Bilateral agreements for sector crediting

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While until recently the CDM was a key pillar of the global carbon market, alternative mechanisms are being developed by several jurisdictions. This presentation informs on insights from a report conducted by Ecofys on behalf of the German Emissions Trading Authority division of the Federal Environment Agency (DEHSt). The report investigates how to create a bridge from the CDM to the new market-based mechanisms at the sectoral level and what the relevance of bilateral agreements can be in this regard. The presentation was given by Carsten Warnecke and Hanna Fekete, Ecofys Consultants for Market-based Mechanisms and International Climate Policies, at the workshop "Reform efforts for the international carbon market: CDM, bilateral offsets, and beyond" on 5 June 2013 in Bonn, Germany.

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Bilateral agreements for sector crediting

  1. 1. Bilateral Agreements for Sector Crediting Workshop: “Reform efforts for the international carbon market: CDM, bilateral offsets and beyond” 05.06.2013 Bonn, Haus der Geschichte
  2. 2. Content Preliminary results of the research project “The fragmentation of the carbon market and options for counteraction” (FKZ: 3712 41 507) > Project objectives > Country and sector selection > First considerations for benchmarks and agreements © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  3. 3. Current situation > Carbon market does not provide incentives for mitigation activities in non-LDCs – EU ETS restrictions for CERs from non-LDC CDM projects apply – Design and implementation of new market mechanisms are still pending > Fragmentation tendencies emerge – CDM’s role as common standard for the indirect linking of schemes decreases – Regional schemes and standards gain in importance > Gap phase with low activity might result in loss of expertise and structures which is required if ambition and demand increases > NMM needs pilots and testing of approaches starting now to ensure practical readiness in time © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  4. 4. Project objectives > Theoretic research to develop approaches based on a bilateral crediting system that allows pilot activities > Pilots shall develop towards new market mechanism while based on an upscaled continuation of CDM-like activities > Activities shall have a – sectoral coverage based on benchmarks – high level of environmental integrity – generate net emission reductions > Demand for „reduction units“ could be created based on bilateral agreements between Parties as long as markets are not available > EU ETS in article 11a (5),(6) even considers bilateral agreements as an option in case in case no new international agreements on climate change has been agreed > Open to further ETS and regional markets to join the initiative © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  5. 5. Approaches > Project shall – Identify suitable countries and sectors within these countries – Develop initial sector approaches including proposals for benchmark concepts – Elaborate preliminary recommendations for the design of such bilateral agreements – And recommend actions on the level of policy makers © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  6. 6. COUNTRY AND SECTOR SELECTION - Bilateral Agreements for Sector Crediting - © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  7. 7. Sector and country selection - approach to country selection Upper Middle Income Countries 2. Below 30 € / tCO2 exclusion 1. Global importance 2. Regional importance Indicators Absolute GHG emission level Political stability, good integration in the region rating Shortlisted countries 3. Activity level 4. Ambition level Selected countries for individual assessment © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete CDM and NAMA activities, MRV activities International GHG reduction pledge, national RE and EE targets
  8. 8. Country selection - Results > Chile – High involvement in NAMA concepts – Very good relationship between Chile and Germany – Orientation towards liberal markets > South Africa – High level of ambition – High engagement in international processes and key role on African continent – Openness to carbon pricing © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  9. 9. Sector and country selection - approach to sector selection > The aim is to identify – general importance – individual suitability of sectors > Indicators for importance and suitability of sectors include – share of the sectors of national emissions – existing experience regarding mitigation activities – inclusion in national mitigation plans © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  10. 10. Sector selection - Results > Chile – Electricity sector – Good data availability – Priority in national plans – Activities needed to support a long-term positive transformation > South Africa – Low income housing sector – Emphasising pilot character of the project – Important co-benefits for population – Some experience in CDM for building sector in South Africa – Low income housing is a priority in national plans © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  11. 11. FIRST CONSIDERATIONS FOR BENCHMARKS AND AGREEMENTS - Bilateral Agreements for Sector Crediting - © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  12. 12. The benchmark concept (1) Definition of the system boundary (2) Identification of key performance indicator (3) Selection of peers for comparison (4) Collect data of peers for comparison (5) Measurement of own current performance (6) Define specific levels (7) Define an action plan for improvement (8) Implement specific improvement measures (9) Evaluate the results of the measures Benchmark stringency © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  13. 13. Sector characteristics for BM Power generation sector Building sector Data availability Good, no confidentiality issue, grid EF calculations Difficult Success in the CDM well represented; several methodologies, high share of projects, first SBL Limited, low penetration rate, mostly single measures in buildings Barriers in the CDM Large differences in regional baseline and respective incentive level MRV, boundary setting, high transaction costs, high “signal to noise ratio” Size of average projects in terms of ERs Small to very large Small, up-scaling desired but difficult Benchmarks in the EU ETS None, no free allocation None, not covered by the EU ETS © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  14. 14. Benchmark concept development in the power sector - exemplarily for Chile > Electricity generation is currently dominated by gas and hydro power plants > Future capacity additions will likely be based coal to reduce the import dependence and to respond to demand increases. > Chile has vast potential of renewable energies including solar potential in the north, hydro in the south, wind along the coast and geothermal potential in regions with volcanic activities > Chile released a law which requires electricity companies with more than 200 MW capacity to have a share of at least 5% of renewable energy in their sales Total Installed Capacity Total GRID Thermal (MW) Chile‘s power sector in detail Hydro (MW) Wind (MW) GRID SING 4.570 13 0 4.582 SIC 6.680 5.840 196 12.715 AYSEN 21 18 2 41 MAGALLANES 99 0 0 99 Total National 11.370 5.870 198 17,437 Source: CDEC-SIC 2012 © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  15. 15. Benchmarks steps > Many procedures can be developed following CDM compatible approaches – definition of the system boundary, – the identification of the key performance indicator (e.g. tCO2e/MWh), – the data collection of peers for comparison and monitoring > Adjustments to approaches seem to be required – for the selection of peers for comparison to ensure the project-byproject approach of the CDM is expanded to a sectoral coverage ● geographic scope of the benchmark, ● the size and type of plants to be included, ● the fuel used and ● the existence of a grid connection. > Stringency level needs to consider own contribution from countries, net emission reductions © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  16. 16. Benchmark setting approaches > The use of the current CDM framework: – Application of the SBL approach and the CDM tool to calculate the grid EF – Net emission reduction ensured by discount on standardised grid EF SIC No. of CDM projects using a grid emission factor SING 57 5 Operating margin Av. 0.703 0.785 Build margin Av. 0.405 0.652 Combined margin Av. 0.557 0.759 > Application of a default value: Source: IGES, Ecofys – Use of a politically set default value – Benchmark below the CDM grid emission factor – Reference e.g. EF of NG fired power plant, various EU ETS phase II NAPs set such benchmark levels between 0.350 – 0.450 tCO2e/MWh > Hybrid approach: – Combination of the above – RE by default get reduction units according to default value while fossil fuel based activities apply for benchmark based on the CDM approach – Incentives also for new NG fired power plants and for efficiency increase in existing fossil fuel fired power plants © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  17. 17. BM concept development in the low income housing sector - exemplarily for South Africa > CDM experiences show that the needs for – pragmatic MRV approaches – valuation of indirect and long term effects – bundling of less homogeneous single activities to facilitate reaching a large coverage > large demand for low cost buildings to supply the growing population with adequate housing facilities > government targets for new buildings > low income housing segment provides free housing to poorest parts of the population; such houses are usually constructed in a standard way, resulting in a large number of similar homes > Lessons learned with the use of the CDM and upscaling approaches exist © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  18. 18. Benchmarks steps > All BM steps include challenges – e.g. the boundary definition © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  19. 19. Benchmark setting approaches > Performance indicator: – GHG emissions per floor area vs. – GHG emissions per standard housing unit > Peers for comparison – Buildings with similar service levels – Segment specific building codes > Ex-post MRV – Based on ex-ante agreed higher building standard and implementation volume © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  20. 20. Outlook on next steps of the project > What level of – benchmark stringency, – GHG quantification accuracy and – Additionality would ensure acceptability of reduction units in various demand systems? > How can integration in the international processes be ensured to counteract fragmentation of carbon markets? > What institutional set-ups are required and what options do exist? > What are preconditions to reach actual implementation? © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete
  21. 21. Thank you. Ecofys: Carsten Warnecke, Hanna Fekete Contact: c.warnecke@ecofys.com h.fekete@ecofys.com © ECOFYS | 05.06.2013 | Carsten Warnecke, Hanna Fekete

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