- What is the PLAC?
The Latin American Carbon Program or PLAC (from its Spanish initials) is a CAF initiative in the emerging market for environmental services, with special emphasis on the infant carbon market.
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- Is the PLAC another CAF financial instrument available to its clients?
In addition to supporting the development of individual projects with potential for activating the Clean Development Mechanism (CDM), the PLAC also supports training activities and knowledge transfer aimed at strengthening the institutions in all shareholder countries. The Program has been involving and now also develops innovative financial instruments focused on renewable energy and energy efficiency, whether or not eligible for the greenhouse gas (GHG) reduction market.
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- What is the origin or what is the carbon market, and why does it interest us?
The carbon market is generated by multisectoral concern around the world about the accumulation of greenhouse gases (GHGs) in the atmosphere. According to a growing scientific consensus, this accumulation creates greenhouse-like conditions by trapping the heat which raises the temperature, a process known as global warming. This increase in global temperatures creates the conditions that many identify as climate change. In other words, the higher temperature generates changes in the atmosphere and oceans, which affect climate patterns. According to experts, examples of this change are reflected in the size and number of hurricanes and typhoons, severe droughts, migrations from? productive arable land, a more pronounced El Nino effect, etc.
In view of this apparent nexus between rising global temperatures and climate change, the science has led to a political commitment, which began in 1992 with the Earth Summit in Rio de Janeiro. The process made headway in 1997 with the Kyoto Protocol, and every year since progress has been made on the creation of the political and legal framework of a world treaty administered by the United Nations. The objective of the treaty is to reduce greenhouse gas emissions in the world in an effort to diminish the effect of human activity on global warming through commitments by the public sector and incentives for the private sector.
The carbon market is a mechanism that has emerged from the international negotiations. The market permits flexible transactions involving the exchange of GHG emissions based on specific projects or GHG emission permits.
How does the Kyoto Protocol (KP) affect our countries?
The Protocol comes into force after ratification by 55% of the industrial countries that accepted reductions commitments. The European Union, Canada, countries of Eastern Europe and Japan have already ratified the Protocol, while the United States and Australia have formally withdrawn from the process. With the recent ratification by Russia, the Protocol came into force in early 2005. The agreement establishes compulsory commitments to reduce GHG emissions by developed countries. Among current CAF members, only Spain has assumed emission reduction commitments. As a result, the treaty generates interesting business opportunities for the countries of Latin America and the Caribbean.
Business opportunities in the carbon market?
One of the market mechanisms established by the KP, which creates incentives for emission reductions, is the Clean Development Mechanism (CDM). This mechanism opens the way for the public and private sectors in countries that have accepted reduction commitments to purchase emission reductions generated in developing countries.
The carbon market works like any other market where a transferable good is traded between a buyer and a seller. The parties negotiate an agreement on the value of the good; for example, when a company or public entity in a country with commitments (such as Canada, the EU or Japan) enters into an Emission Reductions Purchase Agreement with a company or public entity in a country without commitments (such as all CAF members, except Spain).
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- What is bought and sold?
Certified emission reductions (CERs) or verified (VERs) are sold which represent one ton of CO2 (or the equivalent of other GHGs; for example, methane). One ton of certified reductions is equal to one CER.
Another way of visualizing the transaction is as a sale of efficiency, whether energy or other productive processes (including transport), measured in tons of CO2 equivalents not emitted thanks to the investment made possible by new technology, design improvements and/or fuel switch, among others.
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- What prices are anticipated?
Depending on the type of project and transaction, current prices fluctuate between US$1.00 and US$6.00 per ton. In practice the highest value ERs come from renewable energy projects with a lower risk profile, while the most economic (from the buyer's point of view) are related to methane capture and use; for example in sanitary landfills. The PLAC believes that prices will change in line with the risk determinants.
So far in the experience of the PLAC, prices fall within a range of prices between 3 and 5 euros.
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- What space is there for forest or land-use projects?
So far there is only a small market for ER related to CO2 capture in sinks or what are known as active and viable forest projects. Other institutions have been developing funds for these projects, which are expected to begin to function in the near future.
There are several reasons for this low level of activity: first the KP has not yet defined the procedures for these projects, which are expected to be issued in 2005; second, this type of project presents technical challenges which are not easy to overcome. This difficulty increases the current cost of transaction or formulation of project, and the final price of the ER because the potential volume of projects of this type is lower.
This is why there is not much activity in this type of project by the buyers, but they are expected to increase in value in the future.
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- How can the CAF help its clients with forest or land-use projects?
Although current policy is not to become involved in this type of project, the CAF recognizes that its shareholder countries and clients have a strong interest in them because they represent a large part of natural wealth at world level. The PLAC is also looking for ways to add value to the project; so, for the time being we can offer the following:
- Clear and objective conversations with interested parties on this type of project;
- Recommendation that the intention to include the environmental concept of emission reduction be included in the project business plan, and in financial analysis scenarios. This is a market that the CAF plans to enter, but only when more progress has been made on the business, technical and political context.
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- What has been signed with the Netherlands government (CAF-Netherlands CDM facility)?
Under this agreement, the CAF will facilitate to the Dutch government the purchase of up to 10 million tons of ERs from Latin American and Caribbean countries.
These funds are destined exclusively for purchase of CERs, after being generated, certified and validated (a process that the PLAC will accompany). They will not be used to finance projects for related studies.
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- Are the funds provided by the CDM CAF-Netherlands facility additional funds for project financing?
No. These funds will be used to purchase emission reductions. They represent an additional income for the project’s cash flows, which must be included in the financial analysis, but they do not represent in any way a source of additional financing. For financing the CAF has traditional mechanisms, which may be applied to projects according to established criteria.
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- Is this mechanism only for projects with CAF financing?
No. Although logically the CAF-CDM Synergy in a project significantly increases the value added for the parties, this option is not always feasible or viable; so the PLAC has the space to work with quality projects that meets the minimum requirements established by the program.
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- Is this mechanism only for projects located in CAF shareholder countries?
No. As a window for management and purchase of emission reductions (ERs) for Latin America and the Caribbean, the PLAC can add value to projects that are developed in all the countries of the continent, excluding Annex I countries such as the United States, Canada and Spain. For example, the PLAC is actively developing projects in Central America.
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- How many buyers of CERs are there for our countries at present?
Demand is still limited but growing. Successful experiences create incentives for the entry of other actors into the market.
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- What type of projects is the PLAC interested in?
Examples of projects with potential for reduction of greenhouse gas emissions:
Energy Sector:
- Renewable - hydroelectric-biomass-aeolic, geothermal projects etc.;
- Fuel switch, energy efficiency, conversion of diesel or fuel oil to natural gas, change of electricity generation technology (open cycle turbines to combined cycle).
Mass Transport Sector:
- Fuel switch to natural gas;
- Change of diesel technology - replacing old buses;
- Optimization of roads reducing travel time, creating express lanes, etc.
Industrial Sector:
- Switch to a more efficient and clean fuel (eg natural gas);
- Change technology - improvements in efficiency;
- Industrial cogeneration.
Waste Handling and Residue Disposal Sector:
- Methane capture in sanitary landfills;
- Use of methane in energy projects;
- Optimization of gas pipelines.
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- I have a project that I consider could interest the PLAC, what is my first step?
Send a profile and summary of the project idea to one of the CAF offices in Caracas, Bogota, Quito, Lima, La Paz and Brasilia, or send it directly by e-mail to: plac@caf.com. The format for submitting the project idea is available at this link:
Project Idea Note (PIN).
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- Are their basic criteria from considering the projects?
The PLAC intends to analyze and if possible support projects that offer an important opportunity for generating ERs, especially those submitted by CAF clients. The projects should comply with certain basic criteria such as:
Commercial viability, not just long-term plans or intentions;
Offer tangible benefits of sustainable development (supply of clean energy, generation of employment, technology transfer, etc);
Have a business and financing plan at an advanced stage;
Have the CDM component included before the financial close;
Qualify under the basic CDM criteria (emission reductions must be real, measurable and certifiable, and promote sustainable development).
If the answers to all these questions are affirmative, the CAF would be interested in receiving more information on the project idea.
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- Other institutions with the same objectives have initiatives and programs, what differentiates the CAF program from the others?
Exclusive geographical focus on Latin America and the Caribbean
Works with entities from public, private or mixed sectors
Focuses on energy, industry and transport projects
No participation in the project
Provides the opportunity, as long as the project qualifies:
- Financing of infrastructure projects
- Financing of industrial projects
- Project structuring (investment banking and capital markets) - through other areas of the corporation.
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