Upload
wyatt-perez
View
217
Download
2
Tags:
Embed Size (px)
Citation preview
The Concept of The Concept of Incremental CostsIncremental Costs
Typical GEF Projects for Climate ChangeTypical GEF Projects for Climate Change
1. Energy Efficiency (Operational Prog. 5)• Industrial Boilers
• Agricultural Pump-Sets
2. RETs (Operational Prog. 6)• Wind Power, Small Hydro, Biomass Power etc.
3. Low GHG Emitting Technologies (Operational Prog. 7)• PV for Grid Power
• Fuel Cells for Mass Transport Vehicles
Example: Climate ChangeExample: Climate Change (Costs/ emissions during the project life cycle)
Baseline: Coal-fired power station with Conventional Boiler (33% efficiency)
Cost: Rs. 1000 Crore, Carbon: 15 million tons Alternative: Coal Plant with Super Critical Boiler
delivering the same electricity
Cost: Rs. 1100 Crore, Carbon: 13.5 million Tons Incremental Cost: Rs. 100 CroreN.B. There is an incremental cost but no “incremental component.”
Incremental Cost MatrixIncremental Cost Matrix
Global Benefit Mt. Carbon
Domestic Benefit
Cost Rs. Crore
Alternative -13.5 Power Local AQ
1100
Baseline -15 Power
1000
Increment 1.5 Local AQ Improvement
100
IC of mitigation: Rs. 100 Crore / 1.5 MtC = Rs. 667/ tC
Key ElementsKey Elements Additional net costs (not benefits) Always relative to some baseline course of
action Costs incurred as a result of redesigning an
activity, or selecting an alternative activity That alternative can be additional to or
substitute for the baseline plan
Key Elements ..2Key Elements ..2
When the baseline plan is designed to achieve only
national benefits and redesigning or selecting an alternative techn is
made to meet a global environmental objective,
then the incremental cost is that of achieving the
resulting global environmental benefits
Alternate BaselinesAlternate Baselines Assuming the current trend will continue:
current-mix of techn. is projected to continue
ex: dependence on kerosene (lighting) or fuelwood Consider alternatives (fossil fuels) and project
Least-cost-mix
ex: Diesel system (for electricity) or LPG (for cooking)
Consider no-project scenario situation for the project period
Marginal cost of technology should be considered
Alternative ScenarioAlternative Scenario
Select technology (RET or Energy Efficiency)
or
Select alternate institutional arrangement or policy initiative
Which provides the same level or scale of benefit as the Baseline Scenario (MWh or GJ)
Leads to reduction in GHG emission or emissions are fully avoided
Alternate technology or alternate institutions will involve addition cost
Example: Climate ChangeExample: Climate ChangeBiomass Gasifier Based Power Biomass Gasifier Based Power
Generation for an IslandGeneration for an Island
Baseline: A Village is getting electricity from a diesel generator of capacity 1 MW– Capacity: 1 MW– Electricity generation: 5000 MWh / yr
Alternate Scenario: Energy-forest and Biomass Gasifier– Capacity: 1 MW– Electricity generation: 5000 MWh / yr
Incremental Cost-MatrixIncremental Cost-Matrix
Domestic benefits
Global benefit
Cost (life cycle)
Alternative (1 MW)
5000 MWh Local Bemefits
0 30 crore
Diesel (1 MW)
5000 MWh - 20000 tC 25 crore
Increment Local Benefits
- 20000 tC 5 crore
IC of mitigation: Rs. 5 crore / 20000 tC = Rs. 250/ tC
Example: Biological DiversityExample: Biological Diversity Identified Ecosystem
– Priority under Convention on Bio Diversity– Threat
Cause of Threat is (say) Industrial Pollution Solution is Removal of Cause (Incremental) Cost
– Extra cost of same industrial activity with pollution abated
Example Continued Domestic Benefits
– Some fish breeding grounds in the polluted wetland
– Some tourism But, suppose Incremental Cost>>Incremental Domestic Benefit
Grant = IC
Example Continued Baseline: Development of the industry
sector Alternative: Continued development, same
output, but remove the threat Incremental Cost: The extra cost of
achieving the same baseline development
IC = [Cost of A] - [Cost of B]
IssuesIssues Selection of baseline and its justification Selection of Alternate technology / Scenario stating it
will not spread if no project implemented Adoption of technology or Institutional arrangement
involves IC; which is not provided by Govt. / Banks
- Risk associated with Alternate Scenario If any additional benefit; it will be deducted from IC
estimation Use appropriate discount rate and estimate life cycle
cost Sourcing of baseline finance domestically
Baseline Course of ActionBaseline Course of Action
The baseline course of action is what
would normally occur in the project
area in the absence of the proposed
project.
Incremental Cost Approach for Incremental Cost Approach for Climate Change ProjectsClimate Change Projects
If the project falls under OP#5 or OP#6:
– The life-cycle costs of “win-win” Energy Efficiency and RET alternatives < baseline costs
– Incremental costs = barrier removal costs If the project falls under OP#7:
– The barrier is the cost of the technology itself.
– Incremental costs = alternative technology costs - baseline costs
MisunderstandingsMisunderstandings
“Incrementalism”: No radical efforts possible
Inseparability of global and domestic benefits
Impossibility of monetizing environmental benefits
Small transfers of resources Complex
ImplementationImplementation Issues
– Conflict of interest (country, co-financiers)– Length of communication chain– Unpopularity (strategic flaws, difficult concept)– Sensitivity of estimates
Reaching Agreement on Reaching Agreement on Incremental CostIncremental Cost
Choosing the Eligible Objective Negotiating a Reasonable Baseline Estimating the Cost and Ensuring the
Equivalence of the Proposed Alternative Comparing the Cost Streams Discounting the Future Costs
››Agree on incremental cost
Incremental Cost Approach for Incremental Cost Approach for Climate Change ProjectsClimate Change Projects
If the project falls under OP#5 or OP#6:
– The life-cycle costs of “win-win” efficiency and renewable alternatives < baseline costs
– Incremental costs = barrier-removal costs
Incremental Cost Approach for Incremental Cost Approach for Climate Change ProjectsClimate Change Projects
If the project falls under OP#7:
– The barrier is the cost of the technology itself.
– Incremental costs = alternative technology costs - baseline costs
The utility of the incremental cost The utility of the incremental cost approachapproach
Summary of Approach
Incremental
Local
HISTORYHISTORY Cost Accounting
– Incremental cash flow analysis Project Economics
– Incremental benefits > incremental costs Global Environment
– London Amendments to Montreal Protocol (1990)
– FCCC; CBD; GEF Here to stay
MOTIVATIONSMOTIVATIONS Complementarity
– Make a difference– Relieve the “added burden” on project hosts– Obtain replenishment
Project Selection– Developmental expenditure– Global environment protection