1. International Climate Policy Hamburg Institute of International Economics International Climate Policy CDM: latest status of international rules and the CER market The CDM: latest status of international rules and the CER market National Office for Climate Change and Ozone Protection Hanoi, March 1, 2004 Axel Michaelowa Hamburg Institute of International Economics, Germany a-michaelowa@hwwa.de www.hwwa.de/climate.htm

2. International Climate Policy Hamburg Institute of International Economics International Climate Policy Structure of presentation CDM rules – Methodology status – The unresolved additionality issue The fragmented market – Competition between the mechanisms – Different domestic trading schemes – The EU linking directive Share of CERs in total project revenue Important stakeholders Chances for Vietnam

3. International Climate Policy Hamburg Institute of International Economics International Climate Policy Steps of international climate policy “Russian doll“ structure of agreements:

4. International Climate Policy Hamburg Institute of International Economics International Climate Policy CDM ”valve“ AAUs, ERUs CERs CDM Kyoto commitment Country 1 Country 2 Emissions trading JI Tropical air?

5. International Climate Policy Hamburg Institute of International Economics International Climate Policy 4 industrial countries 5 develo- ping countries 1 AO SIS COP/MO P accre- dits elects Project design document : Baseline Monitoring Approval Methodology if first of its kind Certifier (OE) Project partners Countries Stake- holder Observers comment new rules within 8 weeks comment within 30 days Verific ation Involved countries 3 members propose revision within 8 weeks CDM pro- ject Monit oring report Certifier Validation or for- warding of new metho- dology Involved countries 3 members can propose revision within 15 days to be donewithin 30 days CERs Involved countries Rulebook Baseline and monitoring methodologies is- sues decides on new rules within 4 months with- holds 2% adap- tation tax spot checks changes registers Certifi- cation Project partners elects Executive Board (10 members) The CDM maze Currently 20 applications: 10 Europe 6 Japan 2 US 2 Asia 37 applications pending authorise

6. International Climate Policy Hamburg Institute of International Economics International Climate Policy Baseline principles a) old coal fired power station 1200 g CO 2 /kWh. b) gas turbine 450 g CO 2 /kWh c) 850 g CO 2 /kWh

7. International Climate Policy Hamburg Institute of International Economics International Climate Policy Case law and path dependency The EB does not provide a basic set of rules beyond the Marrakech Accords text –Exception: small scale projects All rules are developed by case law Project pioneers have to propose a new rule (“methodology”) for each new project type –Higher validation costs –Delay of several months –Risk of refusal The CDM regime is shaped by first proposers Important role of validators, methodology panel and expert reviewers

8. International Climate Policy Hamburg Institute of International Economics International Climate Policy Stringent decisions on baseline methodologies enhance quality methodologies enhance quality Passed methodologies are very project-specific

9. International Climate Policy Hamburg Institute of International Economics International Climate Policy Submissions of baseline methodologies: types methodologies: types

10. International Climate Policy Hamburg Institute of International Economics International Climate Policy Submitted baseline methodologies Multiple methodologies for same project type?

11. International Climate Policy Hamburg Institute of International Economics International Climate Policy Approved baseline methodologies Multiple methodologies for same project type! EB starts consolidation/standardisation Rang Dong

12. International Climate Policy Hamburg Institute of International Economics International Climate Policy The EB‘s additionality tests 10th session of CDM EB states: As part of [...] determining the baseline scenario an explanation shall be made of how, through the use of the methodology, it can be demonstrated that a project activity is additional and therefore not the baseline scenario. Flow-chart / series of questions that lead to a narrowing of potential project options Qualitative / quantitative assessment of different potential options and an indication of why the non-project option is more likely Qualitative /quantitative assessment of one or more barriers facing the proposed project activity Project type is not common practice in the proposed area of implementation, and not required by recent/pending legislation/regulations

13. International Climate Policy Hamburg Institute of International Economics International Climate Policy Additionality tests - not comparable Flow-chart / series of questions –Stringency depends on type of questions. Essentially no test, but could be framework for test Why is the non-project option more likely? –Should essentially be the outcome of all tests applied, is no test in itself Barrier assessment –The key issue is how important barriers are Project type not common practice and not required by legislation –Only test which is objective, but does only specify necessary, not sufficient conditions for additionality. Still needs another test.

14. International Climate Policy Hamburg Institute of International Economics International Climate Policy Stringency of tests Series of questions: Unpredictable –Does question address the real barriers? –How will answers be evaluated? Example from latest hydropower methodology Barrier test: Level of barrier counts –There will be some barrier for every project. Otherwise everybody would start projects every day. The crucial issue is when a barrier would prevent a project (“decisive” barrier) developed by a capable developer. Can we capture this objectively? What level of barrier is decisive for project decision?

15. International Climate Policy Hamburg Institute of International Economics International Climate Policy Current demand on the CDM and JI market (million $) Pure CDM demand: about 600 million $, i.e. about 150 million t at current prices of 3-5 $/t CO 2 Price differentiation according to quality?

16. International Climate Policy Hamburg Institute of International Economics International Climate Policy International market differentiation

17. International Climate Policy Hamburg Institute of International Economics International Climate Policy National markets

18. International Climate Policy Hamburg Institute of International Economics International Climate Policy The EU as driver of the CDM market Decisions are taken jointly by Council of Ministers and European Parliament Council position, January 2004 No reference to entry into force of Kyoto Protocol CERs accepted from 2005; conversion 1:1 Cap and sinks competence of member states EP environment committee position, Jan. 2004 Hydro > 20 MW only under WCD criteria CERs from 2005 Linking with schemes in non-ratifying countries Cap at 50% of necessary reductions

19. International Climate Policy Hamburg Institute of International Economics International Climate Policy EU as CDM leader Negotiations Council - Parliament, April 2004 Likely: exchange of cap against limits of sinks The survival of the Kyoto Mechanisms without Kyoto entry into force is guaranteed Adoption of linking directive will spur private demand for CDM Market impact Depends on national allocation plans. UK plan is strong, Austrian, Dutch and German likely to be weak Depends on government CER / ERU import regulations / fees

20. International Climate Policy Hamburg Institute of International Economics International Climate Policy Impact of carbon finance on project revenues at 3 €/t CO 2 Source: PCF 2003 2-4Gas Flare Reduction 1.0-1.3Wind ~ 2.0Energy Eff.-District Heating 0.4-3.6Bagasse >5Municipal Solid Waste 2-7Biomass 0.8-2.6Hydro  IRR Technology

21. International Climate Policy Hamburg Institute of International Economics International Climate Policy Thresholds for small-scale projects and transaction costs

22. International Climate Policy Hamburg Institute of International Economics International Climate Policy The role of financial institutions Packaging projects –Development of project pipelines –Portfolio generation Financing projects –Project finance –Venture capital –Special mutual funds –Corporate finance –Lending Bringing in expertise in checking viability of a project proposal –Due diligence Insurance

23. International Climate Policy Hamburg Institute of International Economics International Climate Policy Risks Source: Janssen 2001

24. International Climate Policy Hamburg Institute of International Economics International Climate Policy Important stakeholders Policymakers –Develop a CDM strategy Priority sectors SD criteria Outreach Get DNA operational –Decide on competences /rules –Decide on resources. Fees? DNA staff –Ability to make objective decisions –Ability to market host country

25. International Climate Policy Hamburg Institute of International Economics International Climate Policy Private sector Project developers –Understand CDM incentive –Understand principles of CDM rules –Understand differences between technologies Consultants –Understand CDM and are able to find their niche –Become able to deliver high-quality service according to CDM rules –Network with Annex B buyers /investors

26. International Climate Policy Hamburg Institute of International Economics International Climate Policy Institutional homework done – Kyoto ratified, DNA set up Interesting potential in several sectors – Gas flaring reduction – Renewable energy Agricultural wastes Hydro – Industrial energy efficiency – Forestry Private sector remains to be integrated Transparent rules for project approval remain to be defined Chances and challenges for Vietnam

27. International Climate Policy Hamburg Institute of International Economics International Climate Policy Thank you! Further information: www.hwwa.de/climate.htm or: climate@hwwa.de