LEGAL

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LEGAL REGULATORY ASPECTS OF THE CLEAN
DEVELOPMENT MECHANISM
JUAN RODRIGO WALSH
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Climate Change and CDM Projects Understanding
the Legal Issues at stake

• Designing and implementing CDM or related
  Greenhouse Gas (GHG) reduction projects requires
  understanding the underlying legal and
  institutional frameworks on several planes or
  levels
• The International Legal Framework
• Investor Nation Regulatory Institutional
  Issues
• Host Country Legal Institutional
  Requirements
• Contractual Issues between Investors and
  Developers
• Contractual Issues related to sale of CERs

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Climate Change and CDM Projects Understanding
the Legal Issues at stake

• Designing and implementing CDM or related
  Greenhouse Gas (GHG) reduction projects requires
  understanding the existing International legal
  and institutional frameworks
• The International Legal Framework
• UNFCC
• Kyoto Protocol
• COP/MOP Resolutions
  Decisions
• Executive Board

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History of the Negotiations
THE KYOTO PROTOCOL Together with the UNFCC,
the Kyoto Protocol constitutes the most important
global agreement on the environment to date.
The Protocol establishes Emission Reduction
Targets for the period 2008-2012 for
industrialized countries 5,2 below 1990 level
emissions Kyoto also creates the Clean
Development Mechanism (CDM) for developing
countries Emphasising cooperation and flexible
mechanisms to achieve the Protocols goals
These mechanisms are Emissions Trading (ET)
Joint Implementation (J I ) Clean
Development Mechanism (CDM)
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GHG Committments undertaken by Annexe 1 Countries

• The Kyoto Protocol mandates Developed Countries
  to reduce overall GHG emissions by 5 during
  the period 2008-2012, against 1990 levels of
  emissions.
• Other Annex 1 Countries have committed to
  greater levels of reduction
• Some Examples
• Canada plans GHG reductions of 6 below 1990
  levels.

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Current Emissions versus Goals
Source Royal Institute of International Affairs
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Flexible Mechanisms Introduced by the Kyoto
Protocol

• The Kyoto Protocol establishes strict
  committments for Annex I Countries, allowing for
  compliance by means of flexibility mechanisms
  
• Emissions Trading (ET) 2008-2012
• Joint Implementation (JI) 2008-2012
• Clean Development Mechanism (CDM) 2000-2012

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Emissions Trading (ET)

• Article 17 of the Kyoto Protocolo provides for
  emissions trading transactions between Annexe 1
  Countries
• All ET Transactions must be supplementary to
  national policies adopted by governments pursuant
  to the quantifiable emissions reductions
  committed to by Annexe 1 Countries

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Joint Implementation

• Article 6 establishes that Emissions Reductions
  Units may be transferred between Annexe 1
  Countries in the case of Joint Implementation
  Projects.
• Joint Implementation Activities must be
  complementary to domestic emission reductions
  policies.

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Clean Development Mechanism

• Article 12 allows for projects to be jointly
  executed by developed and developing countries.
• These activities may start in 2000. Developed
  Countries may therefore invest in GHG reduction
  projects in developing countries and utilise the
  credits obtained from these reductions toward
  compliance with national committments.

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• CDM projects must meet the following
  requirements
• Contribute to the sustainable development of
  developing countries
• Have a demonstrable effect on climate change
  mitigation
• GHG Reductions must be measurable and certifiable
  over a period of time
• Environmental Benefits must be permanent and
  additional to any that might occur in absence of
  the project

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CDM requirements

• Acceptability
• Host Country Acceptability
• At an International Level
• For the Investor Nation
• Additionality
• Must be real and measurable
• Must consider existing and future trends
• Externalities
• Must consider social effects and sustainability
• Must consider environmental impacts

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What is Additionality ?

• Environmental Additionality
• Emissions reductions must be over and above a
  business as usual scenario
• Financial Additionality
• Investments must be real. Resources from Annexe 1
  Countries must e additional to existing financial
  committments and ODA
• Business as Usual Scenario
• Some degree of Technical Innovation required

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Carbon Quantification
Additionality project Base Line
Source Ecosecurities 2002
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Other Issues to be Considered in CDM Projects

• Social Impacts
• Employment
• Are jobs created ?
• Infrastructure and Know How
• How does the project contribute to local
  expertise and infrastructure ?
• Environmental Benefits
• Other emissions reductions and environmental
  benefits

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Required Phases for CDM Projects
Pre-Investment Phase
Project Design Base Line Determination
Project Approval
Project Registry
Investment Operation
Implementation
Verification
Certification
Monitoring
Award of CERs
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Pre-investment Phase
Pre Feasibility Criteria

• Carbon Issues
• Project Timeframe
• Defining the Baseline
• Defining Additionality
• Identifying Leakages
• Net Carbon Benefits
• Potential CERs

• Other Considerations
• Overall Environmental Impacts Biodiversity
• Waste management
• Watershed Management
• Sustainable Development
• Host Country Approval
• Training requirements
• Technology transfer

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Implementation Phase
Validation Must be carried out by an
Independent Third Party in order to obtain
approval as a CDM Project Verification Must
also be carried out by an independent Third
Party. Verification requires periodical control
and ex post verification of emissions reductions
o carbon sequestration in sinks Certification
Must also be carried out by an Independent
Third Party. Certification consists in a formal,
written statement to the effect that, during a
certain lapse of time, a particular project has
achieved the targets set for emissions reductions
or sequestration, as verified. CERs awarded by
the CDM Executive Board
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What are CERs ?

• Certificates of Emissions Reductions, measured in
  tons of CO2. (CERs).
• Emissions Reductions must comply with the
  following criteria
• Measurable, and
• Verifiable by Independent Thir Parties .
• They must also pass the test of Additionality

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Climate Change and CDM Projects Understanding
the Legal Issues at stake

• Designing and implementing CDM or related
  Greenhouse Gas (GHG) reduction projects usually
  requires understanding the existing legal and
  institutional framework in the Investor Country
  or the country of the purchaser of the CERs
• Investor Nation Regulatory Institutional
  Issues
• Annexe 1 Country
• Party to Kyoto?
• Domestic CO2 Programme? (ERUPT CERUPT)
• Company to Company

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Climate Change and CDM Projects Understanding
the Legal Issues at stake

• Designing and implementing CDM or related
  Greenhouse Gas (GHG) reduction projects requires
  a fundamental understanding of the legal and
  institutional framework of the Host Country
• Host Country Legal Institutional
  Requirements
• Regulatory Requirements for approval
• Existence of a Host Country CDM office
• Environmental and Regulatory requirements
  applicable to the CDM Project
• Legal, taxation and other regulatory
  requirements for FDI

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Host Country Approval Process The case of
Argentina
Environment Secretariat Resolution
169/2001 Establishes the guidelines for
evaluation and approval for projects submitted
to the Secretariat acting as Focal
Point Projects are subject to independent peer
review and external evaluation Special Climate
Change Office ( OAMDL) Coordination of
environmental policies and Negotiating Positions
at UNFCC and COP/MOP meetings
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CLIMATE CHANGE MITIGATION STRATEGY
The Case of Argentina
Sectors to be given special attention Energy
Sector, Land Use, Land Use Change and Forestry
Sectors (LULUCF), Farming Sector Waste Management
Sector
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OAMDL
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OAMDL FUNCTIONS
OAMDL

• Impacts Adaptation
• Mitigation
• Awareness building Participation

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Organization of the National CDM Authority

• Design of the legal context for the presentation
  and management of projects
• Legal requirements
• Policy Issues
• Methodological support for the preparation and
  assessment of projects
• Pre/ and feasibility Studies, Standardised
  Baseline Studies Monitoring Programs
• Policy Guidelines

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Regulatory Aspects of CDM Projects and the
Climate Change Office (OAMDL)

• Registration and Acreditation of Evaluating
  Institutions for National Project Cycle
  Assessment
• Adaptation of Project Presentation Documents and
  standardized formats (PIN, PDD, etc)
• Evaluation Criteria and Sustainability Indices
• Liaison Offices with Provincial and Local
  Governments
• Proposals for simplified Project Evaluation

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Technical Support provided by Climate Change
Office

• Colaboration in designing National Climate Change
  and Mitigation Strategies
• Coordination of National Climate Change
  Programmes, Projects and related research
  activities
• Establishment of Project data bases and general
  awareness building
• Administrative Management of OAMDL Working Groups

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OAMDLs Activities

• Creation of sector-specific Committees
• Sectors
• Energy, Industry Transport
• Forestry
• Farming
• Waste Management
• Objectives
• Identify opportunities for projects for potential
  investors
• Preparation of a strategy for the mitigation of
  GHG emissions on a sector-specific basis, in
  order to achieve the countrys best mitigation
  potential for each sector
• Establishment of sector-specific baseline
• Methodological Guidelines for projects

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Climate Change and CDM Projects Understanding
the Legal Issues at stake

• Designing and implementing CDM or related
  Greenhouse Gas (GHG) reduction projects also
  requires understanding the legal implications and
  potential risks for both Project Developers and
  Investors
• Contractual Issues between Investors and
  Developers
• Applicable Rules for FDI
• Multilateral or Bilateral Investment
  Agreements
• Taxation Repatriation of Profits Issues
• Technology Transfer Intellectual Property
  Issues
• Project Due Diligence between Developers
  and Investors

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Who is purchasing Certified Emissions Reductions
(CERs) ?

• Energy Sector Companies
• Chemical Companies
• Oil Gas Companies
• Paper, Cement, and Steel Industries
• Investment Funds

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Prices Which Way?
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Price Estimates for a GHG Emissions Trading
Market
Source
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What is the market paying for Carbon ?

• PFC - US 3.5-5 / Ton CO2 (depending on risk
  factors)
• ERUPT - Euro 5-9/Ton CO2
• Institutional Funds On a one by one negotiated
  basis
• Private Corporations - US 50cents to 1.50 per
  Ton CO2 ( Within or without Kyoto)
• Options (depending on price and timespan US 25c
  to 75c/Ton CO2)

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ERUPT Results
www.senter.nl/erupt
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Comparison of IRR in Carbon Projects Renewable
Energy
Source World Bank 2001
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Selling Carbon Credits

• This Phase is usually carried out simultaneously
  with the project design and approval phases
• Early Identification of potential Investors
• Enhanced security and feasibility for Project
• Direct Negotiations
• Involvement of Brokers Success Fee for sale of
  CERs

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Climate Change and CDM Projects Understanding
the Legal Issues at stake

• Designing and implementing CDM or related
  Greenhouse Gas (GHG) reduction projects requires
  understanding the legal aspects of the Carbon
  Market and the sale of CERs
• Contractual Issues related to sale of CERs
• Long term purchase contracts
• Brokerage fees
• Monitoring requirements, auditing and
  Independent Verification
• Managing Risk Insurance

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The Way Forward

• The Climate Change Regime has been controversial
• The Kyoto Protocol has been rejected by the U.S.
  as fatally flawed
• Entry into force requires at least 55 countries
  with 55 of global GHG emissions
• Technical uncertainties (Forestry and LULUCF)
• Russian ratification?

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The Way Forward

• Experience is growing
• PCF
• UK ETS
• EU Directives
• U.S. State regimes
• Climate Change is a problem that will not
  disappear!!