Training Workshop European CDM Linking Directive: How to Strategize CDM Opportunities in Thailand Br

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Training WorkshopEuropean CDM Linking
DirectiveHow to Strategize CDM Opportunities in
Thailand Brief Background by Dawan
WiwattanadateThe Montien Hotel, Bangkok,
Thailand 14-15th December 2006






Co-financed by SPF EU-Thailand Economic
Co-operation
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CDM Background

• CDM ???? ????????????????? (Clean Development
  Mechanism)
• ?????????????????????????????????
  ???????????????????????????????????????????
• ??????? ???? Win-Win-Win
• Win 1 Assist non-Annex I Host Countries to
  achieve Sustainable Development economic
  development, social development (better life
  quality), and environmental development (via
  cleaner technologies)
• Win 2 Assist Annex I Countries to achieve their
  emissions reduction target (CDM provides
  cost-effective emissions reduction opportunities)
• Win 3 Assist global emissions reduction ?
  Reduce global warming
• ?????????????????????????????????

CDM Background
Note 3 Flexibility mechanisms under Kyoto
Protocol CDM (Clean Development
Mechanism) Annex I non-Annex I JI
(Joint Implementation) Annex I Annex I
ET (Emission Trading) Annex I Annex I
Project-Based Mechanisms Non-project
Based
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EU ETS Background

• An European Directive on CO2 Emission Trading
  Scheme
• adopted on 22 July 2003 (by the EU Council of
  Ministers)
• operational since January 2005
• It was agreed that the EU ETS would have two
  phases
• Learning Phase during 2005-2007, not legally
  binding
• Implement Phase coincide with KP commitment
  period (2008-2012
• EU ETS ?????????? annual emission caps ????
  emissions allowances (EUAs) ??????????????????????
  ????? (????? ????? ????????????????
  ?????????????? ????????? 13,000 ????)
  ??????????????????? (Installations)
  ???????????????
• Adjust their energy consumption patterns ????
• Purchase emission allowances from other
  installations
• ??? Non-compliance within the scheme implies
• ????????? 40 ???? ?????? CO2
• ????????? 100 ???? ?????? CO2 ????????????

EU ETS Background
Source Wytze 2006
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EU Linking Directive Background

• An European Directive 2004/101/EC (so-called EU
  Linking Directive)
• adopted by the EU Foreign Affairs Ministers (16
  September 2004)
• as an amendment to the ETS Directive
• Established to link the EU ETS with the Kyoto
  Protocol
• ????????????????? EU installations ??????????
  emission reduction credits
• ??????????????????????? project-based Kyoto
  Mechanisms JI CDM
• Linking with CDM has been effective since Jan
  2005
• Linking with JI will be effective since Jan 2008
• ??????????????????? ? the possibilities
• to reduce costs for EU installations and
• to contribute technology transfers to developing
  countries
• The Linking Directive ?????????????????????????
  CDM Credit ????????????? Emissions Allowance
  ????????? ????????????????????????????????????????
  ???????? National Allocation Plans (NAPs)
  ?????????????????????????????????? ? No
  harmonised EU-level cap was agreed upon

Source Wytze 2006
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Possible CDM Transaction Models

• Multilateral Co-operation
• Multilateral Fund collects funding from CER
  investors
• and invests this in CDM projects
• The Fund oversees project development and
  implementation
• CERs are distributed among investors
• Bilateral Co-operation
• MOU with CER buyer or broker, who pays initial
  transaction cost
• Unilateral Co-operation
• Host country takes the initiative and pay initial
  transaction cost
• CERs are issued to buyers once CDM emission
  reductions have been verified and/or certified
• Reduced risk for Annex I buyers, because CERs are
  traded on spot market, but they pay a higher
  price

Source Wytze 2006
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Unilateral CDM advantage disadvantage

• Host country entities may have better risk
  perception regarding domestic investments than
  foreign parties
• Selling spot certified emission reductions ?
  higher price
• project choice led by host country side instead
  of pushed by foreign technology suppliers
• Less advanced technologies implemented in CDM
  projects
• Emission Reduction Purchase Agreement (ERPA) at
  end of project cycle leaves risk on host country
  side (host country entity or intermediary)

Source Wytze 2006
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Possible CDM Approaches

• Single Project Approach
• Programmatic CDM approach
• Programme bringing together several CDM projects
• Within one country, not mandatory activities
• Reduce transaction costs per project
• Examples biogas systems for farmers
• Sectoral CDM approach
• Government policy to reduce GHG emissions in a
  sector
• Baseline and additionality assessment complex
• Examples transport (green transport plan),
  efficient buildings
• Perverse incentive countries with progressive
  energy strategies reduce their CDM potential

Source Wytze 2006
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Definitions (to be finalized)

• As stated in the decision text (UNFCCC 2005),
• a local/regional//national policy or standard
  cannot be considered as a CDM project activity,
  but the project activities under a program of
  activities can be registered as a single CDM
  project activity
• Since many types of government policies can
  affect GHG emissions, a broad definition of
  Policy-CDM would allow a single policy that
  reduces emissions in a range of sectors and
  actors to be eligible as a CDM activity.
• For example, a government policy to adopt a fuel
  tax that impacts fuel consumption in
  transportation, electricity generation,
  commercial and residential use would be
  considered a Policy-CDM.
• Some have suggested that only policies that
  impact upon one sector would likely be able to
  meet the requirements of CDM and thus eligible
  under a Policy-CDM approach. Hence, the project
  boundary would be a particular sector and the
  eligible activity would be a government policy
  that directly was aimed at reducing emissions in
  that sector.
• Such approach has also been termed a
  cross-sectoral Sectoral CDM

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Definitions (to be finalized)

• Policy-based CDM (Policy-CDM) is an approach
  where activities are implemented by the hosting
  government through deliberate government
  policies.
• The policy becomes the project however, CERs
  would only be generated for the impact of the
  policy ex-post.
• The CERs would flow directly to the hosting
  government, but the government could decide to
  allocate the CERs to private actors that were
  impacted by the policy.
• Sectoral CDM (S-CDM) is an approach where
  emissions reduction credits are generated from
  public and private actions in a single sector or
  sub-sector that reduce emissions below the level
  that would have occurred without the project.
  

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Definitions (to be finalized)

• Under Programmatic CDM (P-CDM), project
  activities occur as the result of a deliberate
  program, whether it is a public sector measure
  (either voluntary or mandatory) or private sector
  initiative.
• Key characteristics
• - The program results in a multitude of
  dispersed actions.
• Response to the program occurs at multiple
  sites and among
• a variety of actors.
• - The activities and resulting emissions
  reduction do not necessarily
• occur at the same time, but do respond to the
  same program.
• - The program must have one enacting agent, but
  can be
• implemented by one or more entities.
• - The type, size, and timing of the actions
  induced by the program
• may not be known at the time of project
  registration.
• - The project is submitted using one single PDD.
  

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Programmatic Project-based CDM
P-CDM Project 1
P-CDM Project 2

• Note
• Project activity is an emissions reduction
  activity occurs at a single location
• within a narrowly defined boundary.
• Program of activities would be a program
  supported by a single entity that
• encourages or mandates a number of emissions
  reduction activities hence
• multiple locations under a program.

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Key Question?

• If a government creates a goal to meet a certain
  amount
• of its electricity generation from renewable
  energy,
• for example, creates an incentive program to help
  meet the
• target.
• Would the incentive program clearly be considered
  
• a program of activities and be allowed as
  P-CDM?
• or
• Would it be considered the policy/standard and
  not be allowed as P-CDM?

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CDM Marketing DNA Roles

• Who are major buyers of carbon credits?
• Europe Japan
• Who needs CERs in Europe?
• EU Governments
• EU Installations
• Intermediaries
• How much the possible CER Prices in Europe?
• What should be the roles of Host DNA?

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Europes Carbon Market Share

• Europe and Japan are major shares in the carbon
  market
• Demand increasing in Europe
• Private entities dominate, especially in Japan

Source Hayashi 2006
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Who needs CERs in Europe?

• ?????????????????? (EU Governments)
• Own funds
• Investment in financial institutions funds
• ????????????????? (EU ETS compliance buyers)
• Large Companies
• Own company funds
• Investment in financial institutions funds
• Project-specific acquisition
• Secondary market
• Small companies
• Secondary market
• ????????????? ???? ??????????? (Speculators /
  Intermediaries)

Source Axel Michaelowa, 2006
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Possible CER Prices in Europe

• 4 - 6 for medium-risk forwards 8 -10 for
  low risk forwards / DNA approved projects.11-14
  for registered projects15 for Gold Standard
  registered projects
• EU intermediaries do not believe that CER price
  will become equal to EU allowance price
• Risk (counterpart, delivery, etc.)
• CER and EUA are fundamentally different
• CERs are bankable (from 2005-07 to 2008-12)
• CERs are capped by EU States
• Risk of ITL not being operational on time
• Limited awareness of Linking Directive reduces
  arbitrage
• Only guaranteed CERs are quite similar to EUA

Source Wytze 2006
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Roles of Host DNA

• Regulatory Functions (mandated by Marrakech
  Accords)
• Defining SD criteria
• Confirm voluntary participation of the project
  participants
• Confirm SD contribution of the project and issue
  letter of approval for the purposes of validation
  and registration
• Report to UNFCCC secretariat on the CDM
  activities annually.
• Promotional Functions (optional)
• It is optional but essential tool, especially for
  countries that are not able to automatically
  attract foreign investors.
• It is impossible for a newly established host DNA
  to perform the promotional functions in addition
  to the regulatory functions.
• Coordination of project portfolio and partner
  information is an important promotional function.
• If a host DNA can be a coordination body for
  project bundling, the projects would be much more
  attractive to investors.

Source Wytze 2006
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Conclusion

• KP provides opportunities for carbon trading
• however, it will not be the main driver for
  carbon market
• EU ETS tends to be a main driver because of
  compulsory
• ? Europe will be major market share
• ? EU Linking Directive is expected to expand
  market of
• project-based carbon credits (CERs and
  ERUs)
• ? CER price will vary as follow
• 4 - 6 for medium-risk forwards 8 -10
  for low risk forwards / DNA approved
  projects 11-14 for registered projects 15
  for Gold Standard registered projects
• ? CER would not be equal to EUA due to various
  reasons

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Conclusion

• Bilateral or Unilateral?
• Bilateral
• Initial transaction cost paid by CER buyer
• Pre-determined (low-moderate) CER price
• Limited opportunity for small projects
• Unilateral
• Initial transaction cost paid by host entities
• Spot-market (higher) CER price
• Higher opportunity for small projects
• Recommendation
• Unilateral CDM should be considered only for the
  activities that
• Approved methodology available
• Having enough cash flow
• Domestically available technologies

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Conclusion

• How to Strategize CDM Projects?
• Finalized CDM Institutional Framework and
  Simplified Approval Procedure as soon as possible
• Start CDM process as soon as possible
• (preferably during planning stage)
• No CDM project can be registered if CDM process
  starts after construction
• Integrate Energy Policy with CDM Policy and Plan
  CDM activities on a long-term basis
• DNA should have full-time staff for CDM and play
  more active as well as promotional roles
• Sustainable Technology Needs Assessment and
  prioritize areas for CDM

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Maximising CDM Opportunities

• CDM has two demand-supply chains
• Annex I Side CER demand technology supply
• Non-Annex I Side Technology demand CER supply
  
• In actual practice, chain 1 dominates
• Letter of Approval is often Letter of no
  Objection
• Several non-Annex I Parties do not have criteria
  or strategy for maximising CDM Opportunities
• Technology Need Assessment (TNA)
• Ideally, a CDM host country would assess what it
  needs
• in terms of sustainable technologies

Source Wytze 2006
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Topics for Discussion

• How could Thailand having progressive Energy
  Strategy get benefit from the CDM?
• Are there possibilitites for Thailand to
  implement CDM via Programmatic or Sectoral CDM
  Approaches?
• How to maximise CDM opportunities via Policy
  Integration?
• Should Thailand implement Unilateral CDM and
  which cases?
• How could Thailand maximise benefit from the EU
  Linking Directive?

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Thank you.