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1.4 Negotiating with Investors

Investors may be private or public sector entities. Investors could include:

Industry: multinational, foreign or local companies
National governments: developed country governments (seeking credits in return for their investment) or developing country governments (a country may set up its own CDM projects unilaterally and then solicit investors to invest in these activities.
Local government: other public sector entities such as local government or city councils

Investors may be the main project proponents that both finance and implement the project or may be among the project participants, perhaps setting up a joint venture with a local partner who may be the main project proponent in the host country. Thus a project proponent could be a private sector firm, a foreign government, or the host country government.

Investors may approach a host country with CDM investment proposals, but in addition, SIDS may wish to be proactive in attracting the types of investors that best suit their national priorities. This could include soliciting investors through correspondence, meetings, trade conferences, or advertisements setting out the types of projects that the country is interested in hosting. A country wishing to attract CDM investment could approach governmental donor institutions (1.4.2) and international financial institutions (1.4.1) that have established programmes for investing in CDM projects.

Once project concepts have been defined by the project proponent and investors and any other partners are found, negotiations will take place among the project participants. Agreement is needed on levels of investment, the terms of involvement of each participant, the lifespan of the project, the legal responsibilities and liabilities of the participants, and the terms of renewal or termination of the project. It is the responsibility of the project participants to identify one another and begin negotiations to form a partnership as participants in a CDM project. This preparatory work is needed before entering the CDM project cycleof steps that are required to establish a valid CDM project.

1.4.1 International Financial Institutions

International financial institutions such as the World Bank and the International Finance Corporation are an important source of CDM finance.

The World Bank has entered the CDM market with a Prototype Carbon Fund (PCF). The PCF is financed by governments and industry, and the World Bank uses the fund to purchase CDM credits on behalf of its investors. The credits are then distributed to the investors. The World Bank also offers training to build capacity of host countries and the PCF participants, to enhance the operations and activities of the PCF and its partners, and to promote the market for and quality of GHG projects and emission reduction credits.

Further information: www.prototypecarbonfund.org/splash.html

The International Finance Corporation has set up a fund to purchase GHG Emission Reductions together with the Dutch government: the IFC-Netherlands Carbon Facility (INCaF). The Netherlands has allocated € 44 million (about US$ 40 million) for this Facility over the next three years to provide additional revenues to eligible projects that generate emission reductions in developing countries. The IFC will purchase greenhouse gas (GHG) emission reductions under the Clean Development Mechanism (CDM). The Netherlands will use these emission reductions to help meet its commitments under the Kyoto Protocol.

Further information: www.ifc.org/enviro/EFG/CarbonFinance/carbonfinance.htm

1.4.2 Donor governmental institutions

Some governments may set up programmes through which to purchase CDM credits. For example, the Dutch government has set up a programme called “CERUPT” to purchase CDM credits.

Dutch ‘CERUPT’ Initiative

Senter International, a public institution acting for the Dutch Government, establishes a public tender process calling for proposals for CDM projects. Senter assesses the detailed proposals on the basis of the price at which carbon credits are being offered, the feasibility of the investment and its sustainability. Senter also checks the validation and the Letter of Approval and contracts a number of companies. The proposals that comply to the requirements are ranked by price. Contracts are awarded to the lowest price proposals. Senter accepts the most attractive bids and assists the successful bidders in designing the project, negotiating with the host developing country party, and putting the project into operation.

To be approved a project must be validated by a independent third party to ensure that the project design, the baseline, the monitoring and verification protocol and the emission reduction calculations are valid compare to a set of criteria including the Kyoto Protocol rules, applicable UNFCCC documents, CERU-Pt operational guidelines and terms of reference, Host Country legislation, etc. The emission reductions by the project must be shown to be additional (i) and significantly larger to what otherwise would have occurred. The host country’s government must give approval for the transaction in carbon credits through a Letter of Approval. The Dutch government pays for the emission reductions that occur from 2008, after they have been verified.

Further information: www.senter.nl/asp/page.asp?id=i000000&alias=erupt