Another carbon finance project serves as a good example of how carbon finance can play an instrumental role as a key financing tool. The NovaGerar Landfill Project consists of a sanitary landfill site being developed in southern Brazil, in which the sponsors aim to flare the methane generated on site and generate electricity from its combustion. However, as in the Plantar case, the project sponsors did not have up-front capital to invest in the required equipment.

The project sponsors could have tried to obtain a bank loan using the power purchase agreement (PPA) from the sale of energy to the grid as collateral. However, since the energy sector in Brazil has been facing serious regulatory problems since 2000, energy distributors are highly reluctant to commit themselves through long­term PPAs. Since the project’s cash income was risky, its whole viability was doubtful and the project would probably have struggled to obtain financing for the necessary investment.

However, due to the emission reductions generated by the project and the World Bank’s commitment to acquire all the emission reductions generated until 2012
(as trustee of the Netherlands Clean Development Mechanism Facility — NCDMF) the sponsor’s supplier (i. e. a British producer and operator of flaring and energy systems) agreed to lease their equipment to the sponsor using the emission reductions income as annual payments on the lease. Therefore, the emission reductions allowed the equipment and technology supplier to provide the supplier’s credit facility necessary for the project’s implementation.

The high content of carbon dioxide equivalents in the methane generated by landfills resulted in an incremental project Internal Rate of Return of almost 25 per cent, exclusively based on the revenue streams from emission reduction. Due to the high volume of greenhouse gas emission reductions generated by the project, the carbon component not only allows for the full recovery of the supplier’s investment in the flaring system, but it can also compensate potential losses in the electricity generation cash flow. The supplier agreed with the project sponsor to be paid through a percentage of the cash income from the emission reductions. The agreement between the parties has the same period as the ERPA and also requires the emission reductions payments to be made directly in the supplier’s account in the United Kingdom, with a financial structure similar to that described in Figure 13.2.

The same sponsor is now being approached and has advanced negotiations with another international bank which may provide working capital resources for this project, using the revenues from the remaining emission reductions (i. e. the emission reductions not committed for the lease payment) as a loan repayment quite similar to the Plantar deal.