Clean Development Mechanism

CLEAN DEVELOPMENT MECHANISM

Roadmap
Kyoto Protocol
What is Clean Development Mechanism?
Certified Emission Reductions
Baseline Methodology
CDM Project Management
Project additionality test
Estimation of GHG emission reduction
Emission trading/CER prices
CDM Legal issues
CDM world statistics
Indian Scenario
Present risks of CDM promotion in India

Kyoto Protocol Kyoto Protocol
The Kyoto Protocol is a legally binding agreement that arose out of the UNFCCC to tackle climate change through a reduction of green house gas emissions.
Countries are legally bound to reduce man-made green house gases emissions by approximately 5.2%..
The text of the protocol was adopted at the third conference of the parties to the UNFCCC in Kyoto, Japan, on 11 December 1997.

The Kyoto Mechanism
The protocol devised three innovative mechanisms:
Joint Implementation (JI)
International Emission Trading (IET)
Clean Development Mechanism (CDM)
The first two mechanisms are more relevant to developed countries whereas CDM is related to developing countries like India.

What is Clean Development Mechanism (CDM)?

Certified Emissions Reductions ( CERs ) A CER is given by the CDM Executive Board to projects in developing countries to certify they have reduced green house gas emissions by one tonne of carbon dioxide per year

One CER is equivalent to one tonne of carbon dioxide reduced

ONE CER = $ 10 (CONSERVATIVE ESTIMATE)

Six green house gases Source: IPCC Third assessment report,2001 Gas Global Warming potential Carbon dioxide (CO2) 1 Methane (CH4) 21 Nitrous Oxide (N2O) 310 Hydrofluorocarbons (HFCs) 140-11700 Perfluorocarbons (PFCs) 7000-9200 Sulphur hexafluoride (SF6) 23900

What makes a project eligible for CDM? A project is eligible for CDM benefits if the project will result in a net decrease in green house gas emissions – this is called additionality

CDM Projects Renewable Energy Hydro/Wind/Biomass/Solar/Biogas based Cogeneration Clean Energy Energy Efficiency Waste Heat Recovery and Utilization Natural Gas Green Building Energy Efficient Lighting/Cooling/Heating HFC/PFC Abatement Aforestation /Reforestation Methane/Landfill gas recovery & Utilization Others Types of CDM Projects

Project Activities under CDM must be…
Hosted by non-Annex I Parties (like India) that have ratified the Kyoto Protocol and established a Designated National Authority (DNA).
Developed by public or private entities authorized by the relevant host Party and Annex I Party (like U.K.) involved in the project activity.
Validated by a Designated Operational Entity (DOE) in accordance with the CDM project eligibility and participation requirements.
Registered by the CDM Executive Board after review by a Registration and Issuance Team to ensure compliance with the international rules; and
Once commissioned and operational, verified and certified by a DOE as resulting in real, additional, measurable and verifiable reductions in greenhouse gas emissions below usual baseline scenario.

Baseline If a project gets 20,000 CER’s it means that it’s emissions are 20,000 tonnes of carbon dioxide less than a reference point called a baseline. A baseline for a CDM project gives the greenhouse gases emissions that would have occurred in the absence of the proposed CDM project activity

Baseline Methodology Step-1: Identify Baseline Scenario Step-2: Define Data sources and Assumptions Step-3: Estimating the Baseline Step-4: Evaluating Baseline Methodology Step-6: Monitoring of Baseline Methodology Step-5: Assessment of uncertainties

Step 1: Identifying Baseline Scenario D E F I N E R E F I N E SELECT BASELINE SCENARIO Survey of activities providing similar services as the Project Define Spatial Scope – local/regional/national Map technology/practices for Project Activity in Spatial Boundary Identify policies/regulations that influence choice of Technology/practices Identify programs for promoting resource conservation Technology/practices in the sector Drop/Add alternatives to Baseline Scenarios

Step 2: Defining Data sources and Assumptions Describe Parameters and Assumptions List the Data used and its Sources Define the Vintage of Data Determine the Spatial level of Data

Step 3: Estimating the Baseline
The three Baseline Approaches (Any of the following may be chosen)
Emissions actual or historical.
Emissions of most economic options.
Weighted average of similar projects.
Justification of choice should be done on following basis:
Consistency with the context of applicable project types.
Consistency with underlying algorithms and data sources used in baseline methodology.
One that most closely reflects the process used for calculating baseline emissions.

Step 4: Evaluating Baseline Methodology Two parameters for Evaluation Relevance Robustness Applicability of Baseline Methodology Strength and Weakness Transparency Conservative- ness

Step 5: Assessment of Uncertainties
Continuous monitoring should be done to understanding:
Changes in scenario
Changes in underlying assumptions
Impact of above changes on original estimates
Step 6: Monitoring of Baseline Methodology Uncertainties Related to: Assumptions Variables

1 2 3 4 5 6 7 Preparation of Project Design Document (PDD) Approval of Host Country Validation of Project by DOEs Registration of Project by UNFCCC Monitoring of Project Activity Verification & Certification of CERs by DOEs Issuance of CERs by UNFCCC One Time Activity Annually For full Crediting period Buyers pay to Project owners Signing Contract With Buyers CDM Project Cycle

Feasibility Study Decision Making Project Planning Project Implementation Project Operation & Maintenance CDM CDM CDM CDM Realization of CDM Revenue Without CDM With CDM Include CDM revenue in project financials & IRR calculation If possible secure Bank loan only on virtue of CDM revenue Include discussion of CDM in all board meeting Include all risk & barrier in project DPR report Involve CDM consultant and develop PDD & PCN Submit PDD to validation agencies at least 4 month prior to signing first purchase order or EPC contract for the project Facilitate in CDM registration PDD: Project Design Document ,PCN: Project Concept Note, EPC: Engineering Procurement and Construction, DPR: Detailed Project Report Project Management

Impact of CDM Revenue on the Renewable Energy Project Cost Source: Prototype Carbon Fund, World Bank 2005 Technology IRR Energy efficiency (heating by solar panels) <1.0 Wind 0.9-1.3 Hydro 1.2-2.6 Bagasse 0.5-3.5 Biomass <5.2 Solid Waste Management (Methane Recovery) >5.0

Project’s Contribution to Sustainable Development
Social Well Being - The project should lead to alleviation of poverty by generating additional employment, removal of social disparities leading to improvement in quality of life of people.
Economic Well Being – The project should bring in additional investment consistent with the needs of the people.
Environment Well Being – This includes a discussion of impact of the project activity on resource sustainability and resource degradation.
Technological Well Being – The activity should lead to transfer of environmentally safe and sound technologies that are comparable to best practices.

Project Additionality Test

STEP 0: CLAIMING CREDITS FOR PROJECT WITH START DATE PRIOR to date of registration – if not applicable go to step 1 directly STEP 1 : IDENTIFICATION OF ALTERNATIVES to the project activity consistent with mandatory laws and regulations STEP 3 : BARRIER ANALYSIS Is there at least one barrier preventing the implementation of the proposed project activity without the CDM; and (2) Is at least one alternative Scenario, other than proposed CDM project activity not Prevented by any of the Identified barriers? STEP 2 : INVESTMENT ANALYSIS Does sensitivity analysis conclude that the proposed CDM project activity is unlikely to be the most financially attractive or is unlikely to be financially attractive? STEP 4 :COMMON PRACTICE ANALYSIS (1) No similar activities can be observed? (2) If similar activities are observed, are they essential distinctions between the proposed CDM project activity and similar activities that can reasonably be explained? Project is additional Project is Not Additional Claim CDM Benefits N N N Y Y Y

STEP 2: Investment Analysis Any financial returns from project Other than the CER benefits? Use simple cost analysis Demonstrate costs and prove no benefits accrue No Investment comparison Analysis Choose: IRR 1 , NPV, CB ratio Or unit cost of service ($/kWh) Benchmark Analysis Choose: IRR 2 , NPV, CB ratio Or unit cost of service ($/kWh) 1: Project or Equity IRR; 2: Project IRR. Choose Benchmark: GBR + Risk Premium, or Cost of Cap or Req. return Rate, or Company internal Benchmark Yes Indicator of at least One Alternative > CDM Project Indicator of CDM Project < Benchmark Sensitivity Analysis

STEP 3: Barrier Analysis
Determine whether the proposed project activity faces barriers that:
Prevent the implementation of this type of proposed project activity; and
Do not prevent the implementation of at least one of the alternatives.
Types of barriers:
Investment barriers (other than the economic/financial barriers in Step 2 above)
Technological barriers
Risk perception
Information unavailability

STEP 4: Common Practice Analysis
Analysis of any other activities implemented previously or currently underway similar to the proposed project activity.
Projects are considered similar if
In the same country/region
Rely on a broadly similar technology,
Are of a similar scale,
and take place in a comparable environment (regulatory framework, investment climate, access to technology, access to financing, etc.)
DO NOT INCLUDE Other CDM project activities

Estimation of GHG emissions reduction Estimation of GHG emissions (1) ADD: Estimation of Leakage (2) TOTAL Estimation of GHG emissions (1+2= 3) LESS Baseline emissions (4) NET Emissions reduction (4-3)

Transaction cost for Acquiring CERs
Transaction costs implementing CDM generally comprise of costs towards:
Consultants for developing CDM projects.
Hiring designated Operational Entity (DOE) for validation and Verification.
Registration of projects with CDM Executive Board.
Apart from CDM costs, 2% of the CERs will be deducted adaptation fund by CDM Executive Board.

Emissions trading is a market based system that allows firms the flexibility to select cost effective solutions to achieve established environmental goals.
Emission trading will allow countries and individual companies to buy and sell carbon created by activities that reduce the level of Green House Gas emissions.
Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the "carbon market."
Carbon credits are traded at CO 2 e exchange in UK, European Climate Exchange, Chicago climate Exchange (CCX) and Multi Commodity Exchange (MCX) in India.
Emissions trading

CER Prices as on 15/07/2009 Europe

CER Prices as on 15/07/2009 U.S

CER Prices as on 15/07/2009 India Rs.

Various factors influencing CER prices in India
Supply-demand mismatch
Policy issues
Crude oil prices
Coal prices
CO 2 emissions
Weather/Fuel prices
European Union Allowances (EUAs) prices
Foreign exchange fluctuations
Global economic growth

The Role and nature of Carbon Contracts
CERC Regulations for sharing of CDM benefits
CDM project Risk Identification and Management
CDM Legal issues

The Role and nature of Carbon Contracts
Contracting approaches to sell CERs can include:
Competitive tender processes.
Transacting through independent brokers.
Individual Contractual negotiations (e.g. spot transactions, forward sales of CERs or option contracts)
Alternatively, CERs can be sold through exchange traded contracts.
ERPA: Emission Reduction Purchase Agreement

CDM contracts should cover following aspects:
Nature of the right being sold
Legal title to CERs
Transfer of legal title to CERs
Obligation to ensure that CERs are issued through buyer’s account
Quantity of CERs being acquired
Shortfall provision
Purchase price
Payment of costs
Provision of documents and other information
Liability and indemnities
Force majeure
Dispute resolution
The Role and nature of Carbon Contracts (Contd…)

CERC Regulations for sharing of CDM benefits
Present Sharing of CDM benefits:
Proposed Sharing of CDM benefits:
Year Share of project developer (Generation co.) Share of beneficiar-ies 1 75% 25% 2 75% 25% 3 75% 25% 4 75% 25% 5 75% 25% 6 and onwards 75% 25% Year Share of project developer (Generation co.) Share of beneficiari-es 1 100% Nil 2 90% 10% 3 80% 20% 4 70% 30% 5 60% 40% 6 and onwards 50% 50%

CDM project Risk Identification and Management
Identification of risks:
Main categories of risk are:
Host country political and sovereign risk
General project risk

CDM project Risk Identification and Management (Contd…)
Management of key project Risks:
Generally risk will be allocated to party which is best able to control that risk.
The allocation of risk which neither party is able to control should be reflected in price of CERs.
Risk allocations can be dealt through measures such as:
Conditions precedent in the contract.
Guarantees from host countries or parent companies.
Force majeure clauses.
Laying off risks to third parties such as contractors and DOEs
Warranties, indemnities and rights of termination in contract

CDM WORLD

CDM Statistics Source: India holds 2 nd position with 442 registered projects

CDM Statistics (Contd…) Source: India expects 35,774,921 CERs from registered projects i.e. 80940 CERs per projects

CDM Statistics (Contd…) Source: 1256 registered projects

CDM Statistics (Contd…)

Benefits to Developed Countries
Reduction in emission mitigation costs
More flexibility for meeting their commitment
Market for new and advanced technologies
New investment opportunities

Benefits of CDM to Developing Countries
New source of foreign Investments
Transfer of technology and expertise
Employment generation
Infrastructure development
Reduction in imported energy demand

India’s Position
No obligation to reduce emissions
Per capita Carbon dioxide emission of India is amongst the lowest in the world.
Country India USA U.K China World Per capita CO 2 emission (tonnes of CO 2 /annum) 1.2 20.6 9.8 3.8 4.5

Indian Scenario-CDM
Strong Industrial Base with more than 30
industrial sectors cover CDM projects
Baseline Carbon dioxide emissions from
power sector already in place.
In India, clearance for sustainability is granted by the National CDM Authority (NCDMA) and is spearheaded by the Union ministry of environment and forests (MOEF).
Dynamic, Transparent & Speedy processing by Indian DNA (NCDMA) for Host Country Approval.

Present Risks in CDM Promotion in India
Clarity on Taxation Issues
Necessity of a Green Carbon Fund
Insurance Sector in India – yet to gear up
Lack of Resources for adequate Capacity Building
Non-Ratification of USA

Webography
www.unfccc.int
www.cseindia.org
www.cdmrulebook.com
www.nymex.greenfutures.com
www.ecx.eu
www.mcxindia.com
www.ipcc.ch

Clean Development Mechanism

by Nayan Bhatia on Aug 26, 2009

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