BioCarbon Fund Rules of
Engagement
BioCF Project Training Seminar
Washington, DC
September 14, 2005
Harnessing the carbon market to sustain
ecosystems and alleviate poverty
Key Milestones
 All contracts (Emission Reductions
Purchase Agreements or “ERPA”) to be
signed by June 30, 2006
 Purchasing period: up to 2017 (60% of ERs
delivered by 2012 for Window 1)
 BioCF will maximize 2006-2012 portion of
ERs delivered by each project to Window 1
 BioCF will require that projects ensure
permanence until 2037
Validation

Assumption: BioCF Fund Management Unit (FMU) adds
value to the project, especially in terms of methodological
input

BioCF requires to be involved in the methodological process

BioCF reserves right to communicate with the CDM
Executive Board

Before ERPA is signed

Methodologies must have been submitted to CDM Executive
Board by Operational Entity hired by the BioCF (sometimes
the project entity, in agreement with the BioCF)

FMU must have reviewed the draft submissions

Pre-validation report by Operational Entity must be available

Pre-validation assumes that submitted methodologies are
approved
Permanence
 Unlike climate change mitigation through energy activities,
the climate impact of LULUCF activities only lasts as long
as carbon is sequestered
 “Permanence” = sequestration for the very long term
 BioCF looks for long-term carbon sequestration
 BioCF will pay annually based on increments in carbon
stocks, but never above the long-term average storage
 CoP9 rules on temporary crediting
 Prices diverge from CoP9 implications (see later)
 Liability for replacement:

Project bears replacement responsibility until 2037

BioCF bears replacement responsibility thereafter
Co-benefits


BioCF wants to buy “green carbon with human face”
Social: Improve livelihoods

People receive carbon payments
 New job creation
 Additional income from alternative activities
 Know-how

Environmental

Conserve biodiversity
 Expand natural habitat
 Reconnect forest fragments
 Protect soil against erosion
 Fight against desertification
 Moisture retention
 Stabilize radionuclides in biomass
Price: Basics

To be attractive to investors, BioCF must be costeffective: buy low-cost climate change mitigation
opportunities
 Price assumes quasi-permanence, so can approach
that of CERs or ERUs from energy/infrastructure
projects


Indicative contract price ranges (offers to be
negotiated):




Full price paid as soon the sequestration is achieved
(unlike the “rental” mode provided for under
CDM/CoP9 rules)
$4/t CO2e (ERUs)
max $4/t CO2e (tCERs/lCERs)
< $3/t CO2e (Window 2)
BioCF pays on delivery of Verified Emission Reductions (VERs)
Pricing

Little or no LULUCF market reference: BioCF is
breaking new ground

Mostly voluntary or retail transactions, not Kyoto grade or
large volumes

Energy and infrastructure projects generate
permanent ERs, unlike temporary LULUCF ERs

To determine offer price to project within ranges,
FMU factors in perceived benefits and risks. Pricing
is a

positive function of co-benefits

negative function of risks
Benefit and Risk Analysis (1)

Several categories of risks

Regulatory risks

Project risks

Country risks

Market risks

Reputational risks

Principle: allocate risk to party best able to bear it
(seller or buyer)

Most risks affect both the seller and buyer
Benefit and Risk Analysis (2)

Regulatory risks

At methodology submission: methodology rejected (Seller + Buyer)
 At project registration: project found not to be additional (Buyer)

Project risks

Lower-than-expected ER potential (Seller + Buyer, depending on ERPA)

Technological failure
 Non-permanence
 Leakage


No financial closure (Seller + Buyer)
Country risks

Legal challenges to sale of ERs (Buyer + Seller)
 Host Country rejection: no Letter of Approval (Seller + Buyer)
 Expropriation of assets (Seller + Buyer)

Market risks


Lack of tradability (CDM, EU ETS) (Buyer)
Reputational risks

Environmental (Buyer + Seller)
 Social (Buyer + Seller)
Benefit and Risk Analysis (3)

Benefits

Environmental

Social

Need to include a couple of relevant but simple
indicators of environmental and social improvements in
the Monitoring Plan and track them during project
implementation

Benefits command a premium embedded in the price of
an ER

To the extent possible, benefits will be disclosed in the
ER certificate to educate buyers
Benefit and Risk Analysis (4)

Need to achieve some consistency in ER pricing
across the BioCF portfolio

FMU will quantify the perceived co-benefits and
risks of each project

Quantification will be discussed with project entity
as prelude to ERPA negotiations and within limits
of provisions of Letter of Intent
Cost Recovery
 100% of project preparation costs pre-financed by
the BioCF will be charged back to projects in the form
of withholdings from ER payments

Negotiated item

Never a negative transfer back to BioCF

Costs capped in the Letter of Intent and ERPA
 If BioCF also prefinances implementation costs
(supervision and certification), these will also be
charged back (subject to negotiation)

Same rule as for preparation costs
 Apply for Japanese PHRD grant or other grants to
finance some preparation costs
Payment Schedule

On delivery, not in advance: annual payments (in accordance
with Monitoring Plan) upon receipt of a verification report that a
certain number of tons of CO2 have been sequestered = Verified
Emission Reductions (VERs)

Other resources must be found to cover the investment cost

BioCF will pay for VERs even if project is not registered by the
market regulator

If project entity requested an advance payment

Proof would have to be given that there is no alternative

Would be limited to max 25% of the ERPA value

Price per ton would be discounted to reflect the risk of non-delivery

Bank guarantee would be requested

No upfront payment has been granted for any of the 22 projects cleared
Communication with Regulator

CFB reserves right to communicate with CDM
Executive Board and Art. 6 Supervisory Committee
on behalf of project entities to increase chance of
VER conversion to tCERs/lCERs, CERs, ERUs

Logical corollary of payment for VERs

IBRD as Trustee of the BioCF listed as project
participant in PDD
Project Cycle
1 Preparation
• Project Idea Note (PIN) and reviewed by Fund Management Unit
(FMU)
• Carbon Finance Document (CFD) prepared by project sponsor
• CFD reviewed by Fund Management Committee and Participants’
Committee
• Start of World Bank technical, financial, environmental and social due
diligence (identification + preparation)
• Host Country endorsement (letter of no-objection)
• Inclusion in portfolio
• FMU signals intention to purchase ERs: Letter of Intent
6m
Project Cycle
2 Methodology
• Project Design Document (sponsor/FMU)
• Baseline Study (BLS) & Monitoring Plan (MP) for carbon,
environmental and social benefits and ER calculation prepared
by project sponsor/consultant + FMU quality control
• [FMU submits new methodology submission (NMB and NMM
through Operational Entity)]
• World Bank due diligence continues (preparation)
6m
6m
Project Cycle
3 Validation
• [Pre-validation of BLS / MP for carbon, environmental and
social benefits by Operational Entity (DOE/AE) (before
methodologies are approved)]
• Pre-validation Report
• DOE/AE assesses ERS
• Host Country Letter of Approval
• Validation Report (after methodologies are approved)
• World Bank appraisal
6m
6m
2m
Project Cycle
4 Negotiation
•
•
•
•
•
•
6m
[FMU drafts Term Sheet (main clauses of a future contract in
plain English)]
Consultations/negotiations with sponsor
Term Sheet signature
World Bank lawyers draft contract (Emission Reductions
Purchase Agreement, or ERPA)
ERPA negotiations
ERPA signature (by June 2006)
6m
2m
3m
Project Cycle
5 Project Start-Up
•
•
•
•
6m
Project registration
Start of activities (at the latest – planting may have started
earlier)
Independent Initial Verification to ensure that MP is fully
operational
Start of monitoring
6m
2m
3m
1-5 y
Project Cycle
6 Implementation
•
•
•
•
•
•
6m
Periodic verification & certification reports (sponsor +
DOE/AE, in accordance with MP and contract)
BioCF pays project sponsor for verified ERs
ERs distributed to BioCF investors pro rata to their share of
the fund
BioCF buys a certain tonnage, not for a certain period of time
Purchase up to 2017
World Bank supervision (until forest established)
6m
2m
3m
1-5 y
12 y
Long-term average storage
90000
Potential ER
80000
70000
50000
Long-term average storage
40000
30000
20000
10000
BioCF Purchase
Year
49
45
41
37
33
29
25
21
17
13
9
5
0
1
tCO2e
60000
www.biocarbonfund.org
www.carbonfinance.org