Innovative Carbon Resource Application For Energy Transition

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The Project has two interrelated components: (a) Payments for emission reductions (ERs) - Climate Finance (estimated US$20 million) and (b) Payments for Internationally Transferred Mitigation Outcomes (ITMOs) - Carbon Finance (estimated US$26.25 million). Results-based payments would be made against the ERs measured, reported, and verified, which would result from more efficient energy use incentivized by energy subsidy reforms. The description of specific components is outlined in the following paragraphs. Component 1: Payments for measured, reported and verified emission reductions (ERs) - Climate Finance (estimated US$20 million). This component encompasses the results-based payments under the Emission Reductions Payment Agreement (ERPA). ERs will be generated due to the change in end-user energy demand and energy intensity resulting from the gradual adjustment of electricity and natural gas tariffs. Annual payments will be made based on the amount of ERs generated and contracted in the preceding year. The payments will reflect the volume and price outlined in the ERPA to be agreed between the GoU and TCAF contributors. The generated ERs under this component will remain in Uzbekistan and will be used for the country’s NDC goals.This component directly supports Uzbekistan’s plans in both its NDC and Climate Change Strategy with respect to engaging international cooperation and mobilizing climate finance . In addition, the ERs and respective payments under this component would serve as a simulation of carbon trading, while all ERs would remain in Uzbekistan and would not affect the country’s climate commitments under its updated NDC. Furthermore, it would pave the way for a real pilot carbon transaction under the Component 2, as outlined below.Component 2: Payments for measured, reported, and verified Internationally Transferred Mitigation Outcomes (ITMOs) – Carbon Finance (estimated US$26.25 million ). Similar to the Component 1, under the Component 2 payments would be made for measured, reported, and verified ERs resulting from energy tariff reforms. The key difference from the Component 1 is that the ERs under the Component 2 will be transferred out of Uzbekistan and become ITMOs, i.e. Uzbekistan will sell ERs and TCAF donor(s) (contributors) will buy the same. The underlying activity, measurement, reporting, and verification of ERs and payments schedule will be outlined in the Mitigation Outcomes Purchase Agreement (MOPA) to be signed between the World Bank with the GoU. The underlying activity—the change in end user energy demand and energy intensity resulting from gradual adjustment in electricity and natural gas tariffs—for this agreement is the same as for the Component 1. The basis for payments under the MOPA is the authorization and international transfer of verified ERs by the GoU, and accordingly payments will be made annually to the GoU. Accordingly, under this Component, the GoU will need to authorize and transfer a portion of ERs to TCAF for distribution to carbon market buyers. This will require the GoU to undertake the necessary tracking, measuring and reporting as required by the Paris Agreement and the transferred portion of ERs will become ITMOs, which will not be used by Uzbekistan for its NDC.Component 2 will therefore pilot an international carbon market transaction of Uzbekistan under Article 6.2 of the Paris Agreement. This will require that Uzbekistan comply with the accounting and reporting requirements of the Paris Agreement. The associated technical assistance (see the next section for details) will support Uzbekistan’s Article 6 readiness efforts in line with its NDC commitments and relevant state programs outlined in the background section above. Technical Assistance (TA). This Project will be accompanied by a technical assistance with an estimated amount of up to US$2 million to be funded by TCAF and administered by the World Bank. The TA will play a critical role in developing the institutional capacity, systems and infrastructure for the GoU stakeholders to fulfill its NDC goals and those outlined in relevant state programs toward the development of a state system of inventory, reporting, and control of GHG emissions. The TA also aims to support the GoU in developing a robust MRV framework in compliance with the Article 6 of the Paris Agreement. A draft Policy Implementation Support Plan (PISP) has been prepared by the GoU toward that goal, which provides stepwise actions to prepare for Article 6 collaboration. It is structured around two main sections: (a) strategizing for Article 6 engagement, which explores high-level opportunities, risks, and conditions for such engagements and identifies key areas to be explored for an engagement strategy and (b) governing Article 6 collaboration, which explores the necessary governance and institutional frameworks that need to be developed to guide and implement Article 6 collaboration.The Project is in line with the overarching goal of Uzbekistan’s County Partnership Framework (CPF) 2022–2026 to support the implementation of the next phase of reforms in the transition toward an inclusive and sustainable market economy in the country. Specifically, the Project would contribute to the following objectives of the Uzbekistan CPF 2022–2026: (a) Objective 1.4: Improve the infrastructure for competitiveness and connectivity; (b) Objective 3.1: Decarbonization and the greener development of industry and the economy; and (c) Objective 3.3: More efficient use of natural resources.