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The World Bank (Bank) has played a pioneering role in catalyzing the market for greenhouse gas emission reductions as envisaged under the Kyoto Protocol, through the Prototype Carbon Fund (PCF) and the Netherlands Clean Development Mechanism Facility (NCDMF), which purchase greenhouse gas emission reductions (ERs) from projects in developing countries and countries with economies in transition. Based on these successes, and the lack of substantive private-sector uptake of similar initiatives, the World Bank is developing several new carbon funds.
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Catalyzing Project Financing
Experience with PCF projects suggests that carbon finance has the potential to increase the rates of return of clean technology projects and enhancing the bankability of investments in renewable energy, energy efficiency, municipal solid waste, and crop waste-to-energy conversion (among others).
"Emission Reductions Purchase Agreements" (ERPAs), through which the Bank purchases ERs on behalf of the donor or the participants in the respective carbon funds, provide important features which minimize many elements of country risk (including currency transfer and convertibility risk) and helps to provide:
 a reliable source of cash flows
at a fixed purchase price,
denominated in US$ (PCF) or Euros (NCDMF),
sourced from the US (not from the emerging market project sponsor),
backed by investment grade purchasers ,
endorsed by the Host Country in a formal letter and/or Agreement between the Host Country and the World Bank, and
assignable to creditors, so revenues may be placed in escrow for debt repayment.
Despite the high quality of these cash flows, current experience shows that banks generally tend to heavily discount carbon revenues under these ERPAs (relative to, for example, revenues from power purchase agreements), therefore limiting the capacity of greenfield clean-technology projects to use the value of the ERPA to access commercial loans. To illustrate, of more than 30 PCF projects for which there are agreed terms, only three have had access to commercial financing, and of these only one has reached financial closure.
Project sponsors in emerging markets generally have limited access to capital, and limited ability to structure and appropriately assign the risks inherent in their projects. PCF experience is that this constitutes a major bottleneck to the development of many projects.
Certain Project sponsors have asked us to help them identify sources of financing, particularly where those financiers will be willing to recognize the financial value of the ERPA in order to help them reach financial closure. In response, the Bank is now actively encouraging financial institutions with relevant capacity to assess the ERPA proceeds in their project evaluations (see attributes described above).
In this context, we consider that subordinated debt and/or equity funds that are willing to value ERPA proceeds are a welcome initiative, consistent with the World Bank's objectives and strategy of acting as a catalyst in the creation of a global market for greenhouse gas emission reductions. Such "mezzanine" financiers can also help strengthen and accelerate the development of emission reduction projects, promoting the financial discipline required for such projects.
The Banks experience with the PCF projects indicates that "mezzanine" and other innovative financing structures can play a critical role in the successful development of projects that can generate ERs, and more broadly in the growth of the carbon markets. These sources are an important addition to the financial tools available to project sponsors, and could be instrumental in many instances to financial closure of these projects.
One of the ways in which the Bank is currently considering assisting potential third party financiers to take advantage of the opportunities available in carbon projects is by acting as a clearinghouse for financiers that are prepared to value ER purchase agreements in their project assessments.
Interested financiers who are prepared to consider providing financing on the basis of their valuation of cash flows from ERs are therefore being invited to express interest in listing on our website. While this does not constitute any binding commitment to financing or to exclusivity on behalf of either the World Bank, or the relevant financier, it would provide project sponsors with an opportunity to have ready access to potential sources of financing.
The World Bank hopes that by catalyzing additional financing streams, we will assist in extending the private financing opportunities available to potential sponsors, particularly in developing countries, and therefore help to expand the number and range of eligible and viable climate mitigation projects.
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