1. Lima, Perú, October 22 nd, 2009 Programme of Activities: Challenges and Opportunities IV Seminario Internacional: Mercado del Carbono Presented by Alberto Carrillo Pineda South Pole Carbon Asset Management Ltd.

2. Introduction The programmatic approach under the CDM has been received with great optimism among stakeholders in the carbon market for a number of reasons:  Potential to increase the contribution of the CDM to the global mitigation efforts  Possibility of achieving economies of scale  Potential to capitalise policy instruments and programmes aimed at reducing emissions  Potential to reach a number of actors that otherwise would have very limited access to the carbon market (e.g. households, small industry, etc.).  Potential to increase the number of projects in regions and countries underrepresented in the carbon market (e.g. Africa)

3. However... The programmatic CDM has taken too long to take off and realise its large potential... Since EB 32 CDMPoA # of projects that started validation 342514 # of projects that requested registration 7841 # of projects that got registered 5301 EB 47 - Modification of procedures and guidelines for the registration of PoAs EB 32 - Fist adoption of procedures and guidelines for the registration of PoAs 200720082009 JunJulAugSepOctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarAprMayJunJulAugSep

4. Abstract Aim of this presentation  Drawing from the market experience accumulated by South Pole and other market participants, introduce the audience to the main administrative, financial and operative challenges to be potentially faced when implementing Programmes of Activities (PoAs) under the Clean Development Mechanism (CDM)  To discuss what has been done and what needs to be done in order to overcome such challenges

5. Content  Challenges inherent to the nature of a Programme of Activities  Regulatory and operative challenges  Economic and commercial challenges  Conclusions

6. Content  Challenges inherent to the nature of a Programme of Activities  Regulatory and operative challenges  Economic and commercial challenges  Conclusions

7. Challenges inherent to the nature of PoAs

8. ­ Logistics of implementation  Documentation –Centralised data storage –Access to user information (e.g. For monitoring)  Sampling / Monitoring –Usage / adoption patterns –Guidelines on sampling not yet available. Will have to be followed during verification once they have been issued by EB –Remote sensing  Maintenance / Follow up / Replacement –Intensive field work –Disposal? ­ Ownership of carbon credits

9. ­ Capacity building / education ­ Incentive scheme  Free supply  Discount  Grant  Subsidized loan ­ Mid and long-term management  Effectiveness off programmes in the long term is still uncertain ­ Selection of appropiate coordinating entities Challenges inherent to the nature of PoAs (cont.)

10. OEM Development bank Retailer Power Utility Energy saving agency Household Destruction facility Freight company Carbon developer Develops and purchase CERs Coordinating entity $ CERs $ Provides subsidized loan Pays back through power bill $ Commercialisation of fridge Commercialisation of fridges Delivery of new fridge and collection of old fridge Destruction of old fridge

11. Content  Challenges inherent to the nature of a Programme of Activities  Regulatory and operative challenges  Economic and commercial challenges  Conclusions

12. Regulatory and operative challenges The main regulatory and operative challenges faced by PoAs can be summarised as follows:  DOE liability for erroneous inclusion of CPAs  Programmes with multiple methodologies  Revision of methodologies  CPA start date

13. The main regulatory and operative challenges faced by PoAs can be summarised as follows:  DOE liability for erroneous inclusion of CPAs  Programmes with multiple methodologies  Revision of methodologies  CPA start date Regulatory and operative challenges

14. DOE liability for erroneous inclusion of CPAs Project Idea Note Project Idea Note PoA DD & CPA DD PoA DD & CPA DD Host Country Approval Host Country Approval Validation Registration Inclusion of further CPAs Inclusion of further CPAs Monitoring and Verification Monitoring and Verification = services provided by South Pole can be done by any DOE Needs to be done by a DOE which hasn’t performed PoA validation or inclusion of any CPA

15. Regulatory and operative challenges DOE liability for erroneous inclusion of CPAs Project Idea Note Project Idea Note PoA DD & CPA DD PoA DD & CPA DD Host Country Approval Host Country Approval Validation Registration Inclusion of further CPAs Inclusion of further CPAs Monitoring and Verification Monitoring and Verification = services provided by South Pole can be done by any DOE Needs to be done by a DOE which hasn’t performed PoA validation or inclusion of any CPA DOE performing inclusion of any CPA is liable for erroneous inclusion for 1 year after inclusion of the CPA and for 6 months after each PoA verification

16. Regulatory and operative challenges DOE liability for erroneous inclusion of CPAs Traditional CDMProgrammatic CDM DOE is liable for Significant deficiencies limited to issues of fraud, malfeasance or incompetence Any error that disqualifies a CPA from inclusion in a PoA DOE is liable for 15 days after the date of receipt of the request for issuance, 1 y after inclusion and 6 months after issuance (i.e. all the crediting period) Penalty DOE has to pay the amount of CERs estimated to have been issued in excess DOE has to pay the total amount of CERs generated by the CPA

17. Regulatory and operative challenges DOE liability for erroneous inclusion of CPAs Project Idea Note Project Idea Note PoA DD & CPA DD PoA DD & CPA DD Host Country Approval Host Country Approval Validation Registration Inclusion of further CPAs Inclusion of further CPAs Monitoring and Verification Monitoring and Verification = services provided by South Pole Several DOEs are including CPAs only if they performed validation. Inclusion is almost as detailed as traditional validation and hence no real economies of scale are happening.

18. The main regulatory and operative challenges faced by PoAs can be summarised as follows:  DOE liability for erroneous inclusion of CPAs  Programmes with multiple methodologies  Revision of methodologies  CPA start date Regulatory and operative challenges

19. Project Idea Note Project Idea Note PoA DD & CPA DD PoA DD & CPA DD Host Country Approval Host Country Approval Validation = services provided by South Pole  Only at validation stage are project owners allowed to request for approval of multiple methodologies –Risk of no approval cannot be minimised. In case the request is not approved by the EB, the project developer would have lost the money invested in taking the project up to validation  Approval may take more than a couple of months  Request of approval can only be done by DOEs –Requesting approval of multiple methodologies implies an additional external fee  The combination of methodologies has to be used for each and every CPA!!! –Not practical –e.g. Programm of biodigestors with and without energy use. Each component needs a different meth combination Request for approval of the application of multiple methodologies to EB Request for approval of the application of multiple methodologies to EB

20. The main regulatory and operative challenges faced by PoAs can be summarised as follows:  DOE liability for erroneous inclusion of CPAs  Programmes with multiple methodologies  Revision of methodologies  CPA start date Regulatory and operative challenges

21. If a methodology, subsequent to being placed on hold or withdrawn, is revised or replaced by inclusion in a consolidated methodology, the PoA shall be revised accordingly. The changes shall be subsequently documented in a new version of PoA (e.g Version 1.1), validated by a DOE and approved by the Board.  It is highly probable that in 28 years, a small-scale methodology will undergo at least one revision  Hence, the project developer will have to incur more than once in validation / revalidation fees for the PoA –Most widely used SSC-Meths AMS.I.DVersion 14 AMS.I.CVersion 15 AMS.III.DVersion 15

22. The main regulatory and operative challenges faced by PoAs can be summarised as follows:  DOE liability for erroneous inclusion of CPAs  Programmes with multiple methodologies  Revision of methodologies  CPA start date Regulatory and operative challenges

23. CPA start date  Time gap between CPA start date and PoA registration can be considerable. Potential loss of significant carbon income for 1 st CPA may discourage project owners to be the 1 st CPA  Given that CPAs cannot start before beginning of validation (e.g. once CPA-DD has been made) encourages work on projects in very early stages increasing the risk of working on projects that don’t happen in the end Project Idea Note Project Idea Note PoA DD & CPA DD PoA DD & CPA DD Host Country Approval Host Country Approval Validation Registration Inclusion of further CPAs Inclusion of further CPAs Monitoring and Verification Monitoring and Verification = services provided by South Pole Earliest start date of any CPA Earliest beginning of crediting period for any CPA

24. Content  Challenges inherent to the nature of a Programme of Activities  Regulatory and operative challenges  Economic and commercial challenges  Conclusions

25. Economic and commercial challenges Some of the most relevant economic and commercial challenges that PoAs face today are:  Lack of experience in the market  Upfront costs associated with the development of a PoA  Coordinating entity selection and taxation issues

26. Economic and commercial challenges Some of the most relevant economic and commercial challenges that PoAs face today are:  Lack of experience in the market  Upfront costs associated with the development of a PoA  Coordinating entity selection and taxation issues

27. Economic and commercial challenges Lack of experience in the market -Lack of experience among DNAs, DOEs, CDM developers and the EB, which makes it impossible to predict the time it will take to register a PoA -Only one programme registered so far -No availability of stories of success in the long term -Limited availability to experienced DOEs -Only one DOE has completed validation of a PoA -In our experience, of 23 DOEs approached for quotation of validation services for a PoA -Only 6 DOEs showed interest/capacity to undertake this project -Only 3 DOEs presented an offer -Only 2 offers were serious enough (e.g. in terms of completeness, detailed proposal of services, etc.)

28. Economic and commercial challenges Some of the most relevant economic and commercial challenges that PoAs face today are:  Lack of experience in the market  Upfront costs associated with the development of a PoA  Coordinating entity selection and taxation issues

29. Economic and commercial challenges Upfront costs associated with the development of a PoA  As previously discussed, the potential for economies of scale hasn’t been fully realised due to –High validation fees from DOEs due to high-perceived risks and regulatory uncertainties (e.g. Liability for erroneous inclusion of CPAs) –Lack of experience in the market So far no single project developer has submitted more than one CPA-DD for a PoA  There is a high risk associated with not being able to include enough CPAs into a PoA or not being to reach a volume that is high enough to reach breakeven point or expected IRR  There are not many international funds for financing of PoAs

30. Economic and commercial challenges Upfront costs associated with the development of a PoA Traditional CDM (000 EUR)* PoA (000 EUR)** PIN3 - 108 - 15 PDD / CPA-DD / PoA- DD 10 – 3050 – 150 Validation7 – 2750 AdministrationN/A100 Monitoring3 – 630 – 100 Verification10 - 1710 - 30 * SNV, 2009 ** KfW, 2009

31. Economic and commercial challenges Critical size needed for different type of programmes * Project Type Size needed for breakeven Size needed for IRR of 15% Distribution of CFL 105,000 – 830,000 CFLs 139,000 Cooking Stoves 13,500 – 145,000 Stoves 13,900 – 180,000 Stoves Household biodigesters 1,100 – 8,000 Biodigesters 1,300 – 21,000 Biodigesters * KfW, 2009

32. Economic and commercial challenges Some of the most relevant economic and commercial challenges that PoAs face today are:  Lack of experience in the market  Upfront costs associated with the development of a PoA  Coordinating entity selection and taxation issues

33. Economic and commercial challenges Coordinating entity selection and taxation issues  Tax treatment and other liabilities for PoAs are unclear and may vary from country to country.  Unclear if and which host countries will issue LoAs and which restrictions will be imposed on the Coordinating Entity  Unclear how international PoAs will –be approved by host countries –be approved by the EB (what happens if the EB rejects the PoA for one country? Will the whole process start again?)

34. Content  Challenges inherent to the nature of a Programme of Activities  Regulatory and operative challenges  Economic and commercial challenges  Conclusions

35. Conclusions  Programmatic CDM is promising but still many hurdles need to be removed if PoAs are to play a significant role in the global mitigation efforts  Our current learning curve is in very early stages. More changes are expected to come based on on- going learning  Costs are expected to go down as project developers and DOEs develop a better understanding on the risks involved in developing a PoA  More funding mechanisms are needed particularly for programms which are not viable on a pure commercial schemes

36. South Pole Carbon Mexico Alberto Carrillo, Country Director a.carrillo@southpolecarbon.com Campeche 290 -402 Col. Hipódromo Condesa Mexico 06100 Tel. (55) 5531 9013 (55) 5564 6793 Thank you for your attention South Pole Carbon Asset Management Ltd.