A Really, Really Quick Overview The CDM: A Really, Really Quick Overview Robert Kelly Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa robert.kelly@undp.org

Agenda Misconceptions about the CDM CDM concepts & terminology The CDM project cycle

Three misconceptions… 1 The CDM is all about climate change

Actually, the CDM is ‘climate neutral’ Annex 1 country buys CERs Acquired CERs are added and national emissions cap increases CERs generated by CDM projects Actual greenhouse gas emissions ‘Business as usual’ emissions

Environmental Benefits Sustainable Development The CDM is all about development Technology Transfer Poverty Reduction Environmental Benefits ODA GEF PES CARBON Sustainable Development Carbon finance represents a supplementary source of funding for some projects – and a means of catalysing development

1 2 3 Three misconceptions… The CDM is all about climate change The CDM is too difficult 3 Sub-Saharan Africa offers few CDM opportunities

In 3 years, the CDM has sparked a $5 billion/year market Number of Projects in the CDM Pipeline, January 2005 – March 2008 3,265 3,035 2,838 Compound Monthly Growth Rate = 11% Approximately 3 billion CERs by 2012 2,593 2,285 1,885 1,759 1,495 1,311 1,141 883 749 647 554 440 275 171 67 83 118 Jan 05 Mar 05 May 05 Jul 05 Sep 05 Nov 05 Jan 06 Mar 06 May 06 Jul 06 Sep 06 Nov 06 Jan 07 Mar 07 May 07 July 07 Sep 07 Nov 07 Jan 08 Mar 08

Current value size of the international carbon market CDM: > 1000 projects registered cumulative > 3(?) bn tonnes CO2e reductions up to 2012 (About India & Japan’s inventory for a year – or nearly 10% of global annual emissions) 2005 ~ $1 billion 2006 ~ $5 billion 2007 ~ $12 billion 2008 …??? JI 2007 < $1 billion EUETS 2007 > $60 billion (?)

Seems like CDM is a roaring success…. BUT: Under Kyoto, CDM purpose is to deliver low cost emission reductions AND assist developing countries achieve sustainable development. Many CERs come from ‘end of pipe’ projects, not really SD HFC & N2O reduction 40% Renewable Energy 23% CH4 reduction 16% Energy efficiency 7% Cement & Coal mine/bed, 7% Fuel switch, 7% Afforestation & Reforestation, 0.2%

Geographical imbalance in the CDM 4 countries (China, India, Brazil and South Korea) account for 80% of credits through to 2012 Within these countries, not necessarily impact poorest Arab States, Africa, Central Asia underrepresented 88 non-Annex 1 countries have yet to benefit from any registered CDM project activity Location of CDM Projects

1 2 3 Three misconceptions… The CDM is all about climate change The CDM is too difficult 3 CDM offers few opportunities outside industrialised countries

The CDM is about more than just heavy industry… Clean energy Use of renewables (e.g. hydro power) to supply electricity to the grid, to local communities and to commercial facilities Use of biomass residues for energy generation / cogeneration – e.g. bagasse from the sugar industry, coffee husks from the coffee industry, etc. Wind power Run-of-river hydro Bagasse Timber residues

The CDM is about more than just heavy industry… Waste management Capturing the methane from animal waste, human waste (sewage), agricultural waste (biomass) and urban landfills Can be combined with electricity generation to produce a second stream of carbon credits Animal waste Sewage / wastewater Landfill

The CDM is about more than just heavy industry… Bio-carbon Forestry plantations – e.g. restoration of mangrove forests Agro-forestry – e.g. shade crops, nitrogen capture in soils Bio-fuels – e.g. bio-ethanol from molasses, bio-diesel from palm oil Forestry Agro-forestry Bio-fuels Transport

China’s registered CDM projects Other, 3% Coal Mine Methane, 5% Biomass Energy, 5% Industrial Gas (HFCs), 6% Wind Power 37% Landfill Gas, 6% Energy Efficiency, 7% 152 registered CDM projects Approximately $915 million in carbon revenue per year Hydro Power 31%

Agenda Misconceptions about the CDM CDM concepts & terminology The CDM project cycle

Mitigation versus sequestration Mitigation/avoided emissions – reduction or prevention of greenhouse gas emissions from a source E.g. methane from animal waste E.g. carbon dioxide from burning fossil fuels E.g. nitrous oxide from agricultural soils REDD Sequestration – removal of greenhouse gases from the atmosphere E.g. forestry – absorption of CO2 through photosynthesis E.g. grassland sequestration E.g. ‘Geo-engineering’ – Carbon Capture & Storage (CCS), marine phytoplankton; absorptive gels; reaction with suspension of chalk in water (to produce CaCO2)

Types of CDM projects Carbon project Emission reduction Atmospheric removal End-of-pipe Destruction Storage Gas recovery & utilization Avoiding new emissions Reduce emission factor Reduce energy consumption Land-use mitigation Reduce energy losses during transmission/ distribution Renewable energy Fuel Substitution Waste heat/gas utilisation Fuel switch Reduce emission factor Energy efficiency at generation GHG efficiency at production

‘Kyoto gases’ that can earn credits Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O) Relevant to almost all projects including bio-carbon & industrial projects Relevant to industrial projects Perfluorocarbons (CxFx) Hydrofluorocarbons (HFCs) Sulphur hexaflouride (SF6)

Greenhouse gas emissions How a CDM project generates carbon credits NOTE: greenhouse gas emissions must also include project emissions – emissions occurring within the project boundary: e.g. fossil fuel emissions from construction e.g. soil disturbance from tree-planting Greenhouse gas emissions Historical Trend Project start Carbon credits (CERs) represent the difference between the baseline and actual emissions AND: leakage – emissions occurring outside the project boundary Time

Leakage leakage nearly always negative (increase emissions) Leakage refers to an increase in emissions outside of the project boundary There are 2 principal forms of leakage for carbon projects: 1 Emission shifting: displacement of GHG activities to other locations/sources e.g. Shift in grazing activities from a forestry project site e.g. Protected forest makes shift from wood to kerosene e.g. Protected forest results in more intensive agriculture (and fertiliser use) Investment crowding: eg: public demand for (& willingness to pay for) protected areas (eg: national parks & nature reserves) diminishes as more areas are protected. leakage nearly always negative (increase emissions) May be positive – eg: adopting EE technology can result in CO2 mitigation as well as increase profitability. If other firms adopt similar practices to increase profits, more CO2 mitigated than from just the original project activity.

Leakage 2 Temporal leakage: also known as ‘non-permanence’ and ‘reversibility’. With sequestration projects, greenhouse gases can be re-released into the atmosphere over time e.g. a forest plantation may burn down, re-releasing its stored carbon e.g. vegetation may be washed away in flash floods Non-permanence only affects sequestration projects – not mitigation projects. It can be addressed at a project level and at a systemic (institutional) level

Baseline study Every carbon project requires a baseline study The purpose of the baseline study is to determine the baseline scenario for each GHG component of the project The baseline must be explicitly defined Selection of the baseline must be justified in a transparent manner Being counterfactual in nature, some aspects of the baseline scenario cannot be observed and thus remain uncertain In order not to exaggerate the emission reductions achieved by the project, the baseline study must adopt a conservative approach whenever assumptions about future developments need to be made The principle of conservativeness

Additionality Has been defined as: Environmental additionality – reductions in GHG emissions Financial additionality – the project only happens because of the financial incentive offered by carbon credits Legal additionality – the project does more than what is required by local law The Kyoto Protocol is somewhat vague, stating simply: “Reductions in emissions must be additional to any that would occur in the absence of the project activity” Assessment of additionality is intrinsically linked with baseline establishment

Additionality Ideally, a project should demonstrate a combination of these forms of additionality It is essential that the project achieve environmental additionality – otherwise, it will not generate any carbon credits! Typically, a project developer also demonstrates that, without carbon revenues, the project would not be viable and/or commercially attractive The CDM Executive Board has developed an ‘additionality tool’ for CDM projects

Project with carbon element Financial additionality – benchmark analysis Benchmark analysis Choose an appropriate financial indicator and compare it with a relevant benchmark value: e.g. required return on capital or internal company benchmark Carbon revenue makes the project attractive relative to investment alternatives Investment threshold Revenue / NPV / IRR Project with carbon element A project can be money-making and qualify as ‘additional’! Project without carbon revenue is profitable – but not sufficiently profitable compared with alternatives Project without carbon element

 ?  Some examples of additionality Capturing methane from an urban landfill and flaring it Carbon credits represent the only source of income for undertaking this activity  Capturing methane from an urban landfill and utilising it to generate electricity Project developer would have to demonstrate that the electricity revenue alone would not make this project attractive ? Building a large hydro project for the grid in Ethiopia Questionable additionality: there is already plenty of hydro activity in Ethiopia 

Crediting period CDM mitigation projects Project developers have two crediting period options: A maximum of 7 years, which can be renewed up to 2 times (i.e. a potential total crediting period of 21 years) A maximum of 10 years, with no option for renewal CDM sequestration projects (forestry) Project developers have two crediting period options: A maximum of 20 years, which can be renewed up to 2 times (i.e. a potential total crediting period of 60 years) A maximum of 30 years, with no option for renewal

Crediting period A maximum of 10 years with no option of renewal Emissions under the baseline scenario Greenhouse gas emissions Emissions under the project scenario Starting date of the crediting period No renewal 10 years

Baseline must be reassessed by DOE at each renewal Why not maximise the crediting period? Baseline must be reassessed by DOE at each renewal The baseline scenario may become less favourable Emissions under the baseline scenario Greenhouse gas emissions Emissions under the project scenario 7 years

Why not maximise the crediting period? Baseline must be reassessed by DOE at each renewal The baseline scenario may become less favourable Emissions under the baseline scenario Greenhouse gas emissions Emissions under the project scenario 7 years 7 years 7 years

Baseline & monitoring methodologies A CDM project must use an approved CDM methodology. If no relevant methodology exists, the CDM project developer can design a new methodology and submit it for approval A CDM methodology contains 2 components: A baseline methodology is an application of a baseline approach to an individual project activity, reflecting aspects such as sector and region A monitoring methodology refers to the method used by the project developer for the collection and archiving of all relevant data necessary for the implementation of the monitoring plan The baseline methodology and monitoring methodology must be used in combination CDM methodologies approved by the CDM Executive Board are publicly available on the UNFCCC CDM website

= X – = X = Estimating emission reductions Baseline emissions What would the level of emissions be in the absence of the project? Baseline emissions ‘Guesstimate’ of baseline activity Emissions factor associated with activity = X – The baseline scenario: Existing or historical emissions Emissions from economically attractive alternative technologies Average emissions of similar project activities E.g. the default IPCC emissions factor for kerosene is 71 tCO2/TJ What is the level of emissions in the presence of the project? Project emissions Project activity Emissions factor associated with activity = X = e.g. fossil fuel consumed e.g. IPCC default emission factor Emissions reductions Denominated in tonnes of CO2-equivalent 1 tCO2e = 1 CER

Agenda Misconceptions about the CDM CDM concepts & terminology The CDM project cycle

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

The CDM project cycle 6 to 12 months 1.5 months Crediting period of the project Project Developer Project feasibility assessment / PIN CDM project development / PDD Host country approval DNA Project validation Project verification DOE CDM Executive Board Project registration CER issuance

Project Idea Note (PIN) PDD Designated Host country approval national authority Validation Operational entities Registration Financing & implementation Project owner Monitoring Verification & certification Executive Board Issue CERs

End Robert Kelly Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa robert.kelly@undp.org