Swedish International Development Agency SESSION 5 United Nations Environment Program Division of Technology Industry and Economy CDM Clean Development Mechanism (and trading of CERs) ACME Applying CLEANER PRODUCTION to MULTILATERAL ENVIRONMENTAL AGREEMENTS
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Swedish International Development Agency
SESSION 5
United Nations Environment ProgramDivision of Technology Industry and Economy
CDMClean Development Mechanism
(and trading of CERs)
ACME Applying CLEANER PRODUCTION to MULTILATERAL ENVIRONMENTAL AGREEMENTS
1/ Overview of the Clean Development Mechanism (CDM)> What are the objectives and purpose of CDM ?
2/ Basics> What are the key concepts ?
3/ Organisation of a CDM project> What are the different steps of a CDM project ?
4/ Statistics> Where are we now with the CDM and how are emission reduction credits traded on the markets?
5/ Opportunities for industrials> What are the challenges and opportunities for industrials in developing countries ?
OVERVIEWAbout Kyoto Protocol
Signed in 1997; in force since 16 February 2005.
Ratified by more than 130 countries> Major non participants: USA and Australia.
Commits Annex 1 countries to reducing greenhouse gas emissions.> GHG emissions may be reduced by ~ 5% below 1990 levels in 2008-2012;> Individual, quantified emission targets for each industrialized country;> 6 greenhouse gas covered: CO2, CH4, N2O, HFC, PFC, SF6.
3 flexibility mechanisms for financing emission reduction abroad.> Clean Development Mechanism (CDM)> Joint Implementation (JI)> International Emissions Trading (ET)
> A mechanism that allows Annex B Countries to undertake GHG emission reduction projects in non-annex B countries, and to use the achieved emission reductions to meet their own emission goal.
> In CDM projects, the Annex B country fund the project and provides any necessary know-how and technology transfer to the non-annex B country where the project is implemented.
> CDM works because emission reductions are many times more expensive to achieve in Annex B countries than in non-Annex B countries (the opportunities for emission reduction are bigger there).
Make difference between Annex I and Annex B countries!
Rules, modalities and procedures of CDM are defined in:> Kyoto Protocol;> Follow-up decisions of COP;> Decisions of CDM Executive Board.
CDM EB (Executive Board):> Responsible for further development of CDM rules, and supervising implementation;> Composed of 10 members + 10 alternates;> Reports to the COP (Conference of the Parties).
Twin objectives of CDM:> Help Annex 1 countries meet their objectives in a cost-effective way;> Contribute to sustainable development of the host country.
ORGANISATIONContent of the PIN (Project Idea Note)
Standardized format for the PIN> the type, size and location of the project;> the anticipated total amount of GHG reduction compared to the “business-as-usual” scenario (which will be elaborated later in the PDD, while describing the baseline);> the suggested crediting life time;> the financial structuring (indicating which parties are expected to provide the project’s financing);> the project’s socio-economic or environmental impacts/benefits;> history of the project regarding other donors and funding tenders;> capacity of project developer to invest in the project.
Standardized format for PDD – Project Design Document (main document in the CDM cycle)
A. General description of the projectB. Setting of the baselineC. Duration of the project / Crediting periodD. Setting of the monitoring planE. Estimation of GHG emission reductionsF. Environmental impactsG. Stakeholders’ comments-Annex 1: Contact information on participants in the projectAnnex 2: Information regarding Public FundingAnnex 2: Baseline informationAnnex 3: Monitoring plan
Statistics on October 2005 from http://cdm.unfccc.int/ (UNFCCC)
ORGANISATIONPDD: Crediting period
Carbon credit (CER) can be generated as from now:> Banking by buyer for use towards compliance in 2008-20012.> Banking by project proponent for sale in later years.
Crediting period:> Usually starting the later of CDM registration, and start of project operation.> Fixed crediting period of up to 10 years. OR> Renewable crediting periods of up to 7 years (maximum 3 x 7 years).
Formal confirmation by the Designated National Authority (DNA) of the hosting country that the project meets sustainable development objectives.
Sustainable development criteria set by the DNA:> Social well being: employment, alleviation of poverty, etc.> Economic well being: investment consistent with needs of the people.> Environmental well being: impacts on the local and global environment, pollution, etc.> Technological well being: transfer of environment safe and sound technologies.
Independent assessment by a Designated Operational Entity (DOE) that project meets criteria of the Kyoto Protocol.
DOE shall:> Review the PDD and supporting documentation;> Conduct site visit;> Interact with stakeholders;> Source other relevant additional information from various sources;> Publish the PDD in the web for international stakeholder comments.
A successfully validated project can be submitted to CDM Executive Board for registration.
Automatic registration of submitted projects unless 3 members of the CDM Executive Board or one of the parties involved file a request for review within a delay of:
> 4 weeks for small scale project;> 8 weeks for large scale project.
Registration fees are payable to the Executive Board by the project participants depending on the quantity of emission reductions:
STEP 0 – Preliminary screening based on the starting date of the project activityStart date of claiming credits for project should precede date of registration
CDM consideration proved = PASS
STEP 1 - Identification of alternatives consistent with current laws and regulationsIf proposed CDM project is the only alternative left, the project is non-additional
STEP 4 - Common Practice Analysis (credibility check)If similar activity can be observed with no essential difference, the project is non-additional
CDM faces Barriers = PASS
No similar activity or similar activities present but difference in circumstances = PASS
STEP 5 - Impact of CDM registration If CDM benefits have no impact, the project is non-additional
PROJECT ACTIVITYIS ADDITIONAL
ORGANISATIONFast track for small-scale CDM project
Why do we need a fast track?> Process not worth it for small projects (high transaction costs); > Many small projects deliver significant local sustainable development benefits;> Small-scale technologies are some of the most promising for solving the long term problem of climate change (e.g. solar; wind; fuel cells); > CDM might lose public support if rules are biased toward large capital-intensive projects.
Size limits for small-scale projects > Electricity generation from renewable sources, up to 15 MW.> Energy efficiency projects saving, up to 15 GWh p.a.> Project reducing emissions up to 15.000 t CO2eq p.a.
Small-scale projects benefits from simplified rules and procedures> Simplified PDD;> 14 pre-approved baseline methodologies (feb. 2005);> Same operational entity may undertake validation and verification / certification;> For small-scale projects, sufficient to demonstrate that barriers would have led to higher emissions in absence of CDM.
Carbon market in 2005:> In 2005, global carbon market transactions worth €9,4 billion.
> In 2005, CDM projects transactions worth €1,9 billion.
Statistics of CDM (as per June 2006):> 225 projects registered, for an average of 70 millions CERs/Year.> 36 projects submitted for registration, for an average of 4,6 millions CERs/Year.> 860 projects known to be prepared for registration.
> 165 proposed baselines methodologies were sent to the CDM EB for approval, 60 approved, 66 rejected and 39 are pending.
Statistics on July 1st 2006 from http://www.cd4cdm.org/ (UNEP)
* List of host countries: Argentina, Armenia, Bangladesh, Bhutan, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Ecuador, El Salvador, Fiji, Guatemala, Honduras, India, Indonesia, Israel, Jamaica, Malaysia, Mexico, Morocco, Nepal, Nicaragua, Panama, Papua New Guinea, Peru, Republic of Korea, Republic of Moldova, South Africa, Sri Lanka and Viet Nam.
Expected average annual CERs from registered projects by host countries*Registered project by host countries*
Statistics on July 1st 2006 from http://cdm.unfccc.int/Statistics/
Contractual arrangements vary depending on how risks are located between Buyer and Seller:
> Project risk - whether or not the project will adequately perform and produce the expected amount of emissions reductions.> Country risk - whether the political and investment climate of host country is stable.> Regulatory risk – whether or not the project will ultimately be deemed additional and registered by the CDM Executive Board.
Various contract features are used to allocate these risk between the buyers and the seller:
> International tenders for CDM projects> Voluntary corporate initiatives> Multilateral Funds> EU commitments for carbon purchase> Bilateral negotiations with the consortium of buyers
Prices of CERs > Average price of 7,5 US$ / tCO2eq in 2005 (3 to 14 US$).
What determinesprices of CERs ?
> Likelihood Seller will deliver verifiable reduction on schedule.> Creditworthiness and experience of the project developer.> Technical and technological viability of the project.> Liabilities the Seller is willing to take in the event the project fails to deliver including penalties for non-delivery and willful default / gross negligence.> Vintages: in some markets, early vintages (until 2012) are priced higher because the Buyer’s willingness to pay in order to meet compliance.> Likelihood of host country approval.> Environmental and social compliance and additional benefits.ACME – Session 5 – Clean Development Mechanism - 36 / 39
CDM is real> 225 projects registered and 60 methodologies approved;> In 2005 CDM projects transactions worth €1,9 billion.
Industrials in developing countries have a role to play> Prices for emissions reduction are increasing;> Buyers and Sellers are innovating ways of addressing risk;> Early entrants will have a clear advantage.
Challenges for CDM in the next years> DNA approval capacities;> High methodology rejection rates;> Annex 1 companies may only be interested in buying CER, not in investing in project (exception for some Japanese companies);> Gap between CER and EU allowance prices (50% even for registered projects);> Interpretation of national policies in baseline methodologies;> Availability of reliable and authentic data for establishing baselines.