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Carbon Market 101Climate Change, CDM & Carbon Trading
Immanuel Edward. J.AClimate Change/Sustainability Advisory
HMR Environmental Engineering Consultants
AgendaIntroduction
– Climate Change & its impact– Response to mitigate Climate Change– Kyoto Protocol’s Financial Mechanism– UNFCCC’s Institutional Framework
CDM – CDM Project Cycle– General CDM Project requirement– Eligible Projects – CDM Cost
Carbon Trading- Concept of Emissions Trading - Global Carbon Market - EU – ETS- CER Supply & Demand- CER Pricing
- EUA price & Impact on CER Price- CER Transaction Models- CER Delivery Structure- CER Price Trend
Basics of Climate ChangeThe Greenhouse Effect
Sou
rce:
The
Pew
Cen
ter
Rep
orts
CO2 Levels in the Atmosphere
Earth’s temperature
Climate Change Signals• Global average surface temperature has increased by
0.6 ºC over the 20th century• 67% of glaciers in Himalayas have retreated in the past
decade
IPCC Third Assessment Report projections for 2100
– Temperature rise of 1.4 - 5.8ºC – Sea level rise of 9 - 88 cm
This projected temperature rise is greater than that experienced in the last 10,000 years !!!
IPCC : Intergovernmental Panel on Climate Change
Impact of Climate Change
Response to Mitigate Climate Change
1954
1979
1992
1988
1997
2005
Objective of UNFCCCStabilization of greenhouse gas concentrations in
the atmosphere at a level that would prevent dangerous anthropogenic interference with the
climate system
Such a level should be achieved within a time-frame sufficient :
• to allow ecosystems to adapt
naturally to climate change
• to ensure that food production is
not threatened and
• to enable economic development
• to proceed in a sustainable
manner
PrinciplesThe Parties should protect the climate systems on the basis of:
• Equity
• Common but differentiated
responsibility
• Respective capabilities
The Kyoto Protocol
• Adopted at 1997 UNFCCC’s Conference of Parties 3 (COP3) in Kyoto, Japan, the Protocol
– defines quantified GHG emission reductions for Annex 1 countries as a reduction from their CO2 emission level by at least by 5.2% over 1990 base level, by the end of first commitment period (2008 – 2012)
– Introduces three flexible market mechanisms which can be used by parties and private firms to fulfill their reduction obligations • Joint Implementation, or JI (Article 6)• Clean Development Mechanism, or CDM (Article 12)• International Emissions Trading (Article 17)
• Entered into force in February 16, 2005 (after the ratification of Russia)
Joint implementation
Kyoto Mechanisms
• Overall target - at least
5.2% reduction below 1990
levels in net anthropogenic
emissions* of Annex I
countries by 2008-2012.
• No targets for developing
countries
Emissions Trading: Article 17
Annex I countries Annex I countries
Allowances allocated by Annex I Govts. to Emission Intensive
Industries
Allowances
Allowances
Allowances allocated by Annex I Govts. to Emission Intensive
Industries
Within an Annex I country and between Annex I countries
Allowance based mechanism
Joint Implementation: Article 6
Annex I countries Annex I countries
ERUs removed from the national budget
Implement projects or carbon sequestration
ERUs
Investment
Project based mechanism
Clean Development Mechanism: Article 12
Developing countries Developed countries
Low cost of emission reduction
High cost of domestic emission
reduction
CERs
Resources
Achieve SD, TT, Investment
Meet ER targets in a cost effective way
Guiding principles
Project based mechanism
Carbon Credits• Emissions trading (among Annex I countries)
– Assigned Amount Units (AAUs)
• Joint Implementation (between Annex I countries)– Emission Reduction Units (ERUs)
• Clean Development Mechanism – CDM (between Annex 1 and non-Annex 1 countries)– Certified Emission Reductions (CERs)
UNFCCC’s CDM Institutional Setup
CDM Executive Board
PP : Project Promoter
DOE : Designated Operational Entity
EB : Executive Board
COP/MOP : Conference of Parties / Meeting of Parties
DNA : Designated Operational Entity
CER : Certified Emission Reductions
Key Players in CDM ProcessKey Players
CDM Executive Board (CDM-EB)
Comprises 10 members from KP parties, meets no less than 3x a year. Tasks: recommendations on modalities and procedures to COP/MOP, approve or disapprove recommendations by branch bodies (Meth Panel, Small-scale WG, A/R WG, Registration Issuance Team, Accreditation Panel)
Project Participant (PP) Can be (1) a private or public entity (based in host country, usually the one in charge of implementation), or (2) a party that has ratified the Kyoto Protocol
Designated National Authority (DNA)
MECA
• Set up by the Party of the KP• Issues the Letter of Approval (LoA) with which the DNA confirms project’s contribution to sustainable development• Approval procedures up differ among countries• Unilateral CDM = one LoA
Designated Operational Entity (DOE)
Auditor accredited by the CDM-EB, whose key tasks are to (a) validate and request registration for a CDM project activity and (b) verify , certify and request issuance of CERs.
How to Indentify a CDM ProjectCDM Project Requirements
• Project implemented in developing nations – Non-Annex 1
countries
• Project should result in net CO2 Emission Reduction (real,
Measureable, Verifiable)
• Contribute towards sustainable development of the nation
• Annex I public funding for CDM to be additional to ODA
and financial obligations
• No nuclear projects in CDM
CDM Project Requirements….
• Establishment of a credible emissions baseline
• Project should establish Additionality
• Contribute towards Sustainable Development of the Host Country
• Concept of CDM, Emission reductions and Carbon revenue should be incorporated in the Planning stage of the project
CDM Prior Consideration
• Within 6 month from the project start the DNA and UNFCCC must be informed
• EB49 annex 22: The project participant must inform the Host Party DNA and the UNFCCC secretariat in writing of the commencement of the project activity and of their intention to seek CDM status. Such notification must be made within six months of the project activity start date and shall contain the precise geographical location and a brief description of the proposed project activity, using the standardized form F-CDM-Prior Consideration.
Baseline
Emissions
Time
Emissions from a green / new project
Baseline emissions (most Plausible scenario/existing project)
AdditionalitySTEP 0: Claiming credits for project with start date prior
to date of registration – if not applicable go to step 1 directly
CDM consideration proved: Pass
STEP 1: Identification of alternatives consistent with current laws and regulations- If proposed CDM project only alternative left: NON-ADDITIONAL (NA)
More than one alternative: Pass
STEP 2: Investment Analysis CDM financially attractiveSTEP 3: Barrier Analysis
No barriers: NA
CDM financially not attractive
STEP 4: Common Practice Analysis – credibility check- If similar activity observed with no essential difference: Project NA
CDM faces Barriers
No similar activity or similar activities present but difference in circumstances
STEP 5: Impact of CDM registration - If CDM benefits have no impact: Project NA
Typical ProjectsRenewable Energy Hydro, Wind, Biomass, Bagasse, Geothermal, Tidal
Waste Heat Recovery Cement, Steel/ Metal, Coke Ovens
Waste Management/Methane Recovery
Waste Water Management, MSW Management, Fuel Pellets, Power generation, Use as Fuel
Transportation LPG, NG, Biodiesel, Pipeline, Railways Shift
Process Change Fertilizer CO2 Recovery, Nitrous Oxide (N2O)Destruction, Refrigerant: HFC Abatement, Aluminum: PFC Control
Energy Efficiency Efficient Generation (Efficient Machinery, T&D Loss Reduction, Fly ash in Cement)
Industrial Fuel Switch Coal to LPG, Natural Gas, Biomass
LULUCF Afforestation and Reforestation
Project Scale• Small-Scale CDM (SSC) project categories
– RE projects up to 15 MW– Energy efficiency projects reducing energy consumption by
up to 60 GWh/yr– Other project activities that reduce emissions less than 60
ktCO2eq
CDM Transaction Cost
% Cost (until CER issuance)PDD (assumption, indicative) 34%DNA fee 19%Validation (assumption, indicative) 20%Registration 5%Sub-totalMonitoring Cost (assumption) 6%Verification Cost (assumption) 8%Adapation Fee 8%
Total (until 1st CER issuance) USD 200,000
Emissions Trading
Carbon Market Theory
Global Carbon Market at a Glance
Transaction Volumes and Values, Global Carbon Market, 2008 and 2009
Source: World Bank, and Bloomberg New Energy Finance and Ecosystem Marketplace for data on the voluntary market
Source: WBCSD/WRI GHG Protocol, 2005
ETS - Scopes
Emissions limit after trading (60tCO2)
Emissions limit after trading (40tCO2)
-10
50
+10
Units sold
Units bought
Company 1
Company 2
Carb
on
dio
xid
e/
GH
G e
mis
sion
s
Emissions limit before trading (50tCO2)
50
Source: UK Emission Trading Group
How Emission Trading works?
Company A can reduce 1000 tons CO2e at $2/ton = $2000
Company B can reduce 1000 tons CO2e at $6/ton = $6000
Company A - Seller Company B - Buyer
1000 tons CO2e at $4/ton = $4000
SELL BUY
$2000 Profit $2000 Savings
Another illustration for ETS
Make or Buy decision
Company
CO2 €
Invest in energy
efficiencyModification of
operation procedure
Fuel switching Emission trading
Carbon market
Sustainable Development
Developing countries
Carbon Credit
€
The Way of Emission Trading
Cap-and-TradeCap-and-Trade -A government establishes a cap that limits the total amount of emission allowed, -and then distributes permits for a “right to emit” the global atmosphere, which can be traded as private property.
Comparison of proposed vs. approved caps for 2008 to 2012
Source : UNFCCC Interactive map of CDM project locations
• Registered CDM activities (2nd March 2011) : 2871 projects all over the world….
Registered CDM Projects
CDM Projects
Source: cd4cdm.org (Feb 2011)
Africa & Middle EastAfrica Africa Middle-East
Cameroon Mauritius Iran
Cape Verde Morocco Israel
Congo DR Mozambique Jordan
Côte d'Ivoire Nigeria Lebanon
Egypt Rwanda Qatar
Equatorial Guinea Senegal Saudi Arabia
Ethiopia South Africa Syria
Ghana Sudan United Arab Emirates
Kenya Swaziland Yemen
Lesotho Tanzania
Liberia Tunisia
Madagascar Uganda
Mali Zambia
CDM Projects
Data Source: UNEP RisoDec 2010
CER Volume
41Data Source: UNEP RisoDec 2010
Primary CDM/ JI Buyers
Carbon Trading: Unilateralism
• Only a PIN (or less) available• Project developing new methodology• No Host government approval • Poor Credit or No Credit• Project not registered• Flexible CER delivery schedule• No punitive damages • Unilateral• Advance payment• Payment upon CER issuance into pending account
CER Price Increases
Approved methodology Host government approval Strong project partners, technology supplier, EPC, Operator, etc. Good Credit Ability for buyer to become a Project Participant Project is registered Guaranteed delivery schedule with punitive damages for non-
delivery Payment on delivery into buyer’s national registry account
Source: Natsource
Source: EcoSecurities
CERs : Risk Vs Price
CER Price
Reasons observations on the CER Price
• There has been a fluctuation in the demand for CERs due to lower emission on account of lower demand and temporary shutdown of companies due to economic slowdown.
• CER prices are likely to shoot up due to increase in crude prices. CER rates and crude prices are inextricably linked.
• Some buyers have postponed their purchases due to financial constraints.• Some sellers have also made distress sales of CERs since they needed immediate cash to get over the
current credit crunch
Source: GTZ Newsletters
4023
840
242
4024
840
254
4026
040
266
4027
440
280
4028
440
290
4029
640
302
4030
840
312
4031
840
324
4033
140
337
4034
340
347
4035
340
359
4036
540
371
4037
540
381
4038
740
393
4039
940
403
4040
940
415
4042
140
427
4043
140
437
4044
340
449
4045
540
459
4046
540
471
4047
740
483
4048
740
493
4049
940
505
4051
140
515
4052
140
527
4053
340
541
4054
840
554
4056
040
564
4057
040
576
4058
240
588
10
11
12
13
14
15
16
17
18
Avg EUA sCER
Polynomial (sCER)
EUA-CER Price Trend
Source : http://www.pointcarbon.com/news/marketdata
Carbon Price
CDM Projects : Typical Risks
CDM Regulatory
PDD developmentRegistration(CDM EB)
validation
Issuance
creditingperiod
monitoring & verification
Country / Political Riskregulatory
change taxchange
host countryapproval
TechnologyCost/Delay
compliancecost
Delays (project / delivery)
Financial
FEX / currency
price
Legal
Project related
precedence
regulatoryprocess Tax / revenue share
implications
FDI Rules
ERPA
performance
Outcome from Cancun
•Improved transparency including annual greenhouse gas inventory reporting by developed countries •Restored confidence in the multilateral process •Effectiveness of market mechanisms emphasised •Targets pledged by developed countries that have ratified the Kyoto Protocol, have been formally recognised, anchoring commitments covering the large part of global emissions •Establishment of a Global Climate Fund to support pollution reduction in developing countries with goal of mobilising $100bn by 2020 (reconfirmation & progress)•New program established to reduce emissions from deforestation and forest degradation (REDD+) •Increased emphasis on "adaptation" support for vulnerable countries
Whatz Next in South Africa Dec-2011 ??
Uncertainty in Future CO2 Emissions
USEFUL WEBSITES
CDM
• http://cdm.unfccc.int/index.html• http://www.iges.or.jp/en/index.html • http://www.cdmrulebook.org/
CER: TRADING & MARKEThttp://cdmpipeline.org/
• http://www.cd4cdm.org/
CARBON NEWS• http://www.pointcarbon.com/• http://www.gtz.de/
Immanuel Edward. J. AManager – Climate Change AdvisoryHMR Environmental Engineering Consultantsedward@hmrenv.com
Thank you
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