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Swedish International Development Agency

A pplying C LEANER PRODUCTION to M ULTILATERAL E NVIRONMENTAL AGREEMENTS. ACME. CDM Clean Development Mechanism (and trading of CERs). S ESSION 5. United Nations Environment Program Division of Technology Industry and Economy. Swedish International Development Agency.

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Swedish International Development Agency

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  1. ApplyingCLEANER PRODUCTION to MULTILATERAL ENVIRONMENTAL AGREEMENTS ACME CDM Clean Development Mechanism (and trading of CERs) SESSION5 United Nations Environment ProgramDivision of Technology Industry and Economy Swedish International Development Agency

  2. ACME – Session 5 – Clean Development Mechanism - 2 / 39 OUTLINE Objectives of this session • 1/ Overview of the Clean Development Mechanism (CDM) • > What are the objectives and purpose of CDM ? • 2/ Basics • > What are the key concepts ? • 3/ Organisation of a CDM project > What are the different steps of a CDM project ? • 4/ Statistics • > Where are we now with the CDM and how are emission reduction credits traded on the markets? • 5/ Opportunities for industrials • > What are the challenges and opportunities for industrials in developing countries ?

  3. ACME – Session 5 – Clean Development Mechanism - 3 / 39 OVERVIEW About Kyoto Protocol • Signed in 1997; in force since 16 February 2005. • Ratified by more than 130 countries • > Major non participants: USA and Australia. • Commits Annex 1 countries to reducing greenhouse gas emissions. • > GHG emissions may be reduced by ~ 5% below 1990 levels in 2008-2012; • > Individual, quantified emission targets for each industrialized country; • > 6 greenhouse gas covered: CO2, CH4, N2O, HFC, PFC, SF6. • 3 flexibility mechanisms for financing emission reduction abroad. • > Clean Development Mechanism (CDM) • > Joint Implementation (JI) • > International Emissions Trading (ET)

  4. ACME – Session 5 – Clean Development Mechanism - 4 / 39 OVERVIEW CDM: the basic idea • What is the Clean Development Mechanism (CDM) ? • > A mechanism that allows Annex B Countries to undertake GHG emission reduction projects in non-annex B countries, and to use the achieved emission reductions to meet their own emission goal. • > In CDM projects, the Annex B country fund the project and provides any necessary know-how and technology transfer to the non-annex B country where the project is implemented. • > CDM works because emission reductions are many times more expensive to achieve in Annex B countries than in non-Annex B countries (the opportunities for emission reduction are bigger there). Make difference between Annex I and Annex B countries!

  5. ACME – Session 5 – Clean Development Mechanism - 5 / 39 OVERVIEW Examples of CDM projects

  6. ACME – Session 5 – Clean Development Mechanism - 6 / 39 OVERVIEW Introduction to the carbon market • Two main commodities traded in the carbon market • > Emission allowance (AAU and EUA) • > Project-based emissions reductions (CER and ERU) • Four different major markets • > Kyoto Protocol • > EU Emissions Trading Scheme • > Canada Greenhouse Gas Offset System • > Japan (voluntary trading system) Annex 1 countriesEU – 25CanadaJapanOther OECD CDM JI Developing Countries Central and Eastern Europe Emission Reduction Units (ERUs) Certified Emission Reduction(CERs)

  7. ACME – Session 5 – Clean Development Mechanism - 7 / 39 OVERVIEW CDM organisation and objectives • Rules, modalities and procedures of CDM are defined in: > Kyoto Protocol; > Follow-up decisions of COP; > Decisions of CDM Executive Board. • CDM EB (Executive Board): > Responsible for further development of CDM rules, and supervising implementation; > Composed of 10 members + 10 alternates; > Reports to the COP (Conference of the Parties). • Twin objectives of CDM: > Help Annex 1 countries meet their objectives in a cost-effective way; > Contribute to sustainable development of the host country.

  8. ACME – Session 5 – Clean Development Mechanism - 8 / 39 BASICS Additionality and baselines “A project is eligible for CDM if greenhouse gas emissions are reduced below those that would have occurred in the absence of the CDM project.” GHG emissions(tCO2eq) 1. Validation of project design, baseline and monitoring plan 2. Verification / Certification of emission reductions Emissions baseline ADDITIONALEMISSIONREDUCTIONS Emissions after the project Years Project implementation

  9. ACME – Session 5 – Clean Development Mechanism - 9 / 39 BASICS Conditions for additionality

  10. ACME – Session 5 – Clean Development Mechanism - 10 / 39 BASICS CDM requirements

  11. ACME – Session 5 – Clean Development Mechanism – 11 / 39 BASICS Where is CDM applicable ? Electrical energy saving1 kWh = 0.8 ~ 0.9 kg CO2 Power generation (waste heat / renewable)1 MW = 4.000 ~ 5.000 t CO2 Coal saving1 kg = 1.3 ~ 1.6 kg CO2 Fuel oil saving1 litre oil = 3 ~ 3.5 kg CO2 NG based power generation1 kWh generation = 0.35 ~ 0.45 kg CO21 kg NG burning/saving = 2.4 ~ 2.5 kg CO2

  12. ACME – Session 5 – Clean Development Mechanism - 12 / 39 ORGANISATION CDM project cycle

  13. ACME – Session 5 – Clean Development Mechanism - 13 / 39 ORGANISATION Content of the PIN (Project Idea Note) • Standardized format for the PIN • > the type, size and location of the project; • > the anticipated total amount of GHG reduction compared to the “business-as-usual” scenario (which will be elaborated later in the PDD, while describing the baseline); • > the suggested crediting life time; • > the financial structuring (indicating which parties are expected to provide the project’s financing); • > the project’s socio-economic or environmental impacts/benefits; • > history of the project regarding other donors and funding tenders; • > capacity of project developer to invest in the project.

  14. ACME – Session 5 – Clean Development Mechanism - 14 / 39 ORGANISATION Content of the PDD Standardized format for PDD – Project Design Document (main document in the CDM cycle) A. General description of the project B. Setting of the baseline C. Duration of the project / Crediting period D. Setting of the monitoring plan E. Estimation of GHG emission reductions F. Environmental impacts G. Stakeholders’ comments - Annex 1: Contact information on participants in the project Annex 2: Information regarding Public Funding Annex 2: Baseline information Annex 3: Monitoring plan

  15. ACME – Session 5 – Clean Development Mechanism – 15 / 39 ORGANISATION PDD: CDM baseline methodologies

  16. ACME – Session 5 – Clean Development Mechanism - 16 / 39 ORGANISATION PDD: Approved methodologies Statistics on October 2005 fromhttp://cdm.unfccc.int/ (UNFCCC)

  17. ACME – Session 5 – Clean Development Mechanism - 17 / 39 ORGANISATION PDD: Methodologies submitted Statistics on October 2005 fromhttp://cdm.unfccc.int/ (UNFCCC)

  18. ACME – Session 5 – Clean Development Mechanism - 18 / 39 ORGANISATION PDD: Crediting period • Carbon credit (CER) can be generated as from now: • > Banking by buyer for use towards compliance in 2008-20012. • > Banking by project proponent for sale in later years. • Crediting period: • > Usually starting the later of CDM registration, and start of project operation. • > Fixed crediting period of up to 10 years. OR • > Renewable crediting periods of up to 7 years (maximum 3 x 7 years).

  19. ACME – Session 5 – Clean Development Mechanism - 19 / 39 ORGANISATION Host country approval • Formal confirmation by the Designated National Authority (DNA) of the hosting country that the project meets sustainable development objectives. • Sustainable development criteria set by the DNA: • > Social well being: employment, alleviation of poverty, etc. • > Economic well being: investment consistent with needs of the people. • > Environmental well being: impacts on the local and global environment, pollution, etc. • > Technological well being: transfer of environment safe and sound technologies.

  20. ACME – Session 5 – Clean Development Mechanism - 20 / 39 ORGANISATION Validation • Independent assessment by a Designated Operational Entity (DOE) that project meets criteria of the Kyoto Protocol. • DOE shall: • > Review the PDD and supporting documentation; • > Conduct site visit; • > Interact with stakeholders; • > Source other relevant additional information from various sources; • > Publish the PDD in the web for international stakeholder comments. • A successfully validated project can be submitted to CDM Executive Board for registration.

  21. ACME – Session 5 – Clean Development Mechanism - 21 / 39 ORGANISATION Registration • Automatic registration of submitted projects unless 3 members of the CDM Executive Board or one of the parties involved file a request for review within a delay of: • > 4 weeks for small scale project; • > 8 weeks for large scale project. • Registration fees are payable to the Executive Board by the project participants depending on the quantity of emission reductions: • > Between 5.000 to 30.000 US$.

  22. ACME – Session 5 – Clean Development Mechanism - 22 / 39 ORGANISATION Last steps • Last steps of the process: • > Project financing. • > Monitoring emissions. • > Validation and certification. • > Insurance of CERs.

  23. ACME – Session 5 – Clean Development Mechanism - 23 / 39 ORGANISATION Transaction cost of the CDM • Estimation of transaction costs during the CDM cycle • > PDD ~ 15.000 to 30.000 € • > DNA approval ~ 5.000 € • > Validation ~ 10.000 € • > Registration ~ 5.000 to 30.000 US$ • > Administration ~ 0,2 US$ / CER • > Verification 5.000 € per turn • At CER prices of 10 €/t CO2 equivalent, the viability threshold of projects is at ~ 10.000 CERs/years.

  24. ACME – Session 5 – Clean Development Mechanism - 24 / 39 ORGANISATION CDM additionality tool “An optional flow chart, adopted by the executive board in October 2004, applicable to any type of project for the demonstrate of additionality.” STEP 0 – Preliminary screening based on the starting date of the project activity Start date of claiming credits for project should precede date of registration CDM consideration proved = PASS STEP 1 - Identification of alternatives consistent with current laws and regulations If proposed CDM project is the only alternative left, the project is non-additional More than one alternative = Pass STEP 3 - Barrier Analysis No barriers , the project is non-additional STEP 2 - Investment Analysis CDM financially attractive CDM financially not attractive CDM faces Barriers = PASS STEP 4 - Common Practice Analysis (credibility check) If similar activity can be observed with no essential difference, the project is non-additional No similar activity or similar activities present but difference in circumstances = PASS STEP 5 - Impact of CDM registration If CDM benefits have no impact, the project is non-additional PROJECT ACTIVITY IS ADDITIONAL

  25. ACME – Session 5 – Clean Development Mechanism - 25 / 39 ORGANISATION Fast track for small-scale CDM project • Why do we need a fast track? • > Process not worth it for small projects (high transaction costs); • > Many small projects deliver significant local sustainable development benefits; • > Small-scale technologies are some of the most promising for solving the long term problem of climate change (e.g. solar; wind; fuel cells); • > CDM might lose public support if rules are biased toward large capital-intensive projects. • Size limits for small-scale projects • > Electricity generation from renewable sources, up to 15 MW. • > Energy efficiency projects saving, up to 15 GWh p.a. • > Project reducing emissions up to 15.000 t CO2eq p.a. • Small-scale projects benefits from simplified rules and procedures • > Simplified PDD; • > 14 pre-approved baseline methodologies (feb. 2005); • > Same operational entity may undertake validation and verification / certification; • > For small-scale projects, sufficient to demonstrate that barriers would have led to higher emissions in absence of CDM.

  26. ACME – Session 5 – Clean Development Mechanism - 26 / 39 STATISTICS Upswing of CDM (1/3) Statistics on July 1st 2006 fromhttp://www.cd4cdm.org/(UNEP) • Carbon market in 2005: • > In 2005, global carbon market transactions worth €9,4 billion. • > In 2005, CDM projects transactions worth €1,9 billion. • Statistics of CDM (as per June 2006): • > 225 projects registered, for an average of 70 millions CERs/Year. • > 36 projects submitted for registration, for an average of 4,6 millions CERs/Year. • > 860 projects known to be prepared for registration. • > 165 proposed baselines methodologies were sent to the CDM EB for approval, 60 approved, 66 rejected and 39 are pending.

  27. End of 2004 End of 2005 ACME – Session 5 – Clean Development Mechanism – 27 / 39 STATISTICS Upswing of CDM (2/3) Number of projects registered or known to be prepared for registration:

  28. ACME – Session 5 – Clean Development Mechanism - 28 / 39 STATISTICS Upswing of CDM (3/3) Annual volumes (million tCO2e) of project-based emission reductions transactions and annual average price in US$ per tCO2.

  29. ACME – Session 5 – Clean Development Mechanism - 29 / 39 STATISTICS Registered projects (1/3) Statistics on July 1st 2006 fromhttp://cdm.unfccc.int/Statistics/ Expected average annual CERs from registered projects by host countries* Registered project by host countries* * List of host countries:Argentina, Armenia, Bangladesh, Bhutan, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Ecuador, El Salvador, Fiji, Guatemala, Honduras, India, Indonesia, Israel, Jamaica, Malaysia, Mexico, Morocco, Nepal, Nicaragua, Panama, Papua New Guinea, Peru, Republic of Korea, Republic of Moldova, South Africa, Sri Lanka and Viet Nam.

  30. ACME – Session 5 – Clean Development Mechanism - 30 / 39 STATISTICS Registered projects (2/3) Statistics on July 1st 2006 fromhttp://cdm.unfccc.int/Statistics/ Registered project by Annex 1 countries involved Registered project by scope

  31. ACME – Session 5 – Clean Development Mechanism - 31 / 39 STATISTICS Registered projects (3/3) Statistics on July 1st 2006 fromhttp://www.cd4cdm.org/(UNEP) CDM projects in each sector CERs until 2012 in each sector

  32. ACME – Session 5 – Clean Development Mechanism - 32 / 39 OPPORTUNITIES Who is buying CER? Buyers based in Europe (41% in 2004, 56% in 2005) and Japan (36% versus 38%) dominate the market for project-based transactions. January 2004 to December 2004Overall volume: 110,0 million tCO2e January 2005 to March 2006Overall volume: 453,5 million tCO2e * as a share of volume contracted.

  33. ACME – Session 5 – Clean Development Mechanism - 33 / 39 OPPORTUNITIES Location of projects Asia accounted for the largest share (73%) of contracted volume of project-based transactions signed. January 2004 to December 2004 January 2005 to March 2006 * as a share of volume contracted.

  34. ACME – Session 5 – Clean Development Mechanism - 34 / 39 OPPORTUNITIES What is being sold ? Technology share of emission reduction projects: January 2004 to December 2004 January 2005 to March 2006 * as a share of volume contracted.

  35. ACME – Session 5 – Clean Development Mechanism - 35 / 39 OPPORTUNITIES How are CERs sold ? (1/2) • Contractual arrangements vary depending on how risks are located between Buyer and Seller: • > Project risk - whether or not the project will adequately perform and produce the expected amount of emissions reductions. • > Country risk - whether the political and investment climate of host country is stable. • > Regulatory risk – whether or not the project will ultimately be deemed additional and registered by the CDM Executive Board. • Various contract features are used to allocate these risk between the buyers and the seller: • > Guarantees; • > Upfront payments; • > Penalties and damage clauses; • > Default clauses; • > Disbursement schedules.

  36. ACME – Session 5 – Clean Development Mechanism - 36 / 39 OPPORTUNITIES How are CERs sold ? (2/2)

  37. ACME – Session 5 – Clean Development Mechanism - 37 / 39 OPPORTUNITIES Future demand for CERs

  38. ACME – Session 5 – Clean Development Mechanism - 38 / 39 CONCLUSION Next steps • CDM is real • > 225 projects registered and 60 methodologies approved; • > In 2005 CDM projects transactions worth €1,9 billion. • Industrials in developing countries have a role to play • > Prices for emissions reduction are increasing; • > Buyers and Sellers are innovating ways of addressing risk; • > Early entrants will have a clear advantage. • Challenges for CDM in the next years • > DNA approval capacities; • > High methodology rejection rates; • > Annex 1 companies may only be interested in buying CER, not in investing in project (exception for some Japanese companies); • > Gap between CER and EU allowance prices (50% even for registered projects); • > Interpretation of national policies in baseline methodologies; • > Availability of reliable and authentic data for establishing baselines.

  39. ACME – Session 5 – Clean Development Mechanism - 39 / 38 CONCLUSION End of session 5 Thank you for your attention… Any questions?

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