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MDG Carbon Facility

Mobilizing Carbon Finance for the Millennium Development Goals

Vladimir LitvakRBEC Energy and Environment Practice Leader

UNDP/GEF Regional Coordinator

RBEC Energy and Environment Practice MeetingWednesday 27th September, 2006

Bratislava, Slovakia

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Presentation Overview

1. Part I: MDG Carbon

1. MDG Carbon Objectives

2. MDG Carbon Strategy

3. MDG Carbon Cost Recovery

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Carbon Finance

This emerging environment finance provides unprecedented opportunities to developing countries but also pose new challenges.Access: Carbon finance put high demands on planning, legal, and

financial institutions of developing countries. Presently, carbon finance and its benefits are clustered in only a few developing countries.

Underlying Finance: The revenues from carbon trade only provide an additional revenue stream that can enhance the return on the investment. Traditional project finance is needed to realize the carbon mitigation project.

Combining/sequencing different instruments: Given the need for policy change and long-term capacity development to access new environment funding and to mobilize underlying finance, different financial instruments will need to be combined/sequenced to achieve specific national targets (ODA, public transfers, direct private investments, environmental commodity markets, etc.).

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Distribution of CDM Projects

LDCs3%

Other Countries

97%

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Core objectives of MDG Carbon Facility

• Increase access to carbon finance to a broader range of developing countries and project types through providing a one-stop shop service in carbon finance from project identification to revenue generation to enable project developers in pre-market situations.

• Maximize the carbon development dividend through developing a MDG Carbon portfolio that strike a balance between cost-effective projects (landfill methane recovery projects, etc.) and high development impact projects (small community renewable energy projects, etc.);

• Develop Capacity of programme countries to combine/sequence different funding sources to achieve specific national targets.

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Strategic Roadmap in the CDM Carbon Finance Market

MDG Impactof Carbon Finance Projects

Number of Countrieswith access to CDM carbon finance market

Low High

Low

High Objective for UNDP MDG Carbon Facility

CurrentCDM Market*(without MDG Carbon Facility)

* 60% of CDM projects in 4 countries; projects from the LDCs constitute only 1% of the CDM pipeline

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Biodiversity projects

Education projects

Gender projects

HIV/AIDS projects

Other

What is MDG Carbon: The Short Answer (Not All Kyoto Projects Are Created Equal)

MDGCarbonProjects

Poverty alleviation projects

Biodiversity projects

Education projects

Gender projects

HIV/AIDS projects Other

Renewable Energy projects

Energy Efficiency projects

Methane Mitigation projects

Biosequestration projects

Other

CDM projects MDG projects

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UNDP’s Comparative Advantage in Developing Carbon Projects

• Through its GEF programme, UNDP is one of the world’s largest sources of technical assistance for climate change

• We have the experience from our GEF portfolio of 1,000 medium & large projects and over 7,000 small-scale projects.

• UNDP is supporting a number of capacity development initiatives for JI/CDM throughout the world (establishment of DNAs, skills development, etc.) as well as the formulation of some pilot CDM projects. One of the only two LDC project registered by the CDM Executive Board (Bangladesh) was developed with UNDP support

• By managing ODA, GEF, MLF, Carbon Finance and adaptation funds under one roof, UNDP will help programme countries sequence/combine these different sources of funds to address the existing policy, capacity and financing gaps to implement the Multilateral Environment Agreements and to meet the MDG targets.

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UNDP’s Challenges in Developing Carbon Projects

• As a technical assistance agency, UNDP does not have the mandate to trade carbon emission reductions and take on carbon market risks;

• UNDP does not have a dedicated due diligence infrastructure to manage carbon investment risks;

• UNDP will need to mobilize some working capital to meet start-up costs;

• MDG Carbon supports commercial project developers and operates on a full cost-recovery basis. This is a major departure from UNDP’s traditional business model;

• MDG Carbon fee policies must be supported by an ongoing, rigorous and transparent financial modeling process.

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UNDP’s Strategy in Developing Carbon Projects

• UNDP will provide this one-stop shop service in partnership with the World Bank and existing commercial financial institution;

• MDG Carbon expects to be in a position to deliver supply aggregation benefits to project developers. By aggregating the supply of carbon credits by different project developers and ensuring due diligence of these credits, UNDP will be able to reduce risks and transaction costs for carbon funds. These savings will translate into the funds being able to offer a higher price to UNDP, and for UNDP, in turn, to offer a higher price to project developers.

• MDG Carbon due diligence policies and procedures build on the existing GEF due diligence framework, including clear risk sharing responsibilities between UNDP Country Offices, UNDP-GEF Regional Technical Advisers (RTAs) and headquarters.

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Partnership with a Financial Institution

CER and VER Projects

Financialinstitution

(CERs or

VERs)

CERs and VERs

Cost Recovery Fees

Project Development &Technical Services

$

€

CER/VER Purchasers*

CERS

VERS

UNDP Project Development$

ERPA $

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MDG Carbon Accounting and Cost Recovery

Atlas Management Project For MDG Carbon

COs

RSCs/RCUs

MDG Carbon

ExpenditureMDG Carbon

Expansion Fund

Cost Recovery from project

investors uponproject registration

Income

CDM Institutions & Consultants

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Start-Up Funds

Fiscal Year Start-up Funds

2007 BDP and Regional Programmes; TA services recovered upon project registration.

2008 Bilateral Assistance;TA services recovered upon project registration.

2009 onwards MDG – Carbon Expansion Fund

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Roles of UNDP Country Offices

• Upon carbon training certification of CO EFPs, COs will: • Identify/mainstream carbon project proposals into UNDP country

programming;• Carry out project design’s pre-appraisal, including MDG impact;• Carry out developer appraisal (legal title to future CERs; track record,

etc.);• Assist RTA in PIN/PDD formulation process at the country level;• Help project developer to understand and navigate the existing

regulatory framework to secure DNA endorsement;• Resolve project non-performance issues due to a construction or

contractual dispute;• Ensure that project operation data are collected and archived in

accordance with monitoring plan, including MDG impact;• Mobilize/manage ODA to provide policy and technical advisory services

to relevant national institutions (DNA, etc.) and project developers.

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Roles of Regional Technical Advisers

•Upon carbon training certification, RTAs will:–Conduct core Appraisal of project design (eligibility, technical

feasibility, economic viability, etc.);–Evaluate applicability of existing baseline methodologies to

proposed projects;–Manage the PIN/PDD formulation process;–Selection of optimum crediting period depending on non-renewal

risk associated with policy change that could negate project’s additionality;

–Advise project proponents on structuring and financing of CDM/JI projects

–Advise on how to combine/sequence carbon finance with other environment sources (ODA, GEF, MP, TREC, etc.)

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Roles of Regional Service Centers/Regional Bureaux

•Develop a regional CDM/JI strategy;•Incorporate Carbon Finance into Regional Policy Dialogue and Programming;•Participate in semi-annual meetings of MDG-Carbon Supervisory Board;•Contract consultants to assist in formulating PINs/PDDs;•As required, organize validation/verification missions of DOEs•Organize regional carbon training workshops for UNDP programme officers•Mobilize ODA for carbon finance capacity development at the regional level.

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MDG Carbon Central Unit (located in BDP/EEG)• Assist RTAs in evaluating applicability of existing baseline

methodologies to proposed projects at the PID/PIN stages and coordinate the development of new methodologies, as required

• Pre-validate PDDs and project monitoring reports prior to transmittal for validation;

• Develop and maintain financial model of MDG Carbon’s cost position, monitor costs, and develop a fee strategy that finances all UNDP costs, a reserve fund, a risk management reserve, an expansion fund and other essential business activities;

• Manage relationship with financial partners in designing and issuing Emission Reduction Purchase Agrements (ERPAs);

• Advise COs and RTAs on legal negotiations with project proponents in collaboration with financial partners.

• Advise RTAs on project structuring and financing, and associated contractual arrangements;

• Develop partnership arrangements through RFP process with financial firms for the MDG Carbon Compliance and Voluntary Programmes;

• Reports to MDG Carbon Supervisory on Facility performance on a semi-annual basis;

• Implement Supervisory Board’s meeting decisions

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MDG Carbon Supervisory Board

•Review MDG Carbon Annual Business Plan and approve MDG Carbon cost recovery and fee allocation policies;

•Appraise MDG-Carbon performance, including regional and sub-regional distribution of CDM/JI/VER projects; climate change and MDG impacts; risk management strategy; human resource development plan; partnerships; and financial performance;

•Assess whether the annual business strike a balance between climate change and MDG impacts, and between opportunities and risks.