Financing Trade in Carbon Credit:

The Role of the Bank

prepared byDr. Christiane Abou-Lehaf

Senior Principal Associate (P&D)THE ARICAN EXPORT-IMPORT BANK

presented atUNCTAD/ECOWAS Bank Regional Workshop

Financing biofuels and Jatropha plantation projects with special emphasis on Clean Development Mechanism (CDM)

Accra- Ghana13-14 November 2006

Contents

1. Introduction2. Why Finance

Trade in Carbon Credit

3. Carbon Credit Trade Finance Programme(CCTFP) – A New Product

4. Conclusion

1. Introduction

Over the last century, the amount of carbon dioxide in the atmosphere has risen, driven to a large extent by our usage of fossil fuels, but also by other factors that are related to rising population and increasing consumption which led to an increase in the global average temperatures.

In a regulatory attempt to cap CO2 emissions, the Kyoto Protocol was signed by a large number of countries.

Associated with fossil fuel depletion and rising energy demand was the increase in oil and gas prices leading to a push towards ‘low-carbon’ technologies and therefore renewable technologies.

Worldwide, these technologies are rapidly becoming cost-competitive with their conventional counterparts leading to a boom in clean energy and the creation of a new market: “The Carbon Mitigation and Trade Market”.

Activities in this new market are rising as it has become an important market-driven avenue of reducing carbon emissions and protecting the environment.

For Africa which is the lowest emitter of green-house gases, this development creates an immense opportunity to attract finance for implementing important projects in an environmentally-friendly manner.

For the Bank, there is an added advantage in that such projects can be financed with better security.

It is in view of the above, that the Bank is introducing a new product to the Bank called “Carbon Credit Trade Finance Programme(CCTFP)”.

2. Why Finance Trade in Carbon Credit

Carbon Credit Finance attracted both governments and private companies to attempt to create and buy carbon credits in developing countries.

Even though there are risks in carbon finance such as performance risk, payment risk, regulatory risk, price risk, etc..., the potential benefits to Africa and financiers, such asthe Bank could be very high. The flow of new and additional resources for environmentally sound projects in African countries can augment Official Development Assistance (ODA) and serve as a conduit for new technologies.

This would meet the need of African countries to increase their energy efficiency and mitigate environmental pollution.

It can also complement the Bank’s engagement in energy and infrastructure projects, where carbon finance can improve the viability of these investments.

Further, the Bank has the opportunity to use carbon finance to increase investment in efficient fossil fuel plants, support renewable energy (including biofuels), deal with poorly managed landfills and other waste streams that pose serious public health risks to large populations, build sustainable forest management, improve land use practices in agriculture, and increase efficiency in transportation – all while setting up a cost-effective mechanism to deal with climate change.

Many international banks and financial institutions have begun to finance trade in carbon emissions. The World Bank, the IFC and Rabobank already have specific products in that area. It is in consideration of the above benefits and trends that it was proposed to consider a new product for financing carbon credit, for adoption by the Bank.

3. Carbon Credit Trade Finance Programme (CCTFP) – A New Product

3.1 Purpose3.2 Objectives 3.4 Beneficiaries3.5 Eligible Transactions3.6 Implementing Modality3.7 Financing Instruments3.8 Pricing 3.9 Tenor3.10 Partnerships

3.1 Purpose

To promote environmentally-friendly projects in Africa by promoting project-based trading of carbon emission reduction credits under the Kyoto Protocol’s Clean Development Mechanism (CDM) as well as pre-financing receivables from carbon credits earned and traded by African businesses and governments thereby contributing to reductions in carbon emissions and abating consequential climate change.

3.2 Objectives

The Bank’s CCTFP has the general objective of supporting Africa private and public environmental projects that would otherwise not be bankable by leveraging the credit of off-takers of carbon credits earned by those projects. The specific objectives are:

1. to stimulate investment in the renovation of old, inefficient power plants and reduce global carbon emissions. through improved urban waste management, providing sustainable development benefits beyond its contribution to global environmental efforts (e.g. local health and sanitation benefits arising out of better waste management, local air quality and health impacts of cleaner and more efficient use of fossil fuel or renewable energy);

2. leveraging additional carbon finance and supporting investments through partnering with developed country governments and private corporations wanting to buy carbon credits in African markets;

3. strengthening the capacity of African countries to benefit from the emerging market for emission reduction credits;

4. to play a major role in building, sustaining, and expanding a market-based approach for carbon emission reductions by piloting the development in Africa, of new techniques for achieving carbon emission reductions while attracting finance for new types of projects (e.g., clean coal, urban infrastructure, sustainable agriculture, a forestration, etc…).

3.3 Beneficiaries

3.3.1 African corporates and governments implementing projects that have earned or are likely to earn carbon credits;

3.3.2 African banks and financial institutions financing trade in carbon credits and/or projects that have earned or can earn carbon credits; and

3.3.3 NGOs and environmental groups seeking finance to promote projects that have earned carbon credit.

3.4 Eligible Transactions

3.4.1 Projects that have earned carbon credits through reduction in GHGs; and

3.4.2 Traders that have accumulated carbon credits earned by environmentally friendly projects and who have sold those credits to acceptable parties.

3.5 Implementing Modality

Financing will be provided to projects that have entered binding and enforceable carbon credits sales contracts with parties acceptable to Afreximbank. Proceeds of the Carbon Credit Sales Contracts will be assigned to the Bank against which advances may be made. The Bank may also provide country risk guarantee, other guarantees, Letters of Credit, etc. in support of eligible transactions provided proceeds of acceptable carbon credit sales contracts are assigned to it.

3.6 Financing Instruments

3.6.1 Direct Advance;

3.6.2 Letters of Credit and Guarantees; and

3.6.3 Advisory services to assist eligible projects earn carbon credit and trade same in the international markets.

3.7 Pricing

3.7.1 Funded transactions will attract:

(i) interest rate, and(ii) fees

The above will be linked to the LIBOR and related to country and transaction risks and market conditions.

3.7.2 The Non-funded transactions will attract fees only.

3.8 Tenor

Maximum tenor will be 5 years.

3.9 PartnershipsThe Bank will implement its CCFP using a partnership approach. Such partners include:

1. African, non-African and multilateral Development Finance Institutions (DFIs).

2. African and non-African EXIM Banks.3. African and non-African banks and carbon

credit funds.4. African and non-African governments.5. African and non-African corporates.6. NGOs and environmental groups.

4. Conclusion

It can be seen that introducing such a programme provides an immense opportunity for the Bank to:

1. ensure that there is a value-added to Africa from pursuing environmentally-friendly projects;

2. achieve greater integration of carbon finance into the mainstream of the Bank’s lending operations;

3. reach out to other international finance institutions and entities engaged in carbon finance projects; and

4. serve as a role model in showing that environmentally-friendly projects can be remunerative and low risk in financing thereby increasing the interest of African banks in this laudable venture.

Contacts

Headquarters:The President1191 Corniche El-Nil, Cairo, 11221, EgyptP.O. Box 404 GeziraCairo, 11568, EgyptTel: 202 5780282Email: mail@afreximbank.comWebsite: afreximbank.com

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