The Coalition for a Better Tomorrow, Today Firas Abu-Sneneh, Jacob - - PowerPoint PPT Presentation

Carbon Intensity Bonds: Promoting Economic Growth Alongside Emission Reduction

Firas Abu-Sneneh, Jacob Humber, Jeff Kessler

The Coalition for a Better Tomorrow, Today

We recommend the use of CI- Bonds

CI-Bonds lower the cost of capital for carbon abatement projects

7 to 15 GT of CO2 can be abated per year through CI-Bonds

CI-Bonds will attract $130 to $550 billion in new investments per year

What the f*$k is a CI-Bond?

CI-Bonds bundle together Green Projects and Standard Projects

CI-Bonds do not require government coordination CI-Bonds minimize and distribute risk and monitoring costs CI-Bonds provide financial incentives to investors

Bondholder Bondholder Government Government Standard Project Standard Project T a x T a x Capital Capital Interest

Bondholder Bondholder Government Government Standard Project Standard Project Capital Carbon Abatement Project Carbon Abatement Project Capital T a x W r i t e

• f

f T a x W r i t e

• f

f Tax Tax Interest Capital Capital

All bonds are assigned a CAP score

The higher the CAP score the more carbon is abated from Green Projects

Countries can choose to restrict tax write-offs to bonds with CAP scores higher than a certain value

Bond Holder Standard Project Carbon Abatement Project Rating Agency Originator Government Tax Credit Fund Standard Loan Issued CAP audit Green Loan Issued Loans Purchased by Fund Bond Issued Tax Credit Issued

Carbon abatement is a calculated, probabilistic value

Standard Project “Green” Project

VS

Initial investment cost Carbon Emission Probability Distribution Project lifetime Green Project Green Project Standard Project Standard Project Probability distribution of abated carbon Discount Rate Return on Investment Probability of “Additionality” Monte Carlo Simulation

CI-Bonds lower the cost of capital for carbon abatement projects

Effects of the CI-Bond

0% 2% 4% 6% 8% 10% 12% 14% 16% $1.00 $3.00 $5.00 $7.00 $9.00 $11.00 $13.00 $15.00 $17.00 $19.00 $21.00 Cost

• f
• Capital
• for
• Carbon
• Abatement
• Project
• Project's
• cost
• f
• abatement
• 4%

6% 6.94% 10% 15% CostofCapitalforaStandardProject

We expect countries to value Carbon Abatement Project at $5 to $20 per MT

CI-Bonds will attract $130 to $550 billion in new investments per year

Green Project Green Project Standard Project Standard Project Assume: Need the same ROI for investments to happen 1.79 Leverage 5.54 Leverage SCC: $20 SCC: $5 $130 billion to $550 billion market

Agriculture Forestry Waste Cement Chemicals Power Petroleumandgas OtherIndustry Ironandsteel GlobalAir&Sea Transport Buildings Transport $- $20.00 $40.00 $60.00 $80.00 $100.00 $120.00 $140.00 5 10 15 20 25 30 35 40 $/tonne-CO2e

• abated
• GT
• f
• CO2e
• abated
• per
• year
• 7 to 15 GT of CO2 can be abated per

year through CI-Bonds

Green bond market is growing but small The Solactive Green Bond Index introduced in 2013 Total Market Value: $19.2 Billion

CI-Bonds improves Green Bonds Incentivizes carbon abatement Targets projects with high social returns

Abate carbon by reducing taxes Not picking winners No International Consensus on Carbon Cost Required

Any Questions?

Tap into bank networks to reduce monitoring costs Fund minimizes and distributes risk

CI-Bond: An Example

• Yield on corporate AAA bond = 10%.
• Tax rate = 30%
• Social cost of carbon = $15
• 10 tons of carbon abated by CAP

CI-Bond: An Example

• Standard AAA bondholder earns $70.
• CI-bond is composed of 86% AAA corporate

bond, and 14% carbon abatement project (CAP).

• The corporate bond portion earns 0.86*70=$60.2
• Tax reduction is 0.14*10*15=$21
• Excess return that accrues to CAP = $11.2

CI-Bond: An Example

• Market forces will force earnings between

two bonds to be equal.

• The return to capital required from the CAP is
• 11.4%.
• This negative return from capital is the

amount of subsidy given to CAP