Clean Development Mechanism Overview and Concepts

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Clean Development MechanismOverview and Concepts
National Workshop on Capacity Development for the
Clean Development Mechanism 26-27 March 2003

• Bridget McIntosh
• Climate Change/Energy Specialist
• working with Cambodian Climate Change Project

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Presentation Outline

• CDM Context within the Kyoto Protocol
• Overview of CDM
• Eligible Projects
• Basic Rules Processes
• Baselines
• Sustainable Development
• CDM Concepts - Developing Projects
• What does the CDM mean for Cambodia?
• Opportunities
• Reality and Issues with CDM
• Next Steps

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CDM Context

• The Kyoto Protocol commits industrialized
  countries to legally binding GHG reduction
  targets during the period 2008-2012
• Most countries have to reduce GHG emissions on
  ave 5 below their 1990 emission levels
• results in a global target of carbon reduction
• These countries can choose to reduce emissions
• at home in their own country
• in other countries
• Reducing emissions in Developing Countries is
  eligible known as CDM

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Overview of CDM

• CDM Clean Development Mechanism
• A mechanism by which Industrialised Nations can
  achieve part of their reduction obligations
  through projects that reduce or fix/sequester
  carbon in Developing Countries.
• The Certified Emission Reductions (CERs) are a
  unit of carbon that is reduced or sequestered.
• Industrialised Nations can submit their CERs to
  meet their target in 2008-2012.
• there is a worldwide demand for projects and
  activities for carbon reduction or fixation
• Many of these projects will be in Developing
  Countries.

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CDM Concept

• Developing Country
• Many opportunities for projects that reduce
  emissions eg
• Forestry planting
• Renewable electricity
• Energy efficiency
• Clean transport
• Biomass energy
• Project Produces CERs

• Developed Country
• Govt and companies want to reduce GHG emissions
• Invest in their own country
• Invest in a project in Developing Country

Investment
CERs
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Purpose of CDM

1. to assist developing countries in achieving
   sustainable development
2. to assist developed countries in achieving
   compliance with part of their quantified emission
   reduction commitments.

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Types of CDM Projects

• Energy efficiency
• End use improvements
• Supply-side improvements
• Renewable energy
• Methane reduction eg landfill gas capture
• Fuel switching
• Agriculture (CH4 and N20)
• Industrial processes
• Sequestration/sinks only afforestation and
  reforestation

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CDM Project Examples
End-use energy efficiency High efficient lighting efficient cook stoves vehicle efficiency
Supply-side energy efficiency High efficiency turbine replacement combine cycle
Renewable energy Biomass Solar Wind Hydro
Fuel switching Gas conversion Biofuels replace fossil fuels
Forestry Afforestration Reforestation Community forestry
Agriculture Intermittent ricefield irrigation
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Summary of basic CDM Rules
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Baseline Concepts

• The baseline is a measure of emissions that would
  have occurred in absence of project
• Used to estimate emission reductions for project
  basis for CERs
• On a project by project basis
• Standard baselines for small scale projects
• 15 MW renewable energy
• 15GWh energy efficiency

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Baseline Methodologies

• 3 main accepted methodologies approved on the
  basis of-
• Status Quo - future emissions would been the same
  as current/historic emissions
• Market Conditions - the technology used in the
  market is the baseline and market barriers
  prevent new technology being adopted
• Best Available Technology - for markets where
  conditions are changing, historic emissions are
  less relevant assume emissions for the
  technology that would have been installed

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Baseline Examples
Project Baseline Approach Type of CDM Baseline
3 Micro-hydro Guatemala The 3 communities did not have access to electricity, so emission reduction based on displacement of kerosene Market Conditions (technology used is the baseline)
Biomass power plant El Salvador Current electricity is fossil fuels and future additions would be similar. Current emissions used as baseline. Status Quo
Wind Power, Honduras This project is displacing the need for a new thermal plant. Emission reductions based on average emissions of typical thermal plants in previous 5 years performance in top 20 Best Available Technology
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Basic Rules for CDM

• Emission reductions from CDM project must be
  additional in developing country
• Use of CERs can only supplement emission
  reduction at home in developed countries
• CDM projects must-
• be approved by the host country
• lead to sustainable development in host country
• result in real, measurable and long-term benefits
  in terms of climate change
• Money for CDM projects not divert Official
  Development Assistance (ODA)
• Nuclear power projects are not eligible
• Only afforestation and reforestation allowed

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Small Scale CDM Projects

• Simplified rules for small scale projects
• Simplified baseline methodology, reduced
  validation and registration requirements
  exemption from adaptation and admin fees
• Examples include
• Home Bigoas (cooking and lighting). Replace
  Kerosene
• Efficient woodstoves
• Mini-grid renewable energy

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CDM Checklist
Project approved by National Authority? -
consistent with Sustainable Development -
consistent with national local development
priorities - no negative environment impact -
has local support
Project results in real, measurable long-term
emission reductions?
Project validated, registered monitored, verified
and certified?
Project started after 1 Jan 2000 submitted by
31 Dec 2005?
The project does not divert ODA.
Project leads to transfer of new, environmentally
efficient technologies or management practices?
Are the emission reductions additional?
CERs Certified Emission Reductions
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Sustainable Development Criteria

• Social Criteria
• Improves quality of life
• Alleviates poverty
• Improves Equity
• Economic Criteria
• Provides financial returns to local entities
• Results in new investments
• Transfers new technology
• Environmental Criteria
• Reduces GHG and use of fossil fuels
• Conserves local resources
• Reduces pressure on local environments
• Provides health and environmental benefits

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How does CDM work in practice?
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CDM Concept

• Developing Country
• Many opportunities for projects that reduce
  emissions eg
• Forestry planting
• Renewable electricity
• Energy efficiency
• Clean transport
• Biomass energy
• Project Produces CERs

• Developed Country
• Govt and companies must reduce GHG emissions
• Invest in their own country
• Invest in a project in Developing Country

Investment
CERs
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CDM Project Investment

• PROJECT
• 9 million
• has emission reductions and eligible to produce
  CERs

CERs 500,000

• Project Investors/Financiers-
• International or Local Developers/Financiers
• Cambodian Government
• International Governments
• Multilateral Agencies eg World Bank ADB

• CDM Investors/Buyers-
• Multilateral CDM Funds eg PCF CERUPT
• Annex 1 Governments
• Private Companies eg Shell
• Non-Annex 1 Governments
• Brokers/Traders

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CDM Investment Structures

• Full or partial equity in project
• CER ownership becomes annex to the normal
  financing agreement
• Usually investing for more than just CERs
• Financial contribution
• Usually upfront payment and takes rights to
  CERs as they are produced
• Normally not more than 10 project cost
• Loan
• Company provides loan at concessional rates in
  return for CERs eg payment of interest in CERs
• CER Purchase Agreement
• Company buys CERs as they are produced
• Becomes additional income stream to project
  finance

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CDM examples
Project Project Cost CER Partner Basis of contribution Structure
Wind Farm Honduras 58m 4.05m CER sale _at_ 3.50/ton Annual CER Purchase for 10 years
3 Micro-hydro Guatemala 320,000 15,000 Value of 4,755 tonnes over 10 yrs Upfront payment
Biomass power plant Nicaragua 2.3m 0.4m Financing of climate friendly component 10 pre 40 finance balance for 5 years
Run-of river Hydro plant Chile 34m 3.4m 10 total cost Initial payment ongoing CER purchase
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Case Study

• 3.65 MW micro hydro project Indonesia
• Project offsetting diesel generation 18,500t
• 9.89m capital cost 0.4m operating costs
• Project executed by IBEKA a local institute
• 16.5 IRR without CDM 18.2 w CER _at_5
• Investment plan-
• Up to 70 of project capital through long term
  loan from financial institution rest through
  equity
• CDM investor options-
• Long term CER purchase agreement
• Equity (JV partner) commitment to buy CERs
• Soft loan against realisation of CERs

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CDM Case Study

• Indonesia
• CDM Project
• 3.65MW hydro
• 9.89m capital cost
• 0.4m operating costs
• Project offsetting diesel emissions
• Likely 18,500 CERs
• basic CER value 92,500
• looking for CDM Partner

• Any Country
• looking for CDM Project
• CDM Project Partner
• Long term CER purchase agreement
• Equity in project
• Soft loan upfront in return for CERs later

Investment
CERs
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Choosing a Host Countrywhat do investors want?

• Clear CDM Policy
• Willingness for investment in CDM projects
• Transparent and clear processes,
• Quick and smooth government approval
• Time, effort and resources to complete deal
• Secure investor climate
• Political and economically stability
• What could occur that could affect investment?
• Sound Techno-Economic potential

Based on report conducted by Point Carbon
www.pointcarbon.com
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What does CDM mean for Cambodia?
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Opportunities of CDM

• CDM encourages developed countries to undertake
  GHG reduction projects in developing countries.
• Increased investment flows
• Attract capital for less carbon-intensive
  projects
• Technology transfer
• Assist in development priorities and sustainable
  development goals
• Create new industries in environmentally
  sustainable technologies
• Poverty alleviation through income and employment
• Assist in improving current and future
  environment (including air quality

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CDM in Cambodia

• Governments, Project Developers and Brokers are
  seeking out CERs and emission reduction projects.
• Emission reduction projects exist in Cambodia in
  many sectors-
• Transport establish intercity/intra-city
  transport
• Forestry community forestry, replanting
• Energy
• renewable energy (particularly in rural areas)
• Installation of cleaner technology (cogeneration)
• Energy usage energy efficient technologies
  building design
• Waste management capture of methane

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Reality Issues w CDM

• CDM may tend towards large CDM Projects
• High transaction costs with CDM projects
• PCF experience 270,000 per project
• transaction costs similar for small or large
  projects
• Solution - bundle small projects together
• eg association of community forestry many small
  scale hydro projects
• Larger developing countries more attractive
• infrastructure institution to deal w large
  projects
• Larger market ability to do many similar
  projects
• Spreads the upfront cost in learning local
  conditions securing suppliers, local management,
  financial, legal and contractual processes

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CDM Transaction Costs
All expenses 265 K
Based on presentation from Ken Newcombe, PCF Fund
Manager COP 8 www.prototypecarbon.com
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Reality Issues w CDM (2)

• CDM will be a competitive market
• Restricted without the US
• Limit on amount of CERs developed countries can
  use towards target (20)
• larger projects with low risk and smooth
  approval/transaction procedures will be preferred
• May limit opportunities in least developed
  countries

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Reality Issues w CDM (3)

• Preparation of developing countries
• poor co-ordination among Ministries
• internal conflict over approvals
• Only 12 National Authorities registered
• Capacity of developing countries
• Weak knowledge of CDM at all levels
  policy-makers, businesses, finance legal
  institutions, NGOs

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Summary

• CDM presents an opportunity for Cambodia
• developing energy infrastructure
• forestry is significant activity
• worldwide increased demand for projects that
  reduce emissions
• win-win situation for both parties
• Cambodia must be prepared
• need an approval body smooth and transparent
  approval process
• need a pipeline of projects for investors when
  they come investigating
• Need to improve investor climate

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Acronymns

• CDM Clean Development Mechanism
• CER Certified Emission Reductions
• A standard unit of greenhouse reduction or sink
• PCF Prototype Carbon Fund
• World Bank CER Fund
• ODA Official Development Assistance
• Part of 0.07 govt aid
• IRR Internal Rate of Return
• DNA Designated National Authority
• The national body who assess /or approves CDM
  projects

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Acronyms

• Annex 1 countries
• 36 industrialised countries and economies in
  transitions listed in Annex 1 of the convention
  who can invest in CDM projects. These countries
  have emission reduction obligations.
• Non - Annex 1 countries
• The countries who are not listed in Annex 1 of
  the Convention and who can host CDM projects