1. Clean Development Mechanism
ACME
Applying CLEANER PRODUCTION to MULTILATERAL ENVIRONMENTAL AGREEMENTS
CDM
Clean Development Mechanism
(and trading of CERs)
SESSION 5
United Nations Environment Program Division of Technology Industry and Economy
Swedish International Development Agency

2. OUTLINE Objectives of this session
1/ Overview of the Clean Development Mechanism (CDM)
> What are the objectives and purpose of CDM ?
2/ Basics
> What are the key concepts ?
3/ Organisation of a CDM project
> What are the different steps of a CDM project ?
4/ Statistics
> Where are we now with the CDM and how are emission reduction credits traded on the markets?
5/ Opportunities for industrials
> What are the challenges and opportunities for industrials in developing countries ?
Slide 2 – Objectives of the session
The Clean Development Mechanism (CDM) is a key tool in the Kyoto protocol, allowing countries with emission reduction targets (Annex I countries) to undertake and benefit from greenhouse gas emission reductions in other (non-Annex I) countries.
At the end of this session you should know what CDM is, how it is organized and functions, what the key requirements are for a CDM project, and how CDM may present an opportunity for industry in both developed and developing countries to benefit in different ways from CDM. You should also have an idea about how emission reduction credits can be sold and bought on the markets.
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3. OVERVIEW About Kyoto Protocol
Signed in 1997; in force since 16 February 2005.
Ratified by more than 130 countries
> Major non participants: USA and Australia.
Commits Annex 1 countries to reducing greenhouse gas emissions.
> GHG emissions may be reduced by ~ 5% below 1990 levels in ;
> Individual, quantified emission targets for each industrialized country;
> 6 greenhouse gas covered: CO2, CH4, N2O, HFC, PFC, SF6.
3 flexibility mechanisms for financing emission reduction abroad.
> Clean Development Mechanism (CDM)
> Joint Implementation (JI)
> International Emissions Trading (ET)
Slide 3 – About Kyoto Protocol
As is explained in more detail in module 3: “Introduction to UNFCCC”, the Kyoto Protocol is an amendment to UNFCCC that sets out specific targets to reduce GHG emissions from UNFCCC Annex I countries (or more correctly, from Kyoto Protocol Annex B countries – these are almost identical, with the exception for the few Annex I countries that have ratified UNFCCC but not the Kyoto protocol). The Kyoto protocol also provides tools and procedures for countries to work together to achieve the emission reduction targets, instead of each country only trying to achieve the targets on their own in their own country. The three key tools are:
Clean Development Mechanism (CDM)
Joint Implementation (JI)
Emission Trading
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4. Make difference between Annex I and Annex B countries!
OVERVIEW
CDM: the basic idea
What is the Clean Development Mechanism (CDM) ?
> A mechanism that allows Annex B Countries to undertake GHG emission reduction projects in non-annex B countries, and to use the achieved emission reductions to meet their own emission goal.
> In CDM projects, the Annex B country fund the project and provides any necessary know-how and technology transfer to the non-annex B country where the project is implemented.
> CDM works because emission reductions are many times more expensive to achieve in Annex B countries than in non-Annex B countries (the opportunities for emission reduction are bigger there).
Slide 4 – CDM: the basic idea
This slide explains the basic idea with CDM.
To avoid confusion, please explain that:
Annex I refers to UNFCCC and is a list of countries that are committed to support developing countries to address climate change. These are mor3e or less identical with the developed countries and economies in transition (former soviet union bloc members).
Annex B refers to the Kyoto Protocol and is a list that states the emission target for each country in Annex I.
However, as not all Annex I countries have ratified the Kyoto Protocol (notably USA), these two lists are not exactly the same. However, to avoid confusion the two terms are often use interchangeably.
Make difference between Annex I and Annex B countries!
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5. OVERVIEW Examples of CDM projects
Slide 5 – Examples of CDM projects opportunities
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6. Certified Emission Reduction (CERs) Emission Reduction Units (ERUs)
OVERVIEW
Introduction to the carbon market
Two main commodities traded in the carbon market
> Emission allowance (AAU and EUA)
> Project-based emissions reductions (CER and ERU)
Four different major markets
> Kyoto Protocol
> EU Emissions Trading Scheme
> Canada Greenhouse Gas Offset System
> Japan (voluntary trading system)
Annex 1 countries EU – 25 Canada Japan Other OECD
Slide 6 – Introduction to the carbon market
There are two types of emission allowances (“commodities”) that can be traded between countries with emission reduction commitments in the Kyoto Protocol (Annex B countries). Both commodities can be used to meet obligations under the Kyoto Protocol.
Emissions allowances: The volume of emissions that each Annex B country is assigned under the Kyoto Protocol is distributed as emissions allowances to companies and other GHG emitters by the government in each country. These companies and stakeholders are committed to not exceed these emission allowances, or if they do, to purchase additional emission allowances from other companies/stakeholders. These allowances are not the result of emission reduction projects, but are part of the total allowance that each country has been assigned. A buyer can purchase allowances such as Assigned Amount Unit (AAUs) or EU Allowances (EUAs) under the “cap-and-trade” regime of the Kyoto Protocol or the EU Emissions Trading Scheme (ETS).
Project-based emissions reductions: generated by projects that reduce greenhouse gas emissions below what would have occurred otherwise. These reductions can only be traded after verification and certification by a third party. Once certificates have been issued, they are called either Certified Emissions Reductions – CER (from CDM projects) or Emissions Reduction Units – ERU (from Joint Implementation projects). Both CER and ERU can be traded.
There are four different major markets for trading with GHG emission allowances/reductions (and a number of smaller domestic markets as well).
Kyoto Protocol: Industrialised country AAUs can be traded. These countries can also purchase project-based emissions reductions through JI and CDM.
EU Emissions Trading Scheme: limits emissions of large-scale emitters within the EU by allocating allowances (EUAs) which can be traded on a Europe-wide market. A Linking Directive relates the EU-ETS to the Kyoto protocol, and allows emitters under the EU-ETS to purchase CER and ERU from JI and CDM.
Canada Greenhouse Gas Offset System: it includes a domestic trading system for large-scale emitters and allows the purchase of CERs/ERU.
Japan (voluntary trading system): A voluntary trading system but Japan intends to purchase large volumes of CERs/ERUs.
Involvement of buyers/investors in CDM (and JI) projects from Annex 1 Parties :
> Most common: purchase CER from project proponent once they have been generated (long-term forward purchase agreement);
> Less common: Invest in CDM project and receive (part of) CER as return on investment.
CDM JI
Developing Countries
Central and Eastern Europe
Certified Emission Reduction (CERs)
Emission Reduction Units (ERUs)
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7. OVERVIEW CDM organisation and objectives
Rules, modalities and procedures of CDM are defined in:
> Kyoto Protocol;
> Follow-up decisions of COP;
> Decisions of CDM Executive Board.
CDM EB (Executive Board):
> Responsible for further development of CDM rules, and supervising implementation;
> Composed of 10 members + 10 alternates;
> Reports to the COP (Conference of the Parties).
Twin objectives of CDM:
> Help Annex 1 countries meet their objectives in a cost-effective way;
> Contribute to sustainable development of the host country.
Slide 7 – CDM organization and objectives
The practical function of CDM is defined in detail in the Kyoto Protocol and in a number of follow-up decisions by COP as well as in supporting documents issued by different bodies in UNFCCC. The most important body is the Executive Board.
The basic requirement for any CDM project are:
Actual and real reductions of GHG emissions must be achieved.
The project must contribute to sustainable development in the country where the CDM project is implemented
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8. BASICS Additionality and baselines
“A project is eligible for CDM if greenhouse gas emissions are reduced below those that would have occurred in the absence of the CDM project.”
GHG emissions (tCO2eq)
1. Validation of project design, baseline and monitoring plan
2. Verification / Certification of emission reductions
Emissions baseline
ADDITIONAL EMISSION REDUCTIONS
Slide 8 – Additionality and baselines
Additionality: A CDM project is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the CDM project.
Baseline: The baseline for a CDM project is the scenario that reasonably represents the anthropogenic emissions by sources of greenhouse gases that would occur in the absence of the proposed project. The method for calculating the baseline is a key challenge for many CDM projects, and ach new baseline methodology need to be approved by the Executive Board. In principle, each type of CDM project has to have its own baseline methodology. Once this methodology id developed and approved, other projects of the same type can use the same baseline methodology to calculate their baseline emissions.
Emissions after the project
Years
Project implementation
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9. BASICS Conditions for additionality Investment barrier
A financially more viable alternative to the project would have led to higher emissions.
Technological barrier
A less technologically advanced alternative to the project (lower risk) would have led to higher emissions.
Barrier due to prevailing practice
Prevailing practice or existing regulatory or policy requirements would have led to implementation of technology with higher emissions.
Other barriers
Competitive disadvantage, managerial barriers …
Slide 9 – Conditions for additionality
Additionality for a CDM project is not only compared to what would have happened in the absence of any project at all (business as usual) but is also compared to alternative projects that would be reasonable to implement if the CDM project is not implemented. If the alternative projects would all result in higher GHG emissions compared to the CDM project, the additionality requirement is met.
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10. BASICS CDM requirements Emissions
Lower emissions, no leakage, no double counting.
Financial
No ODA, no GEF funds, should lead to additional money inflow.
Regulatory
The project should exceed regulatory standards.
Technological
CDM should promote appropriate new technologies.
Investment
CDM should make the IRR of the project an acceptable one. The project should not have happened without the CDM revenue.
Slide 10 – CDM requirements
In addition to the additionality requirement there are a number of specific requirements on CDM projects:
- The project should have been developed with the intent to reduce GHG emissions. This can be demonstrated by initial discussions with the relevant international and national authorities so as to enable the subsequent realisation of a CDM project, as well as by feasibility studies and business plans that address the issues of JI and its positive impacts on the project.
- The funding should be additional, and not part of international aid (Overseas Development Assistance) or funds from the Global Environment Facility
- The project must exceed national legislation. If the project is undertaken in order to comply with laws and regulations, the project in general fails the additionality criteria, as it is assumed the authorities would anyway have enforced the project according to the laws! The exception from this rule is if it can be shown that the law is ‘systematically not in force’ or ‘non-compliance is widespread’.
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11. BASICS Where is CDM applicable ?
Renewable energy > Wind power > Solar > Biomass power > Hydro power
Waste management > Capturing of landfill methane emissions to generate power > Utilisation of waste and waste water emissions for generation of energy
Energy efficiency measures > Boiler and steam efficiency > Pumps and pumping systems > Efficient cooling systems > Back pressure turbines > etc…
Cogeneration in industries having both steam and power requirements
Power sector > Induction of new technologies which are efficient (thermal) > Reduction in technical T&D losses
Fuel switching > From fossil fuel to green fuel like biomass…
Electrical energy saving 1 kWh = 0.8 ~ 0.9 kg CO2
Power generation (waste heat / renewable) 1 MW = ~ t CO2
Coal saving 1 kg = 1.3 ~ 1.6 kg CO2
Fuel oil saving 1 litre oil = 3 ~ 3.5 kg CO2
NG based power generation 1 kWh generation = 0.35 ~ 0.45 kg CO2 1 kg NG burning/saving = 2.4 ~ 2.5 kg CO2
Slide 11 – Where is CDM applicable ?
Examples of eligible projects:
- Fuel switch to lower carbon intensive fuels
- Installations based on renewable energy
- Combined heat and power (CHP)
- Supply-side energy efficiency improvements
- End-use energy efficiency improvements
- Agriculture sector (except land-use change)
- Reduction in methane emissions
- Reforestation/afforestation projects
The box in this slide indicates how different savings may be translated to GHG emissions. Please note that this is only indicative!
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12. ORGANISATION CDM project cycle
Slide 12 – CDM project cycle
The rules and process for developing a CDM project are well defined and described in detail in the Kyoto Protocol, amendments to the protocol, and guidelines issued by the Executive Board and other UNFCCC bodies.
This slide shows the formal process for developing a CDM project, and in the following slides each step will be explained in more detail.
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13. ORGANISATION Content of the PIN (Project Idea Note)
Standardized format for the PIN
> the type, size and location of the project;
> the anticipated total amount of GHG reduction compared to the “business-as-usual” scenario (which will be elaborated later in the PDD, while describing the baseline);
> the suggested crediting life time;
> the financial structuring (indicating which parties are expected to provide the project’s financing);
> the project’s socio-economic or environmental impacts/benefits;
> history of the project regarding other donors and funding tenders;
> capacity of project developer to invest in the project.
Slide 13 – Content of the PIN (Project Idea Note)
The PIN is the very first summary of the project, which is used to assess the possibility for the project to meet all the requirements for a CDM project. The PIN is normally a short and concise document of only a few pages. The Executive Board has issued recommendations on what elements should be in the PIN (as described in this slide).
The PIN is part of the very first step of the CDM process. If the PIN indicates that the project is eligible under CDM, then a more elaborate full project description is compiled: The Project Design Document (PDD).
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14. ORGANISATION Content of the PDD
Standardized format for PDD – Project Design Document (main document in the CDM cycle)
A. General description of the project
B. Setting of the baseline
C. Duration of the project / Crediting period
D. Setting of the monitoring plan
E. Estimation of GHG emission reductions
F. Environmental impacts
G. Stakeholders’ comments -
Annex 1: Contact information on participants in the project
Annex 2: Information regarding Public Funding
Annex 2: Baseline information
Annex 3: Monitoring plan
Slide 14 – Content of the PDD
The Project Design Document (PDD) is the main project document, describing in full detail the project, the methodology chosen for setting the baseline (an existing methodology if available for this type of projects, or an entirely new methodology), the baseline scenario, the additionality of the project and so on. The format is defined by the Executive Board and has to be followed.
The PDD is first submitted by the project proponent to a Designated Operational Entity (explained in the next slide).
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15. ORGANISATION PDD: CDM baseline methodologies Approved methodology
> Statement of which approved methodology has been selected;
> Description of how the approved methodology will be applied in the context of the project.
New methodology
(to be submitted to UNFCCC secretariat)
> Description of the baseline methodology and justification of choice, including an assessment of strengths and weaknesses of the methodology;
> Description of key parameters, data sources and assumptions used in the baseline estimate, and assessment of uncertainties;
> Projections of baseline emissions;
> Description of how the baseline methodology addresses potential leakage.
Slide 15 – PDD: CDM baseline methodologies
A central part of the PDD is a description of how the baseline emissions have been calculated.
Project proponents can either use an existing methodology to calculate the baseline for this kind of projects (if available) or chose to develop a new methodology.
Please note that the baseline methodology and the baseline scenario are two different elements, that both have to be described in the PDD
The baseline methodology and the baseline scenario are essential elements of PDD as these are used to calculate the amount of CER that generated by the project, why they are also subject to close scrutiny by the DOE and Executive Board.
- Guidelines for Completion of the Project Design Document (CDM-PDD),
- The Proposed New Methodology: Baseline (CDM-NMB),
- The Proposed New Methodology: Monitoring (CDM-NMM).
- Guidelines for completing CDM-AR-PDD, CDM-AR-NMB and CDM-AR-NMM (AR – Afforestation and Reforestation).
- Guidance on CDM
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16. ORGANISATION PDD: Approved methodologies
Statistics on October 2005 from (UNFCCC)
Slide 16 – PDD: Approved methodologies
This slide and the next shows that there is an intense effort underway to develop baseline methodologies for different types of projects. At the end of 2005 some 30+ methodologies were approved. In addition there are a number of simplified methodologies for small scale projects established refer to slide 23)
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17. ORGANISATION PDD: Methodologies submitted
Statistics on October 2005 from (UNFCCC)
Slide 17 – PDD: Methodologies submitted
(Continued from previous slide)
But at the same time there were 158 additional new methodologies proposed. This can be compared with that there were approximately 700 CDM projects in the pipeline at that time, which means that roughly 540 projects made used of one of the already approved methodologies, while another 160 projects were proposing new methodologies.
The more projects that are submitted for each type of project, the more methodologies will be developed, and the less need will there be to develop new methodologies.
Explanation of the graph:
Submission process for new methodologies
> Project proponent, via validator, submits new methodology to UNFCCC secretariat;
> CDM Methodology Panel obtains two independent desk reviews;
> CDM Methodology Panel formulates preliminary recommendation;
> Project proponent has 10 days to provide feedback to preliminary recommendation;
> CDM Methodology Panel formulates final recommendation to CDM EB;
> CDM EB rates the methodology based on the recommendation:
A: Methodology is approved;
B: Methodology may be revised and re-submitted without new desk reviews;
C: Methodology is rejected and must go through full cycle if re-submitted.
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18. ORGANISATION PDD: Crediting period
Carbon credit (CER) can be generated as from now:
> Banking by buyer for use towards compliance in
> Banking by project proponent for sale in later years.
Crediting period:
> Usually starting the later of CDM registration, and start of project operation.
> Fixed crediting period of up to 10 years. OR
> Renewable crediting periods of up to 7 years (maximum 3 x 7 years).
Slide 18 – PDD: Crediting period
Another central issue in CDM projects is from when, and for how long, the project will generate CER (also known as the crediting period). For the start date the normal thing is that CER are counted from the date that the project starts, resulting in GHG emission reductions. Less usual is that a project has already started and been registered only afterwards, in which case the credits are counted from the date of registration.
The second question; for how long will the project be considered to generate CER. In principle this is for as long as the project fulfills the CDM requirements (and most importantly among these, that there are no new and more attractive technologies or projects that could replace the project on commercial grounds and generate even less GHG). This could become a very very complicated issue to prove, and to make things easier, projects can either be valid for one period of ten years only, or for up to three years of seven years each, but with revalidation of the project every seven year.
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19. ORGANISATION Host country approval
Formal confirmation by the Designated National Authority (DNA) of the hosting country that the project meets sustainable development objectives.
Sustainable development criteria set by the DNA:
> Social well being: employment, alleviation of poverty, etc.
> Economic well being: investment consistent with needs of the people.
> Environmental well being: impacts on the local and global environment, pollution, etc.
> Technological well being: transfer of environment safe and sound technologies.
Slide 19 – Host country approval
A basic requirement before a CDM project proposal can go forward is that the host country, where the project will be implemented, formally approves of the project. Especially the sustainable development criteria of the project needs to be confirmed. In each country the government has to appoint a Designated National Authority (DNA) that carries out this confirmation based on the PIN and/or PDD. As of yet not all countries have appointed their DNA, which in reality makes CDM projects impossible in that country.
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20. ORGANISATION Validation
Independent assessment by a Designated Operational Entity (DOE) that project meets criteria of the Kyoto Protocol.
DOE shall:
> Review the PDD and supporting documentation;
> Conduct site visit;
> Interact with stakeholders;
> Source other relevant additional information from various sources;
> Publish the PDD in the web for international stakeholder comments.
A successfully validated project can be submitted to CDM Executive Board for registration.
Slide 20 – Validation
The PDD is submitted to a Designated Operational Entity (DOE) for confirmation that the project meets the CDM requirements. DOE is an independent expert organization that has been accredited by the Executive Board to carry out this kind reviews of projects. There are today many DOE operating globally, some of which are specialized (and only accredited) for certain types of projects. The DOE reviews the project from all eligibility aspects, including evaluation how the project contributes to sustainable development in the country where the project is to be implemented.
If DOE does not confirm the project as meeting all the requirements then the project proponent can rework the PDD and resubmit it again to the DOE. If the DOE on the other hand finds that all requirements have been met, then it will submit the PDD to the Executive Board for registration, which is the formal approval of the project by UNFCCC.
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21. ORGANISATION Registration
Automatic registration of submitted projects unless 3 members of the CDM Executive Board or one of the parties involved file a request for review within a delay of:
> 4 weeks for small scale project;
> 8 weeks for large scale project.
Registration fees are payable to the Executive Board by the project participants depending on the quantity of emission reductions:
> Between to US$.
Slide 21 – Registration
The project is registered automatically unless requests for reviews of the PDD have bee requested within a specified period of time. Once the project is registered the project partners can go ahead and implement the project.
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22. ORGANISATION Last steps > Project financing.
Last steps of the process:
> Project financing.
> Monitoring emissions.
> Validation and certification.
> Insurance of CERs.
Slide 22 – Last steps
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23. ORGANISATION Transaction cost of the CDM
Estimation of transaction costs during the CDM cycle
> PDD ~ to €
> DNA approval ~ €
> Validation ~ €
> Registration ~ to US$
> Administration ~ 0,2 US$ / CER
> Verification € per turn
At CER prices of 10 €/t CO2 equivalent, the viability threshold of projects is at ~ CERs/years.
Slide 23 – Transaction cost of the CDM
The CDM process is not free and each step have costs associated. This slide indicates the costs.
The CER price varies depending on supply and demand and can be checked on-line in trading markets. For the past year (2005/2006) the price has been over or much over 10 €/Tonne CO2 equivalent.
The price also depends on how the project is financed (or how the CER are sold):
> Most common: purchase CER from project proponent once they have been generated (long-term forward purchase agreement);
> Less common: Invest in CDM project and receive (part of) CER as return on investment.
The first option (forward buying) is associated with the risk that the emission reductions will not materialize, why CER from this kind of investments have a lower price than CER that have already been generated.
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24. ORGANISATION CDM additionality tool
“An optional flow chart, adopted by the executive board in October 2004, applicable to any type of project for the demonstrate of additionality.”
STEP 0 – Preliminary screening based on the starting date of the project activity
Start date of claiming credits for project should precede date of registration
CDM consideration proved = PASS
STEP 1 - Identification of alternatives consistent with current laws and regulations
If proposed CDM project is the only alternative left, the project is non-additional
More than one alternative = Pass
STEP 2 - Investment Analysis
STEP 3 - Barrier Analysis
No barriers , the project is non-additional
CDM financially attractive
CDM financially not attractive
CDM faces Barriers = PASS
STEP 4 - Common Practice Analysis (credibility check)
If similar activity can be observed with no essential difference, the project is non-additional
Slide 24 – CDM additionality tool
CDM Executive Board consolidated, in October 2004, an “additionality tool” to help project proponents to demonstrate additionality of their project. The use of this tool is optional as project participants can submit other types of tools for the demonstration of additionality. But it is applicable to any type of projects: it can be used for small-scale projects as well.
No similar activity or similar activities present but difference in circumstances = PASS
STEP 5 - Impact of CDM registration
If CDM benefits have no impact, the project is non-additional
PROJECT ACTIVITY
IS ADDITIONAL
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25. ORGANISATION Fast track for small-scale CDM project
Why do we need a fast track?
> Process not worth it for small projects (high transaction costs);
> Many small projects deliver significant local sustainable development benefits;
> Small-scale technologies are some of the most promising for solving the long term problem of climate change (e.g. solar; wind; fuel cells);
> CDM might lose public support if rules are biased toward large capital-intensive projects.
Size limits for small-scale projects
> Electricity generation from renewable sources, up to 15 MW.
> Energy efficiency projects saving, up to 15 GWh p.a.
> Project reducing emissions up to t CO2eq p.a.
Small-scale projects benefits from simplified rules and procedures
> Simplified PDD;
> 14 pre-approved baseline methodologies (feb. 2005);
> Same operational entity may undertake validation and verification / certification;
> For small-scale projects, sufficient to demonstrate that barriers would have led to higher emissions in absence of CDM.
Slide 25 – Fast track for small-scale CDM projects
There are simplified rules for small scale projects, that allow a quicker and cheaper approval process. These rules also allow bundling of several similar projects into one single project.
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26. STATISTICS Upswing of CDM (1/3) Carbon market in 2005:
Statistics on July 1st 2006 from (UNEP)
Carbon market in 2005:
> In 2005, global carbon market transactions worth €9,4 billion.
> In 2005, CDM projects transactions worth €1,9 billion.
Statistics of CDM (as per June 2006):
> 225 projects registered, for an average of 70 millions CERs/Year.
> 36 projects submitted for registration, for an average of 4,6 millions CERs/Year.
> 860 projects known to be prepared for registration.
> 165 proposed baselines methodologies were sent to the CDM EB for approval, 60 approved, 66 rejected and 39 are pending.
Slide 26 – Upswing of CDM (1/3)
Global market figures from Carbon Point.
The Kyoto Protocol only came into effect in 2005 when Russia ratified the protocol. Although many projects had been prepared before that, the impact from the Protocol coming into effect has been a large number of new projects being submitted.
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27. STATISTICS Upswing of CDM (2/3)
Number of projects registered or known to be prepared for registration:
End of 2004
End of 2005
Slide 27 – Upswing of CDM (2/3)
Source: Carbon Point.
Some countries have been more proactive than others in generating projects. The number of projects in India and China are however also reflecting the size of their economies and the fact that many opportunities for GHG emission reduction exist in these countries.
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28. STATISTICS Upswing of CDM (3/3)
Annual volumes (million tCO2e) of project-based emission reductions transactions and annual average price in US$ per tCO2.
Slide 28 – Upswing of CDM (3/3)
Source: State of the Carbon Market 2006, The World Bank, Washington, USA
This slide shows:
The number of CER being traded –note that the information for 2006 is only covering the first months of the year. The 2006 column is likely to exceed the 2005 column.
The CER price is increasing constantly, probably both as the interest to purchase CER is increasing as the commitment period ( ) is coming closer, and because the Kyoto Protocol came into effect and finally became a certainty in 2005.
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29. Registered project by host countries*
STATISTICS
Registered projects (1/3)
Statistics on July 1st 2006 from
Expected average annual CERs from registered projects by host countries*
Registered project by host countries*
Slide 29 – Registered projects (1/3)
This slide shows distribution of CDM projects (left pie) and CER generated (right slide). It can be seen that some countries, e.g. China and S. Korea, have fewer projects but generates more CER. Other countries, e.g. India, have more but smaller projects in terms of CER generation.
Please note that the two pies above have different colors for the same countries!!
* List of host countries: Argentina, Armenia, Bangladesh, Bhutan, Bolivia, Brazil, Chile, China, Colombia, Costa Rica, Ecuador, El Salvador, Fiji, Guatemala, Honduras, India, Indonesia, Israel, Jamaica, Malaysia, Mexico, Morocco, Nepal, Nicaragua, Panama, Papua New Guinea, Peru, Republic of Korea, Republic of Moldova, South Africa, Sri Lanka and Viet Nam.
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30. STATISTICS Registered projects (2/3)
Statistics on July 1st 2006 from
Registered project by Annex 1 countries involved
Registered project by scope
Slide 30 – Registered projects (2/3)
The most active Annex I countries in terms of developing CDM projects are Netherlands, UK and Japan.
The most common type of projects are targeting improvement in energy generation or fuel substitution.
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31. STATISTICS Registered projects (3/3) CDM projects in each sector
Statistics on July 1st 2006 from (UNEP)
CDM projects in each sector
CERs until 2012 in each sector
Slide 31 – Registered projects (3/3)
A comparison of distribution of different type of projects, and distribution of CER generated from different type of projects. It can for example be seen that projects promoting renewable energy sources are the most common ones, but the ones having most impact in terms of generated CER are projects that targets HFC and N2O reduction. This is explained by the fact that N2) and HFC are 300 respectively times more powerful greenhouse gases than CO2 (refer to module 3 for a discussion about the globalawarming potential of different GHG).
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32. OPPORTUNITIES Who is buying CER?
Buyers based in Europe (41% in 2004, 56% in 2005) and Japan (36% versus 38%) dominate the market for project-based transactions.
January 2004 to December 2004 Overall volume: 110,0 million tCO2e
January 2005 to March 2006 Overall volume: 453,5 million tCO2e
Slide 32 –Who is buying CER ?
Source: State of the Carbon Market 2006, The World Bank, Washington, USA
This and the following two slides describes the Emission Trading (ET) situation for CER. Please note that this is different from the three previous slides that described the generation of CER in different kind of projects!
Within Europe, Italy (11%) and Spain (5%)21 sharply increased their purchasing, while the share of the Netherlands - one of the earliest buyers in the market and the biggest European buyer in declined. Within Europe, buyers from the Baltic Sea Group (including Finland, Sweden, Norway, Germany, Denmark and Iceland) also made significant purchases.
Buyers from Japan continued to be dominated by a handful of large trading houses originating and buying credits with the intent to sell on the secondary market. Almost all Japanese contracts signed were with the private sector, whereas the share of the private sector in the EU was almost 70%. Towards the end of 2005 and in early 2006, nearly all European project-based transactions had a private buyer. Canadian buyers were conspicuous by their negligible presence in the market in 2005 and early 2006 (even before the Government’s recent announcements).
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* as a share of volume contracted.

33. OPPORTUNITIES Location of projects
Asia accounted for the largest share (73%) of contracted volume of project-based transactions signed.
January 2004 to December 2004
January 2005 to March 2006
Slide 33 – Location of projects
Source: State of the Carbon Market 2006, The World Bank, Washington, USA
China alone accounted for 66% of global volume and India (leader in 2004 with 43%) goes back to 3%. Contracted volumes in Latin America accounted for 17% of project-based transactions. Joint Implementation projects in economies in transition comes third (3%). There are still a number of voluntary projects in North America and in Australia.
Note that though some shares may seem to be receding, the volumes contracted may have increased.
In terms of the number of transactions per country for , Asia had 32% (with China at 11%), while the share of Latin America has consistently been a steady 26-28% of transactions, with countries other than Brazil entering the market.
A number of projects in Africa appear on the UNFCCC PDD pipeline and a few transactions have taken place in South Africa, Egypt and the Maghreb, representing about 2% of project-based volumes. Despite these gains, Africa as well as countries of Central Asia and the Pacific continues to be largely bypassed by the carbon market. The under-representation of these regions raises deep concerns about the overall equity in the distribution of the CDM market.
The vast majority of approved methodologies deal with energy, industry and synthetic gases.
Most African countries have low energy and industrial footprints, while agriculture and forestry are large contributors to the economies. Yet, the EU ETS denies market access altogether in Phase I to Land Use, Land-Use Change (LULUCF) assets. And the Kyoto Protocol itself only authorizes afforestation and reforestation activities, completely excluding categories such as soil carbon storage, sustainable forest management and avoided deforestation. Even in currently
eligible categories, LULUCF assets have been singled out to require particularly complex methodologies and only one methodology has been approved so far. It should be noted that several official submissions regarding LULUCF have recently been made by several Parties from Africa, Asia and Latin America regarding the sustainable development benefits associated with making such assets more attractive to the market.
The recent approval by the Methodology Panel in a modified version of a so-called simplified methodology “Avoidance of methane production from biomass decay through composting” (AMS IIIF) makes it very difficult for sites across the continent (largely dumps and a handful of sanitary landfills) to develop composting projects. Clearly, changing approved methodologies, even if the intent is to consolidate them, sends a signal of uncertainty to potential developers and investors of carbon assets. These reasons, along with the lack of experienced project sponsors, limited capacity and insufficient access to capital markets as well as perceptions of risk conspire to make it very difficult to do CDM projects.
* as a share of volume contracted.
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34. OPPORTUNITIES What is being sold ?
Technology share of emission reduction projects:
January 2004 to December 2004
January 2005 to March 2006
Slide 34 –What is being sold ?
Source: State of the Carbon Market 2006, The World Bank, Washington, USA
HFC destruction projects amount to 58% of the volumes transacted in 2005 compared with 36% in 2004 (see Figure 9). These so-called “synthetic” or “industrial” gases represent the extreme “low hanging fruits” in climate mitigation. HFC projects, for example, generate reductions at a cost of around US$ US$1.00 per ton CO2e and require a relatively short lead time to implement.
The Executive Board has an approved methodology for such projects. Not only are they relatively low risk to implement, but they also have high global warming potential (GWP) and represent significant volumes of CO2e – and a highly profitable opportunity for developing countries to take to market. The potential of this asset is concentrated at a handful of discrete sites, predominantly located in Asia (China, India, and South Korea) and in Latin America (Mexico, Brazil).
The potential of reducing HFC-23 and of reducing nitrous oxide (N2O) is being tapped very efficiently , whereas coal mine methane and landfill gas assets are entering the marketplace. The latter amounted to 5% of volumes in 2004 and now represent 15% of volumes over
Among the contracted volumes in 2005 and 2006, fuel switch, energy-efficiency, biomass and other renewables amount to a share of 10% by volume and 51% by number of projects – and 71% if landfill gas (LFG) and animal waste management are included. The share of biomass transactions has decreased from 18% to 8%, while that of energy efficiency transactions remained constant (~6-7%).
The window of opportunity to initiate CDM projects is beginning to close if market uncertainties regarding post-2012 commitments persist, and Buyers appear to have a preference for bigger projects (with proportionally lower transaction costs). It is likely that demand will focus on proven technologies with short lead-time projects. In this context, landfill and coal mine methane projects are likely to be very attractive since they are not capital intensive, have short lead times and apply approved methodologies. Small-scale projects, such as certain renewable energy and energy efficiency projects, can be expected to benefit, but less than the other asset classes. Given their high marginal costs of abatement, a small variation from the expected schedule of carbon deliveries, say 10%, would result in fewer payments and this may make some underlying projects uneconomic. Although buyers (especially retail buyers) often express a preference for agroforestry projects that show actual community benefits, their market share is likely to remain relatively modest because of regulatory complexity and limited market access in the EU.
Carbon capture and Storage (CC&S) is another promising asset class, although issues of "permanence" of storage still need to be addressed. A CDM project in Vietnam based on enhanced oil recovery was registered recently. The high capital costs of such projects (capture, purification, dehydration compression and transport) may initially limit their development to those projects involving enhanced oil and gas recovery where the basic infrastructure is already in place.
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* as a share of volume contracted.

35. OPPORTUNITIES How are CERs sold ? (1/2)
Contractual arrangements vary depending on how risks are located between Buyer and Seller:
> Project risk - whether or not the project will adequately perform and produce the expected amount of emissions reductions.
> Country risk - whether the political and investment climate of host country is stable.
> Regulatory risk – whether or not the project will ultimately be deemed additional and registered by the CDM Executive Board.
Various contract features are used to allocate these risk between the buyers and the seller:
> Guarantees;
> Upfront payments;
> Penalties and damage clauses;
> Default clauses;
> Disbursement schedules.
Slide 35 –How are CERs sold ?
As was mentioned previously, trading can be done before a project is implemented (up-front trading) or after the project is implemented. At the moment, when most projects still are to be implemented, up-front trading is most common. The trading arrangements for this kind of CER transactions, and the associated price of CER, depends on several factors as is described in this slide. There are different ways of dealing with the risks.
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36. OPPORTUNITIES How are CERs sold ? (2/2) Carbon funds available through
> International tenders for CDM projects
> Voluntary corporate initiatives
> Multilateral Funds
> EU commitments for carbon purchase
> Bilateral negotiations with the consortium of buyers
Prices of CERs
> Average price of 7,5 US$ / tCO2eq in 2005 (3 to 14 US$).
What determines prices of CERs ?
> Likelihood Seller will deliver verifiable reduction on schedule.
> Creditworthiness and experience of the project developer.
> Technical and technological viability of the project.
> Liabilities the Seller is willing to take in the event the project fails to deliver including penalties for non-delivery and willful default / gross negligence.
> Vintages: in some markets, early vintages (until 2012) are priced higher because the Buyer’s willingness to pay in order to meet compliance.
> Likelihood of host country approval.
> Environmental and social compliance and additional benefits.
Slide 36 – How are CERs sold ?
This slide refers to HOW funding for CDM projects may be acquired (unless the project proponent funds the investment self), and what factors influence the price for each CDM project (again this refers to up-front purchasing and sale of CER)
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37. OPPORTUNITIES Future demand for CERs
Slide 37 – ET: Future demand for CERs
It should be noted that the trading in CER has only just started and the market volume is projected to expand rapidly.
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38. CONCLUSION Next steps CDM is real
> 225 projects registered and 60 methodologies approved;
> In 2005 CDM projects transactions worth €1,9 billion.
Industrials in developing countries have a role to play
> Prices for emissions reduction are increasing;
> Buyers and Sellers are innovating ways of addressing risk;
> Early entrants will have a clear advantage.
Challenges for CDM in the next years
> DNA approval capacities;
> High methodology rejection rates;
> Annex 1 companies may only be interested in buying CER, not in investing in project (exception for some Japanese companies);
> Gap between CER and EU allowance prices (50% even for registered projects);
> Interpretation of national policies in baseline methodologies;
> Availability of reliable and authentic data for establishing baselines.
Slide 38 – Next steps
CDM offers an opportunity for companies in developed and developing countries to benefit. As CDM came into effect as an actual mechanism only when the Kyoto Protocol came into effect in 2005, the market is still very young and still needs to settle. The trends presented in this slide refers to the situation in early 2006 and does not necessarily reflect the market picture in 2007 and later. It seems in any case to be certain that the demand for CDM projects will increase as the deadline for countries to meet their emission targets comes closer. Also, as this is a new market it is, in spite of its uncertainties, most likely going to offer better prospects and returns for companies that enter the market in an early stage.
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39. Thank you for your attention… Any questions?
CONCLUSION
End of session 5
Thank you for your attention…
Any questions?
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