Carbon Markets – CDM project development, 8. August 2010 Jørgen Fenhann

CDM Project Cycle

A set of tools to curb greenhouse gases emissions

Initial Concern

Global Warming

International response

The Kyoto Protocol (Signed 1997, Entered into Force 2005) Developed countries Constraint on Emissions Developing countries No Constraint

Country level

Public policies Intern. Emission Trading

Company / Individual Level

•Transport •Housing •Biofuels •Projects

European Trading Scheme Japanese Voluntary Scheme Project based mechanisms CDM

Certified Emission Reductions (CER)

Different assets

• EU ETS trades EUA – European Union Allowances • CDM (Clean development mechanism) generated CER (Certified Emission Reductions) • IET (International Emission Trading Scheme trades AAU (Assigned Amount Units) 2

The two objectives of the CDM: Cost-efficient mitigation of CC while contributing to SD of developing countries

Host Countries with no GHG emission restrictions Annex I country or enterprise with emission limits Host country specific site Host country specific site Emissions Reduction CER CERs acquired help the achievement of emission reductions Baseline scenario Source: WB Host country benefits from investments flow and technology Project Scenario

Project must provide emission reductions “that are additional to any that would occur in the absence of the certified project activity”

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How is CDM different?

Carbon finance Traditional finance/ investment

CDM Project

Returns/Profit Carbon credits Sustainable development benefits

…layered incremental costs and returns

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Greenhouse Gases under Kyoto Protocol

• • • • • • SIX types of gases with different Global Warming Potential (GWP): Usually expressed in CO2-equivalent: Carbon Dioxide, GWP : 1 Methane, GWP : 21 Nitrous Oxide, GWP : 310 Sulphur Hexaflouride, GWP : 23,900 Perflourocarbon, GWP : 9,200 Hydrofluorocarbon, GWP : 11,700 5

International CDM Criteria

• • • In accordance with the modalities and procedures for a CDM (Annex decision 17/CP.7 – F) − all Parties to the Convention may participate in CDM project activities in a voluntary basis (paragraph 28) - Kyoto Protocol Ratification − Parties participating in the CDM shall designate a National Authority for the CDM (Paragraph 29) Real, measurable and long-term benefits related to mitigation of climate change Reduction in emissions that are additional to any that would occur in the absence of the certified project activity 6

International CDM Criteria

o In accordance with provisions of Annex G - paragraphs 37 (a) and 40 (a) of the CDM M&P, the registration of a proposed CDM project activity can… only take place once approval letters are obtained from Parties to the Convention.

• 40. The DOE shall: −

(a) Prior to the submission of the validation report to the EB, have received from the project participants written approval of voluntary participation from the

Designated National Authority

of each Party involved, including confirmation by the host Party that the project activity assists it in achieving sustainable development

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Project Eligibility Criteria

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

• Assists Parties included in Annex I in achieving emission reduction commitment • Assists non-Annex I Parties in achieving SD and requires approval from host country • Project results in reductions of GHG emissions when compared to the baseline (Additional) • Correctly completed PDD, using the current version and exactly following the guidance • No Official Development Assistance (ODA) • Accurate and reliable information that can be verified in an objective manner 9

The Baseline Assessment

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

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Crediting Period – Renewable & Fixed

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

Operational Lifetime

Renewable: One period (Max 7 yrs..) max. 7 years (2 times) One period (Max 7 yrs..) Renewal: Baseline validation by DOE Fixed: max. 10years (once) One period (Max 10 yrs..) One period (Max 7 yrs..) Renewal: Baseline validation by DOE

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Transaction Costs

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

• Pre-feasibility assessment • PIN & PDD development • Project scale • Complexity • New methodology development • US$ 6,000 to 25,000 12

Project Screening & Design

Institutional Involvement

National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

• Institutions Involved • DNA, Public and Private Stakeholders • Critical Issues • National Sustainable Development Criteria • National Laws • Related Documents (general)   • Project Design Document (PDD) Proof of legal capacity Stakeholder consultation • Letter of Approval (LOA) documentation • Transaction Costs • Processing fee (if any)  Sustainable Development Benefits Description (SDBD) 13

Project Screening & Design

Sustainable Development Criteria

Validation & Registration National Approval Project Implementation & Monitoring Verification Certification & Issuance 3 Dimensions

 Economic  Environmental  Social 14

Activities, Institutions & Documentation

Project Screening & Design National Approval

Validation &Registration

Project Implementation & Monitoring Verification Certification & Issuance

• Institutions • Project developer, consultant • Designated Operational Entity (DOE) • ie: DNV, SGS UK, TÜV-SÜD, JCI, etc.

• CDM Executive Board • Documentation • PDD • Validation Report (basis for registration

Critical Issues

 Validity of Baseline calculation  Methodology  Assumptions   Additionality/Baseline Monitoring Plan Must respond to all issues raised by the DOE 15

Project Screening & Design National Approval

Transaction Costs

Validation &Registration

Project Implementation & Monitoring Verification Certification & Issuance

• Transaction Costs: • Validation costs: • US$ 10,000 – 40,000 • Registration costs

Annual reduction (ton CO2 – eq)

<= 15.000

> 15.000 y <= 50.000

> 50.000 y <= 100.000

> 100.000 y <= 200.000

> 200.000

Registration costs ($)

5.000

10.000

15.000

20.000

30.000

No Registration fee for LDC

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Activities, Institutions & Documentation

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

• Institutions • Project developer, consultant • Documentation • Monitoring Protocol as per PDD • Quality Assurance Protocols • Equipment maintenance • Staff trainings • Emergency procedures etc.

• Meter calibrations • Submit records to buyer • Costs • Dependent on project complexity, monitoring plan requirement

Critical Issues

 Data archiving   Observe timelines strictly Adhere to PDD requirements (monitoring protocol)   Deviations as per procedure Basis for third party verification 17

Activities, Institutions & Documentation

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

• Institutions Involvement • Project developer, consultant

Critical Issues

• DOE (must be different, for normal large Scale CDM projects)  Project must prove to DOE that data monitored has • Related Documentation: • Monitoring Report • Verification Report  been done according to the monitoring protocol Data quality • Transaction Costs (verification) • US$ 2,000 – 15,000 18

Activities, Institutions & Documentation

Project Screening & Design National Approval Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

• Institutions Involvement • CDM EB through the CDM Registry • Project Participants • Project developer, consultant • DOE • Related Documentation: • Request for issuance • Certificate of Emissions Reduction • Verification Report

Critical Issues

 Who owns the CER?

 All verification issues adequately addressed 19

Project Screening & Design National Approval

Summary

Validation & Registration Project Implementation & Monitoring Verification Certification & Issuance

     CDM project cycle follows specific predefined steps involving various documentation and players Key documentation to provide needed reassurance: Project Design Document, LoA, Validation report and Verification report The key players are: Project developer, DNA, DOE and CDM Executive Board The emission calculations are based on the project baseline and in accordance with approved or proposed methodologies There are transactions costs as associated with the carbon asset development which vary with the type and complexity of the project 20

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Thank you!!

More information: http://uneprisoe.org

http://cd4cdm.org

http://cdmbazaar.net

http://cdmpipeline.org

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