principles of the kyoto protocol 1.2.: clean development mechanism - overview and concepts solid...
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Principles of the Kyoto Protocol
1.2.: Clean Development Mechanism - Overview and Concepts
Solid waste and the environment
Outline
CDM Context within the Kyoto Protocol Overview of CDM
Eligible Projects Basic Rules & Processes Baselines Sustainable Development CDM Concepts - Developing Projects
What does the CDM mean for Indonesia? Opportunities Reality and Issues with CDM Next Steps
CDM Context (1)
The Kyoto Protocol commits industrialized countries to legally binding GHG reduction targets during the period 2008-2012
Most countries have to reduce GHG emissions on ave 5% below their 1990 emission levels results in a global target of ‘carbon’ reduction
These countries can choose to reduce emissions ‘at home’ in their own country in other countries
Reducing emissions in Developing Countries is eligible – known as CDM
CDM Context (2)
Benefit of the CDM is to help Annex 1 Parties to implement their
commitment to reduce GHG emission in the most economical way
and To help developing countries (non Annex I
Parties) in achieving sustainable development
Overview of CDM
CDM – Clean Development Mechanism A mechanism by which Industrialised Nations
can achieve part of their reduction obligations through projects that reduce or fix/sequester carbon in Developing Countries.
The Certified Emission Reductions (CERs) are a unit of carbon that is reduced or sequestered.
Industrialised Nations can submit their CERs to meet their target in 2008-2012. there is a worldwide demand for projects and
activities for ‘carbon’ reduction or fixation Many of these projects will be in Developing
Countries.
CDM Concept
Developed Country
Govt and companies want to reduce GHG emissions Invest in their own
country Invest in a project in
Developing Country
Developing Country Many opportunities
for projects that reduce emissions eg Forestry planting Renewable electricity Energy efficiency Clean transport Biomass energy
Project Produces CERs
Investment
CERs
$
Purpose of CDM
1. to assist developing countries in achieving sustainable development
2. to assist developed countries in achieving compliance with part of their quantified emission reduction commitments.
Types of CDM Projects
Energy efficiency End use improvements Supply-side improvements
Renewable energy Methane reduction eg landfill gas capture Fuel switching Agriculture (CH4 and N20) Industrial processes Sequestration/sinks – only afforestation
and reforestation
CDM Project Examples
End-use energy efficiency
High efficient lighting; efficient cook stoves; vehicle efficiency
Supply-side energy efficiency
High efficiency turbine replacement; combine cycle
Renewable energy
Biomass; Solar; Wind; Hydro
Fuel switching Gas conversion Biofuels replace fossil fuels
Forestry Afforestration; ReforestationCommunity forestry
Agriculture Intermittent ricefield irrigation
Summary of basic CDM Rules
Baseline Concepts
The baseline is a measure of emissions that would have occurred in absence of project
Used to estimate emission reductions for project – basis for CERs On a project by project basis
Standard baselines for small scale projects 20 MW renewable energy 20GWh energy efficiency
Baseline (PDD) Contents (1)
A. General description of project activityB. Description of baseline methodology
C. Timeline Project D. Monitoring methodology and Plan E. Calculation of GHG emission by
sources F. Assessment of Environmental impacts G. Stakeholder’s comments
Baseline (PDD) Contents (2)
Annex I: Information of the parties participating in the project
Annex II: Information of public investmentAnnex III: New methodology to calculate
baselineAnnex IV: New monitoring methodologyAnnex V: Baseline data
Baseline Methodologies
Approximately 50 baseline methodologies were approved on the basis of:- Business as usual (“BAU”) - future emissions would
been the same as current/historic emissions and “Additionality”, meaning that the project would otherwise not have occurred
Market Conditions - the technology used in the market is the baseline and market barriers prevent new technology being adopted
Best Available Technology - for markets where conditions are changing, historic emissions are less relevant – assume emissions for the technology that would have been installed
Baseline Examples
Project Baseline Approach Type of CDM Baseline
3 Micro-hydro Guatemala
The 3 communities did not have access to electricity, so emission reduction based on displacement of kerosene
Market Conditions(technology used is the baseline)
Biomass power plant El Salvador
Current electricity is fossil fuels and future additions would be similar. Current emissions used as baseline.
BAU
Wind Power, Honduras
This project is displacing the need for a new thermal plant. Emission reductions based on average emissions of typical thermal plants in previous 5 years + performance in top 20%
Best Available Technology
Basic Rules for CDM Emission reductions from CDM project must be
additional in developing country Use of CERs can only supplement emission reduction
at home in developed countries CDM projects must:-
be approved by the host country lead to sustainable development in host country result in real, measurable and long-term benefits in terms
of climate change Money for CDM projects not divert Official
Development Assistance (ODA) Nuclear power projects are not eligible Only afforestation and reforestation allowed
Small Scale CDM Projects
Simplified rules for small scale projectsSimplified baseline methodology, reduced
validation and registration requirements; exemption from adaptation and admin fees
Examples includeHome Bigoas (cooking and lighting).
Replace KeroseneEfficient woodstovesMini-grid renewable energy
CDM ChecklistProject approved by National Authority? - consistent with Sustainable Development - consistent with national + local development priorities; - no negative environment impact;- has local support
Project results in real, measurable +
long-term emission
reductions?
Project leads to transfer of new, environmentally efficient technologies or management practices?
Are the emission reductions additional?
The project does not divert ODA.
Project validated, registered monitored, verified and
certified?
CERs Certified Emission
Reductions
Sustainable Development Criteria Social Criteria
Improves quality of life Alleviates poverty Improves Equity
Economic Criteria Provides financial returns to local entities Results in new investments Transfers new technology
Environmental Criteria Reduces GHG and use of fossil fuels Conserves local resources Reduces pressure on local environments Provides health and environmental benefits
How does CDM work in practice?
CDM Concept
Developed Country
Govt and companies must reduce GHG emissions Invest in their own
country Invest in a project in
Developing Country
Developing Country Many opportunities
for projects that reduce emissions eg Forestry planting Renewable electricity Energy efficiency Clean transport Biomass energy
Project Produces CERs
Investment
CERs
$
CDM Project InvestmentPROJECT
$9 millionhas emission reductions and
eligible to produce CERs
CERs$500,00
0
Project Investors/Financiers:-
International or Local Developers/Financiers
Cambodian Government
International Governments
Multilateral Agencies eg World Bank; ADB
CDM Investors/Buyers:- Multilateral CDM Funds
eg PCF; CERUPT Annex 1 Governments Private Companies Non-Annex 1
Governments Brokers/Traders
$$
CDM Investment Structures Full or partial equity in project
CER ownership becomes annex to the normal financing agreement
Usually investing for more than just CERs Financial contribution
Usually upfront payment and takes ‘rights’ to CERs as they are produced
Normally not more than 10% project cost Loan
Company provides loan at concessional rates in return for CERs eg payment of interest in CERs
CER Purchase Agreement Company buys CERs as they are produced Becomes additional income stream to project finance
CDM examples
Project Project Cost
CER Partner
Basis of contribution
Structure
Wind Farm Honduras
$58m $4.05m CER sale @ $3.50/ton
Annual CER Purchase for 10 years
3 Micro-hydro Guatemala
$320,000
$15,000 Value of 4,755 tonnes over 10 yrs
Upfront payment
Biomass power plant Nicaragua
$2.3m $0.4m Financing of climate friendly component
10% pre; 40% finance; balance = $ for 5 years
Run-of river Hydro plant Chile
$34m $3.4m 10% total cost
Initial payment + ongoing CER purchase
Case Study
3.65 MW micro hydro project Indonesia Project offsetting diesel generation – 18,500t $9.89m capital cost; $0.4m operating costs Project executed by a local institute 16.5% IRR without CDM; 18.2% w CER @$5 Investment plan:-
Up to 70% of project capital through long term loan from financial institution; rest through equity
CDM investor options:-- Long term CER purchase agreement- Equity (JV partner) + commitment to buy CERs- Soft loan against realisation of CERs
CDM Case Study
Any Country looking for CDM
Project CDM Project Partner
Long term CER purchase agreement
Equity in project Soft loan upfront in
return for CERs later
Indonesia CDM Project
3.65MW hydro $9.89m capital cost $0.4m operating costs Project offsetting diesel
emissions Likely 18,500 CERs basic CER value
$92,500
looking for CDM Partner
Investment
CERs
$
Choosing a Host Countrywhat do investors want?1. Clear CDM Policy
Willingness for investment in CDM projects
Transparent and clear processes, Quick and smooth government approval
Time, effort and resources to complete deal
2. Secure investor climate Political and economically stability
What could occur that could affect investment?
3. Sound Techno-Economic potential
Based on report conducted by Point Carbon www.pointcarbon.com
What does CDM mean for Indonesia?
Opportunities of CDM CDM encourages developed countries to
undertake GHG reduction projects in developing countries. Increased investment flows Attract capital for less carbon-intensive projects Technology transfer
Assist in development priorities and sustainable development goals Create new industries in environmentally sustainable
technologies Poverty alleviation through income and employment Assist in improving current and future environment
(including air quality)
CDM in Cambodia Governments, Project Developers and Investors
are seeking out CERs and emission reduction projects.
Emission reduction projects exist in Indonesia in many sectors:- Transport – establish intercity/intra-city transport Forestry – community forestry, replanting Energy –
- renewable energy (particularly in rural areas)- Installation of cleaner technology (cogeneration)- Energy usage – energy efficient technologies; building
design Waste management – capture of methane
Reality + Issues w CDM
CDM may tend towards large CDM Projects High transaction costs with CDM projects
BGP experience = $100,000 – 150,000 per project transaction costs similar for small or large projects
Solution - bundle small projects togethereg association of community forestry; many small scale hydro
projects
Larger developing countries more attractive infrastructure & institution to deal with large projects Larger market = ability to do many similar projects Spreads the upfront cost in learning local conditions;
securing suppliers, local management, financial, legal and contractual processes
CDM Transaction Costs
Preparation and review of the Project
Validation process
Project Appraisal and Negotiation
Periodic verification & certification
Construction and start up
Project completion
3 months
2 months
2 m
onth
s
3 months
1-3 years
Up
to 2
1 ye
ars
• Upstream Due Diligence, carbon risk assessment and documentation: $ 40K
• Baseline : $20 K• Monitoring Plan: $10K
• Contract, Processing •and documentation: $30k
Total through Negotiations
• Initial verification at start-up: $15K
• Verification: $10-25 K• Supervision: $10-20K
All expenses
$100-150 K
Reality + Issues w CDM (2)
CDM will be a competitive marketRestricted without the USLimit on amount of CERs developed
countries can use towards target (~20%)
larger projects with low risk and smooth approval/transaction procedures will be preferred
May limit opportunities in least developed countries
Reality + Issues w CDM (3)
Preparation of developing countries poor co-ordination among Ministries internal conflict over approvals
Only 12 National Authorities registered
Capacity of developing countriesWeak knowledge of CDM at all levels
policy-makers, businesses, finance + legal institutions, NGOs
Summary
CDM presents an opportunity for Indonesia developing energy infrastructure; forestry is significant activity
worldwide increased demand for projects that reduce emissions win-win situation for both parties
Indonesia must be prepared Functioning approval body + smooth and
transparent approval process need a ‘pipeline’ of projects for investors when they
come investigating Need to improve investor climate
Acronymns
CDM – Clean Development Mechanism CER – Certified Emission Reductions
A standard unit of greenhouse reduction or sink PCF – Prototype Carbon Fund
World Bank CER Fund ODA – Official Development Assistance
Part of 0.07% govt aid IRR – Internal Rate of Return DNA – Designated National Authority
The national body who assess +/or approves CDM projects
Acronyms
Annex 1 countries Approx. 40 industrialised countries and
economies in transitions listed in Annex 1 of the convention who can invest in CDM projects. These countries have emission reduction obligations.
Non - Annex 1 countries The countries who are not listed in Annex 1
of the Convention and who can host CDM projects