Overview: CDM Small-Scale Projects Climate Change Information Center Manila Observatory Ateneo de Manila University

Contents 1.Mechanics of CDM 2.CDM Eligible Projects 3.CDM Transaction Costs 4.Challenge of Small-Scale Projects

1. Mechanics of CDM

Clean Development Mechanism Enables developed countries (known as Annex B countries) to meet their emission reduction commitments in a flexible and cost- effective manner Assists developing countries (non-Annex B countries) in meeting their sustainable development objectives Investors benefit by obtaining Certificates of Emissions Reductions (CERs) Host countries benefit in the form of investment, access to better technology, and local sustainable development

Simplistic numerical example Provide electricity for a barangay “Business-as-usual” (baseline): Diesel generator sets –Cost of project $10 –Emissions 1 tC Cleaner project (CDM-eligible): Micro- hydro –Cost of project $13 –Zero Emissions

Simplistic numerical example CDM Investor (e.g. Japan) –Invests $3 ($13-$10, difference between cleaner and business-as-usual project) –Gains Certificate of Emissions Reduction of 1 tC, which it can meet some of its Kyoto Protocol commitments to reduce emissions

CDM Project Achieves Sustainable Development objectives for the host developing country Reduces GHG Emissions

What are the Criteria for CDM Projects? Sustainable development –Host country criteria –Environmental Impact Assessment –Stakeholder consultations Greenhouse Gas (GHG) emission reductions –Environmental additionality Project additionality Project viability –Technologically proven –Financially sound Host country approval Project validation and registration

Sustainable development Economic impacts  Employment, livelihood Environmental impacts  Local air/water pollution control Social equity  Impacts on disadvantaged groups

Additionality Additionality is the key eligibility criterion in CDM projects  You must do something that you would not have done without the CDM Two types of additionality  Project Additionality  Environmental Additionality

Project Additionality Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur

Environmental Additionality If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.

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)

Starting Point: Viable Project A potential CDM Project is a feasible project  Technologically feasible  Financially sound A potential CDM Project is a project which has an Environmental Compliance Certificate (ECC)

CDM Project Cycle CDCD4MICCC 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

2. CDM Eligible Projects

CDM Eligible Projects Renewable energy Fuel switching End-use energy efficiency improvements Supply-side energy efficiency improvements Agriculture (reduction of CH 4 & N 2 O emissions) Industrial processes (CO 2 from cement, HFCs, etc) Sink projects (only afforestation & reforestation)

Renewable energy Renewable energy for the grid For electricity generation by households or commercial users  E.g., Solar home systems, solar water pumps, photovoltaics, wind battery chargers  For mechanical energy by households or commercial users  E.g. wind-powered pumps, solar water pumps, water mills, wind mills

Renewable energy Thermal energy for households or commercial users  E.g., solar thermal water heaters and dryers, solar cookers, energy derived from biomass for water heating, space heating or drying  Biomass combined heat and power (co- generation) systems

End-use energy efficiency improvements Energy efficiency equipment  Motors  Lamps  Ballasts  Refrigerators  Fans  Air conditioners  Appliances  Etc …

Agriculture Reducing emissions from agricultural soils  Use of ammonium sulfate instead of urea  Use of phosphogypsum in combination with urea instead of urea Reducing methane emissions from livestock Conservation agricultural tillage Agricultural land management practices  Use of composted rice straw instead of fresh rice straw

Sink projects Afforestation  Planting trees on agricultural land  Reforestation  Planting trees on denuded forest land

Clean Development Mechanism Types of small-scale projects that could qualify for fast- track approval procedures Renewable energy projects up to 15 megawatts (MW) of output capacity Energy efficiency improvements that reduce energy consumption on the supply and/or demand side by up to 15 gigawatt-hours (GWh)/year Other project activities that both reduce emissions at source and directly emit less than 15 kilotons (kt) of CO 2 equivalent annually

3. CDM Transaction Costs

Pre-implementation costs Search costs Negotiation costs Baseline determination costs Approval costs Validation costs Review costs Registration costs

Implementation costs Monitoring costs Verification costs Review costs Certification costs Enforcement costs

Trading costs Transfer costs Registration costs

Transaction costsRelation to project size Estimate (k€) Search costsFixed15 Negotiation costsDegressive25 – 400 Baseline determination costsFixed35 Approval costsFixed40 Validation costsFixed15 – 30 Registration costsFixed10 Monitoring costsFixed10 Verification costsDegressive8 per turn Certification costsDegressiveNA Enforcement costsProportional Transfer costsProportional1% Registry costsProportional0.03% Minimum fixed costs (k€)150 Source: Michaelowa et al (2003)

Economies of scale Economies of scale are the most important determinant of transaction costs Due to the important role of fixed cost components

Project size, types & total transaction costs SizeTypeReduction (t CO 2 per yr) € / t CO 2 Very Large Large hydro, geothermal, landfill methane >200, LargeWind power, solar thermal, energy efficiency 20,000 – 200, – 1 SmallBoiler conversion, DSM, small hydro 2000 – 20,00010 MiniEnergy efficiency in housing & SME, mini- hydro 200 – MicroPV< Source: Michaelowa et al (2003)

Project size thresholds PCF considers any project with a volume below 3 million € greenhouse gas benefits would not be attractive due to transaction costs  Threshold of about 50,000 t CO 2 per year for a 20–year project Transaction costs should not be more than 25% of proceeds of CER sales to make a project viable (Shell, 2001) Cost threshold of about 1 € / t CO 2

Inferred Transaction Costs (TAC) of SSC project thresholds (Michaelowa, et al,2003) Project type Annual full load hours GWhCERs per year TAC/CER (€) Hydro 15 MW , Wind 15 MW ,0002 Energy efficiency 15 GWh NA1513,50020 Fuel switch gas to coal NA 23,3505

Viability of CDM Projects Given CER market price estimates of 1 – 5 € pet t CO 2 (Jotzo and Michaelowa, 2001) Given PCF transactions priced at 3 – 4 € per t CO 2  Only projects classified as large and very large are viable  Many small-scale projects would not be viable

Ways to reduce transactions costs Bundle projects to jointly undertake each step of the project cycle

Ways to reduce transactions costs Do verification and certification not annually but at long intervals Exempt projects from one or more steps of the project cycle Streamline the information needs on each step of the project cycle Standardization of parameters Source: Michaelowa et al (2003)

Ways to reduce transactions costs Do unilateral CDM projects that reduce search and negotiation costs Registration and certification fees proportional to the size of the project Validation and verification fees proportional to the size of the project Source: Michaelowa et al (2003)

4. Challenge of Small-Scale Projects

Challenge of Small-Scale (SSC) projects SSC projects have substantial sustainable development benefits But unless high transaction costs are reduced, many SSC projects would not be viable

Small-scale (SSC) projects Solar home systems, photovoltaics, wind- powered pumps, solar cookers Pico-hydro Reducing methane emissions from livestock Community-based forest management Agro-forestry Watershed protection

Small-scale (SSC) projects SSC projects have the best potential for achieving sustainable development benefits SSC projects have the best potential for delivering benefits to the poor and to disadvantaged groups

Roberto C. Yap, S.J., Ph.D. Environmental Economist Climate Change Information Center Manila Observatory Ateneo de Manila University Tel Fax