Key challenges and possible new formats for CDM post-2012 ECBI Fellowships, Oxford, Sep. 3, 2007 Axel Michaelowa, Perspectives GmbH

Structure of presentation The political framework The quantitative role of CDM post-2012 Aggregation of CDM Policy CDM Sector CDM Programmatic CDM Conclusions

The political framework AWG Vienna:  “achieving the lowest stabilization level assessed by the IPCC to date would require Annex I Parties as a group to reduce emissions in a range of 25–40 % below 1990 levels by 2020”  “greater mitigation potential is at the disposal of Annex I Parties through the wider use of flexibility mechanisms” Developing countries support expansion of CDM

The role of the CDM post-2012 Assumptions for market demand  Commitment period  -30% for the EU and other OECD compared to 1990  -10% for Australia, Belarus, Japan, Russia, Ukraine and the US compared to 2012  -5% for new OECD members Chile, Israel, Mexico and South Korea  No commitments for any other countries

The role of the CDM post-2012

The role of the CDM post-2012 Total demand 18.8 billion t CO2 eq. - Banked volumes 7.1 billion t = Net shortfall 11.7 billion t Current CDM pipeline: 0.4 billion t/year Likely that supply could triple until 2020 Total CER supply : 5.5 billion = Shortfall: 50%!!  We need additional CER supply

How to aggregate CDM Bundling of projects  Programmes  Sectoral benchmark for crediting of all projects below the benchmark without further additionality check  Policies  Sectoral no-lose target and ex-post trade – no CDM! Sectoral cap and trade – no CDM!

Evaluating CDM aggregation Bundling of projects  Sensible from transaction cost point of view but done rarely Programme  Essentially project bundle (without any limit) with intermediary providing an incentive. Transaction costs likely to be significant. Experience remains to be gathered Sectoral benchmark  Intensity benchmark makes sense for several important project types but not for all  Abolishing additionality testing is not sensible in situation without binding cap Policy CDM  Requires sizeable resources on government level  Allocation of costs and benefits between different players is tricky

Defining policy CDM Crucial role of government A policy should have an incentive to participate (carrot / stick) Baseline: status quo  Renewable electricity generation caused by the policy *weighted OM/BM (ACM 2)  Energy efficiency standard: average energy use of appliance before standard*current number of appliances*grid average emissions factor  LFG/HFC/N 2 O/PFC capture regulation: emissions of all now regulated sources before regulation  Fossil fuel subsidy removal: Fossil fuel use before subsidy removal*fossil fuel emission factor

Defining policy CDM II Policy emissions  Renewable electricity generation: Zero  Energy efficiency standard: standard energy use of appliance*current number of appliances*grid average emissions factor  LFG/HFC/N 2 O/PFC capture regulation: current emissions of all now regulated sources  Fossil fuel subsidy removal: Fossil fuel use after subsidy removal*fossil fuel emission factor Policy must be monitored throughout crediting period Challenge: changes in economic activity levels over time  Avoid generation of CERs due to activity increase?  Possible solution: limit credit to activity level at project start

Definition of policy CDM III Additionality test  Policy has costs compared to status quo  Costs directly accrue to private sector E.g. renewable energy provision under a RPS is more expensive than fossil fuel Mandated HFC-23 capture entails costs  Costs directly accrue to public sector Subsidy programme for energy efficiency improvement Should macro-economic benefits from policy implementation be taken into account in additionality assessment?  Incremental cost calculation of GEF…

Policy CDM – Responsibilities Who is project participant? Who does the monitoring? Who retains the CERs?  Government  Addressees of the policy who bear costs Probably latter would prefer pass-through of the revenues, not necessarily the CERs as such Share revenues according to cost distribution  Government bears CDM registration and monitoring costs

Policy CDM – Incentives CER put option (Müller 2007): right to sell CERs from policy CDM at a pre-determined price  Gives government certainty about minimum revenue  Challenge to define price (floor price of market)  Challenge to define quantity of put options and their allocation to selling countries CER obligation (Müller 2003): requirement for countries with emission caps to use CERs for at least a pre-defined share of their emission budget  Gives certainty about minimum demand  Does not solve the price problem

Conclusions Post-2012 CER supply under current CDM regime likely to be insufficient, if negotiations orient themselves on IPCC results (as done by AWG) CDM aggregation may increase CER potential Sectoral CDM does not make sense Programmatic CDM is promising but not yet tested  Pilots should be supported Policy CDM is very interesting but incentive problems remain to be resolved

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