CLEAN DEVELOPMENT MECHANISM:OVERVIEW

DENR Training CourseNovember 4-6, 2003

Climate Change Information CenterManila Observatory

Ateneo de Manila University

Contents

1. Problem of Climate Change

2. UNFCCC & Kyoto Protocol

3. Clean Development Mechanism

4. CDM Eligible Projects

5. Environmental Benefits of CDM

6. Mechanics of CDM

7. Basics of CDM Financing

8. Philippine Participation in CDM

1. Problem of Climate Change

Rising temperatures results in changing weather patterns

• Increased occurrence of dramatic weather such as hurricanes

• Melting polar caps, glaciers• Shifts in weather patterns

Historic Temperature Data

150 100 50 0

Thousands of Years ago

Tem

per

atu

re c

han

ge

(oC

)

Car

bo

n d

ioxi

de

(pp

mv)

Atmospheric CO2 Concentration and Temperature Change

Climate Change• Climate change is caused by both natural events (like

volcanic eruptions) and human activities

Human Sources of GHGs

Transportation

Energy GenerationIndustrial Processes

Land Use: Agriculture & Forestry

Carbon Dioxide (COCarbon Dioxide (CO22)) – Most prevalent GHGMethane (CHMethane (CH44)) – Second most common, 21x the potency of CO2

Nitrous Oxide (NNitrous Oxide (N22O)O) – 310x the potency of CO2

Other GasesOther Gases – HFCs, PFCs, and SF6 = range 600 – 23900x potency of CO2

Transport

GHG and Environmental ImpactsChanges in temperature, weather patterns and sea level rise

Agriculture: Changes in crop yields

Irrigation demands,Productivity

Forests: Change in Ecologies,

Geographic range of species, and

Health and productivity

Coastal Areas: Erosion and flooding

InundationChange in wetlands

Water Resources: Changes in water supply

and water qualityCompetition/Trans-border

Issues

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 forvulnerability 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

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

Annex II

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

• Australia 108• Canada 94• EC bubble 92• (Germany 75)• (Portugal 140)• Japan 94• Norway 101• New Zealand 100• USA 93 ???

Economies in Transition

• Bulgaria 92• Baltics 92• Croatia 95• Czech Republic 92• Hungary 94• Poland 94• Romania 92• Russia 100• Ukraine 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

Present day

2012 (BaU)

Assigned Amounts

Joint Implementation

Annex I GHG EmissionsClean Development

Mechanism

2012 with KP

- 5%

1990 level

Domestic Actions

Emission Trading

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 cost-effective 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 (co-generation) 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 fast-track 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): Micro-hydro– 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 projectsYou 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

CDM project CO2 emissions (observable)

Real, measurable and long-termAdditional CO2

emissions reduction

Years

Baseline scenario CO2 emissions (that would occur)

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

C D C D4 MICC C

Project Design & Formulation Project Design Document

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

C D C D4 MICC C

Project Design & Formulation

National Approval

Project Design Document

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

C D C D4 MICC C

Project Design & Formulation

National Approval

Validation / Registration

Project Design Document

Operational Entity A

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

C D C D4 MICC C

Project Design & Formulation

National Approval

Validation / Registration

Project Financing

Monitoring

Verification / Certification

Issuance of CERs

Project Design Document

Monitoring Report

Verification Report / Certification Report / Request of CERs

Operational Entity A

Investors

Project Participants

Operational Entity B

EB / Registry

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..

Industrialized Governments

and Companies

Developing Countries and Communities

Carbon FundCarbon Fund

$$Technology

Finance $$Technology

Finance

CO EquivalentCO Equivalent22

Emission Reductions

CO EquivalentCO Equivalent22

Emission Reductions

Carbon Fund

Carbon Fund

$$ $$

22 22

Emission ReductionPurchase Agreement

BanksInvestor

DebtEquity

Power Purchase Agreement

$$

Electricity

$$

CarbonCredits

Nature of Carbon Financing Contract

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

Without CERs

implemented

With CERs not

implemented

No CDM

Without CERs not implemented;

with CERs implemented

CDM

FIRR

CER income

0

Technology IRR

Hydro, Wind, Geothermal 0.8-2.6

Methane Kick

Crop/Forest Residues 3-7

Municipal Solid Waste 5-10+

Impact of Carbon Finance on Impact of Carbon Finance on Project Financial Rate of ReturnProject Financial Rate of Return

•Revolution in Solid Waste Management

•Important impact on small-holder crop-processors 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)

Carbon Fund

Carbon Fund

$$ $$

22 22

Emission ReductionPurchase Agreement

BanksInvestor

DebtEquity

Power Purchase Agreement

$$

Electricity

$$CarbonCredits

Emission Reduction Purchase AgreementODA

Non-ODA

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

rcyap@ateneo.edu