AAU sales and Green Investment Schemes: Towards implementation in Ukraine

Transcription

1 AAU sales and Green Investment Schemes: Towards implementation in Ukraine Grzegorz Peszko Senior Environmental Economist, Europe and Central Asia 24 April, Kyiv

2 Overview 1. Strategic allocation and management of AAUs 2. Ukraine in the global AAU market 3. AAU sales contracts and pricing 4. Green Investment Scheme design 5. Use of AAU revenues 6. Legal framework and next steps

3 1. Strategic allocation and management of AAUs

4 Decision about strategic allocation of AAU assets Pilot transaction (forward sale) $ Kyoto target Establishing GIS Mln ton CO2E Surplus AAUs (potentially tradable) Traded: Green Investment Scheme (s) Reserve for JI projects (if applicable) Reserve for possible future commitments Greening program I Greening program II Greening program III Mandatory set- asides (non tradable Compliance (Including commitment period reserve)

5 Ukraine s s surplus AAUs Ukraine will be a net seller of AAUs a state asset - in Surplus projected at between billion AAUs Actual surplus will depend on several dynamic variables e.g. energy efficiency improvements, coal, nuclear, economic growth JI and GIS replenish AAU assets AAU, ERU sale Kyoto target Mln ton CO2E Surplus Assigned Amount Units (potentially tradable) GIS & JI

6 Value of Ukraine s s Surplus Price will be established when trading begins Linked to supply and demand balance Very dependent on risks Higher if there is international agreement on ambitious post Kyoto emission reduction targets Expected to be below price for CERs, EUAs or ERUs 3 Scenarios of potential market value of Ukraine surplus AAUs: Price Low volume 0.45 billion AAUs Medium volume 1.0 billion AAUs High volume 1.5 billion AAUs Low (Euro 1) 0.45 bn 1 bn 1.5 bn Medium (Euro 5) 2.25 bn 5 bn 7.5 bn High (Euro 10) 4.5 bn 10 bn 15 bn Ukraine can take steps to improve the value of its surplus by lowering the risks to the buyers and good marketing strategy

7 How to influence AAU value Factor Kyoto Compliance Risk Reputational Risk Project Risk Demand Impact on the value of AAUs Compliance with Kyoto emission target; up-to date inventory of GHGs; ; functioning registry of AAUs; ; reports on time to UNFCCC; political stability and consensus to trade AAUs Credibility that revenues will be used only for agreed programs and projects; accountable GIS management and supervision; protection from corruption and fraud; independent verification of o environmental effects; transparency, access to information and stakeholders participation Professional experienced executive managers of GIS projects portfolio; feasible projects; competent and committed project owners or developers; secured access to finance; predictable approvals and payments; little bureucracy and politics Lower demand for AAUs than for ERUs until 2012 cannot be used by private forms under European emission trading scheme

8 2. Ukraine in the global AAU market

9 Ukraine in the Global AAU Market (I) Billion tco2e Supply of AAUs greater than demand Total needs of industrialized countrries Domestic actions and ETS CDM and JI credits AAUs AAUs Global demand Other CEE Ukraine Russia Potentially available AAUs Potential supply (conservative) High demand Low demand Source: World Bank estimates

10 Ukraine in the Global AAU Market No active market, limited forward trading, no transfer of AAUs until 2008 Trading for compliance expected to be between governments with participation of Japanese private sector entities Value of the surplus depends on supply and demand primarily actions of Europe, Japan and Canada on the demand side; and Russia on the supply side Canada is likely to abstain from purchasing AAUs In Europe AAUs are needed by some governments to cover excessive emissions from sectors outside of EUETS e.g. households, transport, agriculture. Private entities may be active as intermediaries or speculators. In Japan both government and private entities will need AAUs for compliance Global surplus AAUs under different scenarios of participation by Canada and Russia million AAUs over Canada fully in Russia Out -719 Russia in with +1.5bn 781 Russia in with +3bn 2,281 Canada half in ,376 2,876 Canada out 470 1,970 3,470 Note: Negative values indicate shortage; positive values indicate surplus

11 3. AAU transactions

12 Transaction Structures Risks and benefits of trading linked to the following unusual features: Asset created by regulation Asset exists in and depends on a framework of international law Value given by relatively few societies that are willing to pay to prevent climate change and accept this way of meeting climate commitments Will not exist until 2008 Can only be issued by and transferred between established national registry systems Government traders can gain and lose eligibility to transfer AAUs at any time

13 Two types of AAU sales agreements 1. Inter-governmental treaty under public international law Can be used only with sovereign (government) buyers Strong status once ratified and in force (less risk to buyers) Must be ratified by parliament, but legal delegation for CabMin to approve possible 2. Contract under private international law The only option if buyers are foreign companies. Could also be used with government buyers. Applicable law must be selected for contract enforcement and dispute resolution. Keep both options open for government buyers.

14 How to find buyers 1.Auctions 2.One One-to-one one negotiations 3.Hybrid solutions Pilot transactions likely through direct negotiations; auctions expected when market is mature

15 Scheduling payments, AAU transfers and emission reductions Ukraine buyers $ Advance Payments AAU transfers The earlier AAUs are transferred, the lower the AAU delivery risk, and the higher the greening and reputation risks Staggered disbursements: advance + several installments upon AAU delivery and based on performance of greening GIS Projects implemented established Emission reduction generated and accounted First forward 2008 transaction ?

16 Strengthening the Terms of Sale Risks (actual or perceived) have a direct link to price Risks for Ukraine Compliance commits more AAUs than can trade or can transfer Greening unable to deliver credible greening commitments and hence to sell Market price falls before sale Counterparty Credit buyer fails to make agreed payments Risks for Buyers AAU Delivery Ukraine fails to deliver contracted AAUs Greening (reputational( reputational): Ukraine fails to unable to deliver credible greening and AAUs not politically accepted for compliance with Kyoto committments Market the market price increases materially prior to purchase Risks can be managed through contracts, guarantees, insurance and other instruments: the main risk mitigation measure is a GIS design itself

17 Sample Features of an AAU Sales Contract Contractual terms Volumes, vintages and prices Schedule (inc. milestones) for payment AAU delivery schedule, or events triggering transfer, e.g. greening Rules for the transfer of AAUs Default provisions and remedies Reporting obligations Greening Obligations of the seller, e.g. descriptions of earmarked projects for greening Monitoring and verification of greening Other conditions could include: Option for further purchases Price re-openers based on market triggers Framework Treaty between Governments agreement to have private entities in the GIS Possibility to expand scope and timing Accounting provisions for disclosure of GIS accounts Possibility to re-allocate funds among greening opportunities to expand successful operations

18 Pilot AAU Transaction One or more modest transactions (around million AAUs,, less than 1% expected surplus) could allow Ukraine to: test the market and gain experience Raise funds kick-off greening and to establish AAU trading and GIS institutions Test the legal framework and potential multi-sector GIS structures How to engage in a pilot transaction? Adopt government resolution on managing national AAU assets and principles of participation in IET Develop a term sheet Identify low risk and quick to implement programs and pilot project(s) ) for greening and include description in terms sheet Make a proposal to buyers with clear timeframe and process Sign MoUs with selected buyers and begin negotiations of specific terms Complete design of GIS, establish legal basis and project portfolio, sign forward AAU sale-purchase agreement, receive first funds. Lead time approximately one year

19 4. Green Investment Scheme design

20 General Principles of GIS Coordination and Oversight Transparency stakeholders participation in GIS supervision International accounting and reporting standards independent financial and performance audits Accountability separation of supervision from executive management Separation of project selection from verification of results Efficiency Independence from ad hoc politics and interest groups Professional, autonomous operator - competitively selected and hired on performance based contract Clear and predictable procedures/criteria Environmental integrity Environmental reporting standards Independent verification of emission reductions Environmental performance reviews

21 Green Investment Scheme Institutional structure and financial flows Forward AAU sale Ministry of Environment Government of Ukraine Ministry of Finance: Special budget fund $ $ $ $ $ $ Registry AAUs AAU buyers Supervisory/advisory board State Agency for Ecological Investments GIS operators $ $ Verification of milestones and environmental results Financial institutions Equity investors Banks $ Energy supply Industry $ $ $ $ $ $ emission reductions/environmental benefits E Eff. buildings Other: hard and soft

22 Accountable division of tasks and responsibilities Government: : Oversight, strategic planning, fiduciary arrangements, approval of AAU sales contracts Ministry of Environmental Protection: : drafting regulations, supervision, signing AAU sale agreements National Agency for Environmental Investments: : programming, contracting of fund managers, experts and auditors, negotiations of AAU sale contracts, operator of registry Professional portfolio managers (GIS operators) under performance based contract Project identification, appraisal and selection against predetermined criteria and procedures Financial management Monitoring of projects performance Preparing performance reports Independent (third party) agencies: Determination and verification of environmental effects (simplified ied JI procedures by local entities where practical) Periodical performance reviews

23 5.Use of AAU revenues

24 Managing public funds Best if based on agreed international good practices (e.g. OECD Council Recommendations on Good Practices on Public Environmental Expenditures Specific legal provisions for transparency, accountability, efficiency and fiscal prudence; Funding under GIS should complement private financial markets.

25 Various Ways of Using AAU Revenues Projects and investment programs in physical assets Might qualify under JI as well Direct ERs (e.g. power and heat generation, industrial processes) Indirect ERs (e.g. energy efficiency, energy crops for fuels) Support to financial institutions/credit enhancement Technical support to project developers Development of policies and barrier removal liberalization of the power sector, EE standards, adaptation, biodiversity? Education and public awareness raising GIS management, monitoring, verification, reporting

26 Criteria for Selecting Priorities and Projects Selection must be based on careful analysis of e.g.: Country strategies, policies and regulatory framework Availability of underlying financing Project quality and commitment Viability - low return, long payback, small size, risks, abatement cost Projects that are facing barriers that could be removed with AAU revenue to speed up implementation? State owned and/ or private sector projects? Balancing supply and demand side measures? Leverage and replicability? Urgency? OR, should ER potential drive selection? AND, could JI projects be included in the GIS framework?

27 Possible Priority Sectors? Ukraine has significant greening potential even when looking at GHG reduction opportunities alone: Activity GHG emissions (Mt CO2e) Contribution to overall emissions (%) Ukraine Ukraine EU 15 Fuel extraction, processing, distribution and transport Iron and steel production Power and heat production Industrial energy use Residential fuel consumption Agriculture Waste management Transport Total Emissions and/or sinks Land use, land use change and forestry 32,137 33,886 The main emission reduction opportunities are also with the end-users: Residential sector (households and services) Transport sector (relatively small but fast growing emissions)

28 Financing GIS projects Should make projects happen, include incentives to implement projects quickly, encourage efficient, result-oriented behaviors, and avoid distortions, particularly to financial markets and interest rates Equity: not always what project developers need most Soft loans: to those projects that do not have access to credit or equity Investment grants: for project preparation or construction milestones considered for some projects Performance-based grants: Best by most criteria; paid to projects upon delivery of verified milestones and results Credit enhancement: : e.g. contribution to credit guarantee schemes Targeted credit lines for financial institutions: Projects eligible for GIS payments irrespective of how the underlying capital costs are financed GIS payment structure should leverage commercial credit for underlying capital investments against future cash flow from the GIS management agency, and should require some equity contribution from project sponsors

29 6. Legal framework and next steps

30 Typical scope of national legal basis for participation in IET Definition of ownership of AAUs; Authorisation for the relevant ministries decide about trading, including negotiations and drafting AAU Purchase Agreements; Authorisation for the signing and approval of AAU Purchase Agreements; Principles for using the revenues from the sale of AAUs, including earmarking for environmental purposes; Special budgetary arrangements (fiscal and fiduciary rules); Responsibility for implementing the Green Investment Scheme, including the responsibilities of agency managing GIS, agency responsible for supervision, principles for environmental and financial monitoring, reporting and verification; Delegation of authority to the Cabinet of Ministers and relevant Ministries to pass executive regulations on the implementation of international emissions trading and a GIS

31 Legal steps towards AAU trading Concept of country participation in IET approved by Cabinet of Ministers CabMin authorise to negotiate Pilot AAU purchase agreement MoUs or LoIs signed with first buyers Legal basis for IET and secondary regulations drafted TIME Pilot AAU purchase agreement approved by CabMin and/or by Parliament Law on IET approved by parliament Pilot AAU purchase agreement signed Secondary regulations on IET approved by CabMin/Ministry of Environment GIS established, registry connected to International Transaction Log First greening projects implemented; first AAU transferred; first payments received

32 How the World Bank helps GIS options study (done) Technical assistance (active) Japan Trust Fund grant (active) Potential: Lending for underlying investments Partial risk guarantees Buyer (as a trustee of carbon funds) Other as requested by Ukrainian Government

33 Summary Ukraine is well positioned to establish a GIS Design can proceed without delay (Technical Assistance and grant from Japanese Trust Fund at the World Bank available) Credibility Ukraine has made notable progress compared to other potential AAU sellers but enabling legislation and domestic institutions remain to be established Crucial steps Timely adoption and implementation of the COM draft resolution that amends the action plan for implementing UNFCCC commitments to include realistic schedule for implementation of a GIS Initiate work on GIS design and pilot transaction(s) Complete preparatory work and MoUs/LoIs in 2007 so that contracts can be signed in 2008

34 Thank You! Grzegorz Peszko