Carbon Intensity Bonds: Promoting Economic Growth Alongside Emission Reduction The Coalition for a Better Tomorrow, Today Firas Abu-Sneneh, Jacob Humber, Jeff Kessler
We recommend the use of CI- Bonds
CI-Bonds lower the cost of capital for carbon abatement projects
7 to 15 GT of CO 2 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 provide financial incentives to investors CI-Bonds do not require government coordination CI-Bonds minimize and distribute risk and monitoring costs
Interest Standard Project Standard Project Bondholder Bondholder Capital Capital x x a a T T Government Government
Interest Standard Project Standard Project Bondholder Bondholder Capital Capital Capital Capital f f f f o o Carbon Abatement - - Carbon Abatement e e t t i i Project r r Project W W x x a a T T Tax Tax Government Government
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
Carbon Abatement Standard Project Project Standard Green Loan Loan Issued Issued Originator CAP audit Loans Rating Agency Purchased by Fund Government Tax Fund Credit Tax Credit Bond Issued Issued Bond Holder
Carbon abatement is a calculated, probabilistic value
Standard Project VS “Green” Project
Monte Carlo Simulation Standard Project Standard Project Probability distribution of abated carbon Green Project Green Project Initial investment cost Discount Rate Carbon Emission Probability Distribution Return on Investment Project lifetime Probability of “Additionality”
CI-Bonds lower the cost of capital for carbon abatement projects
Effects of the CI-Bond Cost � of � Capital � for � a � Standard � Project � 16% � � Project � � � � 14% � 4% � 6% � 6.94% � 10% � 15% � � Abatement � � � 12% � 10% � � � � Carbon � 8% � � for � � � 6% � � Capital � � � 4% � � � � of � 2% � Cost � � � 0% � � $1.00 �� � $3.00 �� � $5.00 �� � $7.00 �� � $9.00 �� � $11.00 �� � $13.00 �� � $15.00 �� � $17.00 �� � $19.00 �� � $21.00 �� Project's � � � cost � � � of � � � � � � abatement � � � �
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
Standard Project Green Project Standard Project Green Project Assume: Need the same ROI for investments to happen SCC: $20 SCC: $5 1.79 Leverage 5.54 Leverage $130 billion to $550 billion market
7 to 15 GT of CO 2 can be abated per year through CI-Bonds Transport � � $140.00 �� Buildings � � $120.00 �� � $100.00 �� Petroleum � and � gas � Other � Industry � Iron � and � steel � � � abated � � � � $80.00 �� Chemicals � Global � Air � & � Sea � � $60.00 �� � � $/tonne-CO2e � Power � Transport � Cement � Agriculture � Forestry � � $40.00 �� Waste � � $20.00 �� � $- ���� 0 � 5 � 10 � 15 � 20 � 25 � 30 � 35 � 40 � GT � � � of � � � � � CO2e � � � � abated � � � per � � � � � year � � � �
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
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