Financing Trade
in Carbon Credit:
The Role of the Bank
NOT AN OFFICIAL UNCTAD DOCUMENT
prepared by
Dr. Christiane Abou-Lehaf
Senior Principal Associate (P&D)
THE ARICAN EXPORT-IMPORT BANK
presented at
UNCTAD/ECOWAS Bank Regional Workshop
Financing biofuels and Jatropha plantation projects with special emphasis
on Clean Development Mechanism (CDM)
Accra- Ghana
13-14 November 2006
Contents
1.
2.
3.
4.
Introduction
Why Finance
Trade in Carbon
Credit
Carbon Credit
Trade Finance
Programme
(CCTFP) – A New
Product
Conclusion
1. Introduction
Over the last century, the amount of carbon
dioxide in the atmosphere has risen, driven
to a large extent by our usage of fossil fuels,
but also by other factors that are related to
rising
population
and
increasing
consumption which led to an increase in the
global average temperatures.
In a regulatory attempt to cap CO2 emissions,
the Kyoto Protocol was signed by a large
number of countries.
Associated with fossil fuel depletion and rising
energy demand was the increase in oil and gas
prices leading to a push towards ‘low-carbon’
technologies
and
therefore
renewable
technologies.
Worldwide, these technologies are rapidly
becoming
cost-competitive
with
their
conventional counterparts leading to a boom
in clean energy and the creation of a new
market: “The Carbon Mitigation and Trade
Market”.
Activities in this new market are rising as it has
become an important market-driven avenue of
reducing carbon emissions and protecting the
environment.
For Africa which is the lowest emitter of green-house
gases, this development creates an immense
opportunity to attract finance for implementing
important projects in an environmentally-friendly
manner.
For the Bank, there is an added advantage in that
such projects can be financed with better security.
It is in view of the above, that the Bank is
introducing a new product to the Bank called
“Carbon Credit Trade Finance Programme
(CCTFP)”.
2. Why Finance Trade in
Carbon Credit
Carbon Credit Finance attracted both governments and private
companies to attempt to create and buy carbon credits in
developing countries.
Even though there are risks in carbon finance such as
performance risk, payment risk, regulatory risk, price risk,
etc..., the potential benefits to Africa and financiers, such as
the Bank could be very high. The flow of new and additional
resources for environmentally sound projects in African
countries can augment Official Development Assistance (ODA)
and serve as a conduit for new technologies.
This would meet the need of African countries
to increase their energy efficiency and mitigate
environmental pollution.
It can also complement the Bank’s
engagement in energy and infrastructure
projects, where carbon finance can improve the
viability of these investments.
Further, the Bank has the opportunity to use carbon
finance to increase investment in efficient fossil fuel
plants, support renewable energy (including
biofuels), deal with poorly managed landfills and
other waste streams that pose serious public health
risks to large populations, build sustainable forest
management, improve land use practices in
agriculture, and increase efficiency in transportation
– all while setting up a cost-effective mechanism to
deal with climate change.
Many international banks and financial
institutions have begun to finance trade in
carbon emissions. The World Bank, the IFC
and Rabobank already have specific products
in that area. It is in consideration of the above
benefits and trends that it was proposed to
consider a new product for financing carbon
credit, for adoption by the Bank.
3.
Carbon Credit Trade Finance
Programme (CCTFP) – A New
Product
3.1
3.2
3.4
3.5
3.6
3.7
3.8
3.9
3.10
Purpose
Objectives
Beneficiaries
Eligible Transactions
Implementing Modality
Financing Instruments
Pricing
Tenor
Partnerships
3.1 Purpose
To promote environmentally-friendly projects in Africa by
promoting project-based trading of carbon emission
reduction credits under the Kyoto Protocol’s Clean
Development Mechanism (CDM) as well as pre-financing
receivables from carbon credits earned and traded by
African businesses and governments thereby contributing to
reductions in carbon emissions and abating consequential
climate change.
3.2 Objectives
The Bank’s CCTFP has the general objective of supporting Africa
private and public environmental projects that would otherwise not be
bankable by leveraging the credit of off-takers of carbon credits earned
by those projects. The specific objectives are:
1. to stimulate investment in the renovation of old, inefficient power
plants and reduce global carbon emissions. through improved urban
waste management, providing sustainable development benefits
beyond its contribution to global environmental efforts (e.g. local
health and sanitation benefits arising out of better waste
management, local air quality and health impacts of cleaner and more
efficient use of fossil fuel or renewable energy);
2. leveraging additional carbon finance and supporting
investments through partnering with developed country
governments and private corporations wanting to buy carbon
credits in African markets;
3. strengthening the capacity of African countries to benefit from
the emerging market for emission reduction credits;
4. to play a major role in building, sustaining, and expanding a
market-based approach for carbon emission reductions by
piloting the development in Africa, of new techniques for
achieving carbon emission reductions while attracting finance
for new types of projects (e.g., clean coal, urban infrastructure,
sustainable agriculture, a forestration, etc…).
3.3 Beneficiaries
3.3.1
African corporates and governments implementing
projects that have earned or are likely to earn carbon
credits;
3.3.2
African banks and financial institutions financing trade
in carbon credits and/or projects that have earned or
can earn carbon credits; and
3.3.3
NGOs and environmental groups seeking finance to
promote projects that have earned carbon credit.
3.4 Eligible Transactions
3.4.1
Projects that have earned carbon credits
through reduction in GHGs; and
3.4.2
Traders that have accumulated carbon
credits earned by environmentally friendly
projects and who have sold those credits to
acceptable parties.
3.5 Implementing Modality
Financing will be provided to projects that have entered
binding and enforceable carbon credits sales contracts with
parties acceptable to Afreximbank. Proceeds of the Carbon
Credit Sales Contracts will be assigned to the Bank against
which advances may be made. The Bank may also provide
country risk guarantee, other guarantees, Letters of Credit,
etc. in support of eligible transactions provided proceeds of
acceptable carbon credit sales contracts are assigned to it.
3.6 Financing Instruments
3.6.1
Direct Advance;
3.6.2
Letters of Credit and Guarantees; and
3.6.3
Advisory services to assist eligible projects
earn carbon credit and trade same in the
international markets.
3.7 Pricing
3.7.1 Funded transactions will attract:
(i)
(ii)
interest rate, and
fees
The above will be linked to the LIBOR and related to
country and transaction risks and market conditions.
3.7.2
The Non-funded transactions
will attract fees only.
3.8 Tenor
Maximum tenor will be 5 years.
3.9 Partnerships
The Bank will implement its CCFP using a
partnership approach. Such partners include:
1.
2.
3.
4.
5.
6.
African,
non-African
and
multilateral
Development Finance Institutions (DFIs).
African and non-African EXIM Banks.
African and non-African banks and carbon
credit funds.
African and non-African governments.
African and non-African corporates.
NGOs and environmental groups.
4. Conclusion
It can be seen that introducing such a programme provides an
immense opportunity for the Bank to:
1.
2.
3.
4.
ensure that there is a value-added to Africa from pursuing
environmentally-friendly projects;
achieve greater integration of carbon finance into the
mainstream of the Bank’s lending operations;
reach out to other international finance institutions and
entities engaged in carbon finance projects; and
serve as a role model in showing that environmentallyfriendly projects can be remunerative and low risk in
financing thereby increasing the interest of African banks
in this laudable venture.
Contacts
Headquarters:
The President
1191 Corniche El-Nil, Cairo, 11221, Egypt
P.O. Box 404 Gezira
Cairo, 11568, Egypt
Tel: 202 5780282
Email: mail@afreximbank.com
Website: afreximbank.com
Thank you
for
Listnening