 1,000,000 1,485,000 Paper Mill CHP boiler to supply electricity and heat to pulp and paper mill in n Northern Poland THAILAND: 40 MW bagasse cogeneration at the facility of Mitr Phol 8.3 2,770,000 2,770,000 Mitr Phol Biomass Waste Cogen UZBEKISTAN: District heating system replacement and upgrade in the city of 1.0 330,000 1,240,000 Andijan Heating Andijan INDIA: 14.85 MW of electricity generation utilizing municipal solid 10.5 3,513,015 3,513,015 Solid Waste Management waste in Chennai HONDURAS: 60 MW wind power plants to displace thermal plants in 4.8 1,374,480 2,886,408 Wind Farm Francisco Morazan Province MAURITIUS: 112 MW waste incineration plant to manage municipal waste 3.5 1,000,000 1,080,095 Solid Waste Incineration and generate electricity MOROCCO: 140-200 MWwind farmsalongthe northern coast of Morocco 10.0 3,300.000 5,818,000 Tangiers Wind to displace thermal generation sources T 3 TOTAL 105.8 31,985,342 54,358,928 | GUIDANCE BY THE PCF PARTICIPANTS PCF participants have provided regular guidance on how to achieve regional and technological diversity in the PCF port- folio. The current set of guidance, provided at the PCF's Annual Meetings in Zakopane, Poland in June 2002 includes that: ) No more than US$35 million should be allocated to Latin America ) US$25 million should be set aside for countries in East Asia and the Pacific ) US$25 m-illion is provided for Central and South Asia ) US$20 million is dedicated to projects in Africa ) US$75 million will be allocated for JI projects ) Up to USS15 million can be allocated for land-use, land-use change and forestry (LULUCF) projects. In addition to a LULUCF project in a JI country, attempts should be made to identify an eligible 0DM LULUCF activity ) The PCF should increase efforts to identify and develop energy efficiency projects. Technologies -* REGIONAL DISTRIBUTION facturing process, building and appliance OF PCF PROJECTS efficiency measures; and supply-side effi- Geographic diversity of its por-tfolio is a key ciency such as transmission, distribution focus of the PCF going forward. White the efficiency measures, and gas flaring reduc- nuniber of project proposals emnerging from tion), the PCF portfolio is now achiexing a the Latin America region continues to grow, better strategic balance. a balance is beginning to emierge in Eastern Europe and Mfrica. Outreach and consulta- At the request of PCF participants, the rep- tion with countnies in South Asia and East resentation of wind energy has decreased Asia is beginning to bear fruiit, particularly in as the project pipeline has become more India and Vietnam. PCF participants have diversified with the inclusion of a number of requested that at least US$25 million be biomnass, waste to energy and small hydro used to purchase ERs in the East Asia projects. The pipeline, however, does not region. A number of large projects being include either transport or pico-projects, considered in China would allow the PCF to despite efforts to identify them, because of achieve this target. The challenge lies in lim- the complexity and high transaction costs iting the Latin America portfolio to US$35 involved. million. A similar challenge awaits in limiit- ing the Mfrica portfolio to US$20 million, given the expected active participation of South Africa. fiue22 TECHNOLOGY MIX REGIONAL DISTRIBUTION IN TE PO PIPLINEOF APPROVED PROJECTS Total of US$ 106 miliion Technological diversity is also critical for the PCFs pipeline. The PCF intends to achieve a LatinAfa Amrc Nfic 3:2 ratio between renewable energy and Amra~ energy efficiency projects. Renewable energy domtinated the projects going for-ward " cen ,ailand in the first part of the fiscal year 2002. With Easternl. ouhAi greater effort being devoted to locating suit- Europe East Asia able energy efficiency projects (including demand-side management, such as manu -_________________ l2 Our aim is to contract high quality CDM-eligible projects with WELL BALANCED BENEFITS for all parties. figlure 2.3 f igulre 2.14 TECHNOLOGY DISTRIBUTION PCF PROJECTS UNDER DEVELOPMENT OF APPROVED PROJECTS Total of additional US$ 112 million Total of US$ 106 million Small Hydro - _%iWind Latin Africa rnAmerica WBCentral and Managemen Eastern WaEeurBompe - ouh2ai LULUCF 4% Energy East Asia Gethera Efficiency to delivering US$25 million of ER purchase contracts in the region in the coming two figure 2.5 L -_ - .years. This is the highest priority for the TECHNOLOGY DISTRIBUTION OF PCF for the coming year. PROJECTS UNDER PREPARATION Total of additional US$ 112 million > Finding larger transactions. At its launch, Energy it was envisaged that the average ER pur- Efficiency Small Hydro chase from each project would be Gas Wind approximately US$8 million, leading to a Flaring i portfolio of 10-15 projects. Experience over the last two years of operation has sug- Biomass gested that the average size of PCF Wa et purchase from a project is closer to US $3.4 million. This would indicate that more than 50 projects would be needed to purchase the US$180 million capitalization of the PCE To avoid unduly large transaction and LOOKING AHEAD administrative cost burdens, the Fund In addition to the PCNs cleared by the PCF Management Unit has suggested that about Participants Committee, an additional 22 pro- half of the ER purchase business target for posals are currently being prepared as PCNs. the remaining years of the PCF be sourced These projects are estimated to generate ERs from projects with ER purchase contracts valued at about US$112 million, exceeding US$7 million each. > Going East. With healthy project pipelines > Sectoral Approaches. Some sectors in in Latin America and a growing pipeline in larger developing countries offer opportu- Africa, South Asia and Eastern Europe, the nities for large volumes of ERs. Sectoral PCF will sharpen its focus on extensive out- approaches offer a number of advantages, reach and consultation with countries in including reduced transaction costs through East Asia including small island states. simplified methodologies and procedures Discussions have been ongoing with China and coordinated approaches. In the coming and Vietnam, and have recently been initi- two years, the PCF intends to explore such ated with Indonesia. The PCF is committed opportunities in larger countries like Brazil, 2 I - L SSEE China, India, Mexico and South Africa in > Including non-CO2greenhousegases. sectors such as waste management, Recognizing that there are a number of bagasse cogeneration, and gas flaring other greenhouse gases with much reduction. The challenges include the higher global warming potential than development of simplified procedures CO,, the PCF will actively seek projects and methodologies acceptable under the targeting other greenhouse gases from Kyoto Protocol while maintaining the high industrial production (such as nitrous value and credibility of the ERs and defin- oxide as an unintended by-product of ing contractual relationships with parallel adipic acid and nitric acid manufacture purchasers. or perfluorocarbon emissions from alu- minum production) and will continue to Intermediation of transactions. Recog- pursue methane mitigation projects. nizing that the use of intermediaries has substantialpotentialtolowercostsandreduce > Land-use change and forestry proj- risks entailed in buying ERs of small and ects. The PCF land use, land-use change mediumscale enterpiises, thePCFcontinuesto and forestry (LULUCF) portfolio currently strive diligently to develop agreements to consists of two projects - the Brazil work with and through intermediaries. Plantar project, a hybrid energy-forestry Through agreements with institutions project, and the Romania Afforestation including the Development Bank of project. The participants decided at their Southern Africa and the Infrastructure February 2002 meeting in Pails to support Development Finance Corporation of India, one more CDM LULUCF project. Over a the PCF hopes to improve the efficiency of dozen new project idea proposals from finding attractive CDM projects at much Eastern Europe, Africa and Latin America lower costs and building local and regional have been received and are under review capacities to engage in the carbon market. by the Fund Management Unit. Over the next year, these partnerships should demonstrate the effectiveness of these measures and offer insights for fur- ther streamlining. Helping developing countries to l iN DERITAIKE THlElR 1iR'ST (t:\ I \ I l &IAL 'ITPANSA( 'TrI()NS for ER credits. CONVERSATIONS WITH PROJECT MANAGERS g * mu s , La !]|f- * k . s ' - ,,- ,- I '' I '- *V, . @ . 5 it t PI R3Zi b bdi;aii The PCF's Affbi rstatiii -., , >: ~ ', S -project In Rornanila seeks .. ,. 8 ;,, . -to relhaliihtal d' graded i ' s .' ' ' ' ~ Ffoi ests ad Iiiprotve i , , , SOII feltiility, sOili tablli7a- rt i d ec6o,ical -. '-4 ; -- -- WHO CIPRIAN PAHONTU WHERE ROMANIA AFFORESTATION PROJECT The PCF's Romania Afforestation Project has several objectives in addition to achieving ERs: it will improve soil fertility, and assist in soil stabilization and ecological reconstruction. Mr. Ciprian Pahontu is the Head of the Afforestation Service, in Romania's National Forest Administration. Mr Pahontu discussed the advantages of the project: "Romania has more than three million hectares of degraded lands, the improvement and ' i restoration of which is very difficult and expensive. In most cases afforestation is the only solution. According to Romanian statistics, the average afforestation rate of degraded lands is 345 hectares/year (an average figure for the last twelve years). Using carbon finance provided by the Prototype Carbon Fund, we will improve around 1,700 hectares/year, and we like to think that is only a beginning. Without carbon finance, Romania would only be able to improve and restore these lands at a very slow pace. The beneficial role of the forest in maintaining a natural equilibrium is well known. In the design of this project, a high importance was accorded to biodiversity and social aspects. It was also demonstrated that the project will have a favorable impact on local communities. I definitely believe that carbon finance is a viable financing tool to rehabilitate degraded lands on a broader scale. The experience in Romania should be useful to other countries in Europe which share this goal. The additionality principle of the Kyoto Protocol helps to promote a number of projects that without carbon finance wouldn't be viable. Let us not forget that this is a new mechanism, and the implementation and the development of the new rules needs a little time. The growth of carbon finance is limited at the moment, but I think after 2008 a significant growth will be recorded. I would like to suggest that the PCF, as pioneers in the field, organize more workshops, seminars, and conferences in order to advance the development of all procedures needed." I I r C. - .4 Cl The basic common element of PCF transactions is the agreement to purchase greenhouse gas ERs from projects that qualify or are likely to qualify as CDM or JI projects following the entry into force of the Kyoto Protocol. Under these purchase arrange- ments, the PCF agrees to make payments to project entities for the delivery of ERs generated by the CDM or JI projects. KEY ACHIEVEMENTS risks in a standard method quite complex. Key achievements this year in the develop- Standardizing the ERPAs is an ongoing chal- ment of legal agreements include: lenge as the PCF ERPAs are constantly adapted to reflect different project types and > The refining of legal documents taking risks. into account the Marrakesh Accords as well as lessons learned through the imple- REFINING THE LEGAL DOCUMENTS mentation of PCF projects; Over the last year, this basic approach has been refined to both maximize operational ) The negotiation of terms for ER purchase efficiencies and minimize risk, while main- transactions for projects that include taining sensitivity to the unique nature of forestry components, one in Brazil the carbon market. With the increasing num- (CDM), and a second in Romania (JI). ber of projects and additional experience This will enable the PCF to gain experi- gained through project development and ence with sequestration and share the les- risk management, the PCF has advanced in sons learned while further modalities are several key areas: still being discussed by the Parties to the IUNFCCC; ) Principally, the PCF has developed more specific legal agreements to mitigate risks ) The signing of three agreements with identified with individual projects. regional intermediaries, which aim to reduce project transaction costs as well I The PCF has also developed an approach as facilitating the identification and specifically tailored to the needs of JI development of projects and the bundling projects, taking into account the unique of projects; and situation of countries with economies in transition which are included in Annex I > Advancing the goal of standardizing PCF of the Kyoto Protocol. legal agreements. > By translating the provisions of the Aside from the mechanism-specific docu- Marrakesh Accords into its agreements, mentation (e.g. Host Country Agreement for the PCF has been able to make significant JI), a common set of legal documents is used progress in refining its legal instruments. for all PCF projects. These documents include a Letter of Endorsement or No In the Marrakesh Accords, the requirements Objection, a Letter of Intent, a Letter of for participation in CDM projects by host Approval and an Emission Reductions countries were restricted to the ratification Purchase Agreement (see Box 3.1). With the of the Kyoto Protocol and the designation of increasing experience gathered in structuring a national authority for the CDM. projects legally, the PCF is also currently Consequently, the PCF decided it was no undertaking the process of standardizing its longer necessary to enter into a Host ERPAs as far as possible. However, most Country Agreement with PCF host coun- agreements for the transfer of ERs are tries that meet these CDM participation closely linked to the projects themselves and requirements. The international consensus projects and project risks are not homoge- reached at Marrakesh reduces the Kyoto neous. This makes identifying and allocating Protocol-related host country risks, making THE MULTIPLE LIVES OF EMISSION REDUCTIONS EMISSION REDUCTIONS count against * Generated by a Project * Verified by an independent entity _ converted transferred EMISSION REDUCTION UNITS < * Account of Parties or Private Entities 1I-box$1 7jPCF LEGAL INSTRUMENTS INCLUDE: LETTER OF PROJECT ENDORSEMENT OR NO OBJECTION: This letter is a unilateral document issued by a potential PCF host country very early in the process of project identification. With this letter the PCF obtains the general consent from the host country for the further development of the project as a CDM/JI project. The PCF seeks to obtain such a letter when it receives a Project Idea Note on a project which is considered viable before it goes into further development. LETTER OF INTENT: A Letter of Intent is signed by the potential seller of emission reductions and the World Bank as trustee of the PCF. With this document the PCF declares its intention to purchase emission reductions generated by a specific project under terms to be agreed in return for the exclusive right to contract for the purchase of emission reductions. By signing this letter the project entity commits itself to repay project preparation costs if it decides not to proceed to negotiate an Emission Reductions Purchase Agreement with the PCF Trustee in relation to the project. LETTER OF APPROVAL: With the issuance of a Letter of Approval the host country formally approves the project for the purposes of Article 6 or 12 of the Kyoto Protocol, and confirms that the project assists the host country in achieving sus- tainable development. A Letter of Approval is a requirement for all JI and CDM activities under the Kyoto Protocol and is therefore a prerequisite for the signing of an ERPA with the PCF Trustee. EMISSION REDUCTIONS PURCHASE AGREEMENT: An Emission Reductions Purchase Agreement (ERPA) is entered into by the entity selling the emission reductions generated by the project and the PCF Trustee. Under the ERPA the project entity sells to the PCF all rights, title and interests in and to all, or a part of, the emission reductions generated by the project. The PCF Trustee commits to pay the purchase price upon delivery of the contracted amount of emission reductions gen- erated by the project. The ERPA contains provisions on satisfactory project implementation, identifies common project risk, and requests the maintenance of insurance by the project entity. HOST COUNTRY AGREEMENT: In JI countries the PCF Trustee seeks to enter into a Host Country Agreement with the host country. The agreement includes an undertaking by the host country to transfer an amount of Emission Reduction Units equivalent to the amount of emission reductions generated by a project and purchased by the PCF, from the assigned amount of the host country to the registries and accounts of the PCF participants. For the time between the project start date and the beginning of the first commitment period, the Host Country Agreement requires the host country to agree to set aside and transfer assigned amounts, as soon as legally possible, in amounts equivalent to the emission reduc- tions generated by a project. \t | figur^e 3.1| LEGAL AGREEMENTS FOR PCF PROJECTS UMBRELLA HOST COUNTRY AGREEMENT * ~~(Jl Countries ony i i/3. Letter of - 1 etter of Project \ roject Approval - +g / ndorsement\ \ > ; ] *112:IH{- L t2 l ; .-I I r it , | I ;I 1I........ _------- ------ (PROJECT ___ kENTITY Nego Etiai,o-n P,, -10,:1,01 asI Ilu|.e wi.Pun uh ase AgF eeii-ici i Negotiations =5 Host Country Agreements for CDM no fer of the ERUs equivalent to the amount of longer critical for the PCF Instead, the host ERs generated by a project. The Host country is expected to approve individual Country Agreement also contains an under- projects through the issuance of a Letter of taking by the host country to set aside an Approval. equivalent amount of its Assigned Amount Units as security for the delivery of the ERs Under its ERPAs, the PCF purchases ERs purchased by the PCF Trustee through an certified by an independent third party. In Emission Reductions Purchase Agreement ordler to count against the targets of parties to be concluded with the project entity. So to the Kyoto Protocol, these ERs have to be far the PCF team has negotiated or is in the transformed into Certified Emission process of negotiating JI Host Country Reductions (CERs) under the CDM or Agreements with Romania, Bulgaria, the Emission Reduction Units (ERUs) under JI Czech Republic and Poland. as defined under the Kyoto Protocol and the Marrakesh Accords. Once the Kyoto .1if-if, SMALL SCALE '(i -I Protocol has entered into force CERs will -Qt . r ll-1QALLY VIABLE be issued by the Executive Board upon In order to further encourage the growth of receipt of the Certification Report by an the carbon market, the PCF is investigating Operational Entity possible ways to develop and finance small and otherwise economically unviable proj- In the case of projects under Article 6 of the ects. In working through intennediaiies, the Kyoto Protocol (JI), the host country will PCF tries to draw on regional expertise and have to go through a process of converting reduce costs with regard to the individual ERs into ERUs (See Fig. 3.2). First, ERs gen- projects. With the preparation of a senes of erated in its territory will count against the projects in Costa Rica and the Czech host country's Assigned Amounts. Second, if Republic, the PCF has also gained first hand the host country approves the project as a JI experience in the bundling of small projects, activity and agrees to transfer the ERs, it will developing key legal documentation to convert an amount of Assigned Amount develop and underlie these arrangements. Units equivalent to the ERs generated by the project to ERUs. In doing so, it will mark i:jp' 1j1, AHEAD Assigned Amount Units with a project iden- In the coming year, PCF will continue to tifier confirming that the ERs have been improve the structuring of carbon purchase generated by a specific JI project. Finally, transactions: ERUs can then be transferred to the accounts of other Parties to the Kyoto ) The PCF will strive towards further Protocol and/or the subaccounts to private streamlining and standardizing legal doc- entities within other countries. uments, and simplifying contractual arrangements as much as possible. The PCF Host Country Agreement ensures the support of the host country for a spe- > The PCF will continue to gain experience cific JI project. With the approval of a PCF with different types of transactions, such project, the host country also agrees to con- as small projects under intermediary vert ERs generated by such a project into agreements, sequestration projects, and ERUs and to transfer them to the accounts to the extent possible with simplified of PCF participants. Under this Agreement rules and procedures. the country still approves each individual project for the purposes of Article 6 of the > The PCF will continue to share the expert- FKyoto Protocol and authorizes the project ise gained in the process. sponsor to participate in the JI project activ- ity by issuing a Letter of Approval for each In addition, as the first ERs from PCF proj- individual project. In order to obtain the ects will become available, the PCF will ERUs generated by a project, JI host coun- address the issues of delivery and transfer tries agree to actively cooperate in the trans- of ERs to the PCF participants. r D * s 4 -} *1 i ~ -hi - !- ->o LD CL - - J 'I lt i,4 In negotiating more than a dozen transactions in the past year, the PCF has deepened its expertise in structuring carbon pur- chase transactions in ways that help leverage financing for the underlying projects, and that better manage risk for both the PCF and the project sponsors. As a key component of this process, the PCF Annual Report outlined five elements of has developed techniques for systematically risk -project, country, "baseline," "Kyoto- evaluating risk and structuring transactions Protocol-related," and market risk - and to mitigate and assign risk. These policies, how they impact ER transactions. The PCF drawn from best practice in the risk man- uses a range of risk assessment tools includ- agement industry, entail: ing: (a) financial, technical, social and envi- ronmental appraisal of candidate projects in Comprehensive risk assessment through accordance with World Bank Group opera- the project cycle to identify the nature and tional policies, (b) monitoring the Kyoto extent of risks: Protocol process, as well as trends in the ER market, and (c) applying a rigorous process of > Financial engineering and structuring of validating ERs (see Chapter .5). In the past transactions to mitigate and assign ele- year, the PCF has refined our appraisal ments of risk to the parties best able to process to improve our ability to screen proj- assume them: ects, reducing the cost of dropped projects. Using these tools, and assigning each type of "I Pricing transactions to reflect risk; and risk to the party best able to bear it, the PCF aims to structure ER purchase transactions ) Portfolio risk management tools to miti- so that the project sponsors and their credi- gate specific risk and hedge systematic tors assume most project and country risks, risk. while the PCF bears market risk (i.e. volatil- ity of ER prices) and most "Kyoto Protocol- A recent PCF paper ("Financial Risk related" and "baseline" risks. Assessment and Mitigation; Risk-based Structuring and Pricing." PCF Implemen- FINANCIAL ENGINEERING tation Note No. 7, available on the PCF The ERPAs and intermediary agreements website), outlines our procedures for risk negotiated by the PCF in the past year con- assessment, sharing and mitigation. The tain a number of provisions that improve PCF also cooperates with key market play- the risk profile for both the PCF and the ers including CO9e.com, Ecosecurities, project sponsors: Natsource and Point Carbon in gathering and synthesizing market data in order to The ERPA Counterparty. Generally, the build a better understanding of prices, vol- contracting party to the ERPA is the project umes, asset classes and market drivers. entity. In several cases, however, the entity was not yet identified (or legally estab- These efforts have enhanced the ability to lished) at the time the ERPA was required. structure and price transactions in a way To surmount this problem, the PCF has that shares benefits and risks. Below is a negotiated ERPAs in advance of identifica- discussion of how these policies have been tion of the project entity, enabling the spon- put into practice in recent transactions. sors to tap financing (or reduce the cost of financing) for projects: RISK ASSESSMENT AND ALLOCATION Risk is a major factor influencing the value ) Uganda West Nile Hydropower: The of ERs in each transaction. Last year's PCF PCF negotiated an ERPA with the PCF Capitalized Commitment Price ER Purchase Prep. Costs Commis- in ($000) $/tCO2e OOOt C02 (max $000) sioning Brazil Plantar 5,300 3.50 1,514 280 2002 Chile Chacabuquito incl option 6,690 3.5+option 1,750 117 2002 Colombia Wind - Jepirachi 3,200 3.50+0.50 800 190 2003 Costa Rica Hydro - Cote 610 . 3.50 173 0 2002 Costa Rica - Vara Blanca 1,000 3.50 285 0 2004 Costa Rica Wind - Chorotega 920 3.50 263 0 2004 Czech Rep. Interm. - SEF 2,600 4.00 650 n.a. multi Czech Rep. Interm. - CEA 2,600 4.00 650 n.a. multi Poland DH-Stargard 1,090 3.00 365 n.a. 2002 Poland: Pisz Biomass 570 3.00 191 n.a. 2003 Romania Afforestation 3,660 3.60 1,018 n.a. 2002 Uganda West Nile 3,900 3.00 1,300 400 tbd Ugandan government, which incorporated than the full projected volume of ERs, thus it into the bid package for the issuance of mitigating the PCF's exposure to project a concession for providing power to a risk while providing a commitment from remote region. The PCF will ultimately the PCF to pay hard currency revenue. sign the ERPA with the winning bidder. This will enable the project entity to gen- Events of Default. Each ERPA contains a erate ERs which will provide a stream of set of events of default that, if triggered, payments of US$3.5m of hard currency enable the PCF or the sponsor to terminate over 16 years, a cash flow which can be the contract and, in some cases, seek other used to attract financing for the project. remedies. For each deal, these events of default include: ) Czech Republic Energy Efficiency: The PCF is in the process of negotiating > Failure to deliver a minimum cumulative intermediary agreements with two state amount of ERs over a period of years; agencies, the Czech Energy Agency and the State Environmental Fund to deliver > Sales of ERs to a third party which have Subsidiary ERPAs on smaller projects. The been pledged to the PCF; Subsidiary ERPAs will be negotiated by the intermediaries and signed between them > Material misrepresentation and other and the project entities. The intermediary breaches of the agreement. agreement is structured so that if the proj- ects do not deliver the required ERs, the Conditions Precedent. Each ERPA is part intermediaries will negotiate additional of a package of legal contracts related to ERPAs to meet the required levels. the project. The PCF's commitment, while conditional on the effectiveness of the other Payment on delivery. Under all of the contracts, can be used to secure project ERPAs negotiated this year, the PCF com- financing. mits to pay an agreed price upon delivery of ERs (signified by receipt of a verification The PCF has developed term sheet tem- report from an independent third party), net plates outlining the key provisions of trans- of verification costs. In this way, the project actions, which has dramatically reduced the sponsors assume the primary risk of ER cost and time of structuring transactions. delivery, while the PCF assumes price risk. The PCF will consider providing a limited PRICING IN PCF TRANSACTIONS amount of upfront financing in certain The PCF's 2001 Annual Report discussed cases, but will generally require security and how several generic factors influence the will discount the price to reflect risk. PCF's policy for determining the prices at which it contracts ERs: Seniority. The PCF's policy is to negotiate a senior interest in the ERs it purchases. It ) Consistency with evolving market prices achieves seniority by purchasing the first (see Box 4.1 for an overview of the global ERs generated by a transaction, and by market to date); overcollateralizing - i.e., purchasing less :31- ) Equitable benefit sharing; by a Host Country Agreement and Assigned Amount Units from these coun- > Participants' willingness to pay; and tries, reducing the PCF's risk exposure. ) Coherence across the PCF portfolio. ) The projects in the Czech Republic in par- ticular were priced higher because they Based on these factors, the PCF identifies a are backed by intermediaries that are range of offered prices for ER purchases, state agencies which assume a share of which in 2002 was US$3.50-$4.00/tC09e. the risk of non-delivery by sub-projects, Within this range, the offered price for ERs in as noted above. an individual transaction depends on its structure an(i size, the level of risk assumed > In the Colombia Jepirachi wind farm proj- by the PCF, and additional features of the ect, the PCF offers a premium of up to transaction (such as social or environmental US$0.50/tCO0e to the sponsor if it delivers benefits beyond ERs) that would command a set of activities aimed at improving the a price premium. Table 4.1 summarizes pric- social well-being of the local indigenous ing for transactions executed by the PCF in population. the past year. Notably: > The smaller transactions in CDM countries > PCF transactions in Jl countries are gen- were priced somewhat higher than they erally priced higher than those in CDM would otherwise be given their le el of countries because the ERs are backed risk, and did not absorb preparation costs. VOLUME OF TRANSACTIONS ON THE CARBON MARKET 4 60- -1 THE GLOBAL MARKET TO DATE After a rocky start, the global ER market appears to have 40 - gained its footing in 2002, in anticipation of the Kyoto Protocol's entry into force. Since 1996, when trading began, an estimated 200 million tCO2e (excluding post-2012 vin- tages) have traded in over 150 deals.Some experts forecast volumes to reach 70 Mt C02e in 2002 (see fig. 4.1). 20 * *The early market was dominated by Canadian trades in - - 11options, but has shifted in the past year to reflect early com- pliance efforts of European countries, and is characterized by 0 --- - - trading of government-backed allowances and long-term 1996 1997 1998 1999 2000 2001 2002 contracts for project-based ERs. up to) date cnrcsfrpoetbsdEs Year The majority of project-based transactions were priced in the * Pre-Compliance range of US$1 to US$3.50/tCO2e. Government-backed * Dutch (CERUPT/ERUPT) allowance transactions, notably in the UK market trade sub- I PCF stantially higher, largely because of their minimal delivery risk. *UK Denmark Visit the PCF's website for in-depth information on price trends and other market research. Preparation costs were generally capital- ) In the Romania Afforestation transac- ized (see Table 4.1), such that a portion of tion, the PCF is purchasing zero-premium costs will be deducted from the PCF's call options with an out of the money annual payments. Other costs are borne by strike price (i.e., substantially higher than the PCF rather than capitalized, including expected market prices), on ERs beyond administrative costs, cost write-offs for the contracted amount. projects that default, and option premia. After taking these factors into considera- Fifth, the PCF has developed a Portfolio tion, the all-in outcome price paid by the Management Model, through which it reg- PCF participants will be substantially ularly monitors portfolio performance and higher than the contract price. estimates potential defaults in order to develop its hedging strategy. MITIGATING RISK AT THE PORTFOLIO LEVEL THE IMPACT OF CARBON FINANCE Risk assessment, financial engineering and In the past year, the PCF has demonstrated pricing provisions help mitigate risk at the innovative ways to use carbon finance to project level. The PCF has also developed leverage private investment in climate- several tools in the past year to manage risk friendly technologies. It has shown that: at the portfolio level. First, by purchasing from a range of projects, it diversifies away > Carbon payments can dramatically much of the unique risk of each project. improve the returns on climate-friendly Second, the PCF can exercise remedies investments, especially those involving under the ERPA if a project does not deliver abatement of methane emissions (or other the committed volume of ERs. Third, each high-potency GHGs); and ERPA includes a set of milestones, including at least one that occurs before the end of the > Even for traditional renewable energy and PCF's investment phase (June 2004), so that energy efficiency projects, the high quality if the PCF recognizes that projects are not of cash flows from carbon sales can be cat- delivering in accordance with the mile- alytic in helping project entities secure stones, it could give notice to the project upfront financing. entity and (if the default is not remedied) reallocate PCF funds elsewhere. Fourth, to Analysis of projects in the PCF pipeline, com- hedge against the risk of projects defaulting bined with PCFplus research, has demon- after June 2004, and to ensure that the par- strated the impact of selling ERs on a range of ticipants receive adequate ERs given a lim- technologies. Projects that mitigate methane ited capital base, the PCF has purchased production, such as landfill-gas-based power call options. Notable transactions include: generation, can mitigate 5 kg C0.e per kWh or more, which at US$3/tCO2e can contribute ) The Chile Chacabuquito Run-of- over 1.5 US cents per kWh to the project and River Hydropower ERPA provides for boost internal rates of return by 5 percentage the PCF's purchase of a call option for points or more. Carbon finance therefore has ERs generated after the project has deliv- the potential to revolutionize solid waste ered the PCF's firm purchase of ERs. management and other methane-generating businesses in emerging markets. PCF projects in Bulgaria (Svilosaa biomass) and Chile r r i(Chacabuquito hydro). Transactions iti I*'i s. ,<~~~-- 'a'-|;r ; :- , -, r ......... ---------_-_------_-------- A. Transaction ructure B. Indicative Schedule of Cash Flows 6- 5. - 4 -i Leiter of Approval L aiei1 < i 3 .. ~CF Pavillent- ER payments v - - S < >\ERPA n - -Loan Agreemen cu t -2 La i Amortizator, Year Revenues from carbon sales from tradi- LOOKING AHEAD tional renewable energy projects are more In the coming year, the PCF will continue to modest, generating revenues ranging from improve and streamline the structuring of 1/4 to 1/2 US cent per kWh (at a price of carbon finance transactions to leverage pri- US$3/tCo.-e). The higher range would be vate investment and reduce costs. In par- attained in areas with very high carbon ticular: intensity, e.g., the West Nile region of TlTganda where renewable energy would gen- > The PCF will examine new ways of struc- erally displace small diesel generation. turing transactions using the PCF's hard- currency cash flows as collateral for debt As important as the boost to revenues pro- financing. For example, it could consider vided by carbon sales, is the fact that PCF future flow transactions where PCF pay- commitment to pay is (TS Dolla i-denomii- ments would be held in escrow as a debt nated and backed by unconditional promt- reserve or sinking fund. issor-y notes from the PCF participants (all of whom are of investment-grade). These fea- ) To further reduce the cost of dropped proj- tures minimize cross-border, currency and ects, it will increase upstream review of transfer risk, so that PCF financing can be projects, in order to identify deals with used to leverage project financing that would major issues that would hamper a project's not otherwise be forthcoming. potential to generate ERs. For example, in the Brazil Plantar The PCF will continue to refine its risk Sustainable Forestry transaction, the assessnient and mitigation tools, for exam- project sponsor was unable to obtain the ple by updating the Portfolio Management medium-term financing required to execute Model to reflect evolving expectations of the project. Lenders would extend loans delivery of ERs under ERPAs. only with country risk insurance, which was available only for short ternis at high prices. > As prqjects begin to deliver ERs in the TsingPCFpaymentsundertheERPAascol- coming year, the PC1F will develop lateral, the lender was able to extend the processes for registering and tracking loan tenor from two years to five years, expected deliveries to the participants. despite the current economic difficulties in Brazil, and eliminate the need for expensive country risk insurance (Fig. 4.2 a and b). CIC5 a;~H = iF- 9 l QQ C) ji- - ,1- ... a By penetrating new markets and aiming for technological diversity over the past year, the PCF has added considerable value to its portfolio of carbon projects and further solidified its knowledge base. This experience confirms that the creation Marrakesh and, combining these insights of a high quality carbon asset requires at with real project experience, the PCF has least: guided a number of projects successfully through the validation process. It expects ) An excellent understanding of the con- that PCF projects will be among the first to cepts of additionality and baseline; be reviewed by the CDM Executive Board and that this will demonstrate the quality of > The definition and use of practical meth- our projects and the methods applied. ods to determine baselines; The Marrakesh Accords provide three > The creation of workable tools to monitor approaches to baselines (See Box 5.1). Our relevant data and calculate ERs; analysis shows that the PCF's methodology is consistent with the Marrakesh JI and ) Accepted procedures for project valida- CDM requirements, given that the PCF tion and verification of ERs; and establishes baselines: ) An excellent understanding of JI and CDM > As a scenario that is a reasonable repre- modalities and procedures. sentation of emissions that would occur in the absence of the proposed project, The PCF now understands that: ) In a transparent and conservative manner, > There is not one single baseline method- ology that works for all projects and cir- ) On a project-specific basis, cumstances; > Taking into account relevant national or ) Many projects require the use of several sectoral policies and circumstances, and methodological elements to establish a credible baseline; ) Using methodologies which are likely to be approved by the Executive Board. ) The baseline study and monitoring plan must be integrated to ensure project vali- BASELINES AND MONITORING dation and verifiability of ERs; and FOR PCF PROJECTS The Marrakesh Accords define environmen- ) Simulation and projection of emission tal additionality as the positive difference reductions using the monitoring plan's cal- between the emissions that would have culation concepts can help to identify occurred without the project (baseline emis- risks under alternative scenarios. sions) and actual project emissions over time. Thus, the baseline scenario is essential RESPONDING TO MARRAKESH both from a regulatory and a business point The decisions taken by the Parties to the of view. It is the most important determinant UNFCCC in the last twelve months have had of the project's eligibility under the Kyoto a major impact on the PCF's work. The PCF Protocol and, together with the monitoring team has closely followed and contributed plan, determines whether a project will suc- to the discussions before and after the 7th cessfully deliver emission reductions. session of the Conference of the Parties at 39 SM l Investment analysis the option with the highest Latvia (Liepaja: landfill/methane capture); internal rate of return Romania (afforestation) Investment analysis the option with the highest Bulgaria (Svilosa: biomass waste) net present value Investment analysis the least cost option Poland (Stargard: geothermal), Poland (Pisz: biomass waste) Economic analysis the least cost option (using least cost expansion planning) Chile (Chacabuquito: run-of-river hydro), Morocco (wind), Guatemala (El Canada) Scenario analysis the option with the lowest barriers Uganda (small hydro), Brazil (such as risks and costs) (Plantar: fuel switching) Control groups historic trend or a peer group Brazil (Plantar: charcoal production) Electricity Sector the electric system plus system Costa Rica (Umbrella Project), Baseline (economic expansion: a project is additional Colombia (Jepirachi: wind) analysis) if production cost is higher than sector long run marginal cost Business-as-usual for the business-as-usual scenario Nicaragua (rice husk to power) small-scale projects assumptions: a project is addi- tional if impeded by barriers. Common practice for the common practice in defined Mauritius (waste management) small-scale projects countries (based on observations and research results) Default baseline for determined by a validated default Czech Republic (district heating, project classes (multi- method for project classes in a demand side energy saving) project baseline) defined host country (based on observed behavior) Jig u re 5.11 PCF QUALITY ASSURANCE PROCESS How does the quality control system work? |PCF:INTERNALDOCUMENTREVIEW -- , I h---- The PCF continues to demonstrate the To date the PCF has used the project specific application of various baseline methods, baseline methods (see opposite). The method selected for a particular project depends on a number of factors, including In the past year, the PCF baseline teami had the type and size of the project, data avail- to address many questions with regard to ability, uniqueness, replicability and costs. baseline scenarios for power sector proj- Project-specific methods focus on a pro- ects. In most cases, the PCF have used a ject's particular circumstances, while stan- least cost economic analysis for electric dard methods such as benchmarks are power pr-ojects, and although project cir- developed for classes of projects. cumstances can greatly vary, the least-cost method is often justifiable. For examiple: Investment analysis is still used for most PCF projects. But with growing experience > Grid-con nected po wer: the baseline sce- and advanced international discussions, nario is usually known to be the current the PCF is moving towards standardization power generation and distribution sys- and simplification of its tool kit. The PCF tem plus any planned expansions, there- realizes that there are degrees of standard- fore a streamlined method is sufficient. ization and simplification, which depend Where an expansion plan exists, it miay on project size and type, sector, country show that a proposed project is not (yet) and other factors. And it has learned that a the next least cost option. In the absence strict distinction between project-specific of an expansion plan, pro jects may be and standard baselines may not be helpful. able to show that lower cost generation ,In Ilnnovatuon - - - - - - options are available. Where small power is used to simulate expected reductions. projects are not included in the expansion PCF projects do this in the Emission plan, they are additional if their generation Reduction Study. costs are higher than the grid's long-run marginal costs. In all cases, the system's Thus, validated monitoring plans with their power dispatch indicates the power source clear instructions and tools are pivotal in that would have to be dispatched in the that they ensure the long-term environmen- absence of the project activity. tal credibility of projects and provide a more certain basis for emission reductions pur- ) Off-grid powler (isolated locations or self- chases and subsequent performance and generation): the baseline scenario is usu- quality control. In PCF projects, monitoring ally defined by the least cost power supply plans are therefore incorporated into the alternative that is available to the decision legal documentation. maker. Emission reductions are calcu- lated against this baseline scenario. SIMPLIFIED METHODS FOR SMALL-SCALE PROJECTS For grid-connected power projects, the PCF experience in the last year has rein- PCF is moving towards sectoral baseline forced the observation that small-scale proj- studies, which use the same assessment ects need streamlining and simplified framework for most projects in the coun- methods to cope with high transaction costs try and can often be bundled under one and other barriers. In the past year, the PCF methodological umbrella for additionality has begun to experiment with simplified assessment and calculation of emission baseline methods and monitoring concepts: reductions. With a sector baseline and monitoring plan validated for the host > For a small waste management project, country, adding projects becomes a sim- the commonly used technology and prac- ple exercise of demonstrating that the tice in developing countries was studied project meets the criteria of the umbrella. and claimed as a baseline scenario. In the past year, the PCF's work on method- >For a small biomass power project in ologies and our project experience has Nicaragua, barriers to investment were shown again that a good monitoring plan identified in support of a "business as that is integral to the baseline study is as usual" baseline scenario assumption. important as the baseline assessment itself. Monitoring plans: > Small renewable energy projects in Costa Rica were bundled to use the same base- > Can address problems that cannot easily line assessment and monitoring concept be resolved in the baseline study, such as and streamlined documentation. when a baseline may shift as a conse- quence of future regulations; > The PCF is currently validating a default methodology for district heating and > Often employ elements of control groups energy savings projects in the Czech that help to further specify the baseline Republic, which is based on observed scenario and translate it into emissions market behavior. using a monitoring and calculation con- cept along with conservative parameters > The PCF has proposed the publication of and assumptions (the Brazilian Plantar emissions factors for national grids, calcu- project is a good example); and lated centrally on the basis of monitored dispatch data, which can then be used by > Provide an explicit and a realistic link project owners to calculate their emission between the baseline assessment and the reductions on the basis of their power sales expected emission reductions, provided to the grid. the monitoring plan's calculation concept Working through the PCF/CDM Project Cycle is a useful CAPACITY BUILDING tool for all stakeholders. 12 F! --' '| S Social a . I Responsibility - .. .X11- A I ,41'8t 4S L 'I In the Costa Rica umbrella projects, the and increasing the certainty about the qual- PCF has deternmined ex ante emission ity of the carbon asset at an early stage. reduction factors for small scale renew- The PCF quality assurance team reviews able energy projects, thus eliminating the baseline studies, monitoring plans and necessity for central monitoring of enmission reduction studies to ensure that avoided grid emissions. they satisfy PCF standards and meet the existing Kyoto Protocol requirements, > In the Nicaragua project, baseline emis- before the project is submitted to a desig- sions will be calculated using data from a nated operational entity for validation. proxy plant that is likely to represent emis- sions at the margin of the dispatch order. In the past year, the PCF has begun to invite stakeholder comments following the PCF QUALITY CONTROL, Marrakesh requirements for CDM projects. VALIDATION AND VERIFICATION Comments were received for most PCF The past year has seen a refinement of the projects. It has documented all comments PCF's quality assurance system and its on the PCF website along with our closer integration with PCF and CDM/Jl response, and the PCF team has asked val- mandated project cycle steps. PCF idators to take them into account. methodology experts are now involved in project decisions at the earliest stage in the A growing number of firms offered valida- project cycle and provide continuous guid- tion ser-vices last year. The firms that the anceiDnlater stages. The standardization of PCF has used have consistently shown business processes and quality control thus their ability to quickly identify the issues achieved helps the PCF to cope with a on which the credibility of a project hinges, growing project volume, while at the same and they have frequently requested time applying experiences from other proj- improvements in project design and docu- ects, reducing preparation time and costs, nientation. The PCF expects that they will N. --- ---- - -- figure 5.21 CARBON ASSET CREATION AND MAINTENANCE COSTS: THE PCF EXPERIENCE Preparation and Review of the Project Upstream Due Diligence, carbon risk assessment and documentation: $25K Project completion 3 motlts Baseline Study and Monitoring Plan (MP) Baseline and Monitoring Plan: $55K Validation process Periodic verification Contract. Processing certification and docunmentation: S25K Construction and start up Total through Negotions Project Appraisal and Negotiation Preparationi Costs: S265K Consultation and Project Appraisal: $60K Negotiations and Legal documentation: $100K be accredited as Designated Operational CO-BENEFITS OF PCF PROJECTS Entities, which will enable them to submit The World Bank as the PCF's trustee seeks our CDM projects and methodologies to the to ensure that PCF projects fully abide by Executive Board for review. its ten social and environmental safeguard policies. This lends PCF projects a value Unique to the PCF is an "initial verifica- beyond their benefit to the climate and a tion" step at the beginning of the opera- quality that often exceeds not only com- tional phase of a project. This step mercial practice but also the specific CDM confirms that the project is ready to gen- or JI requirements regarding environmen- erate and monitor emission reductions, tal impact assessment by host countries. which reduces project performance risks Moreover, PCF monitoring plans routinely significantly. The PCF has recently com- contain social and environmental per- pleted its first initial verification for a proj- formance indicators, which are monitored ect in Chile (Chacabuquito) with excellent and verified and which host country results. It now expects that this project authorities can use to assess the project's will be the first from which the PCF will contribution to sustainable development. obtain verified emission reductions. i.. |1-1 u-0~~qPCar-bon finianice can improve - - the viabIlity of ! -capturing -methiane from- solid waste X'. landfils, as tt r s= | -deiioloistrated -~Y~ ;$~r~in t.he PCF pr-oject ill Liepaja. Latvia. To further enhance the co-benefits of its CARBON ASSET CREATION projects, the PCF has recently begun, on an AND MAINTENANCE COSTS experimental basis, to negotiate with proj- The PCF FMU closely monitors the time ect sponsors specific social and environ- required and the costs incurred to prepare mental benefits that the project must PCFprojectsandsucceeded inthepast year deliver to the local community. The pro- in bringing some of these costs down, as ject's monitoring and verification system is project experience grew and procedures used to confirm that these benefits actually became more standardized and/or stream- reach the community, and occasionally, lined. PCF payments are made dependent on pos- itive non-carbon outcomes. The time it takes for a project to go through the entire PCF project cycle varies greatly, This is, for instance, the case in a wind reflecting the variety of project types, their farm project on indigenous land in novelty, sizes, circumstances, and countries, Colombia, where the project sponsor has and the complexities of establishing a base- agreed, in consultation with the local line as well as the preparedness of the spon- indigenous community, to implement a sor and project. series of community-driven activities, including the construction of a desalina- For instance, the Brazil Plantar project is tion plant, and the rehabilitation of health comprised of several components within and educational facilities. In another exanm- one project, each of which necessitated a ple involving the Brazilian Plantar project, separate baseline assessment and moni- the monitoring plan contains indicators for toring concept. Umbrella projects such as workers' health and forest protection. those in Costa Rica and the Czech Republic figure 5.t PCF/CDM PROJECT CYCLE - The Manufacturing Process For CDM/JI Emissions Reductions Preparation and Review of the Project * Project Idea Note * Project Concept Note * Project Concept Doctnent (or equivalerit) Baseline Study and Monitoring Plan (MP) Project completion 3 month i ., .. Document /*: : i... . ,ed ER projectiois Periodic verification Validation process & certification . Validationi protocol and rceeot * Verification report * Sujiervision repott cp Construction and startup * Initial veritication report Negotiation of Project Agreements Project Appraisal atid related documenttiton * Ternm sheet r *Eissions Reductiorn Purchase Agreemctit 4-5 .1' Growth -r --- , s a- -.- times are also more susceptible to chang- vious year, there have been remarkable ing project circumstances. shifts in the distribution of cost to the vari- ous project cycle steps. Current experience However, the PCF is now beginning to see shows that the CDM-mandated project some repetition in project types and base- requirements do not impose domiinant costs lines, monitoring and other project cycle in comparison with more traditional func- issues. It has also developed a better tions such as investment appraisal, legal understanding of concepts and procedures, review and contracting. The PCF has also which leads to a more rapid drafting of seen that front-end project preparation costs project documents and a faster overall pro- are going up, while downstream appralsal cessing of such PCF projects. costs are faling. This trend is likely to con- tinue as larger volumes of high quality proj- This effect is to some extent being offset by ects are evaluated in shorter amounts of an increase in project work that is not time, and as more technical assistance will directly related to the carbon component, be needed to access difficut projects, whaich such as financial and social/environmental is expected as the market matures. due diligence and World Bank processing of a transaction. In some instances, such as Lttle experience exists yet with the project the Brazil Plantar project, it has been nec- performance monitoring and the verifica- essary to assist in the financial structuring tion process. Monitohing and verification of the underlying project. costs are mostly absorbed by the project entity, but cost risks cannot be excluded. The PCF may, for instance, have to assist some project entities with putting in place ) The implementation of an orderly moni- the monitoring system and with prepara- toting process for PCF projects, its inte- tions for verification. The PCF tries to gration with project supervision and the maintain low monitoring and verification first rounds of verification of ERs; and costs by aligning the monitoring plan with the performance monitoring and quality ) The creation of training material to pro- assurance system of a well-managed proj- vide methodological assistance and train- ect. However, verification activities may ing for PCF partners and host countries. also have to be more frequent in the early years of a project's life, and costs will Given the need to further reduce the bur- depend on the emergence of accredited den of transaction costs, in particular on local verification capacity. small projects, the PCF will continue to explore cost reduction measures to enable LOOKING AHEAD small projects to compete with high-vol- Over the coming year, the PCF expects to ume, low-cost transactions. It intends, for gain significantly more experience in the instance, to: creation of high quality carbon assets. It expects that next year's knowledge cre- ) Make full use of the emerging modalities ation will lead to a much better under- and procedures for small-scale CDM proj- standing of several new classes of projects, ects and to contribute to their further such as demand-side and energy conserva- development; tion projects and a variety of small scale projects. This will involve the development ) Develop standard methods and formats of several new baseline methods and inno- that streamline and accelerate the project vative research to further enhance the qual- preparation process, and create replica- ity of PCF projects while reducing costs. ble models that make projects more accessible; The main challenges which the PCF team will face next year are: > Contract with additional intermediaries to bundle small projects under common > The development of baseline and moni- methodological and procedural umbrel- toring methods for new and more com- las; and plex types of projects; ) Work with host countries and other mar- ) The interpretation and integration into ket participants to improve capacity and the PCF's methodologies and project deliver technical assistance with a view cycle of the modalities and procedures to achieving cost reductions. for JI and CDM projects that the UNFCCC Parties and the Executive The PCF will continue to share insights Board agree upon; from projects and development activities through presentations and discussions in a variety of fora and through submissions to the CDM Executive Board and other UNFCCC entities. Tecnologies - l~~~' -,mA' ,- u~~ ~ ~ - t \tea ' - I- i SX4jpdvo puee ,POIAMOUN dUI.uiS pUPU SUi41?OJ9 During the past year, the PCF has become one of the standard r eferences and a primary source of information for all actors in the carbon market. The procedures, documentation and methodologies developed by the PCF are helping to structure CDM and J1 projects and carbon transactions beyond the PCF. The generation and dissemination of knowl- host country or the private sector that takes edge for the benefit of the wider CDM/JI the initiative to develop and implement proj- community is one of the key objectives of ects that lead to emission reductions, and the PCE This objective is being pursued enjoys access to the expertise of the PCF through the transparent operation of the team throughout the project's lifetime. Fund and disclosure of information on the PCF website, through PCFplus Research The PCF has also continued to share knowl- and Training activities and through PCF edge gained in the course of the Fund's Fellowships. In addition, PCF knowledge is operations, with UNFCCC Parties and the shared and disseminated through public CDM Executive Board. The past year has events at tTNFCCC conferences, in meetings been the first to see practical application of with the participants, host countries, and the decisions adopted in Marrakesh, at the other stakeholders, as well as in major 7th session of the Conference of the Parties global fora. to the UNFCCC. In addition to bringing an increasing number of projects and accom- IA N i N panying methodological work to the valida- PCF participants are in a privileged posi- tion stage, the PC F's Fund Management Unit tion to take full advantage of "learning by has actively contributed to the work of the doing" offered by the PCF as they have CDM Executive Board and its technical pan- wider access to information on projects, els. The PCF is also likely to be among the technologies and purchase terms. Indeed, first to submit, through Operational Entities, PCF participants have increasingly started projects for registration as CDM projects. to utilize the knowledge gained through PCF projects in their own carbon strategies - V/Ei'fE and in the development of their businesses The PCF website is the main and most fre- at home and abroad. For example, some quently used channel for dissemination of participants are now systematically review- PCF information and knowledge. Its key fea- ing their own project portfolios and identi- ture is the document library, which is acces- fying the benefits of carbon financing in sible to the public. In addition, a private driving more climate-friendly solutions to domain accessible only to Participants con- the market in key sectors of developing tains detailed project information, some of economies. which becomes public after final project approval. All PCFplus Research reports and By penetrating new markets and aiming for key training materials are available on the technological diversity, PCF project activi- website. The website is also used to receive ties have allowed an increasing number of project proposals, questions and public com- host countries and the private sector to ben- ments on PCF projects in validation. efit from the most powerful form of knowl- edge dissemination, capacity building and The PCF website was dramatically re-engi- learning: the development and implementa- neered during the spring of 2002. The new tion of a real CDM or JI project. Often, such site was launched in April with upgraded projects are the first in the country or in the and redesigned features to enhance its nav- particular sector. This approach of " learn- igation, cataloguing and search functions ing by doing" is often more effective than ensuring that its users can locate needed traditional capacity building, since it is the documents easily and quickly. A PCF Help In§ Desk was also established through the web TRAINING site to answer questions on PCF and carbon In order to complement its "learning-by- finance operations and to design and create doing" approach, the PCF has entered into a a data base of frequently asked questions partnership with the World Bank Institute and their answers. During this year, the - the learning arm of the World Bank - to website has averaged 173 visits per day, and implement the PCFplus Training Program. has been visited by over 20,000 users, of This program is designed to respond to host which over 5,000 became repeat users. countries' training needs to enable them to identify, formulate and implement projects To compensate for many web users' lack of that will deliver emission reductions that can broadband access to the PCF site, CDs of be purchased either by the PCF or other car- the website can be ordered as needed and are bon financiers. The program promotes made available to host country and former knowledge and learning to experts from trainees of World Bank Institute/PCFplus both the public and the private sector, workshops. Some materials are already avail- increasing their capacity to identify and able in Japanese, Spanish and French and facilitate carbon financing, and to implement the range of materials available will con- each step of the CDM/JI project cycle. tinue to grow in volume and diversity during Whenever possible, training events are the next year. regional in scope to promote dialogue fJigure 6.1! DISTRIBUTION OF UNIQUE USERS / HITS (May 01-May 02) 3000 r-- 80000 E 2500 7 60000 L, 70000 2000 - 50000 Ma Jte u AgSep Oct Nov Dec Jan Feb Mar Apr May 1500 E - .,0 May Juni Jul Aug Sept Oct Nov 0ec Jan Feb Mar Aprl May ( MY0 - 2 54o May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar April May FYOI FY02 .5 1) 'A~I; Osa.tx @ £ ; x^.'i;.. i' ' 'i'<|1 a u "'9 '*4 t"At. .,.r Q 9''v Renlewables 'a' among regional experts, and are designed in R2EISLARCHt cooperation with local partners to ensure CDM and Jl projects are a complex busi- that they address the needs of the target ness. The research component of PCFplus countries, seeks to address some of its complexities by drawing upon and illuminating lessons from Last year was the first full year of imple- the PCF's pioneering activities. While mostly mentation of the PCFplus Training Program. carried out by experts around the world, In all, six major training workshops were PCFplus Research is administered by the held: three in Central and Eastern European World Bank's Research Group, which pro- Countries, and one each in Central America, vide extensive expertise in various relevant South East Asia/Pacific, and the South topics. The research isprimarily focused on African region. In order to disseminate "nuts and bolts" issues, such as baseline knowledge more effectively, cooperative design, and on the development of the car- efforts were launched with third party train- bon market. Completed studies are made ers from developing countries, with the available on the PCF website, and are uti- World Bank's National Strategy Studies lized frequently in implementation of PCF (NSS) team, and with a regional develop- projects and in PCFplus Training. ment bank. The workshops were attended by 26.5 public and private sector officials Over the last year, PCF plus Research has from 28 countries as well as by representa- added five studies to its arsenal: tives of 10 PCF participants, for a total of 8:32 training days. In addition, training was ) "Baselines for Energy Efficiency Projects provided to Worid Bank staff on the inte- Addressed Through Energy Efficiency gration of carbon finance in World Bank Intermediaries," operations. * I urin th pas yer, aprorammtic ) The second and third reports of the Durig th pat yer, aprorammtic "Market Intelligence Study" (national and approach was adopted for the PCFplus international regulations), Training Program, whereby an increasing number of standard training modules were ) "JI in the Context of EU Accession" and developed, facilitating their posting on the PCF website, and their translation to )>"Applying Sustainable Development Spanish. Criteria to CDM Projects: The PCF Experience''. -I CONVERSATIONS WITH PCF FELLOWS WHO HORST MEYRAHN ik- WHERE RWE RHEINBRAUN AG Horst Meyrahn came to the PCF as a visiting fellow from the environmental protection department of RWE Rheinbraun AG (RWE Group's power pro- duction unit, based in Cologne, Germany). Horst was with the PCF from April to July 2002. His time with the PCF was intended to provide him with a deeper insight into the organization and process of achieving project-based greenhouse gas emission reductions. Horst describes his experience in his own words: "After a starting phase in which I got an overview of the numerous PCF projects and project-related activities I participated in some aspects of the PCF's 'daily work'(e.g. selection of validators, base- line consideration, evaluation of forestry projects, presentation of PCF's work at international con- ferences). I appreciated very much the collegial atmosphere within the PCF team and the willingness to answer my many questions - especially when taking into account that everybody is extremely busy. My visiting fellowship provided me with a lot of new know-how. I learned that even under the many uncertainties of the evolving Kyoto regulations JI and CDM projects are practicable and manageable. In my view a PCF fellowship is a great opportunity and I would therefore recommend it to others. WHO GRACE AKUMU WHERE CLIMATE NETWORK AFRICA Ms. Grace Akumu came to the PCF under the PCF Plus Fellowship Programme from an Environmental NGO, Climate Network Africa, Nairobi, Kenya. Ms. Akumu was previously a member of the PCF-Technical Advisory Group (PCF-TAG) from 1999-2001 and participated in the early PCF-NGO consultations. Below is an excerpt of Ms. Akumu's experience with the PCF: 'My three months fellowship at the PCF has been a worthwhile experience. Other than contributing to the Distance Learning training programme for African Host Countries, I am preparing and organ- ized the PCF/NGO consultations during the UNFCCC-COP8 Conference, New Delhi, India. I have val- ued other in-house training and capacity building provided by the PCF's very knowledgeable experts -for example in baseline construction under different scenarios, determination of additionality, monitoring and verification, procedures for project validation and calculation of emission reduc- tions. As a learning- by-doing strategy, I was impressed and very satisfied with the knowledge gained through the two Project Idea Notes (PINs) which I submitted to the PCF, in order to assist in my training and capacity building. I also had the opportunity to discuss with the management ways to enhance discussions and con- sultations with the host countries and in particular, host country NGOs, in order to share informa- tion with regard to projects and policy formulation. I have discussed too, the issue of capacity building as a continuous process and the possibility of capacity building/ training workshops (in English and French) for the PCF and the new carbon fund initiatives of the World Bank so that African stakeholders can catch up with these new developments. I must congratulate the PCF Team for the excellent working relations, and the collaborative and team spirit of every staff member." Ini- adiin a- ||N Estud on how t sterln Ocoe 200 0 individuas fro host 9.;- sml l 1 1-scale CD prjet poeus, an coutris, NG*;sor pate finstitution-s} and* ; ,t e o se . the fellowship . Encouraged a nali- t fro - -te- fellows, In additio, a std on ho;w to sramline Ocoe 200 10 iniiul fro hot sector baseline in El Salvador were i:itiated, the program will be continued duing the next year. The PCFplus Fellowship Program enables AHEAD senior staff of PCF host countries, PCF par- In the coming year, the PCF will advance its ticipants and imsportant partner institutions ongoing goals, providing a global forum for (e.g., regional development banks) to con- expanded knowledIge sharing by: tribute their experience and insight to PCF implementation and to learn from direct > Enhancing the functionality and useful- involvement in the developinent and mian- ness of the PCF website and ensuring it is agement of PCF activities. The fellowships continuously updated with an increasing also enhance the capacity of the fellows number of project documentation, such and their organizations to identify, plan and as Project Design Documents, baseline negotiate CDM orthe projects and to bene- studies and monitoring plans. These will fit from the opportunities of the carbon he posted on the public domain of the market. website. The goals of fellowships are facilitated by Enhancing the dissemination of PCFplus the fact that fellows are based in the PCF Research reports and doubling the num- Fund Management Unit and engage in day- her of training days proviided under the to-day activities as members of the PCF PCwFplus Training program. core team. The fellowships vary in length fromi a few weeks to several months. Since the inception of the Fellowship Programin in Disseminating knowledge gained throuigh touy i as m r o is one of the PCF's most important functions. PCF GOVERNANCE Members of the Fund Management Committee are drawn from the entire World Bank. Shown here are: David Freestone, Chief F Counsel, LEGEN; Susan G. Goldmark, Sector Manager, LCSFE; Henk Busz, Sector Manager, ECSIE; and Arun Sanghvi. Lead Energy Specialist, AFTEG. iI I i ',4 i S iA FMC COMMITTEE MEMBERS HENK BUSZ SUSAN G. GOLDMARK Sector Manager, Sector Manager. Energy Cluster Infrastructure & Energy Service Department KEN NEWCOMBE PCF Fund Manager DENIS J. CLARKE Chief Investment Officer, ARUN P. SANGHVI Power Department Investments, Lead Energy Specialist, Energy Unit International Finance Company (IFC) DAVID FREESTONE Chief Counsel, ESSD & International Law GP,- -74 in' m ~ i0 0 z W ->, Cim Ci) 1 l _- 60 rO m 0 3 M 0 0 > N' -n 0M0 M oC Hi~nc.~ o 0 E?0 0-0 O - 0z M M > - co C M ) M -o, I - h I CDo~~ mm 0W~ > ~ C', C O 0 M0 M- m MM Co 1 (d0 00 0C', (00 0 02W iC3 >- >~ ~ >0 0> I )n ' Z MO - CZ, OZ '> Z C' ZF 3: 3. 0) 5; Z o ., >C,o M 0- - Ch M M > - -. .> 0 > M > ________ > _______M __________________________ FELLOWS AND TRAINEES FROM AMONG OUR PARTICIPANTS AND HOST COUNTRIES INCLUDE: GRACE AKUMU, Climate Network Africa AYITE-LO AJAVON, Togo ANA MARIA BIANCHI, Argentina EDUARDO DOPAZO, Guatemala CHRISTINE FEDIGAN, Gaz de France SALEEMUL HUQ, Bangladesh MASAYA INAMURO, Mitsui YENI KATSARSKA, Bulgaria MARCEL JEUCKEN, Rabobank MARIO TORRES LEZAMA, Nicaragua EGBERT LIESE, Government of the Netherlands HORST MEYRAHN, RWE JAN PRETEL, Czech Republic ILZE PURINA, Latvia ROB SHORT, Development Bank of Southern Africa (DBSA) HANNE SIIKAVIRTA, Fortum LARS SORENSEN, Statoil DAISUKE TSUCHIYA, Kyushu Electric TOMMI TYNJALA, Government of Finland I~-, -- a,: @ '7 GLOSSARY 1 I - F. Mr-.. . -- uni.....t .of Es isudprun oJ,eult n e- .- a ' U III4fL9I5lWW5* *S m Acodn to thexKyoto 'ProtcolarticlsI1fI on theCDM L- '** . . 3 *5 . ,,- and JI. ERs must be additional to those that otherwise . ***- , * would occur. Environmental additionality es estab- .a* . . ..*sIt -lished when there is a positive difference between the - a* . - a.a emissions that occur in the baseline scenario, and the emissions that occur in the proposed project. / Sm - -r- - we S Lca; I ~5..-. he PCFconti4ues to work towards a sustainable future, through shaping the emerging CAmRBON MARKET for high quality emlssion reductions. IfI , L- iI : FI ;.t i. I % e4 . 'I. pP ~Alnn The PCF continues to work towards a sustainable future through shaping the emferging CARBON EARET for high quality emission reductions jqoj IJ p rI II The PCF continues to work towards a sustainable future, through shaping the emerging C ARBON MARKET for high quality emission reductions. flb -- ...e bh Ir4 I-. IY -rw GI Global Sm Co Impact Collaboration ^^ $ ~Ef: Efficiency P C F PROTOTYPE CARBON FUND 1818 H STREET, NW WASHINGTON, DC 20433 USA TELEPHONE 202.473.9189 FACSIMILE 202.522.7432 WWW.PROTOYPECARBONFUND.ORG