Leveraging Investments for Coal Mine Methane with

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Leveraging Investments for Coal Mine Methane with Climate Change Funds Matthew S. Mendis Robyn L. McGuckin H. Lee Schultz Presented at the Third International Methane and Nitrous Oxide Mitigation Conference Beijing, China November 19, 2003

Presentation Outline: 

Development of Carbon Markets Emerging Carbon Market Opportunities Funds for Carbon Markets Presentation Outline

Development of Carbon Markets: 

Development of Carbon Markets 1990 – Establishment of the Global Environment Facility Provision of grant funds for the “incremental cost” of reducing GHG emissions. 1992 – United Nations Framework Convention on Climate Change (UNFCCC) Agreement to stabilize GHG concentrations in the atmosphere. 1995 – Activities Implemented Jointly (AIJ) Promote pilot projects to demonstrate GHG emission reductions. 1997 – Kyoto Protocol to the UNFCCC Established flexibility mechanisms of Joint Implementation (JI) and the Clean Development Mechanism (CDM) for GHG emission reductions. 2004 - ?? Ratification of KP ??

Development of Carbon Markets - UNFCCC: 

Annex I Parties UNFCC: Division of Parties by Annex Development of Carbon Markets - UNFCCC Annex II Parties Australia / Austria / Belgium / Canada / Denmark / EC / Finland / France / Germany / Greece /Iceland / Ireland / Italy / Japan / Luxembourg / Netherlands / New Zealand / Norway / Portugal / Spain / Sweden / Switzerland / Turkey / United Kingdom / USA Belarus / Bulgaria / Croatia / Czech Republic / Estonia / Hungary / Latvia / Liechtenstein / Lithuania / Monaco / Poland / Romania / Russian Federation / Slovakia / Slovenia / Ukraine Non-Annex I Remaining Ratifying Countries

Development of Carbon Markets - UNFCCC: 

UNFCC: Differentiated Commitments Annex I Parties— developed countries and countries undergoing transition to a market economy—that are committed to adopting policies and measures that will reduce their GHG emissions to earlier levels Annex II Parties— developed countries—must provide new and additional financial resources in order for developing countries to implement the Convention Annex II Parties will also promote and finance the transfer of environmentally sound technologies, particularly for developing countries Non-Annex Parties – developing countries -will act responsibly and cooperate with Annex I Parties to help achieve the objectives of the UNFCCC. Development of Carbon Markets - UNFCCC

Development of Carbon Markets - GEF: 

Development of Carbon Markets - GEF Global Environment Facility (GEF) is the financial mechanism of the UNFCCC. GEF resources must be new and additional grant funds to meet the agreed incremental costs of global environmental benefits. Projects supported by the GEF must be country driven and based on national development priorities. GEF seeks cooperation with other international agencies to enhance its effectiveness. GEF supports innovative, pilot, market barrier removal projects.

Development of Carbon Markets-AIJ: 

Development of Carbon Markets-AIJ AIJ pilot phase was established at the first meeting of the COP in Berlin in 1995. (Decision 5/CP.1) The emission reductions realized during the pilot phase can not be used to meet the reduction commitments under the Kyoto Protocol. The primary purpose of the pilot phase was for all Parties to “learn by doing” and thus gain experience with AIJ. By early 1999, approximately 123 AIJ projects were under implementation or being planned (JIQ, 1999) of which 40 are in Non-Annex I countries. AIJ was used to help establish the rules for CDM and JI.

Development of Carbon Markets – Kyoto Protocol: 

Flexibility Mechanisms: ET; JI; CDM Development of Carbon Markets – Kyoto Protocol Annex I Annex II: Industrialized Nations Need to reduce CO2 beyond what is economically feasible in-country Non-Annex I Need economic incentives for clean (i.e. low CO2) development, do NOT have CO2 limits Economies in Transition May have extra CO2 due to depressed economies and forest credits (hot air) $ CO2e Other Industrialized Nations May develop own CO2 trading systems, may join in 2nd round of KP CO2e $ CO2e Clean Development Mechanism (CDM) $$ Joint Implementation Emissions Trading $ CO2e

Development of Carbon Markets – JI & CDM: 

Objective of JI Allow developed Parties in Annex I to assist the Parties with economies in transition (EITs) that are also in Annex I to implement projects that reduce GHG emissions. Assist Annex I countries in complying with their commitments to reduce GHG emissions Objective of the CDM Assist non-Annex I / developing countries in achieving sustainable development Assist Annex I / developing countries in complying with their commitments to reduce GHG emissions Development of Carbon Markets – JI & CDM

Development of Carbon Markets: 

Project Proponent Development of Carbon Markets Validation/ Registration Monitoring Issuance Design Verification/ Certification Project Proponent CDM Executive Board CERT CDM Project Consultants Project Starts Buyer CDM EB or JI authority Annex 1 Nation CDM Project Consultants Buyer Operational Entity - CDM: Project Activity Cycle

Development of Carbon Markets - CDM: 

CDM: Principal Requirements for Projects Non-Annex I Parties (host country) must benefit from projects that produce certified emission reductions (CERs) Projects must assist host countries in achieving sustainable development Projects must result in real, measurable, and long-term benefits that relate to climate change Projects emissions reductions must be additional to what would be in place without the project activity Development of Carbon Markets - CDM

Development of Carbon Markets - CDM: 

CDM: Developing Quality Projects Identify projects with high credibility and measurable GHG impacts and that are easy to monitor Get local, regional, national governments’ and participants’ support early in project development phase Target projects with local benefits Look for CDM partners with expressed long-term interest and commitment Work closely with project stakeholders Development of Carbon Markets - CDM

Presentation Outline: 

Development of Carbon Markets Carbon Market Today Funds for Carbon Markets Presentation Outline

Carbon Market Today: 

Carbon Market Today Types of Trades Trades driven… Independently Internal (BP, DuPont, etc.) External (utilities) Government Policy US States issuing CO2 limits National trading programs (UK, Denmark, Canada?, Japan?) Regional – EU Trading 2005 –only CO2 Trades through… Brokers (CO2e.com, Natsource, Ecosecurites, CEx) Fund Managers Donor Agencies & Conglomerates (PCF, CDF) Banks (Rabobank) Private Funds - emerging Tenders Netherlands (ERUPT/CERUPT); Finland, BC Hydro, Trans Alta .. Market Mechanisms Similar to Commodity Trading

Carbon Market Today: 

Carbon Market Today Transaction Structures Most transactions based on conditional purchase with varying payment terms (discounted up-front, payment on delivery, etc.) Some transactions based on financial derivatives (such as call options, option payments with strike prices, etc.) Some transactions based on historical and future emission reductions

Carbon Market Today: 

Carbon Market Today What Types of Trades? Project Sectors/Technologies Source: Pew Center, March 2002 Countries of Buying Agents

Carbon Market Today: 

Carbon Market Today Price Ranges ERs range from an average of $0.60 to $3.00/ton CO2 Some ERs much higher ($7-$16), but rare Price range depends on the probability of ERs being certified under the Kyoto Protocol, project risks, country risks, other factors. Prices are higher for ERs that have government approval and for projects with clear baselines and strong additionality.

Carbon Market Today: 

Carbon Market Today Participant Motivation Buyers are motivated by Demonstrating leadership Learning by doing Hedging their positions in the market Sellers are interested in Gaining competitive advantage Learning by doing

Carbon Market Today: 

Carbon Market Today Liabililty Liability for non-performance or non-recognition of emission reductions usually negotiated between buyers and sellers but falls mostly on sellers In some cases, sellers have agreed to pay penalties if unable to deliver emission reductions Greater assumption of liability by sellers command higher prices for emission reductions

Carbon Market Today: 

Carbon Market Today Preferred Projects Project design structure has high probability of Being accepted for validation Accomplishing monitoring, verification, & certification Clear ownership of emission reductions Technologies include Fugitive gas capture from landfills Gas flaring reduction Fuel switching Co-generation Land-use projects—undertaken, but low priority for most buyers

Carbon Market Today: 

Carbon Market Today Emerging Markets for Trading GHG Credits Potential market volume $5-20 billion in GHG credit transactions per year by 2008 National and regional trading programs Underway: United Kingdom, Denmark Future: Australia, Canada, France, European Union, Japan, Norway

Presentation Outline: 

History of Carbon Markets Carbon Market Today Funds for Carbon Markets Presentation Outline

Funds for Carbon Markets: 

Funds for Carbon Markets Funds Reviewed Global Environment Facility (GEF) Prototype Carbon Fund (PCF) Dutch Government Initiatives Other

Funds for Carbon Markets - GEF: 

Funds for Carbon Markets - GEF GEF: The Financial Mechanism of UNFCC Provides grant and concessional funds to developing countries and countries with economies in transition for projects and activities that aim to protect the global environment and achieve the objective of the Convention. Supports full cost of preparing national communications required by the Convention as well as “agreed incremental costs” of mitigation and adaptation measures and projects. Technical assistance and capacity building activities are also supported by GEF. Implementing Agencies: UNDP, UNEP, World Bank, RBs

Funds for Carbon Markets - PCF: 

Funds for Carbon Markets - PCF PCF: Background Established by the World Bank To pilot carbon-financed GHG mitigation projects in JI and CDM countries Total capital: US$180 million to be used in ~ 30 projects Emissions reductions pricing Target portfolio-wide outcome price: ~$5/tCO2 ($19/tC) Target deal price: $3-4/tCO2 (~$11-15tC)

Funds for Carbon Markets - PCF: 

Funds for Carbon Markets - PCF PCF: Features Closed-end Mutual Fund structure with diverse portfolio to Enhance the learning experience Reduce transaction costs Minimize project risks PCF develops high-value knowledge asset to Understand how CDM and JI can be operationalized Facilitate efficient market regulation Leverage sustainable development for Parties

Funds for Carbon Markets - PCF: 

Funds for Carbon Markets - PCF PCF: Subscribers ($180 million) Public Sector (6) Governments of Netherlands, Finland, Sweden, Norway, Canada, and Japan Bank for International Cooperation Private Sector: (17) Electrabel (Belgium), Fortum (Finland), RWE (Germany) Chubu Electric, Chugoku Electric, Kyushu Electric, Shikoku Electric, Tohoku Electric, Tokyo Electric Power BP-Amoco, Gaz de France, NorskHydro (Norway), Statoil (Norway) Mitsui, Mitsubishi Deutsche Bank, RaboBank (Netherlands)

Funds for Carbon Markets - PCF: 

Funds for Carbon Markets - PCF PCF: Host-Country Committee Considering China, Bangladesh, Egypt, Philippines, Sri Lanka, Thailand, Vietnam, Slovakia, Ukraine Joined (through MoU or Project Endorsement) Africa (10) Benin, Burkina Faso, Ghana, Kenya, Morocco, Senegal, Swaziland, Uganda, Togo, Zimbabwe Eastern Europe/ C Asia (8) Bulgaria, Czech R., Hungary, Kazakhstan, Latvia, Poland, Romania, Uzbekistan Asia (1) India Latin America (13) Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Guatemala, Guyana, Honduras, Mexico, Nicaragua, Peru, Uruguay

Funds for Carbon Markets – PCF+: 

Funds for Carbon Markets – PCF+ Carbon Finance Beyond PCF: New Funds Bio-Carbon Fund: To demonstrate benefits and test rules and methods for LULUCF activities in CDM. Design funded. Community Development Carbon Fund: An ongoing facility to distribute benefits of CDM/JI to small projects, small countries and rural poor. “Carbon with a human face”. Design funded. Carbon Neutral: World Bank to demonstrate tapping the voluntary carbon market. Design funded. Launched April 11, fully operational June 2002. Netherlands Clean Development Facility: Agree to place at least US$30 million per year in CDM for 2002-2005+: Signed April 19, May 2002 start-up date.

Funds for Carbon Markets - Netherlands : 

Funds for Carbon Markets - Netherlands Dutch CDM Funds Cerupt: To pilot CDM Carbon Finance projects, modeled on ERUPT-JI, targets 10MT (Tender) INCaF (IFC-Netherlands Carbon Facility) International Finance Corporation: targets 10MT CAF-Netherlands CDM Facility: focuses on public and private sector transactions, located in countries in Latin America and the Caribbean, targets 10MT IBRD Netherlands Fund: targets 16MT ABD Fund: under discussion

Funds for Carbon Markets - Others: 

Funds for Carbon Markets - Others Additional Funds EBRD, Dexia Group, and FondElec: have secured EUR 61 million and is raising another EUR 90 million for investments in GHG emissions reduction in Eastern Europe and FSU The Renewable Energy and Energy Efficiency Fund: initiated by IFC, has secured $65 million for investments in energy projects that reduce emissions of GHG emissions BC Hydro: issued a request for proposal in Feb 2001 for 5.5 million tonnes of CO2 offsets. At current quoted price for CO2 offsets, the value of the offsets = ~ $5–20 million Additional investors: Seattle City Light, the Climate Trust of Oregon, TransAlta, Mitsubishi, and other Japanese industrial and energy companies

Funds for Carbon Markets : 

Funds for Carbon Markets Active Parties in China CBM Donor Agencies World Bank, U.S. Environmental Protection Agency, Asian Development Bank, UNDP, UNEP Private International Developers Texaco, ARCO, Phillips, Amoco, Enron, Sino-American Energy Co., Lowell Petroleum Co., BHP, AMT Drilling Co., Private Chinese Developers Zhongyuan Oilfield, Huabei Oilfield, Northern China Bureau of Petroleum Geology, Jindan Energy Research and Development Co., Yanquan Coalbed Methane Development Co., Huawell Petroleum, Central Coal Research Institute Xi-an Branch, Star Mining Corp.

Thank You: 

Thank You Contact Information Matthew S. Mendis International Resources Group Washington, DC, USA E-mail: mmendis@irgltd.com