The CDM in Industries

The CDM – How to Combine

Business and Climate Protection
Manila, Sept. 8th 2009

Dr. Thomas Bürki, Thomas Bürki GmbH, Benglen/Switzerland

Introduction
❚ CDM: the idea
❙ It is not important, where reduction measures
are realised
❙ climate change and economic perspective:
realise measures, where you get maximum GHG
reduction for money
❙ Promote technology transfer
❙ Do not undermine sustainable development
The Philosophy of the CDM
❚ Reductions must be additional
❚ Projects must contribute to sustainable
development
❚ Projects must be real
CDM: What is the Basis?
❚ Basis: Kyoto Protocol, Art. 12
❙ “The purpose of the clean development
mechanism shall be to assist Parties not
included in Annex I in achieving sustainable
development … ”
❙ „ Reductions in emissions that are additional to
any that would occur in the absence of the
certified project activity “
❙ “Emission reductions shall be … real,
measurable, and long-term benefits related to
the mitigation of climate change”
CDM: What has Happened?
❚ In 57 countries large or small scale projects
were realised
❚ Total reduction of GHG to date
∼ 312 mn tons of CO2e /yr
❚ To date, approx. 2’000 projects are registered

Source: site of the UNFCCC, www.unfccc.int

Current Status of the CDM I
18. Philippines

„big
five“: China

85% India
Brazil
Mexico Republic of Korea
Mexico
Chile
Argentina
Republic of Korea Nigeria
Indonesia
Malaysia
South Africa
Brazil
China Qatar
Colombia
Peru
Israel
Egypt
Thailand
18. Philippines
India Pakistan
Uzbekistan
rest of the world

Number of CER/yr
Current Status of the CDM II

„big
five“:
rest of the world 74% China

India

China Brazil

Mexico

Malaysia

6. Philippines
6. Philippines Chile

Malaysia Republic of Korea

Indonesia

Mexico Thailand

rest of the world

Brazil
India

Number of projects/country
Current Status of the CDM III
Two
scopes
77% (01) Energy industries
(renewable - / non-renewable
sources)

(13) Waste handling and

disposal

(10) Fugitive emissions from fuels

(solid, oil and gas)

(15) Agriculture

(04) Manufacturing industries

(05) Chemical industries

(03) Energy demand

(08) Mining/mineral production

Projects in scopes
Current Status of the CDM IV
energy industries renewable - non
Three renewable (1)

scopes fugitive emissions from production and

consumption of halocarbons and
85% sulphur hexafluoride (11)
waste handling and disposal (13)

fugitive emissions from fuels (10)

mining/mineral production (8)

agriculture (15)

energy demand (3)

Transport (7)

afforestation and reforestation (14)

chemical industries (5)

manufacturing industries (4)

CER in scopes
 Categories of Industrial CDM Projects

Hydroelectricity

Methane recovery
and usage

Biomass to energy
Wind from electricity
CDM Projects
❚ This development has reasons: economics
and chemistry
❚ Economics: the bigger the project, the
more efficient
❚ Chemistry: the bigger the GWP, the bigger
the amount of CER
Climate Change, Basics
❚ Various GHG have different “Green House
Power”
GHG GWP
❙ CO2 1
❙ CH4 (methane) 21
❙ N2O 300
❙ (H)CFC/PFC ∼ 1’000 – 10’000
❙ SF6 23’900
❚ Thus reduction of 1 ton of certain GHG has
different effect on climate
GWP of the Most Important GHG
CFC, HFC, and PFC
Gas GWP ODP lifetime
CFC
R 11 4000 1 50 ± relevant
R 12 8500 1 100 ± relevant
HFC
R 22 1700 0.05 13 relevant
R 123 93 0.02 1.4
Special case
PFC
R 23 11700 0
R 134 a 1300 0 15.6 relevant
R 152 a 140 0 1.8
R 407C 1300 0

the classic
CO2 (= R 744) 1 0 100

often underestimated
N20 296 114
CH4 21 0 relevant
and then there is ...
SF6 23'900 0 > 1'000

by the way
R 290 (Propan) 3 0
R 717 (Ammoniak) 0 0 -
The Fight Against Climate Change
❚ Most industrialised countries have a
quantified emissions limitation
❚ EU is one of the very big spaces with a
limitation (cap)
❚ Kyoto Protocol gives opportunity to reduce
either in the country or jointly with other
countries: flexible mechanisms
How Does Limitation Work? I
❚ Top down attribution of allowed emissions
❙ (per bubble)
❙ per country
❙ (per sector)
❙ per company
❚ Company gets the right, to emit a maximum
of GHG: allowances
❚ Issued by government to company’s account
How Does Limitation Work? II
❚ At the end of a year, the company must
surrender allowances equal to the total
emissions of the company
❚ If emissions < allowances: selling possible
❚ If emissions > allowances: buying necessary
Allowances
for 2008

Allowances
for 2009

Allowances
for 2010

Allowances
for 2011

Allowances
for 2012
How Does Limitation Work? III

2012
Avg 2008 -
How Does Limitation Work? III

disposable
allowances
excess of
allowance
s
How Does Limitation Work? III
Buy
lack of EUA
allowance Buy
s ERU
Buy
CER

disposable
allowances
Buying Allowances/Certificates: How
Much?
❚ Buying EUA
❙ unlimited
❚ Buying ERU
❙ limited
❚ Buying CER
❙ limited
Emissions Reductions: How - and Where?
❚ All these measures are different in different
industries – and countries
❚ The more efficient an industry, the more
expensive further efficiency improvements
❚ The cheaper energy, the less profitable energy
efficiency measures, the less the incentive
❚ Short: the profitability (and therefore the
effectiveness) of measures varies
❚ Thus it makes sense, to co-operate
The CDM: Joint Mitigation of GHG
❚ Goal: registration with the UNFCCC = basis
for issuing of CER
❚ Necessary: CDM project cycle
❚ Prerequisites with project developers
❙ Competence
❙ Knowledge of the CDM project cycle
❙ Systematic work
❙ … and practice
❚ Therefore: maybe contract a specialist for the
CDM part
 The CDM Project Cycle

designated national authority

executive board

project participants

designated operational entity

certified emissions reduction = certificate

source: http://cdm.unfccc.int/CommonImages/ProjectCycleSlide
The CDM Project Cycle, Schedule
CDM Projects: What Has to Be
Considered?
❚ The project must be economically viable
also without CDM
❚ Financial resources for the project
should be available without relying on
CDM revenues
❚ The project must not yet be in place or in
operation
❚ The project must reduce sufficiently GHG
(simple benchmark: > 5’000 tCO2e/y)
How to Carry Out a CDM Project I
❚ Procedures to be observed strictly
❚ To start with:
search/choose appropriate methodology
❙ Large/small scale
❙ Scope
❙ Application criteria
❙ Others
Methodologies
❚ Methodologies describe/support
❙ Application criteria for the project
❙ Modalities and rules to be applied
❙ Choice of baseline
❙ Baseline and project emissions → reduction
❘ Support with the respective formulae
❙ Additionality
❙ Monitoring and verification plan (MVP)
❙ Stakeholder consultation
❙ contribution to sustainable development
Application of Methodologies
❚ Application criteria are to be followed
very strictly. E.g. waste treatment
 No
unbundling!
PDD
❚ The Project Design Document (PDD) is
the application of the respective
methodology to a project
❚ Needs utmost accuracy:
no precision – no registration
❚ Needs time and expertise – and practice
How to Carry Out a CDM Project II
❚ Design phase (incl. project owner and project
developer)
❚ Validation, registration
❚ Implementation
❚ Monitoring
❚ Verification, certification
❚ Issuance of CER
❚ Sale of CER
Small Scale Projects
❚ What is small scale?
❙ Renewables: maximum output capacity
(rated) 15 MWe
❙ Reduction of energy consumption
< 60 GWh/yr
❙ Emissions reduction
< 60’000 t CO2e/yr
Simplifications
❚ Reduced requirements for PDD
❚ Simplified baseline and monitoring
methodologies
❚ One DOE may validate, verify, and
certify
❚ Lower fees
Categories of Projects I
❚ Each projects must be classified in one of the
predefined 15 categories
❙ energy industries renewable - non renewable(1)
❙ energy distribution (2)
❙ energy demand (3)
❙ manufacturing industries (4)
❙ chemical industries (5)
❙ construction (6)
❙ transport (7)
❙ mining/mineral production (8)
Categories of Projects II
❙ Metal production (9)
❙ fugitive emissions from fuels (10)
❙ fugitive emissions from production and con-
sumption of halocarbons and sulphur hexa-fluoride
(11)
❙ Solvent use (12)
❙ waste handling and disposal (13)
❙ afforestation and reforestation (14)
❙ agriculture (15)
Baseline Calculation
❚ Strictly according to methodology
❚ Delimit the system/system boundaries
❙ According to methodology
❚ Develop the actual state w/o the project
❙ Definition of the relevant period
❙ Description of b.a.u.
❘ technology development
❘ investment behaviour
❘ energy consumption, emissions
❘ efficiency, change of efficiency
❙ Calculation of relevant GHG emissions under
this development during the period
Project Calculation
❚ Describe the project
❚ Calculate the development/emissions
with the project according to formulae in
methodology
❚ Compare emissions baseline ↔ project
❚ ⇒ Emissions reduction
Special: how to Deal with Electricity?
❚ Displaced electricity (savings)
❙ emissions of existing grid
❙ calculate operational margin (OM)
❚ Additional electricity generation
❙ emissions factor of alternative generation
❘ calculate e.g. combined margin (OM + building
margin) = methodology
❘ for accepted methodologies see
http://cdm.unfccc.int/methodologies
Costs of CDM Projects ⇒ Size
❚ Costs for the CDM project cycle are
considerable
❙ Elaborate PDD 20’000 USD
❙ Validation 15’000 – 50’000 USD
❙ Registration 10’000 USD
❙ Monitoring, Verification 10’000 – 20’000 USD
❙ Total approx. 70’000 USD
❙ Goal
❘ transcation costs < e.g. 1 USD: 70’000 t CO2e /y
❘ transcation costs < e.g. 2 USD: 35’000 t CO2e /y
Companies with Caps
❚ Companies with caps get allowances
❚ Cap = “account” = unchangeable
❚ When is the cap insufficient?
❙ Strong growth
❙ Less measures to reduce GHG emissions as
necessary
❙ Postponing of measures
❙ Expecting, that reductions outside the
company are cheaper
Context with the Market
❚ Emissions higher than cap: buy
allowances
❚ Emissions lower than cap: sell
allowances
❚ EU-ETS: trade platform for EU
Allowances (EUA)
❚ Other possibility to increase account of
allowances: buy certificates (e.g. CER)
→ restrictions apply
The CER Market
❚ Who needs CER?
❙ Companies with quantified emissions limitation
❙ Industries, power plants
❙ New: airline companies in connection with the EU
❚ Who buys CER?
❙ Brokers, funds
❙ Rarely others
❚ Consequences
❙ There are intermediaries between project owner and
client
⇒ fees/gains apply → gap between buying and selling
The Costs of CER
❚ Costs of the project
❚ Transaction costs
❚ Intermediaries

variation
profit margin trader

transaction costs

project costs
The Price of CER I
❚ Price is made at stock exchanges
❚ E.g. EEX, CCX
❚ Price influenced by demand and supply
❚ Caps for companies are fix
❙ when economy booms, they need certificates
❙ when economy is in recession, they need less
or no certificates
❚ Therefore the price depends among other
things on the course of the economy
The Price of CER II
Euros/tonne CO2e
Price CER

Source: www.eex.de
Market Size
❚ Demand of CER depends mainly on
economy and development of industries
in OECD countries
❚ In Europe, number of CER that may be
bought by companies is limited by decree
❚ Therefore the market is not unlimited
and the price for CER is lower than the
price for EUA
Price Comparison I
Euros/tonne CO2e
Price EUA
for 2010
20

15

10
Price Comparison II
Euros/tonne CO2e
Price CER
for 2010

15

10
Price Expectations, EUA I
35

[Euro/tonne]

30

25

20

15

10

0
EUA 2009 EUA 2010 EUA 2011 EUA 2012
Price Expectations, EUA II
35

[Euro/tonne]

30

25

20

17.26
16.25
15.62
15.24

15

10

01.07.2008 04.09.2009

0
EUA 2009 EUA 2010 EUA 2011 EUA 2012
Price Expectations, CER I
35

[Euro/tonne]

30

25

20

15

10

0
CER 2009 CER 2010 CER 2011 CER 2012
Price Expectations, CER II
35

[Euro/tonne]

30

25

20

13.60
13.48

13.28
13.28
15

10

01.07.2008 04.09.2009

0
CER 2009 CER 2010 CER 2011 CER 2012
The CER Market I
❚ Market illusions
❙ Great volume – great earnings
❙ Easy money making - large profits
❙ Etc.
❚ Reality
❙ Hard work
❙ Difficult (impossible?) to find investors
❙ Sell CER in a highly competitive market
❙ Prices (→ profits) currently low
The CER Market II
❚ Who needs CER?
❚ Who buys CER in the market?
❚ Role of intermediaries
❚ Role of stock exchange
Who Needs/Buys CER?
❚ Mainly companies (industries) with a cap
❚ Only in case emissions > cap
❚ How do industries buy CER?
❙ Core business is production
❙ Commitment (emissions ≤ cap) is “only” legal
problem
❙ Realise measures pays → looked at in industries
❙ Buying CER → broker
❙ Investing in projects abroad: no way
Investors in the CER Market? I
❚ Investors
❙ Industries
❘ Unknown business
❘ No qualified personnel
❘ No intention to employ specialised staff
❘ Risks!
❙ ⇒ They don’t invest in projects
❙ Who else?
❚ Funds
❙ They mostly have their focus
❙ Want to have a choice of projects, no singularities
Investors in the CER Market? II
❚ Rare exemption
❙ companies, who bring a technology
❙ e.g. biomass gasification
Intermediaries in the CER Market
❚ CER are a tradable good
❚ CER market thus classical field of brokers
❚ They specialise in buying/selling tradable
goods
❚ They know markets and developments (?)
❚ They buy big lots of CER from various
projects and thus allocate risks
❚ They do not work free of charge …
What is the Problem? I
❚ What risks exist?
❚ Project risks
❙ The project will not be registered
❙ The project is registered, but not implemented
❙ The project generates less CER than expected
❙ The monitoring fails
❙ Company goes bankrupt or similar
❙ Quality of CER
❙ …..
What is the Problem? II
❚ Market risks
❙ Demand declines
❙ Supply rises (‘overproduction’ of CER)
❙ Prices fall
❙ General framework changes (post Kyoto treaty)
❙ …
❚ Country risks
❙ Risk premium (= price reduction)
❙ Hesitation to make contracts at all (stability of
the country)
New Developments
❚ What happens after “Kyoto”?
❙ New treaty is under negotiation
Dec 2009: Copenhagen
❙ Possible goal: 2020 = 1990 – 20%
❙ (Kyoto: 2010 = 1990 – approx. 5%)
❙ 2011: airlines included in EU-ETS, as far as
they start or land in a country of the EU
❙ Allowances to companies (EU-ETS) will be
partially auctioned → prices of CER may rise
Uncertainties I
❚ What happens after “Kyoto”?
❙ How are goals formulated?
❘ Absolute?
❘ Relative? (to what?)
❘ How will growth be considered?
❙ Who is included in quantified limitation
scheme?
❘ Which countries?
❙ How is trade organised, i.e.
❘ does the CDM exist further?
❘ Is usage of CER still limited?
❘ Significance of technology transfer?
Uncertainties II
❚ What happens after “Kyoto”?
❙ How do countries react
❘ Cap and trade?
❘ Inclusion of (big) industries only?
❘ Inclusion of traffic?
❘ Inclusion of private households?
❙ How do capped industries react?
❘ Do they realise more measures?
❘ Do they displace production?
Attempt to Outlook
❚ The problem of climate change is far away
from being solved
❚ The GHG mitigation process will go on
❚ The number of included countries will rise
❚ Trade will continue, the potential market
might grow
❚ Thus realising GHG mitigation projects has
always three advantages for project owners
❙ Improvement of efficiency and productivity
❙ Reduce future risks (cost reduction)
❙ Evtl. participate in trading of GHG reductions