CDM: Quick Overview Matt Spannagle Technical Manager Millennium Development Goals Carbon Facility Bureau for Development Policy United Nations Development Programme Session 3, Bratislava, October 14 th, 2008

1 1 For interest & warm-up: 1m sea level rise and population displaced Methane clathrates Arctic sea ice extent for September 14 th Arctic ice breakup

2 2 Actually, the CDM is ‘climate neutral’ Actual greenhouse gas emissions CERs generated by CDM projects Annex 1 country buys CERs Acquired CERs are added and national emissions cap increases ‘Business as usual’ emissions

3 3 In 3 years, the CDM has sparked a $5 billion/year market 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 ,141 1,311 1,495 1,759 1,885 2,285 2,593 2,838 3,035 3,265 Number of Projects in the CDM Pipeline, January 2005 – March 2008 Compound Monthly Growth Rate = 11% Approximately 3 billion CERs by 2012 Compound Monthly Growth Rate = 11% Approximately 3 billion CERs by 2012

4 4 Current value size of the international carbon market CDM: > 1000 projects registered cumulative > 3(?) bn tonnes CO 2 e 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 (?)

5 5 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 & N 2 O reduction 40% Renewable Energy 23% CH 4 reduction 16% Energy efficiency 7% Cement & Coal mine/bed, 7% Fuel switch, 7% Afforestation & Reforestation, 0.2%

6 6 Geographical imbalance in the CDM Location of CDM Projects 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

7 7 How a CDM project generates carbon credits Greenhouse gas emissions Historical Trend Project start Carbon credits (CERs) represent the difference between the baseline and actual emissions Time 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 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 AND: leakage – emissions occurring outside the project boundary

8 8 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 Project without carbon revenue is profitable – but not sufficiently profitable compared with alternatives Project without carbon element Project with carbon element Carbon revenue makes the project attractive relative to investment alternatives Investment threshold Revenue / NPV / IRR A project can be money-making and qualify as ‘additional’! Financial additionality – benchmark analysis

9 9 6 to 12 months1.5 monthsCrediting period of the project Project Developer DNA DOE CDM Executive Board Project feasibility assessment / PIN CDM project development / PDD Host country approval Project validation Project registration CER issuance Project verification The CDM project cycle

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