1. CLEAN DEVELOPMENT MECHANISM: OVERVIEW DENR Training Course November 4-6, 2003 Climate Change Information Center Manila Observatory Ateneo de Manila University

2. Contents 1.Problem of Climate Change 2.UNFCCC & Kyoto Protocol 3.Clean Development Mechanism 4.CDM Eligible Projects 5.Environmental Benefits of CDM 6.Mechanics of CDM 7.Basics of CDM Financing 8.Philippine Participation in CDM

3. 1. Problem of Climate Change

4. Rising temperatures results in changing weather patterns Increased occurrence of dramatic weather such as hurricanes Melting polar caps, glaciers Shifts in weather patterns Historic Temperature Data

6. 150 100 50 0 Thousands of Years ago Temperature change ( o C) Carbon dioxide (ppmv) Atmospheric CO 2 Concentration and Temperature Change

7. Climate Change Climate change is caused by both natural events (like volcanic eruptions) and human activities

8. Human Sources of GHGs Transportation Energy Generation Industrial Processes Land Use: Agriculture & Forestry Carbon Dioxide (CO 2 ) Carbon Dioxide (CO 2 ) – Most prevalent GHG Methane (CH 4 ) Methane (CH 4 ) – Second most common, 21x the potency of CO 2 Nitrous Oxide (N 2 O) Nitrous Oxide (N 2 O) – 310x the potency of CO 2 Other Gases Other Gases – HFCs, PFCs, and SF 6 = range 600 – 23900x potency of CO 2 Transport

9. GHG and Environmental Impacts Changes in temperature, weather patterns and sea level rise Agriculture: Changes in crop yields Irrigation demands, Productivity Forests: Change in Ecologies, Geographic range of species, and Health and productivity Coastal Areas: Erosion and flooding Inundation Change in wetlands Water Resources: Changes in water supply and water quality Competition/Trans-border Issues Human Health: Weather related mortality Infectious disease Air quality - respiratory illness Industry and Energy: Changes in Energy demand Product demand & Supply

10. Philippine Rice Production. Arrows indicate El Niño events. (source: Food and Agricultural Organization)

11. Vulnerability information systems El Niño - La Niña Vulnerability Map Support for Greenhouse Gas Inventory

12. Sea level rise 3D modeling and visualization tools are used for vulnerability assessment, exact location and quantification of areas which are susceptible to floods due to rise in sea level. Study area: Northern part of Navotas, Metro Manila

13. 2. UNFCCC and KYOTO PROTOCOL

14. United Nations Framework Convention on Climate Change Objective of the Convention “Stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner.”

16. United Nations Framework Convention on Climate Change Commitments by the Parties to the Convention  Parties have common but differentiated responsibilities.

18. Division of Parties by Annex Australia / Austria / Belgium / Canada / Denmark / EC / Finland / France / Germany / Greece /Iceland / Ireland / Italy / Japan / Luxembourg / Netherlands / New Zealand / Norway / Portugal / Spain / Sweden / Switzerland / Turkey / United Kingdom / USA Belarus / Bulgaria / Croatia / Czech Republic / Estonia / Hungary / Latvia / Liechtenstein / Lithuania / Monaco / Poland / Romania / Russian Federation / Slovakia / Slovenia / Ukraine Non-Annex I Countries = All the Rest of Ratifying Countries Annex II

19. Kyoto Protocol The overall emission reduction target for Annex I Parties as a group is at least 5 percent below 1990 levels, to be achieved by the commitment period 2008 to 2012 (an average over the five years). The Protocol covers six greenhouse gases (Annex A) - CO 2, CH 4, N 2 O, HFCs, PFCs, SF 6 The negotiated targets for individual Annex I Parties are included in Annex B of the Protocol.

20. Selected Quantified Emission Limitation (%) Industrialized Countries Australia108 Canada 94 EC bubble 92 (Germany 75) (Portugal140) Japan 94 Norway101 New Zealand100 USA 93 ??? Economies in Transition Bulgaria 92 Baltics 92 Croatia 95 Czech Republic 92 Hungary 94 Poland 94 Romania 92 Russia100 Ukraine100

21. Kyoto Protocol The Kyoto Protocol was adopted at COP-3 in December, 1997, in accordance with “Berlin Mandate” of COP-1. The Protocol will enter into force when not less than 55 Parties to the Convention, accounting for at least 55 percent of the 1990 total CO 2 emissions of the Annex 1 Parties, have ratified the Protocol. –US: 34%; Russia: 16%; Japan: 8% ;EU: 23%; –Other Annex 1 Parties 19%

22. Kyoto Protocol: Flexibility Mechanisms Present day 2012 (BaU) Assigned Amounts Joint Implementation Annex I GHG Emissions Clean Development Mechanism 2012 with KP - 5% 1990 level Domestic Actions Emission Trading

23. 3. Clean Development Mechanism

24. Clean Development Mechanism Enables developed countries (known as Annex B countries) to meet their emission reduction commitments in a flexible and cost- effective manner Assists developing countries (non-Annex B countries) in meeting their sustainable development objectives Investors benefit by obtaining Certificates of Emissions Reductions (CERs) Host countries benefit in the form of investment, access to better technology, and local sustainable development

25. What can the CDM do for developing countries Attract foreign investment to countries engaged in the trading of CERs Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors Clean up waste management operations Improve land-use strategies and practice Contribute to sustainable development of the host country

26. What are the Criteria for CDM Projects? Sustainable development –Host country criteria –Environmental Impact Assessment –Stakeholder consultations Greenhouse Gas (GHG) emission reductions –Environmental additionality Project additionality Project viability –Technologically proven –Financially sound Host country approval Project validation and registration

27. 4. CDM Eligible Projects

28. CDM Eligible Projects Renewable energy Fuel switching End-use energy efficiency improvements Supply-side energy efficiency improvements Agriculture (reduction of CH 4 & N 2 O emissions) Industrial processes (CO 2 from cement, HFCs, etc) Sink projects (only afforestation & reforestation)

29. Renewable energy Solar power Hydro power Wind power Geothermal Biomass Tidal / Wave power

30. Renewable energy Renewable energy for the grid For electricity generation by households or commercial users  E.g., Solar home systems, solar water pumps, photovoltaics, wind battery chargers  For mechanical energy by households or commercial users  E.g. wind-powered pumps, solar water pumps, water mills, wind mills

31. Renewable energy Thermal energy for households or commercial users  E.g., solar thermal water heaters and dryers, solar cookers, energy derived from biomass for water heating, space heating or drying  Biomass combined heat and power (co- generation) systems

32. Fuel switching For industrial facilities  From steam or compressed air to electricity  For buildings  From oil to gas  For vehicles  From diesel to LPG or to CNG

33. End-use energy efficiency improvements Energy efficiency equipment  Motors  Lamps  Ballasts  Refrigerators  Fans  Air conditioners  Appliances  Etc …

34. Supply-side energy efficiency improvements Generation –Efficiency improvements at power stations and district heating plants and co-generation Transmission and Distribution –Examples:  Upgrading voltage on a transmission line  Replacing a transformer  Increased insulation of pipes

35. Agriculture Reducing emissions from agricultural soils  Use of ammonium sulfate instead of urea  Use of phosphogypsum in combination with urea instead of urea Reducing methane emissions from livestock Conservation agricultural tillage Agricultural land management practices  Use of composted rice straw instead of fresh rice straw

36. Industrial processes Methane (CH 4 ) recovery and avoidance from landfills, coal mines, agro-industries, waste water treatment facilities –CH 4 has global warming intensity 21-times that of CO 2 Cement production (CO 2 ) Electric equipment manufacturing (SF 6 ) PFC emissions from aluminum production –PCF gases have global warming intensity over 6000-times that of CO 2 PFC and SF 6 emissions from semiconductor manufacturing Nitrous Oxide (N 2 O) emissions from adipic acid and nitric acid manufacturing –N 2 O has global warming intensity of 310-times that of CO 2

37. Sink projects Afforestation  Planting trees on agricultural land  Reforestation  Planting trees on denuded forest land

38. Clean Development Mechanism Types of small-scale projects that could qualify for fast- track approval procedures Renewable energy projects up to 15 megawatts (MW) of output capacity Energy efficiency improvements that reduce energy consumption on the supply and/or demand side by up to 15 gigawatt-hours (GWh)/year Other project activities that both reduce emissions at source and directly emit less than 15 kilotons (kt) of CO 2 equivalent annually

39. 5. Environmental Benefits of CDM

40. CDM Project Achieves Sustainable Development objectives for the host developing country Reduces GHG Emissions

41. Simplistic numerical example Provide electricity for a barangay “Business-as-usual” (baseline): Diesel generator sets –Cost of project $10 –Emissions 1 tC Cleaner project (CDM-eligible): Micro- hydro –Cost of project $13 –Zero Emissions

42. Simplistic numerical example CDM Investor (e.g. Japan) –Invests $3 ($13-$10, difference between cleaner and business-as-usual project) –Gains Certificate of Emissions Reduction of 1 tC, which it can meet some of its Kyoto Protocol commitments to reduce emissions

43. Simplistic numerical example WIN – WIN – WIN WIN for the host country –Sustainable development benefit: Cleaner energy production technology WIN for the Annex I country –Credits for emissions reduction WIN for the Global Environment –Emissions reduction

44. Additionality Additionality is the key eligibility criterion in CDM projects  You must do something that you would not have done without the CDM Two types of additionality  Project Additionality  Environmental Additionality

45. Project Additionality Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur

46. Project Additionality Baseline methodology evaluates whether or not the proposed CDM project activity would have gone ahead anyway. Baseline methodology assesses why the proposed CDM project activity is less likely to occur than one or more of the other possible scenarios.

47. Environmental Additionality If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.

48. Environmental Additionality A CDM project activity is additional if anthropogenic emissions of GHGs by sources are reduced below those that would have occurred in the absence of the registered CDM project activity. -CDM M&P para. 43 Emission Reductions = hypothetical baseline emissions – effective (project) emissions

49. Environmental additionality and baseline CO 2 Emissions CDM project CO 2 emissions (observable) Real, measurable and long-term Additional CO 2 emissions reduction Years Baseline scenario CO 2 emissions (that would occur)

50. 6. Mechanics of CDM

51. Starting Point: Viable Project A potential CDM Project is a feasible project  Technologically feasible  Financially sound A potential CDM Project is a project which has an Environmental Compliance Certificate (ECC)

52. CDM Project Cycle CDCD4MICCC Project Design & FormulationProject Design Document

53. Contents of CDM-PDD A. General description of project activity B. Baseline methodology C. Duration of the project activity/ Crediting period D. Monitoring methodology and plan E. Calculations of GHG emissions by sources F. Environmental impacts G. Stakeholders comments

54. CDM Project Cycle CDCD4MICCC Project Design & Formulation National Approval Project Design Document

55. National Approval Approval is by the Designated National Authority (DNA) for CDM Main Criteria for Approval: Does project contribute to the sustainable development objectives of the Philippines? Sustainable development indicators Project type priorities –Positive list –Negative list

56. CDM Project Cycle CDCD4MICCC Project Design & Formulation National Approval Validation / Registration Project Design Document Operational Entity A

57. Validation Designated Operational Entity “External Auditor” Validates the PDD –Including the Baseline Study and the Monitoring Plan Recommends whether the project should be registered as a CDM Project

58. Registration Registration is done by the CDM Executive Board (presently based in Bonn, Germany) CDM Project Registry

59. CDM Project Cycle CDCD4MICCC Project Design & Formulation National Approval Validation / Registration Project Financing Monitoring Verification / Certification Issuance of CERs Project Design Document Monitoring Report Verification Report / Certification Report / Request of CERs Operational Entity A Investors Project Participants Operational Entity B EB / Registry

60. Verification Verification of monitoring report of emission eductions by the project Verification is done by another Designated Operational Entity Operational Entity certifies the actual emission reductions by the project Operational Entity submits certification to CDM Executive Board

61. Issuance of CERs Based on the certification by the Operational Entity, the CDM Executive Board issues the Certificate of Emission Reductions Official registry of CERs CERs are a tradable asset (like stocks or bonds)

62. 7. Basics of CDM Financing

63. Total Project Costs and Sources of Finance Total Project Cost Estimates Investment costs, including development costs, up to commissioning of project Sources of Finance to be Sought or Already Identified Critical to identify other debt and/or equity finance Typical sources of funding: international development banks, government funding, private financing, supplier credit CDM contribution = typically 5-15% of total project costs

64. Financing Options in a CDM Project Carbon Funds Annex I investors contribute to a mutual fund Mutual fund agrees to buy CERs as they are produced by the project Examples –WB Prototype Carbon Fund –Netherland’s CERUPT

65. How Carbon Funds Work.. Industrialized Governments and Companies Developing Countries and Communities Carbon Fund $ $ Technology Finance $ $ Technology Finance CO Equivalent 2 Emission Reductions CO Equivalent 2 Emission Reductions

66. Carbon Fund $ $ $ $ 22 Emission Reduction Purchase Agreement BanksInvestor DebtEquity Power Purchase Agreement $$ Electricity $$ Carbon Credits Nature of Carbon Financing Contract

67. Financing Options in a CDM Project Emission Reductions Purchase Agreement Annex I investor agrees to buy CERs as they are produced by the project

68. Emission Reduction Purchase Agreement Will improve IRRs Forward contract –Payment upon delivery of verified ERs –Upfront payments are rare Will provide a hard currency revenue Helps secure financing and reduce project risk –Future ER payments as collateral for project loans –Can be paid into an escrow account, protecting lenders from currency convertibility and transfer risks

69. How CDM can matter Without CERs implemented With CERs not implemented No CDM Without CERs not implemented; with CERs implemented CDM FIRR CER income 0

70. Technology  IRR Hydro, Wind, Geothermal0.8-2.6 Methane Kick Crop/Forest Residues3-7 Municipal Solid Waste5-10+ Impact of Carbon Finance on Project Financial Rate of Return Revolution in Solid Waste Management Important impact on small-holder crop- processors and animal production

71. Lessons from PCF: Carbon Prices Uganda small hydro (5&1.5 MW) remote area$3.00 Chile: 25 MW hydro run-of-river$3.50 [ +option] Brazil sustainable charcoal replacing coal/coke$3.50 Poland District Heating Fuel Switch – Coal to Geothermal and Biomass $3.50 C. America small wind/hydro$3.50 Romania Afforestation$3.60 [+option] Colombia wind farm$3.50 + 0.5 South Africa Durban waste management$3.75 + 0.2 Czech small-scale energy efficiency$4.00

72. ODA and CDM Funding Public funding for CDM Projects be additional to Official Development Assistance (ODA), Global Environment Facility (GEF) provided by Annex I Parties Public funding for CDM projects must not result in the diversion of ODA ODA can be part of the project financing as long as ODA financing does not claim emission reduction credits (WB PCF)

73. Carbon Fund $ $ $ $ 22 Emission Reduction Purchase Agreement BanksInvestor DebtEquity Power Purchase Agreement $$ Electricity $$ Carbon Credits Emission Reduction Purchase Agreement ODA Non-ODA

74. 8. Philippine participation in CDM

75. Requirements for the Philippines to Participate in CDM Process of Philippine ratification of the Kyoto Protocol Senate Committee on Foreign Affairs has sponsored the ratification on the floor of the Senate, 2 nd June 2003 (1 st Reading) 2 nd Reading, Interpellation, 21 st October 2003 Need 2/3 majority of the Senate to concur in the ratification of the Kyoto Protocol Kyoto Protocol ratified, 22 nd October 2003 Senate concurred in the ratification by a unanimous vote, 19 – 0 (3 rd Reading)

76. Requirements for the Philippines to Participate in CDM Status of efforts to establish CDM Designated National Authority (DNA) Proposal to make the Inter-Agency Committee on Climate Change (IACCC) as the DNA IACCC is composed of: DENR, DOST, DOE, DFA, DTI-BOI, DOTC, NEDA, DPWH, PAGASA, FMB, EMB, Philippine Network on Climate Change (NGO)

77. Roberto C. Yap, S.J., Ph.D. Environmental Economist Climate Change Information Center Manila Observatory Ateneo de Manila University Tel +63 2 426-6144 Fax +63 2 426-6070 rcyap@ateneo.edu