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Global distribution of cdm projects

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This paper studies the global distribution of CDM projects and tries to explain the reason behind the clustering.

This paper studies the global distribution of CDM projects and tries to explain the reason behind the clustering.

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  • 1. Global Distribution of CDM Projects: An approximation to the determinants of carbon market expansion in developing countries, 2004-2007Abstract The market for Clean Development Mechanism (CDM) projects is continuing togrow rapidly, with the current portfolio expecting to deliver 2.3 billion tons of CarbonDioxide equivalent (CO2e)1 greenhouse gas (GHG) emission reductions by 2012,equivalent to 18% of developed economies base year Greenhouse gas emissions (seeannex 1 (where it shows the table where it comes from)). The distribution of CDMprojects is geographically concentrated in a limited number of countries: China, India,Brazil and Mexico. Specific regions in the developing world, namely Sub-SaharanAfrica, Central Europe and Middle East, have been largely bypassed by the CDM marketand are in search of CDM project investors. This study seeks to analyze the globaldistribution of CDM projects in the Pipeline2 from 2004 – 2007 as an approximation tounderstand the underlying process behind it. It presents a series of variables that affectthe opportunities for market expansion and the risks behind the market, and use aRegional Gravitational Theory to explain the geographical location of the CDM projects.It also employs an autoregressive model to foresee the number of projects throughout2008 for several countries. The data used in this study comes from the United NationsEnvironmental Program (UNEP) that consists of observations for 68 countries and 5regions with a monthly frequency. As a result each country has 49 cases starting fromDecember of 2003 until December 2007. Put conclusionsKeywords: Clean Development Mechanism, Autoregressive Models, RegionalGravitational Theory1 CO2e: Carbon dioxide equivalent from the list of Greenhouse gases that are included in the KyotoProtocol, being so: Methane, PFC,2 Explain pipeline
  • 2. Global Geographical Distribution of CDM Projects Introduction The Kyoto Protocol, signed in 1997, finally entered into force on February 16, 2005.The Marrakesh Accords in 2001 set out the fundamental rules for the Kyoto mechanisms—the Clean Development Mechanism (CDM), joint implementation (JI), and emissionstrading –ET-. The CDM was designed to assist developed economies in meeting theirgreenhouse gas emissions reduction targets by implementing reduction/sequestrationactivities in developing economies and counting the reduced/sequestered amounts aspurchasable “credits.” Before the protocol came into effect, investors and projectdevelopers were hesitant to move into the CDM field. Since it came into force there hasbeen a steep increase in the number of projects submitted for validation and registration,and this upward trend is expected to continue in the next few years. Though a relatively recent phenomenon, the market for Clean DevelopmentMechanism is rapidly growing. The World Bank estimated the carbon market value atU$11 billion for 2005, the first year of operation of the European Union EmissionsTrading Scheme (EU ETS). The market value jump at U$30 billion for 2006, and isestimated to reach U$60 billion for 2007. According to Point Carbon, the world carbonmarket could reach U$565 billion by 2020. This considerable sum of money has the riskof being amassed by a few whereas there continues a strong bias in the geographicaldistribution of the projects: China, India, Brazil and Mexico account for the vast majorityof all registered projects as figures 1 and 2 elaborate. The rest of the countries thatparticipate in the carbon market as part of the Clean Development Mechanism havelagged behind and stand no comparison against these four giants. The asymmetricevolution of the market has presented itself as a difficult challenge to policymakers in thesearch of universal participation in the struggle against climate change and elimination ofbottle necks.Figure 1. Geographical location of CDM projects 2
  • 3. Juan Pablo DominguezNote: Red: CDM Large scale project, one location Orange: CDM Large scale project, several locations Yellow: CDM Small scale project, one location White: CDM Small scale project, several locationsSource: UNFCCCChange it black and white Given the youth of carbon markets, especially for CDM, the number of academicpapers written about the topic is very limited. Companies such as Point Carbon andNatsource to name just a couple, are the leading producers of research regarding themechanism. The World Bank, the United Nations Environment Program –UNEP-, theUnited National Climate Change Convention –UNFCC- and the Intergovernmental Panelon Climate Change –IPCC- are among the top multilateral organizations that offermaterial for researchers and are more focused on the legal and operational framework ofCDM than in quantifiable data. The works of the World Bank regarding financing arevery complete and offer relevant and reliable data for topics such as internal rates ofreturns, market potential and main participants. However, the main source of data of thispaper is CDM pipeline which presents an up to date database of all CDM projects on theUnited Nations registry. The data is composed by more than 2548 projects organized byhost country, type, date, methodology, estimated output, credit buyer and othercategories. All the information is available on CD4CDM without any charge.Figure 2. All CDM Projects in the Pipeline in Brazil, Mexico, India, China as apercentage of all projects, 2004-20073
  • 4. Global Geographical Distribution of CDM Projects 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q2-05 Q3-05 Q4-05 Q1-04 Q2-04 Q3-04 Q4-04 Q1-05 Q1-06 Q2-06 Q3-06 Q4-06 Q1-07 Q2-07 Q3-07 Q4-07 India China Brazil Mexico Source: UNEP, put the link. Ojo poner también en la bibliografía (poner 2004 en los quarters, es decir poner 20 antes 04) With these materials we pretend to look the temporal performance in order to analyzethe geographical distribution of the CDM projects. For now China, India and Brazilaccount for more than 75% of the market by number of projects and about 80% ifmeasured by the volume of expected CERs by 2012. The relevance of this study lies inthe opportunities the CDM presents for all developing countries and their commitmentsfor sustainable development and climate change abatement. The difficulty lies in theabsence of a comprehensive study that would enable developing economies decisionmakers as well as CDM developers and investors decide geographical resource allocationand therefore which countries should reinforce their capacity building. Given the lack of a theory for explaining CDM geographical allocation we use twotools: first, the Regional Gravitational Centers theory to broadly explain the behaviorduring these past years of the CDM projects. Second we use statistical models to see ifthe process has any temporal structure. Here we propose a Time Series AutoregressiveModel for understanding the evolution through time of the series. The objective is not topredict future behavior of the location of the CDM projects but as to discover whichcountries arise in the world markets as alternatives to today’s centers. 4
  • 5. Juan Pablo Dominguez The main objective of this text is to analyze the geographical distribution of CDMprojects in the pipeline from late 2003 until late 2007. In order to do so, we have dividedthe text into six sections. The first one is this short introduction followed by a backgroundsection where the main generalities of the CDM market are presented. The third sectionconsists of a study of the main barriers that countries have faced when intending toexpand the CDM market in their economies along with the experience of multilateralagencies interested in fomenting the market. Also, this section briefly presents the mainrisks and rationale of the investor when deciding host country selection. The fourthsection is where we introduce a new perspective on the problem through the inclusion ofthe Regional Gravitational Centers theory as a way to explain the process of globalgeographical distribution of CDM projects. Within this section we also present anestimation of the performance for selected countries for the year 2008 in terms of thenumber of projects. This part of the paper is constructed through the use of econometricalmethods and data provided by the United Nations Environment Program and its CapacityBuilding for Clean Development Mechanism program. The following section extendsabout the prospects for CDM throughout the region and finally the last section ends witha set of concluding remarks. Chapter I Background of (pensar) poner chapter en los demás menos en conclusion The CDM was launched in November 2001, the first project was registered aboutthree years later, and the first CERs were issued in October 2005. CERs can be issued forverified emission reductions achieved since 1 January 2000. Rules for some categories ofCDM projects were adopted later; afforestation and reforestation projects (December2003), small-scale afforestation and reforestation projects (December 2004) andprograms of emission reduction activities (December 2005). CDM projects must use an approved methodology and be validated by an accrediteddesignated operational entity –DOE-. CERs are issued by the CDM Executive Board onlyafter the emission reductions achieved have been verified and certified by an accreditedDOE. Thus a CDM project incurs costs (validation of the project) before it can be5
  • 6. Global Geographical Distribution of CDM Projectsregistered, and further costs (certification of the emission reductions) before CERs areissued. The National Energy Commission of Chile and the German TechnicalCooperation Agency –GTZ for its initials in german- estimated that these cost can at leastsum up to U$70,000 for a regular scale project (see chapter III, investor’s rationale).Figure 2. Observed prices for project-based transactions in 2005-2006 Source: Capoor and Ambrosi, 2007 The objective of a CDM project developer is to obtain CERs and, as previouslystated, this process is neither cost nor risk-free. To help defray these issues ofimplementing the project, proponents often agree to sell some of the expected CERsbefore the project has been implemented. As figure 2 indicates expected CERs fromprojects at an early stage command 2006US$ 10.40-12.40, registered project transactionscommand close to 2006US$ 14.70 and issued CERs are trading at 2006US$ 17.75(Capoor and Ambrosi, 2007). The lowest prices reflect risks that the proposed projectmight not be registered and might not deliver the expected emission reductions. In each,the price also depends on how the risks are shared between the buyer and the seller,through penalty provisions or requirements to replace CERs that could not be delivered.Once a project is registered the uncertainty is limited to the timing and size of the emission reductions. Once CERs are CDM the largest CO2 offset system in the world issued, delivery to an Annex B Party • > 948 projects registered by the end of 2007 • 49 countries in active participation • 192,724,874 certified emission reductions (CERs) issued 6 • approx. additional 2800 projects in pipelineSource: 2.7 billion CERs expected to end of 2012 • UNFCCC
  • 7. Juan Pablo Dominguezregistry where they can be used for compliance is the only uncertainty and they thereforecommand the highest prices. At the end of 2007 the 2783 projects in the CDM pipeline were expected to yieldannual emission reductions of 418 Mt CO2e. Experience to-date suggests that CDMprojects achieve about 91.9% of the projected emission reductions (Fenhann, 2007). Theestimated annual emission reduction from the projects registered during 2006 is 88 MtCO2e and from projects that entered the pipeline during 2006 is 144 Mt CO2e. Theestimated revenue from the sale of CERs generated by the CDM projects registeredduring 2006 is US$ 1-1.5 billion per year and the estimated revenue from the sale of theCERs generated by the CDM projects that entered the pipeline during 2006 is US$ 1billion higher. Capoor and Ambrosi report transactions for about 450 Mt CO 2e in thismarket during 2006 at an average price of about US$10.70 per t CO2e. Thus thetransactions averaged about three to five years of projected emission reductions for thenew projects.Figure 1. Projects that entered the clean development mechanism pipeline 2004-2007, byproject type/sector 500 450 2004 2005 2006 2007 400 350 Number of projects 300 250 200 150 100 50 0 Biomass energy Reforestation Fossil fuel switch Afforestation Coal bed/mine methane Hydro EE service EE supply side Biogas Landfill gas EE households HFCs Energy distribution EE own generation Cement Geothermal CO2 capture PFCs EE industry Wind Tidal N2O Solar Agriculture Transport Fugitive7
  • 8. Global Geographical Distribution of CDM Projects Source: CD4CDM, 2007 Figures 1 and 2 provide the sectoral distribution of projects under the CDMpipeline and related emission reductions. As figure 1 shows, the growth in 2007 wasespecially pronounced in Biomass Energy, Energy Efficiency –EE- Own Generation,Hydro, Landfill Gas and Wind sectors. By number of CERs still HFCs have the biggestnumber. Hydro projects with more than 60 millions tons is the second sector with thebiggest amount followed by N20 and EE own generation. In general, the most importantphenomenon of 2007 in terms of number of projects was a higher participation of EE andHydro with a lower participation of HFC and N20.Figure 2. Estimated CERs from projects that entered the CDM pipeline in 2007, byproject type/sector 90 Millions 80 70 60 Number of CERs 50 40 30 20 10 0 HFCs PFCs Hydro N2O Solar Biogas Transport Tidal Wind Cement EE industry Agriculture CO2 capture EE supply side EE households EE service Geothermal Reforestation Afforestation Biomass energy Landfill gas Fossil fuel switch EE own generation Energy distribution Coal bed/mine methane Fugitive Source: CD4CDM, 2007 Of all the 26 sectors included, only for the agricultural sector does Latin Americamaintain a larger amount of projects in comparison to Asia with 157 and 16 respectively.Regarding energy efficiency Asia has a compelling advantage compared to the rest of the 8
  • 9. Juan Pablo Dominguezregions. Wind, Hydro and Biomass are concentrated mainly the Asian continent,whereas the rest of sectors are more evenly spread with Latin America.Figure 3. Regional distribution of clean development mechanism project activitiesregistered and in the pipeline 2003-2007 180 160 140 120 100 80 60 40 20 0 Au 6 Au 4 Au 5 Au 7 Fe 3 Ap 4 Fe 4 Ap 5 Fe 5 Ap 6 Fe 6 Ap 7 4 D 5 6 7 04 05 06 07 04 05 06 07 -0 0 -0 0 -0 0 -0 0 0 0 -0 0 -0 -0 0 -0 n- n- n- n- b- b- b- b- g- g- g- g- r- r- r- r- ec ec ec ec ct ct ct ct Ju Ju Ju Ju O O O O D D D Latin America Asia & Pacific Sub-Sahara Africa North Africa & Middle-East Europe and Central Asia Note: Central Asia includes Kyrgyzstan, Tajikistan and Uzbekistan which are not considered under Asia - Pacific region. Source: CD4CDM, 2007 Figure 3 shows the principal topic of discussion in this paper. This illustrationpresents the evolution of the number of projects from the 5 different regions we havedivided the Non-Annex I groups in the CDM program. Two regions inmediately showclear advantage: Latin America and Asia-Pacific. The first region was the pioneer inCDM but after 2005 until today Asia pacific has taken a huge advantage in all accounts.Whereas a number and amount of CERs Latin America lost its momentum and Asia hasconsolidated its leadership in the carbon market. The reason behind this process is whatewe want to study here and also to find out how will this distributions of the number ofprograms behave during 2008. In terms of countries, China dominates the CDM market as it is the source of over55.6% of the estimated annual emission reductions of the projects that entered thepipeline during 2007. Capoor and Ambrosi note that as the dominant supplier in theCDM market, China’s informal policy of requiring a minimum acceptable price (around9
  • 10. Global Geographical Distribution of CDM ProjectsUS$10.40 - 11.70 or €8.9 since 2006) before providing approval to projects had asignificant stabilizing impact on the market price.1.1 Annual Investment in CDM projects The number of projects a country presents is closely correlated to the capitalinvested in the programs. The capital that is, or will be, invested in CDM projectsregistered during 2006 was estimated at about US$ 7 billion whereas the capital that is, orwill be, invested in projects that entered the CDM pipeline during 2006 is estimated atover 2006US$ 26.4 billion as Table 1 shows (UNFCCC, 2007)Table 1. Capital investments for projects in 2006 Estimated capital Estimated capital Estimated capital invested in projects Estimated capital invested in invested in unilateral that entered the invested in projects unilateral projects projects that entered pipeline during registered during registered during the pipeline during Country 2006 2006 2006 2006 China 12,130 1,270 93 3,793 India 7,534 1,239 944 5,998 Mexico 1,097 435 138 589 Brazil 981 1,037 601 290 Nigeria 554 206 0 332 Malaysia 455 431 14 0 Indonesia 445 530 27 11 Peru 334 48 47 328 Egypt 328 13 0 0 Equatorial Guinea 324 0 0 324 Guatemala 302 57 21 160 South Africa 271 49 39 261 Qatar 200 0 0 200 Philippines 160 85 – 0 Republic of Korea 141 180 46 84 Total 26,465 6,886 2,512 12,894Source: UNFCCC, 2007 Of the US$ 26.4 billion approximately 50% represents capital invested inunilateral projects by host country project proponents. Unilateral projects are these forwhich the project proponent in the developing country Party bears all costs before sellingthe CERs. At the end of 2006, about 60% of the projects, representing about 33% of theprojected annual emission reductions, were unilateral projects. India is home to the most 10
  • 11. Juan Pablo Dominguezunilateral projects (33% of projected annual emission reductions of projects in thepipeline at the end of 2006), followed by China (20%), Brazil (11%) and Mexico (6%)(UNFCCC, 2007). Over 80 to 90% of the capital, US$ 5.7 billion for registered projects and almostUS$ 24 billion for projects that entered the pipeline went into renewable energy andenergy efficiency projects. Although these projects represent only about 20% of emissionreductions they have high capital costs per unit of emission reductions. The estimatedinvestment of US$ 5.7 billion for CDM renewable energy and energy efficiency projectsregistered during 2006 is roughly triple the Official Development Assistance –ODA-support for energy policy and renewable energy projects in the same countries(UNFCCC). It is almost as much as the private investment in renewable energy andenergy efficiency (2006US$ 6.5 billion) in the same countries. China and India receivemost of the CDM investment and private investment. • CDM projects that entered pipeline in 2006 are expected to result in US$25 billion in capital investment (almost double the 14 billion US$ in total investment leveraged through the Global Environment Facility –GEF- in the climate change area since it started) • CDM renewable energy & energy efficiency projects registered in 2006 are expected to result in US$6 billion in capital investment (about triple the ODA support for energy policy and renewable energy projects in the same countries. Almost as much as private investment in renewable energy and energy efficiency (US$ 6.5 billion in 2006) in the same countries) Source: UNFCCC The capital invested in afforestation and reforestation has been very low. Onlythree afforestation and ten reforestation projects were among the 2783 projects in thepipeline at the end of 2007. The attractiveness of these projects is reduced by uncertaintystemming from the temporary nature of temporary CERs (tCERs) and long term CERs(lCERs) and the fact that installations in the EU ETS can use CERs, but not tCERs orlCERs, for compliance. This issue is highly relevant to certain countries that have hopedto increase their participation in the CDM framework through this category and withoutits approval their participation will remain low.11
  • 12. Global Geographical Distribution of CDM Projects1.2 The CDM Market outlook Besides the invested amount in capital, other important variables influence theexpansion of the CDM market in the near future. It comprises a list of relevant issues thatmust be taken into account when analyzing the carbon market. In this subsection wehighlight some of the most pertinent: 1.2.1 Financial muscle The carbon market and associated emerging markets for clean technology andcommodities have attracted a significant response from the capital markets and fromexperienced investors, including those in the United States. Analysts estimated thatUS$11.8 billion (€9 billion) had been invested in 58 carbon funds as of March 2007compared to US$4.6 billion (€3.7 billion) in 40 funds as of May 2006 (World Bank).50% of all capital driven to the carbon value chain is managed from the UK (WorldBank). Most of the newly raised money, of private origin, came to the sell-side (projectdevelopment and carbon asset creation) which currently represents 58% of thecapitalization (UNFCCC). A key indicator of interest in aligned and closely related fieldsis the record US$70.9 billion in clean technology investments in 2006, with majorinvestments (and announcements) from well-known investment banks (UNFCCC). 1.2.2 Demand-Supply Balance and CER prices The Kyoto Protocol established a set of commitments that limits the amount ofcarbon dioxide equivalent emissions to the atmosphere by developed economies (orAnnex B countries) for the period 2008 – 2012. With this objective in mind, threemechanisms were established: the CDM, JI and International Emissions Trading. In thisway, each country has the opportunity to diminish its emissions locally or obtaincertificates from offsets somewhere else in the world. Emission trading systems weretherefore implanted so as to enable the proper interaction between the obligations of thegovernments to fulfill their commitments and also the operational requirements ofcompanies. This complex mechanism allows the companies and governments establish an 12
  • 13. Juan Pablo Dominguezequilibrium between demand and supply of emission reductions as part of a larger carbonmarket.Table 4. Overview of existing carbon markets (2006)Sources: Capoor and Ambrosi, 2006; Capoor and Ambrosi, 2007; Ellis and Tirpak, 2006; Fenhann, 2006; Enviros, 2006.Abbreviations: CDM = Clean Development Mechanism, CER = Certified emission reductions, ERU = Emission reduction unit, ETS =Emissions trading scheme, JI = Joint Implementation.a Number of projects in the pipeline at the end of 2006 and the estimated annual emission reductions for those projects.b Number of projects with issued CERs and the quantity of CERs issued.c Some national allocation plans for Phase II have not yet been approved, but the number of participants will be higher, and theemissions limits will be about 8 per cent lower,than for Phase I. Contracts for Phase II allowances are already trading.d As discussed in chapter VII.2, this reflects the Direct Entry component of the scheme, which accounted for most of the allowanceallocation and trading activity.e During the first nine months of 2006.f Estimated. The EU ETS is by far the largest market in terms of number of participants andtrading activity. Credits created by CDM projects (certified emissions reductions orCERs) are the second largest market and there are also emissions trading systemsoperating in Australia (the New South Wales.Australian Capital Territory GHGabatement scheme) and the United States (the Chicago Climate Exchange). The quantities13
  • 14. Global Geographical Distribution of CDM Projectstraded in the markets established by these systems and the voluntary markets are muchsmaller than those in the EU ETS and the CDM market. There is a consensus emerging among market analysts that the expected shortfallin the EU ETS Phase II (i.e. from 2008 to 2012) is likely to be in the range of 0.9 billionto 1.5 billion tCO2e (Point Carbon). Estimates for not-yet-contracted volumes fromJI/CDM and projected EU shortfalls are very similar to each other in these projections(unless additional demand before 2012 and the promise of higher prices stimulatesadditional JI/CDM supply).Figure 8. Evolution of the CER Price (secondary market, €) 20 18 16 14 12 10 8 6 4 2 0 May-07 May-07 Nov-07 Mar-07 Mar-07 Nov-07 Nov-07 Apr-07 Apr-07 Jun-07 Jul-07 Jul-07 Aug-07 Aug-07 Jan-08 Jun-07 Jun-07 Jan-08 Sep-07 Oct-07 Dec-07 Feb-08 Sep-07 Oct-07 Dec-07Source: Reuters – TFS Energy Future sources of demand for CERs include Canada, the United States and Japan.The Canadians announced they will tighten its carbon emissions by setting a target of20% below 2006 levels by 2020 (assumed to be 150 MtCO2e by Canada). They allowemissions trading, banking and the use of CERs for up to 10% of the projected shortfall.If these assumptions are true, then some demand from Canada could enter the CERmarket relatively soon. The biggest bet at the moment is the United States. Developmentsin California, the eastern United States, the promise of US presidential candidates to 14
  • 15. Juan Pablo Dominguezaddress more actively in carbon markets hold some promise of market continuity beyond2012 and therefore stimulate positively the demand. However, there is continued debate,especially in California, regarding whether emissions trading, including offsets fromoverseas will be allowed. Japan has been a strong supporter of the Kyoto Protocol and thedistance from actual emissions to its target has motivated the Japanese to be moreaggressive in the search for offsets. 1.2.3 Regulated vs. Unregulated markets In the emerging fragmented carbon marketplace, efforts to mitigate carbon aremultiplying in both the regulated and the unregulated sectors. For regulated markets,emissions trading can help achieve a given level of emission caps efficiently by setting anappropriate price, but this requires that policymakers set the caps consistent with thedesired – and scientifically credible – level of environmental performance. Regulatedcarbon markets can only achieve environmental goals when policymakers setscientifically-credible emission reduction targets while giving companies maximumflexibility to achieve those goals. They also require clarity on the assumptions foreconomic growth and baseline carbon intensity improvements, orderly and transparentrelease of periodic market relevant emissions data and the imposition of strict penaltiesfor fraud or non-compliance. The key elements for well-functioning carbon marketsinclude: competitive energy markets; common, fungible units of measure; standardizedreporting protocols of emissions data; and transferability of assets across boundaries(Point Carbon). Markets can, to a certain extent, accommodate the appetite thatindividuals and companies in Europe, Japan, North America, Australia and beyond havefor carbon emission reductions that go well beyond what their law makers require ofthem. This high-potential voluntary segment, however, lacks a generally acceptablestandard, which remains a significant reputation risk not only to its own prospects, butalso to the rest of the market, including the segments of regulated emissions trading andproject offsets.The enormity of the climate challenge, however, will require a profound transformation,including in those sectors that ‘cap-and-trade’ markets cannot easily reach. These includemaking public and private investments in research and development for new technology15
  • 16. Global Geographical Distribution of CDM Projectsdevelopment and diffusion, economic and fiscal policy changes, programmaticapproaches to decouple economic growth from emissions development as well as theremoval of distortionary subsidies for high-carbon fuels and technologies. 1.2.4 Secondary market The secondary market has been growing rapidly and this is expected to continue asmore CERs are issued as the quantity of CERs issued rises, exchanges are beginning totrade them. This will facilitate trades of CERs on an exchange, with the assistance of abroker, or directly between the buyer and seller. Trades of CERs issued do not involveproject or registration risks. The higher price, US$ 17.75 per t CO q, reflects the absenceof these risks (Capoor and Ambrosi). The first CERs were issued during 2005 and manyof these had already been purchased (through forward contracts). The volume traded isapproximately equal to the quantity of CERs issued. Chapter 2 Barriers, Multilateral Banks and the Investor’s Perspective The former section presented the overview of the CDM market from an outsiderperspective. This section pretends to introduce the view of the people directly involved inthe market. First we analyze how governments from developing economies have intendedto increase its overall market participation in the CDM market. Following we address theissue of Multilateral Banking and its role in the market and finally we present the privatesector’s perspective. Given the large amount of possible candidates, we limit our study into three differentcategories: core countries, peripheral countries and lagging countries. The first ones haveshown a tremendous capacity to attract investors in number and volume for CDMprojects. China, India and Brazil belong to this category. The second group is composedby countries close to the core nations and has counted with serious investments but isbehind the statistics of the leaders. Chile, Vietnam, Indonesia are part of this group.Finally the third group is composed by laggards. Such countries have not been able to 16
  • 17. Juan Pablo Dominguezattract investment in CDM or at least in very small amounts. African countries are part ofthis group. Two key strategies available to enhance the ability of host countries to utilize theCDM are information collection/rearrangement/dissemination and capacity building. Inmost host countries, some relevant information already exists, but often in disparatepieces or it is not considered in terms of the CDM—and it has never been put togetherbefore in a comprehensive form. This is the main reason for publishing this series ofguidebooks, which feature information on specific countries in Asia. By making theguidebooks as user-friendly as possible, they provide essential information that projectdevelopers and investors will need for most effective CDM project preparation andimplementation in each country. (no sé si aqui debe ir esta parte)(alargar un poquito mas)Overcoming barriers (esta seccion viene de overcoming barriers) Geographically, the distribution of CDM projects has so far not been very equitable.A limited number of countries including China, India, Brazil and Mexico have capturedthe largest share of the global CDM project portfolio. Specific regions in the developingworld, namely Sub-Saharan Africa, have been largely bypassed by the CDM market andare struggling to attract a decent number of CDM projects. In fact, of the total 2,783projects, only 33 projects are in Sub-Saharan Africa where 21 of these are actually inSouth Africa, making the distribution even more skewed.Understanding the reasons for this is of great importance in order to allow CDM developinto a stronger instrument for sustainable development as well as creating opportunitiesfor developing countries to obtain benefits for decreasing its CO2e emissions. Not feworganizations are trying to bring CDM to different countries but the process of creating astrong knowledge base is slow where as the market is moving at incredible pace.Capacity-building is different for each member, however, according to the literature two17
  • 18. Global Geographical Distribution of CDM Projectsmain factors are the ones that need to be addressed by those countries that are up againstaccess barriers to the CDM market:Information and expertiseOne of the key challenges facing developing countries interested in participating in theCDM market is the complexity of modalities and procedures of CDM. This has resultedin some CDM stakeholders in developing countries presenting poorly designed CDMprojects that eventually get rejected. Additionally, some developing countries have notbeen able to participate in the CDM primarily due to lack of national-CDM expertise and/or the appropriate institutional setup necessary for the assessment and approval of CDMprojects.FinanceAccess to finance is an additional barrier facing CDM project developers in manycountries, partially due to lack of CDM knowledge among developing country financialintermediaries. Consequently, there is a clear need for human and institutional capacitybuilding within the area of CDM in many developing countries.For particular cases, institutions such as the World Bank along with the UNEP andUNDP have created the Nairobi Framework in order to promote the development ofCDM activities in some sub-saharan countries. Among the activities to be implementedunder the new joint proposal are provision of support toward the establishment &operationalization of several African Designated National Authorities (national CDMoffices), organization of numerous hands-on, CDM capacity development workshops fornational consultants and civil servants, preparation of national portfolios of CDM projects(feasibility studies), preparation of national CDM investors’ guides for host countries,and supporting African countries participate in the annual Carbonexpo.Another case is Capacity Building for Clean Development Mechanism -CD4CDM-project. Through funding from the Netherlands’ Ministry of Foreign Affairs, the 18
  • 19. Juan Pablo DominguezCD4CDM project is a major effort to help develop the institutional and human capacitynecessary to formulate, approve and implement actual CDM projects. The first phasefrom 2002 - 2006 supported CDM implementation in Mozambique, Uganda, Coted’Ivoire, Ghana, Bolivia, Ecuador, Guatemala, Egypt, Morocco, Philippines, Cambodiaand Veitnam. In the second phase (2007 – 2009), the project is implemented inNicaragua, Peru, Suriname, Algeria, Tanzania, Mauritius and Bangladesh followingadditional funding from the Government of the Netherlands.Overcoming barriers to CDM ProjectsResponding to a request by the Annex-I Expert Group on Climate Change, the OECDand URC recently produced a joint study on barriers facing CDM projects and ways toovercome them. The study focused on barriers that can be potentially removed todeveloping CDM projects at the national and international level. Four key groups ofbarriers were identified, including:• National-level barriers, such as electricity regulations not related specifically to theCDM but constrain projects;• National-level barriers related to the CDM, such as institutional capability or lack ofawareness about the CDM potential that can dampen interest in CDM projects.• Project-related issues, including availability of underlying project finance, or othercountry or project-related risks that render the performance of the project uncertain; and• International barriers, such as constraints on project eligibility, such as restricted landuse, and available guidance and decisions, such as the inclusion of carbon capture andstorage projects.The paper concluded that barriers to CDM development could arise at different stages ofthe CDM project cycle. The relative importance of particular barriers varies betweencountries as well as over time. A combination of factors is needed to drive growth in acountry’s CDM activity. This includes the presence of attractive CDM opportunities, apositive investment climate, and an enabling policy and legislative framework.Risks in CDM and its impact on prices19
  • 20. Global Geographical Distribution of CDM ProjectsFigure 8. Evolution of risks throughout the phases of CDM projectsSource: CD4CDM, 2007As previously states, project-based credits are compliance assets that need to be “created”through a process that has certain risks inherent with it (regulation, project developmentand performance, for instance) and can involve significantly higher transaction costs.Such risks are addressed through contractual provisions that define how they areallocated between parties, and, along with other factors, are reflected in the value of thetransaction (IETA). Following we list a number of variables that affect the risk exposureand divided into two categories:Figure 12, Impact on CER prices of risk 20
  • 21. Juan Pablo Dominguez (Todo esto que sigue viene de Financing CDM projects, pp. 82-86)Generic project riskCountry political risk It refers to the risk of political and economical instability, of violence orinfrastructural disruptions in a country and how they can reduce the capacity for theproject to deliver CERs. It might affect delivery not only in time but also in magnitude.This type of risk can be reduced with the purchase of insurance.Counterparty risk It states the need for trusting the other party of the contract; therefore credibility is themain consideration. Credit ratings are instruments for observing such credibility. Severalcompanies have started to construct and publish these reports where each countryreceives a letter in the same fashion as other types of markets. Given that many CDMproject developers will have poor (or non-existent) credit ratings, they may have toprovide credit guarantees in order to satisfy the buyer’s credit requirements.CDM project specific riskMethodology risk To calculate the emission reductions of a CDM project, the project needs to select anapproved baseline and monitoring methodology. If a CDM project is able to use anexisting approved methodology, this considerably reduces the overall risk profile of theproject, since developing a new methodology is costly, time-consuming and risky (with a50% rejection rate, until 2007). Historic data show that, in many cases, revision of the methodology was required orthe methodology was rejected. Furthermore, it took, on average, around 303 days for amethodology to gain final approval. For these reasons, the risk for the project developeris related to the timing of the CER flow: if a new methodology needs to be developed,21
  • 22. Global Geographical Distribution of CDM Projectstime for development and approval will have to be factored in. If a methodology is put onhold the project developer will have to await the decision made by the Meth Panel andthe EB, which will also delay the potential carbon revenue.Host Country Approval risk In order for a project to be registered with the EB it must receive host countryapproval from the Designated National Authority (DNA). A risk more frequentlyencountered is the delay when applying for host country approval. It is known that someDNAs regularly take longer to issue an approval than the official timelines suggest (theaverage time taken between publication of a PDD for comments and issuance of therequired Letter of Approval by the DNA is 4.5 months, but this varies up to a year ormore in some instances). Host country approval risk therefore mainly impacts the timingof the CER flow.Validation & registration risk Every CDM project has to be validated by a Designated Operational Entity (DOE) inorder to be registered with the EB. Depending on the quality and transparency ofarguments and calculations presented in the project documents, the DOE will issue a listof corrective action or clarification requests to the project developer. The validation stage adds further time-delay risk: although validation of most projectscan be done within two months, it typically takes at least three months, due to the highdemand for DOE services, and constraints on DOE capacity. After validation, the project can be submitted for registration to the CDM EB. Theregistration by the CDM EB will be deemed final 8 weeks after the date of receipt by theCDM EB of the request for registration. Within this 8 week period, the CDM EB has theright to ask for review of the project.Performance risk According to the available information to the end of 2006, issuance of CERs has beenonly around 50% of projected CERs in the registered PDDs. Therefore it appears that theperformance of CDM projects has been consistently and significantly over-estimated. 22
  • 23. Juan Pablo DominguezPerformance risk can affect both the timing and the volume of the CER flow from aproject.Monitoring/ Verification risk A monitoring protocol is prescribed for every methodology in order to monitor thegenerated emission reductions. The variables that are monitored must be loggedtransparently by the project developer. In order for CERs to be issued based on thesemonitored variables, they must be independently verified by a DOE. There are numerousrisks related to the monitoring processes and the monitoring equipment installed whichmay endanger the quantity of CERs to be issued. For example, the monitoring equipmentfor a landfill gas capture and flaring project may be installed as required. However, inorder to produce adequate results, the equipment also has to be calibrated correctly. If thegas flow is not monitored correctly, the emission reductions generated by the projectcannot be verified and therefore CERs cannot be issued. This illustrates that monitoringand verification risk factors can impact on the volume of CER flow. Capacity constraintson DOEs can also introduce a time-delay risk.Review of issuance risk Within 15 days after the date of receipt of the request for issuance, the EB can ask forreview of a request for issuance of CERs. Review is limited to issues of fraud,malfeasance or incompetence of the DOE involved in the project. From 2006, the CDMRegistration and Issuance Team also appraises all requests for issuance of CERs. If anyissues relating to verification and issuance arise, the project may receive less CERs thanoriginally expected (or even none at all). The review of issuance risk will thus affect thevolume of CERs generated. If a request for review is triggered, the EB must decide on its course of action at itsnext meeting. If it decides to go ahead with a formal review, this must be carried outwithin 30 days. In total, the possible delay resulting from a request for review can be upto 4 months.Transfer risk23
  • 24. Global Geographical Distribution of CDM Projects In order for CERs to be issued, the project developer can choose to develop a projectunilaterally, thus assigning the legal rights to the CERs to a project participant from thehost country. More commonly, however, the legal rights to the CERs are assigned to aproject participant from an Annex I country. Before the CDM EB will issue the CERs forsuch a project, the project participants will need to inform the Board as to which Annex Iparty will be involved in the project and seek an investor country approval letter from thisAnnex I party. Obtaining an investor country letter of approval is therefore a risk whichcan affect the timing of the CER flow. Upon certification of the emission reductions, the CERs need to be delivered in theelectronic account of the buyer. An international system of registries has been developedto enable such a transfer. A registry is an electronic administration system used by agovernment to register emission allowances, record transfer of ownership of allowancesand reconcile allowance holdings against actual emissions. The International TransactionLog (ITL) is managed by the CDM EB; it logs international transfers of CERs fromregistry to registry. The ITL provides certainty of delivery to the carbon market andbuilds up records of holdings and transactions which mirror registries by recording‘transactions’ of CERs from the CDM Registry to the national registries of Annex IParties in accordance with the Kyoto Rules (see Figure 26 below). The contract to build the ITL was awarded in August 2006 and is expected to becomplete by April 2007. However, as with any complex IT project, there is risk of timedelays.Market risk Most market players stated that considerable price risk – and likely volatility –remained in the market for CERs (Point Carbon). Fijarse donde ponerlo. The largest market for CERs is the EU ETS. In this market the freely tradedcommodity is the European Union Allowance (EUA). Being an openly tradedcommodity, market prices of EUAs fluctuate over time. However, the EU ETS isregulated by the EU and, hence, EU policy is a key factor in determining its development.Prior to every trading phase, Member States propose allocation levels, which in turn are 24
  • 25. Juan Pablo Domingueznegotiated with the European Commission. The outcome of these negotiations determinesthe shortage of allowances in the market, and therefore the demand for additional carboncredits such as CERs. If the allocations are not negotiated and assigned appropriately,more EUAs may be supplied to the market than required, which may cause a drastic fallin the demand for EUAs. This happened during Phase I of the EU ETS (2005−2007)when on 15 May 2006 many EU governments announced that allocations for 2005 hadexceeded actual emissions. As a result, the EUA price fell from about €30 to €9 within afew days (see Figure 22 above). The behaviour of the EU ETS, as well as other markets for CERs (see section 2.5above) can affect both the price and volume of CER demand. It is common for CERprices in ERPAs to be linked to the EU ETS price at the time of selling, thus exposing theseller to the uncertainty in the EU ETS market.Post-Kyoto risk (Aqui hay que hablar de las nuevas conversaciones en Bankgok sobre Copenahgen2009, que ya está pegado de una noticia de Point Carbon Abajo) The Kyoto Protocol sets out to reduce emission reductions by 5.2% between2008−2012. A followup to the Protocol and what role the CDM might play under thisnew regime has not yet been decided. Post-Kyoto risk is therefore due to the uncertaininternational demand and recognition for CERs beyond 2012. It should be noted,however, that the EU has stated that the EU ETS, the largest potential market for CERs(see section 2.5 above) will remain active even after the end of the Kyoto commitmentperiod in 2012.13 The post-Kyoto risk relates to CDM projects particularly becauseproject developers can choose CER crediting periods of 10 years (which cannot berenewed) or 7 years (which can be renewed twice). These crediting periods of up to 21years therefore put the projects well beyond the end of Kyoto in 2012 and, although theremay be some continued demand for CERs from the EU, international demand remains farfrom certain. This risk affects the price and demand for all CERs beyond 2012. From the project developer’s viewpoint, the lack of any certainty post-2012 implies arapidly approaching ‘cliff edge’ beyond which it will be virtually impossible to raise25
  • 26. Global Geographical Distribution of CDM Projectsfinance for a new CDM project. This is due to the fact that CDM project developmenttakes at minimum 6 months, and often up to 3 years or longer, and therefore the windowof opportunity for a project to at least recover its costs while there is any degree ofcertainty over CER revenue (i.e. to December 2012) is rapidly narrowing. In practice, thiscut-off point will be reached at different times for different project types, depending ontheir rate of return. It may already have been reached for some project types in whichlittle project developer interest has been shown. Very few CER buyers are prepared tocommit to buying CERs beyond 2012, and only then at very low prices. Likewise, anyparty willing to take on the risk of financing a project that will not recover its costs before2012 will require a very high rate of return on their investment. Either way, the post-2012market will be highly constrained until there is some certainty on the post-2012 regime,and this will begin to affect development of CDM projects much earlier than this.07.04.08 UN climate talks in Bangkok conclude with more meetings in sightUN climate talks in Bangkok concluded last week, with delegates from more than160 nations agreeing on a more detailed timetable to conclude their talks inCopenhagen by the end of 2009."The train to Copenhagen has left the station," Yvo de Boer, executive secretary of theUN Framework Convention of Climate Change (UNFCCC), said on Friday."Not only do we have the certainty that critical issues will be addressed this year, we nowhave the bite-sized chunks which will allow us to negotiate in an effective manner," hesaid in a statement.As expected, there were no major breakthroughs resulting from last weeks talks. Yet,delegates had the chance to exchange their ideas on a wide range of issues – somecontroversial, such as avoided deforestation to emissions reductions targets for specificindustrial sectors.Still, de Boer pointed out that delegates agreed to continue the use of market-based toolsto help combat global warming, including emissions trading and the carbon marketsunder the Kyoto protocol."This sends an important signal to businesses that the international carbon marketspawned by the Kyoto protocol will continue beyond 2012. Businesses have been askingfor clarity on this issue and now they have it, making it possible for them to plan theirinvestments accordingly," the UN climate chief added. 26
  • 27. Juan Pablo DominguezThe Kyoto protocol obliges rich nations to reduce their emissions of six greenhouse gasesby about 5 per cent below the 1990 level from 2008 through 2012.However, the US has rejected the Kyoto agreement largely because it excludesdeveloping countries, such as China and India, from capping their emissions.The parties to the UNFCCC, which includes the US, agreed to include forest and land-userelated activities to help reduce emissions reductions in the second commitment period.Meanwhile, the group under the Kyoto protocol will continue its work on analysing toolsfor developed countries to reach their emissions reductions targets as its next regularmeetings in June and August.There are 192 parties that make up the UNFCCC, while the Kyoto protocol to date has178 member parties.More meetingsAccording to the so-called Bali roadmap, which was agreed by the internationalcommunity in Indonesia in December, there will be at least seven more major UN climatemeetings until the culmination of the Copenhagen meeting in December 2009.The second major UN climate change meeting this year after Bangkok will be held inBonn, Germany, in June. The Bonn meeting will address ways to "generate and mobilisethe necessary financial and investment flows" to help reduce greenhouse gas emissionsand help countries adapt to "the inevitable impacts of climate change", according to theUNFCCC statement.The third UN gathering this year will be in Ghana in August, and will focus on severalways countries can enhance mitigation, such as reducing emission from deforestation indeveloping countries – particularly since deforestation accounts for some 20 per cent ofglobal emissions.The Ghana meeting will also address ways different business sectors can co-operate onreducing emissions, the statement said.In December, the UNFCCC will host the final climate-change discussions for 2008 inPoznan, Poland, to focus on risk management and risk reduction strategies, as well astechnologies and long-term plans to combat climate change.In 2009, at least four UN climate-change sessions are expected to be held, with acombined duration of eight weeks.27
  • 28. Global Geographical Distribution of CDM ProjectsInvestor’s rationale The revenue earned from the emission reductions credits has very differentimpacts on the profitability of different types of projects. Table 1 shows the effect ofdifferent CER prices on the profitability, measured by the internal rate of return, ofHFC-23, methane from landfill, and renewable energy projects. The sale of CERs makesHFC-23 projects, which have a low capital cost per unit of emissions reduced, muchmore profitable. In contrast, the sale of CERs has little effect on the profitability ofrenewable energy projects, which have a high capital cost per unit of emissions reduced.Table 1. Incremental impact of the CER price on the internal rate of return (IRR) of theproject (percentage)Renewable energy IRR Five years Impact per (2008 to Seven Ten Fourteen Twenty- unit (inPurchase period 2012) years years years one years US$)CER prices (in US$)5 0.5 0.6 0.8 1 1.2 3.16/MWh10 1 1.4 1.7 2.1 2.3 6.33/MWh15 1.6 2.1 2.7 3.1 3.3 9.49/MWh20 2.2 2.9 3.6 4.1 4.5 12.65/MWhSolid waste IRR Five years Impact per (2008 to Seven Ten Fourteen Twenty- unit (inPurchase period 2012) years years years one years US$)tSW (ton solid waste) tSW tSW tSW tSW tSWCER prices (in US$)5 17.9 24.1 29.2 31.7 32.8 41/MWh10 52.3 59.1 62.4 63.5 63.8 82/MWh15 88.2 93.3 95.4 95.9 96 124/MWh20 123.7 127.3 128.6 128.8 128.9 165/MWhHFC/23 IRRa Five years Impact per (2008 to Seven Ten Fourteen Twenty- unit (inPurchase period 2012) years years years one years US$)CER prices (in US$)5 110.8 112.3 112.7 112.7 112.710 176.7 177.3 177.4 177.4 177.415 227.3 227.6 227.7 227.7 227.7 28
  • 29. Juan Pablo Dominguez 20 270 270.2 270.2 270.2 270.2Source: World Bank.a Sixty-five % tax applied on revenue from sale of CERs.Table 2. Normal scale project costs Project phase Costs Project design U$ 20,000 to US 30,000 National aproval Some countries have, some dont Validation U$ 15.000 to U$ 50.000 The CDM Executive Board determines the cost of registry according to the number of emission reductions. Yearly average emission reductions of CO2e U$ <= 15,000 5,000 > 15,000 to <= 50,000 10,000 > 50,000 to <= 100,000 15,000 > 100,000 to <= 200,000 20,000 Registry > 200,000 30,000 Monitoring: 0.05 - 5% of the value of the project Verification Verification: U$ 3,000 - U$ 20,000 per verification visit Certification and CERs There is a management fee besides a mandatory contribution to the UN Adaptation emissions Fund for a value of 2% of all the CERs generated in a year.Source: National Energy Comission of Chile and GTZ, 2006Table 4: Specific costs associated with CDM stages29
  • 30. Global Geographical Distribution of CDM Projects1 US$0.10/CER for the first 15,000 CERs per year and US$0.20/CER for any CERs above 15,000 CERs per year (max US$350,000).The minimum shown here has been calculated as 15,000 CERs/year over a single 7-year crediting period.2 As for large scale, unless total annual average emission reductions over the crediting period are below 15,000 tCO2-e, in which caseno fee is payable. Maximum calculated as 25,000 CERs/year over 7-year crediting period.Sources: CCPO, 2005; UNEP, 2004 and EcoSecurities market informationFalta análisis de la Tablas.(Esta parte va en el tema de perspectiva del inversor en la sección 4 junto con las barrerasa la expansión)Financing the ProjectBox 1: Explanation of ‘Gearing’ or ‘Leverage’The term ‘gearing’ or ‘leverage’ is used to describe the way in which the returns to anequity investor can be increased by increasing the amount of debt in a project’s capitalstructure. This effect arises due to the fact that debt is almost always cheaper than equity.Consider a project with a capital requirement of US$1,000,000 and a project internal rateof return of 15%. If 100% of this capital requirement were provided by equity investors,the equity investors would therefore see a 15% return on their investment. However, if50% of a project’s capital requirement could be borrowed from a bank at an interest rateof 8%, the project would provide a return of 22% to the equity investors (their originalreturn of 15% on US$500,000, plus the 7% return remaining on the other US$500,000,after debt financing costs). From the equity investors’ point of view, increasing theamount of debt in the capital structure will always increase the return on their equityinvestment, provided the debt interest rate is lower than the project IRR (see section 4.3for explanation of this term). 30
  • 31. Juan Pablo DominguezThe above argument ignores any effect of taxation. In fact, in most countries, interestpaymentson debt are a tax-deductible expense. This further enhances the attractiveness of debt inthecapital structure, since the cost of debt is even lower due to the ‘tax shield’ effect (i.e. thefactthat interest payments can offset a tax liability).Market BenefitCDM and JI projects are considered “offset projects.” Market experiences suggests thatthe cost of purchasing an offset from a project tends to be 15-32% lower than trading foran allowance in the open market.To illustrate this concept we will take a power generator in Germany as an example. Letus say that it is a very warm summer in Germany and this has caused the power generatorto burn more coal to sell more electricity to its clients (who use it to cool their homes).Now, lets assume that the German power generator reaches its limit August 31st (itsKyoto Cap). The generator has contracts with its clients to sell them electricity for therest of the year, but they have used all their pollution rights. The generator will nowconsider its options.1. Do nothing - Pay 100 Euros/tonne tax at the end of the compliance period2. Emissions Trading - Find an Annex 1 power generator with pollution rights left overand purchase those rights for market prices (currently 23 Euros/tonne)3. CDM/JI - Find an environmental project that has proven it has reduced carbon dioxidein a Non-Annex 1 country and purchase those rights for market prices (currently 10-15Euros/tonne)The obvious choice financially would be option 3 - for the generator to buy “carboncredits” from the environmental project in a Non-Annex 1 country. However, because the31
  • 32. Global Geographical Distribution of CDM Projectsease of transaction is much higher for option 2 – most power generators currently pay theaccompanying higher marginal cost.Option 3’s project based credits are resultant of the CDM or JI mechanisms and involveconsiderably more rigor than buying a pollution right allocated by Kyoto for EmissionsTrading (Option 2). As we will see, the project developer of a CDM/JI project must domore to earn its credits, but if it does complete the necessary rigors of the UNFCCCcredit creation process it will be a much more competitive option for the German powergenerator. 32
  • 33. Juan Pablo DominguezMultilateral banking Hablar sobre como la banca multilateral ha participado en el mercado de CERs. El rol que han tenido la banca multilateral en proveer recursos e iniciativas paradirigir la inversión y el flujo de recursos financieros a sectores relacionados con elcambio climático. Es importante resaltar que el trabajo de las banca regional,específicamente el caso del ADB ha creado condiciones favorables para el desarrollo dela oferta de certificados a través de una política clara a favor de este tipo de iniciativas.Contrasta completamente con el caso de AfDB que no tiene ni siquiera un grupo osección dedicada a cambio climático dentro de su estructura. Africa es la región másrezagada en cuanto a política de cambio climático. Esto redunda en las dificultades degenerar proyectos atractivos para inversionistas. A continuación se presenta la bancamultilateral que ha participado en cambio climático y su estrategia fundamentalrelacionada con CDM.Practices of the multilateral development banks in supporting activities relevant toclimate change21. MDBs aim at social and economic progress (to eliminate poverty and support sustainabledevelopment) through lending, grant and country-assistance strategies that support differentinfrastructure projects and policy reform activities in their developing member countries. MDBsmake loans at commercial rates to governments (and government entities) in medium-incomemember countries, and grants to governments and government entities in low-income countries.The EBRD, EIB and IFC provide only limited grants.22. The World Bank has the largest investment among the MDBs. In 2006, the IBRD and theIDA approved loans and grants totalling USD 23.6 billion. Together the other MDBs committed asimilar amount: the ADB, AfDB, EBRD and IDB committed USD 7.4 billion, USD 3.47 billion,EUR 4.9 billion and USD 6.4 billion, respectively, in 2006. In the same year, the IFC committedUSD 6.7 billion from its own account and the EIB, as a lending bank of the EU, approved in totalEUR 45.7 billion, of which EUR 5.9 billion was invested outside the EU.23. All the banks recognize the importance of supporting the mitigation of, and adaptation to,climate change. There has been a growing interest on the part of the MDBs in developingindividual climate change strategies and integrating climate change considerations into theirlending activities, such as those of the EBRD and EIB. In the World Bank and the EBRD, climatechange has been considered part of the environmental appraisal for lending projects.24. The July 2005 Gleneagles communiqué on climate change of the Group of Eightindustrialized countries (G8) requested the World Bank and the regional development banks totake a leadership role in developing a framework for clean energy and development, includinginvestment and financing. The purpose of this framework is to be a vehicle to accelerateinvestments to address developing countries’ energy needs, mitigate GHG emissions and supportdeveloping countries in adapting to climate variability and risk. This also provides an opportunityfor all MDBs to consolidate their strategies and actions to address climate change. The jointefforts by MDBs on the Clean Energy and Development Investment Framework (CEDIF) shouldhelp to develop a more comprehensive strategy to address climate change within each MDB.25. Reflecting the different priorities in their business strategies, the focal areas to address climatechange vary between the different banks. The focus on climate change seems to have increased in33
  • 34. Global Geographical Distribution of CDM Projectsthe last two years and is reflected in newly formed dedicated funds for mitigation projects,adaptation initiatives and capacity-building and information-sharing activities.26. In most of banks the climate change issue is managed by staff in clean energy, energyefficiency or other sustainable development units. Specific units in charge of carbon financinghave been established in the World Bank, EIB and EBRD. I. Regional Gravitational CentersCDM and the Regional Gravitational Centers theory (esta seccion se van por ahi 15 a 20paginas) As we discussed above, the CDM market is geographically heavily, both in numberof projects as well as in number of expected CERs, concentrated in 4 countries: China,India, and Brazil. These countries have shown impressive growth in the last decades, notonly in terms of the mechanism but in all economic sectors. They are part of the fastgrowing economies and are becoming relevant for the international arena in terms ofpolitical and economical reasons. Along with Russia, they form the group known asBRIC that has caught the attention of institutional investors, governments, private sectorand are expected to be important future players of the global system. When the data for CDM projects is analyzed through this perspective then it does notcome as a surprise that the leaders of the market are such economies. However, the natureof the CDM market is not only economically driven but also politically created. Theexistence of the market itself responds only to the political will of the governments of theworld because there is actually (at least not in the present) a physical or emotional needfor a carbon restricted world for the general population. There is undeniable support for itbut the market did not come to be as a result of confrontation of needs by agents. For such reasons the CDM projects do not follow the same patterns as theinternational flow of investment (someone, check notes). A different framework foranalysis is needed to explain why such countries account for such a big percentage of themarket. The Regional Gravitational Centers theory is an interesting candidate giving itsbroad spectrum of analysis and multi-staged configuration. Since the moment the Kyoto 34
  • 35. Juan Pablo DominguezProtocol was ratified the number of CDM projects began to grow. This first stage is stillgoing on, however the initial signs of a change in the nature of the host country selectionprocess appears to have sprouted. CDM investors are looking now for new destinationsbecause they want to diversify their portfolio in order to diminish geographical risk(buscar en las notas). Which countries are then now the focus of this investors?Regional Gravitational Centers TheoryGeo-politics and the RGC Geopolitics, according to Rudolf Kjellén, talks about how the environmentinfluences the politics of a nation. This first attempt to link local, geographical andnatural conditions of a nation for explaining its political conduct grew in time (fuente). Inturn, geopolitics has become an important instrument for the analysis of internationalrelations in the modern world (fuente). This construction is the source for the theoreticalapproach used here for explaining the process by which some countries have developedmore numbers of projects than others. More specifically, Geopolitics is the meta-structure, to give it a name, where Regional Gravitational Centers Theory is subscribedand which is our main analytical tool for understanding the phenomenon. Within the International Relations area of study geopolitics as an idea has beensurveyed in a robust manner since the discussion of the Heartland Theory by Sir HalfordMackinder in 1904. Since then it has been further developed and introduced to thedifferent schools of thought of IR Theory. For this paper, the relevance of geopoliticsstems from the early assertions of Friederich Ratzel in the middle of the XIX century.Ratzel promulgated the idea that large areas of influence were needed for great powers asa means for maintaining its leadership and therefore promulgating its own nationalinterests. These arguments were stated in a world characterized for the existence of aColony-Metropolis state of relations between different nations around the world. Howgreat powers decided to divide the spheres of influence triggered later confrontationamong them, changing the international order of the times.35
  • 36. Global Geographical Distribution of CDM Projects Nowadays, the different regions which compose the global system have beenredefined. With the end of the Cold War the configuration of power was rearranged.After the fall of the Soviet Union, the United States enlarged its spheres of influenceclaiming its title as the only remaining super power. With almost two decades past, theworld has reallocated into new spheres and geopolitics still remain as an importantanalytical tool. If we focus our attention on the developing world, 5 main regions are tobe found: Latin America, Asia & the Pacific, Africa, Eastern Europe & Central Asia andfinally North Africa & the Middle East. In this paper, we follow such division andillustrate how each region has developed into sub-regions and reorganized its structure.The Regional Gravitational Centers introduction The Regional Gravitational Centers theory surges as an alternative to geo-politics.Our modern world has changed in many ways in the last few decades and several facetsare not properly explained with the traditional geopolitical perspective. One of the mainaspects to address is the change the international environment along with the formation ofgeo-political/economic plates. These two aspects are pillars for the introduction of theRGC and are presented in the following pages. Other issues not discussed here that arealso relevant are the Westphalia system in today’s world and beyond and the concert ofGreat Powers. a. The international environment and its transformation i. The relationship between globalization and regional integration: The RGC begins with the interpretation of two phenomena: globalization andregional integration. It insists that there is a double causation between the two processesand that such relationship received a new impulse at the end of the Cold War. There aretwo different influences for such process: one being positive with the increased 36
  • 37. Juan Pablo Dominguezinteraction between nations in all spheres (trade, culture, politics and society); the otherone being negative with the unequal growth and development of certain countries whileothers lag behind. ii. The relation between security and stability with economic growth and development: The relative newly found stability in developing countries has favored itsdevelopment (fuente). Economic growth needs for a secure neighborhood for allowinginvestment to mature in a proper way. Society in general needs stability to guarantee theconditions for a deeper interaction with other countries. The benefits from globalizationcan only be perceived within a long-standing and sound environment. iii. The increasing integration by nation-states of close geographical proximity: The late nineties and beginning of the new century saw an increasing amount ofcommercial and cultural agreements between countries. To say a few: NAFTA, CAN,ASEAN and so on. The better parts of those agreements are constricted to countries thatlie within a certain regional sphere. The RGC theorizes the process in five steps: firstfrom isolation to bilateral and multilateral trade. The next phase will deepen multilateraltrade followed with the formation of regional plates. The last phase is globalization butwithin regions, within groups of countries instead of individual countries. b. Formation of geo-political/economical plates With the increasing integration among economies, the need for a deeper relationamong countries appears. In this process each region happens to develop a leader, or agroup of more relevant countries, in terms of economic and political influence. Suchstates are addressed as Geo-gravitational Center State (or in this paper as core countries).They are pillars to world and regional economies and established through the internal andexternal dynamics of each region.37
  • 38. Global Geographical Distribution of CDM Projects Furthermore, such core countries work closer with some countries than others. In ourmodern world, the interdependence among countries forces the leaders to have strongcommunications with the rest of the countries. This Regional Cooperative Circles can beimbedded within other international organization structures or simply by geographicalconditions. As an example, the relation of Brazil with Argentina is closer given itsproximity and strong economic exchange than with Ecuador. Despite having different levels of cooperation, there is a sense of community withinthe region. Ecuadorians as well as Brazilians identify themselves as part of the SouthAmerican region in the same way as Argentineans, Peruvians or Colombians. In this way,the globalization process is not just a sum of bilateral or multilateral exchanges, but also ahierarchical integration process among regional blocs. The creation of those blocs, theintroduction of Geo-gravitational Centric States followed by a Regional CooperativeCircle with a sense of Regional Community is what we call the Formation of a Geo-political/economic plate.1. Geo-gravitational center A country attracts the rest; there is a centripetal relation among a number of states.“Gravity” becomes fundamental to maintain the structure of the bloc. A big power,located in a relatively centric area, has a strong force of gravitation to attract its neighborsand determines the regional stability and prosperity. ii. Role of the G-g center The role of the core country impulses politically other countries by becoming a keyvenue for regional political and diplomatic activities; economically by being and enginefor growth, in security by determining the nature of regional stability; and culturally byinfluencing day to day people’s life. iii. Geo-strategic fulcrums to the World Politics and Economics 38
  • 39. Juan Pablo Dominguez a. The main stream of the world economy - Globalization - Regional integration/regionalization b. Construction of structure of Geo-political/economic plates c. G-g centric state: engines and braces of regional integrationThe process of integration always originates from core of area, where there are somestrengthening advanced political forces. d. Fulcrums of the world politics - Engines of regional integration - Braces supporting security framework - Pillars of world politics iv. Hierarchical framework in the world politics - Invisible hand: different to Adam Smith - International law, norm and institutions - Hierarchical order in anarchical systemRegional Gravitational Centers and CDM geographical distribution Economics and politics have never been so intertwined as with the case of theCarbon Market. Despite of the historically undeniable role governments and regulatorsplay as agents of the market, the existence of the market itself responds only to politicalwill of the international community. With the birth of a Carbon restricted world a new setof incentives and mechanisms have been set into motion by the leaders of today’s globalarena. The Carbon market today represents investments of over US$30 billion dollars(World Bank) and the search for market share has initiated a race between developmenteconomies in order to attract investors.Figure 20. Geographical location of CDM projects and Regional Gravitational Centers39
  • 40. Global Geographical Distribution of CDM ProjectsSource: UNFCCC As presented on section one, Asia is the major absorber of CDM investments.Particularly, in 2006 China and India accounted for 61% and 12% as host countries for allCDM projects. Brazil was in third place with a 4%. The rest of the world just contributedwith 13%. Why? Global economics have to do a lot with this but it all began when in2005 the Kyoto Protocol came into effect. Since then, governments and companies fromthe developed economies have needed to find different mechanisms in order to complywith its carbon emissions obligations. The nature of the CDM market defined theparameters by which investors select hosts countries. CDM is project-based activity and when evaluating a project on an internationalbasis, certain risks such as country and project risk need to be addressed. The beginningof the new millennium brought with itself different economic conditions throughout theworld. Countries like Brazil, Russia, India and China (the well known BRICs) becamefast growing economies getting the attention from investors all around the world.Economic growth rate, investment environment, favorable regulation and so on madepossible that new resource entered the economy. Multinationals started operations in suchcountries and a whole new niche for investment was created. The attention the group offast growing developing economies also meant that the companies and governments thatneeded to acquire emission reductions certificates would concentrate their efforts in amanner that their interests of creating stronger relations with such would enable them to 40
  • 41. Juan Pablo Dominguezachieve their goals in a much more straightforward manner. In other words, thecompanies and governments which were in the market looking for places to buy theCERs from looked into markets they previously were interested upon. Multinationalshave had their eyes in fast growing economies and the opportunity to buy the CERs fromthem is just another phase from their expansion strategy. In that sense, the distribution of global asset allocation has followed the samepattern as international relations have. Between regions, the existence of a leadershipamong countries with best represents the interest of the region as a whole whenencountering the international arena, is also in place in the CDM primary market. ForAsia for example China and India are undoubtedly the most interesting places forinvesting at the end of the first decade of this new millennium. Another center forinvesting is Brazil in the South American region and in the case of Africa, two big polesemerge: North Africa as a whole and South Africa. Besides these “core” countries, a belt of close followers emerge in the emergingmarket dimension. Vietnam, Chile, Colombia also attract investments but nor in the sameway the core countries do. Different conditions of each country separate them for beingin a higher position for attraction resources. However, the “mass” of investment in CDMmarkets seems to have reached a point where the core countries, even though still have alot of potential for producing much more CERs, investors acting rationally and riskaverse, decided to diversify their CDM portfolio and include different sources of CERs.In this framework, it means that the core countries have now yielded part of theirgravitational pull in benefit of the followers. Other countries like Chile, Vietnam andColombia will see this in the near future as signals for attracting more investors. A newphase of geographically determined global asset allocation process begins where thebenefits of CDM projects are more spread.Types of countries1. Core countries:41
  • 42. Global Geographical Distribution of CDM ProjectsThey are leading countries in attracting the CDM investors. Brazil, India and China (3 ofthe 4 countries that form BRICs) have a market share in the supply side of almost 80% in2006. They have the infrastructure and industry that enables them to produce CERs within large amounts, low risk and efficiently. ii. Followers:Countries that also attract investors but not in the same fashion as the core countries.They are improving investment conditions, training their people and constructing theframework for increasing their offer for CDM projects. Such countries usually havestrong relations with core countries and the transmission of market share from one toother responds more to the flows of economy than those of politics.1. Lagards:Countries that simply do not have strong enough market potential for the currentconditions of CDM. Countries in Africa where potential for carbon sequestering orenergy efficiency still do not have approved methodologies that would enable them tooffer attractive enough projects. New developments must be made in the mechanism inorder to be able to include such countries.Two-stage process of global asset allocation for CDM project-based activities:Risk diversificationRGC allows us to explain the main development of the CDM allocation process in thebeggining stages. However, this process is also influenced by market forces that concerncountry specific risks. If RGC theory tells that a status quo is going to be maintained,however it does no t explain to us which other countries from the group of followers aregoing to increase its market participatios in detriment of the core countries. The situationcomes from the basic belief that one should not concentrate all of its assets in onedetermined space, in other words, don’t put all your eggs in one basket. 42
  • 43. Juan Pablo DominguezCDM geographical distribution is deeply connected not only to political and economicalcontext of the international system but also to the fundamental reasoning behind marketforces. Risk is, as explained in detail above, an inherent part of CDM and thereforeinvestors will look for diversification when managing their portfolio.(Parte de lo que sigue viene de Point Carbon y su CDM&JI Monitor)ViewPoint: Should buyers be diversifying risk from China and HFC?The attraction of investing in projects in China and project types that generate largeamounts of credits has been long-established, but investors are also aware that putting toomany eggs in these baskets can be risky - and one of the most basic tenets of riskmanagement is that portfolios should be diversified.There is no question that the large amounts of cheap credits generated by CDM projectshave had a big impact on the market, but this has been more in terms of price – makingCERs probably up to €5 cheaper than what they would otherwise have been.Nonetheless, investors are wary of buying too many credits from HFC-23 projects. Theexecutive board tends to take a less-than-favourable view of large amounts of CERsentering the market from one particular project type. And any outright hostility toHFC-23 could in turn make it much more difficult for the volume of CERs on PDDs forHFC-23 projects to be issued. An over-reliance on Chinese CERs is also potentiallyproblematic, despite the clear advantages that the country offers when it comes to buyingcarbon credits.The most positive element about China’s role in the CDM is a clear energy policy. Thegoal to boost the use of renewables in the energy mix to 20 per cent by 2020 is obviouslyvery positive for the encouragement of wind power, biomass and small-scale hydroprojects. But investors have to take account of systemic risk, which is loosely defined asa policy or event that can make a particular country difficult to operate in.43
  • 44. Global Geographical Distribution of CDM ProjectsIn China, risks are a major change in policy or economic circumstance, or an occurrencessuch as a natural disaster or shortcomings in infrastructure, such as power cuts orbreakdown in telecommunications.So, even though China and HFC-23 have clearly played a major role in project portfolios,investors need to diversify into other locations and project types that may not be asattractive. I expect India to make a strong comeback as a location for investors to sourcecarbon credits, and it’ll happen sooner than you think. Indian sellers have raised theirgame and dropped their prices, so they could attract some investment away from China,particularly among those investors who want to avoid putting their assets in the oneplace.The information provided in the table is from emission reduction purchase agreements (ERPAs) – based on contacts with key traders,brokers and project developers. It does not necessarily represent the complete market. Information has been anonymised in order torespect key players’ confidentiality needs. Explanations of abbreviations and acronyms: see page 7 and Glossary onwww.pointcarbon.com.The price categories are developed by Point Carbon and are based on the risk distribution between buyer and seller: 1: The seller doesits utmost to deliver a flexible/non-firm volume, whereas the buyer commits to buy what the seller delivers. 2: The seller does itsutmost to deliver a flexible/non-form volume, whereas the buyer commits to buy if the seller delivers. The contract is only valid on aset of preconditions. 3: The seller guarantees to deliver a firm volume; the buyer commits to buy if the seller delivers. The contract isonly valid on a set of preconditions and usually has a strong force majeure clause. 4: The seller guarantees to deliver a firm volume,and the buyer guarantees to buy if seller delivers.--“If people are 50-60 per cent reliant on a particular technology or geographic regionthen they may feel over-exposed. Portfolio managers need to diversify their assetssources and might therefore consider swapping their over-exposed positions to re-profile 44
  • 45. Juan Pablo Domingueztheir portfolio. That’s still theory; let’s see if it becomes market practice, like in the oil &gas business,” Laurent Segalen, director of investment funds at NATIXIS, and investmentmanager of the European Carbon Fund said.Econometrics and International RelationsHablar sobre las críticas de los traditionalists y los behavioralist (pag 37 Contendingtheories of IR)The traditionalist often criticizes the behavioralist for: 1. Allegedly being too confident of the ability to generalize, to convert problematic statements into causal propositions, and to use these propositions to predict behavior in an area in which things are not predictable. 2. Attributing to abstract models a congruence with reality that the models do not have. 3. Avoiding the substantive issue of international politics because, in the zeal for scientific method, the behavioralist may never have really mastered those issues in all their complexity, and 4. Succumbing to a fetish for measurement that ignores crucially important qualitative differences among the phenomena being measured.3Behavioralists assert that when they test for statistical correlation between two factors,they are determining whether the relationship between the two might be merelycoincidental, and when they engage in a multivariate analysis, they are trying to find outwhich of several factors constitute the most reliable predictor of a particular outcome.43 All thes and other criticisms are presented by Bull, “Case for a Classical Approach”4 J. David Slinger, “The Incomplete Theorist: Insight Without Evidence”, in Knorr and Rosenau, eds.,Contending Approaches to International Politics pp. 72-7345
  • 46. Global Geographical Distribution of CDM ProjectsThe process by which the international investment community has deployed itsinvestments, specifically in the case of CDM, seems to follow a particular pattern thatwill be presented below5.Model estimation and 2008 projection After identifying the main characteristics of the global allocation of resources forCDM projects in the World and understanding the trajectory of the geographicaldistribution of the same is then when we se tour goal for visualizing what is going tohappen in the near future. This section of modeling pretends to give us answers aboutwhere the market is going and the forces of asset allocation maintain its trends. It istherefore not pretended to give an exact number of the projects that are going to appear in2008 but rather illustrate the where the resources CDM are going to. The methodology used in this section is basically univariate time series analysis 6.The software used was E-Views and J-Multi. The data was gathered by CD4CDM whichis part of the United Nations Environment Program –UNEP- in the CDM PipelineOverview. It includes CDM projects from the validation stage (start of the 30 days publiccomment period), through registration and to issuance of Certified Emission Reductions –CERs-. This means that no Project Idea Notes –PINs- or projects at a stage beforevalidation are included. All data is taken from the UNFCCC CDM homepage and fromthe Project Design Documents -PDD- of the projects that all are accessible there. The data consists of observations for 68 countries and 5 regions with a monthlyfrequency. As a result each country has 49 cases (with the exception of Guyana that hasno values) starting from December of 2003 until December 2007. The 5 regions are as5 Part of the analysis in this sub-section is inspired on Professor Su Hao’s lecture on Gravitational RegionalCenters at China’s Foreign Affairs University, 2006.6 The frequency of the data and the conditions of the same reduce the possibilites of different modelingtechniques. For instance, a Vector Autoregressive approach was ruled out because the matrix turned out tobe singular. In that sense, no estimation could be obtained. Combinations off countries such as Brazilagainst the rest of Latin America lacked statistical significance. 46
  • 47. Juan Pablo Dominguezfollow: Latin America, Asia-Pacific, North Africa and the Middle East, Sub-SaharaAfrica and Europe and Central Asia. Given the fact that only a fraction of those 68countries have presented significant numbers of projects, the individual models whererestricted to such projects with more than 10 observations since the beginning of thesample period. Accordingly the number of countries eligible for modeling was limited to20 as presented on table 1.Table 1. Countries that were modeled.Region Modeled Not modeled Argentina, Brazil, Chile, Colombia, Bolivia, Cuba, Dominican Republic, ElLatin Ecuador, Guatemala, Honduras, Salvador, Guyana, Jamaica, Nicaragua, Panama,America Mexico, Peru Paraguay, Uruguay China, India, Indonesia, Malaysia, Bangladesh, Bhutan, Cambodia, Fiji, Lao PDR,Asia & Philippines, South Korea, Sri Lanka, Mongolia, Nepal, Pakistan, Papua New Guinea,Pacific Thailand, Vietnam SingaporeEurope & Armenia, Azerbaijan, Cyprus, Georgia,Central Kyrgyzstan, Macedonia, Malta, Moldova,Asia Tajikistan, Uzbekistan Equatorial Guinea, Ivory Coast,, Kenya, Mali,Sub-Sahara South Africa Mauritius, Mozambique, Nigeria, Senegal,Africa Tanzania, UgandaNorthAfrica & Israel Egypt, Jordan, Morocco, Qatar, TunisiaMiddle-East The ideal situation would be one where all countries could be estimated.Unfortunately, that would require that every country in that list must have a steadypresentation of projects every month for a certain amount of time. As stated before, thecriterion for selecting the countries or types to be modeled was simple: have more than10 projects overall since December 2003. However, the countries that were modeledrepresented in 2007 93% of all in the case of Latin America, 99% in Asia & Pacific, 0%in Europe and Central Asia (of a total of 17 projects in that specific region), 47% in Sub-Saharan Africa and 83% in North Africa and the Middle East. Table 2 presents thepercentage that the countries represent from 2004 until 2007.47
  • 48. Global Geographical Distribution of CDM ProjectsTable 2. Modeled countries as a percentage of the total, 2004-2007 Latin Asia & Europe and Sub-Sahara North Africa & America Pacific Central Asia Africa Middle-East 2004 94% 93% 0% 100% 0% 2005 91% 97% 0% 50% 25% 2006 95% 99% 0% 83% 43% 2007 93% 99% 0% 47% 83%Table 1.2 Types of projects that were modeled Modeled Not modeled Afforestation, CO2 capture, Energy Agriculture, Biogas, Biomass energy, distribution, EE households, EE industry, Cement, Coal bed/mine methane, EE ownUngrouped EE service, Fugitive, Geothermal, HFCs, generation, EE supply side, Fossil fuel N2O, PFCs, Reforestation, Solar, Tidal, switch, Hydro, Landfill gas, Wind Transport Total, Renewables, CH4 reduction &Grouped Cement & Coal mine/bed, Energy Fuel switch, Afforestation & Reforestation Efficiency, HFC PFC & N2O reductionProjections After estimating a model according to the data we projected for 12 periods ahead (i.e.all of 2008). The purpose of modeling the quantity of projects is not to forecast the exactmagnitude of such but rather to see the main tendencies between countries and regions.Which country produces more projects than others and see where they grow the most inrelative terms. It was expected that all projected results presented an upward trendbecause of the steady increment of the market the past few years; the interesting part istherefore to analyze which countries are growing faster than others and also if theleadership of core countries in terms of number of projects will not be challenged in2008. In other words, the interesting part is to see how the “followers” countries increasetheir number of projects and catch up to the “core” countries. In the next paragraphs we present the main projections of the models and analyzethem. There are 5 regions and a total of 20 countries projected. Each region is explainedand also which country is their leader and also followers. Countries that were not 48
  • 49. Juan Pablo Dominguezincluded in the modeling process are therefore what we call “laggards” in the globalallocation process for CDM resources within a Regional Gravitational Centersframework. That in turn means that 48 of the 68 countries still need to work in capacitybuilding if they want actively participate in the CDM market.Latin America The geographical conditions divide Latin America into basically two sub-regions:Central America and South America. The first one is composed by 9 countries andbesides Mexico, Guatemala and Honduras are the only countries with significantnumbers. As table 3 illustrates, Mexico is projected to almost double the number ofprojects in the pipeline in 2008 but far from the 117 projects it presented in 2006. In turn,Honduras and Guatemala seem to have picked up the pace gaining more projects.Table 3. Latin America number of projects, 2004-2008 200 200 200 200 4 5 6 7 2008* Latin America 36 155 228 213 234 Argentina 0 7 4 10 23 Brazil 16 81 73 80 94 Chile 4 11 8 22 54 Colombia 0 5 2 16 33 Ecuador 2 4 5 8 13 Guatemala 1 4 3 4 24 Honduras 7 4 2 7 28 Mexico 4 20 117 38 64 Peru 0 5 2 14 36 Source: CD4CDM * Projected by author. South America in turn shows Brazil as its categorical leader regardless of itsslower relative growth from 2007 to 2008 projected. The sub-region shows an upwardtrend although not very pronounced and its best projected performer of 2008 is Chile witha very important jump in the production of CDMs. Other interesting details are: Peruexceeds Colombia in magnitude and is located in the 4th position in the whole region ofLatin America. Argentina loses momentum and countries such as Honduras andGuatemala are beginning to produce more projects than the austral country. In49
  • 50. Global Geographical Distribution of CDM Projectsconclusion, Chile is the big booster in relative terms in the region showing a growth rateexceeding 200% with and increase in its monthly average production passing from 2 to 5in 2008; Brazil and Mexico will maintain their leaderships and Guatemala and Hondurasare the best followers along Chile.Table 4. Latin American countries regional and global CDM project participation,2004-2008 Regional participation Global participation 2004 2005 2006 2007 2008* 2004 2005 2006 2007 2008* Latin 100.0 100.0 100.0 100.0 100.0 69.2 36.5 29.1 13.3 America % % % % % % % % % 9.9% Argentina 0.0% 4.5% 1.8% 4.7% 9.8% 0.0% 1.6% 0.5% 0.6% 1.0% 30.8 19.1 Brazil 44.4% 52.3% 32.0% 37.6% 40.2% % % 9.3% 5.0% 4.0% Chile 11.1% 7.1% 3.5% 10.3% 23.1% 7.7% 2.6% 1.0% 1.4% 2.3% Colombia 0.0% 3.2% 0.9% 7.5% 14.1% 0.0% 1.2% 0.3% 1.0% 1.4% Ecuador 5.6% 2.6% 2.2% 3.8% 5.6% 3.8% 0.9% 0.6% 0.5% 0.5% Guatemala 2.8% 2.6% 1.3% 1.9% 10.3% 1.9% 0.9% 0.4% 0.2% 1.0% 13.5 Honduras 19.4% 2.6% 0.9% 3.3% 12.0% % 0.9% 0.3% 0.4% 1.2% 14.9 Mexico 11.1% 12.9% 51.3% 17.8% 27.4% 7.7% 4.7% % 2.4% 2.7% Peru 0.0% 3.2% 0.9% 6.6% 15.4% 0.0% 1.2% 0.3% 0.9% 1.5%Source: CD4CDM* Projected by author.Note: The percentages in 2008 do not sum 100% because the regions and global CDM projects were also modeled individually. Thistells us that the projections have a positive bias because the projection of total projects in Latin America summed 234 whereas the sumof the countries already gives us 369. Latin America undoubtedly will continue to lose terrain against other regions.Despite being the first region to present CDM projects, in 2007 it represent a merely13.3% of all projects. According to the model, the decreasing tendency will continue in2008 and the participation will amount to 9.9%. Brazil will remain to have this year itslarge number of projects in the region amounting to 40.2% of all Latin American projects(coming from a 37.6% in 2007). Next in line is Mexico with 27.4% for 2008 projectedfollowed by Chile with 23.1% for the same year. The interesting thing is that the gapbetween Mexico and Chile was narrowed tremendously according to the estimations.Chile came from a participation in the previous year of 10.3% in the region when Mexicoamounted 17.8%. Both countries gained weight in the region but Chile won much more. 50
  • 51. Juan Pablo DominguezPoner gráficasAsia PacificTable 8. Latin America number of projects, 2004-2008 200 200 200 200 4 5 6 7 2008* Asia & Pacific 14 253 521 1331 1768 China 2 23 194 734 636 India 10 179 264 357 457 Indonesia 1 4 9 41 54 Malaysia 0 5 16 73 76 Philippines 0 19 6 43 18 South Korea 0 6 13 22 52 Sri Lanka 0 4 7 3 0 Thailand 0 1 1 41 62 Vietnam 0 4 4 7 9 Source: CD4CDM * Projected by author.The first thing that caught our attention from this table is that according to the projection,the region of Asia Pacific will maintain its strong leadership as the world leading regionfor CDM projects. An outstanding 74.8% projected for 2008 makes without a doubt Asiathe hottest place to invest in CDM. From the region, China and India hold unchallengedits command and production of projects amounting 636 and 457 of such respectively.Despite such high numbers, the region has much to offer. Other countries such asVietnam and Thailand are projected to more than double its 2007 numbers and otherssuch as South Korea even triple them. Indonesia and Malaysia are maintaining itsproduction levels according to the models but the Philippines seem to have.Poner imagen de proyectos de ChinaChina and India are two countries that deserve special attention given their greatnumbers. In the case of China it is very interesting to see how quickly the Chinese wereable to become the world leaders in term of CDM projects. In 2004 and 2005 the quantityof projects was minuscule regardless of having a great amount of expected CERs by theend 2005. It was in 2007 that this Asian giant developed all of its potential and presented51
  • 52. Global Geographical Distribution of CDM Projects734 (CD4CDM, 2008) different projects for registration. The case of China is soremarkable that in July 2007 alone, it presented 118 (CD4CDM, 2008) projects forregistration. The model however projected a more mild growth for the Chinese case inthe year 2008. The projection says that China will produce over 636 projects this year andmaintain and average of over 50 projects per month. These results could be explained bythe fact that investors are now trying to diversify their portfolio in order to decreasegeographical concentration of projects. This means that after a certain number of projectsin a country, investors look for different host countries in a way to control their riskexposure. In such case, a second phase of the global allocation of resources intended forMDL projects began.Poner imagen de IndiaTurning our attention now to another great giant of Asia, India has been one of the mostsuccessful countries creating CDM projects. In 2004 the Indians only had 10 projects; by2005 the numbers have multiplied to form 179 new projects (CD4CDM, 2008). Thisamazing growth was doubled by 2007 and according to the model; the Indiansubcontinent will have more than 450 new projects in 2008. Their steady growth will berepresented by an average of 28 projects every month.The rest of the region also presented a positive trend. According to the model SouthKorea was the country the presented the most pronounced increase in CDM projectnumbers. In 2007 the Koreans summed 22 projects and it is projected that by the end of2008 their numbers would have increased until 52, which means that in a year they havedoubled all their previous projects. Another interesting case is Thailand who had a veryimportant 2007 in terms of magnitude of their projects. Before that year Thailand hadonly 2 projects but by the end of last year they had already amounted 41 projects in total.It is projected that this growth will be maintained, although not at such high rate.Poner imagen de South Korea y Thailand 52
  • 53. Juan Pablo DominguezTable 9. Asian & Pacific countries regional and global CDM project participation,2004-2008 Regional participation Global participation 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 100.0 100.0 100.0 100.0 100.0 26.9 59.5 66.5 83.1 Asia & Pacific % % % % % % % % % 74.8% 24.8 45.8 China 14.3% 9.1% 37.2% 55.1% 36.0% 3.8% 5.4% % % 26.9% 19.2 42.1 33.7 22.3 India 71.4% 70.8% 50.7% 26.8% 25.8% % % % % 19.3% Indonesia 7.1% 1.6% 1.7% 3.1% 3.1% 1.9% 0.9% 1.1% 2.6% 2.3% Malaysia 0.0% 2.0% 3.1% 5.5% 4.3% 0.0% 1.2% 2.0% 4.6% 3.2% Philippines 0.0% 7.5% 1.2% 3.2% 1.0% 0.0% 4.5% 0.8% 2.7% 0.8% South Korea 0.0% 2.4% 2.5% 1.7% 2.9% 0.0% 1.4% 1.7% 1.4% 2.2% Sri Lanka 0.0% 1.6% 1.3% 0.2% 0.0% 0.0% 0.9% 0.9% 0.2% 0.0% Thailand 0.0% 0.4% 0.2% 3.1% 3.5% 0.0% 0.2% 0.1% 2.6% 2.6% Vietnam 0.0% 1.6% 0.8% 0.5% 0.5% 0.0% 0.9% 0.5% 0.4% 0.4%Source: CD4CDM* Projected by author.Rest of the World 2004 2005 2006 2007 2008 Europe and Central Asia 0 5 8 17 48 Sub-Sahara Africa 1 8 12 17 51 South Africa 1 4 10 8 36 North Africa & Middle- East 1 4 14 23 45 Israel 0 1 6 19 29As for the other three regions included in the study, the model projected importantincreases in all areas. In the case of Africa as a whole, production is expected to bedoubled. North Africa and the Middle East region presented 23 projects where Israel wasthe leader in the region amounting for almost 83% of all projects. In 2008, although theyhad in expansion of 56% as indicated by the model, their participation decreased to 64%.This phenomenon supports the idea that investors are spreading to new countries and thateven though regional leaders will maintain its top position, new countries are going toattract new investors. In the region of North Africa and the Middle East countries such asEgypt and Morocco are expected in the near future to increase their participation. In thecase of Jordan, Qatar and Tunisia there is still much more progress needed to becomefollowers instead of laggards of the global asset allocation process for CDM projects.53
  • 54. Global Geographical Distribution of CDM ProjectsFocusing on Sub-Sahara Africa, the positive trend will have a sharp rise in 2008. Themodel suggests that this region will pass from 17 projects in 2007 to 51 in this year.Furthermore, monthly average production is expected to pass from 1 to 4 projects. In thisregion, the uncontested leader is South Africa accounting for 47% of the whole region in2007. For this country, 2008 seems to be a great year. It is expected to deliver 36 projectsby the end of this year and increase its participation in the region to over 70%. Inaddition, its average monthly production is projected to pass from 1 to 4 projects amonth.Now, considering Europe and Central Asia the results are more unenthusiastic. Eventhough there is still growth, this region has not been broadly included in the process ofresource allocation for the CDM market expanse. Since 2003 this region has onlyamounted 30 projects and the countries with higher numbers are Armenia andUzbekistan, both with just 7 projects. Given this lack of data we were not able to projectany number of new projects in 2008, however a big effort was done to study the region asa whole. As a result the model projected a big increase in the numbers of projects. In2007 the Europe and Central Asia region presented 17 projects with an average of 1project per month. By 2008, the new projects are expected to sum up 48 new cases withan average of 4 projects per month. This is a big gain for the region but much more needsto be done. It is also important to recall that most of the countries that geographicallybelong to the region but because they are not consider developing economies andhenceforth do not apply as CDM projects, much of the demand for new projects in thiscountries might be transferred to other potential suppliers such as Russia and Ukrainewho are now the leaders of the Joint Implementation scheme. In the future, theconnection between these countries will affect the amount of resources that countries ofthe region might attract as competition for certificates of the flexible schemes of Kyoto. Regional participation Global participation 200 200 200 200 2004 2005 2006 2007 2008 4 5 6 7 2008 Europe and 100.0 100.0 100.0 100.0 Central Asia 0.0% % % % % 0.0% 1.2% 1.0% 1.1% 2.0% 54
  • 55. Juan Pablo Dominguez 100.0 100.0 100.0 100.0 100.0 Sub-Sahara Africa % % % % % 1.9% 1.9% 1.5% 1.1% 2.2% 100.0 South Africa % 50.0% 83.3% 47.1% 70.6% 1.9% 0.9% 1.3% 0.5% 1.5% North Africa & 100.0 100.0 100.0 100.0 100.0 Middle-East % % % % % 1.9% 0.9% 1.8% 1.4% 1.9% Israel 0.0% 25.0% 42.9% 82.6% 64.4% 0.0% 0.2% 0.8% 1.2% 1.2%Despite this important increase in these regions performance, Asia and Latin Americahave picked up a much faster pace. Asia and the Pacific made up over 83% of all theprojects in 2007 and the model projected a decrease until 74% for 2008. That lossrepresents not a diminution of the capacity of the Asians to produce more projects butthat the other regions are also gaining experience in the creation of projects. As a result,the model projects that the participation in global numbers of CDM projects for Sub-Sahara Africa will pass from 1.1% to 2.2% in 2008. II. Regional Prospects(La idea es hablar sobre las diferentes regiones y como se espera que se comporten en elfuturo próximo)China is still ranked as the most attractive location for CDM investment, owing topositive conditions and excellent potential that the country holds for developing projects.India and Chile are in second and third place. The Philippines has been added to thegroups of host countries regularly rated by Point Carbon. The south-east Asian countrygoes into 14th place, ahead of Egypt and Thailand.The Thai government finally approved approved its first batch of projects, but despite anincrease in grade, Thailand still remains last in Point Carbon’s ranking.55
  • 56. Global Geographical Distribution of CDM ProjectsOther than India, China has approved more CDM projects than any other nation, and therenewables sector - wind, solar, hydropower and biomass projects - account for themajority of those projects.China has managed to become the world’s leader in CDM mainly due to the commitmentof the government in support of the mechanism. It had all the conditions to rise as animportant player and it took the appropriate measures for achieving its goals. Thecombination of a strong leadership, economic development, GHG reduction potential,financial opportunities as well as a recipient private sector allowed this country tobecome the number one in market participation. (esto es mio, hay que ver lo que dicen loscountry profiles)Earlier this month, Finance Minister Jin Renqing told a congress of senior CommunistParty figures that China may offer tax incentives to companies that invest in therenewable energy sector. Also at the People’s Congress, the country’s prime ministerWen Jiabao said China needed to place greater emphasis on meeting its energy efficiencytargets, particularly in power generation, and energy intensive industries such as steel,cement, chemicals, fertiliser and ceramics. 56
  • 57. Juan Pablo DominguezChina is aiming at generating 20 per cent of its electricity needs from renewable sourcesby 2020, although hydro projects are expected to be the largest single non-fossil fuelsector by far.While most of the focus is likely to remain in China and India as they are well establishedCDM locations, Brazil and Argentina could also be other important sources, particularlyto those companies who want to diversify country risk.Sobre Africa y Capacity BuildingCJM 15 November 2006UN Secretary General Kofi Annann has unveiled a package of measures in Nairobi onbehalf of UN bodies and multilateral banks that are aimed at building capacity in thedevelopment of renewable energy schemes in Africa, a continent that has garnered only 2per cent of the volume of emissions reductions promised by registered projectsworldwide.The new proposals, which have been drawn up by the United Nations FrameworkConvention on Climate Change (UNFCCC), the United Nations Environment Programme(UNEP), the World Bank through the International Finance Corporation and the AfricaDevelopment Bank, and the Global Environment Facility, will attempt to build capacityin the CDM on the continent as the private sector has either been unwilling or unable todevelop CDM projects for reasons ranging from lack of available opportunities todevelop projects to the lack of co-ordination at government level.‘The Nairobi Framework for the CDM’ will try and build up a portfolio of CDM projectsin sub-Saharan Africa through co-ordination of activities between UN bodies andmultilateral banks, and small fund will attempt to provide seed money for renewableenergy projects such as in wind energy. The tie-up between the various internationalagencies will to a large degree fuse together existing efforts, but will attempt to makebetter use of the expertise and experience available, sources in the UN said.The idea will be to develop renewable technologies that will provide electricity to areasthat have never had access to power, so the projects in many cases will not be replacing57
  • 58. Global Geographical Distribution of CDM Projectsestablished power stations that burn coal or oil. They will, however, pre-empt any futurecapacity that burns fossil fuels.The new initiative seeks to broaden the CDM beyond North Africa, Nigeria and SouthAfrica by by building up expertise at government level. While some African countries,such as Uganda and Tanzania, established a designated national authority last year(DNA), most countries south of the Sahara have yet to set up the framework required toapprove CDM projects, a key requirement if ventures aimed at cutting emissions are toprogress through the project pipeline.Project developers on the sidelines of the UN conference said last week that a lack ofunderstanding at government level was the single biggest obstacle to getting CDM off theground in Africa, but other major hurdles also need to be overcome, such as thedevelopment or approval of methodologies in projects that are more suited to Africa’spattern of economic development and energy infrastructure.Projects as such forestry and fuel switching are viewed as those that have the best chanceof taking root in Africa, but blueprints for such projects are often very complicated andtime-consuming, increasing the cost of developing CDM investment on the continent.Fixed costs such as project identification, office and administration, validation andverification and even interpretation can be too high in many cases for developers ofsmall-scale projects, many of whom are unable to borrow money from African banks atpreferential rates.While the few foreign investors who have committed money to projects in sub-SaharanAfrica can draw on a wider sources of finance, most African banks have been slow orunwilling to finance domestic entrepreneurs in the sector, complain project developers.“This is absolutely crucial to the CDM in Africa,” said an official with the African branchof Climate Action Network, a network of environmentalist groups. Social developmentbanks, such as ‘solidarity banks’ could be part of the solution, he suggested, as thesebanks lends with favorable conditions, asking for less collateral and a lower interest ratefor prospective project developers.`7.3. Prospects for the carbon market for the period 2008.2012 58
  • 59. Juan Pablo Dominguez602. The Kyoto Protocol mechanisms (CDM, JI and international emissions trading) andthe emissions trading systems established by Annex B Parties (EU ETS) will be thedominant carbon markets for the 2008 to 2012 period. They are already the largestmarkets by far. The EU ETS is expected to expand to include Norway, Iceland andLiechtenstein in 2008, to link with a Swiss emissions trading system, incorporate Turkeyif it joins the EU, and to cover aviation beginning in 2011.603. The Regional Greenhouse Gas Initiative (RGGI), covering the CO 2 emissions ofelectricity generating units in 10 states in the northeastern United States, is scheduled tobegin in 2009. Canada has announced a system for 2010. Proposals for a nationalemissions trading system are under consideration in Australia. New Zealand is workingon the design of a system. And various regional and national systems have been proposedfor the United States. Those systems are unlikely to begin operation before 2011.604. Since the EU ETS allows Kyoto Protocol mechanisms to be used for compliance,this chapter focuses on the market for Kyoto Protocol compliance units. Capoor andAmbrosi conclude that the current projected demand.supply balance, excluding Canada,implies that the price of CERs/ERUs is likely to help set the market equilibrium price forEUAs during this period (Capoor and Ambrosi, 2007). The analysis considers 2010 as arepresentative year for the 2008 to 2012 compliance period. 1. 7.3.1. Demand605. Annex B Parties can use Kyoto Protocol units to help meet their commitments. Thedemand for these units is the difference between the actual emissions and thecommitment for each Party whose emissions exceed its commitment. Thus the forecastdemand depends on the forecast emissions of individual Annex B Parties and respectivesuccess of their policies and measures.606. Three recent estimates of the demand are presented in annex 5, table 24. Theestimates vary widely, from about 400 Mt CO q per year to over 850 Mt CO q per year.The Canadian demand is a significant uncertainty for the estimates. In April 2007 theCanadian government stated that it does not plan to purchase Kyoto units, but firms59
  • 60. Global Geographical Distribution of CDM Projectscovered by the emissions trading system will be able to use specified types of CERs forup to 10 per cent of their total emissions f purchases by the Canadian government areexcluded, the Point Carbon and Capoor and Ambrosi estimates are virtually identical at400 Mt CO , whereas the ICF International range of 500.671 Mt CO q is somewhathigher. .90 I2 e2 e 2 eq2 e607. Annex B governments have already committed to purchase CERs and ERUsequivalent to 917 Mt CO2 eq, 183 Mt CO2 eq per year, which is over 45 per cent of thedemand as estimated by Point Carbon and Capoor and Ambrosi (2007).608. The estimates of the demand by EU ETS installations are all close to the maximumuse of CERs and ERUs allowed by the national allocation plans.609. The demands estimated in table Annex 5, Table 24 are unlikely to changesignificantly. Canada.s decision reduced the projected demand substantially, but nofurther reductions are anticipated. Any growth in demand will be limited and come after2010. Expansion of the EU ETS to include aviation could increase the demand for CERs/ERUs and new emissions trading systems in Australia or the United States could allowthe use of Kyoto units, which might also increase the demand. ICF Internationalestimates an average demand of zero to 30 Mt CO 2 eq per year for CERs/ERUs from theUnited States (RGGI) during the period 2008.2012 (ICF International, 2007).610. Capoor and Ambrosi estimate that half of the potential demand has been contractedor is yet to be contracted. 2. 7.3.2. Supply611. Figure 34 shows Kyoto units supplied by CDM projects in 2010, JI projects andAnnex B Parties with surplus allowances (AAUs). Detailed estimates of the supply arepresented in annex 5, table 25. 60
  • 61. Juan Pablo DominguezFigure 34. Estimated supply of Kyoto units in 2010 (Mt CO2 eq per year)Abbreviations: CER = certified emission reduction, AAU = assigned amount unit, ERU =emission reduction unit.612. The flow of new projects and the CERs/ERUs they can generate by 2012 isuncertain because of delays in negotiating the post-2012 regime. Until a newinternational agreement is negotiated, the ability of emission reductions after 2012 to earnCERs or ERUs is uncertain. This means delays in negotiating a post-2012 regime willprogressively reduce the period during which investors can recover their costs (Capoorand Ambrosi, 2007; Haites, 2004). Soon, only the most profitable projects, such as HFCand N2O destruction projects, will be able to recover their investment prior to 2013.613. The Russian Federation, Ukraine and some eastern European countries will havesurplus AAUs they can sell to other Annex B Parties. Some of these countries areestablishing green investment schemes, which use the revenue from the sale of AAUs tofund emission reduction measures. ICF International assumes that only AAUs from greeninvestment schemes will be purchased by other Annex B Parties. Point Carbon andCapoor and Ambrosi estimate the surplus AAUs available, but do not assume they will besold.614. Point Carbon and Capoor and Ambrosi find that the projected supply of CERs andERUs is almost sufficient to meet the estimated demand, excluding Canada. The supply61
  • 62. Global Geographical Distribution of CDM Projectsof surplus AAUs is huge relative to the residual demand. In its mid-case, ICFInternational projects that, in addition to CERs and ERUs, some AAUs from greeninvestment funds will be used to meet the estimated demand. All of the estimates suggestthat supply will exceed the demand.615. The supply of Kyoto units could increase further due to: • CDM projects for programmes of emission reduction activities.. No project of this type has been registered yet, but such projects could generate relatively large emission reductions; • HFC-23 destruction projects at new HCFC-22 plants. The eligibility of such projects has been under negotiation for a few years. If approved, they could generate large quantities of CERs; • CO2 capture and storage. The eligibility of such projects has been under negotiation for a few years. If approved, they could generate large quantities of CERs, although the time needed to implement such projects would limit the quantity issued before the end of 2012; • Tradable credits for reduced deforestation. This has been proposed, but it now appears unlikely during the period 2008.2012; • Emissions limitation commitments proposed by Belarus and Kazakhstan. The proposed commitments probably would leave each country with surplus AAUs, although it could take some time for them to meet the eligibility conditions to sell AAUs. •616. In summary, the analyses suggest the supply will be abundant relative to thedemand. Demand for the period 2008.2012 is unlikely to change significantly, but thesupply of Kyoto units could increase substantially.617. The supply of CERs and ERUs will be affected by several factors over the next fewyears, including:91 62
  • 63. Juan Pablo Dominguez• Uncertainty about the post-2012 regime. The value of emission reductions after 2012 isuncertain, so projects with longer payback periods become progressively less attractive,reducing the flow of new projects;• Administrative uncertainty. Inconsistent decisions, possible review upon registration,and possible review on issuance present relatively small risks for project developers.Owing to the relative lack of experience, the risks are higher for JI projects than for CDMprojects;• Market liquidity. The secondary market for CERs is still small so accurate priceinformation is not readily available. This should change over the coming year as thenumber of issued CERs rises. The secondary market for ERUs will lag by a year or more;• Possible changes to the rules. The rules for the CDM could be changed to generate awider geographic distribution of projects and/or to favour projects that have moredevelopment benefits. 3. 7.3.3. Prices618. Will the surplus supply lead to a collapse of CER/ERU/AAU prices, as happenedduring Phase I of the EU ETS? Probably not. Phase I EU allowances cannot be carriedover for use beyond 2007, so they have no value after the end of the period. In contrast,Kyoto units can be carried over (banked), so they should have a value at the end of theperiod provided they can be used for compliance after 2012. The EU ETS will allow theuse of CERs and ERUs after 2012. A post-2012 international agreement is also expectedto retain the Kyoto mechanisms and thus maintain the market for those units.619. To date, all government purchases have been CERs and ERUs and participants inthe EU ETS can only use CERs and ERUs for compliance. The supply of CERs andERUs is still less than the demand, even without Canada. So long as these policiescontinue, the demand for AAUs from the Russian Federation, Ukraine and EasternEuropean countries will be limited to the demand not supplied by CERs and ERUs,causing them to carry over most of their surplus AAUs.620. Banking (carry over) of different units by an Annex B Party is restricted asfollows:9263
  • 64. Global Geographical Distribution of CDM Projects • RMUs may not be carried over; • ERUs which have not been converted from RMUs may be carried over up to a maximum of 2.5 per cent of the Party’s assigned amount; • CERs may be carried over up to a maximum of 2.5 per cent of the Party’s assigned amount; • tCERs and lCERs may not be carried over; • AAUs may be carried over without restriction.621. There are no provisions governing carry over of CERs, tCERs and lCERs by non-Annex I Parties or legal entities.622. To comply with these rules EU ETS participants should use any issued CERs orERUs they own for compliance by the end of 201293 and Annex B governments shouldcomply by submitting CERs, RMUs, and ERUs and carrying over AAUs.623. If the uncertainty relating to carry over by non-Annex I Parties and their legalentities is not resolved, it could cause the price to decline in 2012 as they try to sell theCERs they own. Early resolution of this uncertainty to avoid such a price drop isdesirable.Figure 35. Expected prices for EU allowances in 2010 and 2020, based on response toPoint Carbon survey 64
  • 65. Juan Pablo DominguezSource: Point Carbon, 2007c.624. Since CERs and ERUs can, and probably will, be used for Phase II compliance byEU ETS installations the prices for issued CERs, ERUs and Phase II EU allowancesshould be similar if not identical. As of May 2007 there is still a substantial difference inthe prices; CERs issued trade at EUR 12.13 whereas Phase II EU allowances trade atEUR 19. Figure 35 shows the price expectations for EU allowances in 2010 and 2020 ofparticipants in an online survey conducted early in 2007. For 2010 the average is EUR17.40, with a roughly symmetrical distribution ranging from less than EUR 5 to overEUR 35.625. ICF International forecasts the price for CERs/ERUs/Phase II EU allowances atEUR 8, with a range of EUR 8.20 (ICF International, 2007, table 3). ICF recognizes,however, that market behaviour may lead to an average price over the period higher thanforecast by market fundamentals. For example, industrial installations with surplus EUAshave tended to bank them, rather than sell them, and there may be delays in the deliveryof CERs or ERUs into the EU ETS.626. Based on the above information, the market price of issued CERs, ERUs and PhaseII EU allowances is estimated to average EUR 17.50 (USD 23.60) with a range of EUR10 (USD 13.50) to EUR 25 (USD 33.75) for the period 2008.2012.7.3.4. Market size627. With an annual demand of 400 to 600 Mt CO2 per year (excluding the Canadiangovernment) the price of 2006USD 23.60 suggests a market of USD 9.4.14.2 billion peryear, say 2006USD 10.15 billion per year (see figure 36).628. The above calculation assumes that all CERs, ERUs and AAUs bought forcompliance are purchased at the market price. Many CERs and ERUs have already beenpurchased by Annex B governments in the primary market at lower prices, so the annualcompliance cost should be somewhat lower. CERs and ERUs purchased by other buyers65
  • 66. Global Geographical Distribution of CDM Projectscould be sold multiple times, so the annual value of transactions could be higher orlower.94Africa’s low participation in the CDM marketThe bundling of CDM projects in sub-Saharan Africa would go some way to attractinstitutional and large buyers of carbon credits so that the region can boost its share of thegrowing international carbon credit market, a United Nations official told a conference inJohannesburg late last month.Speaking at the Clean Development Mechanism in Africa conference, Sami Kamel,carbon finance co-ordinator at the United Nations Environment Programme Risoe Centre,said that big buyers of certified emission reductions (CERs) were deterred from investingin sub-Saharan Africa because the size of the projects were too small.“I think there is increasing interest in Africa right now among the large institutionalbuyers. But some of the common barriers or some of the common causes of why they arenot looking at sub-Saharan countries is that the projects are too small for their own termsand conditions,” Kamel told the auditorium. 66
  • 67. Juan Pablo Dominguez“Many institutional buyers today or large buyers of credits are primarily interested inprojects that are minimum 50,000 CERs per year and that, I think, is acting as a keydriver for having them not participate. And this relates to the need for entities in sub-Saharan African countries that can bundle projects so that these projects can be moreattractive to these buyers,” he added.Under the Kyoto Protocol, bundling of projects is permitted providing that all individualprojects use the same methodology.Africa accounts for just 1.6 per cent of the world’s CDM projects, compared to Asia,which accounts for 63.4 per cent, and Latin America, which accounts for 32.5 per cent.Out of 24 projects in sub-Saharan Africa that are currently in the CDM project pipeline,17 are in South Africa.“I think the key trigger for having some countries ahead of other countries is the overallinvestment climate. But governments and development agencies have a lot to do to bringthose countries that are lagging behind to a level that is similar to other advancedcountries like Brazil, China or India,” Kamel said.The UN is attempting to address this balance through the Nairobi Framework, whichattempts to co-ordinate activities in the UN agencies such as UNDP, UNEP and theWorld Bank, with the aim of boosting Africa’s share of CDM projects. The framework,which was launched last November, aims to do this through capacity building, offeringfinancial support and education to those countries that need it most.However, uncertainty over what will happen when the first Kyoto period expires in 2012was another reason that was highlighted as deterring investment in the CDM ingeneral. Grant Little, corporate CDM project leader for Sappi, a South African paper andpulp company, said that his organisation took “a chance that there will be a system inplace post-2012” when planning its Tugela project, which is expected to yield 55,000CERs per year.Kamel said that buyers were tentatively showing an appetite for carbon credits generatedafter 2012.“There is an increasing belief among buyers that there will be some kind of regime post-Kyoto and some buyers are signing ERPAs (emissions reduction purchase agreements)67
  • 68. Global Geographical Distribution of CDM Projectsincluding a price or the option to buy CERs post-Kyoto, which is an indicator that sometype of regime will be designed,” Kamel said.Under a resolution passed at the Nairobi climate conference in November, Annex Imembers under the Kyoto Protocol have until 23 February to identify expert agencies toaid them in negotiating their greenhouse gas targets when the Kyoto Protocol expires in2012.According to UNEP figures, the volume of projects that are at various stages of theapproval pipeline in African countries south of the Sahara numbers just 24, comparedwith 958 for the Asia and Pacifc region and 490 for Latin America. In North Africa thefigure is 22. (cambiar las cifras) 68
  • 69. Juan Pablo DominguezAppendix A. Estimation resultsAll countries were modeled in first differences in order to obtain stationarity. So when wetalk about the variables we refer to their first difference. Latin America* Argentina Brazil Chile Structure AR(6) with seasonal dummies AR(2) AR(3) AR(1) R2 0.348945 0.341319 0.5321 0.161466 AR: -4.366, -2.060, -3.318, -2.156, AR: 2.626 -6.688, Seasonal dummies: -1.440, -2.193, -4.548586, -4.056, t-stats 2.649, 3.088, 1.612 -3.09541 -2.246 -2.945 Jarque-Bera p- value 0.5011 0.119535 0.7521 0.08911 -.17-.70i .61-.60i .61+.60i -.21+.68i -.31+.58i -.17+.70i Inverted roots -.21-.68i -.71+.28i -.71-.28i -.31-.58i -.66 -.40 Colombia Ecuador Guatemala Honduras Mexico** Peru Structure AR(2) AR(1) AR(2) AR(1) AR(2) AR(1) R2 0.431238 0.210435 0.506671 0.140625 0.1362 0.246738 -5.36196, -6.271, AR: -2.395 t-stats -1.93137 -3.463148 -2.325 -2.7136 Dummy: 2.287 -3.84237 Jarque-Bera p-value 0.168528 0.014544 0.5649 0.5649 0.00000 0.281267 Inverted -.40-.37i -.45+.36i roots -.40+.37i -.48 -.45-.36i -.37 0.6083 -.54 Asia & Pacific China India Indonesia Structure Constant, MA(1) AR(1) MA(1) AR(2) R2 0.190726 0.3097 0.0912 0.291805 C: 2.180 t-stats MA: -3.709 -4.528032 -2.795 -4.197-2.92 Jarque-Bera p-value 0.358085 0.00000 0.6347 0.00000 Inverted roots .49 -.56 .38 -.36-.70i -.36+.70i Malaysia Philippines South Korea Sri Lanka Thailand Vietnam Structure MA(1), Trend AR(1) MA(1) MA(1) AR(1) AR(1) R2 0.42179 0.213775 0.312945 0.455048 0.083868 0.180136 Trend: 3.255 t-stats MA: -7.256 -3.593799 -8.428046 -16.6612 -2.03047 -3.1498 Jarque-Bera p-value 0.00000 0.00000 0.216413 0.00000 0.00000 0.000047 Inverted roots .84 -.60 .8 .92 -.29 -.4569
  • 70. Global Geographical Distribution of CDM Projects Sub- Europe and Sahara North Africa & Central Asia Africa South Africa Middle-East Israel AR(4) withStructure seasonal dummies AR(3) AR(1) AR(2) AR(2)R2 0.4032 0.470892 0.2357 0.332682 0.376416 AR: -4.576, -4.379, -3.347, -2.570 -5.479, Dummies: 1.758, -4.405, -5.082,t-stats 2.529, 1.868, 1.726 -3.993 -3.738 -4.499, -2.946 -2.947Jarque-Berap-value 0.2879 0.020023 0.0749 0.002156 0.168176Inverted .255 -.2559 . .02-.84i i -.33+.57i -.37+.54iroots 4230 -.4230 -.79 -.50 -.33-.57i -.37-.54i Coal bed/mine Agriculture Biogas Biomass energy Cement methaneStructure AR(2) AR(1) AR(2) AR(1) AR(1) 0.24114R2 0.348879 3 0.2056 0.094558 0.160084t-stats -4.759, -2.024 -3.821 -3.129, -2.189 -2.169305 -2.948694Jarque-Berap-value 0.001379 0.00000 0.4252 0.00000 0.000024Inverted -.35-.42iroots -.35+.42i -0.52 -.23+.52i -.23-.52i -0.31 -0.41 EE own EE supply Fossil fuel generation side switch Hydro Landfill gas WindStructure AR(1) AR(1) AR(1) AR(1) AR(2) AR(1) 0.27310R2 0.318828 0.437632 0.172137 4 0.206792 0.095351t-stats -4.590869 -5.985233 -3.17767 -4.21188 -2.608, -0.410 -2.22498Jarque-Bera 0.03809p-value 0.00000 0.256262 0.32097 5 0.000012 0.397081Inverted -.19+.61iroots -0.57 -0.67 -0.48 -0.53 -.19-.61i -0.31 CH4 reduction & HFC, Cement & PFC & Coal Energy N2O Total Renewables mine/bed Efficiency reduction Constant, AR(1) withStructure seasonal dummies AR(1) AR(2) AR(1) AR(1)R2 0.348879 0.152444 0.2576 0.35886 0.267857 AR: -4.576, -4.379, -3.347, -2.570 Dummies: 1.758,t-stats 2.529, 1.868, 1.726 -2.969093 -3.767, -2.262 -5.022349 -4.102349Jarque-Berap-value 0.001379 0.00000 0.0331 0.00000 0.010738Inverted .255 -.2559 .4230 -.27+.52iroots -.4230 -0.41 -.27-.52i -0.6 -0.5 70
  • 71. Juan Pablo Dominguez71
  • 72. Global Geographical Distribution of CDM Projects An approximation to the determinants of carbon market expansion in developing countries, 2004-2007........................................................................................................1 Abstract............................................................................................................................1Introduction.........................................................................................................................2Chapter I Background of (pensar) poner chapter en los demás menos en conclusion.......5 1.1Annual Investment in CDM projects ...............................................................10 1.2 The CDM Market outlook...................................................................................12 1.2.1 Financial muscle...........................................................................................12 1.2.2 Demand-Supply Balance and CER prices....................................................12 1.2.3 Regulated vs. Unregulated markets..............................................................15 1.2.4 Secondary market..........................................................................................16Chapter 2 Barriers, Multilateral Banks and the Investor’s Perspective...........................16 Overcoming barriers (esta seccion viene de overcoming barriers)............................17 Information and expertise......................................................................................18 Finance...................................................................................................................18 Overcoming barriers to CDM Projects..................................................................19 Risks in CDM and its impact on prices.................................................................19 Generic project risk....................................................................................................21 Country political risk.............................................................................................21 Counterparty risk...................................................................................................21 CDM project specific risk..........................................................................................21 Methodology risk...................................................................................................21 Host Country Approval risk...................................................................................22 Validation & registration risk................................................................................22 Performance risk....................................................................................................22 Monitoring/ Verification risk.................................................................................23 Review of issuance risk.........................................................................................23 Transfer risk...........................................................................................................23 Market risk.............................................................................................................24 Post-Kyoto risk......................................................................................................25 Investor’s rationale.....................................................................................................28 72
  • 73. Juan Pablo Dominguez Financing the Project.............................................................................................30 Market Benefit...........................................................................................................31 Multilateral banking...................................................................................................33 Practices of the multilateral development banks in supporting activities relevant to climate change.......................................................................................................33I. Regional Gravitational Centers......................................................................................34 Regional Gravitational Centers Theory.....................................................................35 Geo-politics and the RGC......................................................................................35 The Regional Gravitational Centers introduction......................................................36 a. The international environment and its transformation ..................................36 b. Formation of geo-political/economical plates...............................................37 Regional Gravitational Centers and CDM geographical distribution........................39 Types of countries......................................................................................................41 Two-stage process of global asset allocation for CDM project-based activities: Risk diversification............................................................................................................42 Econometrics and International Relations.................................................................45 The traditionalist often criticizes the behavioralist for: ........................................45 Model estimation and 2008 projection......................................................................46II. Regional Prospects........................................................................................................55 Sobre Africa y Capacity Building..................................................................................57 7.3. Prospects for the carbon market for the period 2008.2012 ....................................58 Optimizing sources by host country capacity .......................................................7473
  • 74. Global Geographical Distribution of CDM ProjectsOptimizing sources by host country capacity Country risks play a major role in investment decisions by foreign investors andlenders. Different regions vary dramatically in the types of investment capital they attractand the returns expected. Many of these differences can be explained by thecharacteristics of the national investment markets involved. UNCTAD has developed aninvestment compass to help countries understand how they rate on factors relevant toinvestment decisions by foreign direct investors7. The key variables include: • Operating costs, reflecting items such as wages, rents and electricity tariffs; • Taxation types and levels, along with investment incentives; • Resource assets, including human and natural (raw materials, resources) capital, aswell as market size; • Infrastructure, including both basic (transport, water, power) andtelecommunications; • Economic performance and governance, including economic growth rates, currentaccount balance, unemployment, country debt rating, rule of law and political stability;7 <http://compass.unctad.org/Page1.egml?country1=&country2=&region=&sessioncontext=202061216&object=SC.app.objects.methodology>(accessed January, 2008). 74
  • 75. Juan Pablo Dominguez • Regulatory framework for foreign investors, including entry, operating and exitrequirements. A similar analysis by Ernst & Young ranks countries according how attractive theyare to investors in renewable energy projects (Ernst & Young, 2007). The ranking criteriainclude measures of both natural and social capital, such as: • The Renewables Infrastructure Index., covering items such as: electricity marketregulatory risk; planning and grid connection issues; and access to finance; • Technology Factors, including power off-take attractiveness; tax climate; grant/softloan availability; market growth potential; current installed base; resource quality; andproject size.75
  • 76. Global Geographical Distribution of CDM Projects Most public companies in the carbon space are in a fast-growth mode and are yetto show a profit. One public company delayed its public disclosure in the wake of anunfavorable analyst report. Some companies cited the delay in the operations of theInternational Transaction Log (ITL) as a risk that would made it more difficult to earnand book revenues from CER spot sales this year. There was increased consolidation inthe sector and evidence of growing interest in the U.S. markets. A prominent investmentbank bought a sizeable stake in a leading project development and asset managementcompany. Another company acquired a boutique analyst firm in the United States, whilea third acquired a smaller company in Washington DC specializing in developing ProjectDesign Documents (PDDs) (fuente). Several European entities opened offices in theUnited States citing the need to develop a presence in this potentially large market(fuente). Reports of early offset transactions in North America filtered in with pricesreported in a very wide price range starting at around US$1.50, e.g. from pre-compliancebuyers for emission reductions from enhanced recovery from oil and gas fields (fuente). The most promising impact of carbon markets has been its impact on innovationas smart capital takes an early, long-term bet on the quickly growing emerging market forenvironmentally-oriented investment (fuente). A key indicator of interest in aligned andclosely related fields is the record US$70.9 billion in clean technology investments in2006 with major investments (and announcements) from well-known investment banks(fuente). (Esta parte no va aqui) 76