Transcript
Amit Bando November 13, 2009
Economics of Climate Change
Paradigm Shift from Projects to Programs
2
Agenda
How do we evaluate climate change projects?How do we evaluate climate change projects?
The current project cycle
Gaps in the evaluation process
From projects to programs
3
The Kyoto Protocol provides the basis for evaluating climate change projects
Kyoto Protocol (1997)
The Protocol creates legally binding obligations for 38
industrialized countries to return their emissions of
greenhouse gases to an average of 5% below their 1990 levels
by 2012
Marrakech Accords (2001)Define the principles of the Kyoto Protocol’s flexible
mechanisms: the Clean Development Mechanism (CDM),
Joint Implementation (JI) and Emissions Trading (ET)
4
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:
relatively low-cost &
politically acceptable
Advantages for developing
countries:
inward investment,
environmental & technology
benefits
5
In 3 years, the CDM has sparked a $5 billion/year market
Number of Projects in the CDM Pipeline,January 2005 – February 2008
Compound Monthly Growth Rate = 13%
Approximately 3 billion CERs by 2012
Compound Monthly Growth Rate = 13%
Approximately 3 billion CERs by 2012
67 83 118 171275
440554 647
749883
1,1411,311
1,495
1,7591,885
2,285
2,593
2,8383,035
Jan05
Mar05
May05
Jul05
Sep05
Nov05
Jan06
Mar06
May06
Jul06
Sep06
Nov06
Jan07
Mar07
May07
July07
Sep07
Nov07
Jan08
6
How a CDM project generates carbon credits
Gre
enh
ou
se g
as e
mis
sio
ns
Historical Trend
Project startProject start
Carbon credits (CERs) represent the difference
between the baseline and actual emissions
Carbon credits (CERs) represent the difference
between the baseline and actual emissions
Time
7
‘Kyoto gases’ that can earn credits
There are over 30 atmospheric greenhouse gases…But only 6 attract carbon credits:
• Carbon dioxide (CO2)
• Methane (CH4)
• Nitrous oxide (N2O)
Relevant to bio-carbon & industrial projects
Relevant to industrial projects
• Perfluorocarbons (CxFx)
• Hydrofluorocarbons (HFCs)
• Sulfur hexaflouride (SF6)
8
Each of these gases has a different warming potential
Each of these gases has a different ‘radiative forcing’ capability and a different atmospheric residence time
Need for a ‘common currency’, so that all carbon credits are denominated in the same way
Solution: develop a relative scale, using CO2 as a reference gas
9
Global warming potential
Greenhouse Gas (GHG)
Greenhouse Gas (GHG)
Global Warming Potential (GWP)
Global Warming Potential (GWP)
Carbon dioxideCarbon dioxide 11
MethaneMethane 2121
Nitrous oxideNitrous oxide 310310
PerfluorocarbonsPerfluorocarbons 6,500 – 9,2006,500 – 9,200
HydrofluorocarbonsHydrofluorocarbons 140 – 11,700140 – 11,700
Sulfur hexafluorideSulfur hexafluoride 23,90023,900
Relative scale – everything is measured relative to CO2
e.g. methane is 21 times more potent as a greenhouse gas
than CO2
e.g. sulfur hexafluoride is 24,000 more potent!
10
Global warming potential
Greenhouse Gas (GHG)
Greenhouse Gas (GHG)
Global Warming Potential (GWP)
Global Warming Potential (GWP)
Carbon dioxideCarbon dioxide 11
MethaneMethane 2121
Nitrous oxideNitrous oxide 310310
PerfluorocarbonsPerfluorocarbons 6,500 – 9,2006,500 – 9,200
HydrofluorocarbonsHydrofluorocarbons 140 – 11,700140 – 11,700
Sulphur hexafluorideSulphur hexafluoride 23,90023,900
Carbon credits are always expressed in terms of ‘carbon
dioxide equivalence’ (CO2e)
e.g. 1 tonne of CO2 = 1 tCO2e(= 1 carbon credit = 1 CER)
e.g. 2 tonnes of CH4 = 42 tCO2e(= 42 carbon credits = 42 CERs)
e.g. 2 tonnes of SF6 = 47,800 tCO2e(= 47,800 carbon credits
= 47.8 kCERs)
11
Additionality
It is essential that the project achieve environmental additionality – otherwise, it will not generate any carbon
credits!
However, the project developer must also usually demonstrate that, without carbon revenues, the project
would not be viable and/or commercially attractive – this is known as financial additionality
Environmental additionality – the project produces fewer greenhouse gas emissions than the baseline scenario
12
Additionality – benchmark analysis
Project without carbon revenue is profitable –
but not sufficiently profitable
compared with alternatives
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
Carbon revenue makes the
project attractive relative to investment alternativesInvestment
threshold
Rev
enu
e /
NP
V /
IR
R
Choose an appropriate financial indicator and compare it with a relevant benchmark value: e.g. required return on
capital or internal company benchmark
13
Some examples of additionality
Capturing methane from an urban landfill and flaring it
— Carbon credits represent the only source of income for undertaking this activity
Capturing methane from an urban landfill and utilizing it to generate electricity
— Project developer would have to demonstrate that the electricity revenue alone would not make this project attractive
Building a large hydro project for the grid in Ethiopia
— Questionable additionality: there is already plenty of hydro activity in Ethiopia
?
14
Crediting period
CDM mitigation projects
• Project developers have two crediting period options:
– A maximum of 7 years, which can be renewed up to 2 times(i.e. a potential total crediting period of 21 years)
– A maximum of 10 years, with no option for renewal
CDM sequestration projects (forestry)
• Project developers have two crediting period options:
– A maximum of 20 years, which can be renewed up to 2 times(i.e. a potential total crediting period of 60 years)
– A maximum of 30 years, with no option for renewal
15
Crediting period
Gre
enh
ou
se g
as e
mis
sio
ns
Emissions under the baseline scenario
Emissions under the project scenario
Starting date of the crediting
period
Starting date of the crediting
period10 years No renewalNo renewal
A maximum of 10 years with no
option of renewal
16
Agenda
How do we evaluate climate change projects?
The current project cycleThe current project cycle
Gaps in the evaluation process
From projects to programs
17
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
18
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
19
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
20
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
21
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
22
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
23
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
24
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
25
Costs of a typical CDM project
Assumes a 10-year project.
Recurrent costs discounted at 3%
annual rate to express in present-value
terms.
Registration costs, Administration Fee
and Adaptation Fund Levy not included.
Assumes a 10-year project.
Recurrent costs discounted at 3%
annual rate to express in present-value
terms.
Registration costs, Administration Fee
and Adaptation Fund Levy not included.
Indicative CDM Cost Profile For A ‘Typical’ CDM Project
13,000
38,000
16,50010,000
34,000
53,000
PDD
Validation
InitialMonitoring
OngoingVerification
ByDOE
Ongoing Annual
Monitoring
Pre-RegistrationCDM Costs
Post-RegistrationCDM Costs
US$
51,000
67,50077,500
111,500
164,500
PIN
26
CER volumes from CDM projects
970,000
520,000
318,000
206,000170,00083,000 79,000 74,000 54,000 26,000 18,000
N 2O
Fugitive
em
issi
ons
Refore
stat
ion
Landfil
l gas
Energy
effic
iency
(power
)Hyd
roW
ind
Transp
ort
Biogas
Solar
Energy
effic
iency
(house
holds)
4.5m
HFCs
Average Annual CER Production by CDM Project-Type
27
Carbon revenues also vary on a project-by-project basis
Biom
ass
ener
gyW
ind
Hydro
Solar
Geoth
erm
al
Tidal
Biogas
Agricultu
re
Refore
stat
ion
Landfil
l gas
Coal m
ine
met
hane
Fugitive
Fossil
fuel
switc
h
Cemen
t
Transp
ort
PFCs
EE house
holds
EE indust
ry
EE ser
vice
sec
tor
EE supply
sid
e
Energy
distri
bution
379379
928928
543543
234234
1,2281,228
00
661661
330330762762
1,7111,711
4,1284,128
7,9347,934
3,0393,039
1,1011,101
1,1791,179
00 9191
1,8111,811
1313
827827
00
Standard deviation(kCERs by 2012)
Standard deviation(kCERs by 2012) Markers
indicate maximum, mean and minimum
project size within
each technology
28
Agenda
How do we evaluate climate change projects?
The current project cycle
Gaps in the evaluation processGaps in the evaluation process
From projects to programs
Limitations of current evaluation process Each project is evaluated in isolation
Benefits outside project boundary are discounted
“Additionality” is difficult to define
NPV/IRR is the single metric
Impacts of leveraging and collateral on asset value are not fully considered
Limitations of CDM market
Projects are f inanced sequentially s tart ing with those generating the most CERs at lowes t cos t
Bias towards funding larger stand-alone projec ts
Bias towards mit igation and away from adaptat ion
Monitoring is costly and often impractical -- f law in project design leading to implementation problems
Lack of uniform registry of CERs
Lack of an “enabling environment”
Regulatory and institutional support is often lacking
Evaluation methods and guidelines are complicated
Markets for CERs often very “thin” internationally
Small countries and marginal populations unable to participate in CDM
32
The crediting period is fixed
Gre
enh
ou
se g
as e
mis
sio
ns
Emissions under thebaseline scenario
Emissions under theproject scenario
7 years 7 years 7 years
Baseline must be reassessed by DOE at each
renewal
Baseline must be reassessed by DOE at each
renewal
The baseline scenario may become less
favorable
The baseline scenario may become less
favorable
33
Agenda
How do we evaluate climate change projects?
The current project cycle
Gaps in the evaluation process
From projects to programsFrom projects to programs
34
Programmatic CDM offers new opportunities
Installation / unit size
Nu
mb
er o
f in
stal
lati
on
s / u
nit
s
Regular CDM
• Single site, stand-alone projects
• ‘Carbon upgrades’
Regular CDM
• Single site, stand-alone projects
• ‘Carbon upgrades’
Bundled CDM
• Bundling several projects under a single PDD
• All projects must be identified ex ante, and must start at the same time
Bundled CDM
• Bundling several projects under a single PDD
• All projects must be identified ex ante, and must start at the same time
Programmatic CDM
• Addresses the ‘long tail’ of small units
• Permits sector-wide transition to low-carbon economy
• Particular relevance to non industrial sector
Programmatic CDM
• Addresses the ‘long tail’ of small units
• Permits sector-wide transition to low-carbon economy
• Particular relevance to non industrial sector
Size-Distribution of Potential CDM Project Sites
smalllarge medium
35
Why not “optimize” the crediting period?
Gre
enh
ou
se g
as e
mis
sio
ns Emissions under the
baseline scenario
Emissions under theproject scenario
7 years
The baseline scenario may become less
favorable
The baseline scenario may become less
favorable
Baseline must be reassessed by DOE at each
renewal
Baseline must be reassessed by DOE at each
renewal
Leverage affects value of CERs
Incorporate collateral into evaluation models so that equilibrium determines leverage, not just rate of interest
Variations in leverage causes fluctuations in CER values In absence of interventions, leverage becomes too high in
boom times and too low in bad times “Natural buyer” hypothesis has been used in
Macroeconomics to study financial cycles -- used to model market for CERs
Provides guidance to regulators on when to restrict leverage
Figure 1: Overall Methodology for Energy Sector Analysis
Step 1
Step 2
Step 3
Step 4
Demand Forecast
Least-cost Generation & Transmission Expansion (Using
Horizon-year Plan) Planning Study
Costs and Benefits
Quantification
Energy Supply Incremental
Environmental Impacts
Economic Analysis
Sensitivity and Risk Analysis
R eg ressi o n M et h od
S im u lat ion M od els
Willingness -to-Pay
Spreadsheet Calculat ion
Bene fits Trans fer Method
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