The Future of the Clean Development Mechanism: African Perspectives Initial Findings of a

1. The Future of the Clean Development Mechanism: African Perspectives Initial Findings of a Climate Strategies Research Project ecbi Regional Eastern and Southern Africa Workshop Gabarone/Botswana September 2008 Benito Müller based on contributions by Francis Yamba and Holger Liptow european capacity building initiative ecbi Oxford Institute for Energy Studies

2. The Clean Development Mechanism in the post-2012 Climate Change Regime Project Leaders: University of Zurich (Axel Michaelowa) and OIES (Benito Müller) Project Partners: Tsinghua University/Beijing (Duan Maosheng) Federation of Indian Chambers of Commerce and Industry (Prodipto Ghosh) Center for Energy Environment and Engineering, Lusaka, Zambia (Francis Yamba) The project is structured by thematic 'work packages' (to be carried out in two phases: April 08-June 09, and April 09-December 09) and by a number of 'host country modules'. Phase I: April 2008 to June 2009 (Funded by UK DFID) WP.1: Project CDM. WP.2: Programmatic CDM WP.3: Enhanced CDM: Phase II: April 2009 to December 2009 WP.4: Assessment of “low-hanging fruit” in project as well as enhanced CDM WP.5: CER Put Options -- An instrument to manage host country carbon investment risks. WP.6: Summary Report. Three Workshops: 21 July in Beijing, 29 July in New Delhi, 6 September in Oxford

3. CDM (in Africa): BACKGROUND The Idea It is an innovative cooperative mechanism under the Kyoto Protocol of the United Nations Framework Convention on Climate Change (UNFCCC). It was designed with the dual aim of assisting developing countries in achieving sustainable development and assisting industrialised countries in achieving compliance with their Greenhouse Gas (GHG) emission-reduction commitments. It is also meant to allow companies in developing countries to become fully engaged in climate change initiatives and to benefit from new investments, transfer of cleaner technologies and generation of “Certified Emission Reduction” credits (CERs) that can be sold to (companies in) developed countries to meet their targets. 3

4. REGISTERED PROJECTS BY REGION Out of 965 projects registered by end of March 2008, only 25 projects have been registered in Africa representing only 2.6% of the total registered projects WHY SUCH A SLOW UPTAKE?? CDM (in Africa): BACKGROUND 4

5. Two Reasons for Slow Uptake 5 1. Complex Procedures One of the arguments advanced for this low participation in CDM market in Africa is the complexity of modalities and procedures of CDM. 2. Domestic Barriers Others argue that a variety of domestic barriers exist which contribute to this low CDM participation.

6. CDM MODALITIES AND PROCEDURES 6 • Realising the CDM low participation in Africa, the CDM Executive Board introduced simplified procedures and methodologies for small scale projects intended to stimulate development of CDM projects in Africa, as well as the possibility of project ‘bundling’ • Despite these incentives, of the total number of projects in the Africa CDM pipeline by August 2008, only a small percentage of small scale projects were registered. • A number of factors have been identified for this low performance to include non interest from carbon purchasers who preferred larger projects. Even bilateral carbon purchasers insisted on high CERs, for example more than 30,000 tonnes per annum by the WB CDCF. • The transaction costs are still relatively high. For example, studies have shown that transaction costs are still too high to make small scale LULUCF projects economically feasible • Further, the additionality arguments are almost the same as for large projects.

7. CDM POLICY FRAMEWORK 7 • Facilitate the development of simplified methodologies which encompass regional baselines to enable small scale projects feed into regional electricity grid, For example Southern African Power Pool ( SAPP), and Western and Eastern African Power Pools. • The proposed sectoral based methodologies are welcome to Africa, but implementation should not be at country level but regional/continental levels in view of few number of some industries per sector in each individual country.

8. CDM post 2012 negotiation: African Perspectives Sustainable development should be the point of focus. This is needed since it is the objective of the Convention on this aspect, but experience has shown that CDM has tended to award prominence to emission reduction Eligibility of avoided deforestation and land degraded projects to include charcoal production, agriculture and bioenergy projects Further increase the threshold for small scale projects beyond 60,000 tonnes per annum to enable increased bundling. Formulation of simplified methodologies for regional baseline for electricity grids Although the Kyoto Protocol specifies emphasis on transfer of technology as part of the CDM, this aspect has not materialised 8

9. CDM post 2012 negotiation: African Perspectives 9 • This time around as part of the AWG negotiations, it is essential that what is being proposed as part of the Bali Action Plan 1/CP.13 ‘ Nationally appropriate mitigation actions by developing country Parties in the context of sustainable development, supported and enabled by technology, financing and capacity building in a measurable, reportable and verifiable manner’ should in reality be converted from words into actions • Equally as part of the AWG negotiations, the mechanism on transfer of technology should be vigorously followed to ensure what is being proposed under 3/CP.13 Annex 1 E ‘Mechanism for technology transfer relating to innovative options for financing and development of technologies’ in particular clauses d and e are agreed upon and implemented • ‘To encourage Parties to create an environment conducive for private sector investments by providing such incentives as greater access to multilateral sources and other sources of targeted .smart. subsidy schemes that trigger private sector co-financing’

10. Indian Perspective: New Delhi Inception Workshop • The CDM reforms must ensure a healthy demand and supply balance of CERs. The demand for emission credits depends on the willingness of Annex I parties to accept the credits in the domestic policies. As the reforms look at generating more supply of projects from developing countries, the stability of demand for CERs in the long run is a critical issue that needs to be addressed in the second commitment period of the Kyoto Protocol. • The concept of carbon additionality needs to be revisited in respect of certain technologies, for example renewable energy technologies where CO2 reduction can be easily inferred / presumed. Financial additionality should be done away with, as it would restrict the project pipeline and hinder CDM projects from coming on board.

11. Indian Perspective: New Delhi Inception Workshop • Country specific baselines should be developed because viability of projects depends on the circumstances of the country. • Smaller projects and sectors with potential opportunities that remain untapped under the present framework need to be tapped under the CDM in the second commitment period. Mechanisms designed for aggregating projects from small and medium enterprises (SMEs) such as Programmatic CDM need to be enhanced for better results. • There is an urgent need for facilitation of aggregators/bundling entities to promote programmatic CDM in the SME sector. The reforms in CDM must address capacity building needs to aid the development of aggregators, which would be an important step towards strengthening the project pipeline.

12. Chinese Perspective: Beijing Inception Workshop • Sectoral CDM - 4 Possible Approaches • cap-based, • intensity-based, • policy-based and • technology-based • Major challenges for sectoral CDM: • Avoidance of double accounting in case that current CDM continues to exist. If no feasible technical solution could be found, the current CDM may come to an end. • The establishment of an effective incentive mechanism. The emission reductions are to be achieved by companies, if the incentive mechanism is not effective (e.g. all of the credits will be issued to the government or the industry associations), the companies may have no interest in reducing emission.

13. Chinese Perspective: Beijing Inception Workshop • Mr. YI Xianliang (Ministry of Foreign Affairs): • For developing countries to be involved effectively in the global mitigation efforts, the CDM must continue after 2012 • Involvement of energy intensive industries such as iron and steel and cement in the CDM and mitigation of emissions in such sector is of key importance. • CDM is a bridge for developed and developing countries to cooperate in GHG mitigation, but real market demand is vital to the survival of CDM. • Mr. Lu Xuedu (Ministry of Science and Technology, CDM EB) • The absolute target-based approach may be very difficult because developing countries in many cases experience leap development and it is not possible to predict precisely the BAU emissions. • As for intensity-based approach, different products may exist in one sector and one single intensity baseline may not be feasible. • As for technology-based approach, it may be practical for some major technologies. • As for policy-based approach, the assessment of additionality may be a serious challenge but the EB guidance on E+/E- policy may serve as a basis for discussion.

14. The CDM as vehicle for the Bali Road Map Bali Action Plan: (Decision 1/CP13) 1. [The COP] Decides to launch a comprehensive process to enable the full, effective and sustained implementation of the Convention through long-term cooperative action, now, up to and beyond 2012, in order to reach an agreed outcome and adopt a decision at its fifteenth session, by addressing, inter alia: b. Enhanced national/international action on mitigation of climate change, including, inter alia, consideration of: ii. Nationally appropriate mitigation actions by developing country Parties in the context of sustainable development, supported and enabled by technology, financing and capacity-building, in a measurable, reportable and verifiable manner;

15. The CDM as vehicle for the Bali Road Map • Can the CDM serve as implementing tool of Para. 1.b.ii? • Pro: CDM links MRV actions in non-Annex I actions with MRV financial support from within Annex I countries • Contra: CDM has not delivered on technology transfer, or capacity building • Contra: CDM is a flexibility mechanism for Annex I compliance, it does not (necessarily) lead to global emission reductions, as arguably required by the concept of “mitigation actions by developing country Parties.” • R-CDM: Solution? • Voluntary or mandatory retirement of CERs • Mandatory: CER Retirement Obligations (R-CEROs) on developed countries, with a safety valve of R-CERO-Waivers, sold internationally to finance, in particular, MRV technology transfer and capacity building