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Stock-taking on GEF Engagement in Carbon Markets UNDP MDG Carbon (Part I) Marcel Alers, PTA, Climate Change Mitigation GEF Case Studies / Removing Barriers (Part II) John O’Brien, RTA, Climate Change Mitigation Meeting on GEF-5 and Carbon Finance Washington DC, 15 November 2010 0 UNDP and Climate Finance GEF Unit Climate Change MDG Carbon Portfolio of climate change mitigation [and adaptation] projects Capacity building, technical assistance and commercialization of carbon projects UN REDD Montreal Protocol Unit Avoided deforestation pilots and support to international dialogue Portfolio of ozone depleting substance projects with large climate benefits Combining and Sequencing Climate Finance Additional platforms include: Territorial Approach, Community Based Adaptation, Green Commodities Facility, & others 1 Today’s UNDP Team GEF Unit Climate Change MDG Carbon Marcel Alers Principal Technical Advisor, Climate Change Mitigation Robert Kelly UNDP GEF, Arab States Oliver Waissbein MDG Carbon, Finance & Legal John O’Brien UNDP GEF, Europe and CIS Noel Soriano UNDP GEF, Asia Pacific 2 MDG Carbon Mission Mission: • Create market-enabled environments • Develop proof-of-concept, demonstration carbon finance activities 3 core objectives: • Access. Expanding to under-represented developing countries • MDGs. Promoting sustainable development outcomes • Scale. Promoting replication and solutions at scale 3 MDG Carbon Focus Areas and Activities Market Enabling Grant Based Model Project Development Cost-Recovery Model Activity Pillar I Activity Pillar II Activity Pillar III Activity Pillar IV Policy Dialogue Capacity Building New Meths & Instruments Project Development Activities Thematic Area I: Project-Based Carbon Finance (CDM/JI) GEF-5 Climate Change Thematic Area II: Sectoral Crediting & Trading Mechanisms Thematic Area III: Unaddressed Sources & Sinks of GHGs 4 MDG Carbon: 3 Thematic Areas Synergies / Linkages Thematic Area I: Project-Based Carbon Finance (CDM/JI) Thematic Area II: Sectoral Crediting & Trading Mechanisms Thematic Area III: Unaddressed Sources & Sinks of GHGs • • • • Discrete project activities Addressing existing imbalances in CDM/JI Well suited to LDCs Opportunity to develop programmatic approaches • Emerging modality for carbon finance at scale, addressing entire national sectors (cement, buildings) Forerunner to domestic market mechanisms Well suited to MICs and EITs • • • • • Sources and sinks of emissions currently not covered by international agreements Examples: ozone depleting substances, peatlands Voluntary carbon markets as a stepping stone 5 Combining and Sequencing Climate Finance: Life Cycle Management of Refrigerators Energy Efficient Market Transformation/ Early Retirement Current Funding Sources: • GEF • MLF (pilots) • Innovative financing mechanisms Usage Phase ODS Life-Cycle End of Life/ ODS Destruction Industrial Conversion/ Manufacture of ODS-Free, Low-GWP Appliances • • • Current Funding Sources: MLF CERs (HFC 134a) VERs (HCFC 141b) Waste Management Replacement of unit Current Funding Sources: • VERs • MLF (pilots) • Innovative financing mechanisms 6 Part II Case Studies Removing Barriers to enable private sector carbon markets to work properly John O’Brien John O’Brien, Regional Technical Advisor Climate Change Mitigation [email protected] Washington D.C., November 15th 2010 7 Carbon Market has grown and grown but has it been a success? 1. Why the private sector carbon market has not fully worked over the period 2003-2010 2. What are the barriers to a full functioning private sector carbon market 3. Case Studies – Kyrgyzstan Small Hydro & Other 4. Concluding Thoughts 8 Only FOUR countries make up 70% of the private sector carbon market! Location of CDM Projects • 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012 • 50% of all issued CERs are from 50 projects (over 2000 projects registered to date) • Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to 2012 • Africa has largely been forgotten by the CDM Ex: Geographical imbalance in the CDM 9 The CDM was supposed to stimulate billions of dollars of investment in emission reduction projects – What happened in reality? GHG HFC23 N2O Project Sector HFC22 Production Nitric & Adipic Acid Production CH4 Landfills, Coal-mines, Gas Networks, Biogas SF6 Magnesium Production CO2 These CDM Projects have quick pay-back periods: Normally 3 years or less Carbon pays for 50% to 100% of project cost! Typically high IRR Renewable Energy Typically longer payback periods: 5 years and greater Forestry Energy-efficiency Larger upfront capital requirements 10 Despite high potential carbon finance for EE has not taken off … 11 A number of barriers have stopped carbon market from really flourishing … Barrier Barrier Explained … Awareness Barriers Lack of awareness of the benefits of carbon finance at local/sub-regional level. Not well understood. 2/3 of countries with less than 10 CDM projects. Policy Barriers Lack of Government Policies to favor CDM or JI – or to attract investment in general. Policies need to create a favorable investment environment. Regulatory Barriers Lack of Approval Mechanisms – DNA not always established or effective. Approvals take time. (Government approval and CDM EB approval) Opportunity Cost Barriers Carbon Finance is only a small part of project revenues in most co2 reduction type projects. Senior management needs to focus on other issues, not on generating CERs/ERUs. 1212 A number of barriers have stopped carbon market from really flourishing … (Part 2) Barrier Barrier Explained … Risk Guarantee Risk guarantee insurance is either very difficult or very expensive to obtain. Transaction Cost Barriers Transaction costs in the carbon market are too high. It simply should not cost $150-200,000 usd plus to develop and register one single project. Financial Barriers Carbon Market was lots of trading and little financing. With few exceptions, an ERPA does not provide sufficient collateral to obtain a bank guarantee - debt markets look for traditional guarantees. Equity wants a higher return to compensate for the higher level of risk. Uncertainty Barriers Would you invest your money in a carbon finance project in 2010 when there is so much uncertainty surrounding the future of the carbon market post2012. 1313 UNDP Barrier Removal Activites to Overcome Carbon Market Barriers in Europe & CIS region incl. Central Asia fall into two categories … Project Development Market Enabling Kazakhstan – Roundtable on Kyoto & 1 day Training seminar to Kaztransgaz (GEF EE lighting and EE buildings project and wind project) Ukraine - Lugansk Landfill Gas – Methane Capture Project Uzbekistan - Gas Recovery from Pipeline Project with UzTransGaz Kyrgystan – Discussions on carbon finance opportunities and elaboration of project ideas (GEF EE Buildings & Small Hydro) Kyrgyzstan - Small Hydro Project (pending due to political reasons) Tajikstan – Roundtable on carbon finance opportunities and identification of possible projects (GEF Renewable Energy project) New CDM Project Ideas Programmatic CDM for Small Hydro in Georgia (GEF Renewable Energy project) Turkmenistan – Discussions on carbon finance opportunities and elaboration of project ideas (GEF EE Buildings) Programmatic JI : EE Lighting in the Russian Federation (3 x GEF EE Projects (new)) Uzbekistan – Assistance with establishing the DNA and elaboration of project ideas (GEF EE Buildings) PoA EE Buildings (Uzbekistan & Kyrgzstan) UNDP employed a Full-Time carbon specialist for Central Asia for 2 years 1414 Lessons Learned by UNDP in developing Carbon Finance projects Project Development (CDM, JI) moves much slower than you might expect as many projects face unexpected problems and delays; The actual number of emission reductions achieved by projects can often by much less than originally estimated - strong due diligence is critical; New types of staff with experience in carbon finance are required in UNDP (typical grant model that UNDP is used to does not apply to carbon finance – cost recovery model is more service oriented); It is critical to select project partners very carefully (i.e – no large multi-national companies but also no ‘one man and a dog’ companies); UNDP should work in countries where the private sector carbon market does not work and with project types that are not widely implemented in these countries; (i.e – no 51st landfill gas project in Brazil or 60th wind project in China) 1515 Capacity Building Business Plans Where is the overlap? Feasibility Studies Projects Finance - Debt Awareness Carbon Finance Carbon Finance Project Development Market Enabling Finance - Equity Policies What goes here? Finance – Revolving Fund Regulations GEF Removing Barriers to Energy-Efficiency, Renewable Energy, Sustainable Transport LULUCF Legislation Opportunity Cost New Approaches - PoA - NAMAs - Sectoral Trading - REDD Financing – ERPA prepayment Financing – Risk Guarantee Studies & Reports on carbon finance 16 Conclusion : Now is an ideal time to get involved in the post-2012 carbon markets Thank You! 17