CARBON FINANCE

MECHANISM
Presented By:
SUMESH RAUT
074MSESP019

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 OUTLINES
1. Introduction
2. Function of carbon Finance
3. Carbon Finance Concept
4. Kyoto protocol
5. Carbon Finance Models
6. Risk Identification and Sharing
7. Conclusions
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 INTRODUCTION
CARBON FINANCE:
Branch Of Environmental Finance.

Covers financial tools such as Carbon Emission trading.

Reduces the impact of Greenhouse Gases (GHGs).

Explores the financial implication's of living in a carbon constrained

world.

Objective is to reduce Carbon emissions from economic activities.

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 Carbon Finance Concept
Carbon Finance is based on the ability to monetize the sale
of Carbon Credits to finance investment costs.

Parties Involved in Carbon Financing:

• Project Owner
• Carbon Credit Owner
• Banks
• Host government
• Multilateral Agencies
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CARBON FINACE: Its Drivers and Markets

FIG:1.1 Carbon Finance :Its drivers and Markets SOURCE: Wiley [Carbon Finance] 5
 KYOTO PROTOCOL
• An agreement made under the UNFCCC (United nations Framework
convention on Climate change)
• Currently 192 parties of the UNFCCC have signed and ratified the
Protocol.

Proposed 3- flexible mechanisms to meet emission reductions

obligations:

1. Emissions Trading Schemes (ETS)

Uses Cap and Trade Mechanisms obligation.

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 Cont….

2. Joint Implementation (JI)

Project based mechanism

involves developing and implementing projects that reduce GHG emission, by

generating carbon credits.
Credits generated from this mechanism is know as Emission reduction Units(ERUs)

3. Clean development Mechanisms (CDM)

Allows industrialized countries to invest or finance a project in a developing countries.

 credits generated from this mechanism is known as certified Emissions Reductions

credits(CERs) for having reduced emissions. 7
 Carbon Finance Models

1. Advanced Payment Mechanism

Advanced payment mechanism acts much like a loan provided by the
carbon credit buyer.

This mechanism is simple and relatively quick to arrange, comparable

to conventional loan.

Major disadvantage is that buyers are willing to provide upfront

payments usually at advanced stage(after registration on UNFCCC ).

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 2.Pooling Model

• The model structure follows

mezzanine finance.

• This mechanism aims to

package a pool of projects and
monetize their emission
reductions .

Fig 2.1 pooling model9

 3.Local Bank Guarantee Model

• Similar to Pooling Mechanism.

• Instead of providing debt the

Investors provide a Letter of
Guarantee for a Local bank.

• With the Guarantee letter the

Project owner is able to access
finance from Local bank.
Fig:2.2 local bank guarantee model
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 RISK IDENTIFICATION AND SHARING
• Project Risks profile affects the
ability of a CDM project to attract
finance in two different ways:
1. Directly by affecting the lenders
willingness to invest
2. Indirectly by changing the Carbon
Credit buyer perception of risk.
As figure 2.3 shows after financial
closure the risk of project failure
falls.
Risk of under-performance persist
high until the registration.
Fig 2.3: Project Risks profile per stage (Source: First climate
analysis) 11
 CONLCUSIONS
Carbon Markets play an important role in shifting private
investment flows toward climate change issues.
Clean development mechanisms must be overcome by the
quality of Carbon Credit revenues.
Carbon delivery guarantee must be set to deliver carbon
credits from quality projects in developing countries to
buyers in developed countries.

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THANK YOU!
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