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Clean Development Mechanism (CDM) & Emission Reduction Credits:

Opportunities for the Caribbean Utility Sector

Jin Lee, Center for Clean Air Policy

Engineers Conference: Leveraging Technologies to Create ValueCARILEC, St. Kitts Electricity Dept & Nevis Electricity Company Ltd.

28 July, 2005Saint Kitts & Nevis

About the Center for Clean Air Policy

Non-profit Washington, DC, Prague, and Brussels based environmental think-tank committed to advancing pragmatic and cost-effective air quality and climate policy through analysis, dialogue, and educationLeader in several international climate initiatives on international emissions trading, the CDM, and post-2012 climate policy optionsInvolved in a number of capacity building and analytical projects in developing countries, including China, India, Brazil, Mexico, and the CaribbeanLead analyst on project to help design the EU Emissions Trading Scheme (EU ETS) and its Monitoring, Reporting and Verification (MRV) program.

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Dialogue on Future International Actions to Address Global Climate Change (the FAD)

Brings together senior climate negotiators from approx. 15 developed and 15 developing countries» Meets face-to-face biannually and through workgroups via conference

call to develop specific ideas in b/t meetings.Informal, off-the-record forum to discuss mitigation and adaptation options for a possible post-2012 international framework for climate policyFunding for the project supported by governments of 15 countries.CCAP produces FAD working papers and will produce a compendium in 2006 on the project and options discussed.For all presentations and finalized working papers from the process, see: www.ccap.org/international/future.htm

About Climate Institute

Nonprofit organization founded in 1986 to serve as a bridge between policymakers and scientists around the world, as well as betweendeveloped and developing nations. Promotes cooperative international action to address climate change» Organized conferences, symposia and ministerial briefings in 30 nations; » Coordinated expert studies; produced materials for public education;» Supported renewable energy development and increased energy

efficiency. Through its network of international experts, private sector partners and relationships with the NGOs worldwide and especially in the Caribbean, the Institute can serve as a catalyst in coalescing outside support for clean energy development efforts in small island nations.

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Presentation Outline

Climate Change and the Kyoto ProtocolClean Development Mechanism (CDM)» Overview: Type, Criteria, and Project Cycle» Current Status of CDM Projects: Type, Regional Distribution, Price

CDM Activities in the Caribbean» Challenges» Funding Opportunities» Capacity Building

– “Regional Capacity Building for Caribbean Participation in the CDM”– CCAP’s Regional Baseline Development

Conclusions Ongoing Activities in the Caribbean

Climate Change

Climate Change» Rising temperature: 0.6 oC since the late 1800s, 1.4 – 5.8 oC by 2100» Source: greenhouse gasses (GHGs: CO2, CH4, N2O) from fossil fuel

combustion and forest clearing » Impacts: extreme weather events (storms, floods and droughts), sea

level rise, lower agricultural yields, etc.

Impacts in the Caribbean» Sea level rise: decreased fresh water supply, increased beach and

coast erosion, aggravated tropical stormsThreatens the coastal community including villages and industrial, tourism and energy infrastructure

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Source: UNFCCC (2004)

Source: UNFCCC (2005)

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The Kyoto Protocol

to the United Nations Framework Convention on Climate Change (UNFCCC): www.unfccc.intAdopted in Dec 1997; Entered into force on Feb 2005Detailed rules specified by the Marrakech AccordsLegally binding GHG emission targets for industrialized countries and economies in transition (Annex I) which ratified the Protocoloverall 5% below existing 1990 levels in the first commitment period (2008 –2012), with varying targets for individual countriesNo quantitative targets for emission reductions in developing countries

Flexible Mechanisms» Clean Development Mechanism» Joint Implementation» Emissions Trading

Flexible Mechanisms of the Kyoto Protocol

Clean Development Mechanism (http://cdm.unfccc.int/) » Annex I countries pay for emission-reducing sustainable development

projects in non-Annex I countries» Annex I countries can use certified emission reductions (CERs) to help

meet their own targets

Joint Implementation» Annex I countries pay for emission reduction projects in other Annex I

countries and are awarded emission reduction units (ERUs)» To avoid double counting, a corresponding subtraction is made from

the host country’s assigned amount

Emissions Trading» Countries can acquire assigned amount units (AAUs) from other Annex

I countries that reduced emissions beyond their targets» Annex I countries may acquire CERs from CDM, ERUs from JI, or

Removal Units (RMU) from sink activities

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Clean Development Mechanism (CDM)

Goal: » sustainable development of host developing countries and cost-effective

emission reductions for A1 countries

Entities Involved» Executive Board (EB)

– supervises the CDM; defines the procedure and rules

» Designated National Authorities (DNA)– a national authority designated by the participating countries to approve

project registrations, report to EB on CDM activities, and promote CDM

» Designated Operational Entities (DOE)– a domestic legal entity or an international organization accredited and

designated by EB– validates and requests registration of a proposed project activity– verifies and certifies emission reduction for the EB to issue CERs

CDM Types and Criteria

Project Types» Large-scale CDM» Small-scale CDM (SSC)» Afforestation and Reforestation CDM (AR)

Project Criteria» “real, measurable and long-term benefits of emission reduction or

removals” that are additional to any that would have occurred without the project

Baseline» Projection of emissions under a “without project” or “business-as-

usual” scenario» Difference between "without project” and “with project” baselines

determines the amount of CERs generated over the life of the crediting period

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CDM Project Cycle

Design

Registration

Implementation

Monitoring &Reporting

Validation

Verification

CertificationProject Participants

Designated OperationalEntity

Stakeholderconsultations/

Public comment

Designated NationalAuthority of host

and Annex I country

Parties, Stakeholders, Accredited NGOs

Approval

CDM Project Cycle:Pre-Implementation I

Project Design Document (PDD)» Baseline & monitoring methodology (new or approved) are submitted for

approval to the EB» Environmental impact analysis» Comments received from local stakeholders» Description of new and additional environmental benefits

Methodology» New methodologies are reviewed by the Methodology Panel under the EB

and are approved by the EB » As of Jul 26, 2005, there are:

– 23 approved large-scale and 4 approved consolidated methodologies– approx. 113 methodologies under review– 15 approved small-scale methodologies

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CDM Project Cycle: Pre-Implementation I - Methodology

Large-Scale CDM» http://cdm.unfccc.int/methodologies/PAmethodologies/approved.html

Small-Scale CDM» http://cdm.unfccc.int/Projects/pac/pac_ssc.html» Uses a simplified project design document (PDD), simplified methodologies for

baseline determination and monitoring plans » http://cdm.unfccc.int/methodologies/SSCmethodologies/approved.html» Examples include:

– Renewable electricity generation for a grid

– Supply side energy efficiency improvements – transmission & distribution; generation

CDM Project Cycle:Pre-Implementation II

Validation» Independent evaluation of a project activity by a Designated

Operational Entity (DOE)» DOE reviews the PDD against the requirements of the CDM, with

an opportunity for public comment, and decides whether or not tovalidate it

» 4 – 8 weeks

Registration» The Executive Board receives the validated PDD» Unless a participating Party or three EB members request a review,

the proposed activity becomes formally recorded as a CDM project» 8 weeks if no objections

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CDM Project Cycle:Post-Implementation

Monitoring» Monitoring report, including an estimate of CERs generated

Verification & Certification» DOE (different one to that which validated the project) produce a

verification report and certify the emissions reductions as real» Unless a participating Party of 3 EB members request a review,

CERs are issued and distributed to project participants» ‘Share of the proceeds’: 2% of the CERs goes to the Adaptation

Fund (LDCs are exempt)

Status of the Current CDM Project Portfolio

172126Total number of projects:CER issued

CER issuance review

Request for CERs

Certified

11At verification

136Registered

00Rejected by EB

23Under review

20Request for review

74Request for registration

147112At validation

24-Jul-052-Jun-05Project Status

Source: UNEP RISØ Centre (2005)

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Sectoral Distribution of the CDM Projects (as of June 2, 2005)

151530126Total

3472Others

413992HFCs

50202Geothermal

8713Energy Efficiency

5062Agriculture

44564Biogas

42457Wind

5820425Landfill gas

1552237Hydro

2096042Biomass Energy*

2012 CERs

(ktCO2e)#Type

Source: UNEP RISØ Centre (2005)

Hydro10%

Landfill gas39%

HFCs27%

Others0%

Ag0%

Biogas3% Wind

3%

Geothermal3%

Biomass energy*

14%

Energy Eff iciency

1%

Hydro, 37

Biomass Energy,* 42

Biogas, 4

Energy Eff iciency, 2

Geothermal, 2

HFCs, 2Others, 2

Ag, 2

Wind, 7

Landfill Gas, 25

Number of Projects CERs %

*including incineration of household and other wastes

Regional Distribution of the CDM Projects(as of June 2, 2005)

Latin America, 62

Asia Pacif ic, 39

Africa, 2Middle East,

1

Central America, 20

Europe (FSU), 2

Latin America

53%

Asia Pacif ic37%

Europe (FSU)1%Central

America7%

Middle East1%

Africa1%

Number of Projects CERs %

158977126World

3281Middle East

4292Europe (FSU)

5072Africa

2509420Central America

2411539Asia Pacific

10850462Latin America

2012 CER

(ktCO2e)#Region

Source: UNEP RISØ Centre (2005)

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CER Price

Source: Lecocq & Capoor (2005); Point Carbon (2005)

Figure 1. Prices for Non-retail, Project-based Emissions Reductions, Jan 04 ~ Apr 05 (in US$ per tCO2e)

Price » $3.00 to $7.15 (avg. $5.63)» 21% increase, Jan 03 – May 04» CER offers at $10.85; bids at

$8.44 (July 05)

Increasing demand relative to a rather tight supply

» International Finance Corporation (IFC) recently signed 20 million US$ emission reduction purchase agreements (ERPAs) in Brazil and India

CDM Activities in the Caribbean

Jamaica Wigton Wind Farm (20.7 MW)» At validation; 53 ktCO2/yr for 10 years approx. 298,400 US$/yr for 10

years » Credit buyer: CAF - the Netherlands CDM Facility» http://www.dnv.com/certification/climatechange/Projects/ProjectDetails.asp?ProjectI

d=178

Jamaican Cement Industry Energy Efficiency CERs» PDD not yet submitted; US$ 105m; unspecified CERs» EE project: Trinidad Cement Limited (TCL) will improve EE of its Jamaican

subsidiary, Carib Cement.» The IFC administers the IFC-Netherlands Carbon Facility, through which it

purchases carbon credits on behalf of the Dutch Government.

WHY only one CDM project in the Caribbean so far?

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Challenges for CDM Activities in the Caribbean

Limited Capacity» Only 6 DNAs: Antigua and Barbuda; Barbados; Cuba; Jamaica; Saint Lucia;

and Trinidad and Tobago» Lack of legal framework and structure for establishing DNAs» Existing DNAs do not have sufficient human and financial resources

Lack of Awareness and Initiatives for Project Opportunities» Few stakeholders understand the opportunities afforded by the CDM» Those who do are often intimidated by the complexities and costs of CDM

project preparation

Barriers to Market Participation» Regulatory uncertainty makes it difficult to develop or utilize approved baseline

methodology» Lack of financing for project preparation and scarcity of base financing» High transaction cost due to smaller size of economy makes it difficult to

achieve economy of scale

Carbon Funds and Programs for CDM

World Bank (WB), International Financial Corporation (IFC), and other Multilateral Financial Institutions (MFIs)» WB – Prototype Carbon Fund (PCF): $180m» WB – Community Development Carbon Fund (CDCF): $128.6m» WB – Biocarbon Fund: $100m» WB Netherlands CDM Facility: $180m» WB – Italian Carbon Fund: $80m» IFC Netherlands Carbon Facility (INCaF): €44m» Netherlands European Carbon Facility (NECaF): 10mt ER along

with IBRD» Multilateral Carbon Credit Fund (MCCF): between €50m to €150m» CAF-Netherlands CDM Facility: €40m (10 mtCO2e)

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Carbon Funds and Programs for CDM

Government Funds » Austrian JI/CDM Programme (Austria): €11m to €36m» KfW Carbon Fund (Germany): €50m» SICLIP 2002-2012 (Sweden): SEK200m» Belgian JI / CDM Tender (Belgian Federal Govt): €10m» Finnish CDM / JI Pilot Programme (Finland): €20m

Private Funds» Japan Carbon Finance, Ltd.: $141.5m» European Carbon Fund: €105m» GG-GAP GHG Credit Aggregation Pool: €72m to €98.6m» ICECAP: 40 to 50 mtCO2e

Equity Investors» e7 Fund for Sustainable Energy Development

Funding Opportunities for CDM Activities in the Caribbean

CAF - The Netherlands CDM Facility» Initiative by the Netherlands and the Andean Development Corp. (CAF)» €40m (10Mtons of CO2e) in Latin America and the Caribbean focus» RE / EE; CH4 capture from landfills; fuel switching; change of electricity

generation technology

WB – Community Development Carbon Fund» Small-scale RE / EE; waste to energy conversion

Central American Bank of Economic Integration (CABEI)» Works with EcoSecurities on small-scale CDM projects » Assists project development and the CDM project cycle

Others» Finish CDM / JI Pilot Programme w/ small-scale RE focus» WB – Biocarbon Fund: Trinidad & Tobago Nariva Wetland Restoration

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Capacity Building in the Caribbean

http://www.gcsi.ca/cdmforum/index.htm

“Regional Capacity Building for Caribbean Participation in the CDM”» Phase I: Developed a regional team and conducted training workshops» Phase II: Identified barriers to investment and develop a regional CDM strategy

for CARICOM» Phase III: Tested the multi-sector baseline to bring lessons learned forward into

the international negotiation

Project Partners» Caribbean Planning for Adaptation to Climate Change Project (CPACC)» CARICOM Secretariat» The Caribbean Energy Information System/Scientfic Research Council

(CEIS/SRC)» Global Change Strategies International Inc. (Ottawa, Canada)» Center for Clean Air Policy (Washington, DC, USA)

“Regional Capacity Building for Caribbean Participation in the CDM”

Phase I: Dec 99 – Mar 00» Preliminary identification of EE/RE project opportunities» Data collection to develop the preliminary regional baseline for the power sector

Phase II: Apr 00 – Nov 00» Development of most viable projects identified: transmission systems and landfill

gas capture or other waste management» Development of regional baseline using the different baseline simplifying

methods : » Evaluation of projects against the relevant regional baselines

---------------------------------------------------------------------------------------------------------------------Regional Baseline

» is based on aggregated data for a sector, project type, or technology» Groups of similar projects compare their emissions rates to a standardized

emission rate defined by the baseline (CO2/MWh) to calculate additionality» Streamlines the project review process and promote consistency and

transparency

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“Regional Capacity Building for Caribbean Participation in the CDM”

Phase III: Nov 00 – Jun 01» 3rd regional workshop to discuss the portfolio of potential CDM projects and the

results of the regional baseline analysis» Final report on recommendations regarding implementing the regional baseline

in the Caribbean and regional strategy for international negotiations

Lessons Learned» Regional Coordination: CEIS, CPACC, and CARICOM involvement crucial in

project implementation» Long-term planning: data collection and quality control, more time and

involvement of regional experts for baseline analysis» Training: more time and budget for hands-on training » Potential future activities: Regional Climate Change Center on CDM (i.e.,

regional DNA) and identification of adaptation projects with mitigation benefits

CCAP’s Regional Baseline Development Results

Gas-fired simple cycle

Gas-fired combined cycle

Oil-fired simple cycleOil-fired combined cycle

LFO/HFO steam turbineBAT diesel engines759 kgCO2/MWh

Average diesel enginesBiomass

All coal-fired technologiesAll non-fossilBaseline

ineligible for CERseligible for CERs

Baseline» is derived from technology and fuel data on recently installed power plants collected

from thirteen countries in the Caribbean» weighted-average emission rate of the last 3 capacity additions built in or after 1998

and before 2001, excluding Trinidad and Tobago because of its atypical generation capacity for natural gas

» 759 kgCO2/kWh, is roughly 12% lower than the weighted-average of all power plants at 859 kgCO2/kWh

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Reflection on CCAP’s Analysis of Cost-effective Project Opportunities

Gas-fired simple cycle

Gas-fired combined cycle

Oil-fired simple cycleOil-fired combined cycle

LFO/HFO steam turbineBAT diesel engines759 kgCO2/MWhAverage diesel enginesBiomass

All coal-fired technologiesAll non-fossilBaselineineligible for CERseligible for CERs

The CCAP analysis assumed CER price of $15/tCO2e, much higher than the current CER market price projects identified as cost-effective may not be viable now.Transaction costs associated with a CDM project have been estimated at $200 ~ 500K per project depending on the size and typeEfforts are being considered at the next COP meeting to help streamline the CDM process in order to lower these transaction costs

Conclusions:CDM and ERC Opportunities in the Caribbean

CDM offers financial incentives for projects that reduce GHG emissions and help countries achieve sustainable development goals

Limited number of current CDM projects in the Caribbean for a number of reasons:» Limited project proponents» Unavailability of needed institutional arrangements (e.g., few DNAs)» Lack of capacity» Relatively small size of projects given size of the economy, which influences the

financial viability of the projects

Based upon preliminary CCAP analysis of CDM opportunities in theCaribbean electricity sector, there appears to be some opportunities

BUT, the Caribbean community must act relatively quickly given the time it takes to move project through CDM cycle into implementation in time to make CER financial value advantages

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Ongoing Activities in the Caribbean:Global Sustainable Energy Islands Initiative (GSEII)

A consortium organized by the Climate InstituteSupport sustainable energy development of the small island developing states (SIDS) through potential donor support and private investment and increased awareness

Key Partners: » Climate Institute» Energy & Security Group» Organization of American States (OAS)» United Nations Industrial Development Organization (UNIDO)

For more information on the GSEII:» Visit the project website at http://www.climate.org/programs/gseii.shtml» Contact Nasir A. Khattak, Director of Global Environmental Programs at the

Climate Institute at nkhattak@climate.org

Found not economically viablePV system for Grenada Chocolate Company

10,000 bulbs to be installed in 2005Energy Efficient Lighting Project

Expected launch in Spring 2006Grenada Solar Hot Water Heating Financing Program

Postponed indefinitely (hurricane)Grenada Nutmeg Shell to Energy Project

Grenada

Discussion renewed with utility225 kW Wind Turbine on Carriacou island

Planned for Fall of 2005 or 2006Energy Efficiency Lighting Project

Pre-feasibility stageDOMLEC Micro Hydro Project

Initial stages of discussionPilot Phase for a potential 4MW Wind Farm

Planned for late 2005 or 2006Dominica Solar Hot Water Heating Financing Program

Dominica

Study in progress by UNIDOEfficiency improvements in DOMLEC Distribution System

Part of Geo-Caraibes Project (OAS)Geothermal Project Pre-feasibility Development

Energy week held – Dec 2004Energy Efficiency and Renewables Awareness Campaign

Complete – Fall 2004Energy Audits & Training Project for Hotel Industry

Complete - 6000 bulbs installedEnergy Efficient Lighting Project

Part of Geo-Caraibes (OAS)Sulphur Springs Geothermal Project

Pre-feasibility completedPoultry Litter to Energy Project

Pre-feasibility completedSt. Lucia Ciceron Landfill Gas to Energy Project

To be launched in Spring 2005St. Lucia Solar Hot Water Heating Financing Program

Wind analysis ongoing by LUCELECLUCELEC Point de Caille 4.25 MW Wind Farm

St. Lucia

Ongoing GSEII Activities

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Ongoing Activities in the Caribbean:Endangered Islands Campaign

Objectives» Develop comprehensive approaches to climate change, including clean

energy transformation, coastal protection, improved building design and siting, emergency preparedness and other adaptation measures

» Build partnerships between participating island nations and coastal cities of more populous countries sharing similar vulnerabilities to climate change

» Leverage partnerships to motivate the public that populous, heavy GHG emitting nations need to take meaningful actions in order to save many SIDS from extinction.

Launched in Jan 05 at the Mauritius Conference on Sustainable DevelopmentPartners: GSEII and other adaptation-related research groups Climate Institute is working with the World Bank’s $2m GEF funds for adaptation in St. Lucia, Dominica, St. Vincent and the Grenadines

Works Cited

Inter-American Development Bank (forthcoming). Greenhouse Gas Mitigation, Carbon Finance, and the Clean Development Mechanism.

Lawson, K., Kolar, S., & Kelly, C. (2000). A Regional Approach to Developing Multi-Project Baselines for the Power Sector. Center for Clean Air Policy. Washington, DC.

Lecocq, F., and Capoor, K. (2005). State and Trends of the Carbon Market 2005. Carbon Finance, World Bank. Washington, DC. International Emissions Trading Association. Geneva, Switzerland.

Point Carbon (2005). CDM & JI Monitor, 12 July 2005.

UNEP RISØ Centre (2005). CDM Pipeline Overview (updated 2 June 2005)

UNFCCC (2004). First Ten Years. Bonn, Germany

UNFCCC (2005). Caring for Climate: a guide to Climate Change Convention and the Kyoto Protocol (revised 2005 edition). Bonn, Germany.

For more information, contact Jin Lee at jlee@ccap.org