Project-based mechanisms for climate protection (1): Realising a Net-Mitigation Effect

Concepts for the realisation of a Net-mitigation-effect

Part I of the project:

“Project-based mechanism for climate

protection in Europe: Net-mitigation-effects

and further development of the Joint

Implementation (JI) Mechanism”

Carsten Warnecke

24.09.2012

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Content

> Objectives of the project

> Objectives of the workshop

> Background on domestic offsetting in

Germany/Europe

> Assessment of Net-mitigation-effect approaches

> Considerations for Net-mitigation-effect

implementation

> Summary

24.09.2012 Carsten Warnecke

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The project objectives

> Development of criteria and options for the possible design and

further development of a project-based mechanism for Germany

and/or Europe (domestic offsetting)

> Step-wise approach analysing four specific aspects defined in

separate work packages

– Assessment of concepts to effectively achieve a net emission

reduction (part I),

– Preparation of further quality criteria for projects (part II),

– Optimisations of the demand side (part III)

– Proposals for the legal implementation of an improved

mechanism in Germany (part IV)

> The general aim is to develop the current domestic JI

“beyond pure offsetting”


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The workshop objectives

> Presentation of project approaches and draft results

> Discussion about proposals and recommendations

> Feedback will be considered for the final project results

> Scope of Workshop:

– part I, II and III;

– results of part IV are specific to the German situation and

separately provided in German language


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Background on domestic offsetting

in Germany/Europe


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JI – current situation

> JI is designed as bilateral project-based mechanism

in the capped environment

> In many European countries JI is used as vehicle for

“domestic offsetting”

> Germany currently has 25 registered JI projects

– Beside coal mine methane, N2O

and PFC reduction projects

mainly small scale energy–efficiency

projects are registered

– Germany is a pioneer with its

large share of PoA projects

> JI is a complementary mechanism

focussing on existing unregulated gaps


European countries with registered JI projects (source: UNEP Risoe CDM/JI Pipeline, 1st September 2012)

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(domestic) JI future

> Current negotiations at the UNFCCC level create uncertainty

about the future of the JI framework

> JISC proposal for the review of the JI guidelines currently are

under discussion

> In Germany the implementing law (ProMechG) sets an end date

for JI (end of 2012)

> Currently no incentive to initiate new projects

> Existing positive effects such as innovation, search mechanism

and private sector investment should be maintained

> Additional contribution to go beyond pure offsetting

> In this uncertain situation different routes for the continuation of

domestic offsetting exist:

– JI continuation

– Article 24a implementation


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Article 24a – in brief

> Article 24a of the EU ETS Directive provides the basis for a new

(domestic) offsetting mechanism

> Applicable to mitigation opportunities in non-ETS sectors which

are not suitable for unilateral inclusion into the EU ETS (Art. 24)

> Legislative framework needs to be developed at EU level

> No Article 24a implementation activities currently ongoing

> Member State participation is voluntary

> Article 24a leaves open, whether allowances or credits are issued

– allowances refer to EUAs (EU ETS directive)

– for credits a new type would have to be introduced

> Article 24a units might be eligible in the EU ETS and without

limitation for the Effort Sharing Decision targets (406/2009/EC)

> No international acceptance (outside the EU)


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Assessment of

Net-mitigation-effect approaches (part I)


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Net-mitigation-effect – beyond pure offsetting

> A Net-mitigation-effect (NME) is defined as GHG reduction

generated by project activities in baseline-and-credit mechanisms

not issued as offsets to project developers.

> Benefits:

– Actual contribution to GHG mitigation (globally and for host

countries)

– Addresses concerns on harvesting cheap mitigation potentials

and might increase acceptance

– Safeguard against failures

– Avoids lagging behind new mechanisms

> Barriers/risks:

– Disincentive for projects

– Increased bureaucracy & transaction costs


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Existing experiences

> Current CDM & JI projects might still have a baseline and

continue their operation after the end of the crediting period

> Over-conservative baselines or assumptions lead to more actual

reductions than credits (e.g. CDM and JI in France, Germany)

> France additionally issues certificates for only 90% of the

emission reductions generated

> Denmark’s pilot programme currently generates a NME of 100%

> New Zealand’s Projects to Reduce Emissions programme required

a “bid-ratio” in the tender process

> The 2009 proposed Waxman-Markey bill included a provision to

apply a discount on international offsets

> NME is on different agendas

– Proposed revision of the JI guidelines

– COP decisions on NMM & Framework for Various Approaches

– CDM policy dialogue


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Selected Net-mitigation-effect approaches

> Limitation of the crediting period: Projects continuing their

operation after the end of the crediting period lead to reductions

which are not rewarded with credits, assuming a baseline for the

projects still exists.

> Discounts: A certain percentage of certified emission reductions

of projects is not rewarded with carbon credits.

> Benchmarks / standardised baselines: Standardisation offers

the opportunity to predefine baselines or benchmarks with

emission levels below the business-as-usual (BAU) emissions.

> Conservativeness: The conservativeness principle ensures that

reductions are rather underestimated than overestimated. The

principle could be extended to an “over-conservative” approach.


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Net-mitigation-effects within the project cycle


Methodology application

Registration

Validation

Continuous monitoring and periodical reporting, verification and issuance

Project planning Project operation Project operation ?

Crediting period

Issuance Discounts Limitation of the crediting period

Benchmarks / standardised baselines below BAU

Conservativeness

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Effects of NME approaches on offset generation


GH

G E

mis

sio

ns

TimeStart crediting period

End crediting period

Option 1: Limitation of the crediting period

Option 3: Standardized baselines below BAU

Option 4: Conservativeness

Option 2: Discounts

ER – x%

4

2

3

1

4

1

Baseline emissions

Project emissions

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Assessment approach

> Development of individual criteria reflecting implementation

aspects of Net-mitigation-effect approaches

> Assessment of shortlisted Net-mitigation-effect approaches

against set of criteria with application of a relative valuation

> Based on semi-quantitative multi-criteria analysis we rank the

options and prioritize the most promising ones with respect to the

objective of this study


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Criteria

1. Possibility to quantify the NME

2. Possibility to adjust the NME to sector or project type

3. Possibility to adjust the NME for new projects

4. Harmonisation level of application to projects

5. Application effort for project developer

6. Planning security for project developer

7. Effort in set up of provisions at administering authorities

8. Effort in implementation at administering authority

9. Effort in reaching political agreement


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Criteria application


(1) Limitation of the

crediting period(2) Discounts

(3) Benchmarks /

standardised baselines(4) Conservativeness

1. NME quantification↓↓ ↑↑ → ↓↓

2. NME adjustments to sector

or project type ↘ ↗ ↑↑ ↗

3. NME adjustments for new

projects ↘ ↗ ↗ ↗

4. Harmonisation level of

application ↑↑ ↑↑ ↗ ↘

5. Effort for project developer→ ↗ ↑↑ →

6. Planning security for project

developer ↑↑ ↗ ↗ ↘

7. Effort in set up of provisions

at administering authority → → ↘ ↘

8. Effort in implementation at

administering authority ↑↑ ↑↑ ↗ →

9. Effort in reaching political

agreement ↘ ↘ ↗ ↗

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Results

> Analysis identified discounts & standardised baselines below BAU

as most promising

> The discount approach allows differentiation of NME contribution

– Only discounts have no interaction with further purposes of

the methodical approach

> Standardisation has various advantages independent from NME

– Stepwise implementation possible

> Implementation is possible in both scenarios (continued JI and

Article 24a) while harmonised implementation seems facilitated

with Article 24a

> How can discounts be implemented which ensure that

disincentives are avoided and a NME maximisation is reached?

– NME maximisation requires differentiation and knowledge on

various project criteria

– Current investment analysis requires similar data and could

serve as basis?


© ECOFYS | | 24.09.2012 Carsten Warnecke

Profitability vs. eligibility of projects

C

B

A

Project profitability

profitability without mechanism participation

additional revenues from mechanism participation

profitabilitythreshold

Financially unattractive projects with mechanism participation

“Additional” projects: mechanism participation possible

Financially attractive projects without mechanism participation

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Profitability vs. NME contribution of projects


B3

B2

B1

Project profitability

profitability without mechanism participation

additional revenues from mechanism participation

profitabilitythreshold

% deduction of profitability above threshold < fixed NME contribution

% deduction of profitability above threshold = fixed NME contribution

% deduction of profitability above threshold > fixed NME contribution

reduced margin for fixed NME contribution

reduced margin for profitability-based NME contribution

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Summary

> Net-mitigation-effect contributions are possible but careful

implementation required

> Discounts & standardised baselines below BAU seem

promising approaches

> Profitability-based approaches and/or further flexibility

required to ensure innovation potential of mechanism

> The discount approach allows immediate implementation

> Little experience so far but provide already valuable

lessons learned and approaches


© ECOFYS | | 24.09.2012 Carsten Warnecke

Thank you.

Contact:

Carsten Warnecke

Senior ConsultantInternational Climate PoliciesT: +49 (0)221 270 70 204M: +49 (0)172 297 39 08E: [email protected]

Project-based mechanisms for climate protection (1): Realising a Net-Mitigation Effect

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