Carbon Finance in Gas Flaring and Venting Reduction
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Transcript of Carbon Finance in Gas Flaring and Venting Reduction
Carbon Finance in Gas Flaring and Venting Reduction
Veronique BishopCarbon Finance Business
The World Bank
OPEC – GGFR WorkshopVienna, June 30-July 1, 2005
• Kyoto Protocol basics
• Impact of carbon finance
• Securing financing
• Examples
Outline
• UN Framework Convention on Climate Change
• Industrialized countries (except US, Australia) commit to reduce GHG emissions by 5.2% on average in 2008-12 (vs. 1990)
• Target can be met by:
– Reducing emissions: CO2, CH4, N2O, HFCs, PFCs, SF6
– CO2 “sequestration” via land use change and forestry– Purchasing ERs from other ratifying countries
• “Joint Implementation” – Industrialized countries (EEur, FSU)• “Clean Development Mechanism” – Developing countries• “International Emissions Trading”
• Entered into force on 2/16/05
Kyoto Protocol
• Internalizes the climate externality (partly)
– “Polluter pays” principle– Modeled on US SO2, NOX market
• Free trade lowers the cost of compliance:– OECD: $25-150 per tonne CO2e (marginal abatement cost)– LDCs: <$10 / tCO2e
• OECD shortfall of ~ 2.8-4.8 billion tCO2equiv.
• Funds established to diversify risk, share cost
• World Bank’s role: jump-start market, disseminate lessons, catalyze LDC investment, support host countries
.
Kyoto Compliance Market
World Bank Carbon Funds
Industrialized Governments
and Companies
Developing Countries and
Companies
Carbon Fund
Carbon Fund
$$Technology
Finance $$Technology
Finance
CO Equivalent22
Emission Reductions
CO Equivalent22
Emission Reductions
World Bank Carbon Funds
Italian Carbon Fund
Netherlands CDM Facility $ 180 m
$ 43.8 m to date
Community Development Carbon Fund. $128.6 mto date
Prototype Carbon Fund $180 m
Netherlands Europe and CentraI Asia Facility (with IFC)
BioCarbon Fund
$ 80 mto date
$ 35 m Netherlands ECAF
Spanish Carbon Fund $ 200 m
$ 30 m Danish Carbon Fund
• Emission reductions are calculated relative to a baseline
• Key elements:
– CO2 reduced by displacing fossil fuels– Mitigation of methane, nitrous oxide, other GHGs – CO2 “sequestered” eg through agroforestry
• Impact depends on technology, ER price
• Price depends on:
– Risk and risk-sharing– Supply and demand within market segment
Impact of Carbon Finance
Carbon Prices(Jan. 2004 - April 2005 in $US/tCO2e)
Source: PCF estimates, based on database assembled with Natsource,Co2e.com and PointCarbon
$0.00
$2.00
$4.00
$6.00
$8.00
ER VER CER ERU
Impact by Technology
Energy Sector Fossil fuel displacement
Methane mitigation
Renewables Energy efficiency Biomass cogeneration ( )Gas flaring reduction Gas venting reduction ( ) Coalmine methane ( ) Landfill gas (to energy) ( )
Fossil Fuel Displacement
Fuel Displaced Generic Emissions Factor
(tCO2e/MWh)
Carbon Revenue at US$4/tCO2e
(US$/MWh)
Gas 0.40 $1.60
Coal 0.85-1.0 $3.40-$4.00
Diesel 0.75-1.50 $3.00-$6.00
ER cash flows improve IRRs by 0.5 – 3.0%
Methane Mitigation
Carbon Revenue* (methane only)
US$/tcm CH4 US$/MWh
Biomass cogen, landfill methane
up to $60 up to $16
Venting reduction, coalmine methane
up to $52 up to $14
* at US$4/tCO2e
Impact on IRR can be >15 percentage points
Impact for Flaring Reduction at $4/tCO2e
Fossil fuel displacement
[Coal]Gas
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
per 1000 m3 CH4 per MWh
US
$
Impact for Venting Reduction(flaring only), $4/tCO2e
CH4 destruction
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
per 1000 m3 CH4 per MWh
US
$
Impact for Venting Reduction(commercial use), $4/tCO2e
CH4 destruction
Fossil fuel displacement
[Coal]Gas
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
per 1000 m3 CH4 per MWh
US
$
• Revenue boost:
– ~$ 6/ 000m3 for flaring reduction – +~$52/ 000m3 for venting reduction
• High quality cash flow:
– OECD - sourced – Investment-grade payor– $- or €- denominatedEliminate FX riskFinancial engineering helps tap capital
Impact of Carbon Finance
Host Country
Sponsor/ Project
CF
ERPA
Engagements re:• Regulation (e.g. tariffs)• Kyoto Protocol compliance
ERs
Ltr. of Approval
ER pmt
Securing Underlying Finance
Host Country
Sponsor/ Project
CF
ERPA
Engagements re:• Regulation (e.g. tariffs)• Kyoto Protocol compliance
ERs
Ltr. of Approval
ER pmt
Securing Underlying Finance
Lender?Loan ??
Brazil
Rabobank Project
PCF
ERPA
Financing Agr.
Ltr. of Approval
ERs
Future flow structure: Plantar
ER pmts $5 m
Loan $5 m
SPV
ER payments placed in offshore escrow
Brazil Plantar Sust. Fuelwood
-4000
-2000
0
2000
4000
6000
1 2 3 4 5 6 7
Year
Cash
Flo
ws (
$000)
LoanDisbursementPCF Payments
LoanAmortization
ER payments amortized 100% of commercial loan principal
Ecuador
Project
NCDF
ERPA
Ltr. of Approval
ERs
Future flow structure: Abanico
CER pmt $4.03
Sub
Hidrobanico
PPA?
Loan ?IIC
Ecuador
IIC Project
NCDF
ERPA
Financing Agr.
Ltr. of Approval
ERs
Future flow structure: Abanico
CER pmt $4.03
Loan $7 m
SPV
CER payments placed in offshore escrowSub
Hidrobanico
PPA
Flaring reduction: Rang Dong
• First GFR methodology approved
• Additionality:
– Cash flows with and without carbon– Project must demonstrate that carbon
finance raises IRR above sponsor’s hurdle rate
Venting reduction: FSU
• FSU republic that transits gas and receives share of gas + royalty
• Leaky transmission pipeline: 5% losses
• Poor financial condition due to low collections, theft
Venting reduction: case
• $45m investment to reduce losses to 2% over 3 years
• Negative IRR without carbon due to low gas price
• IRR increases to 37% with carbon
• Financing by oil co, MCM, World Bank
• Revenue in hard currency will enable sponsor to repay loan
Working with the World Bank Group
• World Bank Group’s role in carbon market:
Ensure liquidity in CDM, JIBenchmark new methodologiesIntroduce new countries, sectors, technologies Learning by doing projects
Support to host countries:Capacity building Support in bringing CDM/JI projects to market
Working with the World Bank Group
• Carbon Finance support:
Purchase of emission reductionsAssistance throughout the project cycle
Project design documentValidationProject approval, registrationVerification
Flexible structuring: VERs, CERs, beyond 2012 …Help in securing underlying financing
Conclusions• Carbon finance:
Lowers compliance costsImproves returns on climate-friendly projectsProvides a bankable revenue streamIs taking off: Kyoto enters into force 1/4/05
• World Bank Group can help:Provide a combination of carbon finance and
underlying financingHandle CDM registration processHelp develop capacity
Carbon Market Structure
Project-Based Transactions
Allowance Markets
UK Emission Trading Scheme
EU Emission Trading Scheme
Chicago Climate Exchange
Retail
Kyoto Pre-
Compliance
Not for Kyoto Compliance
New South Wales Certificates
0
20
40
60
1996 1997 1998 1999 2000 2001 2002 2003Q1-Q3
Kyoto Pre-ComplianceNot Kyoto Pre-Compliance
Traded Volumes
Volume traded in project-based transactions, m tCO2e