EXHIBIT 4.18


                               GUARANTEE AGREEMENT



                                     Between



                                 COVANTA ENERGY
                                   CORPORATION



                                 (as Guarantor)



                                       and



                              BANKERS TRUST COMPANY



                                  (as Trustee)



                                   dated as of



                                ----------, 200-



                            COVANTA CAPITAL TRUST [ ]



<PAGE>


                           COVANTA ENERGY CORPORATION



     *Reconciliation and tie between Trust Indenture Act of 1939, as amended by
the Trust Reform Act of 1990, and Guarantee Agreement, dated as of -----------,
200-.


Section of the                                           Section of
Trust Indenture Act of 1939                              Guarantee Agreement
---------------------------                              -------------------

310(a)(1), (2) and (5)...................................4.1
310(a)(3) and (4)........................................Inapplicable
310(b)...................................................2.8, 4.1
311(a)...................................................2.2(b)
311(b)...................................................2.2(b)
312(a)...................................................2.2(a)
312(b)...................................................2.2(b)
312(c)...................................................2.2(b)
313(a)...................................................2.3
313(b)(1)................................................2.3
313(b)(2)................................................2.3
313(c)...................................................2.3, 8.3(c)
313(d)...................................................2.3
314(a)...................................................2.4
314(b)...................................................2.4
314(c)(1) and (2)........................................2.4, 2.5
314(c)(3)................................................2.4
314(d)...................................................2.4
314(e)...................................................2.4, 2.5
315(a), (c) and (d)......................................3.1
315(b)...................................................2.7
315(e)...................................................3.2
316(a)(1)................................................3.1, 5.4
316(a)(2)................................................Inapplicable
316(a) (last sentence)...................................1.1
316(b)...................................................8.2
317(a)...................................................3.1
317(b)...................................................Inapplicable
318(a)...................................................2.1


--------

*    This reconciliation and tie shall not, for any purpose, be deemed to be
     part of the Guarantee Agreement or to have any bearing upon the
     interpretation of any of its terms or provisions.


<PAGE>



                                TABLE OF CONTENTS

                                                                          Page


Article I. DEFINITIONS......................................................1
     Section 1.1      Definitions...........................................1


Article II. TRUST INDENTURE ACT.............................................4
     Section 2.1      Trust Indenture Act; Application......................4
     Section 2.2      List of Holders.......................................4
     Section 2.3      Reports by the Guarantee Trustee......................4
     Section 2.4      Periodic Reports to the Guarantee Trustee.............4
     Section 2.5      Evidence of Compliance with Conditions Precedent......5
     Section 2.6      Events of Default; Waiver.............................5
     Section 2.7      Event of Default; Notice..............................5
     Section 2.8      Conflicting Interests.................................5


Article III. POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE.............5
     Section 3.1      Powers and Duties of the Guarantee Trustee............5
     Section 3.2      Certain Rights of Guarantee Trustee...................7
     Section 3.3      Compensation; Indemnity; Fees.........................8


Article IV. GUARANTEE TRUSTEE...............................................9
     Section 4.1      Guarantee Trustee:  Eligibility.......................9
     Section 4.2      Appointment, Removal and Resignation of
                        the Guarantee Trustee...............................9


Article V. GUARANTEE.......................................................10
     Section 5.1      Guarantee............................................10
     Section 5.2      Waiver of Notice and Demand..........................10
     Section 5.3      Obligations Not Affected.............................10
     Section 5.4      Rights of Holders....................................11
     Section 5.5      Guarantee of Payment.................................12
     Section 5.6      Subrogation..........................................12
     Section 5.7      Independent Obligations..............................12


Article VI. COVENANTS AND SUBORDINATION....................................12
     Section 6.1      Subordination........................................12
     Section 6.2      Pari Passu Guarantees................................12


Article VII. TERMINATION...................................................13
     Section 7.1      Termination..........................................13


Article VIII. MISCELLANEOUS................................................13
     Section 8.1      Successors and Assigns...............................13

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     Section 8.2      Amendments...........................................13
     Section 8.3      Notices..............................................13
     Section 8.4      Benefit..............................................14
     Section 8.5      Interpretation.......................................14
     Section 8.6      Governing Law........................................15

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                             GUARANTEE AGREEMENT


     This GUARANTEE AGREEMENT, dated as of ------- --, 200-, is executed and
delivered by COVANTA ENERGY CORPORATION, a Delaware corporation (the
"Guarantor") having its principal office at 40 Lane Road, Fairfield, New Jersey
07004, and BANKERS TRUST COMPANY, a New York banking corporation, as trustee
(the "Guarantee Trustee"), for the benefit of the Holders (as defined herein)
from time to time of the Preferred Securities (as defined herein) of Covanta
Capital Trust [ ], a Delaware statutory business trust (the "Issuer").

     WHEREAS, pursuant to an Amended and Restated Trust Agreement, dated as of
-------- --, 200-- (the "Trust Agreement"), among the Guarantor, as Sponsor, the
Property Trustee and the Delaware Trustee named therein and the Holders from
time to time of undivided beneficial interests in the assets of the Issuer, the
Issuer is issuing $----------- aggregate Liquidation Amount (as defined in the
Trust Agreement) of its ----% Preferred Securities, Series /*/, Liquidation
Amount $--- per preferred security (the "Preferred Securities") representing
preferred undivided beneficial interests in the assets of the Issuer and having
the terms set forth in the Trust Agreement;

     WHEREAS, the Preferred Securities will be issued by the Issuer and the
proceeds thereof, together with the proceeds from the issuance of the Issuer's
Common Securities (as defined below), will be used to purchase the Debt
Securities (as defined in the Trust Agreement) of the Guarantor which will be
deposited with Bankers Trust Company, as Property Trustee under the Trust
Agreement, as trust assets; and

     WHEREAS, as incentive for the Holders to purchase Preferred Securities, the
Guarantor desires irrevocably and unconditionally to agree, to the extent set
forth herein, to pay to the Holders of the Preferred Securities the Guarantee
Payments (as defined herein) and to make certain other payments on the terms and
conditions set forth herein.

     NOW, THEREFORE, in consideration of the purchase by each Holder of
Preferred Securities, which purchase the Guarantor hereby agrees shall benefit
the Guarantor, the Guarantor executes and delivers this Guarantee Agreement for
the benefit of the Holders from time to time of the Preferred Securities.

                             Article I. DEFINITIONS

     Section 1.1 Definitions.

     As used in this Guarantee Agreement, the terms set forth below shall,
unless the context otherwise requires, have the following meanings. Capitalized
or otherwise defined terms used but not otherwise defined herein shall have the
meanings assigned to such terms in the Trust Agreement as in effect on the date
hereof.

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
Guarantor shall not be deemed to be an Affiliate of the Issuer. For the purposes
of this definition, "control" when used with respect to any specified Person

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means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

     "Board of Directors" means either the board of directors of the Guarantor
or any committee of that board duly authorized to act hereunder.

     "Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Issuer.

     "Event of Default" means a default by the Guarantor on any of its payment
or other obligations under this Guarantee Agreement; provided, however, that,
except with respect to a default in payment of any Guarantee Payments, the
Guarantor shall have received notice of default from the Guarantee Trustee or
the Holders of not less than 25% in principal amount of the Outstanding
Preferred Securities and shall not have cured such default within 60 days after
receipt of such notice.

     "Guarantee Payments" means the following payments or distributions, without
duplication, with respect to the Preferred Securities, to the extent not paid or
made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions
(as defined in the Trust Agreement) required to be paid on the Preferred
Securities, to the extent the Issuer shall have funds on hand available therefor
at such time; (ii) the redemption price, including all accumulated and unpaid
Distributions to the date of redemption (the "Redemption Price"), with respect
to any Preferred Securities called for redemption by the Issuer, to the extent
the Issuer shall have funds on hand available therefor at such time; and (iii)
upon a voluntary or involuntary dissolution, winding-up or liquidation of the
Issuer, unless Debt Securities are distributed to the Holders, the lesser of (a)
the aggregate of the Liquidation Amount of $--- per Preferred Security plus
accumulated and unpaid Distributions on the Preferred Securities to the date of
payment and (b) the amount of assets of the Issuer remaining available for
distribution to Holders in liquidation of the Issuer (in either case, the
"Liquidation Distribution").

     "Guarantee Trustee" means Bankers Trust Company, until a Successor
Guarantee Trustee has been appointed and has accepted such appointment pursuant
to the terms of this Guarantee Agreement, and thereafter means each such
Successor Guarantee Trustee.

     "Holder" means any holder, as registered on the books and records of the
Issuer, of any Preferred Securities; provided, however, that in determining
whether the holders of the requisite percentage of Preferred Securities have
given any request, notice, consent or waiver hereunder, "Holder" shall not
include the Guarantor, the Guarantee Trustee, or any Affiliate of the Guarantor
or the Guarantee Trustee.

     "Indenture" means the Subordinated Indenture dated as of --------- --,
200-, as supplemented and amended, between the Guarantor and Bankers Trust
Company, as trustee.

     "List of Holders" has the meaning specified in Section 2.2(a).

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     "Majority in Liquidation Amount of the Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the Liquidation Amount of all then outstanding
Preferred Securities issued by the Issuer.

     "Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chairman or a Vice Chairman of the Board of Directors of such
Person or the President or a Vice President of such Person, and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of
such Person, and delivered to the Guarantee Trustee. Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Guarantee Agreement shall include:

     (a) a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definitions relating thereto;

     (b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;

     (c) a statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and

     (d) a statement as to whether, in the opinion of each officer, such
condition or covenant has been complied with.

     "Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.

     "Responsible Officer" means, when used with respect to the Guarantee
Trustee, any officer assigned to the Corporate Trust Office, including any
managing director, vice president, assistant vice president, assistant
treasurer, assistant secretary or any other officer of the Guarantee Trustee
customarily performing functions similar to those performed by any of the above
designated officers, and also, with respect to a particular matter, any other
officer, to whom such matter is referred because of such officer's knowledge of
and familiarity with the particular subject.

     "Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.

     "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.

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<PAGE>


                        Article II. TRUST INDENTURE ACT

     Section 2.1 Trust Indenture Act; Application.

     (a) This Guarantee Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Guarantee Agreement and
shall, to the extent applicable, be governed by such provisions.

     (b) If and to the extent that any provision of this Guarantee Agreement
limits, qualifies or conflicts with the duties imposed by the Trust Indenture
Act, such imposed duties shall control.

     Section 2.2 List of Holders.

     (a) The Guarantor shall furnish or cause to be furnished to the Guarantee
Trustee (a) semiannually, on or before June 30 and December 31 of each year, a
list, in such form as the Guarantee Trustee may reasonably require, of the names
and addresses of the Holders ("List of Holders") as of a date not more than 15
days prior to the delivery thereof, and (b) at such other times as the Guarantee
Trustee may request in writing, within 30 days after the receipt by the
Guarantor of any such request, a List of Holders as of a date not more than 15
days prior to the time such list is furnished, in each case to the extent such
information is in the possession or control of the Guarantor and is not
identical to a previously supplied list of Holders or has not otherwise been
received by the Guarantee Trustee in its capacity as such. The Guarantee Trustee
may destroy any List of Holders previously given to it on receipt of a new List
of Holders.

     (b) The Guarantee Trustee shall comply with its obligations under Section
311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act. Each
Holder, by receiving and holding the same, agrees with the Guarantor and the
Guarantee Trustee that neither the Guarantor nor the Guarantee Trustee shall be
held accountable by reason of the disclosure of any information in accordance
with Section 312 of the Trust Indenture Act.

     Section 2.3 Reports by the Guarantee Trustee.

     Not later than 60 days after December 31 of each year, commencing 60 days
after December 31, 200-, the Guarantee Trustee shall provide to the Holders such
reports as are required by Section 313 of the Trust Indenture Act, if any, in
the form and in the manner provided by Section 313 of the Trust Indenture Act.
The Guarantee Trustee shall also comply with the requirements of Section 313(d)
of the Trust Indenture Act.

     Section 2.4 Periodic Reports to the Guarantee Trustee.

     The Guarantor shall provide to the Guarantee Trustee, the Securities and
Exchange Commission and the Holders such documents, opinions, reports and
information, if any, as required by Section 314 of the Trust Indenture Act and
the compliance certificate required by Section 314 of the Trust Indenture Act,
in the form, in the manner and at the times required by Section 314 of the Trust
Indenture Act.

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     Section 2.5 Evidence of Compliance with Conditions Precedent.

     The Guarantor shall provide to the Guarantee Trustee such evidence of
compliance with such conditions precedent, if any, provided for in this
Guarantee Agreement that relate to any of the matters set forth in Section
314(c) of the Trust Indenture Act. Any certificate or opinion required to be
given by an officer pursuant to Section 314(c)(1) may be given in the form of an
Officers' Certificate. Any certificate or opinion with respect to compliance
with a condition or covenant provided for herein shall comply with Section
314(e) of the Trust Indenture Act.

     Section 2.6 Events of Default; Waiver.

     The Holders of a Majority in Liquidation Amount of the Preferred Securities
may, by vote, on behalf of the Holders, waive any past Event of Default and its
consequences. Upon such waiver, any such Event of Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Guarantee Agreement, but no such waiver shall extend
to any subsequent or other default or Event of Default or impair any right
consequent therefrom.

     Section 2.7 Event of Default; Notice.

     (a) The Guarantee Trustee shall, within 90 days after the occurrence of a
default, transmit by mail, first class postage prepaid, to the Holders, notices
of all defaults known to the Guarantee Trustee, unless such defaults have been
cured before the giving of such notice (the term "default" or "defaults" for the
purposes of this Section being hereby defined to mean any event or condition
which is, or with notice or lapse of time or both would become, an Event of
Default); provided, that, except in the case of a default in the payment of a
Guarantee Payment, the Guarantee Trustee shall be protected in withholding such
notice if and so long as the Board of Directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Guarantee
Trustee in good faith determines that the withholding of such notice is in the
interests of the Holders.

     (b) The Guarantee Trustee shall not be deemed to have knowledge of any
default unless the Guarantee Trustee shall have received written notice, or a
Responsible Officer charged with the administration of this Guarantee Agreement
shall have obtained written notice, of such default from the Guarantor or any
Holder.

     Section 2.8 Conflicting Interests.

     The Trust Agreement shall be deemed to be specifically described in this
Guarantee Agreement for the purposes of clause (i) of the first proviso
contained in Section 310(b) of the Trust Indenture Act.

        Article III. POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

     Section 3.1 Powers and Duties of the Guarantee Trustee.

     (a) This Guarantee Agreement shall be held by the Guarantee Trustee for the
benefit of the Holders, and the Guarantee Trustee shall not transfer this

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Guarantee Agreement to any Person except a Holder exercising his or her rights
pursuant to Section 5.4(iv) or to a Successor Guarantee Trustee on acceptance by
such Successor Guarantee Trustee of its appointment to act as Successor
Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall
automatically vest in any Successor Guarantee Trustee, upon acceptance by such
Successor Guarantee Trustee of its appointment hereunder, and such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered pursuant to the appointment of such Successor
Guarantee Trustee.

     (b) If an Event of Default has occurred and is continuing, the Guarantee
Trustee shall enforce this Guarantee Agreement for the benefit of the Holders.

     (c) The Guarantee Trustee, before the occurrence of any Event of Default
and after the curing of all Events of Default that may have occurred, shall
undertake to perform only such duties as are specifically set forth in this
Guarantee Agreement, and no implied covenants shall be read into this Guarantee
Agreement against the Guarantee Trustee. In case an Event of Default has
occurred (that has not been cured or waived pursuant to Section 2.6), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.

     (d) No provision of this Guarantee Agreement shall be construed to relieve
the Guarantee Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:

          (i) prior to the occurrence of any Event of Default and after the
     curing or waiving of all such Events of Default that may have occurred:

               (A) the duties and obligations of the Guarantee Trustee shall be
          determined solely by the express provisions of this Guarantee
          Agreement, and the Guarantee Trustee shall not be liable except for
          the performance of such duties and obligations as are specifically set
          forth in this Guarantee Agreement; and

               (B) in the absence of bad faith on the part of the Guarantee
          Trustee, the Guarantee Trustee may conclusively rely, as to the truth
          of the statements and the correctness of the opinions expressed
          therein, upon any certificates or opinions furnished to the Guarantee
          Trustee and conforming to the requirements of this Guarantee
          Agreement; but in the case of any such certificates or opinions that
          by any provision hereof or of the Trust Indenture Act are specifically
          required to be furnished to the Guarantee Trustee, the Guarantee
          Trustee shall be under a duty to examine the same to determine whether
          or not they conform to the requirements of this Guarantee Agreement;

          (ii) the Guarantee Trustee shall not be liable for any error of
     judgment made in good faith by a Responsible Officer of the Guarantee
     Trustee, unless it shall be proved that the Guarantee Trustee was negligent
     in ascertaining the pertinent facts upon which such judgment was made;

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          (iii) the Guarantee Trustee shall not be liable with respect to any
     action taken or omitted to be taken by it in good faith in accordance with
     the direction of the Holders of not less than a majority in Liquidation
     Amount of the Preferred Securities relating to the time, method and place
     of conducting any proceeding for any remedy available to the Guarantee
     Trustee, or exercising any trust or power conferred upon the Guarantee
     Trustee under this Guarantee Agreement; and

          (iv) no provision of this Guarantee Agreement shall require the
     Guarantee Trustee to expend or risk its own funds or otherwise incur
     personal financial liability in the performance of any of its duties or in
     the exercise of any of its rights or powers, if the Guarantee Trustee shall
     have reasonable grounds for believing that the repayment of such funds or
     liability is not assured to it under the terms of this Guarantee Agreement
     or indemnity satisfactory to it against such risk or liability is not
     assured to it.

     Section 3.2 Certain Rights of Guarantee Trustee.

     (a) Subject to the provisions of Section 3.1:

          (i) The Guarantee Trustee may conclusively rely and shall be fully
     protected in acting or refraining from acting upon any resolution,
     certificate, statement, instrument, opinion, report, notice, request,
     direction, consent, order, bond, debenture, note, other evidence of
     indebtedness or other paper or document reasonably believed by it to be
     genuine and to have been signed, sent or presented by the proper party or
     parties.

          (ii) Any direction or act of the Guarantor contemplated by this
     Guarantee Agreement shall be sufficiently evidenced by an Officers'
     Certificate unless otherwise prescribed herein.

          (iii) Whenever, in the administration of this Guarantee Agreement, the
     Guarantee Trustee shall deem it desirable that a matter be proved or
     established before taking, suffering or omitting to take any action
     hereunder, the Guarantee Trustee (unless other evidence is herein
     specifically prescribed) may, in the absence of bad faith on its part,
     request and conclusively rely upon an Officers' Certificate.

          (iv) The Guarantee Trustee may consult with legal counsel, and the
     advice or opinion of such legal counsel with respect to legal matters shall
     be full and complete authorization and protection in respect of any action
     taken, suffered or omitted to be taken by it hereunder in good faith and in
     accordance with such advice or opinion. Such legal counsel may be legal
     counsel to the Guarantor or any of its Affiliates and may be one of its
     employees. The Guarantee Trustee shall have the right at any time to seek
     instructions concerning the administration of this Guarantee Agreement from
     any court of competent jurisdiction.

          (v) The Guarantee Trustee shall be under no obligation to exercise any
     of the rights or powers vested in it by this Guarantee Agreement at the
     request or direction of any Holder, unless such Holder shall have provided
     to the Guarantee Trustee such security and indemnity satisfactory to it,
     against the costs, expenses (including attorneys' fees and expenses) and
     liabilities that might be incurred by it in complying with such request or

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<PAGE>

     direction, including such reasonable advances as may be requested by the
     Guarantee Trustee; provided that, nothing contained in this Section
     3.2(a)(v) shall be taken to relieve the Guarantee Trustee, upon the
     occurrence of an Event of Default, of its obligation to exercise the rights
     and powers vested in it by this Guarantee Agreement.

          (vi) The Guarantee Trustee shall not be bound to make any
     investigation into the facts or matters stated in any resolution,
     certificate, statement, instrument, opinion, report, notice, request,
     direction, consent, order, bond, debenture, note, other evidence of
     indebtedness or other paper or document, but the Guarantee Trustee, in its
     discretion, may make such further inquiry or investigation into such facts
     or matters as it may see fit.

          (vii) The Guarantee Trustee may execute any of the trusts or powers
     hereunder or perform any duties hereunder either directly or by or through
     its agents or attorneys, and the Guarantee Trustee shall not be responsible
     for any misconduct or negligence on the part of any such agent or attorney
     appointed with due care by it hereunder.

          (viii) Whenever in the administration of this Guarantee Agreement the
     Guarantee Trustee shall deem it desirable to receive instructions with
     respect to enforcing any remedy or right or taking any other action
     hereunder, the Guarantee Trustee (A) may request and shall be entitled to
     receive instructions from the Holders, (B) may refrain from enforcing such
     remedy or right or taking such other action until such instructions are
     received, and (C) shall be fully protected in acting in accordance with
     such instructions.

     (b) No provision of this Guarantee Agreement shall be deemed to impose any
duty or obligation on the Guarantee Trustee to perform any act or acts or
exercise any right, power, duty or obligation conferred or imposed on it in any
jurisdiction in which it shall be illegal, or in which the Guarantee Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Guarantee Trustee
shall be construed to be a duty to act in accordance with such power and
authority.

     Section 3.3 Compensation; Indemnity; Fees.

     The Guarantor agrees:

     (a) to pay to the Guarantee Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which compensation shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust);

     (b) except as otherwise expressly provided herein, to reimburse the
Guarantee Trustee upon request for all reasonable expenses, disbursements and
advances incurred or made by the Guarantee Trustee in accordance with any
provision of this Guarantee Agreement (including the reasonable compensation and
the expenses and disbursements of its agents and counsel), except any such
expense, disbursement or advance as may be attributable to its negligence or bad
faith; and

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     (c) to indemnify the Guarantee Trustee and its directors, officers, agents
and employees for, and to hold it harmless against, any loss, liability or
expense incurred without negligence or bad faith on the part of the Guarantee
Trustee, arising out of or in connection with the acceptance or administration
of this Guarantee Agreement, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Guarantee Trustee will
not claim or exact any lien or charge on any Guarantee Payments as a result of
any amount due to it under this Guarantee Agreement.

     The provisions of this Section 3.3 shall survive the termination of this
Guarantee Agreement or the earlier resignation or removal of the Guarantee
Trustee.

                         Article IV. GUARANTEE TRUSTEE

     Section 4.1 Guarantee Trustee: Eligibility.

     (a) There shall at all times be a Guarantee Trustee which shall:

          (i) not be an Affiliate of the Guarantor; and

          (ii) be a Person that is eligible pursuant to the Trust Indenture Act
     to act as such and has a combined capital and surplus of at least
     $50,000,000, and shall be a corporation meeting the requirements of Section
     310(a) of the Trust Indenture Act. If such corporation publishes reports of
     condition at least annually, pursuant to law or to the requirements of the
     supervising or examining authority, then, for the purposes of this Section
     and to the extent permitted by the Trust Indenture Act, the combined
     capital and surplus of such corporation shall be deemed to be its combined
     capital and surplus as set forth in its most recent report of condition so
     published.

     (b) If at any time the Guarantee Trustee shall cease to be eligible to so
act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the
manner and with the effect set out in Section 4.2(c).

     (c) If the Guarantee Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee and Guarantor shall in all respects comply with the provisions
of Section 310(b) of the Trust Indenture Act.

     Section 4.2 Appointment, Removal and Resignation of the Guarantee Trustee.

     (a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or
removed without cause at any time by the Guarantor.

     (b) The Guarantee Trustee shall not be removed until a Successor Guarantee
Trustee has been appointed and has accepted such appointment by written
instrument executed by such Successor Guarantee Trustee and delivered to the
Guarantor. If an instrument of acceptance by a Successor Guarantee Trustee shall
not have been delivered to the Guarantee Trustee within 30 days after such
removal, the Guarantee Trustee being removed may petition any court of competent
jurisdiction for the appointment of a Successor Guarantee Trustee.

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     (c) The Guarantee Trustee appointed hereunder shall hold office until a
Successor Guarantee Trustee shall have been appointed or until its removal or
resignation. The Guarantee Trustee may resign from office (without need for
prior or subsequent accounting) by an instrument in writing executed by the
Guarantee Trustee and delivered to the Guarantor, which resignation shall not
take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee
Trustee.

     (d) If no Successor Guarantee Trustee shall have been appointed and
accepted appointment as provided in this Section 4.2 within 60 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, any court of
competent jurisdiction for appointment of a Successor Guarantee Trustee. Such
court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Guarantee Trustee.

                              Article V. GUARANTEE

     Section 5.1 Guarantee.

     The Guarantor irrevocably and unconditionally agrees to pay in full to the
Holders the Guarantee Payments (without duplication of amounts theretofore paid
by or on behalf of the Issuer), as and when due, regardless of any defense,
right of set-off or counterclaim which the Issuer may have or assert. The
Guarantor's obligation to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Guarantor to the Holders or by causing
the Issuer to pay such amounts to the Holders. The Guarantor shall notify the
Guarantee Trustee of any such payment.

     Section 5.2 Waiver of Notice and Demand.

     The Guarantor hereby waives notice of acceptance of the Guarantee Agreement
and of any liability to which it applies or may apply, presentment, demand for
payment, any right to require a proceeding first against the Guarantee Trustee,
Issuer or any other Person before proceeding against the Guarantor, protest,
notice of nonpayment, notice of dishonor, notice of redemption and all other
notices and demands.

     Section 5.3 Obligations Not Affected.

     The obligations, covenants, agreements and duties of the Guarantor under
this Guarantee Agreement shall in no way be affected or impaired by reason of
the happening from time to time of any of the following:

     (a) any amendment to the Indenture or the Trust Agreement;

     (b) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Issuer of any express or implied agreement,
covenant, term or condition relating to the Preferred Securities to be performed
or observed by the Issuer;

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     (c) the extension of time for the payment by the Issuer of all or any
portion of the Distributions (other than an extension of time for payment of
Distributions that results from the extension of any interest payment period on
the Debt Securities as provided in the Indenture), Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Preferred
Securities or the extension of time for the performance of any other obligation
under, arising out of, or in connection with, the Preferred Securities;

     (d) any failure, omission, delay or lack of diligence on the part of the
Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Preferred Securities, or
any action on the part of the Issuer granting indulgence or extension of any
kind; (e) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of debt of,
or other similar proceedings affecting, the Issuer or any of the assets of the
Issuer;

     (f) any invalidity of, or defect or deficiency in, the Preferred
Securities;

     (g) the settlement or compromise of any obligation guaranteed hereby or
hereby incurred; or

     (h) any other circumstance whatsoever that might otherwise constitute a
legal or equitable discharge or defense of a guarantor, it being the intent of
this Section 5.3 that the obligations of the Guarantor hereunder shall be
absolute and unconditional under any and all circumstances.

     There shall be no obligation of the Holders to give notice to, or obtain
the consent of, the Guarantor with respect to the happening of any of the
foregoing.

     Section 5.4 Rights of Holders.

     The Guarantor expressly acknowledges that: (i) this Guarantee Agreement
will be deposited with the Guarantee Trustee to be held for the benefit of the
Holders; (ii) the Guarantee Trustee has the right to enforce this Guarantee
Agreement on behalf of the Holders; (iii) the Holders of a majority in
Liquidation Amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee in respect of this Guarantee Agreement or exercising any
trust or power conferred upon the Guarantee Trustee under this Guarantee
Agreement; and (iv) if the Guarantee Trustee fails to enforce this Guarantee
Agreement, any Holder may institute a legal proceeding directly against the
Guarantor to enforce its rights under this Guarantee Agreement, without first
instituting a legal proceeding against the Issuer or any other Person. If the
Guarantor has failed to make a Guarantee Payment, a Holder may directly
institute a proceeding against the Guarantor for enforcement of this Guarantee
Agreement for such payment. The Guarantor waives any right or remedy to require
that any action on this Guarantee Agreement be brought first against the Issuer
or any other Person or entity before proceeding directly against the Guarantor.

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     Section 5.5 Guarantee of Payment.

     This Guarantee Agreement creates a guarantee of payment and not of
collection. This Guarantee Agreement will not be discharged except by payment of
the Guarantee Payments in full (without duplication of amounts theretofore paid
by the Issuer) or upon distribution of Debt Securities to Holders as provided in
the Trust Agreement.

     Section 5.6 Subrogation.

     The Guarantor shall be subrogated to all (if any) rights of the Holders
against the Issuer in respect of any amounts paid to the Holders by the
Guarantor under this Guarantee Agreement and shall have the right to waive
payment by the Issuer pursuant to Section 5.1; provided, however, that the
Guarantor shall not (except to the extent required by mandatory provisions of
law) be entitled to enforce or exercise any rights which it may acquire by way
of subrogation or any indemnity, reimbursement or other agreement, in all cases
as a result of payment under this Guarantee Agreement, if, at the time of any
such payment, any amounts are due and unpaid under this Guarantee Agreement. If
any amount shall be paid to the Guarantor in violation of the preceding
sentence, the Guarantor agrees to hold such amount in trust for the Holders and
to pay over such amount to the Holders.

     Section 5.7 Independent Obligations.

     The Guarantor acknowledges that its obligations hereunder are independent
of the obligations of the Issuer with respect to the Preferred Securities and
that the Guarantor shall be liable as principal and as debtor hereunder to make
Guarantee Payments pursuant to the terms of this Guarantee Agreement
notwithstanding the occurrence of any event referred to in subsections (a)
through (g), inclusive, of Section 5.3 hereof.

                    Article VI. COVENANTS AND SUBORDINATION

     Section 6.1 Subordination.

     The obligations of the Guarantor under this Guarantee Agreement will
constitute unsecured obligations of the Guarantor and will rank subordinate and
junior in right of payment to all Senior Indebtedness and Subordinated
Indebtedness (each as defined in the Indenture) to the extent and in the manner
set forth in the Indenture. The obligations of the Guarantor under this
Guarantee Agreement do not constitute Senior or Subordinated Indebtedness.

     Section 6.2 Pari Passu Guarantees.

     The obligations of the Guarantor under this Guarantee Agreement shall rank
pari passu with the obligations of the Guarantor under any similar Guarantee
Agreements issued by the Guarantor on behalf of the holders of the Trust
Securities issued by the Issuer (as defined in the Indenture).

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<PAGE>

                            Article VII. TERMINATION

     Section 7.1 Termination.

     This Guarantee Agreement shall terminate and be of no further force and
effect upon (i) full payment of the Redemption Price of all Preferred
Securities, (ii) the distribution of Debt Securities to the Holders in exchange
for all of the Preferred Securities or (iii) full payment of the amounts payable
in accordance with the Trust Agreement upon liquidation of the Issuer.
Notwithstanding the foregoing, this Guarantee Agreement will continue to be
effective or will be reinstated, as the case may be, if at any time any Holder
must repay any sums paid with respect to Preferred Securities or this Guarantee
Agreement.

                          Article VIII. MISCELLANEOUS

     Section 8.1 Successors and Assigns.

     All guarantees and agreements contained in this Guarantee Agreement shall
bind the successors, assigns, receivers, trustees and representatives of the
Guarantor and shall inure to the benefit of the Holders of the Preferred
Securities then outstanding. Except in connection with a consolidation, merger
or sale involving the Guarantor that is permitted under Article XI of the
Indenture and pursuant to which the successor or assignee agrees in writing to
perform the Guarantor's obligations hereunder, the Guarantor shall not assign
its obligations hereunder.

     Section 8.2 Amendments.

     Except with respect to any changes which do not adversely affect the rights
of the Holders in any material respect (in which case no consent of the Holders
will be required), this Guarantee Agreement may only be amended with the prior
approval of the Holders of not less than a Majority in Liquidation Amount of all
the outstanding Preferred Securities; provided, however, that all such
amendments shall comply with Section 316 of the Trust Indenture Act. The
provisions of Article VI of the Trust Agreement concerning meetings of the
Holders shall apply to the giving of such approval.

     Section 8.3 Notices.

     Any notice, request or other communication required or permitted to be
given hereunder shall be in writing, duly signed by the party giving such
notice, and delivered, telecopied (confirmed by delivery of the original) or
mailed by first class mail as follows:

     (a) if given to the Guarantor, to the address set forth below or such other
address, facsimile number or to the attention of such other Person as the
Guarantor may give notice to the Holders:

         Covanta Energy Corporation
         40 Lane Road
         Fairfield, New Jersey 07004

         Facsimile No.: [          ]
         Attention:  Treasurer

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     (b) if given to the Guarantee Trustee or the Issuer, in care of the
Guarantee Trustee, at the Issuer's (and the Guarantee Trustee's) address set
forth below or such other address as the Guarantee Trustee on behalf of the
Issuer may give notice to the Holders:

         Covanta Capital Trust [   ]
         c/o Covanta Energy Corporation
         40 Lane Road
         Fairfield, New Jersey 07004

         Facsimile No.: [          ]
         Attention:  Treasurer

         with a copy to:

         Bankers Trust Company
         [                          ]
         [                          ]

         Facsimile No.: [          ]
         Attention:     [          ]
                        [          ]

     (c) if given to any Holder, at the address set forth on the books and
records of the Issuer or to the names and addresses as shall have been filed
with the Guarantee Trustee within two years preceding such transmission.

     All notices hereunder shall be deemed to have been given when received in
person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

     Section 8.4 Benefit.

     This Guarantee Agreement is solely for the benefit of the Holders and is
not separately transferable from the Preferred Securities.

     Section 8.5 Interpretation.

     In this Guarantee Agreement, unless the context otherwise requires:

     (a) capitalized terms used in this Guarantee Agreement but not defined in
the preamble hereto have the respective meanings assigned to them in Section
1.1;

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<PAGE>

     (b) a term defined anywhere in this Guarantee Agreement has the same
meaning throughout;

     (c) all references to "the Guarantee Agreement" or "this Guarantee
Agreement" are to this Guarantee Agreement as modified, supplemented or amended
from time to time;

     (d) all references in this Guarantee Agreement to Articles and Sections are
to Articles and Sections of this Guarantee Agreement unless otherwise specified;

     (e) a term defined in the Trust Indenture Act has the same meaning when
used in this Guarantee Agreement unless otherwise defined in this Guarantee
Agreement or unless the context otherwise requires;

     (f) a reference to the singular includes the plural and vice versa; and

     (g) the masculine, feminine or neuter genders used herein shall include the
masculine, feminine and neuter genders.

     Section 8.6 Governing Law.

     THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE
CONFLICT OF LAW PRINCIPLES THEREOF.

     This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.

     THIS GUARANTEE AGREEMENT is executed as of the day and year first above
written.

                           COVANTA ENERGY CORPORATION

                           By:
                              -----------------------------------------
                                Name:
                                Title:


                           BANKERS TRUST COMPANY
                           as Guarantee Trustee

                           By:
                              -----------------------------------------
                                Name:
                                Title:




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