LEGAL & REGULATORY ASPECTS OF THE CLEAN DEVELOPMENT MECHANISM JUAN RODRIGO WALSH

Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires understanding the underlying legal and institutional frameworks on several planes or levels: The International Legal Framework Investor Nation Regulatory & Institutional Issues Host Country Legal & Institutional Requirements Contractual Issues between Investors and Developers Contractual Issues related to sale of CERs

Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires understanding the existing International legal and institutional frameworks: The International Legal Framework ò UNFCC ò Kyoto Protocol ò COP/MOP Resolutions & Decisions ò Executive Board

THE KYOTO PROTOCOL: Together with the UNFCC, the Kyoto Protocol constitutes the most important global agreement on the environment to date. The Protocol establishes Emission Reduction Targets for the period for industrialized countries 5,2% below 1990 level emissions Kyoto also creates the Clean Development Mechanism (CDM) for developing countries Emphasising cooperation and “flexible mechanisms” to achieve the Protocol’s goals These mechanisms are: Emissions Trading (ET) Joint Implementation (J I ) Clean Development Mechanism (CDM) History of the Negotiations

GHG Committments undertaken by Annexe 1 Countries The Kyoto Protocol mandates Developed Countries to reduce overall GHG emissions by 5 % during the period , against 1990 levels of emissions. Other Annex 1 Countries have committed to greater levels of reduction: Some Examples: Canada plans GHG reductions of 6 % below 1990 levels.

Current Emissions versus Goals Source: Royal Institute of International Affairs

Flexible Mechanisms Introduced by the Kyoto Protocol The Kyoto Protocol establishes strict committments for Annex I Countries, allowing for compliance by means of “flexibility mechanisms” : Emissions Trading (ET) Joint Implementation (JI) Clean Development MechanismClean Development Mechanism (CDM)

Emissions Trading (ET) Article 17 of the Kyoto Protocolo provides for emissions trading transactions between Annexe 1 Countries All ET Transactions must be supplementary to national policies adopted by governments pursuant to the quantifiable emissions reductions committed to by Annexe 1 Countries

Joint Implementation Article 6 establishes that Emissions Reductions Units may be transferred between Annexe 1 Countries in the case of Joint Implementation Projects. Joint Implementation Activities must be complementary to domestic emission reductions policies.

Clean Development Mechanism Article 12 allows for projects to be jointly executed by developed and developing countries. These activities may start in Developed Countries may therefore invest in GHG reduction projects in developing countries and utilise the credits obtained from these reductions toward compliance with national committments.

CDM projects must meet the following requirements: Contribute to the sustainable development of developing countries Have a demonstrable effect on climate change mitigation GHG Reductions must be measurable and certifiable over a period of time permanent additionalEnvironmental Benefits must be permanent and additional to any that might occur in absence of the project

CDM requirements AcceptabilityAcceptability –Host Country Acceptability –At an International Level –For the Investor Nation AdditionalityAdditionality –Must be real and measurable –Must consider existing and future trends ExternalitiesExternalities –Must consider social effects and sustainability –Must consider environmental impacts

What is Additionality ? Environmental AdditionalityEnvironmental Additionality –Emissions reductions must be over and above a “business as usual scenario” Financial AdditionalityFinancial Additionality –Investments must be real. Resources from Annexe 1 Countries must e additional to existing financial committments and ODA Business as Usual ScenarioBusiness as Usual Scenario –Some degree of Technical Innovation required

Additionality = project – Base Line Carbon Quantification Source: Ecosecurities 2002

Other Issues to be Considered in CDM Projects Social ImpactsSocial Impacts –Employment: Are jobs created ? –Infrastructure and Know How: How does the project contribute to local expertise and infrastructure ? Environmental BenefitsEnvironmental Benefits –Other emissions reductions and environmental benefits

Required Phases for CDM Projects Project Design Base Line Determination Project Approval Project Registry Verification Certification Award of CERs Pre-Investment Phase Implementation Monitoring Investment & Operation

Pre-investment Phase Pre Feasibility Criteria Carbon Issues Project Timeframe Defining the Baseline Defining Additionality Identifying “Leakages” Net Carbon Benefits Potential CERs Other Considerations Overall Environmental Impacts Biodiversity Waste management Watershed Management Sustainable Development Host Country Approval Training requirements Technology transfer

Implementation Phase Validation: Must be carried out by an Independent Third Party in order to obtain approval as a CDM ProjectVerification: Must also be carried out by an independent Third Party. Verification requires periodical control and ex post verification of emissions reductions o carbon sequestration in sinks Certification: Must also be carried out by an Independent Third Party. Certification consists in a formal, written statement to the effect that, during a certain lapse of time, a particular project has achieved the targets set for emissions reductions or sequestration, as verified. CDM Executive Board CERs awarded by the CDM Executive Board

What are CERs ? Certificates of Emissions Reductions, measured in tons of CO2. (CERs). Emissions Reductions must comply with the following criteria: –Measurable, and; –Verifiable by Independent Thir Parties. They must also pass the test of “Additionality”

Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects usually requires understanding the existing legal and institutional framework in the “Investor Country” or the country of the purchaser of the CERs: Investor Nation Regulatory & Institutional Issues ò Annexe 1 Country ò Party to Kyoto? ò Domestic CO2 Programme? (ERUPT & CERUPT) ò Company to Company

Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires a fundamental understanding of the legal and institutional framework of the Host Country: Host Country Legal & Institutional Requirements ò Regulatory Requirements for approval ò Existence of a Host Country CDM office ò Environmental and Regulatory requirements applicable to the CDM Project ò Legal, taxation and other regulatory requirements for FDI

Host Country Approval Process: The case of Argentina Environment Secretariat Resolution 169/2001 Establishes the guidelines for evaluation and approval for projects submitted to the Secretariat acting as “Focal Point: Projects are subject to independent peer review and external evaluation Special “Climate Change Office” ( OAMDL) Coordination of environmental policies and Negotiating Positions at UNFCC and COP/MOP meetings

Sectors to be given special attention: Energy Sector, Land Use, Land Use Change and Forestry Sectors (LULUCF), Farming Sector Waste Management Sector CLIMATE CHANGE MITIGATION STRATEGY: The Case of Argentina

OAMDL Energy, Industry & Transport Forestry Farming Waste Management Sector Committees SAyDS Sec. of Energy Sec. of Industry Sec. of Transport Sec. of Science & Technology Agriculture Foreign Affairs Executive Committee Business Associations Academia NGO’s SMAyDS Advisory Comittee

OAMDL FUNCTIONS OAMDL Impacts & Adaptation Mitigation Awareness building & Participation CDM Project Management Identify prioritary sectors to implement CDM projects and activities Define CDM Policy Establish methodologies and procedures for identifying, preparing and evaluating projects Full cycle management and Host Country approval of CDM projects Establish relationships with sources of financing for projects Rules for submission of projects Project Design Documents (PDD) Evaluating Institutions Registry (RIE) National Climate Change Programs

Organization of the National CDM Authority Design of the legal context for the presentation and management of projects –Legal requirements –Policy Issues Methodological support for the preparation and assessment of projects –Pre/ and feasibility Studies, Standardised Baseline Studies & Monitoring Programs –Policy Guidelines

Regulatory Aspects of CDM Projects and the Climate Change Office (OAMDL) Registration and Acreditation of Evaluating Institutions for National Project Cycle Assessment Adaptation of Project Presentation Documents and standardized formats (PIN, PDD, etc) Evaluation Criteria and Sustainability Indices Liaison Offices with Provincial and Local Governments Proposals for simplified Project Evaluation

Technical Support provided by Climate Change Office Colaboration in designing National Climate Change and Mitigation Strategies Coordination of National Climate Change Programmes, Projects and related research activities Establishment of Project data bases and general awareness building Administrative Management of OAMDL Working Groups

OAMDL’s Activities Creation of sector-specific Committees –Sectors: Energy, Industry & Transport Forestry Farming Waste Management –Objectives: Identify opportunities for projects for potential investors Preparation of a strategy for the mitigation of GHG emissions on a sector-specific basis, in order to achieve the country’s best mitigation potential for each sector Establishment of sector-specific baseline Methodological Guidelines for projects

Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects also requires understanding the legal implications and potential risks for both Project Developers and Investors: Contractual Issues between Investors and Developers ò Applicable Rules for FDI ò Multilateral or Bilateral Investment Agreements ò Taxation & Repatriation of Profits Issues ò Technology Transfer & Intellectual Property Issues ò Project Due Diligence between Developers and Investors

Who is purchasing Certified Emissions Reductions (CERs) ? Energy Sector Companies Chemical Companies Oil & Gas Companies Paper, Cement, and Steel Industries Investment Funds

Prices: Which Way?

Price Estimates for a GHG Emissions Trading Market Source:

What is the market paying for Carbon ? PFC - US$ / Ton CO2 (depending on risk factors) ERUPT - Euro 5-9/Ton CO2 Institutional Funds – On a one by one negotiated basis Private Corporations - US$ 50cents to $1.50 per Ton CO2 ( Within or without Kyoto) Options (depending on price and timespan US$ 25c to 75c/Ton CO2)

ERUPT Results

Comparison of IRR in Carbon Projects: Renewable Energy Source: World Bank 2001

Selling Carbon Credits This Phase is usually carried out simultaneously with the project design and approval phases Early Identification of potential Investors Enhanced security and feasibility for Project Direct Negotiations Involvement of Brokers: Success Fee for sale of CERs

Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires understanding the legal aspects of the Carbon Market and the sale of CERs: Contractual Issues related to sale of CERs Long term purchase contracts Brokerage fees Monitoring requirements, auditing and Independent Verification Managing Risk: Insurance

The Way Forward The Climate Change Regime has been controversial The Kyoto Protocol has been rejected by the U.S. as “fatally flawed” Entry into force requires at least 55 countries with 55% of global GHG emissions Technical uncertainties (Forestry and LULUCF) Russian ratification?

The Way Forward Experience is growing –PCF –UK ETS –EU Directives –U.S. State regimes Climate Change is a problem that will not disappear!!