Issue mapping for CDM: An Asian perspective — How to Realize New and Promising Channel?

Climate Experts [Advisory Service on Climate Strategy]Chair, Senior Research Fellow

IGESVisiting Research Fellow

Naoki MatsuoE-mail: n_matsuo@climate-experts.infohttp://www.climate-experts.info/

Climate Mitigation and Sustainable Development Choosing Less-Energy Economy is the key for Economic

Growth Japan: Good example Technology transfer needed

Digestion of the technology in the host country needed… Climate mitigation = Opportunity; NOT cost…

How to design the measures to make portfolio of other policy objectives Maximizing “co-benefits”

Energy cost reduction Local environment protection Local employment Energy security …

Developing Countries’ Concern… Unfairness…

Big gap in per capita emissions. Impact of climate change (vulnerability).

Historical contribution to global warming… Larger than current emission gap

Emission limit to non-Annex I also? Against “Opt-In” provision at Kyoto negotiation. Concern on run out of low-hanging fruit (low-cost mitigation options)

Attitude of developed countries… Bush Administration

Negotiation tactics as “G77+China”… How to invite more technology and money…

Formalistic/strategic behavior dominates… What is needed in the real world? Proven experiences! [Example] East Germany experience Positive attitude of EITs

USIJI experience Positive attitude of Latin America

CDM in the Negotiations “JI” concept in the UNFCCC

AIJ “Pilot” Phase introduced at COP 1 (too early for introduction)

JI revised in the Kyoto negotiations Proposed by developed countries (e.g., US proposal) Opposed by developing countries

“CDF” concept in the Brazilian proposal CDF: Penalty for non-compliance Fund for mitigation

projects Converted to CDM (with acrobatic interpretation) Saved Kyoto negotiations

What is CDM? Almost same as JI concept in the US proposal… Key point: Proposal from non-Annex I Bridge between South and North…

Two Objectives for CDM Environmental corporation

To assist host developing country to achieve sustainable development No uniform judgement criteria

(under jurisdiction of the host government) Local environment, employment, …

New tool to comply with the target (investor) Offset domestic excess emissions by the GHG

“reductions” in the developing country Business tool for private sector Incentives / driving force

Institutions for CDM COP/MOP (Conference of the Parties/Meeting of the Parties)

Ultimate decision-making body for the Kyoto Protocol Designation of the Operational Entities COP as COP/MOP until the entry into force of the KP

CDM Executive Board (CDM EB) Supervising body of the CDM. Supported by the Secretariat Decides the detailed rules/modalities of the CDM.

Recommendation to the COP/MOP Registration of the projects; Accreditation of the OE; Approval of

the baseline methodologies, etc.; Issuance of the CERs; Operation of the CDM Registry; …

Panels Recommendation of the detailed rules/modalities to the CDM EB OE Accreditation; Small-scale CDM; Baseline/monitoring

methodologies Operational Entity

Validation of the project as CDM (ex-ante) Verification/certification of emissions reductions (ex-post)

CDM To Date1. Introduction of CDM to Kyoto Protocol as the “Bridge” between South an

d North 1997

2. Marrakech Accords + CDM Executive Board establishment 2001

3. Detailed rule preparation [with 3 Panels] 2002–03

Accreditation of the Operational Entity (validator/verifier)• 20 entities proposed (2: non-Annex I). 1st OE to be accredited at next EB

Small scale CDM• Definition, Indicative list of methodologies, Simplified procedures

Baseline and Monitoring Methodologies• PDD template (version 01; ver.02 to be used after next EB?)

4. Approval process started 2003

New methodology approval• 35 methodologies submitted (including duplication)• 9 methodologies approved; 4 reformatted (for validation)• First CDM project will be registered at EB 14…• Methodologies approval process: every 2 months• http://cdm.unfccc.int/methodologies/process/

Role of CDM New Channel

Mutual understanding between South and North Opportunity to realize benefits by emission

reductions Transfer of technology and money New emerging market of GHG emission

reductions New business opportunities and compliance tool for

Annex I Also new businesses for non-Annex I companies

(emerging interest) Issues remain…

Issue Mapping PDD – Additionality/Baseline and Methodology

How to make the project as CDM? DNA – Host country institution

How to invite foreign investment? Domestic incentives – Investing country

Utilization of CER in domestic emissions trading scheme? Project selection

What types of project are promising? Financing the project – Carbon financing

Still unknown in the financial sector Sustainability – Public money utilization

Small-scale, community-based, … Needs-Seeds matching – How to find the project?

Institutional framework

CDM Project Cycle and Associated Risks

Project Design

PDD DraftingNew Methodology Approval

Validation

Project Implementation

Monitoring

Verification/Certification

CERs Issuance

Compliance Tool Sold in the Market

CDM EB

CDM EB

OE

OE

Designing the “additional” project?

Find out capable consultant? Approved without delay?

Registered as CDM without delay? (incl. host/investor country’s approval)

Planned performance? Without delay?

Is monitoring good enough?

Planned amount of CERs issued?

Market price hover around?

CDM Project-Cycle – ValidationPDD Drafting (with New Methodology)

Submit to CDM EB through OE

Meth Panel recommendationJudgement by CDM EB

A-rated: ApprovedB: Resubmit to Meth PanelC: Not approved

Expert desk review + Public comments

Validation by OEHost country approval, local stakeholder/NGO/public comments

Request for registration by OE (w/ validation report)Assessment by CDM EB (w/ host countries)

Registration as CDM project by CDM EB

If existing methodology applicable

Pre-recommendation

(technical) clarification

Reformat to AM 00xx

PDD and Methodology New Methodologies in Annexes 3 (baseline) and 4

(monitoring) of the Project Design Document Not easy task…

Submission: 1st round: 14, 2nd: 2, 3rd: 5, 4th: 14, 5th: 7,… Only 2 approved in the 1st and 2nd round (9 +3 approved to

date) Submitted new methodology: 48 to date

Approved ones provide good examples Once failed, around a half year delayed…

Problems Many skills needed…

What is “methodology”? How to describe methodology? What is “additionality”? How to demonstrate additionality? What is “baseline”? How to identify baseline scenario?

Methodology, Additionality and Baseline Methodology

Describe the proper noun by linguistic words Assume a conceptual/virtual generalized project

Additionality The same project would not be implemented if the project is not

registered as CDM project Demonstrate why it is not “anyway” project

Baseline scenario What would have occurred if CER revenue = 0 ? Several possible scenarios are assessed…

Local regulation, investment analysis, several barriers, … Demonstrate logical and reasonable conclusion Express as a mathematical formula/algorithm

How to describe the additionality/baseline as methodology?

Concept of Baseline

If Current Situation Continues… (BaU)

Project emissions

Baseline emissions

(counter-factual)If local regulation is introduced…

Reductions even without the project

True emission reductions

time

Decomposing Baseline Setting… Baseline Methodology [Meth Panel/CDM EB]

Baseline “Scenario” identification “Additionality test” is included “Applicability conditions” are set

Represent such a scenario by using “mathematical formula” Baseline Emissions: BEy = f (pi) The associated parameters pi are those of ‘project’ scenario

to be monitored [linked to the monitoring methodology] Application of the Baseline Methodology [OE/CDM EB]

Specific to the proposed project “Evidences” whether the methodology can be applicable are

needed

Difference between Baseline Scenarios

283

613

271

442

190

580

500540

576

860

0

100

200

300

400

500

600

700

800

900

AV OM BM CM AV OM BM CM AV OM

All Grids SIC Grid SING Grid PCF (SICGrid)

Intensity

(t-CO2/GWh)Concept (t-CO2/GWh)

All Grids AV 283OM 613BM 271CM 442AV 190OM 580BM 500CM 540AV 576

PCF (SIC Grid) OM 860

AV Weighted AverageOM Operating MarginBM Build Margin

CM =(OM+BM)/2 Combined Margin

Hydro Project Baseline in Chili

SING Grid

SIC Grid

Approved Methodologies (reformatted) AM0001

Incineration of HFC 23 Waste Streams AM0002

Greenhouse Gas Emission Reductions through Landfill Gas Capture and Flaring where the Baseline is established by a Public Concession Contract

AM0003 Simplified financial analysis for landfill gas capture projects

AM0004 Grid-connected biomass power generation that avoids uncont

rolled burning of biomass

HFC 23 Waste Stream

HFAnhydrous Hydrogen Fluoride

HFAnhydrous Hydrogen Fluoride

CHCl3Chloroform

CHCl3Chloroform

Reaction Process

Reaction Process

Separation/Purification

Process

Separation/Purification

ProcessCHClF2

HCFC 22

CHClF2

HCFC 22

Raw Materials

Product

HClHydrochloric Acid

HClHydrochloric Acid

CHF3

HFC 23

CHF3

HFC 23

Around 3% of HCFC 22 production

• HFC 23: Inevitably generated by-product of HCFC 22 production process [non-toxic substance]• Most of HFC 23 is released without recovery [small portion: sold]• High GWP: 11,700 (equivalent to 11,700 times of CO2 in mass unit)

Now released to atmosphere

Project OutlineHFC 23 Reprocessing Operation

Steam

Fuel (LNG)

1200 oCIncineration furnace (Thermal Oxidizer)

Cooling Tower

Air

Ca(OH) 2

Neutralization tank

Filtrate

CaF 2

Gaseous effluent

Absorption Tower

Absorption liquid tank

Water

Alkali solution

Precipitation tankHCFC 22

Plant

GHG Emission SourcesIn the boundary Outside the boundary

Baseline scenario[monitored] HFC 23 None

Project scenario

Non-negligible[monitored]

HFC 23 (leak)CO2

(Fuel combustion)CO2

(HFC combustion)

CO2

(Power generation)CO2

(Steam generation)

negligible small[not

monitored]

N2O(Fuel combustion)

HFC 23 (leak to effluent liquid)

CO2

(trapped as CaCO3 etc)

CO2

(Sludge transport, Alkali production, etc)

N2O(Power/steam generation)

Not counted

GHGs associated with the facility construction

(Macroeconomic indirect effects)

Accounting of Emission Reductions

ERy = BEy − PEy

PEy = PEy[in] + PEy

[out]

= ND_HFC23y (Not Destroyed HFC 23) + CO2_HFC23y (HFC combustion) + CO2_NGy (Natural Gas combustion) + CO2_Powery (Power supply) + CO2_Steamy (Steam supply)

BEy = [[ q_HFC23y Purity_HFC23y ] B_HFC23y ] GWP_HFC23HFC 23 input to the incinerator HFC 23 to be limited due to local regulation (= 0)

Cut-Off Condition: Q_HFC23y Q_HCHC22y w (ratio of latest 3 years) (to exclude the case of manipulating of HCFC 22 production process to get more HFC 23)

Monitoring Parameters

HCFC 22 plant

Project Boundary(newly build decomposition facility)Power

Q_Powery

q_HFC23y

Q_NGy

CO2_HFC23ycalculated from q_HFC23y

CO2_NGycalculated from Q_NGy

measured

measured

measured

ND_HFC23y measured

CO2_Powerycalculated from Q_Powery

Q_HCFCy

measured

HFC 23

Q_Steamymeasured

CO2_Steamycalculated from Q_Steamy

Steam

Fuel (LNG)

1200 oCIncineration furnace (Thermal Oxidizer)

Cooling Tower

Air

Ca(OH) 2

Neutralization tank

Filtrate

CaF2

Gaseous effluent

Absorption Tower

Absorption liquid tank

Water

Alkali solution

Precipitation tank

HCF23_soldmeasured

B_HFC23ycalculated from domestic regulation status

Purity_HFC23ymeasured

Q_HFC23ycalculated from q-HFC23yand Purity_HFC23y

Environmental pollutants are also monitored

Project Validation and Registration Operational Entity to judge whether the Project is validated as a CDM project Validation check points

CDM participation requirements(incl. host country’s approval/confirmation document to assist its SD)

Stakeholders’ comments and the responses Environment impact assessment Baseline setting (with “approved” methodology and “anticipated” value)

Whether the methodology is applied appropriately? Evidences needed…

Monitoring Plan and methodology (incl. baseline emissions) Operational Entity opens the PDD etc for public and invites public comments.

The OE makes Validation Report available for public and requests it to register. Registration by the Executive Board

Within 8 weeks after request by the OE If review requested, the EB should decide within following 2nd meeting

Request by the EB member (more than 3) or the Party concerned

Small Scale CDM Definition (mutually exclusive by component; ceiling for creditation)

<15 MW renewables (RE: indicative list; 15 MW: catalog capacity; MW: MW(e)) <15 GWh/yr EE (EE: list; activity down: no; BaU minus project) <15 kt-CO2e/yr (threshold: Project emissions; list)

Bundling/unbundling Bundling: OK; Debundling: no

Baseline Regular revision Benchmarking (multi-project) methodologies: given in advance Simplification in procedures (also for monitoring) Share of Proceeds: lower (LDC: zero)

Project Cycle; Crediting Period Same as others

OE OEs for Validation and verification/certification can be the same Local OE: desirable

Simplification In each procedures (not skipping some procedures)

Transfer of GHG Units

AAU

RMUCER

ERU

CDM Project

CER

Generating CERs

CDM RegistryPending a/c

To the participants’ a/c

JI Project

ERU

Host country converts AAU or RMU to ERUs

To the participants’ a/c

Annex I initial allocation + Sink

AAU

RMU

Base year GHGs x Annex Bx 5 years

Additional absorption

Each Party issues to Its holding a/c

Distribution to firms…

AAU RMU

CER

ERU

Emissions Trading

Can non-Annex I sell CERs? Non-Annex I can hold CERs in its account in the CDM

Registry [Government and entities] However, it is uncertain whether such CERs can be

transferred… Not prohibited, but not allowed… Emissions trading is for Annex B countries (only?) Eligibility to participate in Kyoto mechanisms is set for

Annex I countries only At least some country (e.g., Japan) does not allow…

Risky for non-Annex I entities to hold CERs… Instead, they can get monetary profits or ask Annex I

partner(s) to do so on behalf; Or, set up an account in Annex I.

GHG Market Perspectives Market value of CERs…

Once issued, all CERs (except for sink-related CERs) have the same value

Currently, CER value depends on… Methodology status

Approved or expected to be approved or …? Possibility of success of the project

(Proven) experience of the project participants Technology CDM [methodology, validation, …] Name value in the GHG/CER market

Possibility of unexpected failure Host country’s policy — Country risks

Ordinary FDI policy CDM policy

Good collaboration between hosts and investors is must Companies and governments

GHG Market Development Voluntary reductions market

Emission (reductions) market under authorized institution

Financialpre-compliance,

Voluntary↓

CDM

Retail Market

Regional Markets- EU

National Markets –Japan ??

Other National Markets ??

US Market ?

??

??

??

National markets - Denmark

National Markets –United Kingdom

CO2e.com (modified)Pre-2008

Intra-Firm trading

Shell

BP 2005: next milestone…

Host Country’s Institution Designated National Authority (DNA)

How to establish/maintain the DNA? How to reduce bureaucracy and enhance efficient

decision-making? How to call domestic entities’ attention to this new

business Latin-American countries’ experiences

Risks associated with host country’s CDM policy is crucial to invite CDM projects e.g., many projects proposed in Latin American countries

which already established their CDM policy and DNA AIJ experiences are important

Clear process and criteria for approval process and supporting scheme

Domestic Incentives in Annex I Clear incentives needed…

e.g., domestic emissions trading scheme Government’s procurement Carbon funds Other supports

Information, negotiation, … Responding to the uncertainties

e.g., independence of the KP entry into force Anyway, CER is fungible in the EU-wide

emissions trading scheme Existing of the market

Project Selection and Financing Design non-CO2 gases reductions and/or renewables

High GWP gases enhance the profitability of CDM project e.g., Landfill CH4, HFC decomposition, CH4 in biomass

residue, … Design other values than GHG reductions

Maximizing co-benefits Underlying project

+ CDM part (additional reductions) Underlying project:

OK for profitable or ODA project Utilization of higher technology Risk reduction How to finance underlying part?

Financial sector people have not known carbon-related value yet…

UnderlyingProject

CDM Part(additional)

How to Utilize Public Money in CDM Public funding for CDM projects is not to result in

the diversion of ODA… ODA utilization and Sustainability judged by the host country

Consultation between host/investors needed on needs/possibilities

Financing the project by ODA Underlying part by ODA + additional reduction part (CDM part) by

others Screening the on-going/planned ODA projects and assess the possibility for

additional GHG reductions Sustainability-oriented project implementation and support

(by packaging with other project) Example: PV project in small island states

Redress the regional imbalance of CDM projects Private participants focus on profitable geographical region

Supporting smooth implementation of CDM projects Capacity building Information clearinghouse role to match needs and seeds, etc…

Matching Needs and Seeds Status-Quo

Ad-Hoc based needs-seeds matching How to invite needs?

Capacity building private sector, (central/local) gov’t officials, NGOs,…

Institutional DNA and others(?)

How to invite seeds? From Annex I

(ir)regular business forum in Annex I From non-Annex I

financial sector, private sectors, Role of Information Clearinghouse Needed…

Internet-based institution Other channels…

Who plays? Host (central/local) government, Investor government, MDB, Private sector, …