Swedish International Development Agency

1
Applying CLEANER PRODUCTION to MULTILATERAL
ENVIRONMENTAL AGREEMENTS
ACME
CDM Clean Development Mechanism (and trading of
CERs)
SESSION 5
United Nations Environment ProgramDivision of
Technology Industry and Economy
Swedish International Development Agency
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OUTLINE
Objectives of this session

• 1/ Overview of the Clean Development Mechanism
  (CDM)
• gt What are the objectives and purpose of CDM ?
• 2/ Basics
• gt What are the key concepts ?
• 3/ Organisation of a CDM project
• gt What are the different steps of a CDM project ?
• 4/ Statistics
• gt Where are we now with the CDM and how are
  emission reduction credits traded on the markets?
• 5/ Opportunities for industrials
• gt What are the challenges and opportunities for
  industrials in developing countries ?

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OVERVIEW
About Kyoto Protocol
Signed in 1997 in force since 16 February
2005. Ratified by more than 130 countries gt
Major non participants USA and
Australia. Commits Annex 1 countries to reducing
greenhouse gas emissions. gt GHG emissions may be
reduced by 5 below 1990 levels in 2008-2012 gt
Individual, quantified emission targets for each
industrialized country gt 6 greenhouse gas
covered CO2, CH4, N2O, HFC, PFC, SF6. 3
flexibility mechanisms for financing emission
reduction abroad. gt Clean Development Mechanism
(CDM) gt Joint Implementation (JI) gt International
Emissions Trading (ET)
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OVERVIEW
CDM the basic idea
What is the Clean Development Mechanism (CDM) ? gt
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. gt 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. gt 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!
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OVERVIEW
Examples of CDM projects
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OVERVIEW
Introduction to the carbon market
Two main commodities traded in the carbon
market gt Emission allowance (AAU and EUA) gt
Project-based emissions reductions (CER and
ERU) Four different major markets gt Kyoto
Protocol gt EU Emissions Trading Scheme gt Canada
Greenhouse Gas Offset System gt Japan (voluntary
trading system)
Annex 1 countriesEU 25CanadaJapanOther OECD
JI
CDM
Central and Eastern Europe
Developing Countries
Emission Reduction Units (ERUs)
Certified Emission Reduction(CERs)
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OVERVIEW
CDM organisation and objectives

• Rules, modalities and procedures of CDM are
  defined in
• gt Kyoto Protocol
• gt Follow-up decisions of COP
• gt Decisions of CDM Executive Board.
• CDM EB (Executive Board)
• gt Responsible for further development of CDM
  rules, and supervising implementation
• gt Composed of 10 members 10 alternates
• gt Reports to the COP (Conference of the Parties).
• Twin objectives of CDM
• gt Help Annex 1 countries meet their objectives in
  a cost-effective way
• gt Contribute to sustainable development of the
  host country.

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BASICS
Additionality and baselines
A project is eligible for CDM if greenhouse gas
emissions are reduced below those that would have
occurred in the absence of the CDM project.
GHG emissions(tCO2eq)
1. Validation of project design, baseline and
monitoring plan
2. Verification / Certification of emission
reductions
Emissions baseline
ADDITIONALEMISSIONREDUCTIONS
Emissions after the project
Years
Project implementation
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BASICS
Conditions for additionality
Investment barrier A financially more viable alternative to the project would have led to higher emissions.
Technological barrier A less technologically advanced alternative to the project (lower risk) would have led to higher emissions.
Barrier due to prevailing practice Prevailing practice or existing regulatory or policy requirements would have led to implementation of technology with higher emissions.
Other barriers Competitive disadvantage, managerial barriers
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BASICS
CDM requirements
Emissions Lower emissions, no leakage, no double counting.
Financial No ODA, no GEF funds, should lead to additional money inflow.
Regulatory The project should exceed regulatory standards.
Technological CDM should promote appropriate new technologies.
Investment CDM should make the IRR of the project an acceptable one. The project should not have happened without the CDM revenue.
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BASICS
Where is CDM applicable ?
Renewable energygt Wind powergt Solargt Biomass powergt Hydro power Waste managementgt Capturing of landfill methane emissions to generate powergt Utilisation of waste and waste water emissions for generation of energy
Energy efficiency measuresgt Boiler and steam efficiencygt Pumps and pumping systemsgt Efficient cooling systemsgt Back pressure turbinesgt etc
Cogeneration in industries having both steam and power requirements
Power sectorgt Induction of new technologies which are efficient (thermal)gt Reduction in technical TD losses
Fuel switchinggt From fossil fuel to green fuel like biomass
Electrical energy saving1 kWh 0.8 0.9 kg
CO2 Power generation (waste heat / renewable)1
MW 4.000 5.000 t CO2 Coal saving1 kg 1.3
1.6 kg CO2 Fuel oil saving1 litre oil 3 3.5
kg CO2 NG based power generation1 kWh generation
0.35 0.45 kg CO21 kg NG burning/saving 2.4
2.5 kg CO2
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ORGANISATION
CDM project cycle
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ORGANISATION
Content of the PIN (Project Idea Note)
Standardized format for the PIN gt the type, size
and location of the project gt 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) gt the suggested crediting life time gt
the financial structuring (indicating which
parties are expected to provide the projects
financing) gt the projects socio-economic or
environmental impacts/benefits gt history of the
project regarding other donors and funding
tenders gt capacity of project developer to
invest in the project.
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ORGANISATION
Content of the PDD
Standardized format for PDD Project Design
Document (main document in the CDM cycle) A.
General description of the project B. Setting of
the baseline C. Duration of the project /
Crediting period D. Setting of the monitoring
plan E. Estimation of GHG emission reductions F.
Environmental impacts G. Stakeholders
comments - Annex 1 Contact information on
participants in the project Annex 2 Information
regarding Public Funding Annex 2 Baseline
information Annex 3 Monitoring plan
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ORGANISATION
PDD CDM baseline methodologies
Approved methodology gt Statement of which approved methodology has been selected gt Description of how the approved methodology will be applied in the context of the project.
New methodology (to be submitted to UNFCCC secretariat) gt Description of the baseline methodology and justification of choice, including an assessment of strengths and weaknesses of the methodology gt Description of key parameters, data sources and assumptions used in the baseline estimate, and assessment of uncertainties gt Projections of baseline emissions gt Description of how the baseline methodology addresses potential leakage.
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ORGANISATION
PDD Approved methodologies
Statistics on October 2005 from
http//cdm.unfccc.int/ (UNFCCC)
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ORGANISATION
PDD Methodologies submitted
Statistics on October 2005 from
http//cdm.unfccc.int/ (UNFCCC)
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ORGANISATION
PDD Crediting period
Carbon credit (CER) can be generated as from
now gt Banking by buyer for use towards
compliance in 2008-20012. gt Banking by project
proponent for sale in later years. Crediting
period gt Usually starting the later of CDM
registration, and start of project operation. gt
Fixed crediting period of up to 10 years. OR gt
Renewable crediting periods of up to 7 years
(maximum 3 x 7 years).
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ORGANISATION
Host country approval
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 gt Social well being employment,
alleviation of poverty, etc. gt Economic well
being investment consistent with needs of the
people. gt Environmental well being impacts on
the local and global environment, pollution,
etc. gt Technological well being transfer of
environment safe and sound technologies.
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ORGANISATION
Validation
Independent assessment by a Designated
Operational Entity (DOE) that project meets
criteria of the Kyoto Protocol. DOE shall gt
Review the PDD and supporting documentation gt
Conduct site visit gt Interact with
stakeholders gt Source other relevant additional
information from various sources gt Publish the
PDD in the web for international stakeholder
comments. A successfully validated project can
be submitted to CDM Executive Board for
registration.
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ORGANISATION
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 gt 4 weeks for small
scale project gt 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 gt Between 5.000 to 30.000 US.
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ORGANISATION
Last steps
Last steps of the process gt Project financing. gt
Monitoring emissions. gt Validation and
certification. gt Insurance of CERs.
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ORGANISATION
Transaction cost of the CDM
Estimation of transaction costs during the CDM
cycle gt PDD 15.000 to 30.000 gt DNA approval
5.000 gt Validation 10.000 gt Registration
5.000 to 30.000 US gt Administration 0,2 US /
CER gt Verification 5.000 per turn At CER
prices of 10 /t CO2 equivalent, the viability
threshold of projects is at 10.000 CERs/years.
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ORGANISATION
CDM additionality tool
An optional flow chart, adopted by the executive
board in October 2004, applicable to any type of
project for the demonstrate of additionality.
STEP 0 Preliminary screening based on the
starting date of the project activity Start 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 regulations If
proposed CDM project is the only alternative
left, the project is non-additional
More than one alternative Pass
STEP 3 - Barrier Analysis No barriers , the
project is non-additional
STEP 2 - Investment Analysis
CDM financially attractive
CDM financially not attractive
CDM faces Barriers PASS
STEP 4 - Common Practice Analysis (credibility
check) If similar activity can be observed with
no essential difference, the project is
non-additional
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 ACTIVITY IS ADDITIONAL
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ORGANISATION
Fast track for small-scale CDM project
Why do we need a fast track? gt Process not worth
it for small projects (high transaction costs)
gt Many small projects deliver significant local
sustainable development benefits gt Small-scale
technologies are some of the most promising for
solving the long term problem of climate change
(e.g. solar wind fuel cells) gt CDM might lose
public support if rules are biased toward large
capital-intensive projects. Size limits for
small-scale projects gt Electricity generation
from renewable sources, up to 15 MW. gt Energy
efficiency projects saving, up to 15 GWh p.a. gt
Project reducing emissions up to 15.000 t CO2eq
p.a. Small-scale projects benefits from
simplified rules and procedures gt Simplified
PDD gt 14 pre-approved baseline methodologies
(feb. 2005) gt Same operational entity may
undertake validation and verification /
certification gt For small-scale projects,
sufficient to demonstrate that barriers would
have led to higher emissions in absence of CDM.
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STATISTICS
Upswing of CDM (1/3)
Statistics on July 1st 2006 from
http//www.cd4cdm.org/ (UNEP)
Carbon market in 2005 gt In 2005, global carbon
market transactions worth 9,4 billion. gt In
2005, CDM projects transactions worth 1,9
billion. Statistics of CDM (as per June
2006) gt 225 projects registered, for an average
of 70 millions CERs/Year. gt 36 projects submitted
for registration, for an average of 4,6 millions
CERs/Year. gt 860 projects known to be prepared
for registration. gt 165 proposed baselines
methodologies were sent to the CDM EB for
approval, 60 approved, 66 rejected and 39 are
pending.
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STATISTICS
Upswing of CDM (2/3)
Number of projects registered or known to be
prepared for registration
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STATISTICS
Upswing of CDM (3/3)
Annual volumes (million tCO2e) of project-based
emission reductions transactions and annual
average price in US per tCO2.
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STATISTICS
Registered projects (1/3)
Statistics on July 1st 2006 from
http//cdm.unfccc.int/Statistics/
Expected average annual CERs from registered
projects by host countries
Registered project by host countries
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.
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STATISTICS
Registered projects (2/3)
Statistics on July 1st 2006 from
http//cdm.unfccc.int/Statistics/
Registered project by Annex 1 countries involved
Registered project by scope
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STATISTICS
Registered projects (3/3)
Statistics on July 1st 2006 from
http//www.cd4cdm.org/ (UNEP)
CDM projects in each sector
CERs until 2012 in each sector
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OPPORTUNITIES
Who is buying CER?
Buyers based in Europe (41 in 2004, 56 in 2005)
and Japan (36 versus 38) dominate the market
for project-based transactions.
January 2004 to December 2004Overall volume
110,0 million tCO2e
January 2005 to March 2006Overall volume 453,5
million tCO2e
as a share of volume contracted.
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OPPORTUNITIES
Location of projects
Asia accounted for the largest share (73) of
contracted volume of project-based transactions
signed.
January 2004 to December 2004
January 2005 to March 2006
as a share of volume contracted.
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OPPORTUNITIES
What is being sold ?
Technology share of emission reduction projects
January 2004 to December 2004
January 2005 to March 2006
as a share of volume contracted.
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OPPORTUNITIES
How are CERs sold ? (1/2)
Contractual arrangements vary depending on how
risks are located between Buyer and Seller gt
Project risk - whether or not the project will
adequately perform and produce the expected
amount of emissions reductions. gt Country risk -
whether the political and investment climate of
host country is stable. gt 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 gt Guarantees gt Upfront
payments gt Penalties and damage clauses gt
Default clauses gt Disbursement schedules.
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OPPORTUNITIES
How are CERs sold ? (2/2)
Carbon funds available through gt International tenders for CDM projects gt Voluntary corporate initiatives gt Multilateral Funds gt EU commitments for carbon purchase gt Bilateral negotiations with the consortium of buyers
Prices of CERs gt Average price of 7,5 US / tCO2eq in 2005 (3 to 14 US).
What determinesprices of CERs ? gt Likelihood Seller will deliver verifiable reduction on schedule. gt Creditworthiness and experience of the project developer. gt Technical and technological viability of the project. gt 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. gt Vintages in some markets, early vintages (until 2012) are priced higher because the Buyers willingness to pay in order to meet compliance. gt Likelihood of host country approval. gt Environmental and social compliance and additional benefits.
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OPPORTUNITIES
Future demand for CERs
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CONCLUSION
Next steps
CDM is real gt 225 projects registered and 60
methodologies approved gt In 2005 CDM projects
transactions worth 1,9 billion. Industrials in
developing countries have a role to play gt Prices
for emissions reduction are increasing gt Buyers
and Sellers are innovating ways of addressing
risk gt Early entrants will have a clear
advantage. Challenges for CDM in the next
years gt DNA approval capacities gt High
methodology rejection rates gt Annex 1 companies
may only be interested in buying CER, not in
investing in project (exception for some Japanese
companies) gt Gap between CER and EU allowance
prices (50 even for registered projects) gt
Interpretation of national policies in baseline
methodologies gt Availability of reliable and
authentic data for establishing baselines.
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CONCLUSION
End of session 5
Thank you for your attention
Any questions?