Beyond profit sig carbon finance


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Beyond profit sig carbon finance

  1. 1. Introduction to carbon finance 1
  2. 2. Overview• Project-based emission reduction mechanisms have successfully attracted investment flows into low carbon projects, BUT:  they have mostly benefited large stand-alone projects in advanced developing countries  they are deemed insufficient to curb carbon emissions trends in emerging economies• Small-scale and dispersed emissions reduction activities have suffered from limited access to the international carbon market due to high transaction costs• Uncertainty on the future of Kyoto-based project mechanisms in the post-Kyoto era: scaling up or disappearing?• In the medium-term:  increased focus on sustainability issues and geographical distribution  increased interest in voluntary markets, where demand is driven by consumer and CSR trends rather than policy
  3. 3. Joint Implementation and Clean Development Mechanism  JI and CDM projects involve developing and implementing projects that reduce GHG emissions abroad, thereby generating carbon credits that can be sold on the International ET carbon market and other regulated markets such as the EU Emissions Trading Scheme.  These carbon credits generate an additional income stream for the project and provide a cost effective means of assisting Annex I countries and companies within those countries to meet their emission commitments. • JI is a project mechanism where an Annex I country can benefit from Joint emission reductions achieved through a project implemented inImplementation another Annex I country (JI) Clean • CDM is a mechanism where an Annex I country can benefit from emission Development reductions achieved through a project implemented in a non-Annex I country Mechanism (developing economies – China, India, South Africa…). (CDM) • Parties with commitments under the Kyoto Protocol have accepted targets for reducing their emissions. These targets are expressed as “assigned amounts” overEmission Trading the 2008-2012 commitment period. Scheme (ETS) • Emissions trading allows countries that have excess emission allowances to sell them to countries that are struggling to meet their targets 3
  4. 4. CDM: how it works• The achievement of emission reduction projects by Annex I Countries (industrialized and economies in transition) in non-Annex I Countries.• The achievement of projects allows to obtain “Certified Emission Reductions” (CERs)• CERs are credited to the investor Country and can be used for compliance• Legal entities authorized by Parties can participate in projects 4
  5. 5. CDM approval cycle Origination and preparation of the Project completion Project Idea Note (PIN) and Host Country Approval Issuance Preparation of project documentation (PDD, Baseline Study and Monitoring Plan) Time till registrationPeriodic verification ~ 18 months& certification Validation process and(Verification report other Parties approval Supervision report) Registration by EB Complex registration procedure to ensure transparency 5
  6. 6. Example CDM: Grid-connected generation from RES Registered projects >1000 large-scale > 900 small-scale Example: 1 MW PHOTOVOLTAIC PLANT IN SOUTH AFRICA -The plant displaces 1 MW on the grid, which would be otherwise produced by coal power plants (baseline for SA) - The project will receive yearly an amount of credits proportional to the CO2 that the coal plant would otherwise emit in the atmosphere (~ 2000 credits/year)Environmental additionality – the project produces fewer greenhouse gas emissions than thebaseline scenario. It is essential that the project achieve environmental additionality – otherwise, itwill not generate any carbon creditsHowever, the project developer must also usually demonstrate that, without carbon revenues, theproject would not be viable and/or commercially attractive – this is known as FinancialAdditionality 6
  7. 7. The role of the Clean Development Mechanism (CDM) Advantages for CDM allows developed countries: developed Developedcountries can countries to relatively low-cost & reduce generate politically acceptable emissions „carbon credits‟ anywhere in (Certified the world Emission Advantages forThey can count Reductions, developing countries: these CERs) in reductions developing inward investment, towards their own targets countries environmental & technology benefits 7
  8. 8. The Carbon Market, a “baby” already worth 150 bln $ Size of the global carbon market Volumes and prices for Kyoto offset transactions (CERs and ERUs)Source: World Bank 8
  9. 9. CDM in numbersRegistered CDM projects (2003-2010) Total cumulated CERs by project-type Afforestation & Middle East & North Reforestation 3000 Africa: Africa (MENA): 2800 Fuel switch 1% 2600 2% Latin America 2400 17% 2200 Energy Efficiency Million CERs 2000 1800 1600 CH4 reduction & 1400 Cement & Coal 1200 mine/bed 1000 Renewables 800 600 Asia & Pacific: 400 HFC & N2O 200 reduction 80% 0 dic/03 giu/04 dic/04 giu/05 dic/05 giu/06 dic/06 giu/07 dic/07 giu/08 dic/08 giu/09 dic/09 mar/04 mar/05 mar/06 mar/07 mar/08 mar/09 set/04 set/05 set/06 set/07 set/08 set/09Number (%) of CDM projects in each category Afforestation & Reforestation Transport • Total projects registered from 2006: Demand-side EE 1,0% 4% 0,4% Fuel switch 2% HFCs, PFCs & over 5000 N2O reduction 2% • Amount of CERs expected: approx Supply-side EE 3.000.000 kCERs • Uneven regional distribution - Africa is 11% Renewables CH4 reduction & 60% an unexploited market for CDM Cement & Coal mine/bed 20% 9
  10. 10. POST-2012 perspectives• Although there is still uncertainty about a new global climate deal, Cancun provided encouraging signals• CDM is a self-financed mechanism, so it can survive as long as there is demand for credits (no Kyoto-2 is needed)• Increased focus on African countries “…the Kyoto framework allows the CDM to continue beyond 2012, even in absence of a 2ndcommitment period.. Environmental integrity of CDM must be improved and its use as an offsettingmechanism should be increasingly focused on Least Developed Countries”Comm. Hedegaard, DG CLIMA, EU Commission, Sept. 2010• In the EU-ETS (the main source of demand for credits today) the post-2012 scenario in case of no global deal is already set: • Use of credits from projects registered before 2012 will be allowed through 2020 • Projects registered after 2012 will be allowed if: • located in Least Developed Countries • within the framework of bilateral agreements between EU and third countries 10
  11. 11. Post-2012 perspectives: LDCs• Currently <1% of developing country emissions, BUT• Robust economic growth provides emission mitigation opportunities • Generation Capacity additions >150 GW • Potential CO2 emission savings >700 Mt/year against BAU 11
  12. 12. Scaling up CDM: Programmes of Activities (PoAs) Source: KfW• Registered PoAs are applying project types that are considered as rather complex within the CDM.• This trend is confirmed by projects applying for registration. PoAs allows for an overall reduction of CDM transaction costs for project types with a high number of appliances in dispersed areas• Typical projects are: • efficient lightning (CFL) • improved cooking (stoves) • Off-grid renewables • Methane avoidance
  13. 13. POA regional trends Source: KfW POAs can enhance geographical distribution of carbon finance