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Global Distribution of CDM Projects:       An approximation to the determinants of carbon market expansion in             ...
Global Geographical Distribution of CDM Projects                       Introduction   The Kyoto Protocol, signed in 1997, ...
Juan Pablo DominguezNote:      Red: CDM Large scale project, one location       Orange: CDM Large scale project, several l...
Global Geographical Distribution of CDM Projects           100%             90%             80%             70%           ...
Juan Pablo Dominguez    The main objective of this text is to analyze the geographical distribution of CDMprojects in the ...
Global Geographical Distribution of CDM Projectsregistered, and further costs (certification of the emission reductions) b...
Juan Pablo Dominguezregistry where they can be used for compliance is the only uncertainty and they thereforecommand the h...
Global Geographical Distribution of CDM Projects   Source: CD4CDM, 2007             Figures 1 and 2 provide the sectoral d...
Juan Pablo Dominguezregions.   Wind, Hydro and Biomass are concentrated mainly the Asian continent,whereas the rest of sec...
Global Geographical Distribution of CDM ProjectsUS$10.40 - 11.70 or €8.9 since 2006) before providing approval to projects...
Juan Pablo Dominguezunilateral projects (33% of projected annual emission reductions of projects in thepipeline at the end...
Global Geographical Distribution of CDM Projects1.2 The CDM Market outlook       Besides the invested amount in capital, o...
Juan Pablo Dominguezequilibrium between demand and supply of emission reductions as part of a larger carbonmarket.Table 4....
Global Geographical Distribution of CDM Projectstraded in the markets established by these systems and the voluntary marke...
Juan Pablo Dominguezaddress more actively in carbon markets hold some promise of market continuity beyond2012 and therefor...
Global Geographical Distribution of CDM Projectsdevelopment and diffusion, economic and fiscal policy changes, programmati...
Juan Pablo Dominguezattract investment in CDM or at least in very small amounts. African countries are part ofthis group. ...
Global Geographical Distribution of CDM Projectsmain factors are the ones that need to be addressed by those countries tha...
Juan Pablo DominguezCD4CDM project is a major effort to help develop the institutional and human capacitynecessary to form...
Global Geographical Distribution of CDM ProjectsFigure 8. Evolution of risks throughout the phases of CDM projectsSource: ...
Juan Pablo Dominguez     (Todo esto que sigue viene de Financing CDM projects, pp. 82-86)Generic project riskCountry polit...
Global Geographical Distribution of CDM Projectstime for development and approval will have to be factored in. If a method...
Juan Pablo DominguezPerformance risk can affect both the timing and the volume of the CER flow from aproject.Monitoring/ V...
Global Geographical Distribution of CDM Projects   In order for CERs to be issued, the project developer can choose to dev...
Juan Pablo Domingueznegotiated with the European Commission. The outcome of these negotiations determinesthe shortage of a...
Global Geographical Distribution of CDM Projectsfinance for a new CDM project. This is due to the fact that CDM project de...
Juan Pablo DominguezThe Kyoto protocol obliges rich nations to reduce their emissions of six greenhouse gasesby about 5 pe...
Global Geographical Distribution of CDM ProjectsInvestor’s rationale       The revenue earned from the emission reductions...
Juan Pablo Dominguez 20                              270             270.2     270.2       270.2            270.2Source: W...
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 C...
Juan Pablo DominguezThe above argument ignores any effect of taxation. In fact, in most countries, interestpaymentson debt...
Global Geographical Distribution of CDM Projectsease of transaction is much higher for option 2 – most power generators cu...
Juan Pablo DominguezMultilateral banking        Hablar sobre como la banca multilateral ha participado en el mercado de CE...
Global Geographical Distribution of CDM Projectsthe last two years and is reflected in newly formed dedicated funds for mi...
Juan Pablo DominguezProtocol was ratified the number of CDM projects began to grow. This first stage is stillgoing on, how...
Global Geographical Distribution of CDM Projects       Nowadays, the different regions which compose the global system hav...
Juan Pablo Dominguezinteraction between nations in all spheres (trade, culture, politics and society); the otherone being ...
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
Global distribution of cdm projects
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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.

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Global distribution of cdm projects

  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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