Transcript The Kyoto Protocol and Overview of the Clean Development

The Kyoto Protocol and Overview of
the Clean Development Mechanism
Mini workshop - NBSSI
December 2005
Solomon K. Quansah, KITE
Aim of mini workshop
• To help establish GHG emission reduction projects
that are consistent with national sustainable
development goals, particularly projects in the energy
sector.
• Develop national capabilities so that persons in
developing countries are capable of analyzing the
technical and financial merits of projects and
negotiating possible finance agreements with Annex
I countries and investors.
The Kyoto Protocol
The Kyoto Protocol is an agreement made under the United
Nations Framework Convention on Climate Change
(UNFCCC).
Countries that ratify this protocol commit to reduce their
emissions of carbon dioxide and five other greenhouse
gases, or engage in emissions trading if they maintain or
increase emissions of these gases.
The Kyoto Protocol now covers more than 160 countries
globally and over 55% of global greenhouse gas (GHG)
emissions.
Clean Development Mechanism
The Clean Development Mechanism (CDM) is an arrangement
under the Kyoto Protocol allowing industrialised countries with a
greenhouse gas reduction commitment (so-called Annex 1
countries) to invest in emission reducing projects in developing
countries as an alternative to what is generally considered more
costly emission reductions in their own countries.
In theory, the CDM allows for a drastic reduction of costs for the industrialised
countries, while achieving the same amount of emission reductions as without
the CDM. In practise, however the emission reductions may be less with CDM
than without it and may lead to unsustainable practices.
The CDM is supervised by the CDM Executive Board (CDM EB) and is under the
guidance of the Conference of the Parties (COP/MOP) of the United Nations
Framework Convention on Climate Change (UNFCCC).
CDM Institutions
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UNFCCC secretariat/ “CDM Team”
COP/MOP
Executive board
Panels and working groups
Validators/Verifiers
Project Participants
Project facilitators
Brokers/Consultants
CER buyers
Modalities and Procedures
http://cdm.unfccc.int/Reference/Documents/cdmmp/English/mp
eng.pdf
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Definitions
Role of the COP/MOP
Executive Board
Accreditation & Designation of Operational Entities
Designated Operational entities
Participation requirements
Validation and registration
Monitoring
Verification and certification
Issuance of CERs
CDM key points
• A CDM project activity is mostly a part of a larger
project
• CDM is available for emissions mitigation projects and
certain sequestration projects
• CDM is market based
• CDM is project based
• CDM outputs are Certified Emissions Reductions (CER)
= 1 tonne CO2 equivalent
• CERs give annex 1 countries possibility to emit one
tonne of CO2 = globally neutral
CDM Project Cycle
Sustainable
Development
outputs
Designated
National
Authority
Baseline Study
In Project
Design
Validator
AE > DOE
EIA
Public
stakeholders
Feasibility
study
Buyers
Brokers/
Investors/funds
Full Project
Design
Document
Executive
Board
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MONITORING
Project appraisal
Process of project identification and design
• Concept – Project Identification Note (PIN)
• Pre-feasibility screening
• Feasibility (technical, financial, legal etc.)
• Project Design Document (PDD) is required to
register a CDM project
• www.cdmguide.org
Refer to www.cdmguide.org
Project appraisal
Elements of the project appraisal (SSN)
• CDM assists Annex 1 countries in meeting their
emissions reduction targets in return for
income for credits derived from projects that
contribute to sustainable development
….so sustainable development
Project appraisal
• CDM Requirements
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Has the country ratified the Kyoto Protocol?
Does the country have a functioning DNA?
Does the project contribute to SD? - more
Does the project result in GHG reductions?
Are the emissions reductions real and measurable?
Is the project additional?
Does the project result in a diversion of ODA?
Is the project mitigation or A/R sinks?
No nuclear!
• Feasibility
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Does the technology work?
Is there capacity to install, operate, and maintain the technologies?
Does the finance work?
What are barriers (financial, technical, capacity, institutional, normative etc.)?
Any other risks?
Project appraisal
• A/R? An A/R CDM project activity is an aforestation or reforestation
measure, operation or action that aims at achieving net
anthropogenic GHG removals by sinks.
• “Aforestation” is the direct human-induced conversion of land that
has not been forested for a period of at least 50 years to forested
land through planting, seeding and/or the human-induced
promotion of natural seed sources.
• “Reforestation” is the direct human-induced conversion of nonforested land to forested land through planting, seeding and/or the
human-induced promotion of natural seed sources, on land that
was forested but that has been converted to non-forested land. For
the first commitment period, reforestation activities will be limited
to reforestation occurring on those lands that did not contain
forest on 31 December 1989.
Project appraisal
Sustainable Development
• What does the Ghana DNA say?
• Gold Standard projects?
Project appraisal
Local/regional/global environment
• Water quality and quantity
• Air quality (emissions other than GHGs)
• Other pollutants: ( toxicity, radioactivity, POPs, stratospheric ozone layer depleting gases)
• Soil condition (quality and quantity)
• Biodiversity (species and habitat conservation)
Sub total
Social sustainability and development
• Employment (including job quality, fulfilment of labour standards)
• Livelihood of the poor (including poverty alleviation, distributional equity, and access to essential
services)
• Access to energy services
• Human and institutional capacity (including empowerment, education, involvement, gender)
Sub total
Economic and technological development
• Employment (numbers)
• Balance of payments (sustainability)
• Technological self reliance (including project replicability, hard currency liability, skills
development, institutional capacity, technology transfer)
TOTAL
Project appraisal
Does the project result in GHG emissions?
• What would happen without the project
activity (baseline scenario)?
• What would happen in the project activity
(project scenario)?
Project appraisal
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First step appraisal tool – does the project activity reduce
emissions?
The first step would be to consider a simple baseline for
the project. The simplest place to begin is to consider
the boundary for your project and to decide what is
happening now in your project boundary (plant or area
of activity) or rather what is the status quo. (In the case
where the project introduces a service new to the area,
the technology that would normally have been used and
its emissions constitute the baseline.)
The emissions from this status quo are considered as an
initial estimation of baseline emissions (please note: this
is a lesson you will be asked to unlearn later). The next
step would be to estimate the emissions from your
candidate project activity. Are the emissions of the
project activity lower than the baseline emissions for the
same level of activity? If the answer is yes, then your
project does reduce emissions of GHGs.
Project appraisal
Real and measurable
“The process of prediction and subsequent monitoring
and refining applies to the emissions from the project
activity…
it follows that the parameters that are required to
calculate the actual emissions reductions, can be
monitored and accurately measured over time.
The difference between the baseline emissions and the
emissions from the project activity will, of course,
amount to the measured reductions in greenhouse
gases as a result of the project.”
Reference from toolkit.
Project appraisal
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Simple discounted cash flow analysis: Project Base Case
Discounted cash flow analysis
Years
Capital costs
Planning and feasibility
Technology
Training and commissioning
Sub-total
Operating costs
Energy and water
Labour
Maintenance
Decommissioning
Sub-total
Income
Sale of product
Other income
Sub-total
Total
Internal Rate of Return
Net Present Value
Nominal Payback Period
0
1
2
3…
10…
21
Project appraisal
Is the project additional?
• What would have happened in the absence of the
project activity?
• Additionality test: Standard tool may be applied
• Investment analysis (IRR/NPV/Payback of base-case
i.e. without emissions reductions) is this
conservatively below the investment threshold?
• Barrier tests (are there technical, normative,
investment, other barriers)
Project appraisal
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Tools for Users: Additionality decision tree
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Yes
No
Is the project profitable under current market conditions
this will depend on the project owners’ credit profile and
the type of investor?
No
Yes
Are there other barriers to the project or its technology
being implemented despite the project showing a viable
rate of return?
Yes
Project likely to be additional
No
Project is not likely to be additional
Is the project in response to/compliance with
policy/national/provincial/state/ regional/local and/or
corporate legislation/policy/targets?
Project appraisal
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Tools for
Users:
An Eligibility Checklist
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Is your project nuclear? NO Is your project LULUCF? YES - ? [ reading on page ]
Is your country a non-Annex 1 country? YES [ 
Appendix]
Has your country ratified the KP? YES [
www.UNFCCC.int]
Does your project contribute to your country’s sustainable
development? YES - [ Module 16]
Does your country have a DNA in place? YES [
www.unfccc.int]
Does your project impact the environment negatively and
if so, will it comply with your country’s EIA requirements? YES
- [ Module ?]
Will your project reduce/avoid GHGs? YES [Modules ?
and ?]
Will this reduction/avoidance be real and measurable? YES
- [ditto]
Will this reduction/avoidance be additional to the BAU
scenario? YES [ditto]
Will your project divert ODA? NO -
Project appraisal
Technological Feasibility
• Does the technology work?
• Is the technology mature?
• Is the technology new to the region?
• Will the technology work in the region?
• Is there capacity to install, operate, and
maintain the technologies?
Project appraisal
Financial Feasibility:
• Does the finance work?
• Is the rate of return/Net Present Value/Payback
period sufficient to interest the investor?
Project appraisal
Barrier Assessment:
• What are the barriers (financial, technical,
capacity, institutional, normative etc.)?
• Do these barriers imply changes in interest of
investors?
• Technology issues:
– is the project greenfield or retrofit?
– Is the technology new to the region or is there
existing experience/track record in the region?
Project appraisal
Risk Assessment:
– Risks?
– Projects and CDM projects in particular are all
about risk and risk mitigation….
– Go to Presentation on Risks
Elements of the CDM project
Elements of the CDM project
Project size
• Small-scale and “regular”
• Size determines project design requirements
and parameters
• See separate presentation on small scale
project activities…
Elements of the CDM project
Project boundary
• Definition: “The project boundary shall encompass all …emissions …
of (GHG) under the control of the project participants that are
significant and reasonably attributable to the CDM project activity.”
• What’s inside and outside the project boundary?
• What emissions are directly as a result of the project?
• What emissions can be considered as “leakage”?
• Which leakage must be included and which can be excluded?
• Definitions: http://cdm.unfccc.int/Reference/Documents/Pdd
Glossary/ English/pddgloss
Elements of the CDM project
New and existing baseline methods:
• Small-scale projects are dealt with top-down –
baselines are already set.
• “regular” size projects can make use of existing
baseline methodologies.
• If the baseline has not already been approved
new baseline methodologies can be proposed follow guidelines at: cdm.unfccc.int
Sustainable Development and the DNA
approval
SD and the DNA approval
The essential elements:
• Approve that project activities contribute to
host country SD
• Cede CERs to project participants
• Voluntary: promote country projects, locate
sources of funding etc.
SD and the DNA approval
Project concept identification and description:
• Introduction
SD and the DNA approval
Project concept:
• Project Name, owner and beneficiaries
• Project Objective and Background on the identified
proposed activity
• Proposed Project Activities
• Proposed Project Outputs
• Background information on the institutional
arrangements
• Eligibility Criteria: Please give information to illustrate
that the project is eligible (see above)
• Cost of project.
PINs
PIN Template
Refer to Toolkit Module 19 for general advice in CDM Toolkit at
www.cdmguide.org
CDM
Toolkit
Module
Ref
Notes
Section One: Project description and underlying project feasibility
Classify your project type (according to Schedule A in Module 10
10
Which greenhouse gases does your project reduce? (CO2 / CH4 / 10
N2O / HFCs / PCFs / SF6)
Give a brief description of your project (approx 10 lines), including
the objective of the project, its proposed activities, the technologies to
be employed, the technologies replaced and project location (country,
region and town).
10
Provide details of the project developer, including: organisational
category, experience, function(s) in project, contact person
10
This item is of more relevance to external
investors, or for a large organisation with fairly
autonomous subsidiaries or divisions.
Describe how the project fits into the objectives of the developer
organisation. Include any details required in internal project
motivation applications.
10
This item is more likely to be
relevant to internal decision makers.
Does the project have the necessary permits, licenses, rezoning applications
for the plant, site or technology?
11,13,16
PINs
Section Two: Technology
Describe the technology to be used in the project,
together with the technology this will replace
(business as usual)
11
Provide examples of the ability of the technology
to perform in similar circumstances (a case history)
11
PINs
Section Three: Greenhouse gas reduction and baseline
Describe your project baseline (5 lines)
14
What is the expected crediting lifetime of the CDM
activity? Does this differ from the underlying project’s
duration?
14
Describe your projects boundary, including a diagram
where possible.
14
Give an estimate of your project’s anticipated GHG
reductions expressed in tCO2e per year of project
duration. Include a summary of relevant calculations.
14
Is your project likely to be small scale or regular? If
regular is there an approved methodology for your
project? If small scale, does your project involve any
unusual interpretations of the rules and procedures?
14
PINs
Section Four: CDM Requirements
Confirm that the host country has ratified/acceded
to the Kyoto Protocol
16, 12
Does your project have an Annex 1 partner from a
country that has ratified the Kyoto Protocol?
16, 12
Has the host country established a DNA with rules
and procedures for approval? If not, give an
indication of when is this likely to be operational.
16, 12
If your project financing structure includes ODA,
describe your argument for Financial Additionality
15
Describe (15 lines) your main arguments for the
project’s additionality, referring to barrier evaluation
(technical, financial, institutional, capacity etc)
10, 13,
14
Note that this is not
necessarily a pre-requisite,
but some investors may
prioritise this.
PINs
Section Five: Financing
What are the expected IRRs of both the project base
case and CDM project?
12
Attach Cash flow schedules (or other appropriate
financial analysis).
12
Describe the anticipated finance structure giving details 12
of financing sources, such as the amount anticipated
from CER revenues.
List both secured and required financing partners
together with the amount and type of finance (e.g.
CER purchasers, equity, debt, bridging finance)
12
Give an indicative required-price of the CERs.
12
You can use the cash flow
analysis tools developed
in Module 12. Include
both base case and CDM
project analyses.
PINs
Section Six: Contribution to Sustainable Development
Describe the sustainable development impacts of 16
your project (10 lines).
Is your project in compliance with the host
country’s requirements for sustainable
development? (If the host country has not yet
established these requirements, use Gold
Standard requirements as a proxy.)
16
PINs
Section Seven: Project partners
Describe the anticipated architecture of your
project (5 lines).
18
List each of your project partners providing:
organisation category; contact person; credentials
(experience in the case of a technology partner,
and financial standing in the case of a financial
partner); their interest or main activities in the
project
18
PINs
Section Eight: Implementation
What is the anticipated commissioning date of
your project?
12, 14,
15
What are the major barriers and risks facing your
project at this point?
11, 12,
13, 14,
15, 16,
17, 18
You may want to exclude
this item for release to an
external investor
List any capacity resource needs identified, and
where these are to be sourced (internally or
externally)
11, 12
You may want to exclude
this item for release to an
external investor