Issue mapping for CDM: An Asian perspective

1
Issue mapping for CDM An Asian perspective
How to Realize New and Promising Channel?

• Climate Experts Advisory Service on Climate
  Strategy
• Chair, Senior Research Fellow
• IGES
• Visiting Research Fellow
• Naoki Matsuo
• E-mail n_matsuo_at_climate-experts.info
• http//www.climate-experts.info/

2
Climate Mitigation and Sustainable Development

• Choosing Less-Energy Economy is the key for
  Economic Growth
• Japan Good example
• Technology transfer needed
• Digestion of the technology in the host country
  needed
• Climate mitigation Opportunity NOT cost
• How to design the measures to make portfolio of
  other policy objectives
• Maximizing co-benefits
• Energy cost reduction
• Local environment protection
• Local employment
• Energy security

3
Developing Countries Concern

• Unfairness
• Big gap in per capita emissions.
• Impact of climate change (vulnerability).
• Historical contribution to global warming
• Larger than current emission gap
• Emission limit to non-Annex I also?
• Against Opt-In provision at Kyoto negotiation.
• Concern on run out of low-hanging fruit (low-cost
  mitigation options)
• Attitude of developed countries
• Bush Administration
• Negotiation tactics as G77China
• How to invite more technology and money
• Formalistic/strategic behavior dominates
• ? What is needed in the real world? Proven
  experiences!
• Example East Germany experience ?
  Positive attitude of EITs
• USIJI experience ? Positive attitude of Latin
  America

4
CDM in the Negotiations

• JI concept in the UNFCCC
• AIJ Pilot Phase introduced at COP 1 (too early
  for introduction)
• JI revised in the Kyoto negotiations
• Proposed by developed countries (e.g., US
  proposal)
• Opposed by developing countries
• CDF concept in the Brazilian proposal
• CDF Penalty for non-compliance ? Fund for
  mitigation projects
• Converted to CDM (with acrobatic interpretation)
• Saved Kyoto negotiations
• What is CDM?
• Almost same as JI concept in the US proposal
• Key point Proposal from non-Annex I
• Bridge between South and North

5
Two Objectives for CDM

• Environmental corporation
• To assist host developing country to achieve
  sustainable development
• No uniform judgement criteria(under jurisdiction
  of the host government)
• Local environment, employment,
• New tool to comply with the target (investor)
• Offset domestic excess emissions by the GHG
  reductions in the developing country
• Business tool for private sector
• Incentives / driving force

6
Institutions for CDM

• COP/MOP (Conference of the Parties/Meeting of the
  Parties)
• Ultimate decision-making body for the Kyoto
  Protocol
• Designation of the Operational Entities
• COP as COP/MOP until the entry into force of the
  KP
• CDM Executive Board (CDM EB)
• Supervising body of the CDM. Supported by the
  Secretariat
• Decides the detailed rules/modalities of the CDM.
  Recommendation to the COP/MOP
• Registration of the projects Accreditation of
  the OE Approval of the baseline methodologies,
  etc. Issuance of the CERs Operation of the CDM
  Registry
• Panels
• Recommendation of the detailed rules/modalities
  to the CDM EB
• OE Accreditation Small-scale CDM
  Baseline/monitoring methodologies
• Operational Entity
• Validation of the project as CDM (ex-ante)
• Verification/certification of emissions
  reductions (ex-post)

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CDM To Date

• Introduction of CDM to Kyoto Protocol as the
  Bridge between South and North 1997
• Marrakech Accords CDM Executive Board
  establishment 2001
• Detailed rule preparation with 3 Panels 200203
• Accreditation of the Operational Entity
  (validator/verifier)
• 20 entities proposed (2 non-Annex I). 1st OE to
  be accredited at next EB
• Small scale CDM
• Definition, Indicative list of methodologies,
  Simplified procedures
• Baseline and Monitoring Methodologies
• PDD template (version 01 ver.02 to be used after
  next EB?)
• Approval process started 2003
• New methodology approval
• 35 methodologies submitted (including
  duplication)
• 9 methodologies approved 4 reformatted (for
  validation)
• First CDM project will be registered at EB 14
• Methodologies approval process every 2 months
• http//cdm.unfccc.int/methodologies/process/

8
Role of CDM

• New Channel
• Mutual understanding between South and North
• Opportunity to realize benefits by emission
  reductions
• Transfer of technology and money
• New emerging market of GHG emission reductions
• New business opportunities and compliance tool
  for Annex I
• Also new businesses for non-Annex I companies
  (emerging interest)
• Issues remain

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Issue Mapping

• PDD Additionality/Baseline and Methodology
• How to make the project as CDM?
• DNA Host country institution
• How to invite foreign investment?
• Domestic incentives Investing country
• Utilization of CER in domestic emissions trading
  scheme?
• Project selection
• What types of project are promising?
• Financing the project Carbon financing
• Still unknown in the financial sector
• Sustainability Public money utilization
• Small-scale, community-based,
• Needs-Seeds matching How to find the project?
• Institutional framework

10
CDM Project Cycle and Associated Risks
Project Design
? ? ? ? ? Designing the additional project?
PDD Drafting
? ? ? ? ? Find out capable consultant?
New Methodology Approval
? ? ? ? ? Approved without delay?
CDM EB

• ? ? ? ? Registered as CDM without delay?
• (incl. host/investor countrys
  approval)

Validation
OE
Project Implementation
? ? ? ? ? Planned performance? Without delay?
Monitoring
? ? ? ? ? Is monitoring good enough?
Verification/Certification
OE
CERs Issuance
? ? ? ? ? Planned amount of CERs issued?
CDM EB
? ? ? ? ? Market price hover around?
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CDM Project-Cycle Validation
PDD Drafting (with New Methodology)
Submit to CDM EB through OE
(technical) clarification
Expert desk review Public comments
Pre-recommendation
Meth Panel recommendation
Judgement by CDM EB
A-rated Approved
B Resubmit to Meth Panel
C Not approved
Reformat to AM 00xx
Validation by OE
If existing methodology applicable
Host country approval, local stakeholder/NGO/publi
c comments
Request for registration by OE (w/ validation
report)
Assessment by CDM EB (w/ host countries)
Registration as CDM project by CDM EB
12
PDD and Methodology

• New Methodologies in Annexes 3 (baseline) and 4
  (monitoring) of the Project Design Document
• Not easy task
• Submission 1st round 14, 2nd 2, 3rd 5, 4th
  14, 5th 7,
• Only 2 approved in the 1st and 2nd round (9 3
  approved to date)
• Submitted new methodology 48 to date
• Approved ones provide good examples
• Once failed, around a half year delayed
• Problems
• Many skills needed
• What is methodology? How to describe
  methodology?
• What is additionality? How to demonstrate
  additionality?
• What is baseline? How to identify baseline
  scenario?

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Methodology, Additionality and Baseline

• Methodology
• Describe the proper noun by linguistic words
• Assume a conceptual/virtual generalized project
• Additionality
• The same project would not be implemented if the
  project is not registered as CDM project
• Demonstrate why it is not anyway project
• Baseline scenario
• What would have occurred if CER revenue 0 ?
• Several possible scenarios are assessed
• Local regulation, investment analysis, several
  barriers,
• Demonstrate logical and reasonable conclusion
• Express as a mathematical formula/algorithm
• How to describe the additionality/baseline as
  methodology?

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Concept of Baseline
Reductions even without the project
If Current Situation Continues (BaU)
Baseline emissions (counter-factual)
True emission reductions
If local regulation is introduced
Project emissions
time
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Decomposing Baseline Setting

• Baseline Methodology Meth Panel/CDM EB
• Baseline Scenario identification
• Additionality test is included
• Applicability conditions are set
• Represent such a scenario by using mathematical
  formula
• Baseline Emissions BEy f (pi)
• The associated parameters pi are those of
  project scenario to be monitored linked to the
  monitoring methodology
• Application of the Baseline Methodology OE/CDM
  EB
• Specific to the proposed project
• Evidences whether the methodology can be
  applicable are needed

16
Difference between Baseline Scenarios
17
Approved Methodologies (reformatted)

• AM0001
• Incineration of HFC 23 Waste Streams
• AM0002
• Greenhouse Gas Emission Reductions through
  Landfill Gas Capture and Flaring where the
  Baseline is established by a Public Concession
  Contract
• AM0003
• Simplified financial analysis for landfill gas
  capture projects
• AM0004
• Grid-connected biomass power generation that
  avoids uncontrolled burning of biomass

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HFC 23 Waste Stream
Now released to atmosphere

• HFC 23 Inevitably generated by-product of HCFC
  22 production process non-toxic substance
• Most of HFC 23 is released without recovery
  small portion sold
• High GWP 11,700 (equivalent to 11,700 times of
  CO2 in mass unit)

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Project Outline
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GHG Emission Sources
In the boundary Outside the boundary
Baseline scenario monitored HFC 23 None
Project scenario Non-negligible monitored HFC 23 (leak)CO2(Fuel combustion) CO2(HFC combustion) CO2(Power generation) CO2(Steam generation)
Project scenario negligible small not monitored N2O(Fuel combustion) HFC 23 (leak to effluent liquid) CO2(trapped as CaCO3 etc) CO2(Sludge transport, Alkali production, etc) N2O(Power/steam generation)
Project scenario Not counted GHGs associated with the facility construction (Macroeconomic indirect effects)
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Accounting of Emission Reductions

• ERy BEy - PEy
• PEy PEyin PEyout
• ND_HFC23y (Not Destroyed HFC 23)
• CO2_HFC23y (HFC combustion)
• CO2_NGy (Natural Gas combustion)
• CO2_Powery (Power supply)
  CO2_Steamy (Steam supply)
• BEy q_HFC23y ? Purity_HFC23y ? B_HFC23y
  ? GWP_HFC23

HFC 23 input to the incinerator
HFC 23 to be limited due to local regulation ( 0)
Cut-Off Condition Q_HFC23y ? Q_HCHC22y ? w
(ratio of latest 3 years) (to
exclude the case of manipulating of HCFC 22
production process to get more HFC 23)
22
Monitoring Parameters
Environmental pollutants are also monitored
23
Project Validation and Registration

• Operational Entity to judge whether the Project
  is validated as a CDM project
• Validation check points
• CDM participation requirements(incl. host
  countrys approval/confirmation document to
  assist its SD)
• Stakeholders comments and the responses
• Environment impact assessment
• Baseline setting (with approved methodology and
  anticipated value)Whether the methodology is
  applied appropriately?
• Evidences needed
• Monitoring Plan and methodology (incl. baseline
  emissions)
• Operational Entity opens the PDD etc for public
  and invites public comments.The OE makes
  Validation Report available for public and
  requests it to register.
• Registration by the Executive Board
• Within 8 weeks after request by the OE
• If review requested, the EB should decide within
  following 2nd meeting
• Request by the EB member (more than 3) or the
  Party concerned

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Small Scale CDM

• Definition (mutually exclusive by component
  ceiling for creditation)
• lt15 MW renewables (RE indicative list 15 MW
  catalog capacity MW MW(e))
• lt15 GWh/yr EE (EE list activity down no BaU
  minus project)
• lt15 kt-CO2e/yr (threshold Project emissions
  list)
• Bundling/unbundling
• Bundling OK Debundling no
• Baseline
• Regular revision
• Benchmarking (multi-project) methodologies given
  in advance
• Simplification in procedures (also for
  monitoring)
• Share of Proceeds lower (LDC zero)
• Project Cycle Crediting Period
• Same as others
• OE
• OEs for Validation and verification/certification
  can be the same
• Local OE desirable
• Simplification
• In each procedures (not skipping some procedures)

25
Transfer of GHG Units
Annex I initial allocation Sink
AAU
Base year GHGs x Annex B x 5 years
RMU
Additional absorption
Each Party issues to Its holding a/c
Distribution to firms
ERU
AAU
RMU
CER
Emissions Trading
RMU
CER
AAU
ERU
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Can non-Annex I sell CERs?

• Non-Annex I can hold CERs in its account in the
  CDM Registry Government and entities
• However, it is uncertain whether such CERs can be
  transferred
• Not prohibited, but not allowed
• Emissions trading is for Annex B countries
  (only?)
• Eligibility to participate in Kyoto mechanisms is
  set for Annex I countries only
• At least some country (e.g., Japan) does not
  allow
• Risky for non-Annex I entities to hold CERs
• Instead, they can get monetary profits or ask
  Annex I partner(s) to do so on behalf
• Or, set up an account in Annex I.

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GHG Market Perspectives

• Market value of CERs
• Once issued, all CERs (except for sink-related
  CERs) have the same value
• Currently, CER value depends on
• Methodology status
• Approved or expected to be approved or ?
• Possibility of success of the project
• (Proven) experience of the project participants
• Technology
• CDM methodology, validation,
• Name value in the GHG/CER market
• Possibility of unexpected failure
• Host countrys policy Country risks
• Ordinary FDI policy
• CDM policy
• Good collaboration between hosts and investors is
  must
• Companies and governments

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GHG Market Development

• Voluntary reductions market
• Emission (reductions) market under authorized
  institution

2005 next milestone
29
Host Countrys Institution

• Designated National Authority (DNA)
• How to establish/maintain the DNA?
• How to reduce bureaucracy and enhance efficient
  decision-making?
• How to call domestic entities attention to this
  new business
• Latin-American countries experiences
• Risks associated with host countrys CDM policy
  is crucial to invite CDM projects
• e.g., many projects proposed in Latin American
  countries which already established their CDM
  policy and DNA
• AIJ experiences are important
• Clear process and criteria for approval process
  and supporting scheme

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Domestic Incentives in Annex I

• Clear incentives needed
• e.g., domestic emissions trading scheme
• Governments procurement
• Carbon funds
• Other supports
• Information, negotiation,
• Responding to the uncertainties
• e.g., independence of the KP entry into force
• Anyway, CER is fungible in the EU-wide emissions
  trading scheme
• Existing of the market

31
Project Selection and Financing

• Design non-CO2 gases reductions and/or renewables
• High GWP gases enhance the profitability of CDM
  project
• e.g., Landfill CH4, HFC decomposition, CH4 in
  biomass residue,
• Design other values than GHG reductions
• Maximizing co-benefits
• Underlying project CDM part (additional
  reductions)
• Underlying project OK for profitable or ODA
  project
• Utilization of higher technology
• Risk reduction
• How to finance underlying part?
• Financial sector people have not known
  carbon-related value yet

CDM Part (additional)
Underlying Project
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How to Utilize Public Money in CDM

• Public funding for CDM projects is not to result
  in the diversion of ODA
• ODA utilization and Sustainability judged by the
  host country
• Consultation between host/investors needed on
  needs/possibilities
• Financing the project by ODA
• Underlying part by ODA additional reduction
  part (CDM part) by others
• Screening the on-going/planned ODA projects and
  assess the possibility for additional GHG
  reductions
• Sustainability-oriented project implementation
  and support (by packaging with other project)
• Example PV project in small island states
• Redress the regional imbalance of CDM projects
• Private participants focus on profitable
  geographical region
• Supporting smooth implementation of CDM projects
• Capacity building
• Information clearinghouse role to match needs and
  seeds, etc

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Matching Needs and Seeds

• Status-Quo
• Ad-Hoc based needs-seeds matching
• How to invite needs?
• Capacity building
• private sector, (central/local) govt officials,
  NGOs,
• Institutional
• DNA and others(?)
• How to invite seeds?
• From Annex I
• (ir)regular business forum in Annex I
• From non-Annex I
• financial sector, private sectors,
• Role of Information Clearinghouse Needed
• Internet-based institution
• Other channels
• Who plays?
• Host (central/local) government, Investor
  government, MDB, Private sector,