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KfW Carbon Fund Generates CDM and JI Credits for EU ETS
On 29 June of this year, at their headquarters in Frankfurt/Main, Germany, the KfW Bankengruppe announced its Carbon Fund. Companies interested in GHG emission reduction credits can pool money to be invested by KfW in abatement projects. Although this concept is not new, KfW’s initiative is among the first ones that particularly focus on transferring CDM and JI credits to EU ETS installations.
Credit for reconstruction
KfW Bankengruppe (KfW Banking Group – KfW stands for Kreditanstalt für Wiederaufbau - Credit Institution for Reconstruction) was established in Germany in 1948. It is owned by the Federal Government of Germany (80%) and the Federal German States (20%). The bank’s main focus is on the promotion of small and medium-sized enterprises, home finance and housing modernisation, the protection of the environment, and the finance of exports and projects. Next to activities on the German market, the bank also supports investments in countries with economies in transition and in developing countries. With a balance sheet of around e315 billion (year 2003) KfW is among the ten largest banks in Germany.
The present tender, which will close on 31 October of this year and for which KfW has made available a maximum amount of e10m, contains an invitation to project developers to express their interest in offering CDM investment opportunities to the KfW Carbon Fund. During November of this year, these Expressions of Interest (EoI) will be evaluated. In December, applicants of the short-listed EoIs will be invited to submit full proposals.
No AAUs
Although in the present tender only CDM projects can be offered, the Fund intends to also include JI projects in its portfolio in the future. KfW’s Mr. Rainer Sünnen explains: “At present, we expect that the potential of eligible projects will be higher under the CDM than under JI. Nevertheless, in a few months, KfW will expand the procurement program to JI projects, as well. In that respect, Romania and Bulgaria are among the countries with many potentially eligible projects. Russia won’t play a role in the KfW Carbon Fund until it ratifies the Kyoto Protocol.”
Indeed, ratification of the Kyoto Protocol by the host country is one of the eligibility criteria for projects in the KfW Fund next to other CDM criteria listed in the Marrakech Accords. Particular Fund-specific criteria are:
Projects should generate approximately 100,000 tCO2-eq. emission reduction per year, of which KfW will purchase 50% as CERs (50,000 CERs at minimum). Options for purchase of the remaining emission reductions will be offered by KfW.
Projects are basically implemented in host countries with an acceptable country risk.
The project is not a LULUCF or large hydro (>20 MW) activity.
Especially, with the latter criterion KfW ensures that their projects fit in the EU ETS. “The KfW Carbon Fund is primarily designed for German and European enterprises with obligations under the EU ETS. We will only purchase credits which can be transferred into EU allowances. The credits will therefore have to fulfil the requirements of the EU Linking Directive. This also excludes the purchase of AAUs,” explains Mr. Sünnen.
Given the focus on the EU ETS, it is likely that the investors in the KfW Carbon Fund are mainly enterprises covered by this trading scheme. Nevertheless, according to Mr. Sünnen, also governments can participate in the Fund: “For instance, the German Government intends to commit e8m to the fund.”
Bundled projects
The Fund intends to support projects in several different regions. Mr. Sünnen: “We want to establish a portfolio under strict consideration of risk diversification so that it is essential to purchase CERs from projects in different regions. The same holds for the project types: projects will have to come from different countries, deal with different technologies and be designed and implemented by different counterparties.”
Once short-listed, projects will have to be designed along the lines of the Marrakech Accords and the decisions by the CDM Executive Board. According to Mr. Sünnen, it is helpful if projects fall in categories with already approved baseline and monitoring methodologies: “However, we also welcome projects in categories without approved methodologies. In these cases, we assess the likelihood of eventual acceptance by the CDM EB of a proposed methodology.”
Finally, as mentioned above, KfW has a mission to promote small and medium-sized enterprises and to support the development of transitional economies and developing countries. With a view to this, one might expect a considerable opening in the tender for small-scale CDM projects. Yet, the quite high minimum of CERs to be acquired annually from projects (50,000 per year) seems to reduce the scope for small-scale projects.
Mr Sünnen acknowledges that the objective of the KfW Carbon Fund is to purchase cost-effective credits with low transaction costs: “Primarily, it’s a commercially orientated fund, so we must focus on projects which can generate larger amounts of CERs at acceptable transaction costs.” Nevertheless, in Mr. Sünnen’s view, small-scale CDM projects are not out of the picture: “When bundled, small-scale CDM activities could meet the minimum CER threshold and would be acceptable to the Fund. We would welcome such bundled projects.”
For further information, please contact:
Mr Rainer Sünnen
KfW Bankengruppe
Carbon Fund Project
Palmengartenstr. 5-9
D-60325 Frankfurt
Germany
tel.: +49 69 7431 2431
fax: +49 69 7431 4775
e-mail: rainer.suennen@kfw.de
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