Download CDM overview - Capacity Development for the CDM

CLEAN DEVELOPMENT
MECHANISM:
OVERVIEW
DENR Training Course
November 4-6, 2003
Climate Change Information Center
Manila Observatory
Ateneo de Manila University
Contents
1.
2.
3.
4.
5.
6.
7.
8.
Problem of Climate Change
UNFCCC & Kyoto Protocol
Clean Development Mechanism
CDM Eligible Projects
Environmental Benefits of CDM
Mechanics of CDM
Basics of CDM Financing
Philippine Participation in CDM
1. Problem of
Climate
Change
Rising temperatures results in
changing weather patterns
• Melting polar caps, glaciers
• Shifts in weather patterns
• Increased occurrence of dramatic
weather such as hurricanes
Historic Temperature Data
Temperature change (oC)
Carbon dioxide (ppmv)
Atmospheric CO2 Concentration
and Temperature Change
150
100
50
Thousands of Years ago
0
Climate Change
• Climate change is caused by both natural events (like
volcanic eruptions) and human activities
Human Sources of GHGs
Carbon Dioxide (CO2) – Most prevalent GHG
Methane (CH4) – Second most common, 21x the potency of CO2
Nitrous Oxide (N2O) – 310x the potency of CO2
Other Gases – HFCs, PFCs, and SF6 = range 600 – 23900x potency of CO2
Transportation
Transport
Energy Generation
Industrial Processes
Land Use:
Agriculture & Forestry
GHG and Environmental Impacts
Changes in temperature, weather patterns and sea level rise
Coastal Areas:
Erosion and flooding
Inundation
Change in wetlands
Water Resources:
Changes in water supply
and water quality
Competition/Trans-border
Issues
Agriculture:
Changes in crop yields
Irrigation demands,
Productivity
Forests:
Change in Ecologies,
Geographic range of species,
and
Health and productivity
Human Health:
Weather related
mortality
Infectious disease
Air quality - respiratory
illness
Industry and
Energy:
Changes in Energy
demand
Product demand &
Supply
Philippine Rice Production. Arrows indicate El Niño events.
(source: Food and Agricultural Organization)
Vulnerability
information
systems
El Niño - La Niña
Vulnerability Map
Support for Greenhouse Gas Inventory
Sea level rise
3D modeling and visualization tools are used for
vulnerability assessment, exact location and quantification of
areas which are susceptible to floods due to rise in sea level.
Study area: Northern part of Navotas, Metro Manila
2. UNFCCC and KYOTO
PROTOCOL
United Nations Framework
Convention on Climate Change
Objective of the Convention
“Stabilization of greenhouse gas
concentrations in the atmosphere at a level
that would prevent dangerous anthropogenic
interference with the climate system. Such a
level should be achieved within a time frame
sufficient to allow ecosystems to adapt
naturally to climate change, to ensure that
food production is not threatened, and to
enable economic development to proceed in a
sustainable manner.”
United Nations Framework
Convention on Climate Change
Commitments by the Parties to
the Convention
Parties have common but
differentiated responsibilities.
Division of Parties by Annex
Annex II
Australia / Austria / Belgium /
Canada / Denmark / EC /
Finland / France / Germany /
Greece /Iceland / Ireland /
Italy / Japan / Luxembourg /
Netherlands / New Zealand /
Norway / Portugal / Spain /
Sweden / Switzerland / Turkey
/ United Kingdom / USA
Belarus / Bulgaria / Croatia /
Czech Republic / Estonia /
Hungary / Latvia / Liechtenstein
/ Lithuania / Monaco / Poland /
Romania / Russian Federation /
Slovakia / Slovenia / Ukraine
Non-Annex I Countries = All the Rest of Ratifying Countries
Kyoto Protocol
• The overall emission reduction target for Annex I Parties
as a group is at least 5 percent below 1990 levels, to
be achieved by the commitment period 2008 to 2012 (an
average over the five years).
• The Protocol covers six greenhouse gases (Annex A) CO2, CH4, N2O, HFCs, PFCs, SF6
• The negotiated targets for individual Annex I Parties are
included in Annex B of the Protocol.
Selected Quantified Emission
Limitation (%)
Industrialized Countries
Economies in Transition
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Australia
Canada
EC bubble
(Germany
(Portugal
Japan
Norway
New Zealand
USA
108
94
92
75)
140)
94
101
100
93 ???
Bulgaria
Baltics
Croatia
Czech Republic
Hungary
Poland
Romania
Russia
Ukraine
92
92
95
92
94
94
92
100
100
Kyoto Protocol
• The Kyoto Protocol was adopted at COP-3 in
December, 1997, in accordance with “Berlin
Mandate” of COP-1.
• The Protocol will enter into force when not less
than 55 Parties to the Convention, accounting
for at least 55 percent of the 1990 total CO2
emissions of the Annex 1 Parties, have ratified
the Protocol.
– US: 34%; Russia: 16%; Japan: 8% ;EU:
23%;
– Other Annex 1 Parties 19%
Kyoto Protocol:
Flexibility Mechanisms
Annex I GHG Emissions
Clean Development
Mechanism
Emission Trading
1990 level
Joint Implementation
- 5%
Domestic Actions
Assigned Amounts
Present
day
2012
(BaU)
2012 with
KP
3. Clean Development
Mechanism
Clean Development Mechanism
•
•
•
•
Enables developed countries (known as
Annex B countries) to meet their emission
reduction commitments in a flexible and costeffective manner
Assists developing countries (non-Annex B
countries) in meeting their sustainable
development objectives
Investors benefit by obtaining Certificates of
Emissions Reductions (CERs)
Host countries benefit in the form of
investment, access to better technology, and
local sustainable development
What can the CDM do for
developing countries
• Attract foreign investment to countries
engaged in the trading of CERs
• Increase the profitability of cleaner more
efficient technology in energy, industry, and
transport sectors
• Clean up waste management operations
• Improve land-use strategies and practice
• Contribute to sustainable development of
the host country
What are the Criteria for CDM Projects?
• Sustainable development
– Host country criteria
– Environmental Impact Assessment
– Stakeholder consultations
• Greenhouse Gas (GHG) emission reductions
– Environmental additionality
• Project additionality
• Project viability
– Technologically proven
– Financially sound
• Host country approval
• Project validation and registration
4. CDM Eligible Projects
CDM Eligible Projects
•
•
•
•
•
Renewable energy
Fuel switching
End-use energy efficiency improvements
Supply-side energy efficiency improvements
Agriculture (reduction of CH4 & N2O
emissions)
• Industrial processes (CO2 from cement,
HFCs, etc)
• Sink projects (only afforestation &
reforestation)
Renewable energy
• Solar power
• Hydro power
• Wind power
• Geothermal
• Biomass
• Tidal / Wave power
Renewable energy
• Renewable energy for the grid
• For electricity generation by households or
commercial users
 E.g., Solar home systems, solar water pumps,
photovoltaics, wind battery chargers
 For mechanical energy by households or
commercial users
 E.g. wind-powered pumps, solar water pumps, water
mills, wind mills
Renewable energy
• Thermal energy for households or commercial
users
 E.g., solar thermal water heaters and dryers, solar
cookers, energy derived from biomass for water
heating, space heating or drying
 Biomass combined heat and power (cogeneration) systems
Fuel switching
• For industrial facilities
 From steam or compressed air to electricity
 For buildings
 From oil to gas
 For vehicles
 From diesel to LPG or to CNG
End-use energy efficiency
improvements
• Energy efficiency equipment
 Motors
 Lamps
 Ballasts
 Refrigerators
 Fans
 Air conditioners
 Appliances
 Etc …
Supply-side energy efficiency
improvements
• Generation
– Efficiency improvements at power stations and
district heating plants and co-generation
• Transmission and Distribution
– Examples:
 Upgrading voltage on a transmission line
 Replacing a transformer
 Increased insulation of pipes
Agriculture
• Reducing emissions from agricultural soils
 Use of ammonium sulfate instead of urea
 Use of phosphogypsum in combination with urea
instead of urea
• Reducing methane emissions from
livestock
• Conservation agricultural tillage
• Agricultural land management practices
 Use of composted rice straw instead of fresh rice
straw
Industrial processes
• Methane (CH4) recovery and avoidance from landfills,
coal mines, agro-industries, waste water treatment
facilities
– CH4 has global warming intensity 21-times that of CO2
• Cement production (CO2)
• Electric equipment manufacturing (SF6)
• PFC emissions from aluminum production
– PCF gases have global warming intensity over 6000-times that of CO2
• PFC and SF6 emissions from semiconductor
manufacturing
• Nitrous Oxide (N2O) emissions from adipic acid and
nitric acid manufacturing
– N2O has global warming intensity of 310-times that of CO2
Sink projects
• Afforestation
 Planting trees on agricultural land
 Reforestation
 Planting trees on denuded forest land
Clean Development Mechanism
Types of small-scale projects
that could qualify for fasttrack approval procedures
•
•
•
Renewable energy projects up to
15 megawatts (MW) of output
capacity
Energy efficiency improvements
that reduce energy consumption
on the supply and/or demand side
by up to 15 gigawatt-hours
(GWh)/year
Other project activities that both
reduce emissions at source and
directly emit less than 15 kilotons
(kt) of CO2 equivalent annually
5. Environmental Benefits of
CDM
CDM Project
• Achieves Sustainable Development objectives
for the host developing country
• Reduces GHG Emissions
Simplistic numerical example
Provide electricity for a barangay
• “Business-as-usual” (baseline): Diesel
generator sets
– Cost of project $10
– Emissions 1 tC
• Cleaner project (CDM-eligible): Microhydro
– Cost of project $13
– Zero Emissions
Simplistic numerical example
• CDM Investor (e.g. Japan)
– Invests $3 ($13-$10, difference between
cleaner and business-as-usual project)
– Gains Certificate of Emissions Reduction of 1
tC, which it can meet some of its Kyoto
Protocol commitments to reduce emissions
Simplistic numerical example
WIN – WIN – WIN
• WIN for the host country
– Sustainable development benefit: Cleaner
energy production technology
• WIN for the Annex I country
– Credits for emissions reduction
• WIN for the Global Environment
– Emissions reduction
Additionality
• Additionality is the key eligibility criterion in
CDM projects
You must do something that you would not
have done without the CDM
• Two types of additionality
 Project Additionality
 Environmental Additionality
Project Additionality
• Without the ability to register under the
CDM, the proposed project would be, or
would have been, unlikely to occur
Project Additionality
• Baseline methodology evaluates whether
or not the proposed CDM project activity
would have gone ahead anyway.
• Baseline methodology assesses why the
proposed CDM project activity is less likely
to occur than one or more of the other
possible scenarios.
Environmental Additionality
• If the proposed CDM project activity is not
implemented, a less greenhouse gas
friendly activity would have been initiated
or continued instead.
Environmental Additionality
• A CDM project activity is additional if
anthropogenic emissions of GHGs by
sources are reduced below those that
would have occurred in the absence of
the registered CDM project activity.
-CDM M&P para. 43
Emission Reductions
=
hypothetical baseline emissions
– effective (project) emissions
Environmental additionality and baseline
CO2 Emissions
Additional CO2
emissions reduction
Real, measurable
and long-term
Years
6. Mechanics of CDM
Starting Point: Viable Project
• A potential CDM Project is a feasible
project
 Technologically feasible
 Financially sound
• A potential CDM Project is a project which
has an Environmental Compliance
Certificate (ECC)
CDM Project Cycle
Project Design & Formulation
C
C
I
C
Project Design Document
C
D
4
C
D M
Contents of CDM-PDD
A. General description of project
activity
B. Baseline methodology
C. Duration of the project activity/
Crediting period
D. Monitoring methodology and plan
E. Calculations of GHG emissions
by sources
F. Environmental impacts
G. Stakeholders comments
CDM Project Cycle
Project Design & Formulation
Project Design Document
National Approval
C
C
I
C
C
D
4
C
D M
National Approval
• Approval is by the Designated National Authority
(DNA) for CDM
• Main Criteria for Approval: Does project
contribute to the sustainable development
objectives of the Philippines?
• Sustainable development indicators
• Project type priorities
– Positive list
– Negative list
CDM Project Cycle
Project Design & Formulation
Project Design Document
National Approval
Operational Entity A
Validation / Registration
C
C
I
C
C
D
4
C
D M
Validation
• Designated Operational Entity
• “External Auditor”
• Validates the PDD
– Including the Baseline Study and the
Monitoring Plan
• Recommends whether the project should
be registered as a CDM Project
Registration
• Registration is done by the CDM
Executive Board (presently based in Bonn,
Germany)
• CDM Project Registry
CDM Project Cycle
Project Design & Formulation
Project Design Document
National Approval
Operational Entity A
Validation / Registration
Project Financing
Investors
Monitoring
Project Participants
Monitoring Report
Operational Entity B
Verification / Certification
Verification Report /
Certification Report / Request of CERs
Issuance of CERs
C
C
I
EB / Registry
C
C
D
4
C
D M
Verification
• Verification of monitoring report of
emission eductions by the project
• Verification is done by another Designated
Operational Entity
• Operational Entity certifies the actual
emission reductions by the project
• Operational Entity submits certification to
CDM Executive Board
Issuance of CERs
• Based on the certification by the
Operational Entity, the CDM Executive
Board issues the Certificate of Emission
Reductions
• Official registry of CERs
• CERs are a tradable asset (like stocks or
bonds)
7. Basics of CDM Financing
Total Project Costs and Sources of Finance
Total Project Cost Estimates
•
Investment costs, including development costs, up to
commissioning of project
Sources of Finance to be Sought or Already
Identified
•
•
•
Critical to identify other debt and/or equity finance
Typical sources of funding: international development
banks, government funding, private financing, supplier
credit
CDM contribution = typically 5-15% of total project costs
Financing Options in a CDM
Project
Carbon Funds
• Annex I investors contribute to a mutual
fund
• Mutual fund agrees to buy CERs as they
are produced by the project
• Examples
– WB Prototype Carbon Fund
– Netherland’s CERUPT
How Carbon Funds Work..
Technology
$
Technology
$
Finance
Industrialized
Governments
and
Companies
Carbon Fund
Finance
Developing
Countries and
Communities
CO2 Equivalent
CO2 Equivalent
Emission Reductions
Emission Reductions
Nature of Carbon Financing Contract
Investor
Banks
Equity
Debt
Power Purchase Agreement
$$
Electricity
$
$
Carbon
Credits
Carbon
Fund
2
$$
2
Emission Reduction
Purchase Agreement
Financing Options in a CDM
Project
Emission Reductions Purchase
Agreement
• Annex I investor agrees to buy CERs as
they are produced by the project
Emission Reduction Purchase
Agreement
• Will improve IRRs
• Forward contract
– Payment upon delivery of verified ERs
– Upfront payments are rare
• Will provide a hard currency revenue
• Helps secure financing and reduce project risk
– Future ER payments as collateral for project loans
– Can be paid into an escrow account, protecting
lenders from currency convertibility and transfer risks
How CDM can matter
FIRR
Without CERs
implemented
With CERs
not
implemented
Without CERs not implemented;
with CERs implemented
CER income
0
No CDM
CDM
Impact of Carbon Finance on
Project Financial Rate of Return
Technology
DIRR
Hydro, Wind, Geothermal
0.8-2.6
Methane Kick
Crop/Forest Residues
3-7
Municipal Solid Waste
5-10+
•Revolution in Solid Waste Management
•Important impact on small-holder cropprocessors and animal production
Lessons from PCF: Carbon Prices
Uganda small hydro (5&1.5 MW) remote area
$3.00
Chile: 25 MW hydro run-of-river
$3.50 [ +option]
Brazil sustainable charcoal replacing coal/coke
$3.50
Poland District Heating Fuel Switch – Coal to
Geothermal and Biomass
$3.50
C. America small wind/hydro
$3.50
Romania Afforestation
$3.60 [+option]
Colombia wind farm
$3.50 + 0.5
South Africa Durban waste management
$3.75 + 0.2
Czech small-scale energy efficiency
$4.00
ODA and CDM Funding
• Public funding for CDM Projects be
additional to Official Development
Assistance (ODA), Global Environment
Facility (GEF) provided by Annex I Parties
• Public funding for CDM projects must not
result in the diversion of ODA
• ODA can be part of the project financing
as long as ODA financing does not claim
emission reduction credits (WB PCF)
Emission Reduction Purchase Agreement
ODA
Investor
Non-ODA
Banks
Equity
Debt
Power Purchase Agreement
$$
Electricity
$
$
$$
Carbon
Credits
Carbon
Fund
2
Emission Reduction
Purchase Agreement
2
8. Philippine participation in
CDM
Requirements for the Philippines to
Participate in CDM
• Process of Philippine ratification of the
Kyoto Protocol
• Senate Committee on Foreign Affairs has
sponsored the ratification on the floor of the
Senate, 2nd June 2003 (1st Reading)
• 2nd Reading, Interpellation, 21st October 2003
• Need 2/3 majority of the Senate to concur in the
ratification of the Kyoto Protocol
• Kyoto Protocol ratified, 22nd October 2003
• Senate concurred in the ratification by a
unanimous vote, 19 – 0 (3rd Reading)
Requirements for the Philippines to
Participate in CDM
• Status of efforts to establish CDM
Designated National Authority (DNA)
• Proposal to make the Inter-Agency Committee on
Climate Change (IACCC) as the DNA
• IACCC is composed of: DENR, DOST, DOE, DFA,
DTI-BOI, DOTC, NEDA, DPWH, PAGASA, FMB,
EMB, Philippine Network on Climate Change
(NGO)
Roberto C. Yap, S.J., Ph.D.
Environmental Economist
Climate Change Information Center
Manila Observatory
Ateneo de Manila University
Tel +63 2 426-6144
Fax +63 2 426-6070
[email protected]