Chile Kicks Off the Global Carbon Market

SANTIAGO, June 17, 2003

The Government of Chile, along with the World Bank and the group of six governments and the 17 companies that make up the Prototype Carbon Fund (PCF), today announced a landmark event in the fight against climate change. The Chacabuquito run-of-river hydropower project, high in the Chilean Andes is delivering more than electricity. The project is putting Chile into the history books today with the first ever, verified greenhouse gas emission (GHG) reductions in the developing world, intended for the Clean Development Mechanism (CDM) of the Kyoto Protocol, the 1997
international agreement to limit climate altering greenhouse gases.

The CDM will allow industrialized countries and companies with greenhouse gas reduction commitments, to purchase some of their required reductions, in developing countries. Chacabuquito opens a new era of possibilities for Chile and other developing countries, in which reductions in greenhouse gases are exchanged for development dollars. The project demonstrates the potential and value of the Clean Development Mechanism as a powerful development tool for Latin America.

By selling emission reductions to developed countries, Chile is entering fully the international market of environmental cleansing. That will enable the national private sector to access resources to improve their technologies and introduce clean technologies,said Gianni López Ramirez, Executive Director, of Chiles CONAMA, the National Commission for Environment. Throughout the world, and especially in Europe, there is growing demand for these type of emission reductions. This opens great possibilities for Chile, a country with low risk rating for investments, compared with other similar nations. Chacabuquito is the first success story.

Chile and Latin America have already demonstrated their attractiveness to the newly emerging carbon market. 30 percent of the Prototype Carbon Funds 2003 portfolio is located in Latin America. The driving force is the Kyoto Protocol, which commits industrialized countries to reduce their carbon emissions by 5 percent below 1990 levels in the period from 2008 to 2012. Companies can supplement their commitments at home by purchasing lower cost emissions in developing world countries. As a result, projects in developing countries will get a new source of financing for sustainable development in the energy, industrial and waste management sectors, land rehabilitation, and clean technologies. Industrialized countries can meet part of their Kyoto obligation, while the threat of climate change is reduced at lower overall cost.

Chacabuquito is a leading example of the opportunities available through carbon finance. The project is part of the portfolio of the PCF. Six governments and 17 companies teamed up with the World Bank in 2000, and contributed $180 million to create the PCF. It has so far purchased or plans to buy about $110 million of greenhouse gas emission reductions from 26 projects in developing countries.

It is amazing to see how this result has been obtained by continuing and converging efforts of people all around the world, from Japanese companies to European governments and World Bank Staff, and so many people here in Chile and Latin America, said Jean Claude Steffens, Chairman of the ParticipantsCommittee of the PCF. In 1999, we started this process with a somewhat naive enthusiasm to set the corner stone of a new kind of market to protect the environment. Now we are more experienced, but the enthusiasm has not decreased. These projects are not only financed to curb GHG emissions, they are also meant to promote development in local communities and to bring sustainability to the national economy, as shown in Chacabuquito by the use of renewable energy sources to produce electricity.

The prototype fund is showing that emission reductions can be cost-effectively created, verified and certified via investment projects, despite the business risks. In Chacabuquitos case, the 26-megawatt, run-of-the-river plant near Los Andes is scheduled to deliver one million tons of carbon dioxide emission reduction credits to the PCF participants, and the power company, Hidroelectrica Guardia Vieja S.A. is forecast to receive US$3.5 million in return. The current independent verification by the German company TUV has documented that 112 thousand tons of carbon emission reductions can be sold to the PCF from Chacabuquitos first year of operation. In parallel to the PCF, the Japanese corporation Mitsubishi has committed to purchase 100 thousand tons of carbon dioxide emission reductions (approx. 10,000t-CO2 every year for 10 years) from Chacabuquito.

The carbon finance business has taken on a new sense of urgency in the face of mounting evidence that the Earths climate is changing, which could have dire consequences for major parts of humanity. The main culprits are fossil
fuels that are pumping heat trapping carbon dioxide into the Earths atmosphere creating an invisible blanket around the planet. Climate change, and accompanying disrupted weather patterns could wreak havoc on the planet, particularly parts of the developing world. The threat climate change poses to long-term development and the ability of the poor to escape from poverty is of particular concern to the World Bank.

The World Bank is catalyzing a market in which private capital can flow from OECD countries to developing countries for clean technologies and for development that is sustainable,said Axel van Trotsenburg, World Bank country director for Chile. The work of the PCF and the real life example of Chacabuquito shows how the Bank can help make markets work for global public goods through private capital. This not just a win-win situation, it is a triple win, for the private sector, for the environment, and for the people of Chile. This project is proof it can happen.

Five years after it started, the global carbon finance market--providing credits for reductions in greenhouse gas emissions--is approaching the half-billion dollar level in cumulative trade value. It is expected that the JI/CDM carbon market will exceed one billion dollars a year by 2008. Yet right now most developing countries are missing out on the benefits of carbon finance dollars. The Banks responsibility is to make sure that an equitable share of this money, much of it private sector, ends up in the hands of the poorest, in the poorest areas of developing countries.

World Bank News Release No:2003/420/S

Contacts:
Anita Gordon (202) 473-1799

Yanina Budkin 5411 4316 9724

Nazanine Atabaki (202) 458-1450

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From: monti@irn.org