u.s. EP;
Coalbed Methane
        Coal Mine Methane (CMM)
        Finance Guide
U.S. Enyiron'menfal Protection Agency
July 2009  '


           Coal  Mine  Methane (CMM)
                      Finance Guide
                      United States Environmental Protection Agency
                           Office of Air and Radiation
                          1200 Pennsylvania Avenue, NW
                            Washington, DC 20460

                                July 2009
NOTE: Names of companies and/or organizations mentioned herein are provided for the sake of illustration and should not be interpreted or perceived as a
                   U.S. EPA endorsement or recommendation of their services or activities.

This report was prepared by Eastern Research Group, Inc. (ERG) and its subcontractor,
Rudo International Advisors, under EPA contract EP-W-07-067. Principle contributing
       authors were Brooke Leigh Robel (ERG) and Dianne S. Rudo (Rudo).

                                                         TABLE  OF CONTENTS
  Why Target Methane?	2
  Sources of CMM	2
  Recovery and Use of CMM	2
  CMM Project Market	2
  CMM Project Development	3
  CMM Project Feasibility	3
  CMM Project Revenue Streams	5
  CMM Project Costs	5
  Assessing Financial Feasibility	6
  CMM Project Risks	6
  Mine Operation Risks	6
  Equity Investment	8
  Carbon Financing	8

  Loan Guarantees	13
  Political Risk and Credit Insurance	13





Global methane emissions from the coal-mining sector can be
reduced through recovery and utilization projects that collect
methane gas from coal mines and use it productively to gener-
ate electricity or to provide fuel to households and industry.
Often, the critical barrier to developing such coal mine methane
(CMM) projects is securing financing.

The U.S. Environmental Protection Agency's (U.S. EPA's) Coalbed
Methane Outreach Program (CMOP) is a voluntary program with
a goal of reducing methane emissions from coal mining activi-
ties. Our mission is to promote the profitable recovery and utili-
zation of CMM, a potent greenhouse gas (GHG) that contributes
to climate change if emitted to the atmosphere. When collected
and used for energy, CMM is a valuable fuel source.

CMOP estimates that more than 220 CMM projects are already
in operation around the world. Many more project opportunities
exist, especially in emerging market countries. Several factors
have prompted the resurgent interest in CMM projects around
the world. First, the steep growth in global energy demand
has catalyzed the search for new, unconventional sources of
natural gas and  power. Second, programs such as the Kyoto
Protocol's Clean Development Mechanism (COM) and Joint
Implementation (Jl) have created financial incentives to develop
projects that reduce GHG emissions. Third, multinational collab-
orative initiatives such as the Methane to Markets Partnership
(www.methanetomarkets.org) have focused on overcoming
the policy, regulatory, legal, and technical barriers that inhibit
project development.

Many funding and investment sources emphasize sustainable
development, environmental protection, and climate change
mitigation as important components of projects that they
finance. CMM projects support all of these objectives. CMOP
has developed this guide for project developers and investors
who are interested in pursuing CMM project opportunities,
particularly in emerging market countries. While most of the
project and cost information described in the following pages is
U.S.-based, there are numerous global opportunities for CMM
project development.

This guide summarizes the market potential for CMM projects
(e.g., sources/uses of CMM), project economics, types of financ-
ing, and risk mitigation. Particular attention  has been paid to
the emerging  markets of carbon credits as potential funding for
CMM projects.

                                                                             OVERVIEW OF METHANE
                                                                    CAPTURE  AND USE PROJECTS
Why Target Methane?
Methane, one of the principal GHGs, is second only to carbon
dioxide (C02) in its contribution to climate change. Globally, it
accounts for approximately 15 percent of global total GHGs.1
Methane is a potent GHG that is more than 20 times more ef-
fective in trapping heat than  a ton of C02 on a  pound-for-pound
basis over  100 years. Global  average atmospheric methane con-
centrations have more than doubled—from approximately 700
to 1,774 parts per billion by volume—over the time period of
1750 to 200B.2 After nearly a decade of stabilized  levels, global
methane emissions  rose by 27 million tons in 2007.3

Sources of CMM

Coal mines are a  primary source of methane, responsible for
approximately 6 percent of estimated global anthropogenic
methane emissions  in 200B.4 Methane and coal are formed
together during the conversion of vegetation into coal. CMM
refers  to methane released from the coal and surrounding rock
strata  due  to mining activities. In underground mines, it can cre-
ate an explosive hazard to coal miners, so it is removed through
ventilation systems. In some  instances, it is necessary to supple-
ment the ventilation with a degasification system to remove
methane from the mine. The  schematic (next page) illustrates
how methane may be removed from longwall mines through
the ventilation system and a  combination of gob wells, pre-mine
drainage wells, and  in-mine boreholes.

Recovery and Use of  CMM

Specific  CMM end uses depend on the gas quality, especially the
concentration of methane and the presence of other contami-
nants. Worldwide, CMM is  most often used for  power genera-
tion, district heating, boiler fuel, and town gas,  or it is sold to
natural gas pipeline systems. Other uses of CMM include the
  U.S. EPA. Global Anthropogenic Non-C02 Greenhouse Gas Emissions: 1990-
  2020. June 2006. www.epa.gov/climatechange/economics/downloads/
  Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment
  Report: Climate Change 2007, Working Group I Report "The Physical
  Science Basis," November 17,2007. www.ipcc.ch/pdf/assessment-report/
  National Oceanic and AtmosphericAdministration. "Greenhouse Gases,
  Carbon Dioxide And Methane, Rise Sharply In 2007." ScienceDaily. April  24,
  U.S. EPA, idem
    « Coal drying

    « Heat source for mine ventilation air

    • Supplemental fuel for mine boilers

    • Vehicle fuel as compressed or liquefied natural gas (LNG)

    • Manufacturing feedstock

    • Fuel source for fuel cells

    « Direct gas sales to industrial or other end users

CMM Project Market

There are more than 220 CMM projects worldwide in 13
countries that, in total, recover and use more than 3.8 billion
cubic meters of gas annually from active and abandoned coal
mines, thereby avoiding  54 million metric tons of carbon dioxide
equivalent (MtC02e) of GHG emissions each year. A comprehen-
sive list of global CMM projects can be found in the Methane to
Markets International Coal Mine Methane Projects Database at:

Globally, the greatest volume of CMM recovered and used is
from drainage (degasification) systems at underground coal
mines. Degasification systems are currently employed at some of
the most gassy coal mines in 14 countries. Technologies to re-
cover and harness dilute methane from mine ventilation systems
are also beginning to be employed in some parts of the world.
Several countries with declining coal production are effectively
capturing and using the  methane from their abandoned (closed)
underground coal mines.

Project Opportunities

Drained gas is the methane captured or recovered from degasifi-
cation systems at underground coal mines. Pre-mine drainage
produces very high-quality gas with methane concentrations
that can exceed 90 percent. Gob wells generally produce lower
quality gas due to entrained air and other impurities. Methane
concentration in gob gas varies widely, from less than 25 per-
cent  in some Chinese mines to 80 percent in some U.S. mines,
depending on how carefully air intrusion is controlled. Currently,
in the United States, 24  underground coal mines employ de-
gasification systems, liberating more than 36 billion cubic feet
(Bcf) annually (more than 1  billion cubic meters) in 2007. Of this
amount, about 32 Bcf are recovered and utilized for energy.

                                    Removal of CMM From Longwall Mines

Globally, most drained gas is used in internal combustion
engines or turbines to generate power. China and Australia, for
example, have projects of this type. Other uses for drained gas
include town gas, industrial uses, coal drying, and vehicle fuel.

Ventilation air methane (VAM) is the very dilute methane—typi-
cally 1 percent or less—released from underground mine venti-
lation shafts. VAM represents more than half of all coal mining
emissions in the United States and worldwide. With a few
exceptions (see case studies on page 12), it is simply released to
the atmosphere; however, it is technically possible to convert the
dilute methane in ventilation air to useful energy. The economic
feasibility of these projects on  a commercial scale is currently
being demonstrated in Australia, and projects are in operation
or under development in China and the United States.

Even though active  mining no longer occurs, abandoned or closed
underground coal mines can still produce significant methane
emissions (known as abandoned mine methane [AMM]) from
diffuse vents, fissures, or boreholes. This methane can be deliber-
ately extracted and  used to generate power or for other end uses.
There are several thousand abandoned coal mines in the United
States. Of these, U.S. EPA has identified some 400 abandoned
mines that are considered "gassy" and has developed profiles
for abandoned mines that might be good candidates for project
development (see www.epa.gov/cmop/docs/profiles_2008_final.
pdf). Abandoned coal mines are important sources of methane
for power generation projects in several countries, including
Germany, Poland, and the United Kingdom.
CMM Project Development

Project development involves multiple steps, ranging from
evaluating project economics to determining how to mitigate
multiple project risks (see flow chart next page). Typical project
participants include the mine operator, the project developer,
regulatory agencies, and the end user or energy buyer. Some
CMM projects might be pursued as "turnkey"  operations, where
a supplier/vendor constructs and installs the necessary equip-
ment and maintains responsibility for its operating performance.
Detailed descriptions of potential project participants can be
found in Appendix A.

For the purpose of this guide, we focus on assessing the initial
project economics (e.g., costs) and securing financing for CMM

CMM Project Feasibility

The demonstration of a CMM project's technical viability plays
an important role in securing financing. The project's viability
can be demonstrated through: pre-feasibility studies (PFS);
full-scale, comprehensive feasibility studies (FS); and technol-
ogy demonstrations. These analyses are typically funded by the
project developer or investors, although some  government agen-
cies fund these studies, including U.S. Trade and Development
Agency (USTDA), U.S. Agency for International Development
(USAID), U.S. EPA, Australia's Commonwealth  Scientific and
Industrial Research Organisation (CSIRO), and  Australia's na-
tional government.5
                                                              Formerly Australia Greenhouse Office, now Department of Climate Change.

      CMM Project Development Activities
Evaluate preliminary
  project feasibility
  and economics
   Conduct initial
Perform data
Compile preliminary
Develop drilling plan
based on core data
    Identify gas
treatment processes
 Develop gathering
 designs based on
  drilling plan and
                        Compile preliminary
                         Identify method(s)
                            for handling
                           produced fluids
Develop a project
                         Identify and contract
                          with energy buyer
                           Conduct public
                         relations to educate
                           the community

                              Obtain the
                          necessary permits
                           Practice environ-
                         mental stewardship
                             Protect assets and
                             mitigate identified
                                project risks
Pre-Feasibility Studies and Feasibility Studies
One of the first steps in project development involves perform-
ing a PFS to evaluate potential project options. The PFS is a
first-order analysis of possible project configurations includ-
ing location, size, technology to be employed, market(s) to be
served, costs, and revenues. It identifies one or more options
that appear to be technically feasible and economically at-
tractive. Typically, the PFS will be conducted at a level of detail
adequate to broadly identify financing requirements and consid-
ers the potential capital structure, taking into account expected
project cash flows under various scenarios. If the PFS indicates
a potentially viable project, a more in-depth analysis, such as a
comprehensive FS, would be conducted.

A comprehensive FS is a rigorous, detailed assessment of the
technical and economic viability of a CMM project at a specific
site or group  of sites. The objective is to perform due diligence
to determine if financial investment in the project is warranted,
given the project risks. A comprehensive FS considers the finan-
cial as well as technical, legal, regulatory, and environmental
elements of the potential project. Key elements of a comprehen-
sive FS can be found in Appendix B.

Logistical, time, and financial costs are quite high for an FS at a
coal mine, and several site visits and detailed information col-
lection from mine site personnel  are required. Such a study can
typically take several months or a year to complete.

U.S. government funding to support the PFS/FS efforts for CMM
projects (see examples in Appendix B) may be available to project
developers depending on the location and nature of the project.

                                                                     CMM  PROJECT  ECONOMICS
This section identifies the primary revenue streams and costs for
typical CMM projects, as well as some of the risks associated
with these projects.

CMM Project Revenue Streams

    •  Revenues: CMM projects might generate revenues
      through the sale of gas or electricity and/or realize cost
      savings from avoided energy costs.

    •  Carbon Credits (e.g., GHG offsets, emission reductions):
      CMM projects capture methane that would otherwise
      have been vented into the atmosphere, and put it to use,
      thus reducing GHG emissions.These emission reductions, if
      properly verified, might be considered GHG offsets and sold
      as "carbon credits." The financing opportunities associated
      with carbon credits are discussed further on page 8.

    •  Tax Credits: In certain jurisdictions, tax credits might be
      available for the development or recovery of CMM projects.6

CMM Project Costs
There  are three general categories of costs associated with
CMM  projects.

Capital Costs

Capital costs include costs associated with the development,
construction, and financing of the project. Typical capital cost
components are listed in the table below.

The total capital costs of a simple CMM project to produce and
sell pipeline-quality gas are likely to  be several million dollars.
Projects involving enrichment, power production (electricity
generation),  or equipment conversion will be more expensive,
sometimes involving initial costs of more than $10 million even
with an existing gas recovery system.

Operating Expenses

A project's operating costs depend on the project's complexity
and the end product that is being  sold. Operating costs for gas
sales projects using high-quality gas from pre-mine drainage are
generally lower than gas sales  projects involving gas upgrade
or enrichment, which are, in  turn,  lower than  operating costs
for electricity generation projects.  Operating costs components

    • Personnel, maintenance, and operation of gas recovery

    « Annual operating costs for  compressors, water/gas
      separator, and equipment maintenance and insurance.

For  more project-specific information on capital and operating
costs, please see U.S. EPA's Coal Mine Methane Project Cash
Flow Model at: www.epa.gov/cmop/resources/cashflow_model.
html.This online model will be updated periodically to reflect
the  most current cost data. For more detailed information on
gas upgrade costs, see U.S. EPA's document Upgrading Coal
Mine Methane to Pipeline Quality (2008) at: www.epa.gov/

Royalties,  Fees, and Other Expenses
Royalties are assessed for the gas used by project developers who
are  not the owner of the gas  rights. On U.S. federal lands, the pre-
vailing royalty rate is 12.5 percent,  subject to individual  contract
negotiations. On private lands/leases, the royalty rate is  negotiated
and is typically within this range.
Capital Cost Component
Degasification system
Gas collection and gathering system
Gas processing system
Electricity generation
Offsite gas sales
Onsite gas use
Description of Activities and Equipment
Drill, install, and complete wells and boreholes, including water disposal
Blowers, compressors, lines
Separators, dehydrators
Gas turbines or 1C engines, generator sets, utility interconnections
Enrichment equipment, compressors, sales meter/gas analyzer, transmission
Conversion of mine boilers
  Please check with your legal and accounting advisors to determine if tax
  credits apply.

In absolute terms, the project development and up-front financing
costs are roughly the same irrespective of the size of the project;
in percentage terms, however, they are a much bigger burden
on smaller projects. There are a number of organizational  and
transactional costs associated with project development, which
might represent upwards of 25 to 30 percent of the total capital
costs.These costs include:

    • Conducting "due diligence" or examining and verifying
      the assertions and records of other project parties.

    • Performing system design, engineering, and economic

    • Negotiating and drafting legal documents and

    • Obtaining the necessary permits, licenses, and rights-of-
      way for pipelines or power lines.

Other significant non-operational expenses that are regularly
incurred include the following:

    • Taxes (federal, state).

    • Financing-related costs (including interest).

Assessing Financial  Feasibility

There are two standard and interrelated methods used to mea-
sure an investor's return on equity for assessing CMM project
financial feasibility:

    • Discounted Cash Flow Method: The sum of a project's
      net cash flows over  the project's life is discounted to the
      present (i.e., the net present value [NPV] of the project).
      The discount  rate used to make this calculation represents
      the investors' cost of capital. If a project's NPV is positive,
      then the project is deemed capable of yielding the inves-
      tor's minimum required return.

    • Internal Rate of Return: The internal  rate of return (IRR)
      on a project is the discount rate at which the NPV  of the
      project's net cash flow is zero. In other words, it is  the rate
      that equates the present value of future cash flows with
      the initial capital investment. A project's expected IRR can
      be compared with return rates on alternative investment

Sensitivity analysis should also be carried out to examine the
impact of risks on  project returns. Risks could include changes in
key financial variables, such as gas production or electricity prices.
As previously mentioned, CMOP has developed the Coal Mine
Methane Project Cash Flow Model, a Web-based cost-benefit
analysis tool to assist developers with estimating financial
scenarios associated with CMM projects. The online tool al-
lows users to enter mine-specific information including percent
methane of the drained gas, distance from drainage area to
onsite use, compressor/blower efficiencies, drainage well and
blower development costs, gas availability, project  lifetime, loan
terms and interest rate, and certified emission reduction (CER)
unit sale price. The model provides estimated outputs including
equity amount, IRR, and a cash flow analysis. The tool is avail-
able on the CMOP Web site at: www.epa.gov/cmop/resources/

CMM  Project Risks
Project risks change depending on the stage of the project:
development, construction,  or operation. The equity investor
generally bears the development risks of a project—those risks
associated with the developer's ability to complete the project
and receive project cash flows. In this case, the  developer/inves-
tor would be unable to recover "sunk" costs, such  as legal or
consulting fees incurred. Construction and operations risks might
also be associated with substantial losses. Associated  CMM
project risks are described in the exhibit on page 7.

Mine Operation Risks

Mine operators might encounter a separate  set of potential
risks than project developers and/or investors. Maintaining the
productivity and  profitability of their mining  operations are the
primary concerns of mine managers. Mine operators are also
concerned about potential risks that the  CMM project could
pose to their coal operations in terms of  safety  and flexibility,
as well as the risks of the project itself. Possible risks for mine
operations include:

    •  Interference with  mining operations. Coordinating  gas
      production and use with coal operations requires both
      detailed planning and great attention in  implementation,
      which could potentially distract from  or interfere with  coal
      production, or both.

    •  Reduction in mine planning flexibility. Mine  operators
      might be concerned that gas operations  will limit their
      ability to change plans  at a given  mine or to close  or
      sell a mine (e.g., contracts requiring delivery of specified
      amounts of gas over a given time  frame  could infringe on
      the ability to alter coal  mining operations).

                               Risks Associated With CMM Projects
          Project Development Risks
       Construction and Operations Risks
Inability to obtain agreements with mining company and
adjacent land owners.
Indications of marginal gas resource (such as gas quality,
rate of flow, and longevity).
Inability to negotiate energy sale agreements.
Inability to obtain permits.
Insufficient development
Inability to secure financing.
Construction cost overruns or delays in construction
Poor gas productivity (such as flow rate, reliability,
and quality).
Technological risk (poor system performance).
Market risk (drop in revenues due to price changes).
Contractual/legal problems with customers, mine owner/
operator, system suppliers, or regulatory agencies.
Mine closing or change in mining  plan, causing stranded

                                                                         CMM  PROJECT  FINANCING
 Appropriate sources of financing vary depending on the project.
 Project developers often manage their risk exposure by us-
 ing project financing, a financing technique used to raise debt
 financing on the basis of a project's projected cash flows. Project
 revenues might also include carbon financing, which could pro-
 vide a revenue stream based on mitigated carbon emissions.

 Equity Investment

 Lenders typically require that developers invest equity to dem-
 onstrate their confidence in the project's success and willingness
 to risk their own financial resources. While acceptable debt-to-
 equity ratios vary, project financing using project debt can be
 highly leveraged. The actual ratio preferred by lenders usually
 reflects the project's perceived risk as well as the borrower's
 financial stability. In practice, many CMM projects developed
 in the United States have  been financed through corporate
 resources rather than project-specific debt and equity.

 A wide variety of financial institutions or financiers provide debt
 or equity capital, or both (see examples at right). These entities
 vary in terms of their risk tolerance; some will accept project risk
 and others will not. Multilateral and bilateral funding institu-
 tions, such as the Asian Development Bank, the World Bank, and
 the Japan Bank for International Cooperation, have played a
 significant role in financing CMM projects. Appendix C provides
 a more complete overview of these and other project funding
 sources, the risk/return profiles of these institutions, the particu-
 lar investment areas in which they specialize, and the current
 status of the marketplace.

 An equity investment can  be made in a project itself (i.e., as
 in a project finance transaction) or in the company developing
 the project.  In the former case, the investor's return is solely a
 function of the project's financial performance. In the latter, the
 return is a function of the financial performance of all the com-
 pany's operations, rather than the project alone. Consequently,
 the investor must evaluate the company's strategy, its competi-
 tive advantages relative to other firms in its industry, and the
 quality of its management, in addition to the economics of the
 particular project.

 Equity investors can become involved in a project at any stage
 in the project  development process depending on their level
 of activity and  risk tolerance. In the early stages of project
           Examples of Project Funding Sources
        Commercial banks profit by lending money at higher
        interest rates than they pay on deposits. Banks might
        provide short-, medium-, and  long-term corporate
        and project finance loans at a margin or spread over
        a benchmark rate such as LIBOR.7

        Finance companies normally provide debt financing
        for projects and transactions, often financing projects
        in earlier stages than banks and investing in a wider
        range of industries. Most finance companies will
        not put up initial risk capital to fund project devel-
        opment, but they will provide  subordinated debt
        financing in exchange for increased lending  rates.

        Investment bankers provide a  wide variety of services
        that support raising financing. They provide advice
        on corporate and project financing alternatives,
        arrange debt and equity public offerings and private
        placements, and assist in transactions such as merg-
        ers, acquisitions, and divestitures.
development, there is a relatively high probability that the proj-
ect will never be implemented, so investors who fund the early
costs bear the most risk. Most equity investors will consider a
project only after technical and economic studies (such as FS)
show that the project is technically and financially viable, and
after important  contracts such as energy purchase/sale agree-
ments have been signed.

In  addition to the typical financial sources noted above, many
bilateral and multilateral organizations have funding available
for climate change-related programs or initiatives, and several
are currently engaged in projects to mitigate GHG emissions
(see selected examples in Appendix C).

Carbon Financing

Many CMM utilization projects can offer financial returns that
are sufficient on their own merits to attract traditional inves-
tors and lenders. For other projects, the sale of carbon credits
from GHG emission reductions may be required to make them
an attractive investment. In most cases, carbon credit revenues
 7 London Interbank Offered Rate, comparable to the U.S. Federal funds rate.


                                             Carbon Credit Terminology
        Carbon Financial Instruments (CFIs): The Chicago Climate Exchange (CCX) unit of trade, which can be issued as
        allowance-based or offset credits. One CFI represents 100 tC02e.

        Certified Emission Reductions (CERs). A unit of GHG emission reductions issued pursuant to the Clean
        Development Mechanism of the Kyoto Protocol, and measured in tC02e. One CER represents a reduction of GHG
        emissions of one tC02e.

        Emission Reduction Units (ERUs). A unit of emission reductions issued pursuant to Joint Implementation. This unit is
        equal to one tC02e.

        European Union Allowances (EUAs)\~lhe allowances in use under the European Union Emissions Trading Scheme
        (EU ETS). An EUA unit is equal to one tC02e.

        Renewable Energy Certificates (RECs,):Tradable environmental commodities in the United States which represent
        proof that 1 megawatt-hour (MWh) of electricity was generated from an eligible renewable energy resource.

        Verified Emissions Reductions (VERs). A unit of GHG emission reductions that has been verified by an independent
        auditor and can be traded on the voluntary market.
Source: World Bank, Ecosystem Marketplace and New Carbon Finance.

alone are inadequate to provide the level of funding necessary
for project planning and implementation. Carbon credits are
particularly useful for improving the cash flow of projects that
are otherwise economically marginal and, therefore, unattractive
to investors.

The emerging carbon credits market consists of three main types:

   • Regulatory (Compliance) Carbon Markets: Cap-and-trade
      systems under regulatory regimes, such as the Kyoto
      Protocol (through the Clean Development Mechanism or
      the Joint Implementation scheme), the European Union
      Emissions Trading System (EU ETS), or the Australia New
      South Wales (NSW) trading scheme.

   • Voluntary Carbon Exchanges: Voluntary yet legally
      binding, membership-based cap-and-trade systems, for
      example the Chicago Climate Exchange.

   • Voluntary Over-the-Counter (OTC) Markets: Project-based
      carbon offsets purchased exclusive of a cap-and-trade
      system, usually through  negotiated bilateral agreements.

Regulated Carbon  Markets

The Kyoto Protocol is a  legally binding agreement under which
nearly 200 industrialized countries have agreed to reduce col-
lective GHG emissions to an average of 5 percent below 1990
emissions levels by 2012. To date, the regulated overseas GHG
markets that have evolved under the Kyoto Protocol are flexible
cap-and-trade mechanisms that enable developed countries and
countries with economies in transition (EITs) to purchase carbon
credits from other developed countries and EITs to fulfill emis-
sion reductions commitments including:
    Joint Implementation (Jl): A project-based transaction
    system under the Kyoto Protocol to allow emitters in de-
    veloped countries (i.e., "Annex 1" countries) to purchase
    carbon credits from GHG reduction projects implemented
    in another developed country or EITs.

    Clean Development Mechanism  (CDM):A project-based
    transaction system under the Kyoto Protocol, through
    which developed countries can accrue carbon  credits by
    financing GHG reduction projects in developing countries.
   Case Studies: Leveraging Carbon Funds for CMM
                  Projects in China
Two CDM utilization projects are underway in the coal min-
ing concession area of the Yangquan Coal Industry (Group)
Company Limited (YCIG) in  China.

    •  CMM Capture and Use for Power Generation: This
      project installed 90 MW of gas engines for power
      generation from CMM.

    •  Using CMM for Fuelling a Furnace System:This
      project represents the first CMM-fuelled aluminum
      hydroxide roasting furnace system in China and
      perhaps the world. The furnace project is expected to
      reduce methane emissions by nearly 7 MtC02e over
      seven years (2007-2013).

Funding for both projects was secured through the
European Carbon Fund (ECF), which contributes to the
financing of projects that help fight climate change  by
reducing GHG emissions around the world.

           COM  Projects  by Source, 2007
            Jl Projects by Source, 2007
                       Other 1%
                                    Fugitive 3%
                                                                                 Hydro 3%
 Source: World Bank State and Trends of the Carbon Market 2008

 There are several distinct emissions trading systems that have
 been established either within the framework of the Kyoto
 Protocol or entirely outside of it. These allowance-based transac-
 tion systems set a regulatory cap or limit on total carbon emis-
 sions and allow trading within that cap to meet the established
 limits. Some of the caps can be met through the purchase of
 offsets. These systems establish legally-enforceable limits and
 are enforceable in their own right. Examples include the EU ETS
 and Australia's NSW Greenhouse Gas Reduction (previously
 "Abatement") Scheme (GGAS).

 Recent  Kyoto Protocol carbon market activity is reflected in the
 pie charts on the previous  page, with CMM representing 5 and
 27 percent in COM and Jl projects,  respectively.

 In the United States, 10  East Coast states have developed the
 Regional Greenhouse Gas  Initiative (RGGI, www.rggi.org), a
 regulated carbon market, to reduce C02 emissions from power
 plants.8 Currently, neither the RGGI program nor other regional
 and state-level programs underway in the United States, such
 as the Oregon Standard and the Western Climate Initiative,
 explicitly address CMM emissions reductions, but they may in
 the future.9
  Connecticut, Delaware, Maryland, Massachusetts, Maine, New Hampshire,
  New Jersey, New York, Rhode Island, and Vermont participate in RGGI.
  For a complete summary, see "Forging a Frontier: State of the Voluntary
  Carbon Markets 2008" at: www.ecosystemmarketplace.com/documents/
  cms_documents/2008_StateofVolunta ryCarbonMarket2.pdf.
                                                                                                           Renewbles 1%

Source: World Bank State and Trends of the Carbon Market 2008
Voluntary Carbon Markets

Voluntary carbon markets can be divided into two distinct com-
ponents: carbon exchanges (e.g., CCX) and OTC markets.

    • The Chicago Climate Exchange (CCX) was launched in
      2003 and describes itself as "the world's first and North
      America's only active voluntary, legally binding integrated
      trading system to reduce emissions of all six major GHGs
      with offset projects worldwide." CCX Members (full,
      associate, and participant) represent all sectors of the
      global economy. They make a voluntary but legally binding
      commitment to meet annual GHG emission reduction
      targets. Those who reduce below those targets have
      surplus allowances to sell or bank; those who emit above
      the targets comply with their commitment by purchasing
      CFIs. Two U.S. coal mining companies have joined the CCX
      as members and at least one CMM project developer has
      joined as an offset provider.

    • Over-the-Counter (OTC) carbon markets are not driven
      by any sort of emissions cap and do not operate via a
      formal exchange (e.g., trading). Buyers of carbon credits
      are typically motivated by environmental philanthropy,
      public relations (demonstrating sustainability), or pend-
      ing regulations. OTC sellers include project developers,
      aggregators/wholesalers,  retailers, and brokers.

Overall Value of Global Carbon Markets
Chicago Climate Exchange (CCX)
Over-the-Counter (OTC) Carbon Markets
Total Voluntary Markets
European Union Emissions Trading Scheme (EU ETS)
Primary Clean Development Mechanism (COM)10
Secondary Clean Development Mechanism (COM)
Joint Implementation (Jl)
Australia New South Wales (NSW) Trading Scheme
Total Regulated Markets
Total Global Market
Volume (MtC02e)
Value (USS million)
Source: New Carbon Finance, Ecosystem Marketplace, World Bank
While the regulated or compliance markets currently outperform
the voluntary markets, 2006 and 2007 trading volumes and
values suggest that the OTC market is gaining momentum (see

Challenges of Carbon Financing

There are several issues associated with securing carbon credits
for CMM projects. Some of these challenges or barriers include:

    • Lack of standardized methodologies. Because there is no
      one universal carbon trading program, GHG reduction
      projects are  subject to different standards. For example:

       - COM and Jl projects are subject to the require-
         ments of Approved Consolidated Methodologies
         (e.g., ACM0008). These methodologies require
         that the project demonstrate its "additional-
         ity" or emissions reductions in excess of those
         that would otherwise occur under a baseline
         scenario. http://cdm.unfccc.int/methodologies/DB/
         UJW6WTG49X4VYQZK8U4TC8YWY51U1 Y/view.html

       - Voluntary carbon markets each have their own stan-
         dards. For example:

           o CCX Offset Project Registration, Verification &
             Crediting Procedure: www.chicagoclimatex.com/
     o International Organization for Standardization
       (ISO)14064 Standards:
       Part 1: www.iso.org/iso/catalogue_
       Part 2:www.iso.org/iso/catalogue_
       Part 3: www.iso.org/iso/

     o Voluntary Carbon Standard (VCS): www.v-c-s.org/

Ownership of credits. In order to buy or sell credits, proof
of ownership must be demonstrated and legally transferred
to the other party following the transaction. Under most
circumstances, credit ownership will be recorded under the
appropriate trading mechanism (e.g., COM, EU ETS, CCX)
but in the absence of clear reporting (i.e., OTC markets),
a contract specifying ownership of the  resultant carbon
credits should be obtained.

Process for validating/verifying credits. The validation of
carbon credits has become increasingly important. This also
requires having an acceptable methodology and third-party
verifiers. These mechanisms allow the market  to impose
some discipline by ensuring that credits are valid.
10 Primary COM transactions refer to the first sale of CERs from the project
  owner to the buyer. Secondary COM transactions refer to subsequent sales
  of primary CERs.

        - Regulated markets: There have been substantial
          delays in validating and verifying COM projects, in
          particular.11 These delays, in turn, slow the issuance
          of CERs, which might affect project financing and

        - Voluntary markets: Third-party verification has become
          prominent. More than 87 percent of credits in the
          OTC voluntary markets in 2007 were verified by a
          third party.12

       Post-2012 uncertainty. In the absence of a global trading
       regime, it is unclear how the carbon credit markets might
       fair in the post-Kyoto period (i.e., after 2012). Financial
       institutions might not be willing to invest in projects for
       which there is limited or no future liquidity. However,
       national governments, multilateral funds, and/or other
       investors with mandates for alternative investments (e.g.,
       venture capital, hedge funds) might continue to pursue
       carbon credits beyond 2012 if certain guarantees can be
       secured (e.g., future "market price," forward contracts).
 11 World Bank's State and Trends of the Carbon Market 2008
 12 Ecosystem Marketplace and New Carbon Finance, 2008
                   VAM Mitigation: Cutting Edge Technologies Convert Methane Emissions to Income
  In September 2007, the world's first commercial-scale power plant using VAM as the primary fuel went into full operation at the
  West Cliff Colliery of BMP Billiton in Australia. The plant generates 6 megawatts (MW) of electricity and reduces GHG emissions
  by 250,000 tonnes of carbon dioxide equivalent (tC02e) each year, thereby allowing BMP  Billiton to convert the reductions into
  corresponding carbon credits. Use of this extremely lean fuel is made possible by a patented combination of emission control and
  steam cycle technologies developed by MEGTEC Systems, a Methane to Markets Project Network member. By using its flameless
  VOCSIDIZER® regenerative thermal  oxidizer (RTO) as an energy source, MEGTEC generates high grade, super-heated steam from
  a fuel with 0.9 percent methane content. This project is the culmination of technology demonstrations conducted in Australia and
  the United Kingdom. The VOCSIDIZER® has also been demonstrated in the United States at a CONSOL Energy mine. The West Cliff
  facility received financial assistance from the Australian Greenhouse Office Greenhouse Abatement  Programme.

  Biothermica Technologies Inc., a Methane to Markets Project Network member, announced in April  2009 that its VAMOX™ CMM
  abatement system is fully operational at Jim Walter Resources' mine no. 4 in Brookwood,  Alabama.  For the first time in the United
  States, VAM is being destroyed at an active coal mine, all the while generating bankable carbon credits. Biothermica will use
  its VAMOX™ RTO to mitigate VAM as it is released to the atmosphere, creating income by selling carbon credits from the VAM
  destruction. Approved by the U.S. Mine Safety & Health Administration (MSHA), this medium-size unit will achieve GHG emission
  reductions amounting to approximately 40,000 tC02e annually, the same as removing 8,000 cars from the  road. Biothermica
  plans to develop additional VAM  oxidation projects around the world under various GHG  reduction  schemes.

                                                                        RISK  MITIGATION  SUPPORT
Raising debt and equity to finance projects in developing
countries can be challenging. There are a number of risk mitiga-
tion instruments that facilitate raising private capital in these
markets. These instruments are designed to transfer certain
defined risks from lenders and equity investors to creditworthy
third parties such as guarantors or insures. Multilateral insti-
tutions (such as the World Bank, Asian Development Bank,
Inter-American Bank), export credit agencies (e.g., U.S. Export-
Import Bank, Japan Bank for International Cooperation, Export
Development Canada), and political risk insurers (e.g., Overseas
Private Investment Corporation, Nippon Export and Investment
Insurance, United Kingdom's Export Credit Guarantee
Department) provide different types of risk mitigation support.
The CMM project sponsor that possesses a thorough knowledge
of these instruments and practices will be better prepared to
negotiate with potential financiers and, ultimately, is more likely
to succeed in attracting capital.

Loan Guarantees
In order to reduce political risk exposure associated with cross
border lending, banks or other lending institutions might require
a loan guarantee to ensure timely repayment. A loan guaran-
tee is a promise of an acceptable, creditworthy party to repay
all or part of the loan in the event (or under certain specified
circumstances) that the borrower does not or is unable to  repay
the loan.  In limited recourse project finance, project developers
rarely provide guarantees of loan repayment, although  partial
guarantees under specified circumstances (such as construction
completion) do occur. Loan guarantees are typically provided by
national governments interested in catalyzing economic activity
in their areas (see text box). Depending on the credit quality
of the guarantor, these guarantees reduce the loan default risk
which in turn reduces the interest rate on the loan.

Some financial institutions have standardized loan applica-
tion forms that potential borrowers complete. Most, if not all,
institutions will expect the borrower to present a  business plan
(i.e.,  project documents and technical studies). Appendix E
provides a checklist of the typical lending terms and conditions
that financial institutions might use in evaluating CMM projects.
This document should provide the CMM project developer with
a good sense of the information required before approaching  a
financial institution.
                Risk Reduction Assistance
  Certain institutions offer financial assistance to reduce the
  risks that domestic companies might face when exporting
  their products or services abroad.

      • The Export-Import Bank of the United States
        (Ex-lm Bank) provides long-term loans and guar-
        antees, working capital guarantees, and political risk
        insurance tied to the sale of U.S. goods and services.
        It also offers certain special financial  terms to com-
        panies that export environmental goods to foreign
        companies that are unable to obtain  traditional
        financial  support, www.exim.gov

      • The Overseas Private Investment Corporation
        (OPIC) helps U.S. businesses invest overseas by of-
        fering support to mitigate these  risks. OPIC provides
        a range of traditional finance resources, such as
        loans and guarantees. In addition, it offers political
        risk insurance products for cross-border lending or
        investing in emerging markets.www.opic.gov

      • As a member of the World Bank Group, the
        Multilateral  Investment Guarantee Agency
        (MIGA) promotes foreign direct investment into
        developing countries to help support economic
        growth, reduce poverty, and improve people's lives.
        MIGA addresses  investment concerns and political
        risk perceptions by providing political risk insurance,
        technical assistance, and dispute mediation services
        to help remove obstacles.www.miga.org
Political Risk and Credit Insurance

Risk mitigation, in the form of political risk insurance or credit in-
surance, is offered by public (multilateral and bilateral development
institutions - see text box above) and private insurance companies.
It is often used in international project finance transactions and is
available to both  lenders and equity investors. Political risk insur-
ance typically covers the following risks: inconvertibility and trans-
ferability of foreign currency, expropriation and nationalization,
political violence and breach of contract. Credit insurance covers
losses in the event of a  debt service default regardless of the cause
(i.e., covering both political and commercial risks) and is often used
when a government entity is the off-taker of the product.

 A host of finance and revenue sources are available to CMM
 project developers worldwide. By tapping the appropriate sourc-
 es, funding can be secured for all phases of the project develop-
 ment cycle, from prefeasibility studies, to technical specification
 development, to pilot/demonstration studies and full implemen-
 tation. The finance organizations and opportunities outlined
 in this guide contribute to the project development process in
 several ways. Some provide risk reduction products to mitigate a
 technology or service provider's concerns about entering foreign
 markets. Others provide lending and related financial assistance
 for projects that offer environmental benefits and contribute
 to sustainable  development and poverty alleviation. Still  oth-
 ers purchase carbon credits and thereby could supplement a
 project's cash flow. The preceding examples demonstrate that by
 mixing equity investment with financing available from a variety
 of sources, project developers can support even the  largest
 CMM development projects.

                                                                                  APPENDIX A:  CMM
                                                                            PROJECT  PARTICIPANTS
                                                    Construction and Operations Risks
Responsible for conceptualizing, assessing, developing, and implementing a project. Identifies project
opportunities and then completes or delegates project development tasks. Leads the project through all
phases, which include project development, financing, construction, and operation. May be independent
of, a partner with, or the same as, the mine operator.
Mine Operator
A critical participant and at a minimum, supplies the site and fuel to the project. Projects using coal
mine methane (CMM) are located at the host coal company's mine, typically employing the mine's de-
gasification system. Projects might take place prior, during or after mining, depending on the technology
employed. Often plays a much more extensive role. At most existing CMM projects in the United States,
also functions as project developer.
Regulatory Agencies
Provide permits and approvals in the United States, including: U.S. Mine Safety and Health
Administration (the mine operator must file a degasification plan as an amendment to the mine ventila-
tion and dust control plan); state mining authority; state oil and gas agency; and state environmental
or natural resources department. On U.S. federal lands, the Bureau of Land Management deals with
coal/gas leases, and the U.S. Forest Service deals with surface access rights on restricted lands (e.g.,
Inventoried Roadless Areas). The developer might also need permits for rights of encroachment on the
land owner's property and for potential environmental impacts related to pipeline rights-of-way, water
treatment, and combustion related to gas processing. Most permits  require that the developer file
detailed project plans, designs for underground and surface equipment, and land surveys.
System Supplier
Provides the systems that convert raw gas to pipeline quality gas or electric and thermal energy that
might require more than the off-the-shelf compressors, pipes, and meters that the mine operator or
developer can install. The viability of a project depends on the system and its supplier's guarantees and
therefore is considered a major project participant. Vendors will often sell a system on a "turnkey basis,"
where the vendor is responsible for the installation and performance of the entire system. Often investors
will insist that the system supplier retain system ownership  until rigorous performance testing is complet-
ed. Suppliers may extend  their warranties through the project life by means of a maintenance contract.
Project Contractor
Responsible for the design, procurement, construction, and/or installation of CMM project equipment.
Either possesses all necessary capabilities in-house, or will enter into subcontracting arrangement
with other firms. Some contractors, in conjunction with a system supplier, will provide a project facil-
ity on a guaranteed turnkey basis, assuming responsibility for the project's completion and operational
Project Operator
Responsible for cost-effective delivery of the energy product throughout the life of the project. Performs
management functions, as well as the operation and maintenance (O&M) of the system, typically on a
contractual basis with the project. Can be a separate third-party firm under contract to the project own-
ers, or one of the other participants. Major maintenance is usually the function of the system supplier.
Energy Product
Provides the CMM project's revenues. Buyers include electric utilities, local gas distribution companies,
gas wholesalers/blenders, major gas pipelines,  and local fuel users (e.g., boilers, kilns). The mine itself
could take delivery of CMM project electricity, thermal  energy, or raw gas to power onsite equipment. Ir
order to obtain financing for the project, the project must contract with the energy product buyer for a
period not less than the term of the senior debt, plus a 2-3 year "tail."
Fill multiple roles, from arranging to providing the financing for the project.

                                                                       APPENDIX B:  KEY  ELEMENTS OF
                                                                         FEASIBILITY  STUDIES AND U.S.
                                                                                   GOVERNMENT SUPPORT
 A comprehensive feasibility study includes the following key

    • A summary of mine characteristics based on information
      from the pre-feasibility study (PFS) and site visit(s).

    • A detailed assessment of available gas resources based
      on historical gas emissions from the mine, data on in situ
      gas content, and plans for future mine activities. This ele-
      ment might include pilot well tests.

    • A detailed assessment of degasification technologies and
      mine drainage techniques, both those currently in place
      and those that could be added to maximize the quality
      and quantity of drained gas.

    • A detailed assessment of technical possibilities to use the
      gas based on its quality, the overall project objectives,
      and the PFS results. End uses to be considered include
      power generation, gas sales to pipeline (with or without
      upgrade), coal drying, and mine heating.

    • A detailed assessment of market opportunities for gas
      and/or power, including factors such as the distance to
      nearby pipelines, the current and projected market price
      of gas, the demand for and price of power generation  in
      the area, and the possibility  of carbon credits.

    • A detailed assessment of proposed project costs for  the
      project scenarios of interest, using estimates and financial
      projections. These are based on best-available estimates
      from technology vendors and technical experts.

    • A detailed assessment of site-specific legal, regulatory,
      and environmental issues, including the status of gas
      ownership rights, any issues associated with access
      to surface lands for degasification systems, and other
      restrictions on the potential  project (e.g., wetlands

    • A detailed cost-benefit analysis for each technically  vi-
      able scenario based on the market assessment and the
      overall project objectives.

    • A conclusion section that includes an assessment
      of the project's overall viability, whether financial
      investment should be made, and any other appropriate
The following U.S. government agencies provide assistance
for determining project feasibility, ranging from pre-feasibility
studies to comprehensive feasibility studies and technology
demonstration projects.

    • U.S. Trade and Development Agency (USTDA)
      provides funding to facilitate the export of U.S.
      technologies, products, and services to developing and
      transitional countries. Applications for USTDA feasibility
      study grants and technical assistance grants can be
      submitted via two mechanisms: 1) sole source by a
      U.S. company partnering with a project abroad, or 2)
      competitive bidding by a foreign grantee. USTDA has
      provided grant funding to assess the feasibility of several
      coal mine methane  (CMM) projects. For instance, USTDA
      funded a study of potential ventilation air methane
      (VAM) utilization projects in Poland. It has also supplied
      the grant funding for project design and related  planning
      at the Jincheng Anthracite Coal Mining Group's Sihe
      Mine in Shanxi, China, which involves a 120  megawatts
      (MW)  CMM-based power generation project. Recently,
      the agency provided about US$500,000 in grant funding
      for a feasibility study of CMM development potential in
      Ukraine, www.ustda.gov

    « U.S. Agency for International Development
      (USAID), as part of its Methane to Markets commitment,
      offers funding support for methane mitigation projects.
      USAID  missions,  such as those in  India and Ukraine,
      have offered Global Development Alliance (GDA)
      funding support  to energy industry representatives,
      research and academic groups, financial institutions, and
      nongovernmental organizations to assist in promoting
      methane capture and productive use. One of their key
      activities has been a technology demonstration project of
      in-mine drilling and methane degasification at a Ukraine
      coal mine), www.usaid.gov

    • U.S. Environmental Protection Agency (U.S. EPA)
      has funded a number of CMM project-level technology
      demonstration projects, pre-feasibility studies (PFS), and
      comprehensive feasibility studies (FS). Domestically, the
      U.S. EPA has worked with the U.S. Department of Energy
      to support a demonstration project of VAM technology.

      As part of its support for the Methane to Markets
      Partnership, U.S. EPA has also funded a number of pre-
      and comprehensive feasibility studies overseas, including
      these activities in the following partner countries:

       - China: Three comprehensive feasibility studies of
         CMM projects; a PFS of VAM  mitigation; and a tech-
         nology demonstration of VAM technology.

       - India: A PFS of VAM mitigation at two mines.

       - Mexico: A demonstration project.

       - Mongolia: A PFS at an underground coal mine.

       - Nigeria: A PFS at an underground coal mine.

       - Poland: A pre-feasibility assessment of 10 mines for
         VAM mitigation and a technology demonstration.

For more information on U.S. EPA's activities, visit: www.epa.

                                                                                 APPENDIX C:  CMM
                                                                    PROJECT  FUNDING SOURCES
   Types of Financiers     Risk/Return Portfolios
  Commercial Banks
                                                           Specialized Investment
                                                                 Current Status
  Commercial banks profit
  by lending money at higher
  interest rates than they pay
  on deposits. Banks might
  provide short-, medium-,
  and long-term  corporate
  and project finance loans at
  a margin or spread over a
  benchmark rate such as the
  London Interbank Offered
                          Because banks are generally
                          conservative, they apply risk
                          minimization techniques. A project
                          developer seeking bank financing
                          therefore must be prepared  to
                          show the bank's loan officer all
                          important project contracts; a
                          credible, independent project
                          technical assessment; and pro
                          forma financial statements
                          demonstrating the project's  ability
                          to service debt. The developer also
                          should be prepared to discuss
                          its own project development
                          experience and creditworthiness,
                          as well as project assets that
                          could serve as collateral.
                          Because banks are regulated at
                          the federal and/or state levels and
                          are legally restricted from making
                          risky loans, they are conservative
                          lenders, generally providing  senior,
                          secured loans to experienced
                          entities. They typically do not fund
                          projects in their development
                          stages, preferring to wait until
                          projects are well-characterized.
                                Bank financing has been
                                used to fund large-scale
                                coal mine methane (CMM)
                                projects that require major
                                capital investments in
                                both gas recovery systems
                                and collection/utilization
                                components. Few, if any,
                                smaller CMM projects have
                                been bank-financed, however,
                                • Most banks  are unfamiliar
                                  with the CMM project
                                • Smaller projects frequently
                                  are not profitable for banks,
                                  even when expected pricing
                                  is high, due to the bank's
                                  costs for examining  and
                                  processing the transaction.
                             CMM projects are not
                             inherently "unbankable,"
                             despite the lack of bank
                             participation thus far. They
                             are generally supported
                             by strong contracts, earn
                             sufficiently high rates
                             of return, and employ
                             a resource that is well-
                             characterized. The latter point
                             is especially true in the case
                             of use projects at mines with
                             degasification systems. If
                             banks find a CMM project of
                             an acceptable size and are
                             willing to lend on a project
                             finance basis, they could play
                             a more significant role once
                             they  have greater familiarity
                             with  the industry. Banks
                             located near gas resources
                             might be good candidates
                             because they are more likely
                             to have experience with the
                             gas industry and, therefore,
                             be more comfortable with
                             CMM projects.
  Gas Purchasers
                                                                                         Gas companies to date have
                                                                                         played a significant role in
                                                                                         financing CBM projects.
Gas pipeline companies and
gas distribution companies
are potential sources of
capital for CMM projects
because they are interested
in securing low-cost supplies
of gas.
These companies often face
"make or buy" decisions: will it be
more profitable to buy or develop
gas resources? By developing
CMM and other gas projects,
they might be able to ensure
themselves long-term, low-cost
Gas/purchase sale contracts
can be negotiated between
the CBM project and the gas
company such that the project
is profitable and the gas
company pays a relatively low
price for gas.

  Types of Financiers      Risk/Return Portfolios     Specialized Investment        Current Status
 Venture Capitalists
 Venture capitalists usually
 invest in convertible
 preferred stock because this
 instrument greatly increases
 upside potential.
Because venture capitalists
provide risk capital to fledgling
ventures that often have nothing
more than ideas, many of their
investments are unsuccessful. In
exchange for  bearing this risk,
venture capitalists expect to earn
unusually high returns—in the
range of 40 percent after taxes.
Venture capitalists specialize
in funding startup companies,
including those that develop
energy technologies. They might
not be suitable investment
partners for small CMM project
developers, however, because
they invest in companies rather
than projects and given the
active role they take in running
companies. CMM project
developers that partner with
venture capital firms might
have to be willing to cede some
control of their companies.
In recent years, venture
capital investments have
been rushing toward
clean or alternative energy
technologies.13 According
to the United Nations
Environment Programme
(UNEP), sustainable energy
venture capital and private
equity investment were up
more than 30 percent in the
second quarter of 2008 in
comparison with the same
period  in 2007.14
 Pension Funds, Insurance Companies, and Other Institutional Investors
 Pension funds, mutual funds,
 and other institutional
 investors are large, regulated
 companies that pool money
 provided by smaller investors
 and then make investments.
 They control billions of
 dollars of U.S. investment
Most institutional investors are
strictly bound by U.S. Securities
and Exchange Commission (SEC)
laws and their own covenants
and restrictions, which dictate the
types of investments the investors
might make.
Almost all money under
institutional management
must be invested in highly
rated, publicly traded stocks,
bonds, and other highly liquid
Institutional investors have
limited appetite for projects
and, therefore, generally
do not represent potential
capital sources for CMM
 Investment Bankers
 Investment bankers provide
 a wide variety of financial
 services (e.g., advice on
 corporate/project financing
 alternatives; arrange debt/
 equity public offerings and
 private placements; assist
 in transactions such as
 mergers, acquisitions, and
Investment bankers have
minimum size requirements and
are unlikely to be interested in
project financing less than $25-50
million.They might, however, be
able to place equity with private
Investment bankers could
be useful to CMM projects
because they are able to
identify investors interested
in investing in oil and gas
projects, not bound by
investment restrictions,  and
able to invest in smaller
projects. Investment banks also
might be able to help project
developers identify suitable
partners such as oil and gas
exploration companies.
To date, a number of CMM
projects have been financed
through private investments.
Numerous investment banks
have arranged CMM  project
financing, while others,
although they have not been
involved in CMM projects,
have worked with energy
project developers and are
interested in assisting CMM
13 Wald, Matthew L. "Venture Capital Rushes into Alternative Energy." The New York Times. April 30,2007. www.nytimes.com/2007/04/30/business/
14 UNEP. "Clean Energy Investments Charge Forward Despite Financial Market Turmoil." June 2008. www.unep.org/Documents.Multilingual/

Types of Financiers Risk/Return Portfolios Specialized Investment Current Status
Multilateral Sources (Examples)
• The Asian Development
Bank (ADB), a multilater-
al development organi-
zation, strives to improve
the social welfare of
people in the Asia and
Pacific regions.
• The Global Environment
Facility (GEF) works
through three imple-
menting agencies — the
World Bank, the United
Nations Development
Programme (UNDP), and
the UN Environment
Programme (UNEP) — to
provide cost-sharing
grants and concessional
funding to help develop-
ing countries fund proj-
ects and programs that
protect the environment,
such as climate change
mitigation projects.
• The World Bank provides
funding for projects that
are consistent with its
mission to fight poverty
and improve the living
standards of people in
the developing world.
The International Finance
Corporation (IFC), the
private sector arm of
the World Bank Group,
provides financing for
a variety of sustainable
energy and climate
change mitigation ven-
tures. IFC financing can
include both debt and
equity finance of private
• The European Bank for
Reconstruction and De-
velopment (EBRD) uses
investment tools to help
build market economies
and democracies in coun-
tries from central Europe
to central Asia.

• ADB provides projects
with technical assistance,
grants, and loans. In recent
years, ADB has focused on
supporting clean energy
projects under its Energy
2000 policy, which seeks to
reorient the energy sector
in member countries to
address regional and global
environmental effects.
• The GEF Operational
Strategy requires that any
GEF-funded activity relating
to climate change be fully
compliant with the direc-
tives of the UN Framework
on Climate Change Con-
vention (UNFCCC).www.
• Projects that are smaller
than the World Bank's
preferred minimum lending
threshold of -US$50 million
may be bundled with other
development activities to
construct a finance pack-
age of adequate size. www.
• EBRD and the European
Investment Bank(EIB)
established the Multilateral
Carbon Credit Fund (MCCF)
to assist its 27 member
countries in securing carbon
emission reductions for
eligible projects. Although
it does not specifically
mention methane emission
reduction, it does sup-
port fuel-switching from
carbon-intensive (e.g., coal,
heating oil, oil shale) to less
carbon-intensive fuels such
as natural gas.

• ADB has been a sig-
nificant supporter of the
world's largest CMM-
based power generation
project at the Jincheng
Coal Mining Authority's
Sihe Mine in Shanxi Prov-
ince, China.
• Jincheng project cash flow
also will be supplemented
by the sale of carbon
credits (4.5 tC02e) to the
World Bank's Prototype
Carbon Fund.
• IFC has successfully con-
cluded an agreement to
purchase credits via ING
Bank from a project that
generates power using
methane captured from
coal mines in Ukraine.


Types of Financiers Risk/Return Portfolios Specialized Investment Current Status
Bilateral Sources (Examples)
The Japanese Bank for
International Cooperation
(JBIC), as the international
wing of the Japan
Finance Corporation
(JFC), contributes to the
sustainable and sound
development of the
international and Japanese

JBIC provided $20 million
in loan financing for the
Jincheng project above.
JBIC also recently signed
a memorandum of
understanding (MOU)with
The Energy and Resources
Institute (TERI) of India in
the development of GHG
reduction projects in India.
Electric Utilities
Historically, electric utilities
have been required to
purchase power from
independent power
producers (IPPs) with
"qualifying facility" status
(for which many CM M
projects would be eligible).
While competition in the
electricity industry has
reduced IPP business to
some extent, it also might
create increased electric
utility interest in the CMM

This strategy serves two strategic
purposes (in addition to the
retention of a large customer).
First, by taking a customer "off-
line," the utility will reduce the
burden on its own transmission
and distribution system, thereby
enabling the utility to defer
significant investment. This type
of saving could be important in
a more competitive environment.
Second, taking a large load off-
line also will free up the utility's
own generating capacity so that it
will be able to compete for more
business in new markets.

Increased competition means
that utilities will have to find
creative new ways of serving
the energy needs of customers.
This is where CMM projects
might be valuable: The utility
might find that the best way to
retain a client is to provide the
client with the equipment and
financing they need to self-
generate. The utility thus would
earn profits by financing and
selling equipment, providing
O&M services, and selling
backup power, rather than
through the traditional method
of selling kilowatt-hours.
Under a more competitive
industry structure, all utilities
will be looking to develop
low-cost electricity sources
wherever they might find
them. CMM projects might
represent relatively low-cost
generating sources, and as
such might provide a way
for higher cost utilities to
compete in low-cost regions.

Equipment Vendors /Turnkey Developers
Some equipment/
technology vendors/
providers are also planning
to provide full turnkey
service, including carbon
financing for offsets/
emissions avoided.

So far, VAM mitigation or
energy recovery technologies
are the first in this market

For example, Biothermica
is developing a project
using their VAM oxidation
technology at a JWR mine
in Alabama, including a
negotiated deal for carbon
credits (see page 12).

   Types of Financiers     Risk/Return Portfolios    Specialized Investment       Current Status
  Carbon Financing
  In countries that are
  participating in the Kyoto
  Protocol (notably China),
  carbon financing is an
  important source of project
  revenue and is closely
  considered part of the
  overall project financing
  and economics. In the
  United States, there is a
  rapidly emerging voluntary
  carbon market that is
  having a growing impact on
  CMM project development.
Regulatory (compliance)
• Kyoto Protocol—Clean
  Development Mechanism
  (COM) and Joint Implemen-
  tation (Jl)
• Australia New South Wales
  (NWS) Trading Scheme
• European Union Emissions
  Trading Scheme (EU  ETS)
Voluntary markets:
• Chicago Climate Exchange
  (CCX) (voluntary trade &
  cap); currently includes two
  U.S. coal mining companies
  as participating members
  and one gas company (in
  offset provider.
• Over-the-counter (OTC)
  offset/carbon credit scheme
  involving retailers, whole-
  salers or aggregators, and
Emerging cap-and-trade
• Regional Greenhouse Gas
  Initiative (RGGI), does not
  include methane at this
There are currently 55
projects at various stages
in the COM pipeline with
a total potential for 121
million tonnes of carbon
dioxide equivalent (MtC02e)
through 2012. Two other
CMM projects have been
issued certified emission
reductions (CERs) totaling
638,000 tC02e. In the U.S.
voluntary market, CMM is
a major source of offset
credits, accounting for
approximately 30 percent of
CCX transactions.

                                                                        APPENDIX D:  RESOURCES

Carpoor, K. and P. Ambrosi. State and Trends of the Carbon
Market 2008. Funded by the World Bank Institute. May 2008.

Hamilton, K., M. Sjardin, T. Marcello, and G. Xu. Forging a
Frontier: State of the Voluntary Carbon Markets 2008. A report
by Ecosystem Marketplace & New Carbon Finance. May 8, 2008.
cms_documents/2008_StateofVolunta ryCarbonMarket2.pdf

Kollmuss, A. (SEI-US), H. Zink (Tricorona), and C. Polycarp
(SEI-US). Making Sense of the Voluntary Carbon Market: A
Comparison of Carbon Offset Standards. Published by WWF-
Germany. Prepared by Stockholm Environmental Institute (SEI)
and Tricorona. March 2008. www.sei-us.org/wwf_

U.S. Environmental Protection Agency (U.S. EPA). A Guide
to Financing Coalbed Methane Projects. EPA430-B-97-001.
January 1997. Contact CMOP to obtain a copy.

U.S. EPA. Global Anthropogenic Non-C02 Greenhouse Gas
Emissions: 1990-2020. EPA430-R-06-003. June 2006.

World Bank Carbon Finance Glossary of Terms,

Chicago Climate Exchange (CCX) is North America's only
cap-and-trade system for all six GHGs, with global affiliates and
projects worldwide. CCX Members are leaders in GHG manage-
ment and represent all sectors of the global economy, as well as
public sector innovators. Reductions achieved through CCX are
the only reductions made in North America through a legally-
binding compliance regime that includes independent, third-
party verification, www.chicagoclimatex.com

The Climate Action Reserve (Reserve) is a national 501 (c)
(3) nonprofit organization representing international interests in
addressing climate change and bringing together participants
from the government, environment and business sectors. It
works to ensure integrity, transparency, and financial value in
GHG emissions accounting and reduction and the progressive
GHG emissions policy movement nationally and in the western
United States. The Reserve is parent to three programs: the
California Climate Action Registry, Climate Action Reserve, and
Center for Climate Action, www.climateactionreserve.org

Climate Leaders is a U.S. EPA industry-government partner-
ship that works with companies to develop comprehensive
climate change strategies. Partner companies commit to reduc-
ing their impact on the global environment by completing a
corporate-wide inventory of their GHG emissions based on a
quality management system, setting aggressive reduction goals,
and annually reporting their progress to U.S. EPA. Through pro-
gram participation, companies create a credible record of their
accomplishments and receive U.S. EPA recognition as corporate
environmental leaders, www.epa.gov/climateleaders

The Energy Information Administration (EIA), a statistical
agency of the U.S. Department of Energy, provides policy-neutral
data, forecasts, and  analyses to promote sound policymaking,
efficient markets, and public understanding regarding energy
and its interaction with the U.S. economy and the environment.
EIA administers the Voluntary Reporting of Greenhouse Gases
Program, established by Section 160S(b) of the Energy Policy Act
of 1992, which provides a means for organizations and indi-
viduals that have reduced their GHG emissions to record their
accomplishments and share their ideas for action.

The Environmental Markets Association (EMA) is the pre
miere trade association for environmental industry professionals
who are active or interested in the market-based solutions to
combat pollution and create a sustainable environment. EMA
members include large utilities, emissions brokers and trad-
ers, consultants, financiers,  members of the press, government
agencies, nonprofit organizations and academics.

The International Emissions Trading Association (IETA)
is a nonprofit business organization created to establish a
functional international framework for trading in GHG emission
reductions. lETA's membership includes leading international
companies from across the carbon trading cycle, www.ieta.org

 The Pew Center on Global Climate Change brings together
 business leaders, policymakers, scientists, and other experts to
 bring a new approach to a complex and often controversial issue.
 Pew's approach is based on sound science, straight talk, and a be-
 lief that multiple entities can work together to protect the climate
 while sustaining economic growth, www.pewclimate.org

 Under partnership between the World Resources  Institute
 (WRI) and the World Business Council for Sustainable
 Development (WBCSD), the Greenhouse Gas Protocol (GHG
 Protocol) is the most widely used international accounting tool
 for government and business leaders to understand, quantify,
 and manage GHG emissions.www.ghgprotocol.org

                                                  APPENDIX E:  CMM PROJECT  LENDING
                                                                          EVALUATION CHECKLIST

   •  Project description

   •  Business plan

   •  Project financial projections including all assumptions

   •  Description of principal project risks and risk
      mitigation analysis

   •  Financing plan with detailed sources and uses of funds
      (e.g., equipment, financing costs)

      -  Project cost breakdown

      -  Evaluation of equity or collateral contributed (e.g.,
         cash, prepaid development expenses)

      -  Leverage (i.e., financing  provided by borrower and
         financing requested)

   •  Carbon finance plan (if applicable)


   •  Corporate documents (e.g., Articles of Incorporation,
      Partnership Agreement, LLC Articles, operating

   •  Relevant experience in CMM project(s) and
      related technology

   •  Resume(s) of project development staff

   •  Audited financial statements (e.g., balance sheet, income
      statement, cash flow)-year-to-date, plus 2-3 previous
      years, if available

   •  Three-year pro forma financial statements demonstrat-
      ing anticipated results or  expected impact of proposed

   •  Corporate tax returns  (most recent 2-3 years) may be
      required from project  developer

   •  Project implementation schedule, showing target dates
      for achieving essential project milestones

   •  Feasibility studies, technical and  market reports (suf-
      ficient to demonstrate project's technical feasibility), with
      detailed information including the following:

       - Anticipated gas flow rate (e.g., billion cubic feet/day)

       - Projected gas quality (i.e., percent methane
         and range)

       - For projects at active coal mines: projected mine life,
         description of mining plan (e.g., seams to be mined,
         planned production levels, seam depth) including
         mine  maps

       - Planned end-use for CMM and documentation about
         projected capital, operating, maintenance costs, and
         expected performance

   •  Contractual flow chart (i.e., project participants
      and contracts)

   •  Environmental assessment

   •  Description of project contracts (i.e., project contracts
      to be included such as construction contract), especially
      agreement with  mine owner /operator (for projects at ac-
      tive coal  mines), and all agreements with surface owners
      and documentation of rights  to the CMM.

   •  Background information on each of the project partici-
      pants, including  financial information.

                                                                            APPENDIX  F:  GLOSSARY
 Additionality: According to the Kyoto Protocol, greenhouse
 gas emission reductions generated by Clean Development
 Mechanism (COM) and Joint Implementation (Jl) project activi-
 ties must be additional to those that otherwise would occur.
 Additionality is established when there is a positive difference
 between the  emissions that occur in the baseline scenario and
 the emissions that occur in the proposed project.

 * Broker/Trader: A party that mediates between a buyer and a
 seller (e.g., for the sale of carbon offsets).

 Carbon Finance: Resources provided to projects generating
 (or expected to generate) greenhouse gas (GHG) (or carbon)
 emission reductions in the form of the purchase of such emis-
 sion reductions.

 *Carbon Financial Instruments (CFIs): The Chicago Climate
 Exchange (CCX) unit of trade, which can be issued as allow-
 ance-based or offset credits. One CFI represents 100 tonnes of
 carbon dioxide equivalent (tC02e).

 Certified Emission Reductions (CERs): A unit of GHG
 emission reductions issued pursuant to the COM of the Kyoto
 Protocol, and measured in tonnes of carbon dioxide equivalent
 (tC02e). One  CER represents a reduction of GHG emissions of
 one tC02e.

 Clean Development Mechanism (COM): The mechanism
 provided by Article 12 of the Kyoto Protocol, designed to assist
 developing countries in achieving sustainable development by
 permitting  industrialized countries to finance projects for reduc-
 ing GHG emissions in developing countries and receive  credit for
 doing so.

 *Discounted Cash Flow Method: The sum of a project's net
 cash flows over the project's life is discounted to the present
 (i.e., the net present value [NPV] of the  project). The discount
 rate used to make this calculation represents the investors'
 cost of capital. If a project's NPV is positive, then the  project is
 deemed capable of yielding the minimum required return.

 Emission Reduction Units (ERUs):A unit of emission reduc-
 tions issued pursuant to Jl. This unit is equal to one tC02e.
European Union Allowances (EUAs): The allowances in use
under the European Union Emissions Trading Scheme (EU ETS).
An EUA unit is equal to one tC02e.

internal Rate of Return (IRR): Discount rate at which the
NPV of the project's net cash flow is zero. In other words, it is
the rate that equates the  present value of future cash flows
with the initial capital investment. The expected IRR on a project
can be compared to return rates on alternative investment

Joint Implementation  (Jl):  Mechanism provided by Article 6
of the Kyoto Protocol, whereby a  country included in Annex I of
the United Nations Framework Convention on Climate Change
(UNFCCC) and the Kyoto  Protocol might acquire Emission
Reduction Units when it helps to  finance projects that reduce
net emissions in another  industrialized country (including coun-
tries with economies in transition).

*Retailer:  Refers to parties who sell relatively small amounts
of carbon offset credits to individuals or organizations and have
ownership of a portfolio of credits.

Renewable Energy Certificates (RECs): Tradable environ-
mental commodities in the United States which represent proof
that 1 megawatt-hour (MWh) of electricity was generated from
an eligible renewable energy resource.

*Turnkey: A project or contract that provides for the complete
design, procurement (of equipment), construction, and start-up
of a facility—by a date certain—for a fixed sum and at guaran-
teed performance levels.

Verified Emission Reductions (VERs): A unit of GHG emis
sion reductions that has been  verified by an independent audi-
tor. This designates emission reductions units that are traded on
the voluntary market.
 Compliments of the World Bank Carbon Finance Glossary of Terms http://go.worldbank.org/HZGVW3QN20), except indicated by an asterisk (*).