Global distribution of cdm projects

Global Distribution of CDM Projects:

An approximation to the determinants of carbon market expansion in

developing countries, 2004-2007

Abstract

The market for Clean Development Mechanism (CDM) projects is continuing to

grow rapidly, with the current portfolio expecting to deliver 2.3 billion tons of Carbon

Dioxide equivalent (CO2e)1 greenhouse gas (GHG) emission reductions by 2012,

equivalent to 18% of developed economies base year Greenhouse gas emissions (see

annex 1 (where it shows the table where it comes from)). The distribution of CDM

projects is geographically concentrated in a limited number of countries: China, India,

Brazil and Mexico. Specific regions in the developing world, namely Sub-Saharan

Africa, Central Europe and Middle East, have been largely bypassed by the CDM market

and are in search of CDM project investors. This study seeks to analyze the global

distribution of CDM projects in the Pipeline2 from 2004 – 2007 as an approximation to

understand the underlying process behind it. It presents a series of variables that affect

the opportunities for market expansion and the risks behind the market, and use a

Regional Gravitational Theory to explain the geographical location of the CDM projects.

It also employs an autoregressive model to foresee the number of projects throughout

2008 for several countries. The data used in this study comes from the United Nations

Environmental Program (UNEP) that consists of observations for 68 countries and 5

regions with a monthly frequency. As a result each country has 49 cases starting from

December of 2003 until December 2007. Put conclusions

Keywords: Clean Development Mechanism, Autoregressive Models, Regional

Gravitational Theory

1 CO2e: Carbon dioxide equivalent from the list of Greenhouse gases that are included in the Kyoto

Protocol, being so: Methane, PFC,2 Explain pipeline

Global Geographical Distribution of CDM Projects

Introduction

The Kyoto Protocol, signed in 1997, finally entered into force on February 16, 2005.

The Marrakesh Accords in 2001 set out the fundamental rules for the Kyoto mechanisms

—the Clean Development Mechanism (CDM), joint implementation (JI), and emissions

trading –ET-. The CDM was designed to assist developed economies in meeting their

greenhouse gas emissions reduction targets by implementing reduction/sequestration

activities in developing economies and counting the reduced/sequestered amounts as

purchasable “credits.” Before the protocol came into effect, investors and project

developers were hesitant to move into the CDM field. Since it came into force there has

been a steep increase in the number of projects submitted for validation and registration,

and this upward trend is expected to continue in the next few years.

Though a relatively recent phenomenon, the market for Clean Development

Mechanism is rapidly growing. The World Bank estimated the carbon market value at

U$11 billion for 2005, the first year of operation of the European Union Emissions

Trading Scheme (EU ETS). The market value jump at U$30 billion for 2006, and is

estimated to reach U$60 billion for 2007. According to Point Carbon, the world carbon

market could reach U$565 billion by 2020. This considerable sum of money has the risk

of being amassed by a few whereas there continues a strong bias in the geographical

distribution of the projects: China, India, Brazil and Mexico account for the vast majority

of all registered projects as figures 1 and 2 elaborate. The rest of the countries that

participate in the carbon market as part of the Clean Development Mechanism have

lagged behind and stand no comparison against these four giants. The asymmetric

evolution of the market has presented itself as a difficult challenge to policymakers in the

search of universal participation in the struggle against climate change and elimination of

bottle necks.

Figure 1. Geographical location of CDM projects

2

Juan Pablo Dominguez

Note: Red: CDM Large scale project, one location Orange: CDM Large scale project, several locations

Yellow: CDM Small scale project, one location White: CDM Small scale project, several locations

Source: UNFCCC

Change it black and white

Given the youth of carbon markets, especially for CDM, the number of academic

papers written about the topic is very limited. Companies such as Point Carbon and

Natsource to name just a couple, are the leading producers of research regarding the

mechanism. The World Bank, the United Nations Environment Program –UNEP-, the

United National Climate Change Convention –UNFCC- and the Intergovernmental Panel

on Climate Change –IPCC- are among the top multilateral organizations that offer

material for researchers and are more focused on the legal and operational framework of

CDM than in quantifiable data. The works of the World Bank regarding financing are

very complete and offer relevant and reliable data for topics such as internal rates of

returns, market potential and main participants. However, the main source of data of this

paper is CDM pipeline which presents an up to date database of all CDM projects on the

United Nations registry. The data is composed by more than 2548 projects organized by

host country, type, date, methodology, estimated output, credit buyer and other

categories. All the information is available on CD4CDM without any charge.

Figure 2. All CDM Projects in the Pipeline in Brazil, Mexico, India, China as a

percentage of all projects, 2004-2007

3


0%

10%

20%

30%

40%

50%

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80%

90%

100%

Q1-

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India China Brazil Mexico

Source: UNEP, put the link. Ojo poner también en la bibliografía (poner 2004 en los quarters, es decir poner 20 antes 04)

With these materials we pretend to look the temporal performance in order to analyze

the geographical distribution of the CDM projects. For now China, India and Brazil

account for more than 75% of the market by number of projects and about 80% if

measured by the volume of expected CERs by 2012. The relevance of this study lies in

the opportunities the CDM presents for all developing countries and their commitments

for sustainable development and climate change abatement. The difficulty lies in the

absence of a comprehensive study that would enable developing economies decision

makers as well as CDM developers and investors decide geographical resource allocation

and therefore which countries should reinforce their capacity building.

Given the lack of a theory for explaining CDM geographical allocation we use two

tools: first, the Regional Gravitational Centers theory to broadly explain the behavior

during these past years of the CDM projects. Second we use statistical models to see if

the process has any temporal structure. Here we propose a Time Series Autoregressive

Model for understanding the evolution through time of the series. The objective is not to

predict future behavior of the location of the CDM projects but as to discover which

countries arise in the world markets as alternatives to today’s centers.

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The main objective of this text is to analyze the geographical distribution of CDM

projects in the pipeline from late 2003 until late 2007. In order to do so, we have divided

the text into six sections. The first one is this short introduction followed by a background

section where the main generalities of the CDM market are presented. The third section

consists of a study of the main barriers that countries have faced when intending to

expand the CDM market in their economies along with the experience of multilateral

agencies interested in fomenting the market. Also, this section briefly presents the main

risks and rationale of the investor when deciding host country selection. The fourth

section is where we introduce a new perspective on the problem through the inclusion of

the Regional Gravitational Centers theory as a way to explain the process of global

geographical distribution of CDM projects. Within this section we also present an

estimation of the performance for selected countries for the year 2008 in terms of the

number of projects. This part of the paper is constructed through the use of econometrical

methods and data provided by the United Nations Environment Program and its Capacity

Building for Clean Development Mechanism program. The following section extends

about the prospects for CDM throughout the region and finally the last section ends with

a set of concluding remarks.

Chapter I Background of (pensar) poner chapter en los demás

menos en conclusion

The CDM was launched in November 2001, the first project was registered about

three years later, and the first CERs were issued in October 2005. CERs can be issued for

verified emission reductions achieved since 1 January 2000. Rules for some categories of

CDM projects were adopted later; afforestation and reforestation projects (December

2003), small-scale afforestation and reforestation projects (December 2004) and

programs of emission reduction activities (December 2005).

CDM projects must use an approved methodology and be validated by an accredited

designated operational entity –DOE-. CERs are issued by the CDM Executive Board only

after the emission reductions achieved have been verified and certified by an accredited

DOE. Thus a CDM project incurs costs (validation of the project) before it can be

5

CDM the largest CO2 offset system in the world

• > 948 projects registered by the end of 2007

• 49 countries in active participation• 192,724,874 certified emission

reductions (CERs) issued


registered, and further costs (certification of the emission reductions) before CERs are

issued. The National Energy Commission of Chile and the German Technical

Cooperation Agency –GTZ for its initials in german- estimated that these cost can at least

sum up to U$70,000 for a regular scale project (see chapter III, investor’s rationale).

Figure 2. Observed prices for project-based transactions in 2005-2006

Source: Capoor and Ambrosi, 2007

The objective of a CDM project developer is to obtain CERs and, as previously

stated, this process is neither cost nor risk-free. To help defray these issues of

implementing the project, proponents often agree to sell some of the expected CERs

before the project has been implemented. As figure 2 indicates expected CERs from

projects at an early stage command 2006US$ 10.40-12.40, registered project transactions

command close to 2006US$ 14.70 and issued CERs are trading at 2006US$ 17.75

(Capoor and Ambrosi, 2007). The lowest prices reflect risks that the proposed project

might not be registered and might not deliver the expected emission reductions. In each,

the price also depends on how the risks are shared between the buyer and the seller,

through penalty provisions or requirements to replace CERs that could not be delivered.

Once a project is registered the uncertainty is limited to the timing and size of the

emission reductions. Once CERs are

issued, delivery to an Annex B Party

6

Source: UNFCCC


registry where they can be used for compliance is the only uncertainty and they therefore

command the highest prices.

At the end of 2007 the 2783 projects in the CDM pipeline were expected to yield

annual emission reductions of 418 Mt CO2e. Experience to-date suggests that CDM

projects achieve about 91.9% of the projected emission reductions (Fenhann, 2007). The

estimated annual emission reduction from the projects registered during 2006 is 88 Mt

CO2e and from projects that entered the pipeline during 2006 is 144 Mt CO2e. The

estimated revenue from the sale of CERs generated by the CDM projects registered

during 2006 is US$ 1-1.5 billion per year and the estimated revenue from the sale of the

CERs generated by the CDM projects that entered the pipeline during 2006 is US$ 1

billion higher. Capoor and Ambrosi report transactions for about 450 Mt CO2e in this

market during 2006 at an average price of about US$10.70 per t CO2e. Thus the

transactions averaged about three to five years of projected emission reductions for the

new projects.

Figure 1. Projects that entered the clean development mechanism pipeline 2004-2007, by

project type/sector

0

50

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Aff

ores

tati

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2004 2005 2006 2007

7


Source: CD4CDM, 2007

Figures 1 and 2 provide the sectoral distribution of projects under the CDM

pipeline and related emission reductions. As figure 1 shows, the growth in 2007 was

especially pronounced in Biomass Energy, Energy Efficiency –EE- Own Generation,

Hydro, Landfill Gas and Wind sectors. By number of CERs still HFCs have the biggest

number. Hydro projects with more than 60 millions tons is the second sector with the

biggest amount followed by N20 and EE own generation. In general, the most important

phenomenon of 2007 in terms of number of projects was a higher participation of EE and

Hydro with a lower participation of HFC and N20.

Figure 2. Estimated CERs from projects that entered the CDM pipeline in 2007, by

project type/sector

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ER

s


Of all the 26 sectors included, only for the agricultural sector does Latin America

maintain a larger amount of projects in comparison to Asia with 157 and 16 respectively.

Regarding energy efficiency Asia has a compelling advantage compared to the rest of the

8


regions. Wind, Hydro and Biomass are concentrated mainly the Asian continent,

whereas the rest of sectors are more evenly spread with Latin America.

Figure 3. Regional distribution of clean development mechanism project activities

registered and in the pipeline 2003-2007

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Latin America Asia & Pacif ic Sub-Sahara Africa North Africa & Middle-East Europe and Central Asia

Note: Central Asia includes Kyrgyzstan, Tajikistan and Uzbekistan which are not considered under Asia - Pacific region.


Figure 3 shows the principal topic of discussion in this paper. This illustration

presents the evolution of the number of projects from the 5 different regions we have

divided the Non-Annex I groups in the CDM program. Two regions inmediately show

clear advantage: Latin America and Asia-Pacific. The first region was the pioneer in

CDM but after 2005 until today Asia pacific has taken a huge advantage in all accounts.

Whereas a number and amount of CERs Latin America lost its momentum and Asia has

consolidated its leadership in the carbon market. The reason behind this process is whate

we want to study here and also to find out how will this distributions of the number of

programs behave during 2008.

In terms of countries, China dominates the CDM market as it is the source of over

55.6% of the estimated annual emission reductions of the projects that entered the

pipeline during 2007. Capoor and Ambrosi note that as the dominant supplier in the

CDM market, China’s informal policy of requiring a minimum acceptable price (around

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US$10.40 - 11.70 or €8.9 since 2006) before providing approval to projects had a

significant stabilizing impact on the market price.

1.1 Annual Investment in CDM projects

The number of projects a country presents is closely correlated to the capital

invested in the programs. The capital that is, or will be, invested in CDM projects

registered during 2006 was estimated at about US$ 7 billion whereas the capital that is, or

will be, invested in projects that entered the CDM pipeline during 2006 is estimated at

over 2006US$ 26.4 billion as Table 1 shows (UNFCCC, 2007)

Table 1. Capital investments for projects in 2006

Country

Estimated capital invested in projects that entered the pipeline during 2006

Estimated capital invested in projects registered during 2006

Estimated capital invested in unilateral projects registered during 2006

Estimated capital invested in unilateral projects that entered the pipeline during 2006

China 12,130 1,270 93 3,793

India 7,534 1,239 944 5,998

Mexico 1,097 435 138 589

Brazil 981 1,037 601 290

Nigeria 554 206 0 332

Malaysia 455 431 14 0

Indonesia 445 530 27 11

Peru 334 48 47 328

Egypt 328 13 0 0Equatorial Guinea 324 0 0 324

Guatemala 302 57 21 160

South Africa 271 49 39 261

Qatar 200 0 0 200

Philippines 160 85 – 0Republic of Korea 141 180 46 84

Total 26,465 6,886 2,512 12,894Source: UNFCCC, 2007

Of the US$ 26.4 billion approximately 50% represents capital invested in

unilateral projects by host country project proponents. Unilateral projects are these for

which the project proponent in the developing country Party bears all costs before selling

the CERs. At the end of 2006, about 60% of the projects, representing about 33% of the

projected annual emission reductions, were unilateral projects. India is home to the most

10


unilateral projects (33% of projected annual emission reductions of projects in the

pipeline at the end of 2006), followed by China (20%), Brazil (11%) and Mexico (6%)

(UNFCCC, 2007).

Over 80 to 90% of the capital, US$ 5.7 billion for registered projects and almost

US$ 24 billion for projects that entered the pipeline went into renewable energy and

energy efficiency projects. Although these projects represent only about 20% of emission

reductions they have high capital costs per unit of emission reductions. The estimated

investment of US$ 5.7 billion for CDM renewable energy and energy efficiency projects

registered during 2006 is roughly triple the Official Development Assistance –ODA-

support for energy policy and renewable energy projects in the same countries

(UNFCCC). It is almost as much as the private investment in renewable energy and

energy efficiency (2006US$ 6.5 billion) in the same countries. China and India receive

most of the CDM investment and private investment.

Source: UNFCCC

The capital invested in afforestation and reforestation has been very low. Only

three afforestation and ten reforestation projects were among the 2783 projects in the

pipeline at the end of 2007. The attractiveness of these projects is reduced by uncertainty

stemming from the temporary nature of temporary CERs (tCERs) and long term CERs

(lCERs) and the fact that installations in the EU ETS can use CERs, but not tCERs or

lCERs, for compliance. This issue is highly relevant to certain countries that have hoped

to increase their participation in the CDM framework through this category and without

its approval their participation will remain low.

11

• CDM projects that entered pipeline in 2006 are expected to result in US$25 billion in capital investment(almost double the 14 billion US$ in total investment leveraged through the Global Environment Facility –GEF- in the climate change area since it started)

• CDM renewable energy & energy efficiency projects registered in 2006 are expected to result in US$6 billion in capital investment (about triple the ODA support for energy policy and renewable energy projects in the same countries. Almost as much as private investment in renewable energy and energy efficiency (US$ 6.5


1.2 The CDM Market outlook

Besides the invested amount in capital, other important variables influence the

expansion of the CDM market in the near future. It comprises a list of relevant issues that

must be taken into account when analyzing the carbon market. In this subsection we

highlight some of the most pertinent:

1.2.1 Financial muscle

The carbon market and associated emerging markets for clean technology and

commodities have attracted a significant response from the capital markets and from

experienced investors, including those in the United States. Analysts estimated that

US$11.8 billion (€9 billion) had been invested in 58 carbon funds as of March 2007

compared to US$4.6 billion (€3.7 billion) in 40 funds as of May 2006 (World Bank).

50% of all capital driven to the carbon value chain is managed from the UK (World

Bank). Most of the newly raised money, of private origin, came to the sell-side (project

development and carbon asset creation) which currently represents 58% of the

capitalization (UNFCCC). A key indicator of interest in aligned and closely related fields

is the record US$70.9 billion in clean technology investments in 2006, with major

investments (and announcements) from well-known investment banks (UNFCCC).

1.2.2 Demand-Supply Balance and CER prices

The Kyoto Protocol established a set of commitments that limits the amount of

carbon dioxide equivalent emissions to the atmosphere by developed economies (or

Annex B countries) for the period 2008 – 2012. With this objective in mind, three

mechanisms were established: the CDM, JI and International Emissions Trading. In this

way, each country has the opportunity to diminish its emissions locally or obtain

certificates from offsets somewhere else in the world. Emission trading systems were

therefore implanted so as to enable the proper interaction between the obligations of the

governments to fulfill their commitments and also the operational requirements of

companies. This complex mechanism allows the companies and governments establish an

12


equilibrium between demand and supply of emission reductions as part of a larger carbon

market.

Table 4. Overview of existing carbon markets (2006)

Sources: Capoor and Ambrosi, 2006; Capoor and Ambrosi, 2007; Ellis and Tirpak, 2006; Fenhann, 2006; Enviros, 2006.Abbreviations: CDM = Clean Development Mechanism, CER = Certified emission reductions, ERU = Emission reduction unit, ETS = Emissions trading scheme, JI = Joint Implementation.a Number of projects in the pipeline at the end of 2006 and the estimated annual emission reductions for those projects.b Number of projects with issued CERs and the quantity of CERs issued.c Some national allocation plans for Phase II have not yet been approved, but the number of participants will be higher, and the emissions limits will be about 8 per cent lower,than for Phase I. Contracts for Phase II allowances are already trading.d As discussed in chapter VII.2, this reflects the Direct Entry component of the scheme, which accounted for most of the allowance allocation and trading activity.e During the first nine months of 2006.f Estimated.

The EU ETS is by far the largest market in terms of number of participants and

trading activity. Credits created by CDM projects (certified emissions reductions or

CERs) are the second largest market and there are also emissions trading systems

operating in Australia (the New South Wales.Australian Capital Territory GHG

abatement scheme) and the United States (the Chicago Climate Exchange). The quantities

13


traded in the markets established by these systems and the voluntary markets are much

smaller than those in the EU ETS and the CDM market.

There is a consensus emerging among market analysts that the expected shortfall

in the EU ETS Phase II (i.e. from 2008 to 2012) is likely to be in the range of 0.9 billion

to 1.5 billion tCO2e (Point Carbon). Estimates for not-yet-contracted volumes from

JI/CDM and projected EU shortfalls are very similar to each other in these projections

(unless additional demand before 2012 and the promise of higher prices stimulates

additional JI/CDM supply).

Figure 8. Evolution of the CER Price (secondary market, €)

0

2

4

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-07

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-07

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Source: Reuters – TFS Energy

Future sources of demand for CERs include Canada, the United States and Japan.

The Canadians announced they will tighten its carbon emissions by setting a target of

20% below 2006 levels by 2020 (assumed to be 150 MtCO2e by Canada). They allow

emissions trading, banking and the use of CERs for up to 10% of the projected shortfall.

If these assumptions are true, then some demand from Canada could enter the CER

market relatively soon. The biggest bet at the moment is the United States. Developments

in California, the eastern United States, the promise of US presidential candidates to

address more actively in carbon markets hold some promise of market continuity beyond

14


2012 and therefore stimulate positively the demand. However, there is continued debate,

especially in California, regarding whether emissions trading, including offsets from

overseas will be allowed. Japan has been a strong supporter of the Kyoto Protocol and the

distance from actual emissions to its target has motivated the Japanese to be more

aggressive in the search for offsets.

1.2.3 Regulated vs. Unregulated markets

In the emerging fragmented carbon marketplace, efforts to mitigate carbon are

multiplying in both the regulated and the unregulated sectors. For regulated markets,

emissions trading can help achieve a given level of emission caps efficiently by setting an

appropriate price, but this requires that policymakers set the caps consistent with the

desired – and scientifically credible – level of environmental performance. Regulated

carbon markets can only achieve environmental goals when policymakers set

scientifically-credible emission reduction targets while giving companies maximum

flexibility to achieve those goals. They also require clarity on the assumptions for

economic growth and baseline carbon intensity improvements, orderly and transparent

release of periodic market relevant emissions data and the imposition of strict penalties

for fraud or non-compliance. The key elements for well-functioning carbon markets

include: competitive energy markets; common, fungible units of measure; standardized

reporting protocols of emissions data; and transferability of assets across boundaries

(Point Carbon). Markets can, to a certain extent, accommodate the appetite that

individuals and companies in Europe, Japan, North America, Australia and beyond have

for carbon emission reductions that go well beyond what their law makers require of

them. This high-potential voluntary segment, however, lacks a generally acceptable

standard, which remains a significant reputation risk not only to its own prospects, but

also to the rest of the market, including the segments of regulated emissions trading and

project offsets.

The enormity of the climate challenge, however, will require a profound transformation,

including in those sectors that ‘cap-and-trade’ markets cannot easily reach. These include

making public and private investments in research and development for new technology

development and diffusion, economic and fiscal policy changes, programmatic

15


approaches to decouple economic growth from emissions development as well as the

removal of distortionary subsidies for high-carbon fuels and technologies.

1.2.4 Secondary market

The secondary market has been growing rapidly and this is expected to continue as

more CERs are issued as the quantity of CERs issued rises, exchanges are beginning to

trade them. This will facilitate trades of CERs on an exchange, with the assistance of a

broker, or directly between the buyer and seller. Trades of CERs issued do not involve

project or registration risks. The higher price, US$ 17.75 per t CO q, reflects the absence

of these risks (Capoor and Ambrosi). The first CERs were issued during 2005 and many

of these had already been purchased (through forward contracts). The volume traded is

approximately equal to the quantity of CERs issued.

Chapter 2 Barriers, Multilateral Banks and the Investor’s

Perspective

The former section presented the overview of the CDM market from an outsider

perspective. This section pretends to introduce the view of the people directly involved in

the market. First we analyze how governments from developing economies have intended

to increase its overall market participation in the CDM market. Following we address the

issue of Multilateral Banking and its role in the market and finally we present the private

sector’s perspective.

Given the large amount of possible candidates, we limit our study into three different

categories: core countries, peripheral countries and lagging countries. The first ones have

shown a tremendous capacity to attract investors in number and volume for CDM

projects. China, India and Brazil belong to this category. The second group is composed

by countries close to the core nations and has counted with serious investments but is

behind the statistics of the leaders. Chile, Vietnam, Indonesia are part of this group.

Finally the third group is composed by laggards. Such countries have not been able to

attract investment in CDM or at least in very small amounts. African countries are part of

this group.

16


Two key strategies available to enhance the ability of host countries to utilize the

CDM are information collection/rearrangement/dissemination and capacity building. In

most host countries, some relevant information already exists, but often in disparate

pieces or it is not considered in terms of the CDM—and it has never been put together

before in a comprehensive form. This is the main reason for publishing this series of

guidebooks, which feature information on specific countries in Asia. By making the

guidebooks as user-friendly as possible, they provide essential information that project

developers and investors will need for most effective CDM project preparation and

implementation in each country. (no sé si aqui debe ir esta parte)

(alargar un poquito mas)

Overcoming barriers (esta seccion viene de overcoming barriers)

Geographically, the distribution of CDM projects has so far not been very equitable.

A limited number of countries including China, India, Brazil and Mexico have captured

the largest share of the global CDM project portfolio. Specific regions in the developing

world, namely Sub-Saharan Africa, have been largely bypassed by the CDM market and

are struggling to attract a decent number of CDM projects. In fact, of the total 2,783

projects, only 33 projects are in Sub-Saharan Africa where 21 of these are actually in

South Africa, making the distribution even more skewed.

Understanding the reasons for this is of great importance in order to allow CDM develop

into a stronger instrument for sustainable development as well as creating opportunities

for developing countries to obtain benefits for decreasing its CO2e emissions. Not few

organizations are trying to bring CDM to different countries but the process of creating a

strong knowledge base is slow where as the market is moving at incredible pace.

Capacity-building is different for each member, however, according to the literature two

main factors are the ones that need to be addressed by those countries that are up against

access barriers to the CDM market:

17


Information and expertise

One of the key challenges facing developing countries interested in participating in the

CDM market is the complexity of modalities and procedures of CDM. This has resulted

in some CDM stakeholders in developing countries presenting poorly designed CDM

projects that eventually get rejected. Additionally, some developing countries have not

been able to participate in the CDM primarily due to lack of national-CDM expertise

and/or the appropriate institutional setup necessary for the assessment and approval of

CDM projects.

Finance

Access to finance is an additional barrier facing CDM project developers in many

countries, partially due to lack of CDM knowledge among developing country financial

intermediaries. Consequently, there is a clear need for human and institutional capacity

building within the area of CDM in many developing countries.

For particular cases, institutions such as the World Bank along with the UNEP and

UNDP have created the Nairobi Framework in order to promote the development of

CDM activities in some sub-saharan countries. Among the activities to be implemented

under the new joint proposal are provision of support toward the establishment &

operationalization of several African Designated National Authorities (national CDM

offices), organization of numerous hands-on, CDM capacity development workshops for

national consultants and civil servants, preparation of national portfolios of CDM projects

(feasibility studies), preparation of national CDM investors’ guides for host countries,

and supporting African countries participate in the annual Carbonexpo.

Another case is Capacity Building for Clean Development Mechanism -CD4CDM-

project. Through funding from the Netherlands’ Ministry of Foreign Affairs, the

CD4CDM project is a major effort to help develop the institutional and human capacity

necessary to formulate, approve and implement actual CDM projects. The first phase

18


from 2002 - 2006 supported CDM implementation in Mozambique, Uganda, Cote

d’Ivoire, Ghana, Bolivia, Ecuador, Guatemala, Egypt, Morocco, Philippines, Cambodia

and Veitnam. In the second phase (2007 – 2009), the project is implemented in

Nicaragua, Peru, Suriname, Algeria, Tanzania, Mauritius and Bangladesh following

additional funding from the Government of the Netherlands.

Overcoming barriers to CDM Projects

Responding to a request by the Annex-I Expert Group on Climate Change, the OECD

and URC recently produced a joint study on barriers facing CDM projects and ways to

overcome them. The study focused on barriers that can be potentially removed to

developing CDM projects at the national and international level. Four key groups of

barriers were identified, including:

• National-level barriers, such as electricity regulations not related specifically to the

CDM but constrain projects;

• National-level barriers related to the CDM, such as institutional capability or lack of

awareness about the CDM potential that can dampen interest in CDM projects.

• Project-related issues, including availability of underlying project finance, or other

country or project-related risks that render the performance of the project uncertain; and

• International barriers, such as constraints on project eligibility, such as restricted land

use, and available guidance and decisions, such as the inclusion of carbon capture and

storage projects.

The paper concluded that barriers to CDM development could arise at different stages of

the CDM project cycle. The relative importance of particular barriers varies between

countries as well as over time. A combination of factors is needed to drive growth in a

country’s CDM activity. This includes the presence of attractive CDM opportunities, a

positive investment climate, and an enabling policy and legislative framework.

Risks in CDM and its impact on prices

Figure 8. Evolution of risks throughout the phases of CDM projects

19



As previously states, project-based credits are compliance assets that need to be “created”

through a process that has certain risks inherent with it (regulation, project development

and performance, for instance) and can involve significantly higher transaction costs.

Such risks are addressed through contractual provisions that define how they are

allocated between parties, and, along with other factors, are reflected in the value of the

transaction (IETA). Following we list a number of variables that affect the risk exposure

and divided into two categories:

Figure 12, Impact on CER prices of risk

(Todo esto que sigue viene de Financing CDM projects, pp. 82-86)

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Generic project risk

Country political risk

It refers to the risk of political and economical instability, of violence or

infrastructural disruptions in a country and how they can reduce the capacity for the

project to deliver CERs. It might affect delivery not only in time but also in magnitude.

This type of risk can be reduced with the purchase of insurance.

Counterparty risk

It states the need for trusting the other party of the contract; therefore credibility is the

main consideration. Credit ratings are instruments for observing such credibility. Several

companies have started to construct and publish these reports where each country

receives a letter in the same fashion as other types of markets. Given that many CDM

project developers will have poor (or non-existent) credit ratings, they may have to

provide credit guarantees in order to satisfy the buyer’s credit requirements.

CDM project specific risk

Methodology risk

To calculate the emission reductions of a CDM project, the project needs to select an

approved baseline and monitoring methodology. If a CDM project is able to use an

existing approved methodology, this considerably reduces the overall risk profile of the

project, since developing a new methodology is costly, time-consuming and risky (with a

50% rejection rate, until 2007).

Historic data show that, in many cases, revision of the methodology was required or

the methodology was rejected. Furthermore, it took, on average, around 303 days for a

methodology to gain final approval. For these reasons, the risk for the project developer

is related to the timing of the CER flow: if a new methodology needs to be developed,

time for development and approval will have to be factored in. If a methodology is put on

21


hold the project developer will have to await the decision made by the Meth Panel and

the EB, which will also delay the potential carbon revenue.

Host Country Approval risk

In order for a project to be registered with the EB it must receive host country

approval from the Designated National Authority (DNA). A risk more frequently

encountered is the delay when applying for host country approval. It is known that some

DNAs regularly take longer to issue an approval than the official timelines suggest (the

average time taken between publication of a PDD for comments and issuance of the

required Letter of Approval by the DNA is 4.5 months, but this varies up to a year or

more in some instances). Host country approval risk therefore mainly impacts the timing

of the CER flow.

Validation & registration risk

Every CDM project has to be validated by a Designated Operational Entity (DOE) in

order to be registered with the EB. Depending on the quality and transparency of

arguments and calculations presented in the project documents, the DOE will issue a list

of corrective action or clarification requests to the project developer.

The validation stage adds further time-delay risk: although validation of most projects

can be done within two months, it typically takes at least three months, due to the high

demand for DOE services, and constraints on DOE capacity.

After validation, the project can be submitted for registration to the CDM EB. The

registration by the CDM EB will be deemed final 8 weeks after the date of receipt by the

CDM EB of the request for registration. Within this 8 week period, the CDM EB has the

right to ask for review of the project.

Performance risk

According to the available information to the end of 2006, issuance of CERs has been

only around 50% of projected CERs in the registered PDDs. Therefore it appears that the

performance of CDM projects has been consistently and significantly over-estimated.

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Performance risk can affect both the timing and the volume of the CER flow from a

project.

Monitoring/ Verification risk

A monitoring protocol is prescribed for every methodology in order to monitor the

generated emission reductions. The variables that are monitored must be logged

transparently by the project developer. In order for CERs to be issued based on these

monitored variables, they must be independently verified by a DOE. There are numerous

risks related to the monitoring processes and the monitoring equipment installed which

may endanger the quantity of CERs to be issued. For example, the monitoring equipment

for a landfill gas capture and flaring project may be installed as required. However, in

order to produce adequate results, the equipment also has to be calibrated correctly. If the

gas flow is not monitored correctly, the emission reductions generated by the project

cannot be verified and therefore CERs cannot be issued. This illustrates that monitoring

and verification risk factors can impact on the volume of CER flow. Capacity constraints

on DOEs can also introduce a time-delay risk.

Review of issuance risk

Within 15 days after the date of receipt of the request for issuance, the EB can ask for

review of a request for issuance of CERs. Review is limited to issues of fraud,

malfeasance or incompetence of the DOE involved in the project. From 2006, the CDM

Registration and Issuance Team also appraises all requests for issuance of CERs. If any

issues relating to verification and issuance arise, the project may receive less CERs than

originally expected (or even none at all). The review of issuance risk will thus affect the

volume of CERs generated.

If a request for review is triggered, the EB must decide on its course of action at its

next meeting. If it decides to go ahead with a formal review, this must be carried out

within 30 days. In total, the possible delay resulting from a request for review can be up

to 4 months.

Transfer risk

23


In order for CERs to be issued, the project developer can choose to develop a project

unilaterally, thus assigning the legal rights to the CERs to a project participant from the

host country. More commonly, however, the legal rights to the CERs are assigned to a

project participant from an Annex I country. Before the CDM EB will issue the CERs for

such a project, the project participants will need to inform the Board as to which Annex I

party will be involved in the project and seek an investor country approval letter from this

Annex I party. Obtaining an investor country letter of approval is therefore a risk which

can affect the timing of the CER flow.

Upon certification of the emission reductions, the CERs need to be delivered in the

electronic account of the buyer. An international system of registries has been developed

to enable such a transfer. A registry is an electronic administration system used by a

government to register emission allowances, record transfer of ownership of allowances

and reconcile allowance holdings against actual emissions. The International Transaction

Log (ITL) is managed by the CDM EB; it logs international transfers of CERs from

registry to registry. The ITL provides certainty of delivery to the carbon market and

builds up records of holdings and transactions which mirror registries by recording

‘transactions’ of CERs from the CDM Registry to the national registries of Annex I

Parties in accordance with the Kyoto Rules (see Figure 26 below).

The contract to build the ITL was awarded in August 2006 and is expected to be

complete by April 2007. However, as with any complex IT project, there is risk of time

delays.

Market risk

Most market players stated that considerable price risk – and likely volatility –

remained in the market for CERs (Point Carbon). Fijarse donde ponerlo.

The largest market for CERs is the EU ETS. In this market the freely traded

commodity is the European Union Allowance (EUA). Being an openly traded

commodity, market prices of EUAs fluctuate over time. However, the EU ETS is

regulated by the EU and, hence, EU policy is a key factor in determining its development.

Prior to every trading phase, Member States propose allocation levels, which in turn are

24


negotiated with the European Commission. The outcome of these negotiations determines

the shortage of allowances in the market, and therefore the demand for additional carbon

credits such as CERs. If the allocations are not negotiated and assigned appropriately,

more EUAs may be supplied to the market than required, which may cause a drastic fall

in the demand for EUAs. This happened during Phase I of the EU ETS (2005−2007)

when on 15 May 2006 many EU governments announced that allocations for 2005 had

exceeded actual emissions. As a result, the EUA price fell from about €30 to €9 within a

few days (see Figure 22 above).

The behaviour of the EU ETS, as well as other markets for CERs (see section 2.5

above) can affect both the price and volume of CER demand. It is common for CER

prices in ERPAs to be linked to the EU ETS price at the time of selling, thus exposing the

seller to the uncertainty in the EU ETS market.

Post-Kyoto risk

(Aqui hay que hablar de las nuevas conversaciones en Bankgok sobre Copenahgen

2009, que ya está pegado de una noticia de Point Carbon Abajo)

The Kyoto Protocol sets out to reduce emission reductions by 5.2% between

2008−2012. A followup to the Protocol and what role the CDM might play under this

new regime has not yet been decided. Post-Kyoto risk is therefore due to the uncertain

international demand and recognition for CERs beyond 2012. It should be noted,

however, that the EU has stated that the EU ETS, the largest potential market for CERs

(see section 2.5 above) will remain active even after the end of the Kyoto commitment

period in 2012.13 The post-Kyoto risk relates to CDM projects particularly because

project developers can choose CER crediting periods of 10 years (which cannot be

renewed) or 7 years (which can be renewed twice). These crediting periods of up to 21

years therefore put the projects well beyond the end of Kyoto in 2012 and, although there

may be some continued demand for CERs from the EU, international demand remains far

from certain. This risk affects the price and demand for all CERs beyond 2012.

From the project developer’s viewpoint, the lack of any certainty post-2012 implies a

rapidly approaching ‘cliff edge’ beyond which it will be virtually impossible to raise

25


finance for a new CDM project. This is due to the fact that CDM project development

takes at minimum 6 months, and often up to 3 years or longer, and therefore the window

of opportunity for a project to at least recover its costs while there is any degree of

certainty over CER revenue (i.e. to December 2012) is rapidly narrowing. In practice, this

cut-off point will be reached at different times for different project types, depending on

their rate of return. It may already have been reached for some project types in which

little project developer interest has been shown. Very few CER buyers are prepared to

commit to buying CERs beyond 2012, and only then at very low prices. Likewise, any

party willing to take on the risk of financing a project that will not recover its costs before

2012 will require a very high rate of return on their investment. Either way, the post-2012

market will be highly constrained until there is some certainty on the post-2012 regime,

and this will begin to affect development of CDM projects much earlier than this.

07.04.08 UN climate talks in Bangkok conclude with more meetings in sight

UN climate talks in Bangkok concluded last week, with delegates from more than 160 nations agreeing on a more detailed timetable to conclude their talks in Copenhagen by the end of 2009.

"The train to Copenhagen has left the station," Yvo de Boer, executive secretary of the UN Framework Convention of Climate Change (UNFCCC), said on Friday.

"Not only do we have the certainty that critical issues will be addressed this year, we now have the bite-sized chunks which will allow us to negotiate in an effective manner," he said in a statement.

As expected, there were no major breakthroughs resulting from last week's talks. Yet, delegates had the chance to exchange their ideas on a wide range of issues – some controversial, such as avoided deforestation to emissions reductions targets for specific industrial sectors.

Still, de Boer pointed out that delegates agreed to continue the use of market-based tools to help combat global warming, including emissions trading and the carbon markets under the Kyoto protocol.

"This sends an important signal to businesses that the international carbon market spawned by the Kyoto protocol will continue beyond 2012. Businesses have been asking for clarity on this issue and now they have it, making it possible for them to plan their investments accordingly," the UN climate chief added.

26


The Kyoto protocol obliges rich nations to reduce their emissions of six greenhouse gases by about 5 per cent below the 1990 level from 2008 through 2012.

However, the US has rejected the Kyoto agreement largely because it excludes developing countries, such as China and India, from capping their emissions.

The parties to the UNFCCC, which includes the US, agreed to include forest and land-use related activities to help reduce emissions reductions in the second commitment period.

Meanwhile, the group under the Kyoto protocol will continue its work on analysing tools for developed countries to reach their emissions reductions targets as its next regular meetings in June and August.

There are 192 parties that make up the UNFCCC, while the Kyoto protocol to date has 178 member parties.

More meetings

According to the so-called Bali roadmap, which was agreed by the international community in Indonesia in December, there will be at least seven more major UN climate meetings until the culmination of the Copenhagen meeting in December 2009.

The second major UN climate change meeting this year after Bangkok will be held in Bonn, Germany, in June. The Bonn meeting will address ways to "generate and mobilise the necessary financial and investment flows" to help reduce greenhouse gas emissions and help countries adapt to "the inevitable impacts of climate change", according to the UNFCCC statement.

The third UN gathering this year will be in Ghana in August, and will focus on several ways countries can enhance mitigation, such as reducing emission from deforestation in developing countries – particularly since deforestation accounts for some 20 per cent of global emissions.

The Ghana meeting will also address ways different business sectors can co-operate on reducing emissions, the statement said.

In December, the UNFCCC will host the final climate-change discussions for 2008 in Poznan, Poland, to focus on risk management and risk reduction strategies, as well as technologies and long-term plans to combat climate change.

In 2009, at least four UN climate-change sessions are expected to be held, with a combined duration of eight weeks.

27


Investor’s rationale

The revenue earned from the emission reductions credits has very different

impacts on the profitability of different types of projects. Table 1 shows the effect of

different CER prices on the profitability, measured by the internal rate of return, of HFC-

23, methane from landfill, and renewable energy projects. The sale of CERs makes HFC-

23 projects, which have a low capital cost per unit of emissions reduced, much more

profitable. In contrast, the sale of CERs has little effect on the profitability of renewable

energy projects, which have a high capital cost per unit of emissions reduced.

Table 1. Incremental impact of the CER price on the internal rate of return (IRR) of the

project (percentage)

Renewable energy IRR

Purchase period

Five years (2008 to 2012)

Seven years

Ten years

Fourteen years

Twenty-one years

Impact per unit (in US$)

CER prices (in US$)5 0.5 0.6 0.8 1 1.2 3.16/MWh

10 1 1.4 1.7 2.1 2.3 6.33/MWh

15 1.6 2.1 2.7 3.1 3.3 9.49/MWh

20 2.2 2.9 3.6 4.1 4.5 12.65/MWh

Solid waste IRR

Purchase period


Seven years

Ten years

Fourteen years

Twenty-one years


tSW (ton solid waste) tSW tSW tSW tSW tSWCER prices (in US$)5 17.9 24.1 29.2 31.7 32.8 41/MWh10 52.3 59.1 62.4 63.5 63.8 82/MWh15 88.2 93.3 95.4 95.9 96 124/MWh20 123.7 127.3 128.6 128.8 128.9 165/MWhHFC/23 IRRa

Purchase period


Seven years

Ten years

Fourteen years

Twenty-one years


CER prices (in US$)5 110.8 112.3 112.7 112.7 112.710 176.7 177.3 177.4 177.4 177.415 227.3 227.6 227.7 227.7 227.7

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20 270 270.2 270.2 270.2 270.2Source: World Bank. a Sixty-five % tax applied on revenue from sale of CERs.

Table 2. Normal scale project costs

Project phase CostsProject design U$ 20,000 to US 30,000National aproval Some countries have, some don'tValidation U$ 15.000 to U$ 50.000

Registry

The CDM Executive Board determines the cost of registry according to the number of emission reductions.

Yearly average emission reductions of CO2e U$<= 15,000 5,000

> 15,000 to <= 50,000 10,000

> 50,000 to <= 100,000 15,000

> 100,000 to <= 200,000 20,000

> 200,000 30,000

VerificationMonitoring: 0.05 - 5% of the value of the projectVerification: U$ 3,000 - U$ 20,000 per verification visit

Certification and CERs emissions

There is a management fee besides a mandatory contribution to the UN Adaptation Fund for a value of 2% of all the CERs generated in a year.

Source: National Energy Comission of Chile and GTZ, 2006

Table 4: Specific costs associated with CDM stages

29


1 US$0.10/CER for the first 15,000 CERs per year and US$0.20/CER for any CERs above 15,000 CERs per year (max US$350,000).

The minimum shown here has been calculated as 15,000 CERs/year over a single 7-year crediting period.

2 As for large scale, unless total annual average emission reductions over the crediting period are below 15,000 tCO2-e, in which case

no fee is payable. Maximum calculated as 25,000 CERs/year over 7-year crediting period.

Sources: CCPO, 2005; UNEP, 2004 and EcoSecurities market information

Falta análisis de la Tablas.

(Esta parte va en el tema de perspectiva del inversor en la sección 4 junto con las barreras

a la expansión)

Financing the Project

Box 1: Explanation of ‘Gearing’ or ‘Leverage’

The term ‘gearing’ or ‘leverage’ is used to describe the way in which the returns to an

equity investor can be increased by increasing the amount of debt in a project’s capital

structure. This effect arises due to the fact that debt is almost always cheaper than equity.

Consider a project with a capital requirement of US$1,000,000 and a project internal rate

of return of 15%. If 100% of this capital requirement were provided by equity investors,

the equity investors would therefore see a 15% return on their investment. However, if

50% of a project’s capital requirement could be borrowed from a bank at an interest rate

of 8%, the project would provide a return of 22% to the equity investors (their original

return of 15% on US$500,000, plus the 7% return remaining on the other US$500,000,

after debt financing costs). From the equity investors’ point of view, increasing the

amount of debt in the capital structure will always increase the return on their equity

investment, provided the debt interest rate is lower than the project IRR (see section 4.3

for explanation of this term).

30


The above argument ignores any effect of taxation. In fact, in most countries, interest

payments

on debt are a tax-deductible expense. This further enhances the attractiveness of debt in

the

capital structure, since the cost of debt is even lower due to the ‘tax shield’ effect (i.e. the

fact

that interest payments can offset a tax liability).

Market Benefit

CDM and JI projects are considered “offset projects.” Market experiences suggests that

the cost of purchasing an offset from a project tends to be 15-32% lower than trading for

an allowance in the open market.

To illustrate this concept we will take a power generator in Germany as an example. Let

us say that it is a very warm summer in Germany and this has caused the power generator

to burn more coal to sell more electricity to its clients (who use it to cool their homes).

Now, lets assume that the German power generator reaches its limit August 31st (its

Kyoto Cap). The generator has contracts with its clients to sell them electricity for the

rest of the year, but they have used all their pollution rights. The generator will now

consider its options.

1. Do nothing - Pay 100 Euros/tonne tax at the end of the compliance period

2. Emissions Trading - Find an Annex 1 power generator with pollution rights left over

and purchase those rights for market prices (currently 23 Euros/tonne)

3. CDM/JI - Find an environmental project that has proven it has reduced carbon dioxide

in a Non-Annex 1 country and purchase those rights for market prices (currently 10-15

Euros/tonne)

The obvious choice financially would be option 3 - for the generator to buy “carbon

credits” from the environmental project in a Non-Annex 1 country. However, because the

31


ease of transaction is much higher for option 2 – most power generators currently pay the

accompanying higher marginal cost.

Option 3’s project based credits are resultant of the CDM or JI mechanisms and involve

considerably more rigor than buying a pollution right allocated by Kyoto for Emissions

Trading (Option 2). As we will see, the project developer of a CDM/JI project must do

more to earn its credits, but if it does complete the necessary rigors of the UNFCCC

credit creation process it will be a much more competitive option for the German power

generator.

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Multilateral banking

Hablar sobre como la banca multilateral ha participado en el mercado de CERs.

El rol que han tenido la banca multilateral en proveer recursos e iniciativas para dirigir la inversión y el flujo de recursos financieros a sectores relacionados con el cambio climático. Es importante resaltar que el trabajo de las banca regional, específicamente el caso del ADB ha creado condiciones favorables para el desarrollo de la oferta de certificados a través de una política clara a favor de este tipo de iniciativas. Contrasta completamente con el caso de AfDB que no tiene ni siquiera un grupo o sección dedicada a cambio climático dentro de su estructura. Africa es la región más rezagada en cuanto a política de cambio climático. Esto redunda en las dificultades de generar proyectos atractivos para inversionistas. A continuación se presenta la banca multilateral que ha participado en cambio climático y su estrategia fundamental relacionada con CDM.

Practices of the multilateral development banks in supporting activities relevant to

climate change

21. MDBs aim at social and economic progress (to eliminate poverty and support sustainable development) through lending, grant and country-assistance strategies that support different infrastructure projects and policy reform activities in their developing member countries. MDBs make loans at commercial rates to governments (and government entities) in medium-income member countries, and grants to governments and government entities in low-income countries. The EBRD, EIB and IFC provide only limited grants.22. The World Bank has the largest investment among the MDBs. In 2006, the IBRD and the IDA approved loans and grants totalling USD 23.6 billion. Together the other MDBs committed a similar amount: the ADB, AfDB, EBRD and IDB committed USD 7.4 billion, USD 3.47 billion, EUR 4.9 billion and USD 6.4 billion, respectively, in 2006. In the same year, the IFC committedUSD 6.7 billion from its own account and the EIB, as a lending bank of the EU, approved in total EUR 45.7 billion, of which EUR 5.9 billion was invested outside the EU.23. All the banks recognize the importance of supporting the mitigation of, and adaptation to, climate change. There has been a growing interest on the part of the MDBs in developing individual climate change strategies and integrating climate change considerations into their lending activities, such as those of the EBRD and EIB. In the World Bank and the EBRD, climate change has been considered part of the environmental appraisal for lending projects.24. The July 2005 Gleneagles communiqué on climate change of the Group of Eight industrialized countries (G8) requested the World Bank and the regional development banks to take a leadership role in developing a framework for clean energy and development, including investment and financing. The purpose of this framework is to be a vehicle to accelerate investments to address developing countries’ energy needs, mitigate GHG emissions and support developing countries in adapting to climate variability and risk. This also provides an opportunity for all MDBs to consolidate their strategies and actions to address climate change. The joint efforts by MDBs on the Clean Energy and Development Investment Framework (CEDIF) should help to develop a more comprehensive strategy to address climate change within each MDB.25. Reflecting the different priorities in their business strategies, the focal areas to address climate change vary between the different banks. The focus on climate change seems to have increased in

33


the last two years and is reflected in newly formed dedicated funds for mitigation projects, adaptation initiatives and capacity-building and information-sharing activities.26. In most of banks the climate change issue is managed by staff in clean energy, energy efficiency or other sustainable development units. Specific units in charge of carbon financing have been established in the World Bank, EIB and EBRD.

I. Regional Gravitational Centers

CDM and the Regional Gravitational Centers theory (esta seccion se van por ahi 15 a 20

paginas)

As we discussed above, the CDM market is geographically heavily, both in number

of projects as well as in number of expected CERs, concentrated in 4 countries: China,

India, and Brazil. These countries have shown impressive growth in the last decades, not

only in terms of the mechanism but in all economic sectors. They are part of the fast

growing economies and are becoming relevant for the international arena in terms of

political and economical reasons. Along with Russia, they form the group known as

BRIC that has caught the attention of institutional investors, governments, private sector

and are expected to be important future players of the global system.

When the data for CDM projects is analyzed through this perspective then it does not

come as a surprise that the leaders of the market are such economies. However, the nature

of the CDM market is not only economically driven but also politically created. The

existence of the market itself responds only to the political will of the governments of the

world because there is actually (at least not in the present) a physical or emotional need

for a carbon restricted world for the general population. There is undeniable support for it

but the market did not come to be as a result of confrontation of needs by agents.

For such reasons the CDM projects do not follow the same patterns as the

international flow of investment (someone, check notes). A different framework for

analysis is needed to explain why such countries account for such a big percentage of the

market. The Regional Gravitational Centers theory is an interesting candidate giving its

broad spectrum of analysis and multi-staged configuration. Since the moment the Kyoto

34


Protocol was ratified the number of CDM projects began to grow. This first stage is still

going on, however the initial signs of a change in the nature of the host country selection

process appears to have sprouted. CDM investors are looking now for new destinations

because they want to diversify their portfolio in order to diminish geographical risk

(buscar en las notas). Which countries are then now the focus of this investors?

Regional Gravitational Centers Theory

Geo-politics and the RGC

Geopolitics, according to Rudolf Kjellén, talks about how the environment

influences the politics of a nation. This first attempt to link local, geographical and

natural conditions of a nation for explaining its political conduct grew in time (fuente). In

turn, geopolitics has become an important instrument for the analysis of international

relations in the modern world (fuente). This construction is the source for the theoretical

approach used here for explaining the process by which some countries have developed

more numbers of projects than others. More specifically, Geopolitics is the meta-

structure, to give it a name, where Regional Gravitational Centers Theory is subscribed

and which is our main analytical tool for understanding the phenomenon.

Within the International Relations area of study geopolitics as an idea has been

surveyed in a robust manner since the discussion of the Heartland Theory by Sir Halford

Mackinder in 1904. Since then it has been further developed and introduced to the

different schools of thought of IR Theory. For this paper, the relevance of geopolitics

stems from the early assertions of Friederich Ratzel in the middle of the XIX century.

Ratzel promulgated the idea that large areas of influence were needed for great powers as

a means for maintaining its leadership and therefore promulgating its own national

interests. These arguments were stated in a world characterized for the existence of a

Colony-Metropolis state of relations between different nations around the world. How

great powers decided to divide the spheres of influence triggered later confrontation

among them, changing the international order of the times.

35


Nowadays, the different regions which compose the global system have been

redefined. With the end of the Cold War the configuration of power was rearranged.

After the fall of the Soviet Union, the United States enlarged its spheres of influence

claiming its title as the only remaining super power. With almost two decades past, the

world has reallocated into new spheres and geopolitics still remain as an important

analytical tool. If we focus our attention on the developing world, 5 main regions are to

be found: Latin America, Asia & the Pacific, Africa, Eastern Europe & Central Asia and

finally North Africa & the Middle East. In this paper, we follow such division and

illustrate how each region has developed into sub-regions and reorganized its structure.

The Regional Gravitational Centers introduction

The Regional Gravitational Centers theory surges as an alternative to geo-politics.

Our modern world has changed in many ways in the last few decades and several facets

are not properly explained with the traditional geopolitical perspective. One of the main

aspects to address is the change the international environment along with the formation of

geo-political/economic plates. These two aspects are pillars for the introduction of the

RGC and are presented in the following pages. Other issues not discussed here that are

also relevant are the Westphalia system in today’s world and beyond and the concert of

Great Powers.

A. The international environment and its transformation

1. The relationship between globalization and regional integration:

The RGC begins with the interpretation of two phenomena: globalization and

regional integration. It insists that there is a double causation between the two processes

and that such relationship received a new impulse at the end of the Cold War. There are

two different influences for such process: one being positive with the increased

interaction between nations in all spheres (trade, culture, politics and society); the other

36


one being negative with the unequal growth and development of certain countries while

others lag behind.

2. The relation between security and stability with economic growth and development:

The relative newly found stability in developing countries has favored its

development (fuente). Economic growth needs for a secure neighborhood for allowing

investment to mature in a proper way. Society in general needs stability to guarantee the

conditions for a deeper interaction with other countries. The benefits from globalization

can only be perceived within a long-standing and sound environment.

3. The increasing integration by nation-states of close geographical proximity:

The late nineties and beginning of the new century saw an increasing amount of

commercial and cultural agreements between countries. To say a few: NAFTA, CAN,

ASEAN and so on. The better parts of those agreements are constricted to countries that

lie within a certain regional sphere. The RGC theorizes the process in five steps: first

from isolation to bilateral and multilateral trade. The next phase will deepen multilateral

trade followed with the formation of regional plates. The last phase is globalization but

within regions, within groups of countries instead of individual countries.

B. Formation of geo-political/economical plates

With the increasing integration among economies, the need for a deeper relation

among countries appears. In this process each region happens to develop a leader, or a

group of more relevant countries, in terms of economic and political influence. Such

states are addressed as Geo-gravitational Center State (or in this paper as core countries).

They are pillars to world and regional economies and established through the internal and

external dynamics of each region.

Furthermore, such core countries work closer with some countries than others. In our

modern world, the interdependence among countries forces the leaders to have strong

37


communications with the rest of the countries. This Regional Cooperative Circles can be

imbedded within other international organization structures or simply by geographical

conditions. As an example, the relation of Brazil with Argentina is closer given its

proximity and strong economic exchange than with Ecuador.

Despite having different levels of cooperation, there is a sense of community within

the region. Ecuadorians as well as Brazilians identify themselves as part of the South

American region in the same way as Argentineans, Peruvians or Colombians. In this way,

the globalization process is not just a sum of bilateral or multilateral exchanges, but also a

hierarchical integration process among regional blocs. The creation of those blocs, the

introduction of Geo-gravitational Centric States followed by a Regional Cooperative

Circle with a sense of Regional Community is what we call the Formation of a Geo-

political/economic plate.

1. Geo-gravitational center

A country attracts the rest; there is a centripetal relation among a number of states.

“Gravity” becomes fundamental to maintain the structure of the bloc. A big power,

located in a relatively centric area, has a strong force of gravitation to attract its neighbors

and determines the regional stability and prosperity.

2. Role of the G-g center

The role of the core country impulses politically other countries by becoming a key

venue for regional political and diplomatic activities; economically by being and engine

for growth, in security by determining the nature of regional stability; and culturally by

influencing day to day people’s life.

3. Geo-strategic fulcrums to the World Politics and Economics

a. The main stream of the world economy

- Globalization

- Regional integration/regionalization

38


b. Construction of structure of Geo-political/economic plates

c. G-g centric state: engines and braces of regional integration

The process of integration always originates from core of area, where there are some

strengthening advanced political forces.

d. Fulcrums of the world politics

- Engines of regional integration

- Braces supporting security framework

- Pillars of world politics

4. Hierarchical framework in the world politics

- Invisible hand: different to Adam Smith

- International law, norm and institutions

- Hierarchical order in anarchical system

Regional Gravitational Centers and CDM geographical distribution

Economics and politics have never been so intertwined as with the case of the

Carbon Market. Despite of the historically undeniable role governments and regulators

play as agents of the market, the existence of the market itself responds only to political

will of the international community. With the birth of a Carbon restricted world a new set

of incentives and mechanisms have been set into motion by the leaders of today’s global

arena. The Carbon market today represents investments of over US$30 billion dollars

(World Bank) and the search for market share has initiated a race between development

economies in order to attract investors.

Figure 20. Geographical location of CDM projects and Regional Gravitational Centers

39


Source: UNFCCC

As presented on section one, Asia is the major absorber of CDM investments.

Particularly, in 2006 China and India accounted for 61% and 12% as host countries for all

CDM projects. Brazil was in third place with a 4%. The rest of the world just contributed

with 13%. Why? Global economics have to do a lot with this but it all began when in

2005 the Kyoto Protocol came into effect. Since then, governments and companies from

the developed economies have needed to find different mechanisms in order to comply

with its carbon emissions obligations. The nature of the CDM market defined the

parameters by which investors select hosts countries.

CDM is project-based activity and when evaluating a project on an international

basis, certain risks such as country and project risk need to be addressed. The beginning

of the new millennium brought with itself different economic conditions throughout the

world. Countries like Brazil, Russia, India and China (the well known BRICs) became

fast growing economies getting the attention from investors all around the world.

Economic growth rate, investment environment, favorable regulation and so on made

possible that new resource entered the economy. Multinationals started operations in such

countries and a whole new niche for investment was created. The attention the group of

fast growing developing economies also meant that the companies and governments that

needed to acquire emission reductions certificates would concentrate their efforts in a

manner that their interests of creating stronger relations with such would enable them to

40


achieve their goals in a much more straightforward manner. In other words, the

companies and governments which were in the market looking for places to buy the

CERs from looked into markets they previously were interested upon. Multinationals

have had their eyes in fast growing economies and the opportunity to buy the CERs from

them is just another phase from their expansion strategy.

In that sense, the distribution of global asset allocation has followed the same

pattern as international relations have. Between regions, the existence of a leadership

among countries with best represents the interest of the region as a whole when

encountering the international arena, is also in place in the CDM primary market. For

Asia for example China and India are undoubtedly the most interesting places for

investing at the end of the first decade of this new millennium. Another center for

investing is Brazil in the South American region and in the case of Africa, two big poles

emerge: North Africa as a whole and South Africa.

Besides these “core” countries, a belt of close followers emerge in the emerging

market dimension. Vietnam, Chile, Colombia also attract investments but nor in the same

way the core countries do. Different conditions of each country separate them for being

in a higher position for attraction resources. However, the “mass” of investment in CDM

markets seems to have reached a point where the core countries, even though still have a

lot of potential for producing much more CERs, investors acting rationally and risk

averse, decided to diversify their CDM portfolio and include different sources of CERs.

In this framework, it means that the core countries have now yielded part of their

gravitational pull in benefit of the followers. Other countries like Chile, Vietnam and

Colombia will see this in the near future as signals for attracting more investors. A new

phase of geographically determined global asset allocation process begins where the

benefits of CDM projects are more spread.

Types of countries

1. Core countries:

41


They are leading countries in attracting the CDM investors. Brazil, India and China (3 of

the 4 countries that form BRICs) have a market share in the supply side of almost 80% in

2006. They have the infrastructure and industry that enables them to produce CERs with

in large amounts, low risk and efficiently.

2. Followers:

Countries that also attract investors but not in the same fashion as the core countries.

They are improving investment conditions, training their people and constructing the

framework for increasing their offer for CDM projects. Such countries usually have

strong relations with core countries and the transmission of market share from one to

other responds more to the flows of economy than those of politics.

1. Lagards:

Countries that simply do not have strong enough market potential for the current

conditions of CDM. Countries in Africa where potential for carbon sequestering or

energy efficiency still do not have approved methodologies that would enable them to

offer attractive enough projects. New developments must be made in the mechanism in

order to be able to include such countries.

Two-stage process of global asset allocation for CDM project-based activities:

Risk diversification

RGC allows us to explain the main development of the CDM allocation process in the

beggining stages. However, this process is also influenced by market forces that concern

country specific risks. If RGC theory tells that a status quo is going to be maintained,

however it does no t explain to us which other countries from the group of followers are

going to increase its market participatios in detriment of the core countries. The situation

comes from the basic belief that one should not concentrate all of its assets in one

determined space, in other words, don’t put all your eggs in one basket.

42


CDM geographical distribution is deeply connected not only to political and economical

context of the international system but also to the fundamental reasoning behind market

forces. Risk is, as explained in detail above, an inherent part of CDM and therefore

investors will look for diversification when managing their portfolio.

(Parte de lo que sigue viene de Point Carbon y su CDM&JI Monitor)

ViewPoint: Should buyers be diversifying risk from China and HFC?

The attraction of investing in projects in China and project types that generate large

amounts of credits has been long-established, but investors are also aware that putting too

many eggs in these baskets can be risky - and one of the most basic tenets of risk

management is that portfolios should be diversified.

There is no question that the large amounts of cheap credits generated by CDM projects

have had a big impact on the market, but this has been more in terms of price – making

CERs probably up to €5 cheaper than what they would otherwise have been.

Nonetheless, investors are wary of buying too many credits from HFC-23 projects. The

executive board tends to take a less-than-favourable view of large amounts of CERs

entering the market from one particular project type. And any outright hostility to HFC-

23 could in turn make it much more difficult for the volume of CERs on PDDs for HFC-

23 projects to be issued. An over-reliance on Chinese CERs is also potentially

problematic, despite the clear advantages that the country offers when it comes to buying

carbon credits.

The most positive element about China’s role in the CDM is a clear energy policy. The

goal to boost the use of renewables in the energy mix to 20 per cent by 2020 is obviously

very positive for the encouragement of wind power, biomass and small-scale hydro

projects. But investors have to take account of systemic risk, which is loosely defined as

a policy or event that can make a particular country difficult to operate in.

43


In China, risks are a major change in policy or economic circumstance, or an occurrences

such as a natural disaster or shortcomings in infrastructure, such as power cuts or

breakdown in telecommunications.

So, even though China and HFC-23 have clearly played a major role in project portfolios,

investors need to diversify into other locations and project types that may not be as

attractive. I expect India to make a strong comeback as a location for investors to source

carbon credits, and it’ll happen sooner than you think. Indian sellers have raised their

game and dropped their prices, so they could attract some investment away from China,

particularly among those investors who want to avoid putting their assets in the one

place.

The information provided in the table is from emission reduction purchase agreements (ERPAs) – based on contacts with key traders,

brokers and project developers. It does not necessarily represent the complete market. Information has been anonymised in order to

respect key players’ confidentiality needs. Explanations of abbreviations and acronyms: see page 7 and Glossary on

www.pointcarbon.com.

The price categories are developed by Point Carbon and are based on the risk distribution between buyer and seller: 1: The seller does

its utmost to deliver a flexible/non-firm volume, whereas the buyer commits to buy what the seller delivers. 2: The seller does its

utmost to deliver a flexible/non-form volume, whereas the buyer commits to buy if the seller delivers. The contract is only valid on a

set of preconditions. 3: The seller guarantees to deliver a firm volume; the buyer commits to buy if the seller delivers. The contract is

only valid on a set of preconditions and usually has a strong force majeure clause. 4: The seller guarantees to deliver a firm volume,

and the buyer guarantees to buy if seller delivers.

--

“If people are 50-60 per cent reliant on a particular technology or geographic region

then they may feel over-exposed. Portfolio managers need to diversify their assets

sources and might therefore consider swapping their over-exposed positions to re-profile

44


their portfolio. That’s still theory; let’s see if it becomes market practice, like in the oil &

gas business,” Laurent Segalen, director of investment funds at NATIXIS, and investment

manager of the European Carbon Fund said.

Econometrics and International Relations

Hablar sobre las críticas de los traditionalists y los behavioralist (pag 37 Contending

theories of IR)

The traditionalist often criticizes the behavioralist for:

1. Allegedly being too confident of the ability to generalize, to convert problematic

statements into causal propositions, and to use these propositions to predict

behavior in an area in which things are not predictable.

2. Attributing to abstract models a congruence with reality that the models do not

have.

3. Avoiding the substantive issue of international politics because, in the zeal for

scientific method, the behavioralist may never have really mastered those issues

in all their complexity, and

4. Succumbing to a fetish for measurement that ignores crucially important

qualitative differences among the phenomena being measured.3

Behavioralists assert that when they test for statistical correlation between two factors,

they are determining whether the relationship between the two might be merely

coincidental, and when they engage in a multivariate analysis, they are trying to find out

which of several factors constitute the most reliable predictor of a particular outcome.4

3 All thes and other criticisms are presented by Bull, “Case for a Classical Approach”4 J. David Slinger, “The Incomplete Theorist: Insight Without Evidence”, in Knorr and Rosenau, eds.,

Contending Approaches to International Politics pp. 72-73

45


The process by which the international investment community has deployed its

investments, specifically in the case of CDM, seems to follow a particular pattern that

will be presented below5.

Model estimation and 2008 projection

After identifying the main characteristics of the global allocation of resources for

CDM projects in the World and understanding the trajectory of the geographical

distribution of the same is then when we se tour goal for visualizing what is going to

happen in the near future. This section of modeling pretends to give us answers about

where the market is going and the forces of asset allocation maintain its trends. It is

therefore not pretended to give an exact number of the projects that are going to appear in

2008 but rather illustrate the where the resources CDM are going to.

The methodology used in this section is basically univariate time series analysis6.

The software used was E-Views and J-Multi. The data was gathered by CD4CDM which

is part of the United Nations Environment Program –UNEP- in the CDM Pipeline

Overview. It includes CDM projects from the validation stage (start of the 30 days public

comment period), through registration and to issuance of Certified Emission Reductions –

CERs-. This means that no Project Idea Notes –PINs- or projects at a stage before

validation are included. All data is taken from the UNFCCC CDM homepage and from

the Project Design Documents -PDD- of the projects that all are accessible there.

The data consists of observations for 68 countries and 5 regions with a monthly

frequency. As a result each country has 49 cases (with the exception of Guyana that has

no values) starting from December of 2003 until December 2007. The 5 regions are as

5 Part of the analysis in this sub-section is inspired on Professor Su Hao’s lecture on Gravitational Regional

Centers at China’s Foreign Affairs University, 2006.6 The frequency of the data and the conditions of the same reduce the possibilites of different modeling

techniques. For instance, a Vector Autoregressive approach was ruled out because the matrix turned out to

be singular. In that sense, no estimation could be obtained. Combinations off countries such as Brazil

against the rest of Latin America lacked statistical significance.

46


follow: Latin America, Asia-Pacific, North Africa and the Middle East, Sub-Sahara

Africa and Europe and Central Asia. Given the fact that only a fraction of those 68

countries have presented significant numbers of projects, the individual models where

restricted to such projects with more than 10 observations since the beginning of the

sample period. Accordingly the number of countries eligible for modeling was limited to

20 as presented on table 1.

Table 1. Countries that were modeled.

Region Modeled Not modeled

Latin

America

Argentina, Brazil, Chile, Colombia,

Ecuador, Guatemala, Honduras,

Mexico, Peru

Bolivia, Cuba, Dominican Republic, El

Salvador, Guyana, Jamaica, Nicaragua, Panama,

Paraguay, Uruguay

Asia &

Pacific

China, India, Indonesia, Malaysia,

Philippines, South Korea, Sri Lanka,

Thailand, Vietnam

Bangladesh, Bhutan, Cambodia, Fiji, Lao PDR,

Mongolia, Nepal, Pakistan, Papua New Guinea,

Singapore

Europe &

Central

Asia

Armenia, Azerbaijan, Cyprus, Georgia,

Kyrgyzstan, Macedonia, Malta, Moldova,

Tajikistan, Uzbekistan

Sub-Sahara

AfricaSouth Africa

Equatorial Guinea, Ivory Coast,, Kenya, Mali,

Mauritius, Mozambique, Nigeria, Senegal,

Tanzania, Uganda

North

Africa &

Middle-

East

Israel Egypt, Jordan, Morocco, Qatar, Tunisia

The ideal situation would be one where all countries could be estimated.

Unfortunately, that would require that every country in that list must have a steady

presentation of projects every month for a certain amount of time. As stated before, the

criterion for selecting the countries or types to be modeled was simple: have more than

10 projects overall since December 2003. However, the countries that were modeled

represented in 2007 93% of all in the case of Latin America, 99% in Asia & Pacific, 0%

in Europe and Central Asia (of a total of 17 projects in that specific region), 47% in Sub-

47


Saharan Africa and 83% in North Africa and the Middle East. Table 2 presents the

percentage that the countries represent from 2004 until 2007.

Table 2. Modeled countries as a percentage of the total, 2004-2007

Latin America

Asia & Pacific

Europe and Central Asia

Sub-Sahara Africa

North Africa & Middle-East

2004 94% 93% 0% 100% 0%2005 91% 97% 0% 50% 25%2006 95% 99% 0% 83% 43%2007 93% 99% 0% 47% 83%

Table 1.2 Types of projects that were modeled

Modeled Not modeled

Ungrouped

Agriculture, Biogas, Biomass energy,

Cement, Coal bed/mine methane, EE own

generation, EE supply side, Fossil fuel

switch, Hydro, Landfill gas, Wind

Afforestation, CO2 capture, Energy

distribution, EE households, EE industry,

EE service, Fugitive, Geothermal, HFCs,

N2O, PFCs, Reforestation, Solar, Tidal,

Transport

Grouped

Total, Renewables, CH4 reduction &

Cement & Coal mine/bed, Energy

Efficiency, HFC PFC & N2O reduction

Fuel switch, Afforestation & Reforestation

Projections

After estimating a model according to the data we projected for 12 periods ahead (i.e.

all of 2008). The purpose of modeling the quantity of projects is not to forecast the exact

magnitude of such but rather to see the main tendencies between countries and regions.

Which country produces more projects than others and see where they grow the most in

relative terms. It was expected that all projected results presented an upward trend

because of the steady increment of the market the past few years; the interesting part is

therefore to analyze which countries are growing faster than others and also if the

leadership of core countries in terms of number of projects will not be challenged in

2008. In other words, the interesting part is to see how the “followers” countries increase

their number of projects and catch up to the “core” countries.

48


In the next paragraphs we present the main projections of the models and analyze

them. There are 5 regions and a total of 20 countries projected. Each region is explained

and also which country is their leader and also followers. Countries that were not

included in the modeling process are therefore what we call “laggards” in the global

allocation process for CDM resources within a Regional Gravitational Centers

framework. That in turn means that 48 of the 68 countries still need to work in capacity

building if they want actively participate in the CDM market.

Latin America

The geographical conditions divide Latin America into basically two sub-regions:

Central America and South America. The first one is composed by 9 countries and

besides Mexico, Guatemala and Honduras are the only countries with significant

numbers. As table 3 illustrates, Mexico is projected to almost double the number of

projects in the pipeline in 2008 but far from the 117 projects it presented in 2006. In turn,

Honduras and Guatemala seem to have picked up the pace gaining more projects.

Table 3. Latin America number of projects, 2004-2008

2004 2005 2006 2007 2008*Latin America 36 155 228 213 234

Argentina 0 7 4 10 23

Brazil 16 81 73 80 94

Chile 4 11 8 22 54

Colombia 0 5 2 16 33

Ecuador 2 4 5 8 13

Guatemala 1 4 3 4 24

Honduras 7 4 2 7 28

Mexico 4 20 117 38 64

Peru 0 5 2 14 36Source: CD4CDM

* Projected by author.

South America in turn shows Brazil as its categorical leader regardless of its

slower relative growth from 2007 to 2008 projected. The sub-region shows an upward

trend although not very pronounced and its best projected performer of 2008 is Chile with

a very important jump in the production of CDMs. Other interesting details are: Peru

exceeds Colombia in magnitude and is located in the 4th position in the whole region of

49


Latin America. Argentina loses momentum and countries such as Honduras and

Guatemala are beginning to produce more projects than the austral country. In

conclusion, Chile is the big booster in relative terms in the region showing a growth rate

exceeding 200% with and increase in its monthly average production passing from 2 to 5

in 2008; Brazil and Mexico will maintain their leaderships and Guatemala and Honduras

are the best followers along Chile.

Table 4. Latin American countries regional and global CDM project participation, 2004-

2008

Regional participation Global participation 2004 2005 2006 2007 2008* 2004 2005 2006 2007 2008*Latin America 100.0% 100.0% 100.0% 100.0% 100.0% 69.2% 36.5% 29.1% 13.3% 9.9%

Argentina 0.0% 4.5% 1.8% 4.7% 9.8% 0.0% 1.6% 0.5% 0.6% 1.0%

Brazil 44.4% 52.3% 32.0% 37.6% 40.2% 30.8% 19.1% 9.3% 5.0% 4.0%

Chile 11.1% 7.1% 3.5% 10.3% 23.1% 7.7% 2.6% 1.0% 1.4% 2.3%

Colombia 0.0% 3.2% 0.9% 7.5% 14.1% 0.0% 1.2% 0.3% 1.0% 1.4%

Ecuador 5.6% 2.6% 2.2% 3.8% 5.6% 3.8% 0.9% 0.6% 0.5% 0.5%

Guatemala 2.8% 2.6% 1.3% 1.9% 10.3% 1.9% 0.9% 0.4% 0.2% 1.0%

Honduras 19.4% 2.6% 0.9% 3.3% 12.0% 13.5% 0.9% 0.3% 0.4% 1.2%

Mexico 11.1% 12.9% 51.3% 17.8% 27.4% 7.7% 4.7% 14.9% 2.4% 2.7%

Peru 0.0% 3.2% 0.9% 6.6% 15.4% 0.0% 1.2% 0.3% 0.9% 1.5%Source: CD4CDM


Note: The percentages in 2008 do not sum 100% because the regions and global CDM projects were also modeled individually. This

tells us that the projections have a positive bias because the projection of total projects in Latin America summed 234 whereas the sum

of the countries already gives us 369.

Latin America undoubtedly will continue to lose terrain against other regions.

Despite being the first region to present CDM projects, in 2007 it represent a merely

13.3% of all projects. According to the model, the decreasing tendency will continue in

2008 and the participation will amount to 9.9%. Brazil will remain to have this year its

large number of projects in the region amounting to 40.2% of all Latin American projects

(coming from a 37.6% in 2007). Next in line is Mexico with 27.4% for 2008 projected

followed by Chile with 23.1% for the same year. The interesting thing is that the gap

between Mexico and Chile was narrowed tremendously according to the estimations.

Chile came from a participation in the previous year of 10.3% in the region when Mexico

amounted 17.8%. Both countries gained weight in the region but Chile won much more.

50


Poner gráficas

Asia Pacific

Table 8. Latin America number of projects, 2004-2008

2004 2005 2006 2007 2008*Asia & Pacific 14 253 521 1331 1768

China 2 23 194 734 636

India 10 179 264 357 457

Indonesia 1 4 9 41 54

Malaysia 0 5 16 73 76

Philippines 0 19 6 43 18

South Korea 0 6 13 22 52

Sri Lanka 0 4 7 3 0

Thailand 0 1 1 41 62

Vietnam 0 4 4 7 9Source: CD4CDM


The first thing that caught our attention from this table is that according to the projection,

the region of Asia Pacific will maintain its strong leadership as the world leading region

for CDM projects. An outstanding 74.8% projected for 2008 makes without a doubt Asia

the hottest place to invest in CDM. From the region, China and India hold unchallenged

its command and production of projects amounting 636 and 457 of such respectively.

Despite such high numbers, the region has much to offer. Other countries such as

Vietnam and Thailand are projected to more than double its 2007 numbers and others

such as South Korea even triple them. Indonesia and Malaysia are maintaining its

production levels according to the models but the Philippines seem to have.

Poner imagen de proyectos de China

China and India are two countries that deserve special attention given their great

numbers. In the case of China it is very interesting to see how quickly the Chinese were

able to become the world leaders in term of CDM projects. In 2004 and 2005 the quantity

of projects was minuscule regardless of having a great amount of expected CERs by the

end 2005. It was in 2007 that this Asian giant developed all of its potential and presented

734 (CD4CDM, 2008) different projects for registration. The case of China is so

51


remarkable that in July 2007 alone, it presented 118 (CD4CDM, 2008) projects for

registration. The model however projected a more mild growth for the Chinese case in

the year 2008. The projection says that China will produce over 636 projects this year and

maintain and average of over 50 projects per month. These results could be explained by

the fact that investors are now trying to diversify their portfolio in order to decrease

geographical concentration of projects. This means that after a certain number of projects

in a country, investors look for different host countries in a way to control their risk

exposure. In such case, a second phase of the global allocation of resources intended for

MDL projects began.

Poner imagen de India

Turning our attention now to another great giant of Asia, India has been one of the most

successful countries creating CDM projects. In 2004 the Indians only had 10 projects; by

2005 the numbers have multiplied to form 179 new projects (CD4CDM, 2008). This

amazing growth was doubled by 2007 and according to the model; the Indian

subcontinent will have more than 450 new projects in 2008. Their steady growth will be

represented by an average of 28 projects every month.

The rest of the region also presented a positive trend. According to the model South

Korea was the country the presented the most pronounced increase in CDM project

numbers. In 2007 the Koreans summed 22 projects and it is projected that by the end of

2008 their numbers would have increased until 52, which means that in a year they have

doubled all their previous projects. Another interesting case is Thailand who had a very

important 2007 in terms of magnitude of their projects. Before that year Thailand had

only 2 projects but by the end of last year they had already amounted 41 projects in total.

It is projected that this growth will be maintained, although not at such high rate.

Poner imagen de South Korea y Thailand

Table 9. Asian & Pacific countries regional and global CDM project participation, 2004-

2008

52


Regional participation Global participation 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008Asia & Pacific 100.0% 100.0% 100.0% 100.0% 100.0% 26.9% 59.5% 66.5% 83.1% 74.8%

China 14.3% 9.1% 37.2% 55.1% 36.0% 3.8% 5.4% 24.8% 45.8% 26.9%

India 71.4% 70.8% 50.7% 26.8% 25.8% 19.2% 42.1% 33.7% 22.3% 19.3%

Indonesia 7.1% 1.6% 1.7% 3.1% 3.1% 1.9% 0.9% 1.1% 2.6% 2.3%

Malaysia 0.0% 2.0% 3.1% 5.5% 4.3% 0.0% 1.2% 2.0% 4.6% 3.2%

Philippines 0.0% 7.5% 1.2% 3.2% 1.0% 0.0% 4.5% 0.8% 2.7% 0.8%

South Korea 0.0% 2.4% 2.5% 1.7% 2.9% 0.0% 1.4% 1.7% 1.4% 2.2%

Sri Lanka 0.0% 1.6% 1.3% 0.2% 0.0% 0.0% 0.9% 0.9% 0.2% 0.0%

Thailand 0.0% 0.4% 0.2% 3.1% 3.5% 0.0% 0.2% 0.1% 2.6% 2.6%

Vietnam 0.0% 1.6% 0.8% 0.5% 0.5% 0.0% 0.9% 0.5% 0.4% 0.4%Source: CD4CDM


Rest of the World

2004 2005 2006 2007 2008Europe and Central Asia 0 5 8 17 48

Sub-Sahara Africa 1 8 12 17 51

South Africa 1 4 10 8 36North Africa & Middle-East 1 4 14 23 45

Israel 0 1 6 19 29

As for the other three regions included in the study, the model projected important

increases in all areas. In the case of Africa as a whole, production is expected to be

doubled. North Africa and the Middle East region presented 23 projects where Israel was

the leader in the region amounting for almost 83% of all projects. In 2008, although they

had in expansion of 56% as indicated by the model, their participation decreased to 64%.

This phenomenon supports the idea that investors are spreading to new countries and that

even though regional leaders will maintain its top position, new countries are going to

attract new investors. In the region of North Africa and the Middle East countries such as

Egypt and Morocco are expected in the near future to increase their participation. In the

case of Jordan, Qatar and Tunisia there is still much more progress needed to become

followers instead of laggards of the global asset allocation process for CDM projects.

Focusing on Sub-Sahara Africa, the positive trend will have a sharp rise in 2008. The

model suggests that this region will pass from 17 projects in 2007 to 51 in this year.

53


Furthermore, monthly average production is expected to pass from 1 to 4 projects. In this

region, the uncontested leader is South Africa accounting for 47% of the whole region in

2007. For this country, 2008 seems to be a great year. It is expected to deliver 36 projects

by the end of this year and increase its participation in the region to over 70%. In

addition, its average monthly production is projected to pass from 1 to 4 projects a

month.

Now, considering Europe and Central Asia the results are more unenthusiastic. Even

though there is still growth, this region has not been broadly included in the process of

resource allocation for the CDM market expanse. Since 2003 this region has only

amounted 30 projects and the countries with higher numbers are Armenia and

Uzbekistan, both with just 7 projects. Given this lack of data we were not able to project

any number of new projects in 2008, however a big effort was done to study the region as

a whole. As a result the model projected a big increase in the numbers of projects. In

2007 the Europe and Central Asia region presented 17 projects with an average of 1

project per month. By 2008, the new projects are expected to sum up 48 new cases with

an average of 4 projects per month. This is a big gain for the region but much more needs

to be done. It is also important to recall that most of the countries that geographically

belong to the region but because they are not consider developing economies and

henceforth do not apply as CDM projects, much of the demand for new projects in this

countries might be transferred to other potential suppliers such as Russia and Ukraine

who are now the leaders of the Joint Implementation scheme. In the future, the

connection between these countries will affect the amount of resources that countries of

the region might attract as competition for certificates of the flexible schemes of Kyoto.

Regional participation Global participation 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008Europe and Central Asia 0.0% 100.0% 100.0% 100.0% 100.0% 0.0% 1.2% 1.0% 1.1% 2.0%

Sub-Sahara Africa 100.0% 100.0% 100.0% 100.0% 100.0% 1.9% 1.9% 1.5% 1.1% 2.2%

South Africa 100.0% 50.0% 83.3% 47.1% 70.6% 1.9% 0.9% 1.3% 0.5% 1.5%North Africa & Middle-East 100.0% 100.0% 100.0% 100.0% 100.0% 1.9% 0.9% 1.8% 1.4% 1.9%

Israel 0.0% 25.0% 42.9% 82.6% 64.4% 0.0% 0.2% 0.8% 1.2% 1.2%

54


Despite this important increase in these regions performance, Asia and Latin America

have picked up a much faster pace. Asia and the Pacific made up over 83% of all the

projects in 2007 and the model projected a decrease until 74% for 2008. That loss

represents not a diminution of the capacity of the Asians to produce more projects but

that the other regions are also gaining experience in the creation of projects. As a result,

the model projects that the participation in global numbers of CDM projects for Sub-

Sahara Africa will pass from 1.1% to 2.2% in 2008.

II. Regional Prospects

(La idea es hablar sobre las diferentes regiones y como se espera que se comporten en el

futuro próximo)

China is still ranked as the most attractive location for CDM investment, owing to

positive conditions and excellent potential that the country holds for developing projects.

India and Chile are in second and third place. The Philippines has been added to the

groups of host countries regularly rated by Point Carbon. The south-east Asian country

goes into 14th place, ahead of Egypt and Thailand.

The Thai government finally approved approved its first batch of projects, but despite an

increase in grade, Thailand still remains last in Point Carbon’s ranking.

55


Other than India, China has approved more CDM projects than any other nation, and the

renewables sector - wind, solar, hydropower and biomass projects - account for the

majority of those projects.

China has managed to become the world’s leader in CDM mainly due to the commitment

of the government in support of the mechanism. It had all the conditions to rise as an

important player and it took the appropriate measures for achieving its goals. The

combination of a strong leadership, economic development, GHG reduction potential,

financial opportunities as well as a recipient private sector allowed this country to

become the number one in market participation. (esto es mio, hay que ver lo que dicen los

country profiles)

Earlier this month, Finance Minister Jin Renqing told a congress of senior Communist

Party figures that China may offer tax incentives to companies that invest in the

renewable energy sector. Also at the People’s Congress, the country’s prime minister

Wen Jiabao said China needed to place greater emphasis on meeting its energy efficiency

targets, particularly in power generation, and energy intensive industries such as steel,

cement, chemicals, fertiliser and ceramics.

China is aiming at generating 20 per cent of its electricity needs from renewable sources

by 2020, although hydro projects are expected to be the largest single non-fossil fuel

sector by far.

While most of the focus is likely to remain in China and India as they are well established

CDM locations, Brazil and Argentina could also be other important sources, particularly

to those companies who want to diversify country risk.

Sobre Africa y Capacity Building

CJM 15 November 2006

UN Secretary General Kofi Annann has unveiled a package of measures in Nairobi on

behalf of UN bodies and multilateral banks that are aimed at building capacity in the

development of renewable energy schemes in Africa, a continent that has garnered only 2

56


per cent of the volume of emissions reductions promised by registered projects

worldwide.

The new proposals, which have been drawn up by the United Nations Framework

Convention on Climate Change (UNFCCC), the United Nations Environment Programme

(UNEP), the World Bank through the International Finance Corporation and the Africa

Development Bank, and the Global Environment Facility, will attempt to build capacity

in the CDM on the continent as the private sector has either been unwilling or unable to

develop CDM projects for reasons ranging from lack of available opportunities to

develop projects to the lack of co-ordination at government level.

‘The Nairobi Framework for the CDM’ will try and build up a portfolio of CDM projects

in sub-Saharan Africa through co-ordination of activities between UN bodies and

multilateral banks, and small fund will attempt to provide seed money for renewable

energy projects such as in wind energy. The tie-up between the various international

agencies will to a large degree fuse together existing efforts, but will attempt to make

better use of the expertise and experience available, sources in the UN said.

The idea will be to develop renewable technologies that will provide electricity to areas

that have never had access to power, so the projects in many cases will not be replacing

established power stations that burn coal or oil. They will, however, pre-empt any future

capacity that burns fossil fuels.

The new initiative seeks to broaden the CDM beyond North Africa, Nigeria and South

Africa by by building up expertise at government level. While some African countries,

such as Uganda and Tanzania, established a designated national authority last year

(DNA), most countries south of the Sahara have yet to set up the framework required to

approve CDM projects, a key requirement if ventures aimed at cutting emissions are to

progress through the project pipeline.

Project developers on the sidelines of the UN conference said last week that a lack of

understanding at government level was the single biggest obstacle to getting CDM off the

ground in Africa, but other major hurdles also need to be overcome, such as the

development or approval of methodologies in projects that are more suited to Africa’s

pattern of economic development and energy infrastructure.

57


Projects as such forestry and fuel switching are viewed as those that have the best chance

of taking root in Africa, but blueprints for such projects are often very complicated and

time-consuming, increasing the cost of developing CDM investment on the continent.

Fixed costs such as project identification, office and administration, validation and

verification and even interpretation can be too high in many cases for developers of

small-scale projects, many of whom are unable to borrow money from African banks at

preferential rates.

While the few foreign investors who have committed money to projects in sub-Saharan

Africa can draw on a wider sources of finance, most African banks have been slow or

unwilling to finance domestic entrepreneurs in the sector, complain project developers.

“This is absolutely crucial to the CDM in Africa,” said an official with the African branch

of Climate Action Network, a network of environmentalist groups. Social development

banks, such as ‘solidarity banks’ could be part of the solution, he suggested, as these

banks lends with favorable conditions, asking for less collateral and a lower interest rate

for prospective project developers.`

7.3. Prospects for the carbon market for the period 2008.2012

602. The Kyoto Protocol mechanisms (CDM, JI and international emissions trading) and

the emissions trading systems established by Annex B Parties (EU ETS) will be the

dominant carbon markets for the 2008 to 2012 period. They are already the largest

markets by far. The EU ETS is expected to expand to include Norway, Iceland and

Liechtenstein in 2008, to link with a Swiss emissions trading system, incorporate Turkey

if it joins the EU, and to cover aviation beginning in 2011.

603. The Regional Greenhouse Gas Initiative (RGGI), covering the CO2 emissions of

electricity generating units in 10 states in the northeastern United States, is scheduled to

begin in 2009. Canada has announced a system for 2010. Proposals for a national

emissions trading system are under consideration in Australia. New Zealand is working

on the design of a system. And various regional and national systems have been proposed

for the United States. Those systems are unlikely to begin operation before 2011.

58


604. Since the EU ETS allows Kyoto Protocol mechanisms to be used for compliance,

this chapter focuses on the market for Kyoto Protocol compliance units. Capoor and

Ambrosi conclude that the current projected demand.supply balance, excluding Canada,

implies that the price of CERs/ERUs is likely to help set the market equilibrium price for

EUAs during this period (Capoor and Ambrosi, 2007). The analysis considers 2010 as a

representative year for the 2008 to 2012 compliance period.

1. 7.3.1. Demand

605. Annex B Parties can use Kyoto Protocol units to help meet their commitments. The

demand for these units is the difference between the actual emissions and the

commitment for each Party whose emissions exceed its commitment. Thus the forecast

demand depends on the forecast emissions of individual Annex B Parties and respective

success of their policies and measures.

606. Three recent estimates of the demand are presented in annex 5, table 24. The

estimates vary widely, from about 400 Mt CO q per year to over 850 Mt CO q per year.

The Canadian demand is a significant uncertainty for the estimates. In April 2007 the

Canadian government stated that it does not plan to purchase Kyoto units, but firms

covered by the emissions trading system will be able to use specified types of CERs for

up to 10 per cent of their total emissions f purchases by the Canadian government are

excluded, the Point Carbon and Capoor and Ambrosi estimates are virtually identical at

400 Mt CO , whereas the ICF International range of 500.671 Mt CO q is somewhat

higher.

2 e2 e.90 I

2 eq2 e

607. Annex B governments have already committed to purchase CERs and ERUs

equivalent to 917 Mt CO2 eq, 183 Mt CO2 eq per year, which is over 45 per cent of the

demand as estimated by Point Carbon and Capoor and Ambrosi (2007).

608. The estimates of the demand by EU ETS installations are all close to the maximum

use of CERs and ERUs allowed by the national allocation plans.

59


609. The demands estimated in table Annex 5, Table 24 are unlikely to change

significantly. Canada.s decision reduced the projected demand substantially, but no

further reductions are anticipated. Any growth in demand will be limited and come after

2010. Expansion of the EU ETS to include aviation could increase the demand for

CERs/ERUs and new emissions trading systems in Australia or the United States could

allow the use of Kyoto units, which might also increase the demand. ICF International

estimates an average demand of zero to 30 Mt CO2 eq per year for CERs/ERUs from the

United States (RGGI) during the period 2008.2012 (ICF International, 2007).

610. Capoor and Ambrosi estimate that half of the potential demand has been contracted

or is yet to be contracted.

2. 7.3.2. Supply

611. Figure 34 shows Kyoto units supplied by CDM projects in 2010, JI projects and

Annex B Parties with surplus allowances (AAUs). Detailed estimates of the supply are

presented in annex 5, table 25.

Figure 34. Estimated supply of Kyoto units in 2010 (Mt CO2 eq per year)

Abbreviations: CER = certified emission reduction, AAU = assigned amount unit, ERU =

emission reduction unit.

60


612. The flow of new projects and the CERs/ERUs they can generate by 2012 is

uncertain because of delays in negotiating the post-2012 regime. Until a new

international agreement is negotiated, the ability of emission reductions after 2012 to earn

CERs or ERUs is uncertain. This means delays in negotiating a post-2012 regime will

progressively reduce the period during which investors can recover their costs (Capoor

and Ambrosi, 2007; Haites, 2004). Soon, only the most profitable projects, such as HFC

and N2O destruction projects, will be able to recover their investment prior to 2013.

613. The Russian Federation, Ukraine and some eastern European countries will have

surplus AAUs they can sell to other Annex B Parties. Some of these countries are

establishing green investment schemes, which use the revenue from the sale of AAUs to

fund emission reduction measures. ICF International assumes that only AAUs from green

investment schemes will be purchased by other Annex B Parties. Point Carbon and

Capoor and Ambrosi estimate the surplus AAUs available, but do not assume they will be

sold.

614. Point Carbon and Capoor and Ambrosi find that the projected supply of CERs and

ERUs is almost sufficient to meet the estimated demand, excluding Canada. The supply

of surplus AAUs is huge relative to the residual demand. In its mid-case, ICF

International projects that, in addition to CERs and ERUs, some AAUs from green

investment funds will be used to meet the estimated demand. All of the estimates suggest

that supply will exceed the demand.

615. The supply of Kyoto units could increase further due to:

CDM projects for programmes of emission reduction activities.. No project of this

type has been registered yet, but such projects could generate relatively large

emission reductions;

HFC-23 destruction projects at new HCFC-22 plants. The eligibility of such

projects has been under negotiation for a few years. If approved, they could

generate large quantities of CERs;

CO2 capture and storage. The eligibility of such projects has been under

negotiation for a few years. If approved, they could generate large quantities of

61


CERs, although the time needed to implement such projects would limit the

quantity issued before the end of 2012;

Tradable credits for reduced deforestation. This has been proposed, but it now

appears unlikely during the period 2008.2012;

Emissions limitation commitments proposed by Belarus and Kazakhstan. The

proposed commitments probably would leave each country with surplus AAUs,

although it could take some time for them to meet the eligibility conditions to sell

AAUs. •

616. In summary, the analyses suggest the supply will be abundant relative to the

demand. Demand for the period 2008.2012 is unlikely to change significantly, but the

supply of Kyoto units could increase substantially.

617. The supply of CERs and ERUs will be affected by several factors over the next few

years, including:91

• Uncertainty about the post-2012 regime. The value of emission reductions after 2012 is

uncertain, so projects with longer payback periods become progressively less attractive,

reducing the flow of new projects;

• Administrative uncertainty. Inconsistent decisions, possible review upon registration,

and possible review on issuance present relatively small risks for project developers.

Owing to the relative lack of experience, the risks are higher for JI projects than for CDM

projects;

• Market liquidity. The secondary market for CERs is still small so accurate price

information is not readily available. This should change over the coming year as the

number of issued CERs rises. The secondary market for ERUs will lag by a year or more;

• Possible changes to the rules. The rules for the CDM could be changed to generate a

wider geographic distribution of projects and/or to favour projects that have more

development benefits.

3. 7.3.3. Prices

62


618. Will the surplus supply lead to a collapse of CER/ERU/AAU prices, as happened

during Phase I of the EU ETS? Probably not. Phase I EU allowances cannot be carried

over for use beyond 2007, so they have no value after the end of the period. In contrast,

Kyoto units can be carried over (banked), so they should have a value at the end of the

period provided they can be used for compliance after 2012. The EU ETS will allow the

use of CERs and ERUs after 2012. A post-2012 international agreement is also expected

to retain the Kyoto mechanisms and thus maintain the market for those units.

619. To date, all government purchases have been CERs and ERUs and participants in

the EU ETS can only use CERs and ERUs for compliance. The supply of CERs and

ERUs is still less than the demand, even without Canada. So long as these policies

continue, the demand for AAUs from the Russian Federation, Ukraine and Eastern

European countries will be limited to the demand not supplied by CERs and ERUs,

causing them to carry over most of their surplus AAUs.

620. Banking (carry over) of different units by an Annex B Party is restricted as

follows:92

RMUs may not be carried over;

ERUs which have not been converted from RMUs may be carried over up to a

maximum of 2.5 per cent of the Party’s assigned amount;

CERs may be carried over up to a maximum of 2.5 per cent of the Party’s

assigned amount;

tCERs and lCERs may not be carried over;

AAUs may be carried over without restriction.

621. There are no provisions governing carry over of CERs, tCERs and lCERs by non-

Annex I Parties or legal entities.

622. To comply with these rules EU ETS participants should use any issued CERs or

ERUs they own for compliance by the end of 201293 and Annex B governments should

comply by submitting CERs, RMUs, and ERUs and carrying over AAUs.

63


623. If the uncertainty relating to carry over by non-Annex I Parties and their legal

entities is not resolved, it could cause the price to decline in 2012 as they try to sell the

CERs they own. Early resolution of this uncertainty to avoid such a price drop is

desirable.

Figure 35. Expected prices for EU allowances in 2010 and 2020, based on response to

Point Carbon survey

Source: Point Carbon, 2007c.

624. Since CERs and ERUs can, and probably will, be used for Phase II compliance by

EU ETS installations the prices for issued CERs, ERUs and Phase II EU allowances

should be similar if not identical. As of May 2007 there is still a substantial difference in

the prices; CERs issued trade at EUR 12.13 whereas Phase II EU allowances trade at

EUR 19. Figure 35 shows the price expectations for EU allowances in 2010 and 2020 of

participants in an online survey conducted early in 2007. For 2010 the average is EUR

17.40, with a roughly symmetrical distribution ranging from less than EUR 5 to over

EUR 35.

625. ICF International forecasts the price for CERs/ERUs/Phase II EU allowances at

EUR 8, with a range of EUR 8.20 (ICF International, 2007, table 3). ICF recognizes,

however, that market behaviour may lead to an average price over the period higher than

forecast by market fundamentals. For example, industrial installations with surplus EUAs

64


have tended to bank them, rather than sell them, and there may be delays in the delivery

of CERs or ERUs into the EU ETS.

626. Based on the above information, the market price of issued CERs, ERUs and Phase

II EU allowances is estimated to average EUR 17.50 (USD 23.60) with a range of EUR

10 (USD 13.50) to EUR 25 (USD 33.75) for the period 2008.2012.

7.3.4. Market size

627. With an annual demand of 400 to 600 Mt CO2 per year (excluding the Canadian

government) the price of 2006USD 23.60 suggests a market of USD 9.4.14.2 billion per

year, say 2006USD 10.15 billion per year (see figure 36).

628. The above calculation assumes that all CERs, ERUs and AAUs bought for

compliance are purchased at the market price. Many CERs and ERUs have already been

purchased by Annex B governments in the primary market at lower prices, so the annual

compliance cost should be somewhat lower. CERs and ERUs purchased by other buyers

could be sold multiple times, so the annual value of transactions could be higher or

lower.94

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Africa’s low participation in the CDM market

The bundling of CDM projects in sub-Saharan Africa would go some way to attract

institutional and large buyers of carbon credits so that the region can boost its share of the

growing international carbon credit market, a United Nations official told a conference in

Johannesburg late last month.

Speaking at the Clean Development Mechanism in Africa conference, Sami Kamel,

carbon finance co-ordinator at the United Nations Environment Programme Risoe Centre,

said that big buyers of certified emission reductions (CERs) were deterred from investing

in sub-Saharan Africa because the size of the projects were too small.

“I think there is increasing interest in Africa right now among the large institutional

buyers. But some of the common barriers or some of the common causes of why they are

not looking at sub-Saharan countries is that the projects are too small for their own terms

and conditions,” Kamel told the auditorium.

“Many institutional buyers today or large buyers of credits are primarily interested in

projects that are minimum 50,000 CERs per year and that, I think, is acting as a key

driver for having them not participate. And this relates to the need for entities in sub-

Saharan African countries that can bundle projects so that these projects can be more

attractive to these buyers,” he added.

Under the Kyoto Protocol, bundling of projects is permitted providing that all individual

projects use the same methodology.

Africa accounts for just 1.6 per cent of the world’s CDM projects, compared to Asia,

which accounts for 63.4 per cent, and Latin America, which accounts for 32.5 per cent.

Out of 24 projects in sub-Saharan Africa that are currently in the CDM project pipeline,

17 are in South Africa.

“I think the key trigger for having some countries ahead of other countries is the overall

investment climate. But governments and development agencies have a lot to do to bring

those countries that are lagging behind to a level that is similar to other advanced

countries like Brazil, China or India,” Kamel said.

The UN is attempting to address this balance through the Nairobi Framework, which

attempts to co-ordinate activities in the UN agencies such as UNDP, UNEP and the

World Bank, with the aim of boosting Africa’s share of CDM projects. The framework,

66


which was launched last November, aims to do this through capacity building, offering

financial support and education to those countries that need it most.

However, uncertainty over what will happen when the first Kyoto period expires in 2012

was another reason that was highlighted as deterring investment in the CDM in

general. Grant Little, corporate CDM project leader for Sappi, a South African paper and

pulp company, said that his organisation took “a chance that there will be a system in

place post-2012” when planning its Tugela project, which is expected to yield 55,000

CERs per year.

Kamel said that buyers were tentatively showing an appetite for carbon credits generated

after 2012.

“There is an increasing belief among buyers that there will be some kind of regime post-

Kyoto and some buyers are signing ERPAs (emissions reduction purchase agreements)

including a price or the option to buy CERs post-Kyoto, which is an indicator that some

type of regime will be designed,” Kamel said.

Under a resolution passed at the Nairobi climate conference in November, Annex I

members under the Kyoto Protocol have until 23 February to identify expert agencies to

aid them in negotiating their greenhouse gas targets when the Kyoto Protocol expires in

2012.

According to UNEP figures, the volume of projects that are at various stages of the

approval pipeline in African countries south of the Sahara numbers just 24, compared

with 958 for the Asia and Pacifc region and 490 for Latin America. In North Africa the

figure is 22. (cambiar las cifras)

67


Appendix A. Estimation results

All countries were modeled in first differences in order to obtain stationarity. So when we

talk about the variables we refer to their first difference.

Latin America* Argentina Brazil ChileStructure AR(6) with seasonal dummies AR(2) AR(3) AR(1)R2 0.348945 0.341319 0.5321 0.161466

t-stats

AR: -4.366, -2.060, -3.318, -2.156, 2.626

Seasonal dummies: -1.440, -2.193, 2.649, 3.088, 1.612

-4.548586, -3.09541

AR: -6.688, -4.056, -2.246 -2.945

Jarque-Bera p-value 0.5011 0.119535 0.7521 0.08911

Inverted roots.61-.60i .61+.60i -.21+.68i -.21-.68i -.71+.28i -.71-.28i

-.31+.58i -.31-.58i

-.17-.70i -.17+.70i

-.66 -.40

Colombia Ecuador Guatemala Honduras Mexico** PeruStructure AR(2) AR(1) AR(2) AR(1) AR(2) AR(1)

R2 0.431238 0.210435 0.506671 0.140625 0.13620.24673

8

t-stats-5.36196, -

1.93137 -3.463148-6.271, -

2.325 -2.7136AR: -2.395

Dummy: 2.287 -3.84237Jarque-Bera p-value 0.168528 0.014544 0.5649 0.5649 0.00000

0.281267

Inverted roots-.40-.37i -.40+.37i -.48

-.45+.36i -.45-.36i -.37 0.6083 -.54

Asia & Pacific China India IndonesiaStructure Constant, MA(1) AR(1) MA(1) AR(2)R2 0.190726 0.3097 0.0912 0.291805

t-statsC: 2.180

MA: -3.709 -4.528032 -2.795 -4.197-2.92Jarque-Bera p-value 0.358085 0.00000 0.6347 0.00000Inverted roots .49 -.56 .38 -.36-.70i -.36+.70i

Malaysia Philippines South Korea Sri Lanka Thailand VietnamStructure MA(1), Trend AR(1) MA(1) MA(1) AR(1) AR(1)R2 0.42179 0.213775 0.312945 0.455048 0.083868 0.180136

t-statsTrend: 3.255MA: -7.256 -3.593799 -8.428046 -16.6612 -2.03047 -3.1498

Jarque-Bera p-value 0.00000 0.00000 0.216413 0.00000 0.00000 0.000047Inverted roots .84 -.60 .8 .92 -.29 -.45

Europe and Sub- South Africa North Africa & Israel

68


Central AsiaSahara Africa Middle-East

StructureAR(4) with

seasonal dummies AR(3) AR(1) AR(2) AR(2)R2 0.4032 0.470892 0.2357 0.332682 0.376416

t-stats

AR: -4.576, -4.379, -3.347, -2.570

Dummies: 1.758, 2.529, 1.868, 1.726

-5.479, -4.405, -3.993 -3.738 -4.499, -2.946

-5.082, -2.947

Jarque-Bera p-value 0.2879 0.020023 0.0749 0.002156 0.168176

Inverted roots

.255 -.2559 .4230

-.4230.02-.84i i

-.79 -.50-.33+.57i -.33-.57i

-.37+.54i -.37-.54i

Agriculture Biogas Biomass energy CementCoal bed/mine methane

Structure AR(2) AR(1) AR(2) AR(1) AR(1)

R2 0.3488790.24114

3 0.2056 0.094558 0.160084t-stats -4.759, -2.024 -3.821 -3.129, -2.189 -2.169305 -2.948694Jarque-Bera p-value 0.001379 0.00000 0.4252 0.00000 0.000024

Inverted roots-.35-.42i -.35+.42i -0.52 -.23+.52i -.23-.52i -0.31 -0.41

EE own generation

EE supply side

Fossil fuel switch Hydro Landfill gas Wind

Structure AR(1) AR(1) AR(1) AR(1) AR(2) AR(1)

R2 0.318828 0.437632 0.1721370.27310

4 0.2067920.09535

1t-stats -4.590869 -5.985233 -3.17767 -4.21188 -2.608, -0.410 -2.22498Jarque-Bera p-value 0.00000 0.256262 0.32097

0.038095 0.000012

0.397081

Inverted roots -0.57 -0.67 -0.48 -0.53-.19+.61i -.19-.61i -0.31

Total Renewables

CH4 reduction & Cement & Coal mine/bed

Energy Efficiency

HFC, PFC & N2O reduction

StructureConstant, AR(1) with seasonal dummies AR(1) AR(2) AR(1) AR(1)

R2 0.348879 0.152444 0.2576 0.35886 0.267857

t-stats

AR: -4.576, -4.379, -3.347, -2.570

Dummies: 1.758, 2.529, 1.868, 1.726 -2.969093 -3.767, -2.262 -5.022349 -4.102349

Jarque-Bera p-value 0.001379 0.00000 0.0331 0.00000 0.010738Inverted roots

.255 -.2559 .4230 -.4230 -0.41

-.27+.52i -.27-.52i -0.6 -0.5

69


An approximation to the determinants of carbon market expansion in developing

countries, 2004-2007.......................................................................................................1

Abstract............................................................................................................................1

Introduction..........................................................................................................................2

Chapter I Background of (pensar) poner chapter en los demás menos en conclusion....5

1.1 Annual Investment in CDM projects.........................................................10

1.2 The CDM Market outlook...................................................................................12

1.2.1 Financial muscle...........................................................................................12

1.2.2 Demand-Supply Balance and CER prices....................................................12

1.2.3 Regulated vs. Unregulated markets..............................................................15

1.2.4 Secondary market.........................................................................................16

Chapter 2 Barriers, Multilateral Banks and the Investor’s Perspective.....................16

Overcoming barriers (esta seccion viene de overcoming barriers)...........................17

Information and expertise......................................................................................18

Finance...................................................................................................................18

Overcoming barriers to CDM Projects..................................................................19

Risks in CDM and its impact on prices.................................................................19

Generic project risk....................................................................................................21

Country political risk.............................................................................................21

Counterparty risk...................................................................................................21

CDM project specific risk..........................................................................................21

Methodology risk...................................................................................................21

Host Country Approval risk...................................................................................22

Validation & registration risk................................................................................22

Performance risk....................................................................................................22

Monitoring/ Verification risk.................................................................................23

Review of issuance risk.........................................................................................23

Transfer risk...........................................................................................................23

Market risk.............................................................................................................24

Post-Kyoto risk......................................................................................................25

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Investor’s rationale....................................................................................................28

Financing the Project.............................................................................................30

Market Benefit...........................................................................................................31

Multilateral banking...................................................................................................33

Practices of the multilateral development banks in supporting activities relevant to

climate change.......................................................................................................33

I. Regional Gravitational Centers..................................................................................34

Regional Gravitational Centers Theory.....................................................................35

Geo-politics and the RGC......................................................................................35

The Regional Gravitational Centers introduction......................................................36

A. The international environment and its transformation...............................36

B. Formation of geo-political/economical plates...........................................37

Regional Gravitational Centers and CDM geographical distribution........................39

Types of countries......................................................................................................41

Two-stage process of global asset allocation for CDM project-based activities: Risk

diversification............................................................................................................42

Econometrics and International Relations.................................................................45

The traditionalist often criticizes the behavioralist for:.........................................45

Model estimation and 2008 projection......................................................................46

II. Regional Prospects.....................................................................................................55

Sobre Africa y Capacity Building..................................................................................56

7.3. Prospects for the carbon market for the period 2008.2012.....................................58

Optimizing sources by host country capacity........................................................73

71


Optimizing sources by host country capacity

Country risks play a major role in investment decisions by foreign investors and

lenders. Different regions vary dramatically in the types of investment capital they attract

and the returns expected. Many of these differences can be explained by the

characteristics of the national investment markets involved. UNCTAD has developed an

investment compass to help countries understand how they rate on factors relevant to

investment decisions by foreign direct investors7. The key variables include:

• Operating costs, reflecting items such as wages, rents and electricity tariffs;

• Taxation types and levels, along with investment incentives;

• Resource assets, including human and natural (raw materials, resources) capital, as

well as market size;

• Infrastructure, including both basic (transport, water, power) and

telecommunications;

• Economic performance and governance, including economic growth rates, current

account balance, unemployment, country debt rating, rule of law and political stability;

7<http://compass.unctad.org/Page1.egml?

country1=&country2=&region=&sessioncontext=202061216&object=SC.app.objects.methodology>

(accessed January, 2008).

72


• Regulatory framework for foreign investors, including entry, operating and exit

requirements.

A similar analysis by Ernst & Young ranks countries according how attractive they

are to investors in renewable energy projects (Ernst & Young, 2007). The ranking criteria

include measures of both natural and social capital, such as:

• The Renewables Infrastructure Index., covering items such as: electricity market

regulatory risk; planning and grid connection issues; and access to finance;

• Technology Factors, including power off-take attractiveness; tax climate; grant/soft

loan availability; market growth potential; current installed base; resource quality; and

project size.

73


Most public companies in the carbon space are in a fast-growth mode and are yet

to show a profit. One public company delayed its public disclosure in the wake of an

unfavorable analyst report. Some companies cited the delay in the operations of the

International Transaction Log (ITL) as a risk that would made it more difficult to earn

and book revenues from CER spot sales this year. There was increased consolidation in

the sector and evidence of growing interest in the U.S. markets. A prominent investment

bank bought a sizeable stake in a leading project development and asset management

company. Another company acquired a boutique analyst firm in the United States, while

a third acquired a smaller company in Washington DC specializing in developing Project

Design Documents (PDDs) (fuente). Several European entities opened offices in the

United States citing the need to develop a presence in this potentially large market

(fuente). Reports of early offset transactions in North America filtered in with prices

reported in a very wide price range starting at around US$1.50, e.g. from pre-compliance

buyers for emission reductions from enhanced recovery from oil and gas fields (fuente).

The most promising impact of carbon markets has been its impact on innovation

as smart capital takes an early, long-term bet on the quickly growing emerging market for

environmentally-oriented investment (fuente). A key indicator of interest in aligned and

closely related fields is the record US$70.9 billion in clean technology investments in

2006 with major investments (and announcements) from well-known investment banks

(fuente).

(Esta parte no va aqui)

74

Global distribution of cdm projects

Economy & Finance