Download Legal implications of CDM - Capacity Development for the CDM

LEGAL &
REGULATORY ASPECTS
OF THE CLEAN
DEVELOPMENT
MECHANISM
JUAN RODRIGO WALSH
Climate Change and CDM Projects:
Understanding the Legal Issues at stake
Designing and implementing CDM or related Greenhouse Gas
(GHG) reduction projects requires understanding the underlying
legal and institutional frameworks on several planes or levels:
• The International Legal Framework
• Investor Nation Regulatory & Institutional Issues
• Host Country Legal & Institutional Requirements
• Contractual Issues between Investors and Developers
• Contractual Issues related to sale of CERs
Climate Change and CDM Projects:
Understanding the Legal Issues at stake
Designing and implementing CDM or related Greenhouse Gas
(GHG) reduction projects requires understanding the existing
International legal and institutional frameworks:
The International Legal Framework

UNFCC

Kyoto Protocol

COP/MOP Resolutions & Decisions

Executive Board
History of the Negotiations
CLIMATE CHANGE HISTORY
THE KYOTO PROTOCOL:
1980
W.M.O. & UNEP Workshops
1988
IPCC Meeting
Together with the UNFCC, the Kyoto Protocol
constitutes the most important global
agreement on the environment to date.
1990
WORLD CLIMATE Conference
1992
UNCED RIO Conference & UNFCC
1993/6
COP 1 to 3
1997
KYOTO PROTOCOL
1998
COP 4 (Buenos Aires Action Plan)
2001
BONN ACCORDS
2001 COP 7 (Marrakech Accords)
CDM Executive Board set up
The Protocol establishes Emission Reduction
Targets for the period 2008-2012 for
industrialized countries 5,2% below 1990 level
emissions
Kyoto also creates the Clean Development
Mechanism (CDM) for developing countries
Emphasising cooperation and “flexible
mechanisms” to achieve the Protocol’s goals
These mechanisms are:
Emissions Trading
Joint Implementation
Clean Development Mechanism
(ET)
(J I )
(CDM)
GHG Committments undertaken by
Annexe 1 Countries
• The Kyoto Protocol mandates Developed Countries
to reduce overall GHG emissions by 5 % during the
period 2008-2012, against 1990 levels of
emissions.
• Other Annex 1 Countries have committed to greater
levels of reduction:
Some Examples:
• Canada plans GHG reductions of 6 % below 1990
levels.
Current Emissions versus Goals
300
U.S.A.
200
100
0
EU
Japan
Canada
Other OECD
Australia
-100
EE
New EU
Ukraine
-200
-300
Russia
-400
Source: Royal Institute of International Affairs
Flexible Mechanisms Introduced
by the Kyoto Protocol
The
Kyoto
Protocol
establishes
strict
committments for Annex I Countries, allowing
for compliance by means of
“flexibility
mechanisms” :
• Emissions Trading (ET) 2008-2012
• Joint Implementation (JI) 2008-2012
• Clean Development
2000-2012
Mechanism
(CDM)
Emissions Trading (ET)
• Article 17 of the Kyoto Protocolo provides for
emissions trading transactions between Annexe 1
Countries
• All ET Transactions must be supplementary to
national policies adopted by governments
pursuant to the quantifiable emissions reductions
committed to by Annexe 1 Countries
Joint Implementation
• Article 6 establishes that Emissions
Reductions Units may be transferred
between Annexe 1 Countries in the case of
Joint Implementation Projects.
• Joint Implementation Activities must be
complementary to domestic emission
reductions policies.
Clean Development Mechanism
• Article 12 allows for projects to be jointly
executed by developed and developing
countries.
• These activities may start in 2000.
Developed Countries may therefore
invest in GHG reduction projects in
developing countries and utilise the
credits obtained from these reductions
toward compliance with national
committments.
CDM projects must meet the following
requirements:
• Contribute to the sustainable development of
developing countries
• Have a demonstrable effect on climate change
mitigation
• GHG Reductions must be measurable and certifiable
over a period of time
• Environmental Benefits must be permanent and
additional to any that might occur in absence of the
project
CDM requirements
• Acceptability
– Host Country Acceptability
– At an International Level
– For the Investor Nation
• Additionality
– Must be real and measurable
– Must consider existing and future trends
• Externalities
– Must consider social effects and sustainability
– Must consider environmental impacts
What is Additionality ?
• Environmental Additionality
– Emissions reductions must be over and above a “business
as usual scenario”
• Financial Additionality
– Investments must be real. Resources from Annexe 1
Countries must e additional to existing financial
committments and ODA
• Business as Usual Scenario
– Some degree of Technical Innovation required
Carbon Quantification
Additionality = project – Base Line
Carbon storage due to the Project
250
200
tC/ha
150
100
PROJECT - E. globulus (11 year rotation)
BASELINE - Pasture / ex-agricultural land
50
0
0
10
Time (yr)
20
30
Source: Ecosecurities 2002
Other Issues to be Considered in
CDM Projects
• Social Impacts
– Employment:
• Are jobs created ?
– Infrastructure and Know How:
• How does the project contribute to local expertise and
infrastructure ?
• Environmental Benefits
– Other emissions reductions and environmental benefits
Required Phases for CDM Projects
Pre-Investment Phase
Project Design
Base Line Determination
Project Approval
Project Registry
Implementation
Investment & Operation
Verification
Certification
Monitoring
Award of CERs
Pre-investment Phase
Pre Feasibility Criteria
Carbon Issues
Other Considerations
• Project Timeframe
• Overall Environmental Impacts
• Defining the Baseline
•Defining Additionality
• Identifying “Leakages”
• Net Carbon Benefits
• Potential CERs
Biodiversity
Waste management
Watershed Management
• Sustainable Development
• Host Country Approval
• Training requirements
• Technology transfer
Implementation Phase
Validation:
Must be carried out by an Independent Third Party in order to obtain approval as
a CDM Project
Verification:
Must also be carried out by an independent Third Party. Verification requires
periodical control and ex post verification of emissions reductions o carbon
sequestration in sinks
Certification:
Must also be carried out by an Independent Third Party. Certification consists in
a formal, written statement to the effect that, during a certain lapse of time, a
particular project has achieved the targets set for emissions reductions or
sequestration, as verified.
CERs awarded by the CDM Executive Board
What are CERs ?
• Certificates of Emissions Reductions,
measured in tons of CO2. (CERs).
• Emissions Reductions must comply with
the following criteria:
– Measurable, and;
– Verifiable by Independent Thir Parties .
• They must also pass the test of
“Additionality”
Climate Change and CDM Projects:
Understanding the Legal Issues at stake
Designing and implementing CDM or related Greenhouse Gas
(GHG) reduction projects usually requires understanding the
existing legal and institutional framework in the “Investor
Country” or the country of the purchaser of the CERs:
Investor Nation Regulatory & Institutional Issues

Annexe 1 Country

Party to Kyoto?

Domestic CO2 Programme? (ERUPT & CERUPT)

Company to Company
Climate Change and CDM Projects:
Understanding the Legal Issues at stake
Designing and implementing CDM or related Greenhouse Gas
(GHG) reduction projects requires a fundamental understanding
of the legal and institutional framework of the Host Country:
Host Country Legal & Institutional Requirements

Regulatory Requirements for approval

Existence of a Host Country CDM office

Environmental and Regulatory requirements applicable to
the CDM Project

Legal, taxation and other regulatory requirements for FDI
Host Country Approval Process:
The case of Argentina
Environment Secretariat Resolution 169/2001
Establishes the guidelines for evaluation and approval
for projects submitted to the Secretariat acting as “Focal Poi
Projects are subject to independent peer review and external
evaluation
Special “Climate Change Office” ( OAMDL)
Coordination of environmental policies and Negotiating
Positions at UNFCC and COP/MOP meetings
CLIMATE CHANGE MITIGATION
STRATEGY:
The Case of Argentina
Sectors to be given special attention:
Energy Sector,
Land Use, Land Use Change and Forestry Sectors
(LULUCF),
Farming Sector
Waste Management Sector
SMAyDS
OAMDL
Executive Committee
Advisory Comittee

SAyDS
 Sec. of Energy
 Sec. of Industry
 Sec. of Transport
 Sec. of Science &
Technology
 Agriculture
 Foreign Affairs

Business Associations
 Academia
 NGO’s
Sector Committees

Energy, Industry &
Transport
 Forestry
 Farming
 Waste Management
OAMDL FUNCTIONS
• Identify prioritary sectors to implement CDM
projects and activities
•Define CDM Policy
OAMDL
• Establish methodologies and procedures for
identifying, preparing and evaluating projects
• Full cycle management and Host Country approval of
CDM projects
National Climate
Change Programs
• Establish relationships with sources of financing for
projects


Impacts & Adaptation
 Mitigation
 Awareness building &
Participation
CDM Project
Management
Rules for submission of
projects
 Project Design Documents
(PDD)
 Evaluating Institutions
Registry (RIE)
Organization of the National CDM
Authority
• Design of the legal context for the presentation
and management of projects
– Legal requirements
– Policy Issues
• Methodological support for the preparation and
assessment of projects
– Pre/ and feasibility Studies, Standardised Baseline
Studies & Monitoring Programs
– Policy Guidelines
Regulatory Aspects of CDM Projects and
the Climate Change Office (OAMDL)
• Registration and Acreditation of Evaluating
Institutions for National Project Cycle
Assessment
• Adaptation of Project Presentation Documents
and standardized formats (PIN, PDD, etc)
• Evaluation Criteria and Sustainability Indices
• Liaison Offices with Provincial and Local
Governments
• Proposals for simplified Project Evaluation
Technical Support provided by
Climate Change Office
• Colaboration in designing National Climate
Change and Mitigation Strategies
• Coordination of National Climate Change
Programmes, Projects and related research
activities
• Establishment of Project data bases and general
awareness building
• Administrative Management of OAMDL Working
Groups
OAMDL’s Activities
Creation of sector-specific Committees
– Sectors:
•
•
•
•
Energy, Industry & Transport
Forestry
Farming
Waste Management
– Objectives:
• Identify opportunities for projects for potential investors
• Preparation of a strategy for the mitigation of GHG
emissions on a sector-specific basis, in order to achieve the
country’s best mitigation potential for each sector
• Establishment of sector-specific baseline
• Methodological Guidelines for projects
Climate Change and CDM Projects:
Understanding the Legal Issues at stake
Designing and implementing CDM or related Greenhouse Gas
(GHG) reduction projects also requires understanding the legal
implications and potential risks for both Project Developers and
Investors:
Contractual Issues between Investors and Developers

Applicable Rules for FDI

Multilateral or Bilateral Investment Agreements

Taxation & Repatriation of Profits Issues

Technology Transfer & Intellectual Property Issues

Project Due Diligence between Developers and Investors
Who is purchasing Certified Emissions
Reductions (CERs) ?
•
•
•
•
•
Energy Sector Companies
Chemical Companies
Oil & Gas Companies
Paper, Cement, and Steel Industries
Investment Funds
Prices: Which Way?
LEVEL OF
TRADE/ PRICING
SCENARIO
PRICE IN 2010 (US$/Tonne CO2 – expressed in
current prices )
SOURCE
BP AMOCO
HIGH
34.42
MEDIUM
28.05
LOW
22
EU TRADE
58
33
5
Green Paper on GHG Trading Within The EU, European
Commission, 2000.
ANNEX I TRADE
98
78
67
The Energy Journal – Kyoto Special Issue, IAEE, 1999
GLOBAL TRADE
31.5
21
10.5
The Energy Journal – Kyoto Special Issue, IAEE, 1999
CURRENT PRICES
11
3
0.5
Utility Environment Report; Petroleum Economist, Natsource
LLC; Electricity International, Platts; Ecolog; Utility Week;
Reuters; Canada National Post
BP Amoco; The Energy Journal – Kyoto Special Issue, IAEE,
1999.
“High” based on current price of US$27; “Medium” based on
pilot phase upper value of US$22/tonne; “Low” based on pilot
phase lower value of US$17/tonne. Assumed real growth rate of
3.31% p.a. from 2001 to 2020 (average implied growth rate from
model simulations detailed in The Energy Journal.
What is the market paying for
Carbon ?
• PFC - US$ 3.5-5 / Ton CO2 (depending on risk
factors)
• ERUPT - Euro 5-9/Ton CO2
• Institutional Funds – On a one by one
negotiated basis
• Private Corporations - US$ 50cents to $1.50 per
Ton CO2 ( Within or without Kyoto)
• Options (depending on price and timespan US$
25c to 75c/Ton CO2)
ERUPT Results
Project Company
Country and Project ERUs
Municipal Cogeneration
Cluj-Napoca (Romania)
BTG Biomass Technology Group BV A biomass energy portfolio
(Czech)
United Power Co. (joint venture of
Surduc – Nehoiasu Hydro
SC Hidroelectrica SA and Harza
Power Plant (Romania)
Engineering Company LP)
Nuon International Projects BV
Skrobotowo Windpark
(Poland)
Price
per Ton Co2
NV Nuon
924.590
US$ 9,08
522.320
US$ 9,00
612.631
US$ 5,00
583.500
US$ 8,75
www.senter.nl/erupt
Comparison of IRR in Carbon
Projects: Renewable Energy
Country
Project
Romania
Costa Rica
Jamaica
Morocco
Chile
Costa Rica
Guyana
Nicaragua
Brazil
Latvia
District heating
Wind
Wind
Wind
Hydro
Hydro
Bagasse
Bagasse
Biomass
Methane
B as U IRR IRR (w/CER) Increment IRR
10,5
9,7
17,0
12,7
9,2
7,1
7,2
14,6
8,3
11,4
11,4
10,6
18,0
14,0
10,4
9,7
7,7
18,2
13,5
18,8
0,9
0,9
1,0
1,3
1,2
2,6
0,5
3,6
5,2
7,4
IRR
Percentage
9
9
6
10
13
37
7
25
63
65
Source: World Bank 2001
Selling Carbon Credits
• This Phase is usually carried out
simultaneously with the project design
and approval phases
• Early Identification of potential Investors
• Enhanced security and feasibility for
Project
• Direct Negotiations
• Involvement of Brokers: Success Fee for
sale of CERs
Climate Change and CDM Projects:
Understanding the Legal Issues at stake
Designing and implementing CDM or related Greenhouse Gas
(GHG) reduction projects requires understanding the legal
aspects of the Carbon Market and the sale of CERs:
Contractual Issues related to sale of CERs
•
•
•
•
Long term purchase contracts
Brokerage fees
Monitoring requirements, auditing and
Independent Verification
Managing Risk: Insurance
The Way Forward
• The Climate Change Regime has been
controversial
• The Kyoto Protocol has been rejected by the
U.S. as “fatally flawed”
• Entry into force requires at least 55 countries
with 55% of global GHG emissions
• Technical uncertainties (Forestry and
LULUCF)
• Russian ratification?
The Way Forward
• Experience is growing
–
–
–
–
PCF
UK ETS
EU Directives
U.S. State regimes
• Climate Change is a problem that will
not disappear!!