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views or
policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they represent. ADB does
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Making the Carbon Market work for

Development Finance
ADB Carbon Market
Initiative
Jiwan Acharya
Climate Change Specialist
Asian Development Bank

Building Capacity to Respond to Climate Change in South Asia

29-30 June 2010, Kathmandu, Nepal
 CDM Concept

Industrialized Country Developing Country

(Annex B) (non-Annex B)
② Carbon Credits

Entity B
Entity A
ProjectActivity
GHG Emissions
Emission Reduction

① Finance
Technology
(Capacity Building)
 CDM Reality

Industrialized Country Developing Country

(Annex B) (non-Annex B)
① Carbon Credits

Entity B
Entity A Project Activity
GHG Emissions
Emission Reduction

② Payment
 CDM Status

 Total 2,264 projects registered

 75% is from Asia and the Pacific
 Out of this, over 530 projects are from South
Asia
 2800 projects at validation, out of which
approximately 800 projects from South Asia
 Carbon Market

Source: Point Carbon

 The global carbon market is expected to reach €121billlion

(US$170billion) in 2010, up by 33% from 2009.
 Carbon Market: CDM is only one
part
Voluntary Market
CDM / JI projects
CCX
Over-The-Counter

1) Primary carbon credit supply via Emission Reduction Purchase Agreements (ERPAs)
2) Secondary trade either on forward basis or spot market

Large Keidanren
US ETS? Final Canada Europe EU-ETS Japan Voluntary AUS ETS NZL ETS
Emitters Agreement

AAU supply via Green Investment Scheme (GIS)?

Russia, Ukraine,
Former Eastern Bloc
countries

CCX = Chicago Climate Exchange; CDM = Clean Development Mechanism; ETS = Emissions Trading Scheme
GHG = greenhouse gas; RGGI = Regional Greenhouse Gas Initiative
 Global CDM Slowdown?
  2005 2006 2007 2008 2009

  Final figures Final figures Final figures Final figures Forecast

  Mt €m Mt €m Mt €m Mt €m Mt €m

EU ETS total 362 7,218 1,017 18,143 1,643 28,133 3,091 66,993 3,823 45,170

Brokered OTC 207 4,269 627 11,180 1,009 17,278 1,516 33,553 1,331 15,974

exchanges 55 1,131 190 3,395 434 7,431 1,152 25,488 1,997 23,962
auctions - - - - - - 42 965 75 900
Direct 100 1,818 200 3,568 200 3,425 300 6,495 300 3,600
bilateral
options - - - - - - 80 492 120 734
CDM total 401 2,038 563 3,920 947 11,737 1,609 24,172 1,510 4,704

primary 397 1,985 523 3,349 597 5,984 549 6,039 300 2,700
secondary 4 50 40 571 350 5,753 1,037 17,944 1,160 11,600
options - - - - - - 23 189 50 404
JI 28 96 21 95 38 326 72 720 40 450
AAU
            18 179 95 942

RGGI 71 178 339 933

           
Other total 8 52 31 300 48 186 34 119 59 380

Sum
Source: 799
Point Carbon 9,401 1,632 22,458 2,676 40,382 4,895 92,365 5,866 62,580
 Issues
 Kyoto Protocol commitments ending in 2012; no agreed
international framework yet on post-2012

 Lack of long-term price signal to give incentive for

economies to invest in low-carbon alternatives

 Lack of investment/equity – carbon market contributing

to cash flow of approved projects, but rarely contribute
to project financing
 Issue 1: Post-2012

End of Kyoto Commitments

Few buyers
Carbon Credit Volume

Project Project
Approval Completion

?
Emission reduction portfolio (e.g. 10 year period)

Year: 2009 10 11 12 13 14 15 16 17 18 19 20 21
Credits from Registered Projects
Issue 2: CDM only provides additional
cash flow to people with money in the
Top first
countriesplace?
by issued CERs

70.0 100%
90%

Share of all issued CERs

60.0
Millions of issued CERs

80%
50.0 70%
40.0 60%
50%
30.0 40%
20.0 30%
20%
10.0
10%
0.0 0%
China

India

Korea
South

Brazil

Mexico

Chile

Tunisia

Malaysia
Source: UNEP Riso Centre
 Programme of Activities (PoA)

 Small-scale CDM (SSC) projects

aggregated as a single CDM project
 3 PoAs registered so far – 2 related to
household energy efficiency (EE)/
lighting and 1 methane avoidance
 45 in the pipeline but just 11 from South
Asia
 Small-scale CDM (SSC) Projects
 Projects types that can be eligible as SSC are:
 Type I: Renewable energy projects with
maximum output capacity of up to 15 MW
(or an appropriate equivalent)
 Type II: Efficiency improvements projects
which reduce energy consumption by an
equivalent of 60 GWh /yr
 Type III: Other project activities that reduce
emissions by less than 60 kt of CO2e/yr
 Additionality for projects < 5MW & EE
projects with energy savings <=20 GWH
per year (1)
 Automatic additionality to renewable energy projects up
to 5MW, subject to at least 1 of the following conditions:
located in LDCs/SIDs or special underdeveloped zone
located
off grid activity supplying energy to households/
off
communities
distributed energy generation
distributed
renewable energy technologies
renewable
recommended by the DNA and approved by EB as
recommended
additional in the host country
 Additionality for projects < 5MW &
EE projects with energy savings
<=20 GWH per year (2)

 An outstanding development as it removes a

significant barrier to developing high quality, but small
renewable energy projects.
 Countries in South Asia should take the benefit of this
development to register more SSC projects.
Country/sector limitation: contributing
causes
 Focus on “low hanging fruit”
 Limited capacity in host countries
 Restriction in international rules (carbon capture, avoided
deforestation, transport?)
 Lack of finance for GHG reduction benefits
 Most buyers offer “pay-on-delivery” contracts
 Some offer upfront payment but with strict penalties for under-delivery
 Such schemes do not share project risks – remains almost entirely with
project sponsors
 Projects heavily skewed towards countries/sectors already with capital
and/or favorable to foreign direct investment
 ADB Response:
Carbon Market Initiative
 1. Underlying Finance:
Run-of-River Hydro Power Project
 98 MW run-of-river type hydro project (Xiaogushan Hydro)
in Gansu Province, PRC
 Displaces 109 MW coal-fired power generation
 ADB Loan: $35 million (approved in 2003)
 Total Project Cost: $87 million
---------------------------------------------------------------------
 Total volume of ERs expected (10 year): 3.7 million tCO2
 Also avoids annual emissions of 240 tons of particulate
matter and 1,910 tons of SO2
 Contracted ER volume (with World Bank): 2 million tCO2
 Total Contract value: US$8.50 million
 Contract price: US$4.25/tCO2 VER basis
1. Underlying Finance: Ongoing
projects (sample)
Country Project Type
Indonesia Geothermal power
India Wind power
Lao, PDR Small hydropower
Bangladesh Waste composting
China, PR Geothermal space heating
Pakistan Hydropower
Philippines Energy-saver bulb distribution
Thailand Biomass power
Mongolia Boiler efficiency improvement
Uzbekistan Small hydropower
China, PR Urban transport system
2. Technical Support for CDM
 Upstream support in project preparation phase
 Due diligence: technical, financial, legal, safeguards, governance
 Capacity building trainings
 Carbon credit valuation
 Documentation preparation for credits (PIN, PDD, methodology)
 Obtaining host country approvals
 Facilitating project Validation & Registration
 Downstream support in project execution and commercialization
 Implementation / commissioning
 Monitoring & Verification
 Certification & Issuance of CERs to sponsor/developer & fund
3. Credit Marketing Service
 4. Carbon Co-Finance: Carbon Funds
 Asia Pacific Carbon Fund (APCF) for credits up to end
of 2012, and Future Carbon Fund (FCF) for post-2012
 Co-finances projects alongside ADB to help fill project
financing gap
 Purchase of credits generated from now up to 2020
 Can purchase 25-75% of expected carbon credits on
upfront payment basis and the remaining credits via
payment on delivery
 Lower transaction cost if debt/equity financier is ADB
 ADB’s Attempt: Turning Cash Flow
into Financing
Standard
ADB Modality
“Pay-on-Delivery”

Financing 1. 1. 2. 1. 2. Cash Flow

Tech Carbon Carbon
$/€ $/€
Asst Credits Credits

Project phase: Development Commercial Operation

Year: 　 0 　　　　　 1 　　　　　 2 　　　　　 3 　　　　　 4 　　　　　 5 　　　　　

　　 7 　　　　　 8
Carbon Market Initiative

Carbon
　 Funds
Sample CMI Project Type
 Energy Efficiency
 Industrial technology
 Supply-side efficiency (e.g. upgrade of generation equipment)

 Renewable Energy
 Biomass energy
 Small to mid-scale run-of-river hydropower
 Wind power
 Geothermal power

 Methane Capture and Utilization

 Coalmine methane
 Municipal waste management (landfill methane)
 Sample Project Financing Plan

Additional KP1 Credits

Credit Carbon Credits
Marketing Additional post-2012 Credits
Facility
(over 7 to 21 yrs)
First
KP1 First
credits post-
2012
credits
ADB Project with GHG Abatement
Asia Pacific Illustrative Financing Plan - Debt
Carbon Fund
Source of Finance %
ADB Loan Finance 50
APCF 10
Future
Carbon Fund Others Carbon Fund
Future 40
10
Credits up to end of 2012 (KP1) Total
Others 100
30
Credits generated beyond 2012 Total 100
 Impact on project finance: Example 1

Run-of-River Hydropower plant

Emission reductions and carbon credit value
Annual CERs Total CERs Total CERs
2010-20 up to end-2012 Post 2012
Emissions reduction (tCO2e) 134,811 404,433 943,677
Potential revenue
$5/ton $ 674,055 $ 2,022,165 $ 4,718,385
$10/ton $ 1,348,110 $ 4,044,330 $ 9,436,770
$15/ton $ 2,022,165 $ 6,066,495 $ 14,155,155

Indicative project financing plan (with volume and pricing examples)

$5-10/ton $10-15/ton
Total Investment Cost $ 49,090,000 $ 49,090,000
Financing Sources
Government & Other $ 21,529,046 $ 16,979,175
ADB $ 22,000,000 $ 22,000,000
APCF (50% of CERs) $ 2,022,165 3,033,248
FCF (75% of CERs) $ 3,538,789 7,077,578
Ratio (APCF&FCF/Total) 11.3% 20.6%
 Impact on project finance: Example 2

Wind Power project

Emission reductions and carbon credit value
Annual CERs Total CERs Total CERs
2010-20 up to end-2012 Post 2012
Emissions reduction (tCO2e) 63,794 191,382 446,558
Potential revenue
$5/ton $ 318,970 $ 956,910 $ 2,232,790
$10/ton $ 637,940 $ 1,913,820 $ 4,465,580
$15/ton $ 956,910 $ 2,870,730 $ 6,698,370

Indicative project financing plan (with volume and pricing examples)

$5-10/ton $10-15/ton
Total Investment Cost $ 55,422,222 $ 55,422,222
Financing Sources
Equity $ 13,995,164 $ 11,842,117
ADB loan $ 38,795,556 $ 38,795,556
APCF (50% of CERs) $ 956,910 1,435,365
FCF (75% of CERs) $ 1,674,593 3,349,185
Ratio (APCF&FCF/Total) 4.7% 8.6%
 Impact on project finance: Example 3

Small Waste-to-Energy projects

Emission reductions and carbon credit value
Annual CERs Total CERs Total CERs
2010-20 up to end-2012 Post 2012
Emissions reduction (tCO2e) 43,840 131,520 306,880
Potential revenue
$5/ton $ 219,200 $ 657,600 $ 1,534,400
$10/ton $ 438,400 $ 1,315,200 $ 3,068,800
$15/ton $ 657,600 $ 1,972,800 $ 4,603,200

Indicative project financing plan (with volume and pricing examples)

$5-10/ton $10-15/ton
Total Investment Cost $ 30,851,000 $ 30,851,000
Financing Sources
Government & Other $ 13,647,951 $ 12,168,351
ADB $ 15,394,649 $ 15,394,649
APCF (50% of CERs) $ 657,600 986,400
FCF (75% of CERs) $ 1,150,800 2,301,600
Ratio (APCF&FCF/Total) 5.9% 10.7%
 Impact on project finance: Example 4

Biomass (rice husk) Power project

Emission reductions and carbon credit value
Annual CERs Total CERs Total CERs
2010-20 up to end-2012 Post 2012
Emissions reduction (tCO2e) 420,000 1,260,000 2,940,000
Potential revenue
$5/ton $ 2,100,000 $ 6,300,000 $ 14,700,000
$10/ton $ 4,200,000 $ 12,600,000 $ 29,400,000
$15/ton $ 6,300,000 $ 18,900,000 $ 44,100,000

Indicative project financing plan (with volume and pricing examples)

$5-10/ton $10-15/ton
Total Investment Cost $ 172,000,000 $ 172,000,000
Financing Sources
Equity $ 39,675,000 $ 25,500,000
ADB loan $ 115,000,000 $ 115,000,000
APCF (50% of CERs) $ 6,300,000 9,450,000
FCF (75% of CERs) $ 11,025,000 22,050,000
Ratio (APCF&FCF/Total) 10.1% 18.3%
 Carbon Market Beyond 2012
 Demand and supply in the future carbon
markets is expected to be there.
 Determined by domestic and regional
emissions reductions policies that will
develop regardless of what happens in
the global stage, e.g., the EUETS will
still continue to generate CDM credit
demands post 2012.
 Post 2012 Negotiations
 Although inconclusive of a global negotiation, the COP15
demonstrated a generic support to CDM.
 Some achievements of COP 15:
various CDM reforms with special focus on promoting
projects in under represented countries;
many nations pledged emission commitments; these
countries account for some 90% of global emissions; and
brought renewed attention to forest preservation,
technology transfer and funding for developing countries.
 ADB remains hopeful that an agreement will be reached
resulting to a global framework.
 Post 2012 Negotiations
Update (1)
 International negotiations is as challenging as in
2009.
 But it recently entered into a constructive mode
during the talks in Bonn.
 Some parts of the negotiations such as on REDD
is uncontroversial and could be decided upon in
Cancun.
 Progress has also been made on issues related to
finance, institutional frameworks for adaptation,
mitigation technology and capacity building.
Post 2012 Negotiations Update (2)
 On post 2012 framework, the Secretariat has
been asked to identify options and possible
solutions in case there is a gap between
2008-12 and subsequent commitment
periods.
 This sends a positive signal to the market
players.
 This may imply that some solutions could be
found for the flexible mechanisms to
continue in some form until an agreement is
reached.
 There are speculations that negotiations will
most likely continue throughout 2010 and at
least until the end of 2011.
 CMI Summary: Main Advantages for
Project Developers/Sponsors
 Certain funds today, for commodity with uncertain value
in the future
 Reduced budget commitments to close the financing
plan of projects
 Comprehensive technical and implementation support
 Extra credits from successful project implementation
can be marketed with ADB support for further financial
upside
 THANK YOU!
Jiwan Acharya
Sustainable Infrastructure Division
Tel: +63 2 632 6207
jacharya@adb.org