bilateral agreements for sector crediting

Bilateral Agreements for Sector Crediting

Workshop:

“Reform efforts for the international carbon

market: CDM, bilateral offsets and beyond”

05.06.2013

Bonn, Haus der Geschichte

© ECOFYS | |

Content

Preliminary results of the research project

“The fragmentation of the carbon market and options for

counteraction” (FKZ: 3712 41 507)

> Project objectives

> Country and sector selection

> First considerations for benchmarks and agreements

Carsten Warnecke, Hanna Fekete 05.06.2013

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Current situation

> Carbon market does not provide incentives for mitigation

activities in non-LDCs

– EU ETS restrictions for CERs from non-LDC CDM projects

apply

– Design and implementation of new market mechanisms are

still pending

> Fragmentation tendencies emerge

– CDM’s role as common standard for the indirect linking of

schemes decreases

– Regional schemes and standards gain in importance

> Gap phase with low activity might result in loss of expertise and

structures which is required if ambition and demand increases

> NMM needs pilots and testing of approaches starting now to

ensure practical readiness in time

05.06.2013 Carsten Warnecke, Hanna Fekete

© ECOFYS | |

Project objectives

> Theoretic research to develop approaches based on a bilateral

crediting system that allows pilot activities

> Pilots shall develop towards new market mechanism while based

on an upscaled continuation of CDM-like activities

> Activities shall have a

– sectoral coverage based on benchmarks

– high level of environmental integrity

– generate net emission reductions

> Demand for „reduction units“ could be created based on bilateral

agreements between Parties as long as markets are not available

> EU ETS in article 11a (5),(6) even considers bilateral agreements

as an option in case in case no new international agreements on

climate change has been agreed

> Open to further ETS and regional markets to join the initiative


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Approaches

> Project shall

– Identify suitable countries and sectors within these countries

– Develop initial sector approaches including proposals for

benchmark concepts

– Elaborate preliminary recommendations for the design of such

bilateral agreements

– And recommend actions on the level of policy makers


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COUNTRY AND SECTOR SELECTION

- Bilateral Agreements for Sector Crediting -


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Sector and country selection - approach to

country selection


2. Below 30 € / tCO2

1. Global importance

2. Regional importance

Upper Middle Income Countries

3. Activity level

4. Ambition

level

Selected countries for

individual assessment

rating

exclu

sio

n

Shortlisted countries

Indicators

Absolute GHG emission level

Political stability, good integration in the region

CDM and NAMA activities, MRV activities

International GHG reduction pledge, national RE and EE targets

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Country selection - Results

> Chile

– High involvement in NAMA concepts

– Very good relationship between Chile and Germany

– Orientation towards liberal markets

> South Africa

– High level of ambition

– High engagement in international processes and key role on African

continent

– Openness to carbon pricing


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Sector and country selection - approach to sector

selection

> The aim is to identify

– general importance

– individual suitability of sectors

> Indicators for importance and suitability of sectors include

– share of the sectors of national emissions

– existing experience regarding mitigation activities

– inclusion in national mitigation plans


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Sector selection - Results

> Chile – Electricity sector

– Good data availability

– Priority in national plans

– Activities needed to support a long-term positive transformation

> South Africa – Low income housing sector

– Emphasising pilot character of the project

– Important co-benefits for population

– Some experience in CDM for building sector in South Africa

– Low income housing is a priority in national plans


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FIRST CONSIDERATIONS FOR BENCHMARKS

AND AGREEMENTS

- Bilateral Agreements for Sector Crediting -


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The benchmark concept


(2) Identification of key performance indicator

(3) Selection of peers for comparison

(4) Collect data of peers for comparison

(5) Measurement of own current performance

(6) Define specific levels

(7) Define an action plan for improvement

(8) Implement specific improvement measures

(9) Evaluate the results of the measures

(1) Definition of the system boundary

Benchmark stringency

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Sector characteristics for BM


Power generation sector Building sector

Data availability Good, no confidentiality issue, grid

EF calculations Difficult

Success in the CDM

well represented; several

methodologies, high share of

projects, first SBL

Limited, low penetration rate,

mostly single measures in buildings

Barriers in the CDM

Large differences in regional

baseline and respective incentive

level

MRV, boundary setting, high

transaction costs, high “signal to

noise ratio”

Size of average

projects in terms of

ERs

Small to very large Small, up-scaling desired but

difficult

Benchmarks in the

EU ETS None, no free allocation None, not covered by the EU ETS

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Benchmark concept development in the power

sector - exemplarily for Chile

> Electricity generation is currently dominated by gas and hydro power plants

> Future capacity additions will likely be based coal to reduce the import

dependence and to respond to demand increases.

> Chile has vast potential of renewable energies including solar potential in the

north, hydro in the south, wind along the coast and geothermal potential in

regions with volcanic activities

> Chile released a law which requires electricity companies with more than 200

MW capacity to have a share of at least 5% of renewable energy in their sales


GRID

Total Installed Capacity Total

GRID Thermal (MW) Hydro (MW) Wind (MW)

SING 4.570 13 0 4.582

SIC 6.680 5.840 196 12.715

AYSEN 21 18 2 41

MAGALLANES 99 0 0 99

Total National 11.370 5.870 198 17,437

Chile‘s power sector in detail

Source: CDEC-SIC 2012

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Benchmarks steps

> Many procedures can be developed following CDM compatible approaches

– definition of the system boundary,

– the identification of the key performance indicator (e.g. tCO2e/MWh),

– the data collection of peers for comparison and monitoring

> Adjustments to approaches seem to be required

– for the selection of peers for comparison to ensure the project-by-

project approach of the CDM is expanded to a sectoral coverage

● geographic scope of the benchmark,

● the size and type of plants to be included,

● the fuel used and

● the existence of a grid connection.

> Stringency level needs to consider own contribution from countries, net

emission reductions


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Benchmark setting approaches

> The use of the current CDM framework:

– Application of the SBL approach and

the CDM tool to calculate the grid EF

– Net emission reduction ensured by

discount on standardised grid EF

> Application of a default value:

– Use of a politically set default value

– Benchmark below the CDM grid emission factor

– Reference e.g. EF of NG fired power plant, various EU ETS phase II NAPs set

such benchmark levels between 0.350 – 0.450 tCO2e/MWh

> Hybrid approach:

– Combination of the above

– RE by default get reduction units according to default value while fossil fuel

based activities apply for benchmark based on the CDM approach

– Incentives also for new NG fired power plants and for efficiency increase in

existing fossil fuel fired power plants


SIC SING

No. of CDM projects using

a grid emission factor 57 5

Operating margin Av. 0.703 0.785

Build margin Av. 0.405 0.652

Combined margin Av. 0.557 0.759

Source: IGES, Ecofys

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BM concept development in the low income

housing sector - exemplarily for South Africa

> CDM experiences show that the needs for

– pragmatic MRV approaches

– valuation of indirect and long term effects

– bundling of less homogeneous single activities to facilitate

reaching a large coverage

> large demand for low cost buildings to supply the growing

population with adequate housing facilities

> government targets for new buildings

> low income housing segment provides free housing to poorest

parts of the population; such houses are usually constructed in a

standard way, resulting in a large number of similar homes

> Lessons learned with the use of the CDM and upscaling

approaches exist


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Benchmark setting approaches

> Performance indicator:

– GHG emissions per floor area vs.

– GHG emissions per standard housing unit

> Peers for comparison

– Buildings with similar service levels

– Segment specific building codes

> Ex-post MRV

– Based on ex-ante agreed higher building standard and

implementation volume


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Outlook on next steps of the project

> What level of

– benchmark stringency,

– GHG quantification accuracy and

– Additionality

would ensure acceptability of reduction units in various demand

systems?

> How can integration in the international processes be ensured to

counteract fragmentation of carbon markets?

> What institutional set-ups are required and what options do exist?

> What are preconditions to reach actual implementation?


© ECOFYS | | Carsten Warnecke, Hanna Fekete

Thank you.

Ecofys:

Carsten Warnecke,

Hanna Fekete

Contact:

[email protected] [email protected]

05.06.2013

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