The CDM: A Really, Really Quick Overview Robert Kelly Regional Coordinator, CDM Capacity...

The CDM:A Really, Really Quick Overview

Robert KellyRegional Coordinator, CDM Capacity Development,

Southern & Eastern Africa

[email protected]

2 2

Agenda

Misconceptions about the CDMMisconceptions about the CDM

CDM concepts & terminology

The CDM project cycle

3 3

Three misconceptions…

The CDM is all about climate change11

4 4

Actually, the CDM is ‘climate neutral’

Actual greenhouse gas

emissions

CERs generated by CDM projects

Annex 1 country buys CERs

Acquired CERs are added and

national emissions cap

increases

‘Business as usual’ emissions

5 5

The CDM is all about development

TechnologyTransfer

PovertyReduction

Environmental Benefits

ODA

GEF

PES

CARBON

Sustainable Development

Carbon finance represents a supplementary source of funding for some projects – and a means of catalysing development

6 6


The CDM is too difficult22


Sub-Saharan Africa offers few CDM opportunities33

7 7

In 3 years, the CDM has sparked a $5 billion/year market

Jan05

Mar05

May05

Jul05

Sep05

Nov05

Jan06

Mar06

May06

Jul06

Sep06

Nov06

Jan07

Mar07

May07

July07

Sep07

Nov07

Jan08

Mar08

67 83 118 171275

440554

647749

883

1,1411,311

1,495

1,7591,885

2,285

2,593

2,8383,035

3,265Number of Projects in the CDM Pipeline,

January 2005 – March 2008

Compound Monthly Growth Rate = 11%

Approximately 3 billion CERs by 2012

Compound Monthly Growth Rate = 11%

Approximately 3 billion CERs by 2012

8 8

Current value size of the international carbon market

CDM:> 1000 projects registeredcumulative > 3(?) bn tonnes CO2e reductions up to 2012(About India & Japan’s inventory for a year – or nearly 10% of global annual

emissions)

2005 ~ $1 billion2006 ~ $5 billion2007 ~ $12 billion 2008 …???

JI 2007 < $1 billionEUETS 2007 > $60 billion (?)

9 9

Seems like CDM is a roaring success…. BUT:

Under Kyoto, CDM purpose is to deliver low cost emission reductions

AND assist developing countries

achieve sustainable development.

Many CERs come from ‘end of pipe’ projects, not really SD

HFC & N2Oreduction

40%

Renewable Energy23%

CH4

reduction16%

Energyefficiency

7%

Cement & Coalmine/bed, 7%

Fuel switch, 7%

Afforestation &Reforestation, 0.2%

1010

Geographical imbalance in the CDM

Location of CDM Projects

• 4 countries (China, India, Brazil and South Korea) account for 80% of credits through to 2012

• Within these countries, not necessarily impact poorest

• Arab States, Africa, Central Asia underrepresented

•88 non-Annex 1 countries have yet to benefit from any registered CDM project activity

1111


The CDM is too difficult22


CDM offers few opportunities outside

industrialised countries

33

1212

The CDM is about more than just heavy industry…

Clean energy

• Use of renewables (e.g. hydro power) to supply electricity to the grid, to local communities and to commercial facilities

• Use of biomass residues for energy generation / cogeneration – e.g. bagasse from the sugar industry, coffee husks from the coffee industry, etc.

Wind power Bagasse Timber residuesRun-of-river hydro

1313


Waste management

• Capturing the methane from animal waste, human waste (sewage), agricultural waste (biomass) and urban landfills

• Can be combined with electricity generation to produce a second stream of carbon credits

Animal waste Sewage / wastewater Landfill

1414


Bio-carbon

• Forestry plantations – e.g. restoration of mangrove forests

• Agro-forestry – e.g. shade crops, nitrogen capture in soils

• Bio-fuels – e.g. bio-ethanol from molasses, bio-diesel from palm oil

Forestry Agro-forestry Bio-fuels Transport

1515

China’s registered CDM projects

Wind Power37%

Hydro Power31%

Energy Efficiency, 7%

Landfill Gas, 6%

Industrial Gas (HFCs), 6%

Biomass Energy, 5%

Coal Mine Methane, 5%Other, 3%

152 registered CDM projects

152 registered CDM projects

Approximately $915 million in carbon revenue per year

Approximately $915 million in carbon revenue per year

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Agenda

Misconceptions about the CDM

CDM concepts & terminologyCDM concepts & terminology


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Mitigation versus sequestration

• Mitigation/avoided emissions – reduction or prevention of greenhouse gas emissions from a source

• E.g. methane from animal waste

• E.g. carbon dioxide from burning fossil fuels

• E.g. nitrous oxide from agricultural soils

• REDD

• Sequestration – removal of greenhouse gases from the atmosphere

• E.g. forestry – absorption of CO2 through photosynthesis

• E.g. grassland sequestration

• E.g. ‘Geo-engineering’ – Carbon Capture & Storage (CCS), marine phytoplankton; absorptive gels; reaction with suspension of chalk in water (to produce CaCO2)

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Carbon projectCarbon project

Avoiding new emissions

Avoiding new emissions

Reduce emission factor

Reduce emission factor Reduce

energy consumption

Reduce energy

consumption

Land-use mitigation

Land-use mitigation

Reduce energy losses during transmission/ distribution

Reduce energy losses during transmission/ distribution

End-of-pipe End-of-pipe

DestructionDestruction StorageStorage

Gas recovery

& utilization

Gas recovery

& utilization

Emission reductionEmission reduction Atmospheric removal

Atmospheric removal

Renewable energy

Renewable energy

Fuel SubstitutionFuel Substitution

Waste heat/gas

utilisation

Waste heat/gas

utilisation

Fuel switch

Fuel switch



Energy efficiency at generation

Energy efficiency at generation

GHG efficiency at production

GHG efficiency at production

Types of CDM projects

1919

‘Kyoto gases’ that can earn credits

• Carbon dioxide (CO2)

• Methane (CH4)

• Nitrous oxide (N2O)

Relevant to almost all projects including bio-carbon & industrial projects

Relevant to industrial projects

• Perfluorocarbons (CxFx)

• Hydrofluorocarbons (HFCs)

• Sulphur hexaflouride (SF6)

2020

How a CDM project generates carbon credits

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Historical Trend

Project startProject start

Carbon credits (CERs) represent the difference

between the baseline and actual emissions

Carbon credits (CERs) represent the difference

between the baseline and actual emissions

Time

NOTE: greenhouse gas emissions must also

include project emissions – emissions

occurring within the project boundary:

• e.g. fossil fuel emissions from construction

• e.g. soil disturbance from tree-planting

NOTE: greenhouse gas emissions must also

include project emissions – emissions

occurring within the project boundary:

• e.g. fossil fuel emissions from construction

• e.g. soil disturbance from tree-planting

AND: leakage – emissions occurring outside the project

boundary

AND: leakage – emissions occurring outside the project

boundary

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• Leakage refers to an increase in emissions outside of the project boundary

• There are 2 principal forms of leakage for carbon projects:

• Emission shifting: displacement of GHG activities to other locations/sources

– e.g. Shift in grazing activities from a forestry project site

– e.g. Protected forest makes shift from wood to kerosene

– e.g. Protected forest results in more intensive agriculture (and fertiliser use)

– Investment crowding: eg: public demand for (& willingness to pay for) protected areas (eg: national parks & nature reserves) diminishes as more areas are protected.

leakage nearly always negative (increase emissions)

May be positive – eg: adopting EE technology can result in CO2 mitigation as well as increase profitability. If other firms adopt similar practices to increase profits, more CO2 mitigated than from just the original project activity.

1

Leakage

2222

• Temporal leakage: also known as ‘non-permanence’ and ‘reversibility’. With sequestration projects, greenhouse gases can be re-released into the atmosphere over time

– e.g. a forest plantation may burn down, re-releasing its stored carbon

– e.g. vegetation may be washed away in flash floods

2

Non-permanence only affects sequestration projects – not mitigation projects. It can be addressed at a project level and at

a systemic (institutional) level

Leakage

2323

• Every carbon project requires a baseline study

• The purpose of the baseline study is to determine the baseline scenario for each GHG component of the project

– The baseline must be explicitly defined

– Selection of the baseline must be justified in a transparent manner

• Being counterfactual in nature, some aspects of the baseline scenario cannot be observed and thus remain uncertain

• In order not to exaggerate the emission reductions achieved by the project, the baseline study must adopt a conservative approach whenever assumptions about future developments need to be made

– The principle of conservativeness

Baseline study

2424

• Has been defined as:

– Environmental additionality – reductions in GHG emissions

– Financial additionality – the project only happens because of the financial incentive offered by carbon credits

– Legal additionality – the project does more than what is required by local law

• The Kyoto Protocol is somewhat vague, stating simply:

– “Reductions in emissions must be additional to any that would occur in the absence of the project activity”

• Assessment of additionality is intrinsically linked with baseline establishment

Additionality

2525

Ideally, a project should demonstrate a combination of these forms of additionality

It is essential that the project achieve environmental additionality – otherwise, it will not generate any carbon credits!

Typically, a project developer also demonstrates that, without carbon revenues, the project would not be viable and/or

commercially attractive

The CDM Executive Board has developed an ‘additionality tool’ for CDM projects

Additionality

2626

• Benchmark analysis

– Choose an appropriate financial indicator and compare it with a relevant benchmark value: e.g. required return on capital or internal company benchmark

Project without carbon revenue is profitable –

but not sufficiently profitable

compared with alternatives

Project without carbon revenue is profitable –

but not sufficiently profitable

compared with alternatives

Project without carbon element

Project with carbon element

Carbon revenue makes the

project attractive relative to investment alternatives

Carbon revenue makes the

project attractive relative to investment alternatives

Investmentthreshold

Rev

enu

e /

NP

V /

IR

R

A project can be money-making and qualify as ‘additional’!

A project can be money-making and qualify as ‘additional’!

Financial additionality – benchmark analysis

2727

Some examples of additionality

Capturing methane from an urban landfill and flaring it

— Carbon credits represent the only source of income for undertaking this activity

Capturing methane from an urban landfill and utilising it to generate electricity

— Project developer would have to demonstrate that the electricity revenue alone would not make this project attractive

Building a large hydro project for the grid in Ethiopia

— Questionable additionality: there is already plenty of hydro activity in Ethiopia

?

2828

Crediting period

CDM mitigation projects

• Project developers have two crediting period options:

– A maximum of 7 years, which can be renewed up to 2 times(i.e. a potential total crediting period of 21 years)

– A maximum of 10 years, with no option for renewal

CDM sequestration projects (forestry)

• Project developers have two crediting period options:

– A maximum of 20 years, which can be renewed up to 2 times(i.e. a potential total crediting period of 60 years)

– A maximum of 30 years, with no option for renewal

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Crediting period

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Emissions under the baseline scenario

Emissions under the project scenario

Starting date of the crediting

period

Starting date of the crediting

period10 years No renewalNo renewal

A maximum of 10 years with no

option of renewal

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Why not maximise the crediting period?

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Emissions under thebaseline scenario

Emissions under theproject scenario

7 years

The baseline scenario may become less favourable


Baseline must be reassessed by DOE at each

renewal


renewal

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Why not maximise the crediting period?

Gre

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Emissions under thebaseline scenario

Emissions under theproject scenario

7 years 7 years 7 years


renewal


renewal



3232

• A CDM project must use an approved CDM methodology. If no relevant methodology exists, the CDM project developer can design a new methodology and submit it for approval

• A CDM methodology contains 2 components:

• A baseline methodology is an application of a baseline approach to an individual project activity, reflecting aspects such as sector and region

• A monitoring methodology refers to the method used by the project developer for the collection and archiving of all relevant data necessary for the implementation of the monitoring plan

• The baseline methodology and monitoring methodology must be used in combination

• CDM methodologies approved by the CDM Executive Board are publicly available on the UNFCCC CDM website

Baseline & monitoring methodologies

3333

Estimating emission reductions

Baseline emissions

Baseline emissions

Projectemissions

Projectemissions

What would the level of emissions be in the absence of the project?

‘Guesstimate’ of baseline

activity

‘Guesstimate’ of baseline

activity

Emissions factor

associated with activity

Emissions factor


The baseline scenario:

• Existing or historical emissions

• Emissions from economically attractive alternative technologies

• Average emissions of similar project activities

The baseline scenario:

• Existing or historical emissions

• Emissions from economically attractive alternative technologies

• Average emissions of similar project activities

XX

• E.g. the default IPCC emissions factor for kerosene is 71 tCO2/TJ

• E.g. the default IPCC emissions factor for kerosene is 71 tCO2/TJ

Project activityProject activity

Emissions factor


Emissions factor


XX

What is the level of emissions in the presence of the project?

e.g. fossil fuel consumede.g. fossil fuel consumed e.g. IPCC default emission factor

e.g. IPCC default emission factor

– –

Emissions reductions

Emissions reductions

= =

= =

= =

Denominated in tonnes of CO2-equivalent

Denominated in tonnes of CO2-equivalent 1 tCO2e = 1 CER1 tCO2e = 1 CER

3434

Agenda

Misconceptions about the CDM

CDM concepts & terminology

The CDM project cycleThe CDM project cycle

3535

6 to 12 months 1.5 months Crediting period of the project

Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN

CDM project development

/ PDD


/ PDD

Host country approval


Project validation

Project validation

Project registration


CER issuance

CER issuance

Project verification



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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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Pro

ject

D

evel

op

erD

NA

DO

EC

DM

Exe

cuti

veB

oar

d

Project feasibility

assessment / PIN

Project feasibility

assessment / PIN


/ PDD


/ PDD



Project validation

Project validation



CER issuance

CER issuance




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PDD

Host country approvalDesignated

national authority

Operational entities

Project owner

Executive Board

Validation

Registration

Financing & implementation

Monitoring

Verification & certification

Issue CERs

Project Idea Note (PIN)

Project idea

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End

Robert KellyRegional Coordinator, CDM Capacity Development,

Southern & Eastern Africa

[email protected]

The CDM: A Really, Really Quick Overview Robert Kelly Regional Coordinator, CDM Capacity...

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