Climate Change: Political Risk Insurance as Part of the Solution
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December 10, 2007--Less than a month ago, Cyclone Sidr whipped coastal Bangladesh with winds surpassing 100 miles per hour, bringing widespread flooding, massive loss of life, and homelessness. Even for a country used to dealing with nature's fury, the cyclone's intensity was a somber reminder that human-induced global warming--and the intense damage it can unleash--is no longer something that will happen in the future. It is happening right now.

According to the World Health Organization, the proportion of the world's population affected by weather disasters doubled between 1975 and 2001. "But the real disasters are the ones yet to happen if we go on the same path of increasing our greenhouse gas emissions year by year," says WHO.

The need for urgent action to mitigate the effects of climate change is now broadly recognized, with attention focusing on the need to reduce damaging carbon emissions while helping the developing world--considered to be more vulnerable to the effects of climate change--move forward on a low-carbon development path.

The World Bank estimates developing countries will need investments in the neighborhood of $100 billion per year over the next 25 years to meet their energy needs through low-carbon means--far more than public sector resources can provide.

In response, MIGA, a private sector arm of the World Bank Group, is working to help move developing countries onto a lower carbon path by exploiting renewable energy resources, supporting energy conservation, and increasing efficiency. MIGA seeks to promote private investment in new technologies--such as carbon capture and storage--which can reduce the carbon impact of fossil fuels and play a significant role in coal-dependent countries like India and China.

MIGA Helps El Salvador Reduce Carbon Footprint

Half a world away from Bangladesh, El Salvador is taking a small but important step towards energy self-sufficiency with the introduction of a waste-to-power project. In 2006, MIGA provided $1.8 million in investment guarantees to Canadian company Biothermica Energy Inc. to enable the company to install the equipment needed to capture and flare gas generated by municipal waste at a landfill outside metropolitan San Salvador.

The landfill currently receives 500,000 tons of solid waste a year, generating some 7,500 tons a year of methane gas, which has 21 times global warming potential compared to carbon dioxide. With the landfill slated to expand to meet the entire country's municipal waste disposal needs, methane gas emissions are expected to double within the next decade. To address this issue, the project is converting the methane gases generated by the landfill to less harmful carbon dioxide.

"The project is already reducing the country's CO2 emissions by roughly 3 percent. This proportion will go up as more waste is added to the landfill in coming years," says Maxime Drouin, a financial analyst at Biothermica.

MIGA's guarantee helped the investor raise funds from the carbon market and assures the company of reimbursement in the event that a harmful political event puts a stop to operations.

"Carbon credit financing can be very expensive without the appropriate mitigation of risks, and the only way for us to get better financing terms was to lower the project risk," says Drouin. "MIGA's coverage helped us achieve that by removing all noncommercial and some Kyoto-related risks from our balance sheet. MIGA also gives us the necessary level of comfort to commit our own capital in countries where we would never have considered investing before."

"This groundbreaking deal signals that developing countries can indeed cash in on the benefits of reducing greenhouse gases, and also illustrates how carbon finance can work in a sector that developing countries can easily tap into," says Elena Palei, Acting Head of Infrastructure at MIGA.

The project's second phase, set for the end of 2008, involves the construction of a 5 MW power plant that will use methane gas from the landfill to generate electricity. This represents an important way for El Salvador to not only reduce pollution, but to also move away from its dependence on foreign oil.

Tackling Scarce Landfill Capacity in China...

MIGA is also working with a private investor, Golden State Waste Management Corporation, on two solid waste treatment investments in China--including the first waste-to-energy project in Beijing. The projects, which have received a total of $32 million MIGA guarantees, are located in southwestern and eastern Beijing.

With rapid economic and urban development in China, solid waste treatment in large cities has become an increasingly important issue. The government's current five-year plan estimates that the country needs more than $38 billion in investment in the area of solid waste treatment.

Located in Beijing's Fengtai District, one of the projects includes a garbage screening system to sort renewable resources, which it plans to sell or send to renewable resource markets. Remaining garbage will be used as compost and for other purposes.

...And Converting Waste to Energy

The other project, located in Chaoyang District, will use advanced grate incinerator technology to treat solid waste and, at the same time, utilize residual heat and steam to generate electrical power. This will result in an 80 percent reduction in original garbage volume, while reducing the need for less environmentally sound power sources. The facility will also provide an alternative to the district's only other landfill, which is expected to reach capacity in five to six years. With an estimated total investment of $106.5 million, the project is expected to become the largest waste incineration and power generation plant in China.

"Both projects utilize international best-practice technology, and will significantly reduce garbage volume for landfills in an environmentally sensitive way, which saves land--a precious resource--and helps reduce carbon emissions," says Charles Shen, Deputy Financial Controller of GSE Investment Corporation, part of the Golden State family. "We expect these projects to serve as examples for other Chinese cities." Golden State is currently building another waste-to-energy project in Zhangjiagang city.

MIGA's guarantee support was particularly important for the investor to help mitigate the risks associated with the subsovereign investment. "MIGA's added advantage in infrastructure projects such as these is its mitigation of risks and dispute resolution at the municipal level," says Yukiko Omura, Executive Vice President of MIGA. "This support is key to foreign investors who are reticent about making large-scale investments that involve untested local governments as partners."

MIGA Looks to Scale Up Green Infrastructure Investment

Climate change is also having a significant negative impact on water supply, against a backdrop of growing demand. MIGA is helping to manage scarce resources and meet environmental challenges related to water supply, for example, through its support for projects such as the As-Samra wastewater project in Jordan.

MIGA's work in the areas of hydropower, geothermal resource development, wind power, and transmission is also drawing positive attention and results.

"We are hopeful that this is just the beginning of a growing role for MIGA in this incredibly important area of reducing the harmful practices that are associated with global warming," says Omura. "The challenge now is to replicate these lessons more widely."