1. UNCTAD/Earth Council Carbon Market Partnership Gas Flaring Reductions and the Clean Development Mechanism (CDM) Lucas Assunção Coordinator BioTrade and Climate Change Programmes UNCTAD, Geneva NOT AN OFFICIAL UNCTAD RECORD

2. UNCTAD/Earth Council Carbon Market Partnership Agenda 1.The Kyoto Protocol 2.The Clean Development Mechanism (CDM) 3.The emerging carbon market 4.CDM challenges and opportunities for gas flaring reduction projects

3. UNCTAD/Earth Council Carbon Market Partnership The Kyoto Protocol: Architecture Caps emissions of greenhouse gases (GHG) by industrialized countries (Annex I) –combined emissions are reduced by at least 5% of their 1990 levels by the period 2008-2012 Industrialized countries have access to 3 “flexibility” mechanisms –to minimize the cost of reducing emissions (flexibility)

4. UNCTAD/Earth Council Carbon Market Partnership The Kyoto Protocol as a “cap & trade” system Collective problem-solving approach –As a group, reduce GHG emissions by X amount in X time to reduce concentrations Flexibility with regards to –Measures – technology used, policy tools, etc. –Allocation of emission “quotas” among emitters –Trading “quotas” among each other

5. UNCTAD/Earth Council Carbon Market Partnership “Cap and Trade” analogy 10 passengers share a boat to cross a river Due to river conditions, boat has now to be lighter but should still accommodate same 10 passengers The carry-on bags in which we all put our “things” now needs to be smaller From now on, our “stuff” will have to fit in the smaller bag If you have extra “space” in the bag, you can trade it with someone who needs the extra space

6. UNCTAD/Earth Council Carbon Market Partnership Why cap & trade is preferred policy Drives down the costs of achieving environmental objectives –Acid Rain: from $1,000s to $100s (see next slide) Gives industry space to change and adjust Feeds on diversity of marketplace and differences in abatement costs Drives innovation and efficiency So the bigger the market, the better But this also results in “winners and losers”

7. UNCTAD/Earth Council Carbon Market Partnership US SO2 Prices

8. UNCTAD/Earth Council Carbon Market Partnership Kyoto Protocol’s Flexibility Mechanisms Classical “cap & trade” mechanism –International emissions trading (ET) – trading of emission “quotas” among industrialized countries (AAU) “Offset” mechanisms –Joint Implementation (JI) – emission reduction credits resulting from offset projects in other industrialized countries (ERU) –Clean Development Mechanism (CDM) – crediting of certified emission reductions resulting from offset projects in developing countries (CER)

9. UNCTAD/Earth Council Carbon Market Partnership What is the Clean Development Mechanism KP mechanism that defines project activities which reduce GHG emissions or increase CO 2 sequestration implemented in developing countries Purpose: –To support developing countries in achieving sustainable development through the implementation of project activities that reduce GHG emissions –To assist industrialized countries in meeting their GHG emission reduction commitments

10. UNCTAD/Earth Council Carbon Market Partnership CDM Project Activity (Methane recovery in landfill) Certified Emission Reductions (CERs) INVESTORS Sustainable Development in developing countries Remove or retire CER from market (NGO) Sell CER through market Use CER to comply with present or future GHG emission commitments CDM overview

11. UNCTAD/Earth Council Carbon Market Partnership CDM rules from Marrakech Undertaken in developing countries CERs may be used by Annex I countries Voluntary participation approved by each Party Real, measurable and long-term mitigation benefits Reductions are additional to any that would occur in the absence of the project Promotes sustainable development, as confirmed by host country Does not divert ODA Should lead to transfer of technology and know-how Refrain from reductions generated from nuclear facilities

12. UNCTAD/Earth Council Carbon Market Partnership The CDM Project Cycle Process/Steps Project Design Project validation Registration Monitoring Verification/Certification Issuance of tradeable credits Key Actors Project Developers Nat’l CDM Office, National Gov’ts CDM Executive Board Project Operators Independent Third Party CDM Executive Board

13. UNCTAD/Earth Council Carbon Market Partnership The Emerging Carbon Market In anticipation of the entry into force of KP, a global market is emerging Fuelled by the perception that the future will be – –“carbon-constrained” (environment) and/or –have to be less fossil-fuel dependent (political economy) The Dow Jones Sustainable Development Index has outperformed the market

14. UNCTAD/Earth Council Carbon Market Partnership Market Actors Governments –EU-wide emission trading scheme (starts in 2005) –National emissions trading schemes – Denmark, UK, Norway (early starters) –The Netherlands – ERUPT and CERUPT – emission reduction procurement tender – now joined by other governments like Finland, etc. Corporations –Corporate-wide: Shell, BP –Procurement/Investment: TransAlta, OPG, Marubeni –Chicago Climate Exchange

15. UNCTAD/Earth Council Carbon Market Partnership Chicago Climate Exchange

16. UNCTAD/Earth Council Carbon Market Partnership Carbon Finance @ World Bank

17. UNCTAD/Earth Council Carbon Market Partnership Market Forecast We are living in a carbon constrained world. The urgency to control/stop the radical change in the world’s atmosphere and climate will only increase. Market mechanisms are the preferred policy responses. But this will create winners and losers at various points in time.

18. UNCTAD/Earth Council Carbon Market Partnership CDM Challenges and Opportunities: in General Challenges include - Lowering transaction costs Limit on use of credits by industrialized countries “Additionality” issue Promoting CDM investments Ensuring that additional revenue promotes sustainable development Opportunities include – Additional revenue stream More energy-efficient technologies Better practices Greater environmental awareness

19. UNCTAD/Earth Council Carbon Market Partnership Gas Flaring Reduction Projects: Challenges & Opportunities

20. UNCTAD/Earth Council Carbon Market Partnership Gas flaring and climate change CO2 emissions from flaring is about 10% of the Kyoto emission reduction commitment of all Annex-I countries (including USA) Energy wasted through flaring and venting is prodigious The gas alone is enough to supply all of France’s gas requirements Venting of associated gas (methane) directly into the atmosphere is unrecorded and is 23 times more potent than CO2 as a greenhouse gas

21. UNCTAD/Earth Council Carbon Market Partnership Economics of gas flaring About 8 billion standard cubic feet per day of gas is wasted globally (= France’s gas requirements) There are strong economic reasons to stop the flaring and venting of gas resources Requires large capital investment that is sensitive to a variety of risk factors

22. UNCTAD/Earth Council Carbon Market Partnership Major challenges for gas flaring reduction as CDM “Additionality” Demonstrating Sustainable Development Competition with other CDM projects

23. UNCTAD/Earth Council Carbon Market Partnership Additionality Given the economic importance of capturing flared gas and the associated political and regulatory pressures, it is difficult to establish –Whether or not the planned reductions would take place without the proposed CDM project –What amount of reductions can be credited to the CDM project

24. UNCTAD/Earth Council Carbon Market Partnership Demonstrating Sustainable Development 3 categories of reduction projects –Re-inject associated gas –Improve efficiency of flares –Utilization of gas for energy purposes Except for last category, projects do not have high visibility impact in promoting sustainable development – a key component

25. UNCTAD/Earth Council Carbon Market Partnership Competition with other CDM projects Assuming that the carbon market is modest and that prices stay at Euro 3-10 –Other CDM projects may be more attractive than gas flaring reduction projects

26. UNCTAD/Earth Council Carbon Market Partnership Conclusions: Gas Flaring Reduction Projects Viability & attractiveness of GFR projects is likely to increase as the CDM market grows In a large CDM market, GFR projects offer highly effective, measurable sources for large amounts of CERs Uncertainties about gas flaring reduction projects can be reduced by clearer regulatory policy For more information : –CDM Online Course @ www.LearnSD.orgwww.LearnSD.org –The CDM Guide @ www.unctad.org/ghgwww.unctad.org/ghg