AAU trading standards: the Latvian Approach

Ilze PrūseHead of the Pilot Projects Implementation Division of the Climate and Renewable Energy Department

Ministry of the Environment, Republic of Latvia

Introduction

Latvia intends to sell 8 – 10 million of its Assigned Amount Units (AAUs) through pilot transaction in 2008.

The Ministry of the Environment has started negotiations with a limited number of reputable buyers with the intention to sign the pilot forward AAUs sale by June 2008 to gain experience and establish transaction standards for future deals.

Latvia’s participation in IET under Article 17 of the Kyoto Market position of Latvia Legal framework and earmarking of revenues from AAU

sale GIS fund structure and institutional arrangements Environmental integrity – monitoring, auditing and

reporting of greening results Indicative greening programmes Conslusions

Main points of presentation

Current state of affairs

Eligibility

Cabinet of Minister decision on April 12, 2006 of participation in IET under Article 17 of the Kyoto protocol

Earmarking 40 million of AAUs to be potentially available during the first commitment period

Mandate to Ministry of the Environment to work out legal, institutional system of IET by May 2008.

Implementation of the Kyoto Protocol by Latvia

Reserve for JI projects

Decision about strategic allocation of AAU assets

1990 1995 2000 2005 2008 2010 2012 2015

Mln

ton

CO

2E

Kyoto targetKyoto target

Surplus AAUsSurplus AAUs

(potentially (potentially tradable)tradable)

Reserve

Mandatory set-Mandatory set-asides (non asides (non

tradabletradable

Kyoto target

Buyer country

Purchase of ERUs

Domestic actions

Actual Actual emissionsemissions

Purchase of AAUs

Host country

Actual emissions

Actual emissions

Traded: Green

Investment Scheme

Compliance(Including

commitment period reserve)

Latvia can be a fast track provider of credibly greened AAUs with low risk and low transaction costs

Comparative strengths of Latvia: Robust surplus estimates Advanced in compliance with Kyoto eligibility criteria Low reputational risk Solid legal background Strong political commitment to efficient, transparent and

accountable GIS Efficient institutions of public and private sector Terms tailored to buyer expectations

Market position of Latvia (1)

Market position of Latvia (2)

Comparative weaknesses of Latvia:

Relatively small size of tradeable headroom

Limited opportunities for greening with direct reductions of GHG

Key elements of the Law (1) Ownership of AAUs Authorisation to the Cabinet of Ministers to make

decisions on each sale of AAUs, including the price and specific conditions

Authorisation to the Ministry of Environment and Ministry of Finance to prepare the sale of AAUs, including Participation in negotiations Drafting of an AAU Purchase Agreement

Authorisation to the Minister of Environment to sign the AAU Purchase Agreement after the approval of the Cabinet of Ministers is received

Key elements of the Law (2) Principles for using the revenues from the sale of AAUs,

including a clear provision stating that all income from the sale of AAUs shall be earmarked for “greening” projects

Special budgetary arrangement Money from the sale of AAUs is transferred to income

budgetary account in State Treasury Disbursements are organised under the budget

programme “Climate change financial instrument” In annual budget the financing for the Climate Change

financial instrument is ensured in amount of received and unused proceeds from AAU sales in previous years (carry-over provision)

Key elements of the Law (3) Institutional set up for managing GIS fund

Principles for environmental and financial monitoring, and reporting

Provisions for supervisory function performed by the Ministry of the Environment on behalf of the Government

Provisions for transparancy and accountability to public ensured by Advisory Council (representation by relevant stakeholders, including state institutions, non-governmental organisations and buyers)

Delegation to the Cabinet of Ministers to pass secondary legislation on the implementation of IET (establishing a ‘green investment scheme’)

Implementation model

Latvia will propose a programmatic model for the GIS. Most GIS programs will consist of a large number of

small projects. Therefore Latvia would propose to buyers “wholesale”

greening programs backed by a transparent, accountable and efficient national mechanism to “retail” AAUs revenues to multiple project owners.

Latvia can offer robust GIS implemented by competent national institutions that require only minor and targeted institutional strengthening.

Contract and Payment Structure

GIS Fund Manager

Project Beneficiary

Ministry of the Environment

CommercialBanks

Managementcontract

Loan

A

gree

men

t

Financingagreement

Legal agreement

Payment flow

Instruction on Release of Payment

Performance-based grants paid to projects upon delivery of verified milestones and results

Servicepayment

State treasury(budget income

account)

Budgetary programme

Climate change financial instrument

Buyer(AAU PA conditions)

Monitoring will be undertaken in accordance with relevant standards under the International rules and GIS rules and regulations pursuant to the Monitoring principles

Monitoring principles (applied annually):

(1) financial audit

(2) procedural conformity of GIS

(3) assessment of greening results

Report to the Government by April 1 every year, to buyers by June 1.

Environmental integrity – monitoring, auditing and reporting

Use of revenues (“greening”)

The Latvian government will ensure that every AAU sold will be used for “greening” purposes which means:

increase of renewable energy use improvement of energy efficiency application of innovative low carbon technologies capacity building for climate change policy design an

implementation

Sectoral breakdown of greenhouse gas emission sources in Latvia in 2004

Transport27%

Energy 46%

Industrial Processes

2%

Solvent and Other Product Use

1%

Agriculture17%

Waste 7%

EU ETS opertaors represent 27% of total emissions

Climate and energy indicators, Latvia

0.5

1.0

1.5

2.0

2.5

1990 1992 1994 1996 1998 2000 2002 2004 2006

IKP / GDP

Kopējā primāro energoresursu piegāde / TPES

Bruto elektroenerģijas patēriņš / Gross Electricity Consumption

SEG emisijas / GHG emissions

Avots: LIAA

Energy intensity (2005)

2.0

1.8

1.5

1.3

1.0

0.8

0.5

0.3

0.0

0.3

0.5

0.8

1.0

1.3

DKIEGBITAT

GR

DE

SE

FR

OE

CDNL

LU

ES

BE

PT

CY

MTFI

SI

La

tvijaHU

PL

LT

EE

CZ

SK

RO

BG

KPEP/IKP / TPES/GDP - 2005, (toe/000 $2000)

Elektroenerģijas patēriņš* / IKP /Electricity consumption* / GDP - 2005, (kWh/$2000)

EU-27

EU-27

Source: IEA

0.1

1.0

10.0

100.0

SE

FR

DK

GB IE AT IT FI

DE

BE

NL

OE

CD LU ES

GR

PT

Latv

ija CY SI

MT LT HU PL

SK

CZ

RO

EE

BG

CO2/Iedzīvotāju / CO2/Pop, 2005 (tCO2/capita)

CO2/KPEP / CO2/TPES, 2005 (tCO2/toe)

CO2/IKP / CO2/GDP, 2005 (kgCO2/2000$)

EU-27

EU-27

EU-27

Source: IEA

Energy supply-side management Promotion of biomass use including CHP plants Biogas recovery and use Solar heat, geothermal, small hydropower plants

Energy demand-side management Improved energy efficiency in buildings Efficient public lighting Heat distribution in DH systems Industrial power intensity

Integrated projects: Heat production – distribution – final use

Indicative greening pipelines (1)

Indicative greening pipelines (2)

Other Lower carbon transportation systems

Other low and zero- carbon emission technologies

Capacity building for climate policy development and implementation

Capacity building for GIS management

Conclusions and the way forward

Climate change is environmental and economic prerogative and a huge task of political engineering

GIS as an instrument for structural change to deliver deployment and scaling up of climate change mitigation technologies

In countries with limited possibilities of direct GHG reductions it is a leverage for low carbon economy

GIS brings co-benefits of mitigation and opens new business opportunities

GIS can be a testing ground for new generation of post-Kyoto flexible mechanisms: more programmatic lower transaction costs relying more on certified host country systems

Further information

Ministry of the Environment

Republic of Latvia

Phone: +371-7026 417

valdis.bisters@vidm.gov.lv

www.vidm.gov.lv