Cdm Overview


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Cdm Overview

  1. 1. CLEAN DEVELOPMENT MECHANISM: OVERVIEW DENR Training Course November 4-6, 2003 Climate Change Information Center Manila Observatory Ateneo de Manila University
  2. 2. Contents <ul><li>Problem of Climate Change </li></ul><ul><li>UNFCCC & Kyoto Protocol </li></ul><ul><li>Clean Development Mechanism </li></ul><ul><li>CDM Eligible Projects </li></ul><ul><li>Environmental Benefits of CDM </li></ul><ul><li>Mechanics of CDM </li></ul><ul><li>Basics of CDM Financing </li></ul><ul><li>Philippine Participation in CDM </li></ul>
  3. 3. 1. Problem of Climate Change
  4. 4. Rising temperatures results in changing weather patterns <ul><li>Increased occurrence of dramatic weather such as hurricanes </li></ul><ul><li>Melting polar caps, glaciers </li></ul><ul><li>Shifts in weather patterns </li></ul>Historic Temperature Data
  5. 6. Atmospheric CO 2 Concentration and Temperature Change 150 100 50 0 Thousands of Years ago Temperature change ( o C) Carbon dioxide (ppmv)
  6. 7. Climate Change <ul><li>Climate change is caused by both natural events (like volcanic eruptions) and human activities </li></ul>
  7. 8. Human Sources of GHGs Carbon Dioxide (CO 2 ) – Most prevalent GHG Methane (CH 4 ) – Second most common, 21x the potency of CO 2 Nitrous Oxide (N 2 O) – 310x the potency of CO 2 Other Gases – HFCs, PFCs, and SF 6 = range 600 – 23900x potency of CO 2 Transport Transportation Energy Generation Industrial Processes Land Use: Agriculture & Forestry
  8. 9. GHG and Environmental Impacts Changes in temperature, weather patterns and sea level rise Agriculture: Changes in crop yields Irrigation demands, Productivity Forests: Change in Ecologies, Geographic range of species, and Health and productivity Coastal Areas: Erosion and flooding Inundation Change in wetlands Water Resources: Changes in water supply and water quality Competition/Trans-border Issues Human Health: Weather related mortality Infectious disease Air quality - respiratory illness Industry and Energy: Changes in Energy demand Product demand & Supply
  9. 10. Philippine Rice Production. Arrows indicate El Ni ñ o events. (source: Food and Agricultural Organization)
  10. 11. Vulnerability information systems El Ni ñ o - La Ni ñ a Vulnerability Map Support for Greenhouse Gas Inventory
  11. 12. Sea level rise 3D modeling and visualization tools are used for vulnerability assessment, exact location and quantification of areas which are susceptible to floods due to rise in sea level. Study area: Northern part of Navotas, Metro Manila
  12. 13. 2. UNFCCC and KYOTO PROTOCOL
  13. 14. United Nations Framework Convention on Climate Change <ul><li>Objective of the Convention </li></ul><ul><li>“ Stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system . Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner .” </li></ul>
  14. 16. United Nations Framework Convention on Climate Change <ul><li>Commitments by the Parties to the Convention </li></ul><ul><li>Parties have common but differentiated responsibilities. </li></ul>
  15. 18. Division of Parties by Annex Australia / Austria / Belgium / Canada / Denmark / EC / Finland / France / Germany / Greece /Iceland / Ireland / Italy / Japan / Luxembourg / Netherlands / New Zealand / Norway / Portugal / Spain / Sweden / Switzerland / Turkey / United Kingdom / USA Annex I Belarus / Bulgaria / Croatia / Czech Republic / Estonia / Hungary / Latvia / Liechtenstein / Lithuania / Monaco / Poland / Romania / Russian Federation / Slovakia / Slovenia / Ukraine Non-Annex I Countries = All the Rest of Ratifying Countries Annex II
  16. 19. Kyoto Protocol <ul><li>The overall emission reduction target for Annex I Parties as a group is at least 5 percent below 1990 levels , to be achieved by the commitment period 2008 to 2012 (an average over the five years). </li></ul><ul><li>The Protocol covers six greenhouse gases (Annex A) - CO 2 , CH 4 , N 2 O, HFCs, PFCs, SF 6 </li></ul><ul><li>The negotiated targets for individual Annex I Parties are included in Annex B of the Protocol. </li></ul>
  17. 20. Selected Quantified Emission Limitation (%) <ul><li>Industrialized Countries </li></ul><ul><li>Australia 108 </li></ul><ul><li>Canada 94 </li></ul><ul><li>EC bubble 92 </li></ul><ul><li>(Germany 75) </li></ul><ul><li>(Portugal 140) </li></ul><ul><li>Japan 94 </li></ul><ul><li>Norway 101 </li></ul><ul><li>New Zealand 100 </li></ul><ul><li>USA 93 ??? </li></ul><ul><li>Economies in Transition </li></ul><ul><li>Bulgaria 92 </li></ul><ul><li>Baltics 92 </li></ul><ul><li>Croatia 95 </li></ul><ul><li>Czech Republic 92 </li></ul><ul><li>Hungary 94 </li></ul><ul><li>Poland 94 </li></ul><ul><li>Romania 92 </li></ul><ul><li>Russia 100 </li></ul><ul><li>Ukraine 100 </li></ul>
  18. 21. Kyoto Protocol <ul><li>The Kyoto Protocol was adopted at COP-3 in December, 1997, in accordance with “Berlin Mandate” of COP-1. </li></ul><ul><li>The Protocol will enter into force when not less than 55 Parties to the Convention, accounting for at least 55 percent of the 1990 total CO 2 emissions of the Annex 1 Parties, have ratified the Protocol. </li></ul><ul><ul><li>US: 34%; Russia: 16%; Japan: 8% ;EU: 23%; </li></ul></ul><ul><ul><li>Other Annex 1 Parties 19% </li></ul></ul>
  19. 22. Kyoto Protocol: Flexibility Mechanisms Present day 2012 (BaU) Assigned Amounts Joint Implementation Annex I GHG Emissions Clean Development Mechanism 2012 with KP - 5% 1990 level Domestic Actions Emission Trading
  20. 23. 3. Clean Development Mechanism
  21. 24. Clean Development Mechanism <ul><li>Enables developed countries (known as Annex B countries) to meet their emission reduction commitments in a flexible and cost-effective manner </li></ul><ul><li>Assists developing countries (non-Annex B countries) in meeting their sustainable development objectives </li></ul><ul><li>Investors benefit by obtaining Certificates of Emissions Reductions ( CERs ) </li></ul><ul><li>Host countries benefit in the form of investment, access to better technology, and local sustainable development </li></ul>
  22. 25. What can the CDM do for developing countries <ul><li>Attract foreign investment to countries engaged in the trading of CERs </li></ul><ul><li>Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors </li></ul><ul><li>Clean up waste management operations </li></ul><ul><li>Improve land-use strategies and practice </li></ul><ul><li>Contribute to sustainable development of the host country </li></ul>
  23. 26. What are the Criteria for CDM Projects? <ul><li>Sustainable development </li></ul><ul><ul><li>Host country criteria </li></ul></ul><ul><ul><li>Environmental Impact Assessment </li></ul></ul><ul><ul><li>Stakeholder consultations </li></ul></ul><ul><li>Greenhouse Gas (GHG) emission reductions </li></ul><ul><ul><li>Environmental additionality </li></ul></ul><ul><li>Project additionality </li></ul><ul><li>Project viability </li></ul><ul><ul><li>Technologically proven </li></ul></ul><ul><ul><li>Financially sound </li></ul></ul><ul><li>Host country approval </li></ul><ul><li>Project validation and registration </li></ul>
  24. 27. 4. CDM Eligible Projects
  25. 28. CDM Eligible Projects <ul><li>Renewable energy </li></ul><ul><li>Fuel switching </li></ul><ul><li>End-use energy efficiency improvements </li></ul><ul><li>Supply-side energy efficiency improvements </li></ul><ul><li>Agriculture (reduction of CH 4 & N 2 O emissions) </li></ul><ul><li>Industrial processes (CO 2 from cement, HFCs, etc) </li></ul><ul><li>Sink projects (only afforestation & reforestation) </li></ul>
  26. 29. Renewable energy <ul><li>Solar power </li></ul><ul><li>Hydro power </li></ul><ul><li>Wind power </li></ul><ul><li>Geothermal </li></ul><ul><li>Biomass </li></ul><ul><li>Tidal / Wave power </li></ul>
  27. 30. Renewable energy <ul><li>Renewable energy for the grid </li></ul><ul><li>For electricity generation by households or commercial users </li></ul><ul><ul><li>E.g., Solar home systems, solar water pumps, photovoltaics, wind battery chargers </li></ul></ul><ul><li>For mechanical energy by households or commercial users </li></ul><ul><ul><li>E.g. wind-powered pumps, solar water pumps, water mills, wind mills </li></ul></ul>
  28. 31. Renewable energy <ul><li>Thermal energy for households or commercial users </li></ul><ul><ul><li>E.g., solar thermal water heaters and dryers, solar cookers, energy derived from biomass for water heating, space heating or drying </li></ul></ul><ul><li>Biomass combined heat and power ( co-generation ) systems </li></ul>
  29. 32. Fuel switching <ul><li>For industrial facilities </li></ul><ul><ul><li>From steam or compressed air to electricity </li></ul></ul><ul><li>For buildings </li></ul><ul><ul><li>From oil to gas </li></ul></ul><ul><li>For vehicles </li></ul><ul><ul><li>From diesel to LPG or to CNG </li></ul></ul>
  30. 33. End-use energy efficiency improvements <ul><li>Energy efficiency equipment </li></ul><ul><ul><li>Motors </li></ul></ul><ul><ul><li>Lamps </li></ul></ul><ul><ul><li>Ballasts </li></ul></ul><ul><ul><li>Refrigerators </li></ul></ul><ul><ul><li>Fans </li></ul></ul><ul><ul><li>Air conditioners </li></ul></ul><ul><ul><li>Appliances </li></ul></ul><ul><ul><li>Etc … </li></ul></ul>
  31. 34. Supply-side energy efficiency improvements <ul><li>Generation </li></ul><ul><ul><li>Efficiency improvements at power stations and district heating plants and co-generation </li></ul></ul><ul><li>Transmission and Distribution </li></ul><ul><ul><li>Examples: </li></ul></ul><ul><ul><li>Upgrading voltage on a transmission line </li></ul></ul><ul><ul><li>Replacing a transformer </li></ul></ul><ul><ul><li>Increased insulation of pipes </li></ul></ul>
  32. 35. Agriculture <ul><li>Reducing emissions from agricultural soils </li></ul><ul><ul><li>Use of ammonium sulfate instead of urea </li></ul></ul><ul><ul><li>Use of phosphogypsum in combination with urea instead of urea </li></ul></ul><ul><li>Reducing methane emissions from livestock </li></ul><ul><li>Conservation agricultural tillage </li></ul><ul><li>Agricultural land management practices </li></ul><ul><ul><li>Use of composted rice straw instead of fresh rice straw </li></ul></ul>
  33. 36. Industrial processes <ul><li>Methane (CH 4 ) recovery and avoidance from landfills , coal mines, agro-industries, waste water treatment facilities </li></ul><ul><ul><li>CH 4 has global warming intensity 21-times that of CO 2 </li></ul></ul><ul><li>Cement production (CO 2 ) </li></ul><ul><li>Electric equipment manufacturing (SF 6 ) </li></ul><ul><li>PFC emissions from aluminum production </li></ul><ul><ul><li>PCF gases have global warming intensity over 6000-times that of CO 2 </li></ul></ul><ul><li>PFC and SF 6 emissions from semiconductor manufacturing </li></ul><ul><li>Nitrous Oxide (N 2 O) emissions from adipic acid and nitric acid manufacturing </li></ul><ul><ul><li>N 2 O has global warming intensity of 310-times that of CO 2 </li></ul></ul>
  34. 37. Sink projects <ul><li>Afforestation </li></ul><ul><ul><li>Planting trees on agricultural land </li></ul></ul><ul><li>Reforestation </li></ul><ul><ul><li>Planting trees on denuded forest land </li></ul></ul>
  35. 38. Clean Development Mechanism <ul><li>Types of small-scale projects that could qualify for fast-track approval procedures </li></ul><ul><li>Renewable energy projects up to 15 megawatts (MW) of output capacity </li></ul><ul><li>Energy efficiency improvements that reduce energy consumption on the supply and/or demand side by up to 15 gigawatt-hours (GWh)/year </li></ul><ul><li>Other project activities that both reduce emissions at source and directly emit less than 15 kilotons (kt) of CO 2 equivalent annually </li></ul>
  36. 39. 5. Environmental Benefits of CDM
  37. 40. CDM Project <ul><li>Achieves Sustainable Development objectives for the host developing country </li></ul><ul><li>Reduces GHG Emissions </li></ul>
  38. 41. Simplistic numerical example <ul><li>Provide electricity for a barangay </li></ul><ul><li>“ Business-as-usual” (baseline): Diesel generator sets </li></ul><ul><ul><li>Cost of project $10 </li></ul></ul><ul><ul><li>Emissions 1 tC </li></ul></ul><ul><li>Cleaner project (CDM-eligible): Micro-hydro </li></ul><ul><ul><li>Cost of project $13 </li></ul></ul><ul><ul><li>Zero Emissions </li></ul></ul>
  39. 42. Simplistic numerical example <ul><li>CDM Investor (e.g. Japan) </li></ul><ul><ul><li>Invests $3 ($13-$10, difference between cleaner and business-as-usual project) </li></ul></ul><ul><ul><li>Gains Certificate of Emissions Reduction of 1 tC, which it can meet some of its Kyoto Protocol commitments to reduce emissions </li></ul></ul>
  40. 43. Simplistic numerical example <ul><li>WIN – WIN – WIN </li></ul><ul><li>WIN for the host country </li></ul><ul><ul><li>Sustainable development benefit: Cleaner energy production technology </li></ul></ul><ul><li>WIN for the Annex I country </li></ul><ul><ul><li>Credits for emissions reduction </li></ul></ul><ul><li>WIN for the Global Environment </li></ul><ul><ul><li>Emissions reduction </li></ul></ul>
  41. 44. Additionality <ul><li>Additionality is the key eligibility criterion in CDM projects </li></ul><ul><ul><li>You must do something that you would not have done without the CDM </li></ul></ul><ul><li>Two types of additionality </li></ul><ul><ul><li>Project Additionality </li></ul></ul><ul><ul><li>Environmental Additionality </li></ul></ul>
  42. 45. Project Additionality <ul><li>Without the ability to register under the CDM , the proposed project would be, or would have been, unlikely to occur </li></ul>
  43. 46. Project Additionality <ul><li>Baseline methodology evaluates whether or not the proposed CDM project activity would have gone ahead anyway . </li></ul><ul><li>Baseline methodology assesses why the proposed CDM project activity is less likely to occur than one or more of the other possible scenarios. </li></ul>
  44. 47. Environmental Additionality <ul><li>If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead. </li></ul>
  45. 48. Environmental Additionality <ul><li>A CDM project activity is additional if anthropogenic emissions of GHGs by sources are reduced below those that would have occurred in the absence of the registered CDM project activity. </li></ul><ul><li>-CDM M&P para. 43 </li></ul>Emission Reductions = hypothetical baseline emissions – effective (project) emissions
  46. 49. Environmental additionality and baseline CO 2 Emissions CDM project CO 2 emissions ( observable ) Real , measurable and long-term Additional CO 2 emissions reduction Years Baseline scenario CO 2 emissions ( that would occur )
  47. 50. 6. Mechanics of CDM
  48. 51. Starting Point: Viable Project <ul><li>A potential CDM Project is a feasible project </li></ul><ul><ul><li>Technologically feasible </li></ul></ul><ul><ul><li>Financially sound </li></ul></ul><ul><li>A potential CDM Project is a project which has an Environmental Compliance Certificate ( ECC ) </li></ul>
  49. 52. CDM Project Cycle C D C D 4 M I C C C Project Design & Formulation Project Design Document
  50. 53. Contents of CDM-PDD A. General description of project activity   B. Baseline methodology   C. Duration of the project activity/ Crediting period   D. Monitoring methodology and plan   E. Calculations of GHG emissions by sources   F. Environmental impacts   G. Stakeholders comments
  51. 54. CDM Project Cycle C D C D 4 M I C C C Project Design & Formulation National Approval Project Design Document
  52. 55. National Approval <ul><li>Approval is by the Designated National Authority (DNA) for CDM </li></ul><ul><li>Main Criteria for Approval: Does project contribute to the sustainable development objectives of the Philippines? </li></ul><ul><li>Sustainable development indicators </li></ul><ul><li>Project type priorities </li></ul><ul><ul><li>Positive list </li></ul></ul><ul><ul><li>Negative list </li></ul></ul>
  53. 56. CDM Project Cycle C D C D 4 M I C C C Project Design & Formulation National Approval Validation / Registration Project Design Document Operational Entity A
  54. 57. Validation <ul><li>Designated Operational Entity </li></ul><ul><li>“ External Auditor” </li></ul><ul><li>Validates the PDD </li></ul><ul><ul><li>Including the Baseline Study and the Monitoring Plan </li></ul></ul><ul><li>Recommends whether the project should be registered as a CDM Project </li></ul>
  55. 58. Registration <ul><li>Registration is done by the CDM Executive Board (presently based in Bonn, Germany) </li></ul><ul><li>CDM Project Registry </li></ul>
  56. 59. CDM Project Cycle C D C D 4 M I C C C Project Design & Formulation National Approval Validation / Registration Project Financing Monitoring Verification / Certification Issuance of CERs Project Design Document Monitoring Report Verification Report / Certification Report / Request of CERs Operational Entity A Investors Project Participants Operational Entity B EB / Registry
  57. 60. Verification <ul><li>Verification of monitoring report of emission eductions by the project </li></ul><ul><li>Verification is done by another Designated Operational Entity </li></ul><ul><li>Operational Entity certifies the actual emission reductions by the project </li></ul><ul><li>Operational Entity submits certification to CDM Executive Board </li></ul>
  58. 61. Issuance of CERs <ul><li>Based on the certification by the Operational Entity, the CDM Executive Board issues the Certificate of Emission Reductions </li></ul><ul><li>Official registry of CERs </li></ul><ul><li>CERs are a tradable asset (like stocks or bonds) </li></ul>
  59. 62. 7. Basics of CDM Financing
  60. 63. Total Project Costs and Sources of Finance <ul><li>Total Project Cost Estimates </li></ul><ul><li>Investment costs, including development costs, up to commissioning of project </li></ul><ul><li>Sources of Finance to be Sought or Already Identified </li></ul><ul><li>Critical to identify other debt and/or equity finance </li></ul><ul><li>Typical sources of funding: international development banks, government funding, private financing, supplier credit </li></ul><ul><li>CDM contribution = typically 5-15% of total project costs </li></ul>
  61. 64. Financing Options in a CDM Project <ul><li>Carbon Funds </li></ul><ul><li>Annex I investors contribute to a mutual fund </li></ul><ul><li>Mutual fund agrees to buy CERs as they are produced by the project </li></ul><ul><li>Examples </li></ul><ul><ul><li>WB Prototype Carbon Fund </li></ul></ul><ul><ul><li>Netherland’s CERUPT </li></ul></ul>
  62. 65. How Carbon Funds Work.. Industrialized Governments and Companies Developing Countries and Communities Carbon Fund $ Technology Finance $ Technology Finance CO Equivalent 2 Emission Reductions CO Equivalent 2 Emission Reductions
  63. 66. Banks Investor Debt Equity Power Purchase Agreement $$ Electricity $$ Carbon Credits Nature of Carbon Financing Contract Carbon Fund $ $ 2 2 Emission Reduction Purchase Agreement
  64. 67. Financing Options in a CDM Project <ul><li>Emission Reductions Purchase Agreement </li></ul><ul><li>Annex I investor agrees to buy CERs as they are produced by the project </li></ul>
  65. 68. Emission Reduction Purchase Agreement <ul><li>Will improve IRRs </li></ul><ul><li>Forward contract </li></ul><ul><ul><li>Payment upon delivery of verified ERs </li></ul></ul><ul><ul><li>Upfront payments are rare </li></ul></ul><ul><li>Will provide a hard currency revenue </li></ul><ul><li>Helps secure financing and reduce project risk </li></ul><ul><ul><li>Future ER payments as collateral for project loans </li></ul></ul><ul><ul><li>Can be paid into an escrow account, protecting lenders from currency convertibility and transfer risks </li></ul></ul>
  66. 69. How CDM can matter FIRR CER income 0 Without CERs implemented With CERs not implemented No CDM Without CERs not implemented; with CERs implemented CDM
  67. 70. Impact of Carbon Finance on Project Financial Rate of Return <ul><li>Revolution in Solid Waste Management </li></ul><ul><li>Important impact on small-holder crop-processors and animal production </li></ul>Methane Kick 5-10+ Municipal Solid Waste 3-7 Crop/Forest Residues 0.8-2.6 Hydro, Wind, Geothermal  IRR Technology
  68. 71. Lessons from PCF: Carbon Prices $3.60 [+option] Romania Afforestation $4.00 Czech small-scale energy efficiency $3.75 + 0.2 South Africa Durban waste management $3.50 + 0.5 Colombia wind farm $3.50 C. America small wind/hydro $3.50 Poland District Heating Fuel Switch – Coal to Geothermal and Biomass $3.50 Brazil sustainable charcoal replacing coal/coke $3.50 [ +option] Chile: 25 MW hydro run-of-river $3.00 Uganda small hydro (5&1.5 MW) remote area
  69. 72. ODA and CDM Funding <ul><li>Public funding for CDM Projects be additional to Official Development Assistance (ODA), Global Environment Facility (GEF) provided by Annex I Parties </li></ul><ul><li>Public funding for CDM projects must not result in the diversion of ODA </li></ul><ul><li>ODA can be part of the project financing as long as ODA financing does not claim emission reduction credits (WB PCF) </li></ul>
  70. 73. Banks Investor Debt Equity Power Purchase Agreement $$ Electricity $$ Carbon Credits Emission Reduction Purchase Agreement ODA Non-ODA Carbon Fund $ $ 2 2 Emission Reduction Purchase Agreement
  71. 74. 8. Philippine participation in CDM
  72. 75. Requirements for the Philippines to Participate in CDM <ul><li>Process of Philippine ratification of the Kyoto Protocol </li></ul><ul><ul><ul><li>Senate Committee on Foreign Affairs has sponsored the ratification on the floor of the Senate, 2 nd June 2003 (1 st Reading) </li></ul></ul></ul><ul><ul><ul><li>2 nd Reading, Interpellation, 21 st October 2003 </li></ul></ul></ul><ul><ul><ul><li>Need 2/3 majority of the Senate to concur in the ratification of the Kyoto Protocol </li></ul></ul></ul><ul><li>Kyoto Protocol ratified, 22 nd October 2003 </li></ul><ul><ul><ul><li>Senate concurred in the ratification by a unanimous vote, 19 – 0 (3 rd Reading) </li></ul></ul></ul>
  73. 76. Requirements for the Philippines to Participate in CDM <ul><li>Status of efforts to establish CDM Designated National Authority (DNA) </li></ul><ul><ul><ul><li>Proposal to make the Inter-Agency Committee on Climate Change (IACCC) as the DNA </li></ul></ul></ul><ul><ul><ul><li>IACCC is composed of: DENR, DOST, DOE, DFA, DTI-BOI, DOTC, NEDA, DPWH, PAGASA, FMB, EMB, Philippine Network on Climate Change (NGO) </li></ul></ul></ul>
  74. 77. Roberto C. Yap, S.J., Ph.D. Environmental Economist Climate Change Information Center Manila Observatory Ateneo de Manila University Tel +63 2 426-6144 Fax +63 2 426-6070 [email_address]