Solid waste and the environment

Principles of the Kyoto Protocol

1.2.: Clean Development Mechanism - Overview and Concepts
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 Indonesia?

 Opportunities
 Reality and Issues with CDM
 Next Steps
CDM Context (1)

 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
CDM Context (2)

Benefit of the CDM is

 to help Annex 1 Parties to implement their
commitment to reduce GHG emission in the
most economical way
and
 To help developing countries (non Annex I
Parties) in achieving sustainable development
 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.
 CDM Concept

Developing Country
 Many opportunities for
$
Developed Country projects that reduce
emissions eg
 Govt and companies Investment
 Forestry planting
want to reduce GHG
 Renewable electricity
emissions
 Energy efficiency
 Invest in their own
country  Clean transport
 Invest in a project in  Biomass energy
Developing Country  Project Produces CERs
CERs
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.
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
 CDM Project Examples

End-use energy High efficient lighting; efficient

efficiency cook stoves; vehicle efficiency
Supply-side energy High efficiency turbine
efficiency 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
 Summary of
basic CDM Rules
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
 20 MW renewable energy
 20GWh energy efficiency
Baseline (PDD) Contents (1)

A. General description of project activity

B. Description of baseline methodology
C. Timeline Project
D. Monitoring methodology and Plan
E. Calculation of GHG emission by sources
F. Assessment of Environmental impacts
G. Stakeholder’s comments
Baseline (PDD) Contents (2)

Annex I: Information of the parties participating

in the project
Annex II: Information of public investment
Annex III: New methodology to calculate
baseline
Annex IV: New monitoring methodology
Annex V: Baseline data
Baseline Methodologies

 Approximately 50 baseline methodologies

were approved on the basis of:-
 Business as usual (“BAU”) - future emissions
would been the same as current/historic emissions
and “Additionality”, meaning that the project
would otherwise not have occurred
 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
 Baseline Examples
Project Baseline Approach Type of CDM
Baseline
3 Micro-hydro The 3 communities did not have Market Conditions
Guatemala access to electricity, so emission (technology used
reduction based on displacement is the baseline)
of kerosene
Biomass power Current electricity is fossil fuels BAU
plant and future additions would be
El Salvador similar. Current emissions used
as baseline.
Wind Power, This project is displacing the need Best Available
Honduras for a new thermal plant. Emission Technology
reductions based on average
emissions of typical thermal
plants in previous 5 years +
performance in top 20%
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
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
 CDM Checklist
Project approved by
National Authority? Project validated, Project results in
- consistent with registered real, measurable +
Sustainable Development monitored, long-term
- consistent with national verified and emission
+ local development certified? reductions?
priorities;
- no negative environment
impact; The project does
- has local support not divert ODA.

Project leads to transfer

Are the emission
of new, environmentally
reductions CERs
efficient technologies or
additional? Certified Emission
management practices?
Reductions
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
 How does CDM
work in practice?
 CDM Concept

Developing Country
 Many opportunities for
$
Developed Country projects that reduce
emissions eg
 Govt and companies Investment
 Forestry planting
must reduce GHG
 Renewable electricity
emissions
 Energy efficiency
 Invest in their own
country  Clean transport
 Invest in a project in  Biomass energy
Developing Country  Project Produces CERs
CERs
CDM Project Investment
PROJECT CERs
$9 million $500,000
has emission
reductions and
eligible to produce
CERs

$ $

Project Investors/Financiers:- CDM Investors/Buyers:-

 International or Local
Developers/Financiers
 Cambodian Government
 International Governments
 Multilateral Agencies eg
World Bank; ADB
 Multilateral CDM Funds eg
PCF; CERUPT
 Annex 1 Governments
 Private Companies
 Non-Annex 1 Governments
 Brokers/Traders
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
 CDM examples
Project Project CER Basis of Structure
Cost Partner contribution
Wind Farm $58m $4.05m CER sale @ Annual CER
Honduras $3.50/ton Purchase for 10
years
3 Micro-hydro $320,000 $15,000 Value of Upfront
Guatemala 4,755 tonnes payment
over 10 yrs
Biomass power $2.3m $0.4m Financing of 10% pre; 40%
plant climate finance; balance
Nicaragua friendly = $ for 5 years
component
Run-of river $34m $3.4m 10% total Initial payment
Hydro plant Chile cost + ongoing CER
purchase
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 a local institute
 16.5% IRR without CDM; 18.2% w CER @$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
 CDM Case Study

Indonesia
$ CDM Project
Any Country  3.65MW hydro
looking for CDM  $9.89m capital cost
Investment
$0.4m operating costs
Project 
 Project offsetting diesel
 CDM Project Partner emissions
 Long term CER purchase
 Likely 18,500 CERs
agreement
 basic CER value $92,500
 Equity in project
 Soft loan upfront in looking for CDM
return for CERs later Partner
CERs
Choosing a Host Country
what do investors want?
1. 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
2. Secure investor climate
 Political and economically stability
What could occur that could affect investment?
3. Sound Techno-Economic potential
Based on report conducted by Point Carbon www.pointcarbon.com
What does CDM mean for
Indonesia?
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)
CDM in Cambodia
 Governments, Project Developers and
Investors are seeking out CERs and emission
reduction projects.
 Emission reduction projects exist in Indonesia
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
Reality + Issues w CDM

 CDM may tend towards large CDM Projects

 High transaction costs with CDM projects
BGP experience = $100,000 – 150,000 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 with 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
 CDM Transaction Costs
Preparation and review of the Project
Project completion • Upstream Due Diligence, carbon risk
assessment and documentation: $ 40K

• Baseline : $20 K
Periodic verification & All expenses • Monitoring Plan: $10K
certification $100-150 K
• Verification: $10-25 K
• Supervision: $10-20K
Validation process
• Contract, Processing
•and documentation: $30k

Construction and start up Project Appraisal and Negotiation

• Initial verification at start-up: $15K

Total through Negotiations

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
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
Summary
 CDM presents an opportunity for Indonesia
 developing energy infrastructure;
 forestry is significant activity

 worldwide increased demand for projects that

reduce emissions
 win-win situation for both parties
 Indonesia must be prepared
 Functioning approval body + smooth and
transparent approval process
 need a ‘pipeline’ of projects for investors when
they come investigating
 Need to improve investor climate
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
Acronyms

 Annex 1 countries
 Approx. 40 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