Comprehending Carbon Finance - A to Z of CDM [Pakistan Perspective]

8/6/2019 Comprehending Carbon Finance - A to Z of CDM [Pakistan Perspective]

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1

Carbon Finance

What is it? How does itwork?



2

Table of Contents

• Introduction

• Kyoto Protocol

• What are Emissions Trading?

• Emissions Trading Mechanisms

• Issues in Carbon Credits

• Carbon Credits- Project Cycle

• Carbon Credits’ Markets

• Carbon Credits- Opportunities and Options



3

Introduction



4

Introduction

• What are Green House Gases

– Some gases naturally exist in the atmosphere, the so calledGreenhouse Gases (GHGs) that form a blanket surrounding theearth and keeps the earth warmer. This is called GreenhouseEffect.

• What is the Greeen House Effect

– Human activities (fossil fuel burning, depletion of sinks likeforests etc.) has been increasing the concentration of GHGs in

the atmosphere and is leading to rise in temperatures. This iscalled Enhanced Greenhouse Effect.

• What is Climate Change

– Rise in temperatures of earth and other associated climaticchanges as caused by the Enhanced Green House Effect is called“Global Warming” and in broader term “Climate Change”

– The biggest factor of present concern is the increase ingreenhouse gases such as CO2 levels due to emissionsfrom fossil fuel combustion, followed by aerosols(particulate matter in the atmosphere), which exert acooling effect, and cement manufacture. Other factors,including land use, ozone depletion, animal agricultureand deforestation, also affect climate.



5

Evidence of Global Warming

• Empirical Evidence

– Mount Hood, Oregon



6



– This Glacier was one of the biggest in South America, butit is now disappearing at a rate of 200 meter per year



7



– A House on the dunes in Rodanthe,resort town on Cape Hatteras, NorthCarolina, in July 1999 and July 2004



8

International Response

• Global Climate Change Becomes Apparent

–Over a 180 countries attend the “Earth Summit”in Rio de Janeiro, Brazil

– A legal framework for reducing GHGs …The United Nations Framework Convention of Climate Change (UNFCCC)

– The Convention was signed by 154 states(including Pakistan) and entered into force on21st March, 1994.

• What is the UNFCCC?

– It is the first step towards climate policy on globalscale

– It is a non-binding legal framework:• Aims at stabilization of GHG concentration in the

atmosphere at safe level.

• To balance out the response along mitigation andadaptation Measures



9

Principle of UNFCCC

• Based on the principle of common goals but

differentiated roles – On one hand it recognises the

• Primary Responsibility of Developed Countries forhigher emissions, and therefore,

• Asks Developed Countries to take a Leading Role

– On other hand it establishes

• Social and Economic Development as the RightfulPriority of the Developing Countries, and

• The need to assist developing countries that are

vulnerable to climate change



10

The Kyoto Protocol of UNFCCC

• Adopted in Kyoto, Japan in 1997 and ratified inFebruary 2005(Pakistan singed the Protocol on 11th January,2005)

• The Kyoto Protocol: Aims to reduce GHGemissions by 2012 and distinguish two typesof countries:

– Annex-I countries: With binding emissiontargets (industrialised countries):

• Western and Eastern Europe, Canada, Japan, New Zealand, Russia, Ukraine etc.

– Non-Annex I countries: With voluntary

participation (developing countries):• China, India, Pakistan, South Africa,

Philippines, Uruguay, Brazil, and otherdeveloping countries.



11

Background

• Kyoto Protocol (1997)

– The Kyoto Protocol was adopted at the3rd session of the Conference of theParties to the UNFCCC

– The Protocol defines quantifiedgreenhouse gas (GHG) emissions

reduction targets for developedcountries and economies in transition(east Europe).

• These countries are known as Annex IParties as there are listed inAnnexure I of the Kyoto Protocol



12

Kyoto Protocol



13

Kyoto Protocol

• What is the Kyoto Proocol

– The Kyoto Protocol is a protocol to the internationalFramework Convention on Climate Change with theobjective of reducing greenhouse gases in an effortto prevent anthropogenic climate change.

• Emission Mitigation Options

– Source oriented measures

• Energy conservation and efficiency improvement

• Fossils fuel switching

• Renewable energy

– Sink enhancement measures• Capture and disposal of CO2 (under discussion)

• Enhancement of forest sinks (limited options)



14

Kyoto Protocol

• Targets

– Annexure I Parties have to reduce emissions by 5% of 1990 levels between 2008 and 2012

• EEC countries have differing individual target (e.g.Germany has to reduce emissions by 21%)

– 6 Greenhouse gases (GHGs) under review

• Carbon dioxide (CO2) [1 CO2e(quivilent)]

• Methane (CH4) [21 CO2e]

• Nitrous oxide (N2O) [310 CO2e]

• Hydrofluorocarbons (HFCs) [140 ~ 11,700 CO2e]

• Perfulourocarbons (PFCs) [6500 ~ 9200 CO2e]• Sulphur Hexafluoride (SF6) [23,900 CO2e]

Standard“Currency”for emission

trading



15

Kyoto Protocol

• Annex I countries

– Annex I countries (industrialized countries): Australia, Austria,

Belarus, Belgium, Bulgaria, Canada, Croatia, Czech Republic,Denmark, Estonia, Finland, France, Germany, Greece, Hungary,Iceland, Ireland, Italy, Japan, Latvia, Liechtenstein, Lithuania,Luxembourg, Monaco, Netherlands, New Zealand, Norway,Poland, Portugal, Romania, Russian Federation, Slovakia,Slovenia, Spain, Sweden, Switzerland, Turkey, Ukraine, UnitedKingdom, United States of America

– 40 countries and separately the European Union

• Annex II countries

– Annex II countries (developed countries which pay for costs of developing countries)Australia, Austria, Belgium, Canada, Denmark, Finland, France,Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg,Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, United Kingdom, United States of America – 23 countries and separately the European Union; Turkey was

removed from the annex II list in 2001 at its request torecognize its economy as a transition economy



16

Annex I and Annex II Countries, andDeveloping Countries• Annex I countries (industrialized countries)

– Annex I countries agree to reduce their emissions(particularly carbon dioxide) to target levels belowtheir 1990 emissions levels. If they cannot do so, theymust buy emission credits or invest in conservation.

• Annex II countries (developed countries which pay forcosts of developing countries)

– Annex II countries, that have to provide financialresources for the developing countries, are a sub-

group of the Annex I countries consisting of the OECDmembers, without those that were with transitioneconomy in 1992.



17

Annex I and Annex II Countries, andDeveloping Countries• Developing countries

– Developing countries have no immediate restrictionsunder the UNFCCC. This:

• Avoids restrictions on growth because pollution isstrongly linked to industrial growth, and developingeconomies can potentially grow very fast.

• Allows them to get money and technologies fromthe developed countries in Annex II.

– Developing countries may volunteer to becomeAnnex I countries when they are sufficientlydeveloped.



18

Kyoto Protocol

• Arguments

– Some opponents of the Convention argue that thesplit between Annex I and developing countries isunfair, and that both developing countries anddeveloped countries need to reduce their emissions.

– Some countries claim that their costs of following

the Convention requirements will stress theireconomy.

– Developing countries are not expected to implementtheir commitments under the Convention unlessdeveloped countries supply enough funding and

technology, and this has lower priority thaneconomic and social development and dealing withpoverty.



19

What is Emissions

Trading?



20

What is Emissions Trading?

• Emission Allowance

– The Protocol agreed caps or quotas on the maximum amount of Greenhouse gases for developed and developing countries.

– In turn these countries set quotas on the emissions of installations run by local business and other organizations,generically termed operators.

– Countries manage this through their own national registries,

which are required to be validated and monitored forcompliance by the UNFCCC.

– Each operator has an allowance of credits, where each unitgives the owner the right to emit one metric tonne of carbondioxide or other equivalent greenhouse gas.

– Operators that have not used up their quotas can sell their

unused allowances as carbon credits, while businesses that areabout to exceed their quotas can buy the extra allowances ascredits, privately or on the open market.



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• Emission Allowance

– As demand for energy grows over time, the total emissions muststill stay within the cap, but it allows industry some flexibilityand predictability in its planning to accommodate this.

– By permitting allowances to be bought and sold, an operator canseek out the most cost-effective way of reducing its emissions,either by investing in cleaner machinery and practices or bypurchasing emissions from another operator who already has

excess capacity .

– Since 2005, the Kyoto mechanism has been adopted for CO2

trading by all the countries within the European Union under itsEuropean Trading Scheme (EU ETS) with the EuropeanCommission as its validating authority.

– From 2008, EU participants must link with the other developedcountries who ratified Annex I of the protocol, and trade the sixmost significant greenhouse gases.



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• Carbon Credit

– A credit can be an emissions allowance which was originallyallocated or auctioned by the national administrators of a cap-and-trade program, or it can be an offset of emissions.

– Such offsetting and mitigating activities can occur in anydeveloping country which has ratified the Kyoto Protocol, andhas a national agreement in place to validate its carbon projectthrough one of the UNFCCC's approved mechanisms.

– Once approved, these units are termed Certified EmissionReductions, or CERs. The Protocol allows these projects to beconstructed and credited in advance of the Kyoto trading period.

– The Kyoto Protocol provides for three mechanisms that enable

countries or operators in developed countries to acquiregreenhouse gas reduction credits



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• Mechanism

– International Emissions Trading (IET)

• Countries can trade in the international carbon credit marketto cover their shortfall in allowances. Countries with surpluscredits can sell them to countries with capped emissioncommitments under the Kyoto Protocol.

– Joint Implementation (JI)

• A developed country with relatively high costs of domestic

greenhouse reduction would set up a project in anotherdeveloped country.

– Clean Development Mechanism (CDM)

• A developed country can sponsor a greenhouse gas reductionproject in a developing country where the cost of greenhousegas reduction project activities is usually much lower, but theatmospheric effect is globally equivalent.

• The developed country would be given credits for meeting itsemission reduction targets, while the developing countrywould receive the capital investment and clean technology orbeneficial change in land use.



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• Mechanism

– These carbon projects can be created by a nationalgovernment or by an operator within the country. Inreality, most of the transactions are not performedby national governments directly, but by operatorswho have been set quotas by their country.



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• Emission Market

– For trading purposes, one allowance or CER is considered equivalent to

one metric tonne of CO2 emissions or other gases equated to CO2 equivalent terms

– These allowances can be sold privately or in the international marketat the prevailing market price. These trade and settle internationallyand hence allow allowances to be transferred between countries.

– Each international transfer is validated by the UNFCCC. Each transfer

of ownership within the European Union is additionally validated bythe European Commission.

– Climate exchanges have been established to provide a spot market inallowances, as well as futures and options market to help discover amarket price and maintain liquidity.

– Carbon prices are normally quoted in Euros per tonne of carbon dioxide(CO2) or its equivalent (CO2e). Other greenhouse gasses can also be

traded, but are quoted as standard multiples of carbon dioxide.

– These features reduce the quota's financial impact on business, whileensuring that the quotas are met at a national and international level.



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• Emission Market

– Currently there are at least six exchanges trading incarbon allowances:

• Chicago Climate Exchange,

• European Climate Exchange,

• Nord Pool,

• PowerNext,

• Multi Commodity Exchange and

• National Commodity and Derivatives Exchange.– Recently, NordPool listed a contract to trade offsets generated by a

CDM carbon project called Certified Emission Reductions (CERs).

– Many companies now engage in emissions abatement,offsetting, and sequestration programs to generate creditsthat can be sold on one of the exchanges. At least two

private electronic markets have been established in 2008. – Managing emissions is one of the fastest-growing

segments in financial services in the City of London with amarket now worth about €30 billion, but which could growto €1 trillion within a decade.



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• Reducing Emissions through Carbon Credits

– Carbon credits create a market for reducing greenhouse emissions

• by giving a monetary value to the cost of polluting the air.• Monetize an previously “unvalued” commodity … Carbon Emission

Rights (CERs)

– Emissions become an internal cost of doing business and are visibleon the balance sheet alongside raw materials and other liabilities orassets.

• Consider a business that owns a factory putting out 100,000 tonnes

of greenhouse gas emissions in a year. Its government is an Annex Icountry that enacts a law to limit the emissions that the businesscan produce. So the factory is given a quota of say 80,000 tonnesper year. The factory either reduces its emissions to 80,000 tonnesor is required to purchase carbon credits to offset the excess. Aftercosting up alternatives the business may decide that it isuneconomical or infeasible to invest in new machinery for that year.Instead it may choose to buy carbon credits on the open market

from organizations that have been approved as being able to selllegitimate carbon credits.



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– One seller might be a company that will offerto offset emissions through a project in thedeveloping world, e.g. recovering methane

from a cattle farm to feed a power station thatpreviously would use fossil fuel. So althoughthe factory continues to emit gases, it wouldpay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide emissionsfrom the atmosphere for that year.

– Another seller may have already invested innew low-emission machinery and have a

surplus of allowances as a result. The factorycould make up for its emissions by buying20,000 tonnes of allowances from them. Thecost of the seller's new machinery would besubsidized by the sale of allowances. Both thebuyer and the seller would submit accounts fortheir emissions to prove that their allowanceswere met correctly



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Emissions Trading

Mechanisms



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Emissions Trading Mechanisms

• International Emissions Trading

– Annex I Parties which have ceilings for GHGemissions (emission caps)

– Trading of Kyoto Protocol emission units (KP units)between Annex I Parties.

– The total amount of emission cap of Annex I Parties

will not change

– Through market mechanism, International EmissionsTrading can decrease total cost of Annex I Parties toachieve their collective emission reduction targets.



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• International Emissions Trading



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• Joint Implementation (JI)

– Annex I Parties assist other Annex I Parties to implement project

activities to reduce GHG emissions

• The credit from the JI is called emission reduction unit (ERU).

• Credits will be issued based on amount of emission reductionsachieved by the project activities.

• Party where JI project is implemented, is called a host Party.

• Any such project shall provide a GHG emission reductions, or

removals by sinks, that is additional to any that would otherwiseoccur.

– Annex I Parties can use ERUs to contribute to compliance of theirquantified GHG emissions reduction targets of the Kyoto Protocol.

• The total amount of emission cap of Annex I Parties will notchange, because JI is credits transfer between the Parties both of which have emission caps

• ERUs will be issued only after 2008.



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• Joint Implementation



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• Clean Development Mechanism (CDM)

– Annex I Parties assist non-Annex I Parties(developing countries) which don’t have emissioncaps, to implement project activities to reduce GHGemissions

• Credits will be issued based on emission reductionsachieved by the project activities.

• A Party where CDM project is implemented, iscalled a host Party.

• The credit from the CDM is called certified emissionreduction (CER).

• Reductions in emissions shall be additional to any

that would occur in the absence of the certifiedproject activity.

A Promising“quid pro quo” for Developing

countries



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– Annex I Parties can use CERs to contribute tocompliance of their quantified GHG emissionsreduction targets of the Kyoto Protocol.

• As a result, the amount of emission cap of Annex IParties will increase.

–The CDM will issue CERs before the 1st commitmentperiod.

• CERs issued based on activities during the periodfrom the year 2000up to 2012 can be used inachieving compliance of Annex I Parties in the 1st

commitment period.



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• Clean Development Mechanism (CDM)

– Basic Idea• Industrialized countries are supported in reaching

their emission targets

• Sustainable development benefits for developingcountry



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Clean Development

Mechanism



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Clean Development Mechanism

• CDM can work because of differing Marginal AbatementCosts

– the cost of eliminating an additional unit of pollution

– Arbitrage Opportunity

• Japan $400 / ton of Carbon

• USA $200 / ton of Carbon

• Pakistan <$50 / ton of Carbon

• It has a direct environmental impact on a global leveldue to un-localized nature of CO2

– …it does not matter for environment wherereduction occurs.



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• Benefits

– Environmental Benefits

• Local environmental protection

• Global emission reduction

– Social Benefits• Job Creation

– Economic

• “Additional” financing for local SustainableDevelopment priorities

• potential of “Catalyzing” large Foreign DirectInvestment (FDI) flows

• Export Earnings from CERs

– Technological

• Additional Energy Production• Access to Latest Technology– “appropriate” Technlogies … not “recycled” technologies

– Financial viability• ~ Carbon financing can increase project Internal Rate

Returns (IRRs) between 0.5 to 50% (WB)



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• Key Players

–Conference of Parties (COP)

• Conference of the Parties serving as the meeting of the Parties to the Kyoto Protocol

– Designated National Authority (DNA)

• Countries in the CDM shall set up a designated

national authority (DNA) for the CDM.• CDM project participants (PPs) shall receive written

approval of voluntary participation from the DNA of each Party involved.

– The written approval shall include confirmation by the hostParty that the project activity assists it in achieving

sustainable development.– The details of approval procedure is up to each Party.

– CDM Executive Board (EB)

• The EB supervises the CDM, under the authority andguidance of the COP/MOP



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• Key Players

–Designated Operational Entity (DOE)

• Is either a domestic legal entity or an internationalorganization accredited and designated by the EBto

– validate and subsequently request registration of a proposedCDM project activity

– Verify and certify emission reduction of a registered CDMproject activity, and request the EB to issue CertifiedEmission Reductions (CERs) accordingly

– AS of now there are only 18 DOEs that have been accreditedby the EB, and hence validation is often the bottleneck of thewhole project

• Upon request, the EB may allow a single DOE toperform all these functions within a single CDMproject activity.



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Carbon Credits-

Opportunities andOptions



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Carbon Credits- Opportunities and Options

• Energy Industries

–

Switching fuel sources – Utilizing waste heat during generation

– Modernizing inefficient processes

– Alternative Energy: Solar home systems,Solar water pumps, hydro, wind, biogas

– Improvement of energy distribution

• Power Demand Side

– Improvement of energy factor

– Efficient illumination, phase out of standard light bulbs

– Refrigerator and air-conditionerreplacement

– Building insulation

Alternative Energy

Energy Efficiency

http://blogs.ittefaq.com/tech/archives/alternative.html



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• Manufacturing Industries

– Switching the fuel source

– Utilizing waste heat


• Rural Development – Mini biogas as alternative to fire wood and kerosene

– Solar home systems, Solar water pumps

– Solar air-conditioning for rural hospitals, schools

Rural Development

http://elank37.files.wordpress.com/2007/12/bio-gas.jpg



http://www.commondreams.org/archive/wp-content/photos/1129_06.jpg




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• Municipality

–Landfill Waste Management

– Waste to Energy

– Afforestation/Reforestation forcarbon sequestration

– Energy Efficient pumping stations

– Animal Waste

• Transport

– Substituting transport with pipeline – Transport gasification through CNG

busesMunicipal Solid Waste



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• Chemical Industries

–Introducing a chemical agent,

– Switching the fuel source,



• Metal Production

– Utilizing waste heat during smelting process

Waste Heat Recovery



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• Fugitive Emissions from Fuel

–Capturing Tail Gases and flared gases

– Captive generation of power


– Re-injection of natural gas into theground instead of flaring

– CO2 injection into oil fields



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Issues in CDM



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Issues in CDM

• Creating Real Carbon Credits

– The principle of Supplementarity within the Kyoto Protocol

means that internal abatement of emissions should takeprecedence before a country buys in carbon credits.

– However it also established the Clean DevelopmentMechanism as a Flexible Mechanism by which capped entities

could develop real, measurable, permanent emissionsreductions voluntarily in sectors outside the cap.

– Many criticisms of carbon credits stem from the followingissue

• Establishing the fact that an emission of CO2-equivalent

greenhouse gas has truly been reduced involves a complexprocess. This process has evolved as the concept of a carbonproject has been refined over the past 10 years.



50

Issues in CDM

• Creating Real Carbon Credits

–The first step in determining whether or not acarbon project has legitimately led to the reductionof real, measurable, permanent emissions isunderstanding the CDM methodology process.

– This is the process by which project sponsorssubmit, through a Designated Operational Entity(DOE), their concepts for emissions reductioncreation. The CDM Executive Board, with the CDMMethodology Panel and their expert advisors, revieweach project and decide how and if they do indeedresult in reductions that are additional.



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Issues in CDM

• Additionality and Its Importance

– Additionality is a term used by Kyoto's Clean Development Mechanism

to describe the fact that a carbon dioxide reduction project (carbonproject) would not have occurred had it not been for concern for themitigation of climate change.

– More briefly, a project that has proven additionality is a beyond-business-as-usual project and is specifically for a CDM Poject .

– Project Participants (PPs) have to write explanation of how and whythis project activity is additional.

• If the starting date of the project activity is before the date of validation, provide evidence that the incentive from the CDM wasseriously considered in the decision to proceed with the project activity.This evidence shall be based on (preferably official, legal and/or othercorporate) documentation that was available at, or prior to, the start of the project activity.

• Additionality of Funds

– CDM Projects cannot lead to a diversion of development aid

• Industrialised countries need to provide New funds for CDM projects.



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Issues in CDM

• Additionality and Its Importance

– “GHG emission trading programs operate by capping the emissions of a

fixed number of individual facilities or sources. Under these programs,tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allowsfacilities whose emissions are capped to emit more, in direct proportion tothe GHG reductions represented by the credit. The idea is to achieve a

zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels)

would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would havehappened anyway,' then issuing offset credits for its GHG reductions willactually allow a positive net increase in GHG emissions, undermining theemissions target of the GHG program. Additionality is thus critical to thesuccess and integrity of GHG programs that recognize project-based GHGreductions.”

World Resources Institute/World Business Council forSustainable Development (WRI/WBCSD)



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Issues in CDM

• Additionality can be proved due to following barriers

–Investment Barrier

• a financially more viable alternative to the projectactivity would have led to higher emissions;

– investment comparison analysis using a relevant financialindicator,

– benchmark analysis or a simple cost analysis (where CDM is

the only revenue stream such as end-use energy efficiency).

– Technological Barrier

• a less technologically advanced alternative wouldhave been used and led to higher emissions

– Non-availability of human capacity to operate and maintain

the technology– lack of infrastructure to utilize the technology

– unavailability of the technology

– High level of technology risk - performance uncertainty



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Issues in CDM

• Additionality can be proved due to following barriers

– Access-to-Finance barrier

• the project activity could not access appropriate capitalwithout consideration of the CDM revenues

– E.g. … a statement from the financing bank that the revenues fromthe CDM are critical in the approval of the loan.

– Prevailing practice

• prevailing practice or existing regulatory or policyrequirements would have led to implementation of atechnology with higher emissions;

– project is among the first of its kind in terms of technology,geography, sector, type of investment and investor, market etc.

– Other Barriers

• institutional barriers … limited information … managerialresources … organizational capacity … financial resources… capacity to absorb new technologies



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Issues in CDM

• Baseline

– The baseline for a CDM project activity is the scenario thatreasonably represents GHG emissions that would occur inthe absence of the CDM project

– Difference between the baseline emissions and GHGemissions after implementing the CDM project activity(project emissions) is emission reductions.

– A baseline (scenario and emissions) shall be established bytaking into account relevant national and/or sectoralpoliciesand circumstances, such as sectoral reforminitiatives, local fuel availability, power sector expansionplans, and the economic situation in the project sector.

– Before calculating baseline emissions, it is necessary to

identify baseline scenarios.

– A baseline shall cover emissions from all gases, sectorsand source categories within the project boundary.

MultipleBaseline

Options are

possible



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Issues in CDM

• Baseline Options – Case Study of ‘Clean’ power inPakistan

– A project which envisages development of a windfarmfor production of electricity to be used in the nationalgrid.

– Current Emissions – Most likely choice as this are often realsavings

– Thar coal – RFO is too expensive … coal is next choice forfuture energy needs.

– Similar projects – Based on argument that currently new IPPsare RFO/HSD

– Economically attractive – gas is preferred choice withoutCDM (availability?)

– Emission of Wind power

Current emissions of national grid (mix of hydro, RFO,HSD, etc)

Emissions from the next (marginal) Power plant (a Thar Coal plant)Average of “similar” project (RFO / HSD)

Economically attractive project (e.g gas)

Emissions of proposed project (e.g. Wind Power)

E m

i s s i o

n s



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Issues in CDM

• Key Concerns

– Additionality

• Are emission reductions really additional.– “Offsets are an imaginary commodity created by deducting what

you hope happens from what you guess would have happened.” …Dan Welch, Ethical Consumer Magazine

– Perverse Effects

• Although UNFCCC encourage countries to develop and

improve policies and programs to minimize GHG effectsand create mechanisms to foster sustainabledevelopment in developing countries …

– … consideration of compliance with legal requirements as part of the additionality test and baseline calculations, inhibit developingcountries from enacting adequate policies and legislation towardsGHG mitigation

– Narrow Project Boundaries• Only the impacts of individual CDM projects are

measured … the factory as a whole is not considered– E.g. countries like India take full benefit of installing wind farms in

their countries, whilst not being penalized for installation of emission intensive technologies like coal power plants

Why enactemissionreducing

technologies if doing

so willreduce

CERs fromprojects



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Carbon Credits- ProjectCycle



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Carbon Credits- Project Cycle

• Life Cycle Overview



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• Phase I

– Understanding of the project

– Gathering data and information from the plant for allthe project and baseline study

– Development of a project strategy

– PDD design (in case of approved methodology)

– Preparation of monitoring & Verification Protocol plan

– Review environmental impact of the project – Collecting stake- holders comments

– Arranging host country approval

– Arranging receiving country approval

– Validation by UNFCCC approved certifier

– Submission of methodology to UNFCCC

• Deliverable

– Project Identification Note as per UNFCCC format

– Project Design Document as per UNFCCC Guidelines



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• Phase II

–

Identifying a validator – Project validation

– Methodology approval

– Arranging host country approval

–Project implementation

– Monitoring of emission reductions

– Issuing annual monitoring protocol

– Annual verification by UNFCCC approved certifier

– Identification of buyer – Emission Reduction Purchase Agreement (ERPA)

– Conducting audit prior to annual verification



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Carbon Credits’Markets



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Carbon Credits’ Markets

• Potential Market Size

– The overall value for primary CERs wasUS$5 billion in 2006

• More than doubling over the previousyear

• Secondary CERs accounted for anotherUS$444 million

– Overall volumes transacted to the tune of 518 MtCO2e

• State of Carbon Market – Prices are Highly Volatile

• Project-based emission reductionsattracted, on average, a price of US$10.90 per tCO2e for CERs

– 52% increase over 2005 levels

• Long-term prices will depend on

establishment of compliance regimebeyond 2012

• EU –Emission Trading System for period2008-2012, a price of up to US$ 30 pertCO2e was already reached as forwards



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– Financing is a key constraint

• US$4.7 billion of new capital had entered themarket at the end of March 2007

– even more funds are required to bring to the marketenough emission reductions to satisfy the appetite of compliance buyers

• Monetization of long-term CDM contracts islimited



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• Preferences

– Buyers Preference

• Secure delivery !!!!

• LOW PRICES !!!

• Consistent deliverySchedule from Sellers

• High seller rating and

guaranties• Damages for non-

delivery

• Credible seller (Strictcredibility checks)

• Ability to become aProject Participant

• Payment on Delivery

–

Seller’s Preferences• HIGH PRICES !!!

• Funding for PPDpreparation

• Equity / DebtParticipation

• Upfront payment forCERs

• Transfer Project risk toBuyers

• Ability to easily transferCERs

• Secure long-termpayments

• No obligations in caseof non-delivery

• No exposure to pricerisk




• Demand and SupplyPressures

– Demand Pressures

• Canada has noteven begun to buy

• Japan will continueto remain dominant

buyer• EU tightness will

seek CERs to fillneeds

• EU self obligation of

min. 20% after 2012• Exhaustion of cheap

reductionpossibilities

– Supply Pressures

• Increased activity –fast approval of CDMProjects

• Excess EU ETSallocations have notentered market due toinstitutional reasonsand lack of legalinfrastructure

• Unknown behavior of Russia as a seller

• UNFCCCmethodologiesbecome very strict

• Time before 2012 runsout to set up CDMprojects

Comprehending Carbon Finance - A to Z of CDM [Pakistan Perspective]

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