Principles of the Kyoto Protocol
1.2.: Clean Development Mechanism - Overview and Concepts
Outline
CDM Context within the Kyoto Protocol
Overview of CDM
Eligible Projects
Basic Rules & Processes
Baselines
Sustainable Development
CDM Concepts - Developing Projects
What does the CDM mean for Indonesia?
Opportunities
Reality and Issues with CDM
CDM Context (1)
The Kyoto Protocol commits industrialized
countries to legally binding GHG reduction
targets during the period 2008-2012
Most countries have to reduce GHG emissions
on ave 5% below their 1990 emission levels
results in a global target of ‘carbon’ reduction
These countries can choose to reduce
emissions
‘at home’ in their own country
in other countries
Reducing emissions in Developing Countries is
CDM Context (2)
Benefit of the CDM is
to help Annex 1 Parties to implement their
commitment to reduce GHG emission in
the most economical way
and
To help developing countries (non Annex I
Overview of CDM
CDM – Clean Development Mechanism
A mechanism by which Industrialised Nations
can achieve part of their reduction obligations
through projects that reduce or fix/sequester
carbon in Developing Countries.
The Certified Emission Reductions (CERs) are a
unit of carbon that is reduced or sequestered.
Industrialised Nations can submit their CERs to
meet their target in 2008-2012.
there is a worldwide demand for projects and
activities for ‘carbon’ reduction or fixation
Many of these projects will be in Developing
CDM Concept
Developed
Country
Govt and companies
want to reduce GHG
emissions
Invest in their own
country
Invest in a project in
Developing Country
Developing Country
Many opportunities
for projects that
reduce emissions eg
Forestry planting
Renewable electricity Energy efficiency
Clean transport Biomass energy
Project Produces
CERs
Investment
CERs
Purpose of CDM
1.
to assist developing countries in
achieving sustainable
development
2.
to assist developed countries in
achieving compliance with part of
their quantified emission
Types of CDM Projects
Energy efficiency
End use improvements
Supply-side improvements
Renewable energy
Methane reduction eg landfill gas capture
Fuel switching
Agriculture (CH
4and N
20)
Industrial processes
CDM Project Examples
End-use energy
efficiency
High efficient lighting;
efficient cook stoves;
vehicle efficiency
Supply-side
energy efficiency
High efficiency turbine
replacement; combine cycle
Renewable
energy
Biomass; Solar; Wind; Hydro
Fuel switching
Gas conversion
Biofuels replace fossil fuels
Forestry
Afforestration; Reforestation
Community forestry
Agriculture
Intermittent ricefield
Baseline Concepts
The baseline is a measure of emissions
that would have occurred in absence of
project
Used to estimate emission reductions for
project – basis for CERs
On a project by project basis
Standard baselines for small scale projects
20 MW renewable energy
Baseline (PDD) Contents (1)
A. General description of project activity
B. Description of baseline methodology
C. Timeline Project
D. Monitoring methodology and Plan
E. Calculation of GHG emission by
sources
Baseline (PDD) Contents (2)
Annex I: Information of the parties
participating in the project
Annex II: Information of public investment
Annex III: New methodology to calculate
baseline
Baseline Methodologies
Approximately 50 baseline methodologies were
approved on the basis
of:- Business as usual (“BAU”) - future emissions would
been the same as current/historic emissions and “Additionality”, meaning that the project would otherwise not have occurred
Market Conditions - the technology used in the
market is the baseline and market barriers prevent new technology being adopted
Best Available Technology - for markets where
Baseline Examples
Project Baseline Approach Type of CDM Baseline
3 Micro-hydro
Guatemala
The 3 communities did not have access to electricity, so emission reduction based on displacement of kerosene
Market Conditions (technology used is the baseline) Biomass
power plant El Salvador
Current electricity is fossil fuels and future additions would be similar. Current emissions used as baseline.
BAU
Wind Power,
Honduras This project is displacing the need for a new thermal plant. Emission reductions based on average emissions of typical thermal plants in previous 5 years +
performance in top 20%
Basic Rules for CDM
Emission reductions from CDM project must be
additional in developing country
Use of CERs can only supplement emission reduction at
home in developed countries
CDM projects
must:- be approved by the host country
lead to sustainable development in host country
result in real, measurable and long-term benefits in terms of climate change
Money for CDM projects not divert Official Development
Assistance (ODA)
Nuclear power projects are not eligible
Small Scale CDM Projects
Simplified rules for small scale projects
Simplified baseline methodology, reduced
validation and registration requirements;
exemption from adaptation and admin
fees
Examples include
Home Bigoas (cooking and lighting).
Replace Kerosene
Efficient woodstoves
CDM Checklist
Project approved by
National Authority?
- consistent with
Sustainable Development
- consistent with national
+ local development
priorities;
- no negative environment
impact;
- has local support
Project results in
real, measurable +
long-term
emission
reductions?
Project leads to transfer
of new, environmentally
efficient technologies or
management practices?
Are the emission
reductions
additional?
The project does
Sustainable Development Criteria
Social Criteria
Improves quality of life
Alleviates poverty
Improves Equity
Economic Criteria
Provides financial returns to local entities
Results in new investments
Transfers new technology
Environmental Criteria
Reduces GHG and use of fossil fuels
Conserves local resources
Reduces pressure on local environments
CDM Concept
Developed
Country
Govt and companies
must reduce GHG
emissions
Invest in their own
country
Invest in a project in
Developing Country
Developing Country
Many opportunities
for projects that
reduce emissions eg
Forestry planting
Renewable electricity Energy efficiency
Clean transport Biomass energy
Project Produces
CERs
Investment
CERs
CDM Project Investment
PROJECT
$9 million
has emission
reductions and
eligible to
produce CERs
CERs
$500,00 0 ProjectInvestors/Financiers:- International or Local
Developers/Financiers
Cambodian
Government
International
Governments
Multilateral Agencies
eg World Bank; ADB
CDM
Investors/Buyers:- Multilateral CDM Funds
eg PCF; CERUPT
Annex 1 Governments Private Companies
Non-Annex 1
Governments
Brokers/Traders
CDM Investment Structures
Full or partial equity in project
CER ownership becomes annex to the normal financing agreement
Usually investing for more than just CERs
Financial contribution
Usually upfront payment and takes ‘rights’ to CERs as they are
produced
Normally not more than 10% project cost
Loan
Company provides loan at concessional rates in return for CERs eg
payment of interest in CERs
CER Purchase Agreement
Company buys CERs as they are produced
CDM examples
Project Project
Cost CER Partner Basis of contribution Structure Wind Farm
Honduras $58m $4.05m CER sale @ $3.50/ton Annual CER Purchase for 10 years
3 Micro-hydro
Guatemala $320,000 $15,000 Value of 4,755
tonnes over 10 yrs Upfront payment Biomass power plant Nicaragua
$2.3m $0.4m Financing of climate
friendly component
10% pre; 40% finance;
balance = $ for 5 years Run-of river
Hydro plant Chile
$34m $3.4m 10% total
Case Study
3.65 MW micro hydro project Indonesia
Project offsetting diesel generation – 18,500t
$9.89m capital cost; $0.4m operating costs
Project executed by a local institute
16.5% IRR without CDM; 18.2% w CER @$5
Investment
plan:- Up to 70% of project capital through long term loan from
financial institution; rest through equity
CDM investor
options:-- Long term CER purchase agreement
CDM Case Study
Any Country
looking for CDM
Project
CDM Project Partner
Long term CER
purchase agreement
Equity in project
Soft loan upfront in
return for CERs later
Indonesia
CDM Project
3.65MW hydro $9.89m capital cost $0.4m operating costs Project offsetting diesel
emissions
Likely 18,500 CERs
basic CER value $92,500
looking for CDM
Partner
Investment
CERs
Choosing a Host Country
what do investors want?
1.
Clear CDM Policy
Willingness for investment in CDM
projects
Transparent and clear processes,
Quick and smooth government approval
Time, effort and resources to complete deal
2.
Secure investor climate
Political and economically stability
What could occur that could affect investment?
3.
Sound Techno-Economic potential
Opportunities of CDM
CDM encourages developed countries to undertake
GHG reduction projects in developing countries.
Increased investment flows Attract capital for less carbon-intensive projects Technology transfer
Assist in development priorities and sustainable
development goals
Create new industries in environmentally sustainable
technologies
Poverty alleviation through income and employment Assist in improving current and future environment
CDM in Cambodia
Governments, Project Developers and Investors
are seeking out CERs and emission reduction
projects.
Emission reduction projects exist in Indonesia in
many
sectors:- Transport – establish intercity/intra-city transport Forestry – community forestry, replanting
Energy –
- renewable energy (particularly in rural areas) - Installation of cleaner technology (cogeneration)
- Energy usage – energy efficient technologies; building design
Reality + Issues w CDM
CDM may tend towards large CDM Projects
High transaction costs with CDM projects
BGP experience = $100,000 – 150,000 per project
transaction costs similar for small or large projects
Solution - bundle small projects together
eg association of community forestry; many small scale hydro projects
Larger developing countries more attractive
infrastructure & institution to deal with large projects
Larger market = ability to do many similar projects
Spreads the upfront cost in learning local conditions;
CDM Transaction Costs
Preparation and review of the Project
Validation process
Project Appraisal and Negotiation
Periodic
verification & certification
Construction and start up Project completion
3 months
2 m on ths
2 m onth s 3 months 1-3 y ears Up
to 2 1 ye
ars
• Upstream Due Diligence, carbon risk assessment and documentation: $ 40K
• Baseline : $20 K
• Monitoring Plan: $10K
• Contract, Processing •and documentation: $30k
Total through Negotiations
• Initial verification at start-up: $15K • Verification: $10-25 K
• Supervision: $10-20K
All
Reality + Issues w CDM (2)
CDM will be a competitive market
Restricted without the US
Limit on amount of CERs developed
countries can use towards target (~20%)
larger projects with low risk and smooth
approval/transaction procedures will be
preferred
May limit opportunities in least
Reality + Issues w CDM (3)
Preparation of developing countries
poor co-ordination among Ministries
internal conflict over approvals
Only 12 National Authorities registered
Capacity of developing countries
Weak knowledge of CDM at all levels
Summary
CDM presents an opportunity for Indonesia
developing energy infrastructure;
forestry is significant activity
worldwide increased demand for projects that
reduce emissions
win-win situation for both parties
Indonesia must be prepared
Functioning approval body + smooth and transparent
approval process
need a ‘pipeline’ of projects for investors when they
come investigating
Acronymns
CDM – Clean Development Mechanism
CER – Certified Emission Reductions
A standard unit of greenhouse reduction or sink
PCF – Prototype Carbon Fund
World Bank CER Fund
ODA – Official Development Assistance
Part of 0.07% govt aid
IRR – Internal Rate of Return
DNA – Designated National Authority
The national body who assess +/or approves CDM
Acronyms
Annex 1 countries
Approx. 40 industrialised countries and
economies in transitions listed in Annex 1 of
the convention who can invest in CDM
projects. These countries have emission
reduction obligations.
Non - Annex 1 countries
The countries who are not listed in Annex 1
