October 2008

KfW Carbon Fund

KfW Carbon Fund
KfW Bankengruppe (KfW) has launched a carbon fund to purchase emission reduction certificates (carbon credits) generated from CDM and JI projects. Purchasers of carbon credits from the fund are largely businesses from Germany and other EU countries who must comply with obligations assigned to them under the EU Emissions Trading Scheme (ETS) and who want to use the project-based mechanisms to do so. The KfW Carbon Fund is also open to businesses looking to purchase carbon credits for image-boosting or PR purposes. In the form of a public-private partnership, state institutions and governments may also participate in the fund, either to promote implementation and use of the Kyoto mechanisms or to purchase carbon credits for their own use.

Purchase of Carbon Credits by Business and Industry
Interested businesses and institutions enter into an Emission Reduction Purchasing Agreement (ERPA) with KfW in which they stipulate their maximum investment and agree to purchase carbon credits in amounts up to the stated sum. The minimum investment is €500,000.00. KfW acquires carbon credits in its capacity as a trustee, that is in its own name but for the client’s account. As soon as the seller supplies the credits, they are immediately passed to the client in an amount equalling their share in the overall acquisition programme. Distribution of carbon credits to investors in the fund occurs from a portfolio of purchasing agreements which KfW compiles taking cost and risk factors into account. Categorisation of specific types of projects for investors to choose from is not provided for. Funds are called up at the time the carbon credits are received from the seller.

Purchasing Carbon Credits from the KfW Carbon Fund
KfW only purchases carbon credits than can potentially be exchanged for EU allowances. Due to the restrictions laid down in the EU Linking Directive (2004), nuclear power stations and afforestation and, for the time being, land use projects are excluded from the programme. Large-scale hydropower stations are only allowed if they meet internationally accepted environmental standards, including the WCD Guidelines. Projects must save 50,000 t CO2e per year in order to keep transaction costs affordable. Consolidating smaller-scale projects is possible. KfW strives to be named as the official project participant at the time a project is approved. It purchases carbon credits at market-oriented prices, taking economic and risk factors into account. Payment is generally on delivery, meaning once the credits have been transferred to KfW’s account. Partial payments may be agreed for specific projects after consultation with the credit sections at KfW. Depending on the project structure and credit worthiness of the project participants, KfW can also provide full financing solutions.

Projects may be hosted by all countries that meet the criteria laid down in the Kyoto Protocol.

The Project Portfolio
The first tranche of the KfW Carbon Fund closed in the first quarter of 2006. Some 26 businesses and institutions from Germany and elsewhere invested a total of €83.9 million in the carbon acquisition programme. Due to the high demand, the originally targeted fund volume of €50 million was exceeded by almost 70 percent. KfW invested €10 million of its own money in the first tranche.

In autumn 2006, KfW entered into four emission reduction purchase agreements (ERPAs) and six letters of intent (LoIs) which promise to generate around 4.8 million credits for the fund by 2012. The agreements are worth a total €43.5 million and already make up 50 percent of the fund volume. Another 13 projects are in the project pipeline. These largely involve renewable energy (wind, water and biomass/biogas). The regional focus is on Asia (51 percent), especially India and China, followed by Latin America (27 percent) and Africa (22 percent) (status as of 30 September 2006).

The first transfer of carbon credits to the KfW Carbon Fund occurred at the beginning of March 2006. This made KfW one of the first purchasers in the world to hold CERs. Given the positive response to the fund, KfW is planning to launch a second tranche of its carbon acquisition programme. Interested parties should contact KfW directly for more details. For the latest on the KfW Carbon Fund, see www.kfw.de/klimaschutzfonds.