The Science and Politics of Climate Change

Outcomes of CoP6 in The Hague and Bonn

and

Implications for the Bank and Bank Clients

The Resumed CoP6 Negotiations

Failure at the Hague due to:– Accounting for “sinks” towards targets in OECD– “Supplementarity” of carbon trade to domestic

action

• Other big issues:– adequacy of funds for G77;– Consequences of Non-Compliance: Financial

Penalty?– eligibility of sinks/nuclear in CDM

• Less high profile but key issues were:– Transferability and fungibility of ERUs, CERs,

AAUs– Rules on additionality and baselines

Elements of the Deal

• Funding/Adaptation: Predictable and Reliable - $410 mm/yr commitment by 2005. Adds (but not all NEW Funds):– Special CC Fund (adaptation/tech transfer/compensation)– Least Developed Country Fund: Adaptation for LDCs (Cn$10mm so

far)– KP Adaptation Fund: 2% of CDM proceeds for adaptation (NEW

Funds)

• Supplementarity: “..domestic action shall constitute a significant element of the effort by each Party..”

• Compliance: No financial penalty. But 1: 1.3 make-up ratio

• Sinks (LULUCF) in Annex I: new Annex with caps on use of domestic “sinks” to meet targets e.g. 13 Mt C/year for Japan, 12/Canada, 17.63/Russia (28/USA)

• Sinks in CDM: only afforestation and reforestation, rules by CoP9/2003, cap of 1% times 5 of Parties 1990 emissions

• Nuclear in CDM: Parties are to “refrain from using..”

Other Key Breakthroughs

• Transferability and Fungibility: ERs achieved in each mechanism are largely fungible (“commodity” benefit)

• Streamlining of Procedures for Small Projects: agreed to have simplified procedures for:– Renewables up to 15MW– Energy efficiency with reductions of 15GWh equivt./year– Other projects that emit and reduce emissions less than

15,000 t/CO2 per year– To be agreed by CoP8/2002

• Baselines and Additionality: (close to PCF approach)– Only environmental additionality– Conservative and transparent– Crediting periods 1X10yr, or 7yrs renewable X 3 =21yrs

Carbon Market Impact

• “Hot Air” and Annex I Sinks depresses CDM/JI market– W/o US, all OECD needs may be met by Emissions Trading

plus new sink inventory allowances.

• Both CDM/JI “project-based” Market and “Hot –Air” (emissions trading) market will be “policy-driven”– Emissions Trading is cheap option but not attractive to all– CDM/JI expensive/complex but hi quality, tangible impact

• With full competition, market analysis (DEC) suggests: – CDM trades down to $0-25/tC ($7-11t/C more likely)– PCF pays $10-15/tC, other drivers may yield $7-15/tC

• Non-KP Market drivers are significant: OECD domestic regimes and Corporate Voluntary market

Greenhouse gases emission reductions:

an unusual commodity

• ERs become a commodity after certification.

• Before certification ERs are very heterogeneous depending on the plausibility of their baseline.

Emission Reduction=

Hypothetical baseline emissions - effective emissions

Current or projected national policies

Trading? Start-up Project-based mechanism?

EU Yes 2005 At least from 2008UK Yes . 2001 YesFrance Yes 2003? YesNorway Yes 2005 or earlier YesGermany No LaterDenmark Yes 2001 YesSweden Yes 2005 or later YesNetherlands Ongoing work YesFinland Ongoing work YesIreland Ongoing work Ongoing workAustralia Yes US dependent YesUSA Yes ? YesCanada Yes US dependent Japan Ongoing work YesNew Zealand Yes Not decided YesRussia No Yes`

Regional regulations in the US

• Oregon: CO2 emissions standard for new energy utilities. Price cap: $0.57/tCo2. Utilities can offset emissions using project based mechanisms.

• Washington: New plants must demonstrate the use of best available techniques for CO2 emissions control.

• Massachusetts: CO2 emissions cap for energy utilities effective in 2005. Utilities can offset excess emissions using project-based mechanisms.

• New England and Canadian Eastern Provinces: 10% voluntary reduction of GHG emissions below 1990 levels by 2020

Voluntary corporate commitments

• Rapid survey indicates 52 major companies representing1 billion tCO2e emissions in 1999 have pledged to reduce GHG emissions by 2010.

• Resulting demand depends on the baseline. If we set baseline at 1999 emissions, we obtain a total demand of 500 MtCO2e over the next decade.

• At least eight have said they would use project based mechanisms.

Alcoa -- 25% below 1990 in 2010BP Amoco 79.8 Cumulative 2%/year below 1990 Chubu EPCo. 51.3 0.410 kgCo2/kWh in 2005Dupont 44.4 65% below 1990 in 2010Kodak -- 20% below 1990 in 2004Fortum 9 0.5 MtCo2e below baseline in 2010 IBM 4.1 Cumulative 4%/year below 1998 until 2004Intel 3.3 10% below 1995 in 2010 (PFCs) Johns. & John, 1.5 7% below 1990 in 2010Motorola -- 50% below 1995 in 2010 (PFCs)Ontario Pow.Gen. 26 6% below 1990 in 2010 PEMEX 177 -1% per year until 2010 Shell 99 103 MtCo2e in 2002 Statoil 8.3 1.5 MtCo2e below baseline in 2010 Suncor 5 -1.5%/year until 2002 (-1%/year for 2003-2008) Transalta38.5 -----

1999 Emissions

CommitmentInternal Trading CDM/JI

Corporate voluntary commitments

Chicago Climate Exchange

• 25 Midwestern firms will agree on emission targets by the end of 2001 and start trading in 2002.

• -2% below 1998 level in 2002, additional –1% period year between 2003 and 2005.

• Allows for offsets through project-based mechanisms.

Current Bank Strategy and Programs

(Environment Strategy and “Fuel for Thought”)• Mitigating Greenhouse Gas Emissions

Policy reform – on subsidies, internalizing local and regional pollution costs into energy prices (Fuel for Thought)

Promote renewable energy and energy efficiency; utilize the GEF and PCF

Develop the international carbon market through e.g., the PCF

• Adapting to Climate Change Promote practices and policies that reduce vulnerability

in water, agriculture, forestry, health sectors to natural climate variability and

which increase resilience to long-term climate change, eg:o -watershed management and appropriate water pricing

policieso -incorporate modern scientific forecasts of ENSO events

into sector management decisions• Capacity Building

Build institutional capacity for mitigation and adaptation Access to the emerging carbon market

Implications for Bank/ClientsAdaptation

• Projects in pipeline• Mainstreaming Adaptation in the Caribbean• Impact of Climate Change on Agriculture in Africa• Adaptation in the Pacific Islands

• Short-term Vulnerability Reduction• Collaboration with Disaster Management Fund (DMF) to create more resilient infrastructure and institutions

• Long-term Vulnerability Reduction• Integration in water, agriculture and forestry projects – e.g., Bangladesh, Malawi

• Vulnerability Assessment• Identify and assess adaptive interventions

• Capacity Building• Human and institutional capacity building through projects and knowledge development and dissemination

Implications for Bank/ClientsMitigation and Role of PCF

Key Demonstration Effects of PCF

… that investments under CDM/JI can:• Earn export revenue for Developing

Countries/Transition Economies engaging in the new ER commodity trade

• Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors

• Contribute to sustainable development … and how private sector and governments can implement the CDM/JI project cycle and compete in emerging carbon market

Host Country PCF Representation

Joined (through MoU or Project Endorsement)

Latin America (13)Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Peru, Uruguay

Africa (9)Benin, Burkina Faso, Ghana, Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe

Eastern Europe/ C Asia (7)Bulgaria, Czech R., Hungary, Kazakhstan, Latvia, Poland, Romania

ConsideringBhutan, Belarus, Bangladesh,Egypt, Sri Lanka, Thailand

Asia (1)India

PCF Status and Focus

Deal flow far exceeds funding - several carbon contracts now under negotiation

� >50 deals with $350m+ carbon purchases under review

� Targeting signed Emissions Reductions Purchase Agreements (ERPAs)� by end Jan 2002: 12 deals of $45-50mm in Chile,

Costa Rica, Brazil, Uganda, Romania, Morocco and Uzbekistan

� by July 2002 ~$40mm in Nicaragua, India, Guatemala, Argentina, Honduras, Thailand, Czech, and Kazakstan;

� Under active review as FY02 reserves ~$25mm: Guyana, Hungary, Poland, El Salvador and Colombia

� Constraints: FMU and country capacity, quality of asset

Capacity Building and Carbon Finance Strategy?

• One pilot carbon finance deal is not enough• Full service provision requested by Host Countries

– Help build local market capacity– Develop a “carbon investment office”, legislation and

regulation– Develop private sector portfolio and public-

partnerships– Take portfolios of ERs to market

• Activity catalyzed by first carbon finance but as part of wider technical assistance delivered by– Bank programs (e.g. CDM-Assist for Africa,

PCF+/WBI etc)– Partnerships with bilateral donors

Carbon Finance and Capacity Building Beyond PCF?

• Unmet Demand for Learning through a commercial transaction

• Proposals for “first-of-a-kind” strategy– By country, by application, by delivery

mechanism– Crowding-in private sector: first rights to

private sector, helps make marginal projects viable, right of first refusal

• Two carbon finance models proposed for Bank– Carbon finance manager: direct placement (

through Bank Trust Funds, as per PCF)– “arranger” on fee for service basis

Role for a “Forest Carbon Fund”(Adaptation and Mitigation)

• Follows acceptance of Afforestation and Reforestation in CDM

• Rules of Game to be established at CoP9/2003• Draft Forest Strategy proposes a Prototype

Forest Carbon Fund to enhance learning-by-doing

• Key issues:– Environmental and social impacts;– Permanence and leakage?– Cost-effective monitoring and verification

• Build on PCF business practice• Important Public-Private Partnership

Opportunity