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ACME

Applying CLEANER PRODUCTION to MULTILATERAL ENVIRONMENTAL AGREEMENTS

CDM
Clean Development Mechanism
(and trading of CERs)

SESSION 5
United Nations Environment Program
Division of Technology Industry and Economy

Swedish International Development Agency

OUTLINE

Objectives of this session

1/ Overview of the Clean Development Mechanism (CDM)


> What are the objectives and purpose of CDM ?

2/ Basics
> What are the key concepts ?

3/ Organisation of a CDM project


> What are the different steps of a CDM project ?

4/ Statistics
> Where are we now with the CDM and how are emission
reduction credits traded on the markets?

5/ Opportunities for industrials


> What are the challenges and opportunities for industrials in
developing countries ?
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OVERVIEW

About Kyoto Protocol

Signed in 1997; in force since 16 February 2005.


Ratified by more than 130 countries
> Major non participants: USA and Australia.

Commits Annex 1 countries to reducing greenhouse gas emissions.


> GHG emissions may be reduced by ~ 5% below 1990 levels in 2008-2012;
> Individual, quantified emission targets for each industrialized country;
> 6 greenhouse gas covered: CO2, CH4, N2O, HFC, PFC, SF6.

3 flexibility mechanisms for financing emission reduction abroad.


> Clean Development Mechanism (CDM)
> Joint Implementation (JI)
> International Emissions Trading (ET)

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OVERVIEW

CDM: the basic idea

What is the Clean Development Mechanism (CDM) ?


> A mechanism that allows Annex B Countries to undertake GHG
emission reduction projects in non-annex B countries, and to use the
achieved emission reductions to meet their own emission goal.
> In CDM projects, the Annex B country fund the project and provides
any necessary know-how and technology transfer to the non-annex B
country where the project is implemented.
> CDM works because emission reductions are many times more
expensive to achieve in Annex B countries than in non-Annex B
countries (the opportunities for emission reduction are bigger there).
Make difference between Annex I and Annex B countries!
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OVERVIEW

Examples of CDM projects

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OVERVIEW

Introduction to the carbon market

Two main commodities traded in the carbon market


> Emission allowance (AAU and EUA)
> Project-based emissions reductions (CER and ERU)

Four different major markets


> Kyoto Protocol
> EU Emissions Trading Scheme
> Canada Greenhouse Gas Offset System
> Japan (voluntary trading system)

Developing
Countries

CDM

Annex 1 countries
EU 25
Canada
Japan
Other OECD

Certified Emission Reduction


(CERs)

JI

Emission Reduction Units


(ERUs)

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Central and
Eastern Europe

OVERVIEW

CDM organisation and objectives

Rules, modalities and procedures of CDM are defined in:


> Kyoto Protocol;
> Follow-up decisions of COP;
> Decisions of CDM Executive Board.

CDM EB (Executive Board):


> Responsible for further development of CDM rules, and supervising
implementation;
> Composed of 10 members + 10 alternates;
> Reports to the COP (Conference of the Parties).

Twin objectives of CDM:


> Help Annex 1 countries meet their objectives in a cost-effective way;
> Contribute to sustainable development of the host country.
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BASICS

Additionality and baselines

A project is eligible for CDM if greenhouse gas emissions are reduced


below those that would have occurred in the absence of the CDM project.
GHG emissions
(tCO2eq)

1. Validation of project design,


baseline and monitoring plan

2. Verification / Certification
of emission reductions

Emissions baseline

ADDITIONAL
EMISSION
REDUCTIONS
Emissions after the project
Years

Project implementation
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BASICS

Conditions for additionality

Investment A financially more viable alternative to the project


barrier would have led to higher emissions.
Technological A less technologically advanced alternative to the
barrier project (lower risk) would have led to higher
emissions.
Barrier due to Prevailing practice or existing regulatory or policy
prevailing requirements would have led to implementation of
practice technology with higher emissions.
Other barriers Competitive disadvantage, managerial barriers

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BASICS

CDM requirements

Emissions Lower emissions, no leakage, no double counting.


Financial No ODA, no GEF funds, should lead to additional
money inflow.
Regulatory The project should exceed regulatory standards.
Technological CDM should promote appropriate new technologies.
Investment CDM should make the IRR of the project an
acceptable one. The project should not have
happened without the CDM revenue.
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BASICS

Where is CDM applicable ?

Renewable energy

Waste management

> Wind power


> Solar
> Biomass power
> Hydro power

> Capturing of landfill methane emissions to


generate power
> Utilisation of waste and waste water
emissions for generation of energy

Energy efficiency measures


> Boiler and steam efficiency
> Pumps and pumping systems
> Efficient cooling systems
> Back pressure turbines
> etc

Electrical energy saving


1 kWh = 0.8 ~ 0.9 kg CO2
Power generation (waste heat / renewable)
1 MW = 4.000 ~ 5.000 t CO2
Coal saving
1 kg = 1.3 ~ 1.6 kg CO2

Cogeneration in industries having both


steam and power requirements

Fuel oil saving


1 litre oil = 3 ~ 3.5 kg CO2

Power sector
> Induction of new technologies which are
efficient (thermal)
> Reduction in technical T&D losses

Fuel switching

NG based power generation


1 kWh generation = 0.35 ~ 0.45 kg CO 2
1 kg NG burning/saving = 2.4 ~ 2.5 kg CO 2

> From fossil fuel to green fuel like biomass


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ORGANISATION
CDM project cycle

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ORGANISATION

Content of the PIN (Project Idea Note)


Standardized format for the PIN
> the type, size and location of the project;
> the anticipated total amount of GHG reduction compared to
the business-as-usual scenario (which will be elaborated
later in the PDD, while describing the baseline);
> the suggested crediting life time;
> the financial structuring (indicating which parties are
expected to provide the projects financing);
> the projects socio-economic or environmental
impacts/benefits;
> history of the project regarding other donors and funding
tenders;
> capacity of project developer to invest in the project.

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ORGANISATION
Content of the PDD

Standardized format for PDD Project Design


Document (main document in the CDM cycle)
A. General description of the project
B. Setting of the baseline
C. Duration of the project / Crediting period
D. Setting of the monitoring plan
E. Estimation of GHG emission reductions
F. Environmental impacts
G. Stakeholders comments
Annex 1: Contact information on participants in the project
Annex 2: Information regarding Public Funding
Annex 2: Baseline information
Annex 3: Monitoring plan

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ORGANISATION

PDD: CDM baseline methodologies

Approved > Statement of which approved methodology has been


methodology selected;
> Description of how the approved methodology will be
applied in the context of the project.

New
methodology
(to be submitted
to UNFCCC
secretariat)

> Description of the baseline methodology and


justification of choice, including an assessment of
strengths and weaknesses of the methodology;
> Description of key parameters, data sources and
assumptions used in the baseline estimate, and
assessment of uncertainties;
> Projections of baseline emissions;
> Description of how the baseline methodology
addresses potential leakage.

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ORGANISATION

PDD: Approved methodologies

Statistics on October 2005 from http://cdm.unfccc.int/ (UNFCCC)

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ORGANISATION

PDD: Methodologies submitted

Statistics on October 2005 from http://cdm.unfccc.int/ (UNFCCC)

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ORGANISATION

PDD: Crediting period

Carbon credit (CER) can be generated as from now:


> Banking by buyer for use towards compliance in 2008-20012.
> Banking by project proponent for sale in later years.

Crediting period:
> Usually starting the later of CDM registration, and start of project operation.
> Fixed crediting period of up to 10 years. OR
> Renewable crediting periods of up to 7 years (maximum 3 x 7 years).

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ORGANISATION

Host country approval


Formal confirmation by the Designated National
Authority (DNA) of the hosting country that the
project meets sustainable development objectives.
Sustainable development criteria set by the DNA:
> Social well being: employment, alleviation of poverty, etc.
> Economic well being: investment consistent with needs of
the people.
> Environmental well being: impacts on the local and global
environment, pollution, etc.
> Technological well being: transfer of environment safe
and sound technologies.

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ORGANISATION
Validation

Independent assessment by a Designated


Operational Entity (DOE) that project meets
criteria of the Kyoto Protocol.
DOE shall:
> Review the PDD and supporting documentation;
> Conduct site visit;
> Interact with stakeholders;
> Source other relevant additional information from
various sources;
> Publish the PDD in the web for international stakeholder
comments.

A successfully validated project can be submitted


to CDM Executive Board for registration.
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ORGANISATION
Registration

Automatic registration of submitted projects


unless 3 members of the CDM Executive Board or
one of the parties involved file a request for review
within a delay of:
> 4 weeks for small scale project;
> 8 weeks for large scale project.

Registration fees are payable to the Executive


Board by the project participants depending on the
quantity of emission reductions:
> Between 5.000 to 30.000 US$.

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ORGANISATION
Last steps

Last steps of the process:

> Project financing.


> Monitoring emissions.
> Validation and certification.
> Insurance of CERs.

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ORGANISATION

Transaction cost of the CDM


Estimation of transaction costs during the
CDM cycle
> PDD ~ 15.000 to 30.000
> DNA approval ~ 5.000
> Validation ~ 10.000
> Registration ~ 5.000 to 30.000 US$
> Administration ~ 0,2 US$ / CER
> Verification 5.000 per turn

At CER prices of 10 /t CO2 equivalent, the


viability threshold of projects is at ~ 10.000
CERs/years.
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ORGANISATION

CDM additionality tool

STEP 0 Preliminary screening based on the starting date of the project activity
Start date of claiming credits for project should precede date of registration
CDM consideration proved = PASS
STEP 1 - Identification of alternatives consistent with current laws and regulations
If proposed CDM project is the only alternative left, the project is non-additional

An optional flow
chart, adopted by the
executive board in
October 2004,
applicable to any type
of project for the
demonstrate of
additionality.

More than one alternative = Pass


STEP 2 - Investment Analysis

CDM financially attractive

STEP 3 - Barrier Analysis


No barriers , the project is non-additional

CDM financially not attractive

CDM faces Barriers = PASS

STEP 4 - Common Practice Analysis (credibility check)


If similar activity can be observed with no essential difference, the project is non-additional
No similar activity or similar activities present but difference in circumstances = PASS
STEP 5 - Impact of CDM registration
If CDM benefits have no impact, the project is non-additional

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PROJECT ACTIVITY
IS ADDITIONAL

ORGANISATION

Fast track for small-scale CDM project

Why do we need a fast track?


> Process not worth it for small projects (high transaction costs);
> Many small projects deliver significant local sustainable development benefits;
> Small-scale technologies are some of the most promising for solving the long term
problem of climate change (e.g. solar; wind; fuel cells);
> CDM might lose public support if rules are biased toward large capital-intensive
projects.

Size limits for small-scale projects


> Electricity generation from renewable sources, up to 15 MW.
> Energy efficiency projects saving, up to 15 GWh p.a.
> Project reducing emissions up to 15.000 t CO2eq p.a.

Small-scale projects benefits from simplified rules and procedures


> Simplified PDD;
> 14 pre-approved baseline methodologies (feb. 2005);
> Same operational entity may undertake validation and verification / certification;
> For small-scale projects, sufficient to demonstrate that barriers would have led to higher
emissions in absence of CDM.
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STATISTICS

Upswing of CDM (1/3)

Statistics on July 1st 2006 from http://www.cd4cdm.org/ (UNEP)

Carbon market in 2005:


> In 2005, global carbon market transactions worth 9,4 billion.
> In 2005, CDM projects transactions worth 1,9 billion.

Statistics of CDM (as per June 2006):


> 225 projects registered, for an average of 70 millions CERs/Year.
> 36 projects submitted for registration, for an average of 4,6 millions CERs/Year.
> 860 projects known to be prepared for registration.
> 165 proposed baselines methodologies were sent to the CDM EB for approval,
60 approved, 66 rejected and 39 are pending.

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STATISTICS

Upswing of CDM (2/3)

Number of projects registered or known to be prepared for registration:

End of 2004

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End of 2005

STATISTICS

Upswing of CDM (3/3)

Annual volumes (million tCO2e) of project-based emission reductions


transactions and annual average price in US$ per tCO2.

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STATISTICS

Registered projects (1/3)

Statistics on July 1st 2006 from http://cdm.unfccc.int/Statistics/

Registered project by host countries*

Expected average annual CERs from


registered projects by host countries*

* List of host countries:


Argentina, Armenia, Bangladesh, Bhutan, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Ecuador, El Salvador, Fiji,
Guatemala, Honduras, India, Indonesia, Israel, Jamaica, Malaysia, Mexico, Morocco, Nepal, Nicaragua, Panama, Papua
New Guinea, Peru, Republic of Korea, Republic of Moldova, South Africa, Sri Lanka and Viet Nam.

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STATISTICS

Registered projects (2/3)

Statistics on July 1st 2006 from http://cdm.unfccc.int/Statistics/

Registered project by Annex 1


countries involved

Registered project by scope

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STATISTICS

Registered projects (3/3)

Statistics on July 1st 2006 from http://www.cd4cdm.org/ (UNEP)

CDM projects in each sector

CERs until 2012 in each sector

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OPPORTUNITIES
Who is buying CER?

Buyers based in Europe (41% in 2004, 56% in 2005) and Japan (36%
versus 38%) dominate the market for project-based transactions.
January 2004 to December 2004
Overall volume: 110,0 million tCO2e

January 2005 to March 2006


Overall volume: 453,5 million tCO2e

* as a share of volume contracted.


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OPPORTUNITIES
Location of projects

Asia accounted for the largest share (73%) of contracted volume of


project-based transactions signed.
January 2004 to December 2004

* as a share of volume contracted.


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January 2005 to March 2006

OPPORTUNITIES
What is being sold ?

Technology share of emission reduction projects:


January 2004 to December 2004

* as a share of volume contracted.


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January 2005 to March 2006

OPPORTUNITIES

How are CERs sold ? (1/2)

Contractual arrangements vary depending on how risks are


located between Buyer and Seller:
> Project risk - whether or not the project will adequately perform and
produce the expected amount of emissions reductions.
> Country risk - whether the political and investment climate of host
country is stable.
> Regulatory risk whether or not the project will ultimately be deemed
additional and registered by the CDM Executive Board.

Various contract features are used to allocate these risk between


the buyers and the seller:
> Guarantees;
> Upfront payments;
> Penalties and damage clauses;
> Default clauses;
> Disbursement schedules.
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OPPORTUNITIES

How are CERs sold ? (2/2)

Carbon funds
available through

Prices of CERs
What determines
prices of CERs ?

> International tenders for CDM projects


> Voluntary corporate initiatives
> Multilateral Funds
> EU commitments for carbon purchase
> Bilateral negotiations with the consortium of buyers
> Average price of 7,5 US$ / tCO2eq in 2005 (3 to 14 US$).
> Likelihood Seller will deliver verifiable reduction on schedule.
> Creditworthiness and experience of the project developer.
> Technical and technological viability of the project.
> Liabilities the Seller is willing to take in the event the project fails to
deliver including penalties for non-delivery and willful default / gross
negligence.
> Vintages: in some markets, early vintages (until 2012) are priced
higher because the Buyers willingness to pay in order to meet
compliance.
> Likelihood of host country approval.
> Environmental and social compliance and additional benefits.

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OPPORTUNITIES

Future demand for CERs

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CONCLUSION
Next steps

CDM is real
> 225 projects registered and 60 methodologies approved;
> In 2005 CDM projects transactions worth 1,9 billion.

Industrials in developing countries have a role to play


> Prices for emissions reduction are increasing;
> Buyers and Sellers are innovating ways of addressing risk;
> Early entrants will have a clear advantage.

Challenges for CDM in the next years

> DNA approval capacities;


> High methodology rejection rates;
> Annex 1 companies may only be interested in buying CER, not in investing in
project (exception for some Japanese companies);
> Gap between CER and EU allowance prices (50% even for registered projects);
> Interpretation of national policies in baseline methodologies;
> Availability of reliable and authentic data for establishing baselines.
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CONCLUSION
End of session 5

Thank you for your attention


Any questions?

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