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Clean Development Mechanisms: Role
in the Climate Policy & Design of
projects
Lazare Nzeyimana
Department of Water and Environment
[email protected]
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
1- Introduction: Climate Change History
• Historical remarks
– Svante Arrenius – Theoretically argued the correlation between
levels of greenhouse gases and atmospheric temperature
– 1930s – academic discussion without any real impact
– 1970/80s – Other more acute problems… Oil shocks, CFCs ect..
• 1987 – Bruntland Commission, ”Our Common Future”
• 1988 – Establishment of the IPCC (Intergovernmental Panel on
Climate Change
• 1992 – Agenda 21 and the Rio conference – led to UNFCCC
– United Nations Framework Convention on Climate Change
• 1997 – The formulation of the Kyoto Protocol (KP)
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
The Kyoto protocol (KP)
• Historical remarks
– Entered in to force on 16th of February 2005 when Russia signed
and approaved the protocol
– At least 55 parties of the UNFCCC, accounting for at least 55% of
the Annex 1 countries CO2eqv-emissions in 1990
– As of 14th of January 2009, 184 countries and one regional
economic integration organization (the EEC) have deposited
instruments of ratifications, accessions, approvals or acceptances.
– 63.7% of the total CO2 emissions for 1990 of the Annex I Parties
have ratified the Protocol.
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
The Kyoto Protocol (KP)
• Separates Annex 1 countries and non Annex 1 countries
– Annex 1 countries – Developed economies and economies in
transition according to UNFCCC
– Non Annex 1 countries – Less developed economies according to
UNFCCC
• Obligations for an Annex 1 underwriter of the KP
– Emission reduction targets for the period 2008 – 2012 (-5% in total
for all Annex 1) compared to the base year 1990
– Setting up of national greenhouse gas inventory for 1990 and
forward with yearly reporting
– Implement national programmes for implementation of a climate
friendly society including informational activities
– Setting up of specialized entity that deals with all Kyoto related
matters
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
The Kyoto Protocol
• Content
– An Annex 1 country is assigned AAUs (Assigned Amount Units)
equal to their 1990 emissions minus their respective emission
reduction target
Number of AAUs = Total ton CO2eqv1990 – Total ton CO2eqv
reduction2008-2012, yearly
– Each country is obliged not to emit more CO2eqv than number of
held AAUs +/- purchased/sold other emission rights through Kyoto
flexible mechanisms
– This means the system has a flexibility, enabling Annex 1 countries
to fulfil obligations (quantified emission limitations) through market
mechanisms
– Market mechanisms enables cost efficient emission reductions
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
The Kyoto Flexible Mechanisms
1. International Emission Trading (IET), Cap and trade - AAUs
2. Joint Implementation (JI) - ERUs
3. Clean Development Mechanism (CDM) - CERs
•
All mechanisms to keep greenhouse gases at set level within
specified time period!
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
International Emission Trading (IET) Cap and trade
• All Annex 1 countries are given a certain amount of emission
allowances (corresponding to a cap)
– AAU – Assigned Amount Unit, equivalent to emissions in base
year 1990
– Tradable between countries as bilateral trade
– Transferable through JI or CDM project mechanisms
– Cap is lowered for each trading period
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Example of International Emissions
Trading
Country A&B both emits
100 000 ton CO2 equivalents
The Kyoto allocates
95 000 AAUs (Assigned Amount Units) each
Deficit of AAUs
5 000 AAUs
Two choices to fulfill Kyoto obligations:
1. Buy 5 000 AAUs for market price (95 000 AAUs + 5 000 AAUs = 100 000 AAUs = actuall
emissions)
2. Reduce emission with 5 000 ton for the cost of X EUR/ton (95 000 AAUs = 100 000 ton – 5000
ton = 95 000 ton = actual emissions)
3. Reduce emissions with 10 000 AAUs and sell the 5000 in surplus (95 000 AAUs – 5000 AAUs =
90 000 AAUs = 100 000 ton – 10 000 ton = 90 000 ton = actual emissions)
Country A (Selling)
Cost for reducing
emission
Market price per AAU
€ 5 - 30
Country B (Buying)
Cost for reducing
emission
€5
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
€ 30
Clean Development Mechanism (CDM)
CDM - Project based mechanism of the Kyoto protocol
– An Annex 1 country can use emission reductions from a project in
non Annex 1 country to fulfil required emission reductions
– The Annex 1 country is referred to as financing party and the non
Annex 1 country as the host country
– CO2 equivalent – Certified Emission Right (CER)
– When the project has been approved by the CDM executive board,
CERs are issued and transferred to the financing party
– In reality increases the cap, but also increases the system
boundaries
– An emissions reduction in a country without quantitative emission
limitations will still result in a net zero balance of the cap
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
CDM Statistics
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
CDM Statistics
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
CDM Statistics
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
2- Actors and stakeholders
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
UNFCCC institutions in the project
cycles
CDM projects structure
– CDM Executive Board
– Designated National Authorities (DNA)
– Designated Operational Entities (DOE)
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Commercial actors in the project cycles
1- Profit driven organizations – who does what?
– Project finance institutions (Development banks, commercial
banks)
– Buyers of credits
– Project developers
2- Market participants– who does what?
– Trading sector participants
– Brokers
– Financial speculatory actors
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
3- The market system
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Carbon Exchanges
• EUAs traded in many exchanges that have clearing
services
– EUA Contracts, spot trade
– Financial contracts such as futures for EUA
• Nordpool
• European Energy Exchange – EEX
• European Climate Exchange – ECX
• Financial sector involved!
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Non compliant sector
Carbon Off-setting
– Company goodwill/profiling
– Individuals (ex. transport)
– Can be purchased from other than UNFCCC
projects
• The New South Wales GHG abatement
scheme
• Chicago Climate Exchange
• Gold Standard – Quality projects, may increase
value of ERUs/CERs
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
The carbon market system in the EU - flow of CO2
allowances and cash
Financial
Institution
Project financing
AAUs for
Annex 1
country
ERUs Track II
UNFCCC
Project financing
JI Committee
CDM Board
CERs
Carbon financing –
ERU payment
Carbon financing –
CER payment
Buyer of
CER/ERU
ERUs Track I
JI
Developer
JI
Focal Point
ERUs
CDM
projects
CERs
EUA, AAU
from NAP
End user, Trading sector
participant
Non Annex 1 country
EUA, AAU,
ERU, CER
Trader/Broker
Annex 1 country
CO2 allowance
EUA, AAU
Carbon Credit Exchange
EUA, AAU
Finacial Flow
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
4- The projects
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
CDM Project lifecycle
Project Developer
Financial Institution < --- >
Registration
1
2
3
4
Find suitable projects
Screena projects, short list
Write PINs
Send PINs to DNA
Find suitable projects
Screena projects, short list
5
Find financing
Project developer Due Dilligens
8
Apply for necessary permits in
the CDM host country
Write PDDs
Negotiate on financing
Write ERPA, Emissions rights
purchase agreement
Sen PDD to DOE
9
Implementation
10
11
12
13
14
15
DOE (Designated
Operational Entity)
CDM-Board
Register an account in the country
where the credit reciveing company
operates or in EU ETS
Register PIN
Feasibility study/Due Diligence
of shortlisted projects
6
7
Buyer of CERs (Broker/trader)
DNA (Designated National
Authority), host country and
investing country
Negotiate on financing
Write ERPA, Emissions rights
purchase agreement
Apply to DNA for letter of
approval both in project host
country and country of the
company that recieves the
CERs
Start implementing the project
Procure technology
Construction
Launch of GHG reducing
project
Make project public based on
PDD
Decision on financing
Find buyer of CERs or save to trade
Write letter of approval
Cash transaction to project
developer
Apply for registration of the
project by the CDM board
Controlling of GHG reducing
effect
Controll verification
Monitor and capitalize on
investment
Validate PDD
Register project
Verification of GHG reducing
effect /cannot be done by the
same DOE that has validated
and registered the project
Trade or use CERs
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Issue CERs to registered
account of the buyer of the
CERs
The PDD
Content of the PDD
– Choice of methodology
– Applicability
• Scenarios, definitions and cases
– Baseline
• Forward scenario for emissions
• Identification of alternative scenarios
• Project boundaries and activities
• Project emissions and leakage
• Additionality
– Monitoring methodology
• Specifications of monitoring parameters for
measurements
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Methodologies
Different types of methodologies (2009)
– CDM project activities (larger projects)
• 76 approved large scale methodologies
• 40 approved small scale methodologies
– Afforestation and reforestation CDM project activities
• 10 approved large scale methodologies
• 5 approved small scale methodologies
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Example of CDM methodologies
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AM0036 “Fuel switch from fossil fuels to biomass residues in boilers for heat
generation”
AM0001 “Incineration of HFC 23 waste streams”
AM0031 “Baseline Methodology for Bus Rapid Transit Projects”
AM0035 “SF6 Emission Reductions in Electrical Grids”
AR-AM0002 “Restoration of degraded lands through
afforestation/reforestation”
AR-AM0004 “Reforestation or afforestation of land currently under
agricultural use”
AR-AM0008 “Afforestation or reforestation on degraded land for sustainable
wood production”
AMS I.B. ”Mechanical energy for the user with or without electrical energy”
AMS I.C. ”Thermal energy for the user with or without electricity”
AMS III. B. ”Switching fossil fuels”
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
PDD emissions
Project emission calculation
ERy = BEy − PEy − LEy
Where:
– ERy = Emission reductions during the year
y (tCO2/yr)
– BEy = Baseline emissions during the year y
(tCO2/yr)
– PEy = Project emissions during the year y
(tCO2/yr)
– LEy = Leakage emissions during the year y
(tCO2/yr)
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
To pass the additionality test
Argumentation
Additionality
Criteria
Evidence
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Bureaucracy…
Rationale
–
–
–
–
Tracability
Transparency
Measurability
Equality
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Services
Examples where SWECO can offer
services:
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–
–
–
–
Compilation PDDs
Feasibility study of projects
Technical Due Diligence
Financial Due Diligence
Negotiation with buyers (ERPAs)
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
To sum up ….
Sweco
Buyer
Seller
CDMMarket
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA
Thank you very much
Asante saana
ADVANCED INTERNATIONAL COURSE IN LOCAL ENVIRONMENTAL MANAGEMENT IN URBAN AREAS 2010 AFRICA