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The CDM:A Really, Really Quick Overview
Robert KellyRegional Coordinator, CDM Capacity Development,
Southern & Eastern Africa
2 2
Agenda
Misconceptions about the CDMMisconceptions about the CDM
CDM concepts & terminology
The CDM project cycle
3 3
Three misconceptions…
The CDM is all about climate change11
4 4
Actually, the CDM is ‘climate neutral’
Actual greenhouse gas
emissions
CERs generated by CDM projects
Annex 1 country buys CERs
Acquired CERs are added and
national emissions cap
increases
‘Business as usual’ emissions
5 5
The CDM is all about development
TechnologyTransfer
PovertyReduction
Environmental Benefits
ODA
GEF
PES
CARBON
Sustainable Development
Carbon finance represents a supplementary source of funding for some projects – and a means of catalysing development
6 6
Three misconceptions…
The CDM is too difficult22
The CDM is all about climate change11
Sub-Saharan Africa offers few CDM opportunities33
7 7
In 3 years, the CDM has sparked a $5 billion/year market
Jan05
Mar05
May05
Jul05
Sep05
Nov05
Jan06
Mar06
May06
Jul06
Sep06
Nov06
Jan07
Mar07
May07
July07
Sep07
Nov07
Jan08
Mar08
67 83 118 171275
440554
647749
883
1,1411,311
1,495
1,7591,885
2,285
2,593
2,8383,035
3,265Number of Projects in the CDM Pipeline,
January 2005 – March 2008
Compound Monthly Growth Rate = 11%
Approximately 3 billion CERs by 2012
Compound Monthly Growth Rate = 11%
Approximately 3 billion CERs by 2012
8 8
Current value size of the international carbon market
CDM:> 1000 projects registeredcumulative > 3(?) bn tonnes CO2e reductions up to 2012(About India & Japan’s inventory for a year – or nearly 10% of global annual
emissions)
2005 ~ $1 billion2006 ~ $5 billion2007 ~ $12 billion 2008 …???
JI 2007 < $1 billionEUETS 2007 > $60 billion (?)
9 9
Seems like CDM is a roaring success…. BUT:
Under Kyoto, CDM purpose is to deliver low cost emission reductions
AND assist developing countries
achieve sustainable development.
Many CERs come from ‘end of pipe’ projects, not really SD
HFC & N2Oreduction
40%
Renewable Energy23%
CH4
reduction16%
Energyefficiency
7%
Cement & Coalmine/bed, 7%
Fuel switch, 7%
Afforestation &Reforestation, 0.2%
1010
Geographical imbalance in the CDM
Location of CDM Projects
• 4 countries (China, India, Brazil and South Korea) account for 80% of credits through to 2012
• Within these countries, not necessarily impact poorest
• Arab States, Africa, Central Asia underrepresented
•88 non-Annex 1 countries have yet to benefit from any registered CDM project activity
1111
Three misconceptions…
The CDM is too difficult22
The CDM is all about climate change11
CDM offers few opportunities outside
industrialised countries
33
1212
The CDM is about more than just heavy industry…
Clean energy
• Use of renewables (e.g. hydro power) to supply electricity to the grid, to local communities and to commercial facilities
• Use of biomass residues for energy generation / cogeneration – e.g. bagasse from the sugar industry, coffee husks from the coffee industry, etc.
Wind power Bagasse Timber residuesRun-of-river hydro
1313
The CDM is about more than just heavy industry…
Waste management
• Capturing the methane from animal waste, human waste (sewage), agricultural waste (biomass) and urban landfills
• Can be combined with electricity generation to produce a second stream of carbon credits
Animal waste Sewage / wastewater Landfill
1414
The CDM is about more than just heavy industry…
Bio-carbon
• Forestry plantations – e.g. restoration of mangrove forests
• Agro-forestry – e.g. shade crops, nitrogen capture in soils
• Bio-fuels – e.g. bio-ethanol from molasses, bio-diesel from palm oil
Forestry Agro-forestry Bio-fuels Transport
1515
China’s registered CDM projects
Wind Power37%
Hydro Power31%
Energy Efficiency, 7%
Landfill Gas, 6%
Industrial Gas (HFCs), 6%
Biomass Energy, 5%
Coal Mine Methane, 5%Other, 3%
152 registered CDM projects
152 registered CDM projects
Approximately $915 million in carbon revenue per year
Approximately $915 million in carbon revenue per year
1616
Agenda
Misconceptions about the CDM
CDM concepts & terminologyCDM concepts & terminology
The CDM project cycle
1717
Mitigation versus sequestration
• Mitigation/avoided emissions – reduction or prevention of greenhouse gas emissions from a source
• E.g. methane from animal waste
• E.g. carbon dioxide from burning fossil fuels
• E.g. nitrous oxide from agricultural soils
• REDD
• Sequestration – removal of greenhouse gases from the atmosphere
• E.g. forestry – absorption of CO2 through photosynthesis
• E.g. grassland sequestration
• E.g. ‘Geo-engineering’ – Carbon Capture & Storage (CCS), marine phytoplankton; absorptive gels; reaction with suspension of chalk in water (to produce CaCO2)
1818
Carbon projectCarbon project
Avoiding new emissions
Avoiding new emissions
Reduce emission factor
Reduce emission factor Reduce
energy consumption
Reduce energy
consumption
Land-use mitigation
Land-use mitigation
Reduce energy losses during transmission/ distribution
Reduce energy losses during transmission/ distribution
End-of-pipe End-of-pipe
DestructionDestruction StorageStorage
Gas recovery
& utilization
Gas recovery
& utilization
Emission reductionEmission reduction Atmospheric removal
Atmospheric removal
Renewable energy
Renewable energy
Fuel SubstitutionFuel Substitution
Waste heat/gas
utilisation
Waste heat/gas
utilisation
Fuel switch
Fuel switch
Reduce emission factor
Reduce emission factor
Energy efficiency at generation
Energy efficiency at generation
GHG efficiency at production
GHG efficiency at production
Types of CDM projects
1919
‘Kyoto gases’ that can earn credits
• Carbon dioxide (CO2)
• Methane (CH4)
• Nitrous oxide (N2O)
Relevant to almost all projects including bio-carbon & industrial projects
Relevant to industrial projects
• Perfluorocarbons (CxFx)
• Hydrofluorocarbons (HFCs)
• Sulphur hexaflouride (SF6)
2020
How a CDM project generates carbon credits
Gre
enh
ou
se g
as e
mis
sio
ns
Historical Trend
Project startProject start
Carbon credits (CERs) represent the difference
between the baseline and actual emissions
Carbon credits (CERs) represent the difference
between the baseline and actual emissions
Time
NOTE: greenhouse gas emissions must also
include project emissions – emissions
occurring within the project boundary:
• e.g. fossil fuel emissions from construction
• e.g. soil disturbance from tree-planting
NOTE: greenhouse gas emissions must also
include project emissions – emissions
occurring within the project boundary:
• e.g. fossil fuel emissions from construction
• e.g. soil disturbance from tree-planting
AND: leakage – emissions occurring outside the project
boundary
AND: leakage – emissions occurring outside the project
boundary
2121
• Leakage refers to an increase in emissions outside of the project boundary
• There are 2 principal forms of leakage for carbon projects:
• Emission shifting: displacement of GHG activities to other locations/sources
– e.g. Shift in grazing activities from a forestry project site
– e.g. Protected forest makes shift from wood to kerosene
– e.g. Protected forest results in more intensive agriculture (and fertiliser use)
– Investment crowding: eg: public demand for (& willingness to pay for) protected areas (eg: national parks & nature reserves) diminishes as more areas are protected.
leakage nearly always negative (increase emissions)
May be positive – eg: adopting EE technology can result in CO2 mitigation as well as increase profitability. If other firms adopt similar practices to increase profits, more CO2 mitigated than from just the original project activity.
1
Leakage
2222
• Temporal leakage: also known as ‘non-permanence’ and ‘reversibility’. With sequestration projects, greenhouse gases can be re-released into the atmosphere over time
– e.g. a forest plantation may burn down, re-releasing its stored carbon
– e.g. vegetation may be washed away in flash floods
2
Non-permanence only affects sequestration projects – not mitigation projects. It can be addressed at a project level and at
a systemic (institutional) level
Leakage
2323
• Every carbon project requires a baseline study
• The purpose of the baseline study is to determine the baseline scenario for each GHG component of the project
– The baseline must be explicitly defined
– Selection of the baseline must be justified in a transparent manner
• Being counterfactual in nature, some aspects of the baseline scenario cannot be observed and thus remain uncertain
• In order not to exaggerate the emission reductions achieved by the project, the baseline study must adopt a conservative approach whenever assumptions about future developments need to be made
– The principle of conservativeness
Baseline study
2424
• Has been defined as:
– Environmental additionality – reductions in GHG emissions
– Financial additionality – the project only happens because of the financial incentive offered by carbon credits
– Legal additionality – the project does more than what is required by local law
• The Kyoto Protocol is somewhat vague, stating simply:
– “Reductions in emissions must be additional to any that would occur in the absence of the project activity”
• Assessment of additionality is intrinsically linked with baseline establishment
Additionality
2525
Ideally, a project should demonstrate a combination of these forms of additionality
It is essential that the project achieve environmental additionality – otherwise, it will not generate any carbon credits!
Typically, a project developer also demonstrates that, without carbon revenues, the project would not be viable and/or
commercially attractive
The CDM Executive Board has developed an ‘additionality tool’ for CDM projects
Additionality
2626
• Benchmark analysis
– Choose an appropriate financial indicator and compare it with a relevant benchmark value: e.g. required return on capital or internal company benchmark
Project without carbon revenue is profitable –
but not sufficiently profitable
compared with alternatives
Project without carbon revenue is profitable –
but not sufficiently profitable
compared with alternatives
Project without carbon element
Project with carbon element
Carbon revenue makes the
project attractive relative to investment alternatives
Carbon revenue makes the
project attractive relative to investment alternatives
Investmentthreshold
Rev
enu
e /
NP
V /
IR
R
A project can be money-making and qualify as ‘additional’!
A project can be money-making and qualify as ‘additional’!
Financial additionality – benchmark analysis
2727
Some examples of additionality
Capturing methane from an urban landfill and flaring it
— Carbon credits represent the only source of income for undertaking this activity
Capturing methane from an urban landfill and utilising it to generate electricity
— Project developer would have to demonstrate that the electricity revenue alone would not make this project attractive
Building a large hydro project for the grid in Ethiopia
— Questionable additionality: there is already plenty of hydro activity in Ethiopia
?
2828
Crediting period
CDM mitigation projects
• Project developers have two crediting period options:
– A maximum of 7 years, which can be renewed up to 2 times(i.e. a potential total crediting period of 21 years)
– A maximum of 10 years, with no option for renewal
CDM sequestration projects (forestry)
• Project developers have two crediting period options:
– A maximum of 20 years, which can be renewed up to 2 times(i.e. a potential total crediting period of 60 years)
– A maximum of 30 years, with no option for renewal
2929
Crediting period
Gre
enh
ou
se g
as e
mis
sio
ns
Emissions under the baseline scenario
Emissions under the project scenario
Starting date of the crediting
period
Starting date of the crediting
period10 years No renewalNo renewal
A maximum of 10 years with no
option of renewal
3030
Why not maximise the crediting period?
Gre
enh
ou
se g
as e
mis
sio
ns
Emissions under thebaseline scenario
Emissions under theproject scenario
7 years
The baseline scenario may become less favourable
The baseline scenario may become less favourable
Baseline must be reassessed by DOE at each
renewal
Baseline must be reassessed by DOE at each
renewal
3131
Why not maximise the crediting period?
Gre
enh
ou
se g
as e
mis
sio
ns
Emissions under thebaseline scenario
Emissions under theproject scenario
7 years 7 years 7 years
Baseline must be reassessed by DOE at each
renewal
Baseline must be reassessed by DOE at each
renewal
The baseline scenario may become less favourable
The baseline scenario may become less favourable
3232
• A CDM project must use an approved CDM methodology. If no relevant methodology exists, the CDM project developer can design a new methodology and submit it for approval
• A CDM methodology contains 2 components:
• A baseline methodology is an application of a baseline approach to an individual project activity, reflecting aspects such as sector and region
• A monitoring methodology refers to the method used by the project developer for the collection and archiving of all relevant data necessary for the implementation of the monitoring plan
• The baseline methodology and monitoring methodology must be used in combination
• CDM methodologies approved by the CDM Executive Board are publicly available on the UNFCCC CDM website
Baseline & monitoring methodologies
3333
Estimating emission reductions
Baseline emissions
Baseline emissions
Projectemissions
Projectemissions
What would the level of emissions be in the absence of the project?
‘Guesstimate’ of baseline
activity
‘Guesstimate’ of baseline
activity
Emissions factor
associated with activity
Emissions factor
associated with activity
The baseline scenario:
• Existing or historical emissions
• Emissions from economically attractive alternative technologies
• Average emissions of similar project activities
The baseline scenario:
• Existing or historical emissions
• Emissions from economically attractive alternative technologies
• Average emissions of similar project activities
XX
• E.g. the default IPCC emissions factor for kerosene is 71 tCO2/TJ
• E.g. the default IPCC emissions factor for kerosene is 71 tCO2/TJ
Project activityProject activity
Emissions factor
associated with activity
Emissions factor
associated with activity
XX
What is the level of emissions in the presence of the project?
e.g. fossil fuel consumede.g. fossil fuel consumed e.g. IPCC default emission factor
e.g. IPCC default emission factor
– –
Emissions reductions
Emissions reductions
= =
= =
= =
Denominated in tonnes of CO2-equivalent
Denominated in tonnes of CO2-equivalent 1 tCO2e = 1 CER1 tCO2e = 1 CER
3434
Agenda
Misconceptions about the CDM
CDM concepts & terminology
The CDM project cycleThe CDM project cycle
3535
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
3636
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
3737
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
3838
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
3939
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
4040
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
4141
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
4242
6 to 12 months 1.5 months Crediting period of the project
Pro
ject
D
evel
op
erD
NA
DO
EC
DM
Exe
cuti
veB
oar
d
Project feasibility
assessment / PIN
Project feasibility
assessment / PIN
CDM project development
/ PDD
CDM project development
/ PDD
Host country approval
Host country approval
Project validation
Project validation
Project registration
Project registration
CER issuance
CER issuance
Project verification
Project verification
The CDM project cycle
4343
PDD
Host country approvalDesignated
national authority
Operational entities
Project owner
Executive Board
Validation
Registration
Financing & implementation
Monitoring
Verification & certification
Issue CERs
Project Idea Note (PIN)
Project idea
4444
End
Robert KellyRegional Coordinator, CDM Capacity Development,
Southern & Eastern Africa