Brazil: “PLANTAR” Project

Sustainable Fuelwood and Charcoal Production and Substitution of Coke in

Pig Iron Production

Sao Paulo

November 21, 2002

The Plantar S/A is privately held family company founded in 1967.

Silviculture: Forest services - plantation & seedling productionsupporting 25,000 ha/yr (>400,000 ha so far)

Charcoal production: Charcoal from sustainable harvested sources for lump charcoal export market and for Pig Iron production

Pig iron production: 180,000 t/yr< 1% of country’s foundry pig iron production, but represents 4% of the independent producers using charcoal

PROJECT SPONSOR

SECTOR BACKGROUND

Pig iron producersSteel producers

(coal based)

Pig iron export2,665,000 t

Foundry pig iron25,212,570 t

Coal basedindustries18,833,000 t

Charcoal basedintegrated1,617,000 t

Charcoal basedindependent producers

4,762,570 t

PlantationIndigenous forest

Without carbon finance, plantation, charcoal based pig iron production cannot survive and their market share will be taken over.

EMISSION REDUCTIONS BY COAL SUBSTITUTION

from CHINA, POLAND, JAPAN

IMPORTED COKE

Project Objective:To make sustainable charcoal production a viable alternative to coke in pig iron production

Project: Four Components

Sustainably managed Eucalyptus plantations (FSC certified) on land that was pasture in 1989: 23,100 ha (3,300 ha x 7 years); Project lifetime 21 years (3 harvesting cycles of Eucalyptus)

Restoration Forestry: Reforestation of pasture land with native Cerado forest: 478 ha

Improved Charcoal production: (reducing methane and local pollution)

Charcoal displacing Coal/Coke in Pig iron production and produced for lump charcoal market in Europe

Project Financing

Required Investment for Core Proposal

Entire investment (for newly established plantation): US$38.8 million

PCF contribution at $3.50/tCO2e = $5.3 million

Other carbon finance potential = ~$10-20 million

Financial Structure and IRR

Plantar Equity: $33.9 million injected over seven years

Debt financing: $4.9 million up front

IRR without Carbon finance, 12.5%; with CF, 20.7%

Project ERs

Category of ERs ERs (t/CO2) by source over project life

Substitution of Coke in Blast Furnace

7,903,262

Sequestration in Plantations and Forest Ecosystem Rehabilitation

4,545,398

Methane Emissions Reductions

437,325

Totals 12,885,985

Component 1: Sequestration ERs

4.5 million CERs4.5 million CERs

23 100 ha of Eucalyptus Plantations 23 100 ha of Eucalyptus Plantations

Based on Advanced Clones Based on Advanced Clones

CARBON STORED IN THE PLANTATION Carbon Accumulation Dynamics in one Hectare of Forest

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Biodiversity and Land Management Certifiable

Benefits• Production and Conservation Landscape

– 4600ha of set-aside managed for restoration of Cerado dry forest – no carbon credit

– 478 ha of additional restoration forest – for carbon credit

– Biodiversity, soil and water quality baseline validated with monitoring protocol

• Forestry Stewardship Council (FSC) certification in place for existing plantations– Must be obtained and maintained for future

plantations

• Biodiversity Asset Certified and bundled with Carbon

Component 2: Carbonization ERs

Reduction of Methane Emissions from Charcoal Reduction of Methane Emissions from Charcoal ProductionProduction

0.4 million CERs0.4 million CERs

Traditional Brazilian Brick Beehive Kiln

used in about 90% of Brazilian charcoal operations

Efficiency: about 4m3 wood for 1m3 Charcoal

Improved Brazilian Brick Kiln: < 2m3 wood to 1m3 charcoal

(The baseline for charcoal production)

The Project’s Charcoal Production

Flares Methane with automatic spark ignition device, collects tars/oils in smoke – minimizes local air pollution.

Social and Health Benefit Certified

• Charcoal Worker Respiratory Health – Monitoring protocol established and validated

• Certification of good labor practices and no use of child labor– ABRINQ independent certification standard in

place– To be maintained under carbon purchase

contract

Component 3: Industrial ERs

Substitution of Charcoal in Pig Iron ProductionSubstitution of Charcoal in Pig Iron Production7.9 million CERs7.9 million CERs

Environmental Standards for Plant Emissions

• Minas Gerais State licence in place that plant is is operating under loal environmental requirements

• Upgraded charcoal dust filtration system installed to mitigate health hazard

• ISO 14000 certification process in train for approval by mid-2003

Component 4: Cerrado Forest

Restore native Cerrado forest to enhance Restore native Cerrado forest to enhance biodiversitybiodiversity

~ 80,000 CERs~ 80,000 CERs

Use of imported coal-coke in pig iron and forest loss

Biodiversity loss, land degradation

Impact: end of small pig iron producers, loss of rural employment, out migration

Environmentally sustainable industry

Cost: $38.8 million

Energy: lower cost sustainable charcoal replacing imported coal

$5.3mm from PCF; ~$10-20mmfrom other

carbon sales

Baseline Project

PCF ProjectCertified Outcomes:

Biodiversity restored in native forests. Worker heath improves

Outcomes: small pig iron sector survives, rural employment increases

Brazil Plantar Project in Overview

Baseline\MVP Approach for Plantar

• Fuel-Switching Component– Scenario analysis based on historical trends– Investment constraints (most plausible approach

cannot be financed without carbon)– Monitor industry wide production to detect

leakage

• Charcoal Production Emissions Reductions– Historical and current charcoal-making technology– Control group of 10 peers in pig iron industry;

included in MP for revalidation (>50% rule)

• “Cerrado” Rehabilitation – Scenario analysis based on historical trends:

deforestation– Investment analysis (if needed)

Issues in Validation

• Final Validation Opinion issued. Preliminary only with respect to CoP9 rules on A/R sinks

• Key issues were:1. Eligibility of end-of-life plantation lands for

CERs2. Leakage of “deforesting” pig iron industry

to other Brazilian states to avoid charcoal raw material resource crunch

3. Emissions Coefficients for Pig Iron Coal/Coke baseline

4. “Double-counting” of methane emissions from charcoal kilns

Plantar: Issues in Validation

Eligibility of “sequestration reductions” from replanting end-of-life eucalyptus plantations

Issue: DNV claimed that it was “conservative and reasonable” to assume that Parties would make eligible at CoP9 only those ERs from land that was pasture in Dec 1989

• Response: Plantar had to commit to buy all new land that can be proven to be pasture in December 1989

• Response: To avoid “leakage”, Plantar had to assume all former end-of-life plantations were deforested and deduct these “losses” from sequestration on new pasture land;

• Response: To further avoid leakage, Plantar must monitor the former land-owners to assure that they don’t deforest!

Plantar: Issues in Validation

Coefficients for displacement of coal/coke emissions by climate-neutral charcoal from plantations during pig iron production.

Issue: DNV proposed either use of IPCC default values which were ~20% lower than claimed or detailed proof of proposed coefficients

• Response: Detailed engineering process analysis new was commissioned and agreed with DNV. DNV proposed submitting the process to IPCC to create new default value for this process

Plantar: Issues in Validation

Claiming Methane Emissions Reductions from flaring methane in exhaust gases from charcoal production after charcoal is produced from new plantations

Issue: DNV noted that such ERs could not be claimed after 2008 when new plantations were converted to charcoal as it would be “double-counting” baseline emissions as per agreed carbon emissions coefficient.

• Response: Plantar/PCF agreed. Claims eliminated for charcoal produced for pig iron production and claimed only for lump charcoal trade production

• Response: Plantar agreed to continue flaring methane after 2008 in pig iron charcoal kilns

Plantar: Issues in Validation

Leakage of small scale blast furnace operations from Minas Gerais to Carajas State as plantation estate declined due to lack of replanting in Minas Gerais (baseline case).

Issue: DNV claimed that such leakage may occur despite impending shortage of native forest in Carajas and lack of investment capital for new blast furnace construction.

Response: Plantar will maintain detailed record of pig iron production from plantation and native charcoal sources in Minas Gerais and Carajas, with and without benefit of carbon finance

Emission Reduction Purchase Agreement

PCF Purchase - 1.51 million ERs at cost of $5.3

million

- Or $3.50 per tonne CO2e - PCF purchase planned for 2004-

2008- Replacement CERs planned for

2008-2012- PCF purchase enables Sponsor

to secure $4.9 million loan to enable planting

Brazil Biomass/Pig Iron Project

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LoanDisbursementPCF Payments

LoanAmortization

ER payments are used to amortize commercial loan.

PCF Emissions Reduction Purchase Options

  OPTION 1 OPTION 2

  2002-2008 2002-2012

Sequestration ERs 1,300,402 1,300,402

Carbonization ERs 213,884 274,389

Industrial ERs   1,239,897

TOTAL ERs 1,514,286 1,514,286

$3.50 per tonne CO2e

OPTION 1: PCF Emissions Reduction Purchase

Carbonization and Industrial CERs Assuming Set-aside

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Carbonization Sequestration Industrial

Carbonization and Industrial CERs Replace Sequestration RMUs

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OPTION 2: PCF Emissions Reduction Purchase

• Allocation of Kyoto Protocol Risk

- Brazil has ratified Protocol

- Seller covers eligibility risk of sequestration reductions with obligation to substitute with Carbonization and Industrial ERs

- Host Country to issue Letter of Approval within 180 days of entry into force

Emission Reduction Purchase Agreement

Management of Project Performance Risk

• Market—ERPA paying on delivery of early sequestration ERs and carbonization CERs makes project feasible (early cash flow).

• Environmental-- Sponsor to maintain quality assurance program, continue to qualify for forestry certification, and operate in conformance with local environmental regulations and World Bank safeguard policies

• Social--sponsor to maintain certification for sound labor practices

Conditions of Default and Remedies

Kyoto

• Failure to secure and plant land that was pasture in 1989

Environmental and Social

• Failure to: - maintain FSC certification and

certify new land - maintain Abrinq certification

- comply with MP, permits, environmental and social law