Dr' Markus Schwegler Senior Advisor Climate Protection International CIM Expert The Administrative C

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Dr. Markus SchweglerSenior Advisor Climate
Protection - International CIM ExpertThe
Administrative Centre for China's Agenda 21
(ACCA21)Ministry of Science and Technology (MOST)
The Clean Development Mechanism (CDM) Challenges
and Opportunities for the German Industry in China
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The Chinese Climate Policy

• 1992 China approved and ratified the UNFCCC
  UNFCCC
• 1998 China signed the Kyoto Protocol
• 2002 China approved the Kyoto Protocol
• 2004 DNA was founded with the Interim Measures
• 2005 On 12 October 2005, Measures for Operation
  and Management of Clean Development Mechanism
  Projects (CDM Measures)

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Points to Note under CDM Measures

• Resource of emission reductions owned by the PRC
  government
• Outputs of CDM Projects are owned by PRC project
  owner
• Proceeds from sale of outputs jointly owned by
  PRC government and PRC project owner
• PRC government entitled to
• 65 of the transfer price of the outputs from HFC
  and PFC Projects
• 30 of the transfer price of the outputs from N2O
  Projects
• 2 of the transfer price of the outputs from new
  and renewable energy Projects

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The priority areas for CDM projects in China

• Energy efficiency improvement
• Development and utilization of new and renewable
  energy and
• Methane recovery and utilization
• (Measures for Operation and Management of Clean
  Development Mechanism Projects in China)

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Basic Preconditions for a CDM Project

• In order to determine the general eligibility of
  the proposed project, many aspects have to be
  taken into consideration
• Only projects that reduce emissions of at least
  one of the six greenhouse gases acknowledged by
  the Kyoto Protocol are generally eligible to
  qualify as a CDM project and produce certifiable
  and tradable emission reductions.
• As a general rule projects that produce real
  reductions, that are measured and verified and
  are surplus to current regulations will qualify.
• Projects also have to be based in a country that
  is a party to the Kyoto Protocol and has
  completed the ratification process.

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How does the CDM help a project?

• Increased returns?
• A CDM project activity is entitled to receive 1
  CER for every tonne of CO2 equivalent reduced.
• CERs are market products which are allowed to be
  traded.
• The money received from the sale of CERs becomes
  a source of additional cash flow for the project.
  ?
• Attracting CDM investors/funds?
• Various financial supporters/investors,
• national governments,
• bilateral and multilateral financial institutions
  and commercial banks, etc.
• numerous CDM funds (e.g. Prototype Carbon Fund,
  Community Development Carbon Fund, BioCarbon Fund)

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The Economics of Wind farm and Hydro Power
Projects
Hydro power project 7.5 MW installed
capacity 28,448 t CO2 ERs p.a.(10 years) Project
costs US 4.5m Carbon value 5/ t CO2
1.42m 8/ t CO2 2.27m Proportion of
project costs 5/ t CO2 31.5 8/ t CO2
50.5
Wind farm project 20 MW installed
capacity 50,000 t CO2 ERs p.a.(10 years) Project
costs US20m () Carbon value 5/ t CO2
2.5m 8/ t CO2 4.0m Proportion of
project costs 5/ t CO2 12.5 8/ t CO2
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Conditions for CDM projects - Is my project CDM
eligible?

• The CDM eligibility depends on specific project
  circumstances and a quick answer cannot be
  provided. The main CDM eligibility criteria are
  that
• The project is not a baseline scenario
• The project is additional and
• The project contributes to sustainable
  development.

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What Kinds of Projects/Sectors?

• 1. Renewable Energy Projects
• Biomass Energy
• 2. Waste-to-energy projects
• Municipal Solid Waste landfill biogas capture and
  power generation
• Agribusiness Waste to Energy Rice Husk Power
  Plants Palm Oil waste to energy, Farm Biogas
• 3. Community and agro forestry
• Biomass Energy
• 4. Large Scale Energy Efficiency
• 5. Coal Bed Methane
• 6. Transport
• Bio fuel
• 7. Industrial Gas Incineration N20, HFC23

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Project categories eligible under the CDM
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Status of CDM Projects and Expected CERs until
end of 2012 1

• Number of Project
• CDM project pipeline gt1300
• Registered 448
• Requesting registration 48
• CERs issued
• Expected CERs until 2012 gt1,500,000,000
• Total based on registered projects (356) gt
  680,000,000
• Total based on projects requesting registration
  (75) gt 20,000,000
• 1) as as of 15 November 2006

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Chinas CDM Potential and Opportunities

• Potential
• Coal baseline
• Rapid industrialization
• Low energy efficiency infrastructure
• Favourable investment conditions
• Estimated Potential 50 of the today CDM Market

• Opportunities
• Energy Efficiency
• Renewable Energy
• CBM/CMM
• Fuel conversions and new technology for power
  generation

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Mitigation Potential in Three Priority Areas
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Opportunities and Risks

• Opportunities
• Largest CDM Potential worldwide
• High Foreign investments
• CDM host country rating (Point Carbon)
• Expected average annual CERs
• Technology Transfer Opportunities
• Approved Methodologies in China
• Priority Sectors in China
• SD and EHS benefits

• Risks
• Uncertainties about Carbon offset prices
• International approval process
• Currency risks
• CER validity after Kyoto
• Baseline risks
• Project risks
• Regulatory risks
• Technology risks

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Barriers for CDM in China

• Legal framework (51 percent majority Chinese
  ownership of CDM projects)
• Controlling the price of CERs (8 )
• Regulatory uncertainty
• Difficulty to identify Chinese partners
• Lack of knowledge and skills to identify CDM
  opportunities
• Lack of experience to assess risks and develop
  projects
• General lack of market transparency and ability
  to find suitable projects
• Lack of understanding or interest by Chinese
  enterprises

• CDM not fully accepted and understood as
  financial tool
• Complexity of the CDM Cycle
• The currently low CER price in the buyer driven
  market
• Availability of data
• Confidentiality Transparency
• Local DOEs
• Transactions costs
• Large number of different players

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Experiences with CDM in China

• Foreign CDM Participants stakeholders
• CER buyers dominate
• Low interest in project development and
  investment
• Lack of understanding of the Chinese framework
  and market conditions
• Don't fully understand the risks and don't want
  to deal with it (51/49 rule)
• Looking for help to find projects
• Looking for help to deal with contractual and
  risks issues
• Language problem

• Chinese CDM Participants stakeholders
• Limited knowledge of CDM
• Misunderstanding of the financial mechanism
• Up front payment
• Transaction costs
• Project Complexity
• Language problem
• Limited understanding of the operational aspects
  of CDM (PIN, PDD)
• Difficulties to access foreign project partners
  and buyers

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Conclusion and Outlook

• China has a huge energy demand due to the high
  economic growth
• Heavy environmental toll related to energy issues
• Great potential for energy saving and energy
  efficiency improvements
• Great potential for CDM Projects
• Implementation of the CDM in China can deliver
  significant local economic and sustainable
  development co-benefits
• Chinas CDM potential represents a substantial
  component of the global carbon market
• CDM projects must be identified and developed
  within the next couple of years for China to
  capitalize on its CDM potential during the first
  commitment period from 2008 to 2012.
• Chinese and foreign enterprises face barriers to
  CDM development and implementation in practice.

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Dr. Markus SchweglerSenior Advisor Climate
Protection (mschwegler_at_mac.com)
Thank you for your attention

• There is now time for discussion