CLEAN DEVELOPMENT MECHANISM: OVERVIEW DENR Training Course November 4-6, 2003 Climate Change Information Center Manila Observatory Ateneo de Manila University

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CLEAN DEVELOPMENT MECHANISMOVERVIEWDENR
Training CourseNovember 4-6, 2003Climate
Change Information CenterManila
ObservatoryAteneo de Manila University
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Contents

1. Problem of Climate Change
2. UNFCCC Kyoto Protocol
3. Clean Development Mechanism
4. CDM Eligible Projects
5. Environmental Benefits of CDM
6. Mechanics of CDM
7. Basics of CDM Financing
8. Philippine Participation in CDM

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1. Problem of Climate Change
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Rising temperatures results in changing weather
patterns

• Increased occurrence of dramatic weather such as
  hurricanes

• Melting polar caps, glaciers
• Shifts in weather patterns

Historic Temperature Data
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Atmospheric CO2 Concentration and Temperature
Change
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Climate Change

• Climate change is caused by both natural events
  (like volcanic eruptions) and human activities

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Human Sources of GHGs
Carbon Dioxide (CO2) Most prevalent GHG Methane
(CH4) Second most common, 21x the potency of
CO2 Nitrous Oxide (N2O) 310x the potency of
CO2 Other Gases HFCs, PFCs, and SF6 range 600
23900x potency of CO2
Transport
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GHG and Environmental Impacts
Changes in temperature, weather patterns and sea
level rise
Human Health Weather related mortality
Infectious disease Air quality - respiratory
illness
Coastal Areas Erosion and flooding Inundation Ch
ange in wetlands Water Resources
Changes in water supply and water
quality Competition/Trans-border Issues
Agriculture Changes in crop yields Irrigation
demands, Productivity
Forests Change in Ecologies, Geographic range
of species, and Health and productivity
Industry and Energy Changes in Energy
demand Product demand Supply
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Philippine Rice Production. Arrows indicate El
Niño events. (source Food and Agricultural
Organization)
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Vulnerability information systems
El Niño - La Niña Vulnerability Map Support for
Greenhouse Gas Inventory
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Sea level rise
3D modeling and visualization tools are used
for vulnerability assessment, exact location and
quantification of areas which are susceptible to
floods due to rise in sea level. Study area
Northern part of Navotas, Metro Manila
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2. UNFCCC and KYOTO PROTOCOL
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United Nations Framework Convention on Climate
Change

• Objective of the Convention
• Stabilization of greenhouse gas concentrations
  in the atmosphere at a level that would prevent
  dangerous anthropogenic interference with the
  climate system. Such a level should be achieved
  within a time frame sufficient to allow
  ecosystems to adapt naturally to climate change,
  to ensure that food production is not threatened,
  and to enable economic development to proceed in
  a sustainable manner.

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United Nations Framework Convention on Climate
Change

• Commitments by the Parties to the Convention
• Parties have common but differentiated
  responsibilities.

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Division of Parties by Annex
Annex I
Annex II
Australia / Austria / Belgium / Canada / Denmark
/ EC / Finland / France / Germany / Greece
/Iceland / Ireland / Italy / Japan / Luxembourg /
Netherlands / New Zealand / Norway / Portugal /
Spain / Sweden / Switzerland / Turkey / United
Kingdom / USA
Belarus / Bulgaria / Croatia / Czech Republic /
Estonia / Hungary / Latvia / Liechtenstein /
Lithuania / Monaco / Poland / Romania / Russian
Federation / Slovakia / Slovenia / Ukraine
Non-Annex I Countries All the Rest of Ratifying
Countries
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Kyoto Protocol

• The overall emission reduction target for Annex I
  Parties as a group is at least 5 percent below
  1990 levels, to be achieved by the commitment
  period 2008 to 2012 (an average over the five
  years).
• The Protocol covers six greenhouse gases (Annex
  A) - CO2, CH4, N2O, HFCs, PFCs, SF6
• The negotiated targets for individual Annex I
  Parties are included in Annex B of the Protocol.

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Selected Quantified Emission Limitation ()

• Industrialized Countries
• Australia 108
• Canada 94
• EC bubble 92
• (Germany 75)
• (Portugal 140)
• Japan 94
• Norway 101
• New Zealand 100
• USA 93 ???

• Economies in Transition
• Bulgaria 92
• Baltics 92
• Croatia 95
• Czech Republic 92
• Hungary 94
• Poland 94
• Romania 92
• Russia 100
• Ukraine 100

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Kyoto Protocol

• The Kyoto Protocol was adopted at COP-3 in
  December, 1997, in accordance with Berlin
  Mandate of COP-1.
• The Protocol will enter into force when not less
  than 55 Parties to the Convention, accounting for
  at least 55 percent of the 1990 total CO2
  emissions of the Annex 1 Parties, have ratified
  the Protocol.
• US 34 Russia 16 Japan 8 EU 23
• Other Annex 1 Parties 19

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Kyoto ProtocolFlexibility Mechanisms
Annex I GHG Emissions
Clean Development Mechanism
Emission Trading
1990 level
Joint Implementation
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Domestic Actions
Assigned Amounts
Present day
2012 (BaU)
2012 with KP
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3. Clean Development Mechanism
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Clean Development Mechanism

• Enables developed countries (known as Annex B
  countries) to meet their emission reduction
  commitments in a flexible and cost-effective
  manner
• Assists developing countries (non-Annex B
  countries) in meeting their sustainable
  development objectives
• Investors benefit by obtaining Certificates of
  Emissions Reductions (CERs)
• Host countries benefit in the form of investment,
  access to better technology, and local
  sustainable development

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What can the CDM do for developing countries

• Attract foreign investment to countries engaged
  in the trading of CERs
• Increase the profitability of cleaner more
  efficient technology in energy, industry, and
  transport sectors
• Clean up waste management operations
• Improve land-use strategies and practice
• Contribute to sustainable development of the host
  country

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What are the Criteria for CDM Projects?

• Sustainable development
• Host country criteria
• Environmental Impact Assessment
• Stakeholder consultations
• Greenhouse Gas (GHG) emission reductions
• Environmental additionality
• Project additionality
• Project viability
• Technologically proven
• Financially sound
• Host country approval
• Project validation and registration

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4. CDM Eligible Projects
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CDM Eligible Projects

• Renewable energy
• Fuel switching
• End-use energy efficiency improvements
• Supply-side energy efficiency improvements
• Agriculture (reduction of CH4 N2O emissions)
• Industrial processes (CO2 from cement, HFCs, etc)
• Sink projects (only afforestation reforestation)

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Renewable energy

• Solar power
• Hydro power
• Wind power
• Geothermal
• Biomass
• Tidal / Wave power

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Renewable energy

• Renewable energy for the grid
• For electricity generation by households or
  commercial users
• E.g., Solar home systems, solar water pumps,
  photovoltaics, wind battery chargers
• For mechanical energy by households or commercial
  users
• E.g. wind-powered pumps, solar water pumps, water
  mills, wind mills

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Renewable energy

• Thermal energy for households or commercial users
• E.g., solar thermal water heaters and dryers,
  solar cookers, energy derived from biomass for
  water heating, space heating or drying
• Biomass combined heat and power (co-generation)
  systems

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Fuel switching

• For industrial facilities
• From steam or compressed air to electricity
• For buildings
• From oil to gas
• For vehicles
• From diesel to LPG or to CNG

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End-use energy efficiency improvements

• Energy efficiency equipment
• Motors
• Lamps
• Ballasts
• Refrigerators
• Fans
• Air conditioners
• Appliances
• Etc

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Supply-side energy efficiency improvements

• Generation
• Efficiency improvements at power stations and
  district heating plants and co-generation
• Transmission and Distribution
• Examples
• Upgrading voltage on a transmission line
• Replacing a transformer
• Increased insulation of pipes

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Agriculture

• Reducing emissions from agricultural soils
• Use of ammonium sulfate instead of urea
• Use of phosphogypsum in combination with urea
  instead of urea
• Reducing methane emissions from livestock
• Conservation agricultural tillage
• Agricultural land management practices
• Use of composted rice straw instead of fresh rice
  straw

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Industrial processes

• Methane (CH4) recovery and avoidance from
  landfills, coal mines, agro-industries, waste
  water treatment facilities
• CH4 has global warming intensity 21-times that of
  CO2
• Cement production (CO2)
• Electric equipment manufacturing (SF6)
• PFC emissions from aluminum production
• PCF gases have global warming intensity over
  6000-times that of CO2
• PFC and SF6 emissions from semiconductor
  manufacturing
• Nitrous Oxide (N2O) emissions from adipic acid
  and nitric acid manufacturing
• N2O has global warming intensity of 310-times
  that of CO2

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Sink projects

• Afforestation
• Planting trees on agricultural land
• Reforestation
• Planting trees on denuded forest land

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Clean Development Mechanism

• Types of small-scale projects that could qualify
  for fast-track approval procedures
• Renewable energy projects up to 15 megawatts (MW)
  of output capacity
• Energy efficiency improvements that reduce energy
  consumption on the supply and/or demand side by
  up to 15 gigawatt-hours (GWh)/year
• Other project activities that both reduce
  emissions at source and directly emit less than
  15 kilotons (kt) of CO2 equivalent annually

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5. Environmental Benefits of CDM
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CDM Project

• Achieves Sustainable Development objectives for
  the host developing country
• Reduces GHG Emissions

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Simplistic numerical example

• Provide electricity for a barangay
• Business-as-usual (baseline) Diesel generator
  sets
• Cost of project 10
• Emissions 1 tC
• Cleaner project (CDM-eligible) Micro-hydro
• Cost of project 13
• Zero Emissions

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Simplistic numerical example

• CDM Investor (e.g. Japan)
• Invests 3 (13-10, difference between cleaner
  and business-as-usual project)
• Gains Certificate of Emissions Reduction of 1 tC,
  which it can meet some of its Kyoto Protocol
  commitments to reduce emissions

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Simplistic numerical example

• WIN WIN WIN
• WIN for the host country
• Sustainable development benefit Cleaner energy
  production technology
• WIN for the Annex I country
• Credits for emissions reduction
• WIN for the Global Environment
• Emissions reduction

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Additionality

• Additionality is the key eligibility criterion in
  CDM projects
• You must do something that you would not have
  done without the CDM
• Two types of additionality
• Project Additionality
• Environmental Additionality

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Project Additionality

• Without the ability to register under the CDM,
  the proposed project would be, or would have
  been, unlikely to occur

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Project Additionality

• Baseline methodology evaluates whether or not the
  proposed CDM project activity would have gone
  ahead anyway.
• Baseline methodology assesses why the proposed
  CDM project activity is less likely to occur than
  one or more of the other possible scenarios.

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Environmental Additionality

• If the proposed CDM project activity is not
  implemented, a less greenhouse gas friendly
  activity would have been initiated or continued
  instead.

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Environmental Additionality

• A CDM project activity is additional if
  anthropogenic emissions of GHGs by sources are
  reduced below those that would have occurred in
  the absence of the registered CDM project
  activity.
• -CDM MP para. 43

Emission Reductionshypothetical baseline
emissions effective (project) emissions
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Environmental additionality and baseline

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6. Mechanics of CDM
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Starting Point Viable Project

• A potential CDM Project is a feasible project
• Technologically feasible
• Financially sound
• A potential CDM Project is a project which has an
  Environmental Compliance Certificate (ECC)

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CDM Project Cycle
Project Design Formulation
Project Design Document
C
D
C
D
4
M
I
C
C
C
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Contents of CDM-PDD
A. General description of project
activity   B. Baseline methodology   C.
Duration of the project activity/ Crediting
period   D. Monitoring methodology and plan   E.
Calculations of GHG emissions by sources   F.
Environmental impacts   G. Stakeholders comments
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CDM Project Cycle
Project Design Formulation
Project Design Document
National Approval
C
D
C
D
4
M
I
C
C
C
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National Approval

• Approval is by the Designated National Authority
  (DNA) for CDM
• Main Criteria for Approval Does project
  contribute to the sustainable development
  objectives of the Philippines?
• Sustainable development indicators
• Project type priorities
• Positive list
• Negative list

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CDM Project Cycle
Project Design Formulation
Project Design Document
National Approval
Operational Entity A
Validation / Registration
C
D
C
D
4
M
I
C
C
C
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Validation

• Designated Operational Entity
• External Auditor
• Validates the PDD
• Including the Baseline Study and the Monitoring
  Plan
• Recommends whether the project should be
  registered as a CDM Project

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Registration

• Registration is done by the CDM Executive Board
  (presently based in Bonn, Germany)
• CDM Project Registry

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CDM Project Cycle
Project Design Formulation
Project Design Document
National Approval
Operational Entity A
Validation / Registration
Investors
Project Financing
Project Participants
Monitoring
Monitoring Report
Operational Entity B
Verification / Certification
Verification Report / Certification Report /
Request of CERs
EB / Registry
Issuance of CERs
C
D
C
D
4
M
I
C
C
C
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Verification

• Verification of monitoring report of emission
  eductions by the project
• Verification is done by another Designated
  Operational Entity
• Operational Entity certifies the actual emission
  reductions by the project
• Operational Entity submits certification to CDM
  Executive Board

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Issuance of CERs

• Based on the certification by the Operational
  Entity, the CDM Executive Board issues the
  Certificate of Emission Reductions
• Official registry of CERs
• CERs are a tradable asset (like stocks or bonds)

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7. Basics of CDM Financing
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Total Project Costs and Sources of Finance

• Total Project Cost Estimates
• Investment costs, including development costs, up
  to commissioning of project
• Sources of Finance to be Sought or Already
  Identified
• Critical to identify other debt and/or equity
  finance
• Typical sources of funding international
  development banks, government funding, private
  financing, supplier credit
• CDM contribution typically 5-15 of total
  project costs

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Financing Options in a CDM Project

• Carbon Funds
• Annex I investors contribute to a mutual fund
• Mutual fund agrees to buy CERs as they are
  produced by the project
• Examples
• WB Prototype Carbon Fund
• Netherlands CERUPT

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How Carbon Funds Work..
Technology

Finance
Industrialized Governments and Companies
Developing Countries and Communities
Carbon Fund
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Nature of Carbon Financing Contract
Banks
Investor
Debt
Equity
Power Purchase Agreement

Electricity

Carbon Credits
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Financing Options in a CDM Project

• Emission Reductions Purchase Agreement
• Annex I investor agrees to buy CERs as they are
  produced by the project

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Emission Reduction Purchase Agreement

• Will improve IRRs
• Forward contract
• Payment upon delivery of verified ERs
• Upfront payments are rare
• Will provide a hard currency revenue
• Helps secure financing and reduce project risk
• Future ER payments as collateral for project
  loans
• Can be paid into an escrow account, protecting
  lenders from currency convertibility and transfer
  risks

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How CDM can matter
FIRR
CER income
0
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Impact of Carbon Finance on Project Financial
Rate of Return
Technology DIRR
Hydro, Wind, Geothermal 0.8-2.6
Methane Kick
Crop/Forest Residues 3-7
Municipal Solid Waste 5-10

• Revolution in Solid Waste Management
• Important impact on small-holder crop-processors
  and animal production

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Lessons from PCF Carbon Prices
Uganda small hydro (51.5 MW) remote area 3.00
Chile 25 MW hydro run-of-river 3.50 option
Brazil sustainable charcoal replacing coal/coke 3.50
Poland District Heating Fuel Switch Coal to Geothermal and Biomass 3.50
C. America small wind/hydro 3.50
Romania Afforestation 3.60 option
Colombia wind farm 3.50 0.5
South Africa Durban waste management 3.75 0.2
Czech small-scale energy efficiency 4.00
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ODA and CDM Funding

• Public funding for CDM Projects be additional to
  Official Development Assistance (ODA), Global
  Environment Facility (GEF) provided by Annex I
  Parties
• Public funding for CDM projects must not result
  in the diversion of ODA
• ODA can be part of the project financing as long
  as ODA financing does not claim emission
  reduction credits (WB PCF)

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Emission Reduction Purchase Agreement
ODA
Banks
Investor
Non-ODA
Debt
Equity
Power Purchase Agreement

Electricity

Carbon Credits
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8. Philippine participation in CDM
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Requirements for the Philippines to Participate
in CDM

• Process of Philippine ratification of the Kyoto
  Protocol
• Senate Committee on Foreign Affairs has sponsored
  the ratification on the floor of the Senate, 2nd
  June 2003 (1st Reading)
• 2nd Reading, Interpellation, 21st October 2003
• Need 2/3 majority of the Senate to concur in the
  ratification of the Kyoto Protocol
• Kyoto Protocol ratified, 22nd October 2003
• Senate concurred in the ratification by a
  unanimous vote, 19 0 (3rd Reading)

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Requirements for the Philippines to Participate
in CDM

• Status of efforts to establish CDM Designated
  National Authority (DNA)
• Proposal to make the Inter-Agency Committee on
  Climate Change (IACCC) as the DNA
• IACCC is composed of DENR, DOST, DOE, DFA,
  DTI-BOI, DOTC, NEDA, DPWH, PAGASA, FMB, EMB,
  Philippine Network on Climate Change (NGO)

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• Thank you

Roberto C. Yap, S.J., Ph.D. Environmental
Economist Climate Change Information
Center Manila Observatory Ateneo de Manila
University Tel [phone] Fax 63 2
426-6070 rcyap_at_ateneo.edu