As discussed earlier, project risks and financing prices are positively correlated. Thus factors that reduce the overall project risks will automatically reduce the price for project finance. This is what carbon finance can possibly do. We now look at the main identified risk mitigants commonly attributed to carbon rights in a project. Some of these carbon right characteristics and different roles will be further analyzed in the subsequent case-study discussion.

• ERPAs are long-term contracts denominated in hard currency. They work as a natural hedge for foreign exchange risk, and reduce the lender’s exposure to local currency depreciation. This specific risk mitigation is extremely relevant for projects which operate in domestic markets and do not have access to the cheaper international loans (i. e. sources of hard currency revenue streams can increase the interest of investors and banks to participate in a project).

• Lenders who finance projects based on the production and sale of the borrower’s commodities are also bearing the risk of fluctuation in the price of these goods (i. e. the same amount of goods may not cover the entire loan if the price of these goods drops). Therefore, while there is no price fluctuation for the emission reductions in the ERPAs, this can assure a constant and predictable contract value potentially able to be used as guarantee or debt-service repayment to the lender.

• Lenders are extremely concerned about the creditworthiness of the borrower’s clients, who will ultimately generate the revenue streams of the borrower. The ability to provide creditworthy off-takers from a project decreases therefore some of the project-related risks. In this respect, the World Bank is considered a low risk buyer by most lenders.

• Lenders may attribute a large portion of their overall risk evaluation to the borrower’s local government and actions that may hinder or prevent a loan repayment in hard currency (i. e. local currency convertibility to hard currency and transfer overseas), as well as their confiscation and nationalization of goods, and expropriation of assets, which threaten the sponsor’s capacity to produce and export goods. The payment for carbon rights directly into the lender’s account eliminates currency risk. Also, the existence of a government letter of approval (LoA) requested at an early stage in the process minimizes the risk of subsequent interference by the borrower’s government with the generation and remission of emission reductions to buyers.