PROTOTYPE CARBON FUND A PUBLIC/PRIVATE PARTNERSHIP ANNUAL REPORT 2003 i i i i I k ,lt;g;- _U In 2003, we have witnessed extreme climate events wreak havoc in both rich and poor countries. The impact of these events has fallen most heavily on the poorest, who are the least able to recover from such shocks. | '" HA%LENN ; ** - s 46*~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 N~~~~~~~~ 1 / N f ,.n A - .. - '/ , / , b w; ., .. .t -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ C) C) O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ *~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~- - ~ ---ts -~~~~~~~~~~~~~~~~~~~~~' ~C G) C_X 'X .- C) 17~>~ The primary focus of PCF projects is on renewable energy technologies-such as wind, small hydro, and biomass energy technology-that in many cases would not be viable without financial - ; support from the PCF. 7 - dN I - - m, IF s~~~~~~~~~~~~~~~~p. irntsmational level, the Kyoto Protocol commits industrialized ,£duce their carbon emissions by an average of 5.2% * - ,. dr pj Id2008-2012. _ A_1 l . a - , ...~~ ~ ~~~~~~~~~~~~~~~~ - K _ ~~~~~~~~~~~~~ I '' . ~~~~~~ ~~~- w~~~~_ LETTER FROM THE WORLD BANK The impact of human-induced climate change and climate variability has fallen most heavily on poor and middle income countries and on poor people, who are the least able to recover from such shocks. The World Bank recognizes that integrating climate change within long-term development strategies is central to achieving an environmentally and socially responsible path to economic development and poverty reduction. The Prototype Carbon Fund (PCF), now in its fourth year of operation, represents one of the more innovative global mechanisms to mobilize public and private resources and support, in favor of the development of a market for greenhouse gas emission reductions. As a public/private partnership, the PCF represents a platform of shared responsibility among governments and companies from rich countries that are committed to sustainable development. Two new carbon funds have been established to support small projects in poor and middle income countries and deal with the higher transaction costs and risks in pioneering carbon sequestration activities linked to rural development and poverty reduction. The Community Development Carbon Fund will certify benefits to local communities arising from its emission reductions purchase projects. The BioCarbon Fund will contribute to meet the goal of climate change mitigation while helping to reverse land degradation, conserve biodiversity, and improve the livelihoods of local communities. Together they represent a cost-effective and sustainable alternative to meeting the emission miti- gation obligations under the Kyoto Protocol. The PCF has contributed to building a unique repository of knowledge used by developing countries and those interested in investing in the Clean Development Mechanism and Joint Implementation. As a result of increasing demand from client countries, the World Bank has launched the Carbon Finance-Assist Program to help build capacity to attract carbon finance and allow developing coun- tries to participate fully in the Kyoto Protocol. Integrating these efforts into the Bank's regular operational work will enhance the effectiveness and sustainability of our development efforts. [AN JOHNSON Vice President of Enuironmental(i and Sociallh Sustainable Development. The World Bank, 7 LETTER FROM THE PCF PARTICIPANTS' COMMITTEE CHAIR "A lack of knowledge is not a valid excuse for a lack of action." We are at a time in which the global carbon market is characterized by a multitude of uncertainties, such as the pending entry into force of the Kyoto Protocol, the mechanisms of the different markets and the definitions of the commodities traded. Perhaps the most significant uncertainty surrounds carbon market prices. Reflecting these unknowns, many business leaders are still hesitant when asked whether we have reached the point of no return on climate change and still question the need for immediate action on climate policy. Hoping to ignore the predicted effects of global warming and the accompanying climate change, they ask: "Can we go back to zero? Is a political U-turn still possible in a situation in which the world economy is suffering badly?" The participants in the Prototype Carbon Fund do not have the answers to all these questions. That is not what distinguishes them from many others. What does make them different is that they did not hesitate and decided to take action earlier, because they felt that their attitude and commitment would help to motivate others to action and to clarify the political uncertainties. The pioneers of the Prototype Carbon Fund were convinced that a new market involving a totally new commodity first had to be started in concreto-before all rules are cast in iron-simply on the basis of theory, concepts, models and scenarios. But this market needs more than pioneers now. Today, the rules of the game are sufficiently concrete to make the market take off. What we need at this moment is an increasing volume of trades which provide the necessary liquidity for the global carbon market. But let's face reality. There is nothing resembling a rush on emission reductions yet. While the mist over the institutional debate is dissi- pating, some threats have replaced uncertainty. Administrative intricacies and transaction costs are scaring several early investors, whose success stories are badly needed to reassure others. Today the PCF's mission is no longer the pioneering of single transactions but finding ways to leverage carbon finance in order to build the global carbon marketplace. As a sign of these changing times, the project portfolio of the Prototype Carbon Fund is almost complete. The aspiration of the Prototype Carbon Fund manager and participants has always been to pave the way for themselves and all the others who would want to follow. The range of projects already submitted to the Kyoto Protocol's Clean Development Mechanism Executive Board is very encouraging on this point. But in that process it is important that the flexible mechanisms of the Kyoto Protocol remain flexible in order to allow their significant contribution to the long-term climate-change challenge to be effective, while ensuring environmental integrity. That challenge is there for all of us-host countries, governments, businesses and nongovernmental organizations. How we respond will help deter- mine our future. It is in all of our interests to work together. JEAN CLAUDE STEFFENS PCFParticipants Committee Chair 8 LETTER FROM THE HOST COUNTRY COMMITTEE CHAIR Being a long-standing member of the Host Country Committee has given me a great sense of what the Clean Development Mechanism and Joint Implementation will look like once the Kyoto Protocol enters into force. With my knowledge of the PCF's procedures for project preparation, operation, - monitoring and evaluation, I can affirm-with great enthusiasm-that it is possible to achieve high- quality emission reductions through certified project activities and also to fulfill Kyoto Protocol sustainable development requirements. The PCF has made this possible by transforming the rules and procedures of the Marrakesh Accords into environmentally sound CDM/JI projects that reduce greenhouse gases, generate carbon assets and produce relevant social benefits. But projects and carbon transactions are not the only outcome of the PCF after its launch three years ago. There is much more. One example is the pioneering work done by the PCF team, which has left the stakeholders in the "carbon community" with relevant information on CDM/JI project cycles, such as the preparation of monitoring and verification protocols, and methods to calculate project base- lines. Another example is the involvement of governments and the private sector from industrialized countries, "the Participants" in the governance structure of PCF. By providing guidance and funding, they have helped the PCF to reach the level of today's remarkable achievements: 420 Project Idea Notes, 50 Project Concept Notes, 12 signed Emission Reductions Purchase Agreements, plus capacity-building initiatives grouped under the Carbon Finance-Assist Program (CF-Assist). Another example of the PCF's success is the involvement of developing countries, "the Host Countries" in its governing body. Since host country project approval is a key step in project development, their level of organization and involvement has been crucial in the development of the PCF's project port- folio. As the opportunity to "learn by doing" in the development of carbon market policies, rules and business processes grows in host countries-in addition to the establishment of adequate institutional arrangements-even more sound projects will be identified and promptly implemented. This trilogy "the World Bank - PCF Participants - Host Countries" powerfully demonstrates how public/private sector partnerships can mobilize new and additional resources to address global envi- ronmental problems through market-based mechanisms, and lower the cost of compliance with the Kyoto Protocol. The creation of two new carbon funds, the Community Development Carbon Fund (CDCF) and the BioCarbon Fund, needs to be highlighted too, since they will enrich the PCF experience by covering other project areas such as afforestation, reforestation and agriculture. Through them, small-scale projects will be feasible in poorer countries and windows for carbon sequestration projects other than those of the Kyoto Protocol for the first commitment period will be explored. Host countries welcome these new initiatives and recognize the PCF as the first program to facilitate capacity building and funding for certified project activities, in response to the needs expressed by these countries during the past six years of climate negotiations. Yet, there is a lot to be done, especially as more devel- oping countries become part of the PCF process. Let me finish by saying that the host countries are looking forward to the full implementation of the BioCarbon Fund, the CDCF and CF-Assist. In doing so, we will work under the framework of the Host Country Committee in order to facilitate appropriate collaborative channels to strengthen this public/private partnership developed by The World Bank. JUAN PEDRO SEARLE Chair of the Host Country Conimtttee 9 FROM THE FUND MANAGER About this Report As the PCF enters its fourth and final year of its placement phase-the phase in which it contracts the purchase of emission reductions-there is an impressive amount of activity "on the ground" in terms of power plants and waste management systems being built and operated, all with the support of carbon finance. Just how carbon finance supported this activity, and what it means for the many stakeholders in the PCF's operations can now be told, as projects move into implementation. As well, by its fourth year, the PCF's management has committed and expended substantial Fund resources in line with the principal terms of the Fund and ongoing guidance of its participants and host countries. There is now much to report on the way in which Fund resources have been used to meet portfolio development and project selection criteria and achieve the required volume of emis- sion reductions cost-effectively. You will therefore find in the PCF's Annual Report 2003: audited financial statements, performance of Fund Management in containing costs within approved budgets, volume and average cost of the assets contracted, and the success of Fund management in containing non-project costs in Fund implementation, while contracting for delivery of greenhouse gas emission reductions that may serve the participants' needs for cost-effective emission reductions. Likewise, the Prototype Carbon Fund's operational experience is now so deep that participants, project sponsors and host countries alike can more precisely define how the PCF has met their needs and how they see its role in the emerging global carbon market. So this report is different from previous PCF annual reports; it is comprised of two parts: * One documents the PCF's results, covering financials, expected delivery of emission reduc- tions by mechanism and the Fund's contribution to market development through contributing methods for achieving emission reductions and knowledge dissemination. - The other part of this annual report gives the perspective of key stakeholder groups. This includes PCF Participants that have made the PCF possible, as well as host country represen- tatives and project level stakeholders. A sampling of projects from the PCF's unique portfolio is seen through the eyes of this partnership. Using design tools, the components of this annual report are readily distinguishable and separable, allowing individual participants to extract the PCF's results. KEN NEWCOMBE PCFFund Man ager. Senior Manager Carbon Fnanuce Business. The World Bank 10 'HIGH-.LIG - F 2003 Because it is the first global carbon fund, every year in the life of the PCF brings rich experi- ence, insight and learning. Notable achievements in the third full year of PCF performance that have helped us learn by doing include: With the recent approval of the Czech Republic Host Country Agreement and authorization to sign the two outstanding Czech Emission Reductions Purchase Agreements (ERPAs), the number of signed and authorized ERPAs will have doubled from 7 to 14 in 2003-roughly half of the expected final number of projects in the PCF portfolio; Compared to zero agreements signed in 2002 in the Joint Implementation market, 2003 saw major breakthroughs with the signing of Host Country Agreements with Bulgaria, Romania and the Czech Republic. Added to this, the agreement on October 6th 2003, of the Polish Council of Ministers authorizing the signing of the Poland Host Country Agreement, and the accom- plishment of bringing the Hungary Pannongreen project to ERPA signature from identification in just six months, signal major progress in the PCF's Joint Implementation asset creation. In 2003, the PCF filled the East Asia gap in its portfolio with the inclusion of major assets in Indonesia, the Philippines and Vietnam, as well as by reaching a watershed agreement with the government of China on the basic terms of purchase for several major Clean Development Mechanism assets. Breakthroughs in East Asia and new projects in South Asia mark the end of the identification phase for PCF projects. All the projects that could be part of the PCF's final portfolio of about US$160 million in emission reductions purchases are now known and are working their way through due diligence and negotiations. In June 2003, the Chile Chacabuquito Project, a 26-megawatt run-of-river hydropower project, became the first PCF project, and possibly the first CDM project, to achieve verified emission reductions following guidance from the Marrakesh Accords. The independent verifier, TUV Suddeutschland of Germany, verified that the project had achieved 112,000 tons of carbon dioxide emission reductions after almost one year of operation. 2003 marked the beginning of CDM Executive Board review of methodologies to determine additionality under the guidance of the Marrakesh Accords. The World Bank submitted eight new methodologies by mid-September 2003. The CDM Executive Board has already approved two of those submitted by the World Bank. In addition, the Bank submitted for validation the first CDM projects applying the new streamlined procedures for small-scale projects-the Mexico INELEC run-of-river hydropower projects. Altogether these cover about half of the PCF's CDM portfolio. The PCF's commitment to disseminating its unique knowledge to host countries and other stakeholders was handsomely demonstrated in 2003 with a trebling of delivered person- training days in carbon finance from about 800 in 2002 to over 2400 in 2003. . r n i f t l ., . ; : th ksariUS2 in from ndusderi preparac o rin saecnrc. tha ,S1. m on s,ie rpaa on. STAKEHOLDERS IN A SHARED VISION THE PROTOTYPE CARBON FUND Now in its fourth year, the Prototype Carbon Fund is part of a larger global effort to combat climate change. The carbon finance business has taken on a new sense of urgency in the face of mounting evidence that the Earth's climate is changing, which could have dire consequences for major parts of humanity. The main culprits are a series of gases-called greenhouse gases-emitted by fossil fuels, waste, or agricultural processes that contribute to the trapping of heat in the Earth's atmos- phere by creating an invisible blanket around the planet. THE GLOBAL CONTEXT In June 1992, over 180 countries atthe "Earth Summit" in Rio deJaneiro adopted the United Nations Convention on Climate Change (UNFCCC), a legal framework that commits Parties to the Convention to start the process of stabilizing climate-altering greenhouse gases in the atmosphere. The Kyoto Protocol, which was adopted under the UNFCCC, commits industrialized countries to reduce their carbon emissions by an average of 5.2 percent below their 1990 levels in the period 2008-2012. Two of the flexible mechanisms incorporated in the Protocol-the Clean Development Mechanism in developing countries, and Joint Implementation in countries with economies in transition-enable industrialized countries to meet some of their obligations beyond their own borders through proj- ects generating greenhouse gas emission reductions. As the global climate system benefits from reductions in greenhouse gas emissions wherever they occur, the Clean Development Mechanism and Joint Implementation will make the costs of reaching emission reduction targets cheaper, plus contribute to sustainable development through the projects. Companies can supplement their commitments at home by purchasing potentially lower-cost emis- sion reductions in developing countries and countries with economies in transition. As a result, proj- ects in these countries will get a new source of financing for sustainable development in the energy, industrial and waste management sectors, land rehabilitation, and in the introduction of clean and renewable technologies. Industrialized countries can meet part of their Kyoto obligation, while the threat of climate change is reduced at a lower overall cost. The PCF was created as a response to the need to understand and test the procedures for creating a market in project-based emission reductions under the Kyoto Protocol's flexible mechanisms. The PCF has played a pioneering role in developing the market for greenhouse gas emission reductions, while promoting sustainable development, and offering a learning by doing opportunity to its stakeholders. The PCF uses funds made available by its 23 participants-6 governments and 17 companies-in projects that will produce high quality greenhouse gas emission reductions, which PCF Participants can use in compliance with their expected emission reduction obligations. The primary focus of the projects is on renewable energy technologies-such as wind, small hydro, and biomass energy tech- nology-that would in many cases not be financially viable without financial support from the PCF. 13 .4 - - / IL , -7 2K: _ _ - P ,X,7- IN THE SPIRIT OF THE WORLD SUMMIT ON SUSTAINABLE DEVELOPMENT (WSSD) The PCF pre-dated the World Summit on Sustainable Development held in Johannesburg it September 2002, but has captured the spirit and intent of the Summit with its emphasis on partner ships for sustainable development. The broad range of actors that cooperate and play an active rolE in the success of the operations of the PCF, ranging from public and private participants to hos- country officials, from private entities in host countries, to private verifiers and non governmenta organizations, are crucial to the PCF's success. The WSSD was different from other United Nations Summits in that it strongly encouraged partner ships for sustainable development within its formal process, and highlighted such partnerships as ar important outcome of the Summit. The Plan of Implementation adopted by the over 190 govern- ments represented at the WSSD, urges actions to improve access to environmentally sound energy services and resources, and to accelerate increased access of the poor to reliable, affordable, envi- ronmentally sound energy services as a means to improve standards of living. The PCF is one of the most innovative and pioneering public/private efforts-and one a bit ahead of its time-aimed at mobilizing funds to combat climate change. Through the PCF, all of its stakeholders have made the step from debate to action. It has created a learning network which tries to implement the political agreements reached in Kyoto, Bonn and Marrakesh. It translates international obligations into Emission Reductions Purchase Agreements, and has demonstrated how partnership and shared interest among all participating parties can foster cooperation between private and public sectors-North and South-and can help to imple- ment successful emissions reducing projects. We appreciate and are motivated by the efforts of the PCF, which has a head start on the Kyoto Protocol application. The PCF provides its participants and host countries with qualified expertise and with opportunities to join in activities towards building a sustainable society." KYUSHU ELECTRIC POWER COMPANY PCFParticipant 14 WHO IS THE PCF? A PARTNERSHIP OF STAKEHOLDEBS IN A SHARED VISION 03*;... Z Canad'a The Canadian International Development Agency and Canada's Clean Development Mechanism & Joint Implementation Office, housed at the Department of Foreign Affairs and International Trade, have represented Canada in the PCF since its inception in 2000. In an effort to cooperate with other nations, Canada ratified the Kyoto Protocol in December 2002. In the February 2003 budget, CDN$2 billion was dedicated to implementing the Climate Change Plan for Canada, which builds on more than CDN$1.7 billion already committed to climate change programs, showing Canada's commitment to participation in the international process. In addition to the contri- bution to the PCF, the Canadian government has allocated CDN$25 million over five years to establish Canada's Clean Development Mechanism & Joint Implementation Office, as well as CDN$100 million to the Canada Climate Change Development Fund. About CDN$25 million of the latter is supporting projects addressing Clean Development Mechanism capacity building in developing countries. The experience with the PCF has fostered Canada's commitment to continue its participation via the new World Bank funds, namely the Community Development Carbon Fund and the BioCarbon Fund.* The Finnish government regards the Kyoto Protocol as a landmark agreement among the interna- tional efforts to tackle global environmental challenges. Joint Implementation (JI) and the Clean Development Mechanism (CDM) are essential parts in the implementation of the Protocol. Although Finland aims to reach its Kyoto target through domestic measures, CDM and JI could play an impor- tant role in future commitment periods. Finland has established a CDM/JI Pilot Program to test the mechanisms and create the capacity to utilize these mechanisms in the future. The Program has a budget of £22 million. PCF accounts for about half of this budget. The rest of the budget will be used to buy Emission Reduction Units/Certified Emission Reductions from about ten projects bilaterally. Through the Pilot Program, Finland expects to cover 3-4% of its reduction target.* The Japan Bank for International Cooperation (JBIC) is a governmental financial institution that implements Japan's external economic policy and economic cooperation, with US$192.3 billion in J B I C outstanding loans and an overseas network of 26 representative offices worldwide. .. .... JBIC has been very active for more than 10 years in addressing global environment issues, and in providing projects that contribute to alleviation of greenhouse gas effects. In line with these past efforts, the Japan Bank for International Cooperation participated in the PCF along with Japanese private companies in order to become engaged in the proper promotion of flexible mechanisms under the Kyoto Protocol. Involved actively as a member of the Participants' Committee, the Japan Bank for International Cooperation highly commends the PCF Fund Management Unit for the accumulation of know-how in formulating concrete Clean Development Mechanism and Joint Implementation proj- ects. JBIC also intends to utilize the experience and knowledge obtained through participation in the PCF, along with our extensive network in dealing with developing countries." 15 The Dutch government is very committed to tackling the problem of global warming. The government decided to use the Joint Implementation and Clean Development Mechanism instruments to reach 50% of its Kyoto target of 6% in the periods from 1990 to 2008 and 2012. This target equals 100 million tons of carbon dioxide equivalent. The Dutch government implements projects by means of the Dutch Joint Implementation ERUPT tenders and the Clean Development Mechanism Purchase Program. The Ministry of Economic Affairs, the representative of the Dutch government in the PCF, finds it of utmost importance that carbon dioxide emissions get a price on an international market, because it would allow us to use market mechanisms to tackle an environmental problem in a cost-effective way. The PCF and the Dutch government are working hard on the prompt start of CDM. Of course, as people eager to contribute to a solution for climate problems we are evidently facing, we are disap- pointed by the fact that the Kyoto Protocol is not yet in force and as a result, we are not yet able to register our projects. We hope the years 2003 and 2004 will bring a breakthrough in all these areas.* In 1996, following the creation of the pilot phase on Activities Implemented Jointly (AIJ) at the first Conference of the Parties to the UNFCCC, ie COP-1 in Berlin, Norway supported the creation of an AIJ program at the World Bank. The objectives of the program were to extend and diversify the AIJ transactional experience by creating new partnerships and implementing a range of project types. The program emphasized learning, client-country engagement, methodological development, private sector participation and the identification and selection of projects. Three AIJ projects-in Poland, Mexico and Burkina Faso-were implemented through the program, and methodologies for baselines and for monitoring and verification were developed for these projects. These experiences directly influ- enced the development of the carbon funds in the Bank, and the participation of Norway in the PCF* KllS 1 5i ""Oj M I - -ji Sweden strives to be a forerunner in global cooperation to curb climate change. Its domestic emis- sions are low compared to most other industrialized countries-with a reduction of emissions by almost 50% since the 1 970s. International cooperation, cost efficiency and fairness are core elements in Swedish climate policy. Even before the first Conference of the Parties to the Kyoto Protocol, Sweden decided to launch a program for Joint Implementation projects in the Baltic Sea region. Sweden has made great efforts to ensure that the Kyoto Mechanisms evolve into efficient, reliable and fair tools for international cooperation in the field of climate-change mitigation. Sweden joined the PCF with a view to influence the policy of the Fund towards high-quality projects, interesting methodological challenges, and a just geographical distribution of projects. Our conviction that rules and guidelines must reflect high standards of environmental integrity, as well as practical experience, is also reflected in our participation in the PCF.* 16C v '# t, ww 4giatJ '1M a f& * Zet - _s* ' ' PCI Cafl*td bS = *n_twsSn$d**wns _mtplantaua.i 520 1.514,266 1,6m i51 .! I~~'~ 1 =. iuoottwusspmduca dM 1.75 500,000 i, 7n *m ,~spwutnaa'v to ruphk cod j 8:, scXlorgesmtW 3rld on6bw 69 1,750,1000 2.:X,Q a. C ~ugIadi p-cea 3.2D 800/I]t WG~7 V., *Wt**b*q*-a pcwm mcy addaow 0.92 262,660 3 0.60 172,110 2A5.t; a --r d X ~~~~~~~~~~~2.00 500,00 50QkOo g*t 7 j 1 ;.j# 4 t= = plitin s n nin stto C 7.50 2 .000,000 3 8 A . wo ftwtlw"W-mmi SDI 1,192O 2.d445,1 t *. F g f tA*p~,sut whf ti#w'w wu¶w m m nt* d arton 2.48 307,933 4 4 4 4 -n". -. '-F ~~""rviff pAiCtu p6* rma movber co3,90 18wm9e1.4Ar4 i 3¢ ~~~C,- Wit wh~M Mo im 3.90 1,300,3X0 2 fl15tt' i' ';XLssfis;iw ^irk .. > ;6 ; & , - . , , ; - . r * ~~~~~~~~~~~~~ =~~~~~~~~- - Y ~ I 0 's- PCF PORTFOLIO STATUS: EMISSION REDUCTIONS PURCHASE-AGREEMENTS SIGNED PCF PORTFOLIO STATUS: EMISSION REDUCTIONS PURCHASE AGREEMENTS SIGNED PCF ERPA Country/Project ~~~~~~~~~~~~~~~~Emission Total Project CoNtr/Poec Project PCF Contract Reductions Emission Reductions Name ~~~~~~~~~~~Description in million U.S$ tCO,e Generation tCO2e BULGARIA: Disrinct FHesting Distr,ic hearing system upgrades for the cities of Sofia and Pernik 6.00 1,500,000 -2 9o1] 458 CHINA: Co3l-bed MeThane Capture Of Coal mine methane associated wit. coal mining operat.or, 12.75 3 000, Goo 29 OX,Cl N'X and ulti-zation of methane for power generation thereby di.splacirg coal thermal generation CHINA:- Run-of-river Hydro Run.ot.rei`e hydro project to displace coal thermal power generation a 50 2.000,00 ,7C.tW COSTA RI1CA: Vara t3lan-ca Wind Farm 9 6 megavvatt wind tarm to displace thermal power generating untLsin 1.00 284,660 3 55 825 the pro-. inces. of Heredia and Atajuela CZECH REPUBLIC: SEPF Energy En-ergy efficiency rmeasures and renewabl,s through the State 0 72 180,000 11 li Efficiency Environmental Fund (SEF) Emission reduction,s from avoidling methane emissions from treatment 5. 63 1,500W,000 3.62-.IC.57 INDIA: Municipal Solid WasTea IABIL) ol municipal solid waste and generation of electricity in Luckinow INDLA: Off-season Bagasse Off-season substitution of lignite by biomass fuel in four exsurng 12.00 4,000,000 7.:3Y,435 Cogeneration (FASLI and proposed sugar-cogeneration plants INDONESIA: INDOCEMIENT Emiqsson reducirons through energy efficiency measUres and 15.00 5,000,000 Ii 1000(ni Sustainable Cement Production alternative fuels for cement production and by creating a blended cement product l ine MEXICO: INELEC 3 Hydros H-ydro plants at three Sires- Trc,1es, El Gallo. and Chitatan 3 63 1.036,050 3,04C0 4._' MEXICO: INELEC Benito .Juhrez Hydro 15 megawatt capacity hydno plants 'n Benito Juarez 1.00 285.383 856,149 MEXICO- Cruz Arut Win-d si mnegavwatt wind farmr located in the state of Oaxaca 7.50 2,000.000 2,240 CNX, Protect . Phase I MOLDOVA:- Soil Conaeriat;con Afforesitason of dlegraded and eroded state-owned and commnunal 5.10 1 455* 744 1, 7 75 2:8'b agncullural lands throughout Moldova PHJLiPPINES: Cogeneral-on Bagasse cogeneration plants to supply tte hear and power needs of 7 50 2,000,00 2,499 9i.3', milling companies and to expoft po4eier lto he local grid displacing diesel power generation SOUTH AFRICA: Durban Landfill Landfill gas recovery and nroducton,of elsuicity from teodRII.- 15.01 3,800,000 8,780,034 Gas to Energy collected methane UrZDEKGSTAuN): Ardi1an Heating Distridi heating systrrw, replacemnent and upgrade In the city of Andijan 0.63 210.000 1,0700)1) UJZBEKISTANI: Tashkent Heating Distict heating system replacemnent and upgrade in 7.00 2 000,000 3.135.00) fte city of rashkerit VIETNAM.GrontriLa-Al L andifil lgscpuefothladlinF CiMhCty8.75 2,500.000 2,932 e60(1 in Ho Chi 1In CityLndllgscpuefoteladll ICiMshit PCF PORTFOLIO STATUS: PROJECTS UNDER PREPARATION 7~~~~ 5 F bp British Petroleum (BP) is a major global integrated energy company. BP has a strong commitment tc the global reduction of greenhouse gases. Participating in the PCF has provided a good business perspective which runs in parallel with BP'". stated goals to achieve sustainable development and behave with social and corporate responsibility The PCF provides a strong framework in the development of and direction for the global carbon market-leading in the knowledge and experience of the CDM process.* W"* Iiiti-i; = i I zU 11 e Chubu Electric Power Co. Inc. (Chubu Electric) supplies electricity to the Chubu region of centre I Japan, where manufacturing accounts for about 15% of the national GDP, with a population of 16.S 1 million people. A In the energy industry, the Company believes that there is no sustainable development for an ente - J] prise if it does not work in harmony with the global environment. This is why we have included acti\,i- ties for environmental protection among our top priorities and are working in a variety of fields. Climale change in particular, is a complex global, long-term problem and this requires us to coordinate not on y with our partners in Japan but also with those overseas. The PCF has promoted well-designed Clean Development Mechanism and Joint Implementation projects for the sustainable development of host countries, and has played a leading role in the design of the Kyoto Mechanisms. Chubu Electric joined the PCF at its founding and has committEed US$10 million-among the largest contributions from a private sector participant.* a_IM 10 - ** 1- * I f- ,fneroia Since its establishment in 1951, the Chugoku Electric Power Co. Inc., has developed its businesses )n the basis of its fundamental mission of providing a stable supply of high-quality electricity at affoid- able rates. Our service area, the Chugoku region in western Japan, covers about 32,000 square ki o- meters, and has a population of around 7.8 million. The area has an annual gross domestic product of approximately US$260 billion, making it comparable to the economy of Switzerland or Belgiurr. One of the top management priorities of our company is that of taking action on environmental issues. In 1993, we adopted the Chugoku Electric Environmental Action Plan, and are actively engagec in environmental issues. To prevent global warming, we are taking various measures including promot on of nuclear power generation and expanded use of new forms of energy. Participation in the PCF, :he world's pioneer in the field of carbon markets, is also one of our measures to address the glonal warming issue. Through participation in the PCF, we expect that not only will we obtain emission reductions to assist us in meeting our voluntary target, but also that we can contribute to sustainable development and expand our knowledge of the global carbon market.* 17 Deutsche Bank B Deutsche Bank, one the world's largest financial services groups, contains the Global Commodities Group, which is a leading provider of risk management strategies across a range of products and sectors including oil, petroleum, gas, electricity, weather and base and precious metals. In recognition of the environmental and economic implications of climate change, Deutsche Bank is estab- lishing a portfolio of services to assist its clients to deal with the changing policy and economic condi- tions that the ratification of the Kyoto Protocol and other climate change legislation will generate. These services include helping clients identify their liabilities under national and international climate change legislation, developing innovative hedging mechanisms to reduce risk, and providing structured finance to maximize projects' viability and environmental value. For example, in the first quarter of 2004, Deutsche Bank will launch an emissions trading desk based in London as part of the Global Commodities Group. Deutsche Bank strongly endorses the approach and methodology undertaken by the PCF. Its objective of learning by doing has been extremely instructive.* Electrabel | Electrabel is one of Europe's front-runners in the energy sector and leader in the Benelux electricity market. Electrabel provides comprehensive and tailor-made energy for industrial enterprises, making the most of the synergy between electricity and natural gas. It also offers services to small businesses and residential customers. In 2002, Electrabel's sales outside Belgium (its historical base country) represented more than one third of the total volume (excluding trading). Climate change is one of the most important challenges Electrabel will have to face in the future. But response to climate change is much more than complying with the new European Emissions Trading System that will come into force at the beginning of 2005. We have to look for innovative ways to protect our business future in view of the emerging carbon-constrained economy. Scenarios and models alone will not be able to define more than the rough processes of the new market. The PCF appealed to us because we realized the climate change challenge cannot be solved in indus- trialized countries alone. In this context, projects appear as a positive combination of sustainable progress in the host countries, technology transfer and cooperative development.* LO I 161:411d Fortum Fortum is a leading energy company in the Nordic countries and the other parts of the Baltic Rim. Fortum's activities cover the generation, distribution and sale of electricity and heat, the production, refining and marketing of oil, the operation and maintenance of power plants and energy-related serv- ices. The main products are electricity, heat and steam, traffic fuels and heating oils. Fortum's ambi- tion is to provide safe and environmentally benign energy products and services, which contribute to a more sustainable use of resources. The climate issue is the number one environmental challenge of the energy industry in the foresee- able future. Fortum launched a Climate Initiative at the beginning of 2000, which included projects to increase the share of bio-components in traffic fuels and heating fuels. A pilot facility has produced liquefied wood fuel since spring 2002. In autumn 2002 we introduced a bio-gasoline with an ethanol component to the Finnish market. In our electricity and heat production we aim at favouring renew- able energy sources, currently focusing on enhancement of hydro power and increasing use of biomass. 84% of our electricity procurement in 2002-in our own and partly owned power plants- took place without carbon dioxide emissions. The cooperation with the World Bank started in 1997 in the early design phase of the PCF.* 18 *s j >i; i i j j ; j LS Gaz de France Gaz de France is one of the leading European gas groups and is active throughout the world in explo- ration and production, natural gas trading, transmission, storage, distribution, energy management and air conditioning and heating. Gaz de France has 14 million customers, 38,000 employees, g14,546 million in consolidated net sales, C3.65 billion in investments, 640 billion kilowatt hours of natural gas carried (via pipelines and liquid natural gas facilities), 9.8 billion cubic meters of natural gas stored in 14 storage facilities, and 31,000 kilometers of transmission systems. Its greenhouse gas emissions today are close to 3 million tons of carbon dioxide equivalent. Gaz de France is actively looking at sustainable development issues such as reserves impoverishment, promotion of energy efficiency and climate change. We were engaged in action early on global warming-both internally and externally-including research on more efficient and cleaner systems, including major experimentation programs on fuel cells. We are also France's leader in district heating networks using geothermal power. We have invested heavily in fostering the development of clean public transport using natural gas-30 cities have switched to natural gas vehicles. Last July, Gaz de France made a voluntary commitment in France to reduce the greenhouse gas emissions of its transport and distribution pipeline systems by 10% between 1990 and 2007. It is also involved in a research program in the Netherlands for carbon dioxide sequestration in production fields.* 0 i 7 L J ' i R L i l i R " i " 1 4WKYUSHU ELECTRIC POWER CO,INC. Kyushu Electric Power is a power utility where business covers a wide range of services, from power supply to telecommunications. The company is situated in the Kyushu region, the most southwestern of Japan's four main islands. With an area of 4.2 million hectares, the region is home to approximately 13 million people, with an economic scale of US$377 billion. Taking advantage of its close proximity to the Asian continent, Kyushu has long served as a hub of cultural and technical exchanges between Asian and European countries, and Japan. Kyushu Electric Power Company was founded in 1951. Its capital is 237.3 billion yen, with power sales of 76.6 billion kilowatt hours. It employs 14,000 people. Kyushu Electric is taking the best possible measures for environmental conservation, while satisfying power requirements. As measures against global warming, the company actively promotes the use of nuclear power and renewable energy, as well as improvements in the efficiency of power stations. Kyushu Electric is endeavoring to utilize its accumulated know-how and technologies on the reduction of greenhouse gases in activities to prevent global warming. As a part of such efforts, the company partic- ipated in the World Bank's PCF upon its establishment in 2000, and agreed to contribute US$8 million.* E I M111 I - i, i ; A. Mitsubishi Corporation Mitsubishi Corporation (MC) is one of the world's most diverse enterprises as manifested in the expertise of its six varied business groups-New Business Initiative, Energy, Metals, Machinery, Chemicals and Living Essentials. We have many subsidiaries and affiliates and a network of offices around the world. After many years experience conducting international business, MC today is much more than just a trading company. Our business groups work closely with clients to develop a multi- tude of commercial opportunities, from product marketing to distribution, project coordination, sourcing of raw materials, capital investment and development of sales channels. To prevent global warming, Mitsubishi Corporation's participation in the PCF contributes to building a safety net on a worldwide scale, on the climate change issue. We also acquire emission credits and operational know-how through this unprecedented initiative.* 19 A IITSUI & CO., LTO. . . Mitsui is one of Japan's leading general trading companies, or sogo shosha. In response to worldwide efforts to find solutions to the problem of global warming, Mitsui is undertaking such commerce- oriented approaches as compliance with international tradable emissions programs, participation in brokerage of carbon credits through investment in broker C02e.com, LLC, and promotion of afforesta- tion businesses and alternative energy sources. Mitsui is a participant in the PCF established by the World Bank, having made a commitment to invest US$6 million. The Fund is an ambitious endeavor to seek out new, economically optimized methods of solving the twenty-first century's greatest environmental challenge. It plays a capacity-building role that demonstrates that the Kyoto Protocol is workable through the Kyoto Mechanisms, composed of the Clean Development Mechanism, Joint Implementation, and emissions trading. These activities contribute to fostering a global carbon market, climate-change mitigation and sustainable development.* Norsk Hydro manufactures aluminum, fertilizers, petrochemicals and has activities in the oil, gas and electricity sectors. We are at present in more than 60 countries; almost 80% of our turnover of approximately US$22 billion in 2002 was related to business in Europe. Norsk Hydro's annual emis- sions of greenhouse gases amount to approximately 27 million tons of carbon dioxide equivalent, of which a substantial part relates to emission of nitrous oxide from our fertilizer business. Perfluorocarbon gases are a result of our aluminum activity, in addition to carbon dioxide emissions. Norsk Hydro is aware of future regulation of greenhouse gases and the implications these regula- tions may have on our business activities. Our investment in PCF is an important element in our buildup of knowledge and position, as we prepare for the emissions trading system emerging within the European Union. Participation in the PCF is also expected to result in cost savings for Hydro. We know that the marginal abatement costs of achieving greenhouse gas reductions in OECD countries are projected to be significantly higher in the future than the costs in developing countries and coun- tries with economies in transition. Therefore, PCF projects are expected to be undertaken exclusively in the latter groups of countries, with resulting cost savings. And finally, our participation in the PCF meets with our goals of being environmentally and socially responsible.' 20 PCF PERFORMANCE 2003 TECHNOLOGICAL DISTRIBUTION. REGIONAL DISTRIBUTION: ACT'.E T ;F FIPELIrJE PCjE.:T; - TOTAL O; APPPQ. 'I s MILL.: N | _TIE P.D PIPELINE rROJE:T; - T2TAL O APPROQ LS Sj-J' MILLION | Cement Coal-bed Manufacturing Methane _ _ . , Bagasse 9 Eastern Europe Lat.n Amnerica Wind 5 11%~ ~~10 Small 16% 11% Energy Nytrou E;Hici10%y r. Hydra East Asia 32% . 18°, Africa 4% ~ t. - ~~~~~~~~~Geothermal Oxide Removal .314% , - Waste ~~~~~~LULUCFSotanCerlAsa4 1t ~~~~~~~~~~~~~~1 ~~~.* ~~~Management SuhadCnrlAi Fig lI.C 49, 51-~ A{- - ', f b L , . . . . 3 , ,U 1E1 I r 1 x - r . N - ., f . . - -- . , p role K ,.! : S_' oJ 6+_ a -I PORTFOLIO DEVELOPMENT PCF PERFORMANCE 2003 ti- Portfolio 10-elop Mimu. ' u v p r c s j e c t s a n a g~~~~~~~~~~~~~~~~~~~~~~~a ae exp e t axons arnong c ;93 STATUS OF THE PROJECT DEVELOPMENT IN THE PCF FgI. .'.-. j 5~~~~~TAGE OF DIEIELOPMENT NUMBER o; PRO......JECTS %ALvJE OF PROJECTS uS$ r.1,.e ..................a,,-: ONSw ;! | Enr,,; , n 9e jucr~~~~~~~~:r ;.qn,b, ger .3n.1................... 12 5455 12 19MieC0 '1) iij B Yr.;lc t Lle}|\n Go:|nrierr snhel ~~ ~ ~~30 SI.64 Aso I mtc0 > t ^'^g) d Pf;le, t l-.r,. _gt >J;re; leirij t, Fni l-|;g+tnent52 S288 0 d ZMC,S, ,; l ~~~~~~~~~~~~~Pr(,e,:lt ldce; 4--res oj,trT|tt*5j 420 - 3 ~~~~NUMBER OF PCF PROjE;TS , YAiLUE OF PC; CONIRACTS 0 50 100 ISO 200 2Wo 1 00 i:G 4 G jL.>0CTur PORTFOLIO DEVELOPMENT "The Swedish government regards PCF achievements as exemplary in showing that important socioeconomic gains can, in practice, be met through international cooperation in action against climate change." GOVERNMENT OF SWEDEN PCF ParticLpant The Rabobank Group is a broad financial services provider with a balance sheet of US$400 billion. The group consists of 340 independent local cooperative Rabobanks, with more than 1.25 million W members. In its Dutch home market, the Rabobank Group has 9 million private and business Rabobank customers and is market leader in virtually every area of financial services. Rabobank is also the largest internet bank in Europe. The Rabobank Group is represented internationally with 169 locations in 34 countries. It has received the highest credit rating from the major rating institutes and was selected as the world's safest bank by Global Finance each year from 1999 to 2002. The Swiss rating agency Sustainable Assets Management gave the Rabobank Group the second highest sustainability rating of banks worldwide in 2002. Participation in the PCF was Rabobank's first step into the emerging carbon market, and Rabobank is still very active in the PCF. Building on its network of offices in countries such as India, Brazil, Chile and China, Rabobank is presently running an efficient and fully integrated carbon finance operation. Having signed an emission reduction procurement contract with the Dutch government, Rabobank is the first private financial institution to run a carbon fund. Rabobank's Environmental Financial Products department, based in London is able to assist clients in managing their compliance risks and help them to deploy their capital in environmental asset markets. Rabobank has set up electronic trading portals for environmental commodity trading (nitrogen compounds, carbon dioxide and Renewable Energy Certificates). More recently, Rabobank joined a pan-European initiative for the retail market to market low-carbon or carbon-neutral consumer products.* RWE is Germany's fifth-largest industrial company and ranks among the world's leading multi-utility RWE companies. Its core businesses are electricity, gas, water and environmental services. RWE recognizes and upholds the value of sustainability as the guiding principle of international devel- opment and strives to conduct its own business accordingly. RWE has documented its progress towards sustainable development in our "Roadmap to Sustainability." We have set concrete mile- stones for achieving our sustainability objectives while strategy, implementation and communications are becoming increasingly integrated. As part of our climate change mitigation strategy and in order to gain experience with project based greenhouse gas emission reductions, RWE joined the PCF-the only German industrial company to take part. We have also been fortunate enough to benefit from the unique opportunity of a PCF fellowship for one of our environmental protection experts.* 21 Shikoku Electric Power Co., Inc., is this year marking 52 years since it was established in 1951. Shikoku IONDEN Electric Power is one of the 10 electric utilities in Japan that carry on the integrated process of gener- ating, transmitting, distributing and selling electricity in their respective service areas. The company provides high-quality, low-cost, stable electricity of 26 terawatt hours to more than 4 million customers on Shikoku Island. Shikoku Electric Power perceives environmental concerns, especially climate change, as one of the key issues for corporate management. The company is making every effort to promote environmental protection measures at the power supply facilities to achieve a stable and well-balanced combina- tion of power sources in the development, installation, operation and maintenance stages. As further measures to fight global warming, Shikoku Electric Power recognizes that market mecha- nisms are crucial for the sustainable development of human activity. Our international investments for global warming supplement our domestic initiatives. Therefore, Shikoku Electric Power partici- pated as an original member of the Prototype Carbon Fund in January 2000. In response to the PCF proposal in 2002, Shikoku Electric Power made an additional contribution of US$5 million, thus bringing our total contribution to US$10 million. * Statoil is an integrated oil and gas company headquartered in Stavanger, Norway with about 17,000 employees worldwide. In 2002, we produced an average of 1.1 million barrels of oil equivalent per day-92% from the Norwegian continental shelf. We are one of the largest net crude exporters in the world, a leading supplier of natural gas to Europe and a major retail brand in Scandinavia and the Baltic states. Statoil's greenhouse gas emission reduction strategy involves cost-effective emission cuts in our oper- ations, participation in emissions trading, and project-based mechanisms specified in the Kyoto Protocol. We support the World Bank's gas-flaring initiative, which aims to reduce gas flaring world- wide. We seek to develop our leading position in subsurface injection and storage of carbon dioxide into an industrial business opportunity, capitalizing on our carbon dioxide sequestration at the Sleipner field in the North Sea. For this, Statoil received the World Petroleum Congress award of excellence for technological development in 2002. Statoil's participation in the PCF is based on a wish to contribute to implementation of the Kyoto Mechanisms to the benefit of the development of non-Annex I countries and to enable Statoil to meet obligations for greenhouse gas emission limitations cost-effectively. Statoil has confirmed its commer- cial trust in the PCF by extending its participation from US$5 million to US$10 million.* 22 I 1SX3' .3 'C,:!! . :a L' T76 Elet c o e mpany is the world's biggest private sector power company. We consume a I:.rg quantity of reszjrcnes in the power generation process and our emissions of carbon dioxide EC c l mpanying powe~ generation account for about 9% of Japan's total emissions. To keep these emis- s QK3 dovin to the bai.z,t mnlimum, we have been positively promoting environmental measures such at r qpror'inq power oJ neration efficiency, promoting nuclear power and renewable energy, etc. lIs i rditic n to these rnerna measures for reducing greenhouse gas emissions, we are aiming to make use tf the Kyot o Met i anismns. Participation in the PCF has led us to take a step into these new mech- an s ns vwnich still rer~ 3ill uncertain. Our company has been engaged in the PCF from its launch, and sen. ad as a Participar t Committee member to support it. Ar to ughl the Funos hils only just started to receive actual emission reductions, we the participants ha .vq already gained Ats of benefits from the PCF. Most important of all, we have dispatched two of :, r amp oyees throu;i h a staff exchange program, acquiring hands-on expertise and knowledge as mrem bers of the Fune: Management Unit. With this knowledge and experience, we have become one Ot tne leadinig comp n.es in this field in our country. We are proud to be a part of this as a PCF P,r cipant, and we ar will ng to cooperate and contribute to the PCF further on.* Tch Dk Electri PoweZ Company was established in 1951 and supplies electricity to approximately 7onmillion customers' hroughout the seven prefectures of thelTohoku region, in the northeastern part .,T Jepar's ma n islan d1. Tohoku Electric Power operates facilities under an integrated structure of ge neration, tra.nsmiss on1 and distribution. The company's electric power sales in 2002 amounted to 74 355 gigawatt hour. equivalent to those of Belgium. Aunfress ng environn eNntal issues is one of the key management challenges for Iohoku Electric Pcer er. It has set a Mic term Environmental Action Plan for the coming 3-year period. One of the plan's m3J ar emphases is cli uate change mitigation. As part of this effort, we decided to participate in the PCF Furthermore, the company has committed itself to nuclear power development and expanding util :at on of renewat ie energy, enhancement of efficiency, and lower fossil fuel consumption at its gereration facilities. Participation in the FC F gives Tohoku Electric Power Company a great opportunity for gaining know- nov with regard to thte k.yoto Mechanisms, and also to demonstrate to the world community its envi- ronrnental commitment to climate change mitigation. Through participation in the PCF, we are truly p es1sed to ha ve acqu red our very first emission reductions through a hydropower generation project In Chile.k I'h fornrat on cc eta rea Cit ti ra3e V/3s providee by the Participants of the PCF anod wtn tee excepton of minor eo toriai ceanges. s reproduced In tne io ecrm In enich t v 3s provi c 1. Tie v emWs and op eions expressed In tnese pages are those of the companies prov ding the informat oe, and oo cot repre- eI v 1 views and op ii Ons cf I J90old Bane or the Trustee Neither the Worio Bank, nor tne Tr..stee take any responsibiiity for the nformat on conta ted, tr1 epresr3ntat ons nade ,n 1i r e pages 23 CARBON FINANCE AND THE WORLD BANK WHY IS THE CARBON FINANCE BUSINESS IMPORTANT TO THE WORLD BANK AND ITS MISSION TO REDUCE POVERTY? Mitigating climate change by reducing global greenhouse gas emissions is classified as an impor- tant priority for World Bank operations, leading to substantial benefits for Bank borrowing member countries. The limited existing capacity in developing countries in originating Clean Development Mechanism (CDM) and Joint Implementation (JI) projects and undergoing CDM/JI transactions led the World Bank Group to undertake a pioneering role in developing the market for greenhouse gas emission reductions through the establishment of the Prototype Carbon Fund. The World Bank's carbon finance initiatives, including the PCF, are an integral part of the Bank's mission to reduce poverty through its environment and energy strategies. The threat climate change poses to long-term development and the ability of the poor to escape from poverty is of particular concern to the World Bank. The impacts of climate change could unravel many of the development gains of the last several decades. The Bank is therefore making every effort to ensure that developing countries can benefit from international efforts to address climate change. A vital element of this is ensuring that developing countries and economies in transition are key players in the emerging carbon market for greenhouse gas emission reductions. The role of the Bank's Carbon Finance Business is to catalyze a global carbon market that reduces transaction costs, supports sustainable development and reaches and benefits the poorer communities of the developing world. Carbon finance plays an important role in the Bank's efforts to achieve a broad range of institutional goals and to meet commitments made (a) through sector strategies in the infrastructure and envi- ronment sectors, (b) at the Johannesburg World Summit on Sustainable Development, and (c) under the Millennium Development Goals (MDGs). Over and above its impact on reducing greenhouse gases-a specific MDG indicator in itself-carbon finance can directly catalyze sustainable investment in a broad range of areas, ranging from afforestation and biodiversity, to renewable energy and solid waste management. (a) Linkages with Bank Sector Strategies As the Bank's carbon finance operations have illustrated, there are numerous opportunities for cross- sector collaboration. Carbon finance has acted as a powerful catalyst in developing projects that promote rural electrification, renewable energy, improvements in urban infrastructure, sustainable forestry practices and water resource efficiency. The PCF has demonstrated the far-reaching poten- tial of a fully implemented CDM/JI Mechanism by improving basic service delivery through private participation in infrastructure and supporting the development and reach of markets. A glance at the PCF project portfolio reveals the full range of PCF contributions to the World Bank's strategic goals in the fields of energy and environment. The small hydropower projects in Latin America and Africa have resulted in improved access to clean, renewable energy by poorer communities, and in the case of Chile Chacabuquito also led to a strengthening of policies governing land-use and biodi- versity protection in the project area. Energy efficiency projects in Bulgaria and the Czech Republic will lead to reductions in pollution from commercial sources of energy and enhanced urban air quality. Romania's afforestation project will improve soil fertility, and assist in soil stabilization and ecological reconstruction, in addition to generating emission reductions. In Moldova, the PCF's soil conserva- tion project will generate employment through afforestation work and forest management, and is expected to create income through the sale of forest products. In addition, the project will enhance sustainable agricultural production through protection of soil against erosion and landslides. 24 I,#~~~~~~~~~~~~~~~~~~1 1 i X i W'k ;W 11. M4s ~~~~~RATN TH CAI,BON AS E11 tinn § SI - a pr ,-c te A pa I its X Ft~~scan- jes -.e the itato tht\ l i o t ited TFf cart: n :a rdrfr the overrifiedth eX -nh g elment- a re s eraS,r-, Ito appr;sove baseline m, I ario ies I roelin at r j"eifh3rp-Lirs ari, t us ap :pr ove c basr eline m e od o ies. ro ertn o*rd ertc :rear.- emissio reductions w ih c e u~ d for Fha- -o pli,a-,ce ,,r-, :ler the Iryoto Protocol. ~ttin .e lb seline ..ive:1 lor pirc:leci tl-,refore i~ an essenti4l st iin t CF arbc rn _ gut iSS ?1cre mic , 1- rocess . . . l ( b~~~~~~~~~~~stat Th,LDu.il St 1:,,- ,si0n f a number div b eline j -- MtoiIge forapp roval by the Cl Ex tive ~oard, I. SW theiPC F has : ~-: ome a (ey contributoi the velo )ment i n of ii~terr, 3ticol, ,11,, apprc ved CDM bas I e m odo ogies._ Si ce ,r: ,nc rjton, the PCF has rde . pe .d > plied I irc . ~~~~~b h ene andi i-r,onitorirg methodolo( to ere t ian 30 -T ,ns. pec i:; At. ab t wo-thirds of these pr cts CD[ pr<>j- : e in-Jr.~udar,l : everal ;mall-sczale CE proj sTI e PCIF .n, -r1 ha:! al- d 1- I ped methodolog3ie. r a , t 1( Joinlt ory Ir ln,-, r.TaT,. - - (JI) pro ects, and for tl e la se - je .ms h PC kt eCE 1.1 t . - 11). . . ~~~~~~~~~~.< b-rnsi .a'l!itl,ted tio is al nio t,. e catea ories: ia emi ir Iegul jr-s ha ta-DM p cjects where t e em t and gi Si .aIcul ;,or, - It the e ission tredcti al ar sed n the te o mc iit a, ,d proce Tures for C t a)jec pprh ed by s pro e :.e enthe ession r the Confere e ath n rtie tom e - atie . eNFCh (C -a F-7) and ubseqwentg u nce m ts CDM I prol : e,r, ic ee Rms;rd. r . h ist e d all-c;ale DM pri a ects where qu i s ty ulati ins C re and ade us,r- th e simr lified rnlod21iti( Ind ced ires for ?g.;s!t .al c :ale r-j eroetS pproverd at C 8 -I ttore I P -I C S4e r incat: ton, th PCF has de peF dSSpliCdEATrON r~~~~~~~~~~~~~~~~~~~~~~~i 4-> W r O- C [ v r Zm-= =- O- ? Z CD~~~~C 0- - m D 1 * ~~~1 v'x - _ , T~ _ _ _-_ _ W I -Tp~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' t - '-(c m;- '--- R _ na Z j aS * ' D ° X n - ,C C C:t - - C. - - - - : C t A ¾ , A- -.r_, r5._ LEARNING BY DOING THROUGH THE PCF...REGIONAL PERSPECTIVES "The PCF was instrumental in helping us realize the value of the emission reductions from the Guatemala El Canada Project. The PCF helped us navigate the complex set of standards and norms to put together an emission reduction project that minimized risk while preserving value. In particular, the PCF's willingness to purchase emission reductions despite the Project's uncertain CDM status illus- trates the Fund's commitment. The immediate outcome has been an Emission Reductions Purchase Agreement. The long-term outcome will be the application of the many lessons learned from the process as we develop future projects for the broader greenhouse gas market." J U LIE SM ITH-G A LV IN, Mfanager. Project Planning. Energia Global L td. "Emerging markets need to build their institutional framework in order to become real options for investments. The CDM market is one such example. Its operations also constitute the test field for the efficient performance of the greenhouse gas market. The Carbon Finance Business at the World Bank has established one of these test fields, with pioneering implementing facilities such as the PCF. These undertakings constitute a great support for projects in developing countries in the Latin America and Caribbean Region, by ensuring the purchasing agreements needed to continue with the processes of investment and implementation of CDM activities in the region." SERGIO JAUREGUI, Coordinator - National CDAf r' . Bohiia "The Clean Development Mechanism provides a unique opportunity for India to catalyze sustainable development and to leverage the transfer of technology and financial resources. The CDM project development process in India was initiated with the PCF. The government of India is fully committed to having a formal institutional set-up to endorse potential CDM projects. With its enormous indus- trial and manpower strengths, India has an excellent opportunity to play a leading role in the CDM market from the selling side. If the early relationships put in place are healthy, it is likely that India will emerge as a preferred-venue for sourcing Certified Emission Reductions as well as outsourcing carbon-financing-related services for the global CDM market." K I RTAN C SAH 00, Specileitst - Environment & Decentralized Infrastructure, J IDFC-Infrastructure Development Finance Ciompant-. India "Climate change mitigation is one of the environmental priorities of the Czech Republic which is actively seeking to implement the Kyoto Protocol and Joint Implementation projects through two main project implementing agencies, the Czech Energy Agency (CEA) and the State Environmental Fund (SEF). The cooperation with the World Bank is a first step towards developing the Joint Implementation market in the Czech Republic. The PCF has provided CEA and SEF an opportunity to start the concrete implementation of J I projects in the sectors of energy efficiency, district heating, and renewable energy." JOSEF BUBENIK, DirectorCEA ANDREJ MUDRAY, DirectorSEF "Development and implementation of JI projects has been a challenging process for the PCF and also for the host countries. The PCF offers a unique opportunity for host counties to discuss crucial problems related to project preparation and evaluation, but also to share with the PCF team and participants, policy development and project implementation challenges. JI projects also improve the understanding of climate change at the policy and decision-making level in host countries. This will create a solid basis for the long-term policies targeted on achieving our common global goal- mitigation of climate change." ILZE PURINA, ChairpersonofthelBoard. Latvian EnvironmentalInvestmentFund 27 PROJECT: UGANDA WEST NILE HYDROPOWER SMALL-SCALE CDM PROJECTS BRINGING THE BENEFITS OF CARBON FINANCE TO SUB-SAHARAN AFRICA Wedged between the Congo, the south of Sudan and the West Nile river, the 1.5 million people in Uganda's West Nile region live in relative isolation from the rest of the country. Road connections are few, and driving conditions difficult. Nowhere in Uganda is oil and gasoline more expensive than in the West Nile. The national power grid does not reach into the northwest of Uganda, and power from generators is available only for a lucky few and only for a few hours a day. Some entrepreneurs have started mills and small workshops, outfitting them with old diesel gener- ators that are very expensive to operate. Some institutions such as the hospital and some of the richer households have their own diesel generators that help them escape the scarce and unreliable public power service. The growth in individual generators is indicative of a general upswing in economic activity in the region. But life without good roads, reliable electric power, and, until recently, public telephones, remains a challenge. This will all change when, in a few months, the first new power will flow to customers, produced by a private company that won the concession to generate and distribute power in the West Nile. The PCF has been instrumental in making this possible. In early 2004, the West Nile Rural Electrification Company Ltd. plans to start up their new efficient diesel generators in the West Nile towns of Arua and Nebbi, to provide reliable power to the population during the day and most of the night. This is the first carbon finance project that has been approved in Uganda, with an Emission Reductions Purchase Agreement signed in March 2003. The company must expand their customer base quickly, because not only their income from power sales to the local population and industry, but also the PCF payments for emission reductions will depend on the speed and performance with which they manage the conversion. PCF payments also promote the construction and operation of the two new small run- of-river hydropower plants of 5.1 and 1.5 megawatts. Hydropower will significantly increase the emis- sion savings and therefore the income to the company from selling the emission reductions to the PCF. Reliable power will soon be available for workshops and hospital, for schools and households, and it will release the development potential that is buried in the West Nile's soils and people. 28 PCF PERFORMANCE 2003 ~~~~~~~~~~~~~~~~~~~~~.. Impact of Carbon Finance IMPACT OF CARBON FINANCE ;. -1 'lS;:' Q .4$ ' 2, I . is T,i !!EI_ Z _! __ dWE slI|||- ! _T..|| %iSi' [E I | | I | I s | _ E s s s | |~~~LNDFIL 7 E r I , 1 | I111 i iIli I 11_liI111il11__ i a>PR i M 1 I il l I 11! 11 11 | W 111110 11111 11|1 ! 11 '',IMPACT OF, CA BO F |§IN w!ANCE 65 Ii.99X, '| ". '1, ,1 i. . I :K I Il r d C'& N" C i Sit Ill I 3 iJ'3. I I Istn'ZU FS; ocut.L (Id ttto. I d I I. J% )dj d P)tioAX LiI 1i ItiI I' J3 t!ul I] 1- I 'F IlL -!I SC )t Ma uittli] >1Ui1?JIS01ElO3 11ll j LI( SJIIOfl I''If I ' 01 ¾~~\~ F) SiKIJ'IlIth\ tHh'I4P\~ f))VLiUPIS)I '' ) ¼(~j})A Jo 'Itll?\ L\ 10. ! . I jxtl 11 3fl '-'Fl '' 'A 4) i iit' !it'.l .'F 1 -l I 1 M ItT 1, puu.Pl.N.Iw JhlUtttI'11 t ' ll ).I 1 1'JIlt]'~ .' Sil[Lllo, 1pt.1i !.>.lt Ij J(T,ILI '....... . ........ II tI , II I1'.I M l (11 II,.ll'm nII i ,11,i.1 W t) ' jui1- "d, 4 1,,- b.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, IOJ II I' ', °'''I1' &$ 0 4 J tP I I JI I I _41 ~ ~ 1 Lj " m'~ ' l IIJ jSR3J8j II'.' - l 4 4 4' ' ~' F11s 2IrAr!r.) j 4 D 41 LIlrl A tA. tj tj zBlt'i' - ' ' 1F F 'ST\'/ L' , '4L I", N C - SUO P/ -- mAli 1 141 1 1 I t' ' F 1 F : F,!: t 01: - |13rX; nU I :1 -!/\U 1,111 l I 1 ' S z ILI I - - l l P,Sq 11,:! l , sq ,L : 1 4_ I r + U, Id- "+l j,e t I Vl I .t , I Ul~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~:;1'' :1.1j il ;.tIP L;14 .^' ' jI l Ij':.! 11 1, '_, ' ,.=_ll18 N1V1_Sr1S 3-a lD3rf )dd .11;N i 'o :*- - ill 4 S3i) '1t S ! ... PROJECT: JEPIRACHI WIND POWER THE FIRST PCF PROJECT TO PAY A PREMIUM FOR BENEFITS FOR THE SUSTAINABLE DEVELOPMENT OF THE COMMUNITY A windswept coastal arid land, the Guajira region on Colombia's northeast Atlantic coast is one of the poorest on the South American continent. An inhospitable environment has made everyday life on their traditional lands miserably difficult for the region's indigenous Indian people, the Wayuu. There is no permanent access to drinking water, which results in a high level of disease in an area with ill-stocked health centers and lack of access to education. But things are looking up for local Wayuu in La Guajira. The PCF, through the provision of carbon finance, hopes to contribute to improving the welfare of this disadvantaged community. In December 2002, the PCF signed an agreement with the utility company Empresas Publicas de Medellin to purchase 800,000 tons of greenhouse gas emission reductions from the 19.5 megawatt Jepirachi Wind Power Project, which is located in the Wayuu Indigenous Territory of the northeast Atlantic coast of Colombia in the Department of Guajira. Once construction is completed in February 2004, the fifteen windmills will be delivering around 68.3 gigawatt hours per year to the Colombian national grid. Overa21-yearperiod,theprojectwillpreventcarbondioxideemissionsofl,168,000tons,which would occur if the power were generated by conventional methods. The name Jepirachi means "northeast wind" in the Wayuu language, and indeed the location is ideal for wind generation-at a height of around 60 meters the average wind speed is 10 meters per second. And the wind is constant, ensuring a high annual yield of power The Jepirachi Wind Power Project was used as a basis to propose a new baseline methodology to the Clean Development Mechanism Executive Board based on least cost analysis and optimization modeling for renewable energy capacity additions to existing power systems. It was also the basis for the proposal of a new monitoring methodology for capacity expansion projects which replace electricity that would otherwise be generated and dispatched to the grid by other power plants. Ij . :.r ;j . .;.-' I am happy with the (Jepirachi) project, here in my land, in my community, for our children.. .we have suffered so much with no water, no services.. .thanks to God.. .with this support for our needs, our people benefit." LAURA URIANA Mother. Rancherta Kasiwolin 30 4 f -,_. < 1 4 :- b -, at, _ ^ *_ -~~~~~~-.^ 3 The Jepirachi project has its roots in the corporate environmental policy of the company. With this project we support sustainable development and generate local social welfare. wherever we act. LUIS CARLOS RUBIANO ORTEGON SUSTAINABLE DEVELOPMENT AT THE NATIONAL AND LOCAL LEVEL The Jepirachi Wind Power Project will contribute to the sustainable development of Colombia in many ways. First, it will demonstrate the potential for wind-based generation at the commercial level, thereby facilitating investments that will capture the relatively large wind-energy potential identified in the country. Secondly, the Jepirachi Wind Power Project will contribute to the capacity to increase the share of non-hydroelectric energy in the national grid, which is currently dominated by hydroelectric and thermal energy options. This is critical for Colombia, as it must enhance the grid's reliability of supply to avoid the forced rationing experienced during the 1990s after severe droughts caused power shortages. Without carbon finance, the favored option for capacity additions would be thermal energy given its relatively low cost. Finally, the Jepirachi Wind Power Project will contribute to the development of the host indigenous community, which is among the poorest in the country, by financing a series of community-driven proj- ects designed in consultation with the project sponsor, that are above and beyond what is required by the system of transfers mandated by Colombian law. The social plan was the result of extensive consul- tation with the community and the project developer about community needs. The main features of the social plan are: training to facilitate direct and indirect job creation; the provision of a water desalin- ization plant fed by wind power and the provision of water storage depots; the rehabilitation of the graveyard; health and educational facilities, as well as the refurbishing of a health center, including solar- powered refrigeration capacity. By targeting water supply, education and health services, the project addresses the priorities for social development identified by the community. There is also an agree- ment between the project sponsor and the host indigenous community to review the program two years following its implementation. For its part, the PCF has agreed to pay a premium of US$0.50 per ton of emission reductions upon the implementation of this plan-in addition to the funds for the purchase of 800,000 tons-which will be monitored using a series of specified indicators. The Emission Reductions Purchase Agreement contains an innovative clause that identifies under which conditions this premium will be paid, namely upon delivery of the emission reductions and upon verification that the social plan has been implemented. PROJECT: THE LIEPAJA SOLID WASTE MANAGEMENT A TRUE PIONEER, LIEPAJA WAS THE FIRST PROJECT UNDERTAKEN BY THE PCF One of Latvia's environmental priorities is the development of sanitary landfills and the improvement of solid waste management. Existing landfills pose an environmental and public health hazard and in some cases leachate from these sites pollutes the shallow groundwater from which 70% of drinking water is obtained. In coastal areas like Liepaja, Latvia's third largest city, leachates can reach the harbor and then the Baltic Sea. The Liepaja Solid Waste Management Project brings a state-of-the-art waste management system to the Liepaja region in Latvia. The project will establish a waste management facility demonstrating self-sustaining, modern management of municipal solid waste through maximum collection and utilization of landfill gas in the district of Liepaja. Other objectives include: a) demonstrating modern sanitary landfill techniques on a regional basis; b) strengthening institutional capacity at the local/regional levels on issues related to municipal solid waste management; c) arresting the on-going contamination of groundwater; d) reducing environmental disamenities for neighbors of existing disposal sites that would be closed; e) facilitating the separation of recyclable material; and f) reducing greenhouse gas emissions through an Emission Reductions Purchase Agreement with the PCF. The contribution from the PCF has made it possible to install a state-of-the-art system-which would allow for the maximum collection of generated methane-that would not otherwise be affordable. This system would help to lower greenhouse gas emissions in two ways. First, it mitigates the methane emitted by decaying waste; and, second, it substitutes landfill gas-which will be used to generate electricity-for fossil fuels. Over a 20 year lifetime, the project will reduce greenhouse gas emissions by almost a million tons of carbon dioxide. This project is covered by one of the first Joint Implementation activities under the Kyoto Protocol, and has allowed Latvia to take full advantage of the opportunities emerging from the nascent carbon market. Perhaps, of most immediate benefit to the environmental quality of life for people in the area, 22 of 26 existing obsolete dump sites have been closed under the project, with the other four to be closed in 2004. -r' -, .. , ^^ LIEPAJAS RAJONA MAZO IZGAZTUVJU REKULTlVACLJA 32 =;Lei 0 2 :4 Oki EN t^POW4111 In FY03, the PCF completed its third year of operation, with projects dropped due to lack of underlying financing or a successful track record of project development, learning delays in the development of the project. and knowledge sharing, as well as solid and reliable finan- cial performance. The Fund has developed a high-quality Oncethe PCFfunds are committed to projects, the Fund will and cost effective project pipeline that is pursuing new proj- move into the implementation phase, when the contracts ects while balancing the need to reduce costs and limit risks are signed, and the projects are under implementation and in the portfolio. In FY04, the Fund will conclude the place- finally become operational. In this stage the PCF will focus ment of its financial resources to projects (placement phase), on handling project implementation risks and reacting and gradually shift towards the implementation of the proj- to new implementation challenges. Some projects are ects (implementation phase). expected to drop out of the portfolio at this stage, but at a significantly lower rate than in the placement phase. The Fund Management Unit recently developed a model of the Fund lifecycle. The first four years of the Fund's life are After about three years the Fund will enter into the mainte- characterized as the placement phase as most efforts are nance phase, in which all projects have been implemented dedicated to developing the project pipeline-finding new and should be generating emission reductions. This phase projects, managing them to the stage where the project shows the lowest risk; the Fund plans to scale down its oper- contract can be signed (Emission Reductions Purchase ation and respond to occasional project non-delivery by Agreement), and notionally committing the Fund's allo- exercising options to buy additional emission reductions cable balance. During this stage a large number of projects from other projects in the portfolio. will be under review, and a correspondingly high number of The diagram shows the three phases of the Fund's life cycle with the corresponding pipeline and resources required to respond to the challenges of individual phases. Fig. V PCF PORTFOLIO 300 * PIPELINE 250 PORTFOLIO 2 200 150 as 100i -- so~- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PCF ADMINISTRATIVE BUDGET 2000 Z 1500 0 1000 a 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PLACEMENT PHASE IMPLEMENTATION PHASE MAINTENANCE PHASE PCF FINANCIAL PERFORMANCE The PCF business model had originally been based on a L A 4d*.A.A project financing basis ratherthan on a commodity purchase basis as it stands now. The current basis significantly reduces i7j> the credit and delivery risks of the portfolio. At the end of FY03 the level of funds actually drawn from participants 7 ~ 2i ^ /came to 41% of the original drawdown schedule outlined in the Information Memorandum, noticeably increasing the internal rate of return for individual participants. Also, the Fund is currently on target to keep its non-project related 4 . costs within its original target of 9% of total available funds. The Fund Management Unit has been cost conscious and over the span of four fiscal years has consistently used less administrative resources than annually approved by partic- - . _ . . ... . - - ... ipants. The following table shows that trend where from inception, only 83% of total administrative budgets have 1 been used: $ IN THOUSANDS BUDGET ACTUAL FY00 350 286 FY01 1,728 1,291 FY02 1,692 1,661 FY03 1,904 1,467 TOTAL 5,674 4,705 However, as the Fund now moves to conclude the placement phase, the focus will be shifting from management of project pipeline and project development to project implementa- _- - tion. The Fund will be facing some additional challenges due to regulatory uncertainties, particularly as projects are designed before the supporting regulatory environment is -., > <_ put in place. This may potentially increase the level of support needed during the implementation phase. PCF FINANCIAL PERFORMANCE "I am satisfied with our cooperation with the Prototype Carbon Fund and consider the project which has already commenced as very essential for our city. The City of Liepaja invests a lot of work in various environmental programs as well-kept environment, clean air and the sea are the values we want to leave for the next generations to come." ULDIS SESKS M6a ior of Liepaja & Ak~~~~~~~~~~~~~~A 7;.r~~~~~~~~~~~~~~~~~~~~~~~~, _t^- - LIEPAJA SOLID WASTE MANAGEMENT PROJECT DESCRIPTION: A. Remediation. All existing disposal sites will be remediated and subsequently closed. At the Skede site, which has been in operation for nearly 40 years, the landfill gas will be collected and used for electricity generation. B. Technical and Operational Improvements. A state-of-the-art solid waste management system, which would meet international sanitary landfill standards will be established. It will include preparation of the new disposal site in accordance with European Union requirements, establishment of a line for reception of waste already separated at the household level and distinct areas for the storage of separated material as well as hazardous waste, which will be transported to another site. C. Installation of Energy Cells and a Landfill Gas Collection System. Energy cells will be installed for the enhanced degradation of easily biodegradable waste and the accelerated production of landfill gas, containing about 50% methane. The resulting greenhouse gas emis- sion reductions have been partly sold to the PCF under an Emission Reductions Purchase Agreement. Emission reductions will be carefully monitored and subject to periodic verifica- tion by a third party. D. Installation of a Power Generator. An energy conversion unit (gas engine) of about one megawatt capacity which runs on landfill gas will be installed at Grobina, and one of about 0.3 megawatt will be installed at Skede. Both units will be connected to the power grid. E. Establishment of Waste Collection Points. A system of waste collection points (for areas with small waste volumes) will be established to ensure the efficient transport of waste to the regional disposal site. The collection points will be equipped with separate containers for different types of recyclable materials. 33 PROJECT: SUSTAINABLE CEMENT PRODUCTION THIS PROTOTYPE PROJECT FOR INDONESIA IS THE PCF S FIRST PROJECT IN THE CEMENT SECTOR The Sustainable Cement Production Project proposed by Indonesia's second largest cement producer PT Indocement Tunggal Prakasa Tbk (Indocement) is the PCF's first cement sector project for reducing greenhouse gas emissions. Globally, cement production accounts for about 3-4% of total human- induced greenhouse gas emissions. Considerable potential exists in developing countries to reduce such emissions by adopting new technologies, processes and methods in cement production. Indocement-majority owned by the Heidelberg Cement Group of Germany-intends to introduce new types of cement in Indonesia, as well as undertake fuel change projects in the company's three Indonesian locations, namely, Citeureup (about 45 kilometers south of Jakarta), Cirebon (about 300 kilometers east of Jakarta) and Tarjun, in South Kalimantan. The main objective of the proposed project is to reduce carbon dioxide emissions by implementing technologies and techniques not yet applied in the Indonesian cement industry. The envisaged sale of the emission reductions to the PCF and other carbon buyers under the Clean Development Mechanism contributed to the feasibility of the project. The total greenhouse gas emission reductions over the ten- year crediting period is estimated to be in the range of 10 to 12 million tons. The proposed project bundles two sub-projects. One sub-project aims to reduce the clinker content in cement by introducing limestone and other alternative materials such as fly-ash and natural pozzolana (Trass) in the finish grinding process (blended cement). Clinker is the main ingredient in cement, which is produced by burning a mixture of raw materials, comprised mainly of limestone and clay, in large rotary kilns at temperatures above 1400 degrees Celsius. About 60% of the estimated emission reduc- tions are attributed to process changes for producing blended cement. In the first phase, alternative materials up to a range of about 6-8% will be introduced into the final cement. Indocement plans to increase this proportion eventually to 20% to introduce new types of composite cements to the Indonesian market. The second sub-project aims to reduce greenhouse gas emissions by using alternative fuels instead of coal, oil and gas. Indocement will primarily aim to utilize biomass as alternative fuels, such as rice husk, coconut waste and palm oil waste, but will also examine other wastes such as used car tires and waste oils etc. There are considerable amounts of palm oil waste available near Tarjun (South Kalimantan). Indonesia's rice production is mainly located in Java. A substantial amount of rice husk is available espe- cially in West Java near the plant locations Cirebon and Citeureup. The introduction of alternative fuels is expected to commence in 2004 to replace 1% of the total heat consumption for clinker production. This will progressively increase to about 7% in 2007 and will remain at this proportion afterwards. 34 '-7~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 ~~ -v I' oj- -- - As -- = kS __~~~~~~~~~ - ._ 1 -~~~ i - . -4 s- - E We are very h-appy lo cooperate with the PCF for this project. The Clean Developmient Mech-aisnis is a ver-y new tool for the inidustry and thec PCF is ain expereienced partnier in- this field of work', having gainied a ver-y good r-epuitation. We beli[eve, that the comibiniation of ouri expertise in 4 cemen-t techniolo-gy an(l the PCF's knowliedge abouit thie CDM wfll lea(l us to suiccess. In additioni to treduicing( L greenhouse ,as emissions by u-slino bio fuelis and othier ANaste miateri-als pr-oduiced tin the vicinity of thie stites. ouir p Oect w\l lontibute to susta~~~~~ T 17 4~~1 _. CAPTURING A D' _ L CAPTURING AND DISSEMINATING LEARNING The Moldova Soil Conservation Project is of special and primary significance for our country, anid is perlfectly in line with the Action Plan for the Implementation of the Strategy for Sustainable Development of the National Forestry Sector. Furthermore. the future of this country's people will largely depend on the implementation of this project. A distinct feature of the proj'ect is the creation of co mmunity forests which unequivocally will contribute to the improvemenit of the environment and quality of life for people in these areas." ANATOLIE POPUSHOI Director General of the State Forestr.vAgencv, "Moldstbva _- - RESTORING PRODUCTIVITY TO DEGRADED LANDS The objective of the project is to restore the productivity of 14,500 hectares of degraded agricultural lands for rural communities and to build community capacity to manage 5,400 hectares of these lands. Planting degraded pasturelands with tree and shrub species adapted to adverse conditions such as poor soils and erosion will provide urgently needed fuel wood and timber to rural communities. Plant species will include a large variety of native and semi-naturalized species. On land of sufficient quality, Quercus robur, Fraxinus excelsior, and many other species of trees and shrubs can be planted. On the most degraded lands, less-demanding species such as Robinia pseudoacacia and Gleditschia triachantos have to be used. All 1,891 afforestation plots, with an average of seven hectares each, will consist of at least two species. As soil conditions improve, within 20 or more years, an effort will be made to reintroduce more native species to recreate the old forests typical of Moldova. Project lands belong either to Moldsilva, the national government forestry agency, or to local commu- nities. With communal land, there are two possible courses of action. The community may decide to delegate planting and management to Moldsilva for 10 years, after which the land will be returned to the communities with a number of contractual obligations regarding protection and management. Alternatively, the community may decide to relinquish the land to Moldsilva indefinitely. In both cases, the community has an incentive to transfer the land to Moldsilva given the advanced degradation of the land and its very low economic value, sometimes negative value-even when the arable topsoil has been lost, the owner still has to pay the land tax. Over a period of about 15 years, the project is expected to sequester 1.8 million tons of carbon dioxide equivalent, around 1.5 million tons of which will be purchased by the PCF. The remainder will be kept in a reserve to mitigate the risk of damage to the carbon asset, in case the new plantings are destroyed by natural or human factors. The total Emission Reductions Purchase Agreement value is estimated at around US$5.1 million. Moldsilva is the project developer. It will fully finance the estimated US$14 million needed over the first 4 years of the project, while the PCF will purchase the emission reductions resulting from carbon sequestration in above- and below-ground vegetation. Avoided losses in soil carbon stocks resulting from the project have been estimated but will not be part of the PCF purchase. 37 PROJECT: HUNGARY: PANNONGREEN PECS HEAT AND POWER HELPING TO MEET THE CHALLENGES OF EUROPEAN UNION ACCESSION THROUGH CONVERSION TO RENEWABLE FUEL In Central and Eastern European towns and cities, blocks of flats, individual dwellings, hospitals, schools and other buildings receive their heat supply from "district heating systems" that involve centralized boilers connected to a distribution pipe network. District heating is the most economical way to provide heat to high-density urban areas, and is the dominant form of space heating in many cities. The Pannonpower Group's hard coal-fired CHP plant in the southwest Hungarian city of Pecs, supplies the country's second largest district heating network with 2,250 terajoules of heat per annum, and provides an additional 550 gigawatt of electricity annually to the grid. Pannonpower faces major investment requirements since the plant can no longer continue operation in its current form and still meet the tightening limits on sulphur dioxide emissions from 2005. Pannonpower evaluated a wide range of alternatives including different mixes of fuels and technolo- gies: scrubbers, "clean" coal, fuel switch to natural gas and fuel switch to natural gas and biomass. Without carbon finance, the baseline study indicated that the most financially attractive alternatives would have been either continuous operation on coal with a scrubber or fuel switch to natural gas- natural gas being marginally more expensive-while fuel switch to biomass came a distant third. Biomass fuel is available in the region in the form of substantial excess firewood residues and sawdust. Biomass for the project will be supplied by Forest Stewardship Council certified forests under long-term fuel supply contracts with two state-owned, regional forestry companies. With the long-term fuel supply contracts with the two forestry companies, and an Emission Reductions Purchase Agreement with the PCF for the sale of 1.2 million tons of carbon dioxide equivalent emis- sion reductions from 2008, financing for the conversion of one of four blocks from coal to biomass was secured from Hungary's largest commercial bank. Pannongreen, the project company, will be the owner and operator of the biomass block. Two other blocks will be converted to natural gas. Commercial start is scheduled for September 2004. The biomass block will have a capacity of 65 megawatts thermal and 49 megawatts electric, with annual generation of 160 terajoules heat and 334 gigawatt electric. Through the use of carbon financing to kick-start the process, Pannonpower will assure a continuous heat supply in a way that will benefit all parties. Due to improved efficiency of the refurbished plant, the plant will be able to maintain its output with a smaller capacity and lower fuel use. As for the local and global environmental benefits, the company should now be able to comply with the new European Union environmental standards. 38 C)~~~~~~~~~~~~~~~C 0 Q 2 2 Q : c° C) CI X : *HE- _ O ° *) W UC.) -C O-- 0. 0 ) 0 b 0 CZ C]- Cl) -4- -A t, 1 rJ C -v - 0 ' ir. . u ,, ~ 4i a-e ~ 0 ~~ ~~~P bf) P-~~~ b LU IP - 4wv -~~~~~~~~~~~ . PROJECT: CHILE-THE CHACABUQUITO HYDROELECTRIC PROJECT FROM PLANNING TO RESULTS: THE PROJECT THAT HAS GENERATED THE FIRST VERIFIED EMISSION REDUCTIONS The Chacabuquito run-of-river hydropower project, high in the Chilean Andes is delivering more than electricity. The project made history for the Prototype Carbon Fund, as the first PCF project to become operational, when it started generating electricity in July 2002. In 2001 the Norwegian firm Det Norske Veritas had validated the likely compliance of the project with modalities and procedures of the Clean Development Mechanism. In June 2003 the German firm TUV Suddeutschland verified the first emission reductions from the project. The Chacabuquito plant, near the little town of Los Andes, 100 kilometers northeast of Santiago, is a world away from Kyoto, where in 1997 representatives of 159 countries signed the Kyoto Protocol to reduce the greenhouse gases that cause climate change. The conference in Kyoto made the project possible when it established a Clean Development Mechanism, defining the rules under which the Chacabuquito Project receives financing from the PCF. Chacabuquito's 26-megawatt, run-of-river plant near Los Andes is scheduled to deliver one million tons of emission reductions to PCF Participants. The project developer, a power company called Hidroelectrica Guardia Vieja S.A., will receive US$3.5 million in return. Concurrently with the PCF, Mitsubishi Corporation has independently contracted to purchase another 100,000 tons of green- house gas emission reductions. The project design was evaluated by two independent auditors. By selling emission reductions to developed countries. Chile is entering fully the international market of environmental cleansing. That will enable the national private sector to access resources to improve their technologies and introduce clean technologies. Throughout the world. and especially in Europe, there is growing demand for these type of emission reductions. This opens great possibilities for Chile. a country with low risk rating for investments, compared with other similar nations. Chacabuquito is the first success story. GIANNI LOPEZ RAMIREZ ExecutwteDirector,ofChilesCONA MA.theNationalCommissionjorEnvironment. As a further contribution through the PCF, Mitsubishi has purchased carbon dioxide emission reductions from the Chacabuquito project. This is the world's first case of what is known- in the business as a 'parallel purchase', wlicha supplements the PCF and helps improve the viability of projects. Under this scheme, Mitsubishi bought .oo,ooo tons worth of f4 gcarbon dioxide emission reductions from the same project in parallel with the PCF. This project has a highi potential of being recognized as a Clean Development Mechanism project under the Kyoto Protocol." MITSUBISHI CORPORATION POF Pffth -pyi ' t) I wl ,I , J nlli atI riaie12t H ent 4 H (,A'. i tla Ik Ih l PC F I T t its si p pon 1. 1)1 is 11)ojt cct h i(h ch\ ii( m lI Ilti lII SI ('S I III ta an eaple) In cfi t I e I Irst ni th c\N I. I L.t Ius hI I I ii I i Ie I I a; l ieIt Ial 1 hiI l'inIall aIklI\\ liet' K\ oco to i el r ititm) hrtc(. 1hie P(I ai"C ohei r , J~ j j A POWERFUL DEVELOPMENT TOOL FOR LATIN AMERICA The Chacabuquito Project will be connected to a regional subsystem within the central system that accounts for about three-quarters of Chile's power generation. The project will generate power for industrial and residential consumers in the region. It will help to replace the coal that currently provides 25% of the region's power and causes pollution. Local people will be employed at the plant and roads and bridges built to service it will provide new access to small villages in the area. Carbon finance was instrumental in the developer's decision to proceed with the project, even through carbon funds only cover a small part of the project's cost of US$37 million. Chacabuquito is a model which shows how carbon finance opens new possibilities for Chile and other developing countries to implement renewable energy projects. The project demonstrates the poten- tial and value of the Clean Development Mechanism as a powerful development tool for Latin America. 41 HOST COUNTRIES, PROJECT PIPELINE AND TRAINING ~~~~~~~~~ 1 .nterrey - o ' DOMINICAN IDVELEC Jf Nydfroa ,i, ,< iE PUBLIC GUATEMALA .Jclgalpa ChlW m J El Canada SMal Hd EL SALVADOR San SalVador YN Chorotega Wind Fr ECUAD- v q " i,* < ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~if on ,ass Paul* CHI] Host Countries * Projects in Advanced Stages ChacabuuftoSniafHydro uUAY * Training Events Sbg uwnesAires A Distance Learning Courses This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and anyother information shown on thin map do not imply, on the part of The World Bank Group, any judgment on the legaistatus of any territory, or any andorsement or acceptance ofsuch boundaries. IBRD 31609R1 NOVEMBER 2003 s ' t 42 '~~~~~~~~i Waste Management ,c pP bned Heat and Power CEA rgyE oI> = -SoD Conll ation Pue ono Fe ititHet fceci(dropower Pw RoCr,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~rj CHINA :h , N, BH st ,(ABIQ) BANGAE Add / IET~~~ ~ ~~~~~~~~~NAM asA Cogeneration Projcts R LANKA GU UGANDA CAMBODIA DIFVOIRE ~~~~~~~~~West Nil. Smalf Hydro j CMOI LNS TOGO BENIN- c es i Salaamn. MB SoNd West. Management \-SWAZILAND * SOUTH AFRICA Durban MunIdpal SoDd Wast. . - ~~~~~~~~~A The PCF brings I ogether a group of dedicated, forward-looking * ( S u ; comiipaniies and governments which are committe(d to btildilln tlle ~ -carhon rmarket an(d to furthering- the cause of suistainable development. Rabobank eonsiders it a privilege to be a part of that group. RABOBANK _- - ) - I { I I fIt 111 1/*1114 43 PCF GOVERNANCE PARTICIPANTS COMMITTEE J A \ - 'i f: 44 _ -1~~~~I "4' on,'-X "i - ] ,-~' V f _ _ _ _ _ _ _ _ __R#4 45 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT June 30, 2003 and 2002 Delnitte T-c,cch A trrnat I ,Il t(-rfltioniiI Fit n I SULitL 500 3S55 12th Street, N.W Washington, DC 200()4 1207 Tel: (2023 879-5600 Fax (202) 879 5309 ~wwusdelotte con, D eloitte Touche Tohmatsu (International Firm) INDEPENDENT AUDITORS' REPORT To: International Bank for Reconstruction & Development as Trustee for the Prototype Carbon Fund We have audited the accompanying balance sheets for the Prototype Carbon Fund for which the International Bank for Reconstruction and Development (IBRD) acts as Trustee and Administrator, as of June 30, 2003 and June 30, 2002 and the related statements of income (loss), changes in equity and cash flows for the years then ended. These financial statements are the responsibility of IBRD's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and International Standards on Auditing. Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Prototype Carbon Fund as administered by the International Bank for Reconstruction and Development at June 30, 2003 and June 30, 2002, and the results of its operations and its cash flows for the years then ended in conformity with International Financial Reporting Standards. As discussed in Notes 6 and 7 to the financial statements. Emission Reductions and Options to Purchase Emission Reductions are stated at fair value. Management of the Fund has estimated the fair values of Emission Reductions and Options to Purchase Emission Reductions in the absence of readily ascertainable market values. These values may differ from the values that would have been used had a ready market for Emission Reductions and Options to Purchase Emission Reductions existed, and the differences could be material. DtVe -rt4ire&tM (4uh441 -) September 26, 2003 46 PROTOTYPE CARBON FUND: BALANCE SHEETS AS OF JUNE 30, 2003 AND 2002 Expressed In U.S. dollars June 30, 2003 June 30, 2002 ASSETS Equity in pooled investments $ 7,925,852 $ 14,391,580 investment income receivable 43,378 62,509 Receivable from other trust funds (Note 3) 28,202,154 21,405,610 Emission reductions (Note 6) 355,320 Option to purchase emission reductions (Note 7) 562,500 Advance payments for emission recuctions (Note 8) 595,000 595,000 Valuation allowance for advance payments (Note 8) _ (595,000) TOTAL ASSETS $ 37,684,204 $ 35,859,699 LIABILITIES AND EQUITY LIABILITIES: Accrued fund development expenses $ 400,000 $ 930,000 Accrued project development expenses - 193,000 Accrued project-related expenses 68,000 Accrued administrative expenses 22,769 178,281 Accrued performance-linked expenses (Note 4) 100,000 140,000 Total liabilities 590,769 1,441,281 EQUITY: Capital contributions pledged 180,000,000 145,000,000 Notes receivable on capital contribut ons (130,613,786) (102,117,990) Capital contributions paid in (Note 1) 49,386,214 42,882,010 Retained deficit (12,292,779) (8,463,592) Total equity 37,093,435 34,418,418 TOTAL LIABILITIES AND EQUITY $ 37,684,204 $ 35,859,699 PROTOTYPE CARBON FUND: STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 Expressed in U.S. dollars July 1, 2002 to July 1, 2001 to June 30, 2003 June 30, 2002 REVENUE Investment income (Note 9) $ 260,806 $ 930,606 Premium income - 11,315 Total revenue 260,806 941,921 EXPENSES Net project-related expenses (Note 11) 2,428,815 2,977,619 Performance-linked expenses (Note 4) 100,000 90,000 Aominisrrative expenses 1,470,021 1,661,089 Valuation allowance for advance payments (Note 8) (595,000) 295,000 Investment income transfer (Note 10) 686,157 _ Total expenses 4,089,993 5,023,708 NET LOSS $ (3,829,187) $ (4,081,787) See notes to financial statements 47 PROTOTYPE CARBON FUND: STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 Expressed in U S dollars Capital Notes Retained Total FOR THE YEAR ENDED JUNE 30, 2002 Contributions Receivable Deficit Equity BALANCE, JULY 1, 2001 $ 145,000,000 $ (109,137,677) $ (4,381,805) $ 31,480,518 CAPITAL CONTRIBUTIONS Public sector participants - 3,398,887 3,398,887 Private sector participants 3,620,800 3,620,800 Net loss - - (4,081,787) (4,081,787) BALANCE, JUNE 30, 2002 $ 145,000,000 $ (102,117,990) $ (8,463,592) $ 34,418,418 Capital Notes Retained Total FOR THE YEAR ENDED JUNE 30, 2003 Contributions Receivable Deficit Equity BALANCE, JULY 1, 2002 $ 145,000,000 $ (102,117,990) $ (8,463,592) $ 34,418,418 CAPITAL CONTRIBUTIONS Pubic sector participants 5,000,000 (2,028,356) 2,971,644 Private sector participants 30,000,000 (26,467,440) 3,532,560 Net loss - (3,829,187) (3,829,187) BALANCE, JUNE 30, 2003 $ 180,000,000 $ (130,613,786) S (12,292,779) $ 37,093,435 PROTOTYPE CARBON FUND: STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2003 AND 2002 Expressed in U.S. dollars July 1, 2002 to July 1, 2001 to June 30, 2003 June 30, 2002 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (3,829,187) $ (4,081,787) Adjustments to reconcile net loss to net cash used in operating activities: Unrealized loss (gain) on pooled investments 157,303 (57,985) Decrease in investment income receivable 19,131 91,644 Increase in receivable from other trust funds (6,796,544) (683,287) Increase In emission reductions (355,320) Increase in option to purchase emission reductions (562,500) Increase in advance payments for emission reductions (295,000) (Decrease)/lncrease in allowance for advance payments (595,000) 295,000 Increase in accrued project-related expenses 68,000 (Decrease)/lncrease in accrued administrative expenses (155,512) 161,119 Decrease in accrued fund developmient expenses (530,000) (270,000) Decrease in accrued project development expenses (193,000) (Decrease)/lncrease in accrued performance-linked expenses (40,000) 50,000 Net cash used in operating activities (12,812,629) (4,790,296) CASH FLOWS FROM INVESTING ACTIVITIES Sales/(Purchases) of securities 6,308,425 (2,229,391) Net cash provided/(used) in Investing activities 6,308,425 (2,229,391) CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions 6,504,204 7,019,687 Net cash provided by financing activities 6,504,204 7,019,687 NET INCREASE IN CASH CASH, BEGINNING OF PERIOD - CASH, END OF PERIOD S - $ See notes to financial statements 48 PROTOTYPE CARBON FUND: NOTES TO FINANCIAL STATEMENTS JUNE 30, 2003 1. ORGANIZATION AND OPERATIONS The Fund is administered by the IBRD as Annual Participants' Meeting, held in June Trustee. Pursuant to the Fund's governing 2002 at Zakopane, Poland, it was approved The Prototype Carbon Fund (the Fund) was document, the Trustee is authorized, among to increase the size of capital contributions established in 1999 by the International Bank other things, to accept capital contributions to the Fund from $145 million to $180 million for Reconstruction and Development (IBRD) to the Fund from the participants, invest the and ten of the Participants entered Into as a mechanism to help countries reduce funds collected, and establish a committee Supplementary Participation Agreements to global concentrations of greenhouse gases responsible for overseeing the operations purchase an additional interest in the Fund. (GHG) and thereby minimize the adverse of the Fund (the Fund Management Participants provide their contributions impacts of climate change on developing Committee). either through the delivery of an uncondi- countries. The operational principles of the tional promissory note made payable to the Fund are: (1) to invest in projects that are There have been two closings of the Fund Trustee upon demand, or through advance intended to generate high-quality GHG emis- representing the deadline for enterng into payments to separate holding trust fund sion reductions in developing countries and Participation Agreements. As of the First accounts managed by IBRD as Trustee. As countries with economies in transition, (2) to Closing of the Fund on April 20, 2000, six the Trustee establishes the need for cash on endeavor to effect an equitable sharing Public Sector Participants and 15 Private an annual basis ano requests cash payments between the Fund participants and the Sector Participants had purchased an from the Participants, the outstanding developing countries of any emission reduc- interest in the Fund by signing Participation balances of promissory notes are reduced by tions and other benefits arising from such Agreements. As of the Second Closing of the corresponding amounts received from projects, and (3) to disseminate broadly the the Fund on October 31, 2000, two addi- the Participants. As of June 30, 2003 and knowledge gained in the development of the tional Private Sector Participants had entered 2002, capital contributions paid in cash by Fund and the Implementation of the projects, into Participation Agreements. At the Third the Participants, are as follows: Expressed in U.S. dollars Amounts paid as of Amounts paid as of PUBLIC SECTOR PARTICIPANTS June 30, 2003 June 30, 2002 Canada $ 1,182,600 $ 1,182,600 Finland 1,182,600 1,182,600 Japan Bank for International Cooperation 1,182,600 1,182,600 Netherlands 1,771,400 1,182,600 Norway 1,182,600 1,182,600 Sweden 1,182,600 1,182,600 TOTAL PUBLIC SECTOR PARTICIPANTS $ 7,684,400 $ 7,095,600 Amounts paid as of Amounts paid as of PRIVATE SECTOR PARTICIPANTS June 30, 2003 June 30, 2002 BP Amoco $ 586,300 $ 586,300 Chubu Electric Power Company Inc. 1,175,100 586,300 Chugoku Electric Power Company Inc. 821,580 586,300 Deutsche Bank (Note 3) 586,300 5,000,000 Electrabel 586,300 586,300 Fortum OYJ 704,060 586,300 Gilde Strategic Situations B. V 586,300 586,300 Gaz de France 586,300 586,300 Kyushu Electric Power Company Inc. 939,580 586,300 MIT Carbon Fund 704,060 586,300 Mitsubishi 586,300 586,300 Norsk Hydro ASA 586,300 586,300 RWE Aktiengesellschaft 586,300 586,300 Shikoku 1,175,100 586,300 Statoil 1,175,100 586,300 Tohoku Electric Power Company Inc. 1,175,100 586,300 Tokyo Electric Power Company Inc. 939,580 586,300 TOTAL PRIVATE SECTOR PARTICIPANTS $ 13,499,660 $ 14,380,800 TOTAL ALL PARTICIPANTS $ 21,184,060 $ 21,476,400 Plus receivables from other trust funds 28,202,154 21,405,610 TOTAL CAPITAL CONTRIBUTIONS PAID IN $ 49,386,214 $ 42,882,010 49 2. SUMMARY OF SIGNIFICANT Emission Reductions - The Fund enters the Fund. These include salaries and benefits, ACCOUNTING AND RELATED POLICIES into executory contracts (i.e., firm commit- contracted services, marketing, communica- ments) with external parties for the purchase tions, audits and reporting, and overhead. Basis of Accounting - The accompanying of emission reductions (ERs). Upon delivery of Administrative expenses are recognized financial statements are prepared in accor- verified ERs by such external parties, the Fund when incurred. dance with International Financial Reporting records them on the balance sheet as assets Standards. These financial statements are that are measured at fair value at the end of Project-Related Expenses - The Fund presented on a comparative basis for the the reporting perod. will reimburse the Trustee for all costs years ended June 30, 2003 and 2002. incurred during each project's preparation, Option to Purchase Emission including project negotiation and validation Use of Estimates - The preparation of Reductions - The Fund enters into agree- costs. The Fund will absorb the expenses financial statements in conformity with ments with external parties to purchase ERs. that are associated with each project's super- International Financial Reporting Standards Some purchase agreements contain provi- vision and verification of ERs. Project includes estimates and assumptions that sions which provide options for the Fund to expenses are recognized when incurred. affect the reported amounts of assets and purchase additional ERs generated by the liabilities and disclosure of contingent assets projects. Options to purchase emission reduc- 3. RECEIVABLE FROM and liabilities at the date of the financial tions are deemed to be derivative instruments OTHER TRUST FUNDS statements and the reported amounts of accounted for under International Accounting revenue and expenses during the reporting Standard (IAS) 39, Financial Instruments: Certain Participants have elected to deposit period. Actual results could differ from Recognition and Measurement, and are all or part of their contribution in holding these estimates. measured at fair value at the end of the accounts established as separate trust funds. reporting period. These trust funds are also administered by Cash - The Fund places the funds it IBRD. As contributions become due, at the receives from the Participants under Advance Payments for Emission request of the Trustee, funds will be trans- International Bank for Reconstruction and Reductions - The Fund enters into agree- ferred from those holding accounts into the Development (IBRD) investment management ments for the purchase of ERs with external Fund. In August 2002, a holding account was (see Equity in Pooled Investments). parties. In some instances, the purchase establshed for the contributions from the agreements contain provisions for the Fund Deutsche Bank and the amount of $4,413,700 Equity in Pooled Investments - Amounts to pay for ERs prior to their delivery Such was transferred from the Fund into this paid into the Fund, but not yet disbursed, prepayments are recorded by the Fund in holding account. are managed by IBRD, which maintains a the balance sheet as Advance Payments for single investment portfolio (the Pool) for all Emission Reductions. The amounts accumu- As of June 30, 2003, four holding accounts of the trust funds administered by IBRD, lated in the Advance Payments for Emission set up by Canada, Finland, Sweden and the International Development Association Reductions account will be reclassified to Deutsche Bank had contribution balances (IDA), and the International Finance Emission Reductions on the balance sheet (less contributions already transferred Corporation (IFC). Under the Pools current when qualifying ERs are delivered to the Fund. to the Fund) of $8,817,400, $8,554,189, investment strategy, a significant portion $6,416,865, and $4,413,700, respectively. of the Pool is invested in liquid instruments Premium Income - Participants who enter As of June 30, 2002, the amounts in these such as U.S. Treasury securties and other into Participation Agreements after the holding accounts were $8,817,400, high-grade bonds. First Closing paythe Fund a premium in an $8,197,772, and $4,390,438 for Canada, amount equal to 2.5% of their required annual Finland, and Sweden, respectively. IBRD maintains the investments on a pooled contributions. The premium payments are accounting basis: investment income is not taken into account in determining the 4. PERFORMANCE-LINKED EXPENSES allocated to each trust fund on a pro-rata Participants' interests in the Fund, or in the AND CONTINGENT LIABILITY basis based on proportional fund balance at calculation of the size of the Fund. Income cost. Equity in pooled investments represents from premiums is recognized in the statement During each of the first ten years of the Fund's the Fund's pro-rata portion of the Pool's of income (loss) as earned. operations, the Trustee may be entitled to market value at the end of the period. receive a performance-linked payment of The corresponding pro-rata realized and Fund and Project Development up to $100,000, payable annually upon the unrealized gains or losses accrue to the Expenses - The Fund will reimburse the approval of the Participants at the annual Fund in the period in which they occur. Trustee for 80% of all costs and expenses Participants' meeting. The Participants had incurred by the Trustee prior to the First authorized transfers of $100,000 and $90,000 Capital Contributions - The Fund derives Closing in relation to the development of for the fiscal years ended June 30, 2003 and Its funding from contributions provided by the Fund, not to exceed $2 million, which 2002, respectively, from the Fund to the its Participants. Each Participant's contribution is to be paid in five equal annual installments. Trustee as performance-linked payments. is recorded in full as Capital Contributions In addition to these amounts, the Fund will The amount of future payments can not Pledged upon execution of a Participation also reimburse the Trustee for all costs and be reasonably estimated. Agreement between the Participant and expenses incurred by the Trustee prior to the Fund. Amounts not yet paid in are the First Closing of the Fund in relation to the 5. FIRM COMMITMENTS recorded as Notes Receivable on Capital identification, preparation, and appraisal of Contributions and shown as a reduction proposed projects No new fund and project As of June 30, 2003, the Fund has entered of Capital Contributions Pledged on the development expenses were incurred in fiscal into executory contracts (i.e., firm commit- balance sheet. The notes receivable are years ended June 30, 2003 and 2002. ments) with external parties to purchase settled through cash payments upon the ERs in the total amount of $19,498,730. Trustee's request, in accordance with an Administrative Expenses - The Fund As of June 30, 2002, the amount of signed annual budget and business plan approved reimburses the Trustee for all costs and firm commitments was $5,977,000. When by the Participants. expenses incurred in the administration of verified ERs are deiivered to the Fund by 50 such external parties, the Fund records them circumstances of the option in our portfolio 11.PROJECT-RELATED EXPENSES on the balance sheet as assets that are while employing a consistently applied valua- measured at fair value at the end of the tion process. Hence, Fund management has For the fiscal year ended June 30, 2003, the reporting period (Note 6). In addition, under determined that as of June 30, 2003, the best net project-related expenses of $2,428,815 the provisions of some contracts, the Fund is estimate of fair value of such option approxi- consist of project-related expenses in the entitled to purchase a share of any additional mates consideration given for it by the Fund, amount of $2,508,553 net of reimbursements ERs over the annual minimum required. The which is equal to the amount of $562,500 for preparation, supervision, and verification future volume of such ERs can not be Because of the inherent uncertainty of deter- costs in the amount of $79,738 received reasonably estimated. mining the fair value of the option, the fair from Hidroelectrica Guardia Vieja S.A. in value determined in good faith by manage- accordance with the executory contract. 6. EMISSION REDUCTIONS ment may oiffer from the values that would No reimbursements were received in the have been used had a ready market existed fiscal year ended June 30, 2002. As of June 30, 2003, the Fund paid $355,320 for the option, and the differences could be for the verified ERs from Hidroelectrica material. Management intends to closely Guardia Vieja S.A. These ERs are not currently monitor market conditions and revise this certified emission reductions (CER) under valuation as appropriate. the Clean Development Mechanism (CDM). 8. ADVANCE PAYMENTS Due to the evolving nature of international FOR EMISSION REDUCTIONS and national climate change and emission trading regulatory and policy regimes, as In December 2000, the Fund entered into an well as the emerging nature of the current executory contract with the Republic of Latvia market for ERs, presently, there is no single for the purchase of ERs in the amount of standard for determining fair value of ERs. $2,477,000. Under this contract, the Fund Therefore, determining fair value requires pays for most of the ERs in installments over that judgment be applied to the specific 6 years and will make a final payment in fiscal facts and circumstances of ERs in our portfolio year 2013 with the first delivery of verified while employing a consistently applied valua- ERs expected in calendar year 2004. The Fund tion process. Hence, Fund management has is also contractually entitled to a share of determined that as of June 30, 2003, the any additional ERs over the annual minimum best estimate of fair value of these ERs required. As of June 30, 2003, the Fund has approximates consideration given for them made advance payments of $595,000 to the by the Fund, which is equal to the amount of Republic of Latvia under this contract. $355,320. Because of the inherent uncertainty of determining the fair value of ERs, the fair Due to significant uncertainties surrounding value oetermined In good faith by manage- the quantities and value of ERs for which the ment may differ from the values that would advance payments of $595,000 had been have been used had a ready market existed made, prior to fiscal year 2003 a 100% for the ERs, and the differences could be valuation allowance had been established. material. Management intends to closely In fiscal year 2003, management re-assessed monitor market conditions and revise this the allowance and determined that such valuation as appropriate. allowance is no longer required. 7. OPTION TO PURCHASE 9. INVESTMENT INCOME EMISSION REDUCTIONS Investment Income consists of both realized In November 2002, the Fund paid $562,500 and unrealized gains or losses incurred during for the option to purchase ERs over and the respective fiscal years For the years above the firm commitment under the ended June 30, 2003 and 2002, the unrealized contract from Hidroelectrica Guardia Vieja ,nvestment loss is $157,303 and the unrealized S.A. The option may be exercised, in whole investment gain is $57,985, respectvely. or in part, on or before December 31, 2010 For the years ended June 30, 2003 and 2002, Options to purchase emission reductions the realized Investment income is $418,109 are deemed to be derivative instruments and $872,621, respectively. accounted for under (AS 39, Financial Instruments: Recognition and Measurement, 10. INVESTMENT INCOME TRANSFER and are measured at fair value at the end of the reporting period. In accordance with the decision made by the Participants, in August 2002 a transfer of Due to the evolving nature of international investment Income was made from the Fund and national climate change and emission to a separate trust fund in the amount of trading regulatory and policy regimes, as well $686,157 to be used for enhanced capacity as the emerging nature of the current market bulding, training, and research activities. for ERs, presently, there is no single standard The amount represents investment income for determining fair value of this option. earned by Deutsche Bank's contributions Therefore, determining fair value requires that while held in the Fund for the period from judgment be applied to the specific facts and May 2000 to July 2002 (Note 3). 51 GLOSSARY Additionality: According to the Kyoto Fund Management Committee: Monitoring plan: A set of requirements for Protocol, gas emission reductions generated PCF Committee comprising five members, monitoring and verification of emission reduc- by Clean Development Mechanism and Joint consisting of the Fund Manager and four tions achieved by a project. Implementation project activities must be other members of the management of the additional to those that otherwise would occur International Bank on Reconstruction and Operational Entity: An independent entity, Additionality is established when there is a Development (IBRD) selected by the President accredited by the CDM Executive Board, which positive difference between the emissions of the IBRD. The Fund Management validates CDM project activities, and verifies that occur in the baseline scenario, and the Committee is responsible for overseeing the and certifies emission reductions generated by emissions that occur in the proposed project. operations of the Fund. such projects. Afforestation: The process of establishing Fund Management Unit (FMU): Unit Project Concept Note: A brief description and growing forests on bare or cultivated land, headed by the Fund Manager and responsible of a project prepared by the project which has not been forested in recent history. for the day-to-day operations of the Fund. proponent entity or intermediary that is to be presented for consideration by the PCFs Baseline: The emission of greenhouse gases Greenhouse gases (GHGs): These are the Fund Management Committee and the that would occur without the contemplated gases released by human activity that are Participants' Committee. policy intervention or project activity responsible for climate change and global warming. The six gases listed in Annex A of Project Design Document: A project- Biomass fuel: Combustible fuel composed the Kyoto Protocol are carbon dioxide (CO2), specific document required under the CDM of a biological material, for example, wood or methane (CH4), and nitrous oxide (N20), as rules which will enable the Operational Entity wood by-products, rice husks, or cow dung. well as hydrofluorocarbons (HFCs), perfluoro- to determine whether the project (i) has been carbons (PFCs), and sulfur hexafluoride (SF4. approved by the parties involved in a project, Carbon asset: The potential of greenhouse (ii) would result in reductions of greenhouse gas emission reductions that a project is able High quality emission reductions: gas emissions that are additional, (iii) has an to generate and sell. Emission reductions of a sufficient quality so appropriate baseline and monitoring plan. that, in the opinion of the Trustee, at the time ° Carbon finance: Resources provided to proj- a project is selected and designed, there will Project Idea Note: A note prepared by I ects generating (or expected to generate) be a strong likelihood, to the extent it can be a project proponent regarding a project a greenhouse gas (or carbon) emission reduc- assessed, that PCF Participants may be able to proposed for PCF. The Project Idea tions in the form of the purchase of such emis- apply their share of emission reductions for the Note is set forth in a format provided by sion reductions. purpose of satisfying the requirements of the the PCF and available on its website UNFCCC, relevant international agreements, or www.prototypecarbonfund.org. Carbon dioxide equivalent (CO2e): applicable national legislation. The universal unit of measurement used to Reforestation: This process increases the indicate the global warming potential of each Host country: The country where an emission capacity of the land to sequester carbon by o of the six greenhouse gases. Carbon dioxide- reduction project is physically located. replanting forest biomass in areas where forests a naturally occurring gas that is a byproduct have been previously harvested. 0 of burning fossil fuels and biomass, land-use Internal rate of return: The annual return changes, and other industrial processes- that would make the present value of future Registration: The formal acceptance by the S is the reference gas against which the other cash flows from an investment (including its CDM Executive Board of a validated project as greenhouse gases are measured. residual market value) equal the current market a CDM project activity price of the investment. In other words, the O Certified Emission Reductions (CERs): discount rate at which an investment has zero Sequestration: Sequestration refers to A unit of greenhouse gas emission reductions net present value. capture of carbon dioxide in a manner that issued pursuant to the Clean Development prevents it from being released into the atmos- Mechanism of the Kyoto Protocol, and measured Joint Implementation (J1): Mechanism phere for a specified period of time. in metric tons of carbon dioxide equivalent, provided by Article 6 of the Kyoto Protocol, whereby a country included in Annex I of the United Nations Framework Convention Clean Development Mechanism (CDM): UNFCCC and the Kyoto Protocol may acquire on Climate Change (UNFCCC): The inter- Q The mechanism provided by Article 12 of the Emission Reduction Units when it helps to national legal framework adopted in June 1992 Kyoto Protocol, designed to assist developing finance projects that reduce net emissions in at the Rio Earth Summit to address climate countries in achieving sustainable development another industrialized country (including coun- change. It commits the Parties to the UNFCCC by permitting industrialized countries to finance tries with economies in transition). to stabilize human induced greenhouse gas projects for reducing greenhouse gas emission emissions at levels that would prevent z in developing countries and receive credit for Kyoto Protocol: Adopted at the Third dangerous manmade interference with the doing so. Conference of the Parties to the United Nations climate system. Convention on Climate Change held in Kyoto, Conference of Parties (COP): The meeting Japan in December 1997, the Kyoto Protocol Validation: The assessment of a project's 3 of parties to the United Nations Framework commits industrialized country signatories to Project Design Document, which describes its > Convention on Climate Change. reduce their greenhouse gas (or "carbon") design, including its baseline and monitoring o emissions by an average of 5.2% compared plan, by an independent third party, before the Emission Reductions (ERs): The measurable with 1990 emissions, in the period 2008-2012. implementation of the project against the 0 reduction of release of greenhouse gases into requirements of the CDM, the atmosphere from a specified activity or over Millennium Development Goals (MDGs): a specified area, and a specified period of time. Commit the international community to an Verification Report: A report prepared expanded vision of development, one that by an Operational Entity, or by another Emission Reductions Purchase Agreement vigorously promotes human development as independent third party, pursuant to a (ERPA): Agreement which governs the the key to sustaining social and economic Verification, which reports the findings of the purchase and sale of emission reductions. progress in all countries, and recognizes the Verification process, including the amount of importance of creating a global partnership for reductions in emission of greenhouse gases Emission Reduction Units (ERUs): A unit development. The goals have been commonly that have been found to have been generated. of emission reductions issued pursuant to Joint accepted as a framework for measuring devel- a Implementation. This unit is equal to one opment progress. metric ton of carbon dioxide equivalent. 52