Carbon Finance: Opportunities and Challenges in Mauritius Dream Cazzaniga

Carbon Finance: Opportunities and Challenges in Mauritius

Dream CazzanigaUniversita’ L. Bocconi, Milano, Italy

UNDP Mauritius - dream.cazzaniga@undp.org

03 September 2008

22

Overview

1.1. Status of energy supply & demandStatus of energy supply & demand

2. The CDM and the Carbon Market

3.3. Opportunities & Challenges for Carbon Opportunities & Challenges for Carbon Market in MauritiusMarket in Mauritius

4. UNDP’s Carbon strategy

33

Agenda

1.1. Status of energy supply & demandStatus of energy supply & demand

2. The CDM and the Carbon Market

3. Opportunities & Challenges for Carbon Market in Mauritius

4. UNDP’s Carbon strategy

44

Republic of Mauritius:Dependence on Fossil Fuel

Year1992 1996 2000 2004 2008

Impo

rt D

epen

denc

y (%

)

65

70

75

80

85

55

CO2 and non-CO2 Emissions

Year1990 1995 2000 2005 2010 2015 2020

CO

2 A

mou

nt (1

06 t)

0

1

2

3

4

5

6

7

RemovalsEmisisons (measured)Emisisons (forecast)

2.52 tonnes CO2 per capita (2006)

GAS 1000 tonnes(2006)

CO 64.8

NO2 16.6

CH4 13.0

N2O 1.7

NMVOC 17.7

SO2 33.0

66

Sectoral CO2 Emissions (2006)

Electricity (57.1%)

Transport (25.2%)

Manufacturing (12.1%)

Residential (4.1%)

other (1.5%)

Electricity & Transport account for >82% of total emissions

77

Electricity Demand - 1

Year1980 1985 1990 1995 2000 2005

Ele

ctric

ity G

ener

ated

(GW

h)

0

500

1000

1500

2000

2500

5-6% per year

Demand growing at 5-6% per annum over the past decade

88

Electricity Demand - 2 (Sectoral Consumption)

Commercial (31%)

Industrial (34%)

Domestic (33%)

other (2%)

Commercial, Industrial and Domestic activities claim one third each of electricity consumption

99

Electricity Supply (Fuel Input, 2006)

Fuel Oil & Diesel (43.5%)

Coal (34%)Bagasse (19%)

Hydro (3.3%)

~78% of electricity produced from fossil fuels

1010

Fueling Transport

• 100% dependence on fossil fuels

• Gasolene – 23%; Diesel – 41%; Aviation – 35%; LPG – 1%

• Claims almost 50% of final energy consumption

• Offers huge opportunities for emissions reduction, but may also be more challenging

1111

Agenda

1.1. Status of energy supply & demandStatus of energy supply & demand

2. The CDM and the Carbon Market

3. Opportunities & Challenges for Carbon Market in Mauritius

4. UNDP’s Carbon strategy

1212

The legal framework for the Carbon Market

Kyoto Protocol (COP 3 - 1997)The Protocol creates legally binding obligations for 38 industrialized countries (countries Annex I) to return their emissions of greenhouse gases (GHG) to an average of 5% below their 1990 levels by 2012

Marrakech Accords (COP 7 - 2001)Define the principles of the Kyoto Protocol’s flexible mechanisms:

- Clean Development Mechanism (CDM)

- Joint Implementation (JI)

- Emissions Trading (ET)

1313

The role of the Clean Development Mechanism (CDM)

Developed countries can

reduce emissions anywhere in the

world

They can count these reductions towards their own

targets

CDM allows developed countries to generate ‘Carbon

credits’ (Certified Emission

Reductions, CERs) in developing

countries

Advantages for developed countries (Annex 1):

relatively low-cost & politically acceptable

Advantages for developing countries (non-Annex 1):

inward investment, environmental & technology

benefits

1414

How does a CDM project generate Carbon credits

• Carbon credits (CERs) represent the difference between the baseline (Business as Usual scenario) and actual emissions.• CERs acquired by Annex 1 countries increase the national emissions cap.

15

• Every Carbon project requires a baseline study

• The purpose of the baseline study is to determine the baseline scenario for each GHG component of the project

• In order not to exaggerate the emission reductions achieved by the project, the baseline study must adopt a conservative approach whenever assumptions about future developments need to be made (The principle of conservativeness)

• A baseline is calculated through a methodology which is an application of a baseline approach to an individual project activity, reflecting aspects such as sector and region.

Baseline study

1616

• The Kyoto Protocol states: “Reductions in emissions must be additional to any that would occur

in the absence of the project activity”

• Assessment of additionality is intrinsically linked with the baseline establishment

• We can articulate ‘additionality’ in:

– Environmental additionality – reductions in GHG emissions

(It is essential: otherwise, it will not generate any carbon credits!)

– Financial additionality – the project only happens because of the financial incentive offered by carbon credits

– Legal additionality – the project does more than what is required by local law

Additionality

17

• Benchmark analysis

An appropriate financial indicator can be used for a comparison with a relevant benchmark value: e.g. required return on capital or internal company benchmark

Project without carbon revenue is profitable –

but not sufficiently profitable

compared with alternatives

Project without carbon element

Project with carbon element

Carbon revenue makes the

project attractive relative to investment alternatives

Investmentthreshold

Rev

enue

/ N

PV /

IRR

Financial additionality

1818

In 3 years, the CDM has sparked a $5 billion/year market

Jan05

Mar05

May05

Jul05

Sep05

Nov05

Jan06

Mar06

May06

Jul06

Sep06

Nov06

Jan07

Mar07

May07

July07

Sep07

Nov07

Jan08

Mar08

67 83 118 171 275440 554 647 749

883

1,1411,311

1,4951,759

1,885

2,285

2,5932,838

3,0353,265

Number of Projects in the CDM Pipeline,January 2005 – March 2008

Compound Monthly Growth Rate = 11%

Approximately 3 billion CERs by 2012

1919

There are over 45 Carbon Markets – but 3 principal regimes

Kyoto Mandatory Regime Non-Kyoto MandatoryRegimes

Voluntary Regimes

UNFCCC

Kyoto Protocol

CDMNon-Annex 1

Countries (Developing Countries)

Joint ImplementationAnnex 1 Countries

European Union Trading Scheme

(EU-ETS)

New South Wales

(Australia)

Individual US States

(East Coast, California, Oregon)

Chicago Climate Exchange (CCX)

Retail MarketLinkingDirective

2020

Agenda

1.1. Status of energy supply & demandStatus of energy supply & demand

2. The CDM and the Carbon Market

3. Opportunities & Challenges for Carbon Market in Mauritius

4. UNDP’s Carbon strategy

2121

Sub-Saharan Africa is struggling …

• 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012

• Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to 2012

• Africa accounts for 11% of global GHG potential reductions by 2010

Number of CDM Projects In Selected Countries (May 2008)

(Registered projects)

2222

Electricity - How ‘dirty’ is Mauritius grid?

For Mauritius:

EFgrid,OM,y = 0.9243 tCO2 / MWh; EFgrid,BM,y = 1.0322 tCO2 / MWh;

EFgrid,CM,y = 0.9783 tCO2 / MWh

QUITE DIRTY

Much scope for CO2 reductions through the use of Much scope for CO2 reductions through the use of Energy Efficiency and Renewable EnergyEnergy Efficiency and Renewable Energy

EFgrid,OM,y : Generation-weighted average CO2 emissions net of electricity generated (excludes low-cost, must run plants & CDM projects).

EFgrid,BM,y : Generation-weighted average CO2 emissions net of electricity generated of either 5 most recently built plants or 20% of last power generated.

2323

Electricity - 1Demand Side Management (CFLs - Compact fluorescent lamps)

• Replacing incadescent lamps with CFLs• CEB 1million CFLs project (3 X 14W CFLs per

household in Mauritius by September 2008) Expected night demand reduction by up to 20 MW

• CEB already has a contractual agreement with Climate Care for looking into C-finance of project (VERs/CERs)

• UNDP working on a strategy to generate demand for an additional 1-2 million CFLs

• Also carrying out a detailed analysis of lighting needs / status in: (1) hotels (2) local authorities and (3) industrial estates

2424

Electricity - 2• Solar Hot Water Units

• The Government of Mauritius is providing an economic incentive to deploy Solar Hot Water (SHW) units for replacing existing electricand gas water heaters.

• This project can yield between 6,114 tCO2e/yr and 8,253 tCO2e/yr by the end of 2009 (for 20000 SHW units)

• Assuming 1 CER = Euro 10, carbon layer is in the range of Euro 61,140-82,530 by end of 2009

• Potential for further deployment: ~97800 SHW units 29,897-40,362 tCO2e/yr Euro298,970-403,620/yr.• CDM methodology for SHW systems is being developed by SouthSouthNorth

2525

Electricity – 3 Renewable Energy (Wind / PV)• Strong potential CO2 reductions: Electricity input/year x EFgrid

for a 25MWp --> 50,000 MWh/year x 0.9522 tCO2/MWh = = 48,918 tCO2/year (CERs) for 100 MWp --> 195,672 tCO2/year (CERs )•Challenges• Lack of wind and solar insolation maps prevent the

accurate determination of wind and solar (PV) energy potentials, as well as geographical distribution

• High upfront capital costs• Need a foreword looking Energy Policy for laying down

the right instruments (e.g. feed-in tariffs, portfolio standard; fiscal & economic incentives, etc.) for mkt development of renewables.

2626

Bio-fuel – fuel switch / bio-ethanol

• Mauritius capacity: 30 million liters/yr.• In 2006: used 89,000t gasolene [173,000t diesel oil] Equivalent to ~274,000 tCO2 / yr [3,070tCO2/t(fuel)]

• E10 (10%bioethanol:90% gasolene) ~27,400 tCO2 reduct. / yr• E25 (25%bioethanol:75% gasolene) ~68,300 tCO2 reduct./ yr• Bio-diesel [B10] ~54,600 tCO2 reductions / year

• No policy to date (legal, technical, financial, economic framework) for the promotion of E10-E25

• No baseline & monitoring methodologies

2727

Transport – Improving Efficiency in Bus Transit• Two projects being discussed:

- (P1) bus fleet renewal - (P2) bus lane modernization

• P1 – involves renewal of 2700 buses with more efficient buses, including diesel-electric hybrid vehicles

• Hybrid buses 77,100 tCO2 reductions / yr (start with only 200 buses – i.e. 5711 tCO2 reduct./ yr)Barriers: (1) Finance

(2) Fuel grade puts emissions standard at between Euro 0 and Euro 1, while new, efficient engine technologies would be rated above Euro 3

(3) Size of the project

2828

Bundling and Programmatic CDMs• Benefit/cost analysis does not favour small stand-alone projects.

I.e. Agalega Energy Efficiency project (CNO biofuel + 6 kWh/m2/day solar insolation) --> But only ~386 tonnes CO2/yr reduction

• Bundling:• Similar small-scale projects can be bundled into one CDM

project Each activity in the bundle is an individual CDM project activity

• Composition of the bundle does not change over time• All projects must be submitted and start at the same time

• Programmatic CDMs• The sum of all individual activities under the programme is

the CDM project activity• No pre-fixed composition (because, for example, uptake of an

incentive could be unknown)• Activities can be added on an ongoing basis

2929

Agenda

1.1. Status of energy supply & demandStatus of energy supply & demand

2. The CDM and the Carbon Market

3. Opportunities & Challenges for Carbon market in Mauritius

4. UNDP’s Carbon strategy

3030

UNDP’s objective

MD

G Im

pact

of C

arbo

n Pr

ojec

ts

Geographical & Sectoral Diversity of Carbon Projects

CurrentCDM Market

Objective for UNDP

3131

UNDP’s two-pronged Carbon strategy

Capacity Development

MDG Carbon FacilityProvides support to private-sector project developers

Through: provision of a comprehensive package of services to assist with the preparation and implementation of carbon projects.

Creating an ‘operational’ CDM framework in participating countries – an environment in which functioning public institutions are able to effectively interact with the private sector to jointly develop carbon projects.

Through: Workshops, tutorials, technical support, awareness-raising, scoping studies……for (DNA) Designated National Authorities, government, ministries & agencies, consultants, private sector, trade bodies, academics, project developers, etc.

3232

MDG Carbon Facility

Fortis

Project Proponents

UNDP

Carbon Banking Services

Project Development

Services

MDG Carbon FacilityCDM Activities

www.mdgcarbonfacility.org

3333

Many thanks for their contribution to :Mr. Prakash (Sanju) Deenapanray CDM National Project Coordinatorprakash.deenapanray@undp.org

Mr. Robert KellyRegional Coordinator, CDM capacity developmentSouthern and Eastern Africa

Thank you

dream.cazzaniga@undp.org