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Approaches to lift sectoralmitigation potential with markets in transitionDEHSt Side Event
2nd of December 2014, Lima, Peru
Carsten Warnecke Hanna Fekete
About NewClimate Institute
Non-profit research institute founded Nov. 2014 by 7 former Ecofys colleagues
Offices in Berlin and Cologne (Germany)
Areas of expertise Climate negotiationsTracking climate action Climate and development Climate financingCarbon market mechanisms
2www.newclimate.org02/12/2014
Background
Insights from DEHSt research project
Bilateral Agreements as Basis Towards Piloting SectoralMarket Mechanisms
Duration: Sept 2012 – Aug 2015
Activity gap in market-based mechanisms challenges maintaining the expertise of stakeholders and testing of new approaches in practice
Demand for „reduction units“ could be created based on bilateral agreements between Parties
Theoretically, the EU ETS with article 11a (5),(6) considers bilateral agreements
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Objectives
Theoretic research to develop approaches based on a bilateral crediting system that allows pilot activitiesPilot activities shall have a
sectoral coverage based on benchmarkshigh level of environmental integritygenerate net emission reductions
Open to further ETS and regional markets to join the initiativeResearch shall
Identify suitable countries and sectors for piloting Develop initial sector approaches including proposals for benchmark conceptsElaborate recommendations for the design of such bilateral agreements
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Country selection approach
1. Global importance
2. Regional importance
Upper Middle Income Countries
3. Activity level
4. Ambition level
Selected countries for individual assessment
rati
ng
excl
usi
on
Shortlisted countries
-> Absolute GHG emissionlevel
-> Good integration in the region,role model potential
-> Development of detailed and objective ranking methodology
-> Focus on carbon market and greenhouse gas mitigation related activities and ambition
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Criteria for ranking
Indicators for criterion “level of activity”:
Participation in the Clean Development Mechanisms
Activities under the Partnership for Market Readiness (PMR) of the World Bank
Activities around Nationally Appropriate Mitigation Actions (NAMAs)
Activities around Monitoring, Reporting and Verification (MRV) of greenhouse gases;
further described with the following sub-indicators:
o Submission of National Communications to the UNFCCC; existence of greenhouse gas
inventories
o Activities under the Global Environment Facility (GEF) and the MRV partnership
Indicators for criterion “level of ambition”:
Emission reduction pledges on an international level
Further targets: National energy efficiency or renewable targets
Engagement in Low Emission Development Strategies (LEDS)
Participation in regional or global networks
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Sector selection
Two structurally different sectors are selected in the target countries:
Power generation sector Building sector
Data availability Good, no confidentiality issue, CDM
grid emission factor calculation
experiences
Difficult due to heterogeneity of
building and owner structure
Average emission
reduction per CDM project
activity
Small to very large Small, up-scaling desired but difficult
Successes in the CDM Well represented; high share of
projects, several methodologies and
tool to calculate grid emission factor,
first SBL
Limited, low penetration rate, very low
issuance success, mostly single
measures in buildings
Barriers in the CDM Large differences in regional
baselines and respective incentive
level
Monitoring, boundary setting, high
transaction costs, high “signal to noise
ratio”
Benchmarks in the EU ETS
(2013-2020)
None, no free allocation None, not covered by the EU ETS
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Concepts for credited reference levels based on benchmarks
Second part
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Why benchmarks?
Benchmarks as (simplified) means to politically agree on crediting thresholds for piloting approaches
GH
G in
ten
sity
time
Historical
Reduction units issued(bilaterally supported reductions)
Currently implemented national policies & measures
(2) Reference (BAU)
Own contribution
(3) Benchmark stringency (crediting baseline)
(4) Emission level achieved
Current external support and CDM projects
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Benchmark approach
(1) Definition of the system boundary
(2) Identification of the key performance indicator
(3) Selection of peers for comparison
(4) Data collection of peers for comparison
(5) Measurement of own current performance
(6) Definition of the benchmark level (stringency)
Objectives:Apply existing approaches if possible (e.g. CDM)Ensure consistency with established schemes (e.g. EU ETS)High environmental integrity (ensure crediting thresholds always below BAU)Preserve incentives for mitigation activitiesProvide a scientifically justified basis for political decisions
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Chile‘s power generation sector
Almost 1/3 of the GHG emissions stem from electricity and heat generation
Electricity generation dominated bygas and hydro power plants
Future capacity additions likely based on coal
Vast potential for renewable energy
Chile requires large electricity companies to have a share of at least 5% of renewable energy; increasing by 0.5ppts annually
Chile is developing plans for a domestic ETS under the PMR
Chile’s renewable energy NAMA is one of the first NAMAs to receive international finance
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Benchmark concept
CDM is a valuable framework with application potential
CDM has addressed most of the identified sector challenges and describes solutions being a consensus for many stakeholders
The benchmark proposal follows the CDM to the extent possible but require a few modifications to increase pragmatism, ambition and suitability for sector coverage, e.g.
Geographic scope of the benchmarkExistence of a grid connectionExclusion of low-cost/must-run power unitsStringency levels beyond pure offsetting
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Stringency level setting
The use of the current CDM framework:Application of SBL approach and CDM grid EF tool
Net emission reduction ensured by discount on standardised grid EF
Application of a default value:
Agreed benchmark alwaysbelow CDM grid EF
Reference e.g. EF of NG fired power plant,e.g. between0.350 – 0.450 tCO2e/MWh Data source: IGES 2014
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Stringency level setting
Hybrid approach:Combination of approaches
RE by default get reduction units according to default BM value while fossil fuel based activities apply for BM based on the (adapted) CDM approach
Incentives also for new NG fired power plants and for efficiency increase in existing fossil fuel fired power plants
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CDM in the building sector
CDM projects mostly refer to single measures in buildingsCDM application in its current form to entire buildings lags behind its enormous potentialLow “signal to noise” ratio, high complexityMost available methodologies are either too specific or do not provide practicable solutions to sector challengesCDM experiences show the need for
Pragmatic MRV approachesValuation of indirect and long term effectsBundling of less homogeneous single activities to facilitate reaching a large coverage
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South Africa‘s building sector
Large demand for low cost buildings to supply the growing population with adequate housing facilitiesGovernment targets for new buildingsLow income housing segment provides free housing to poorest parts of the populationLow income houses usually constructed in a standard way, resulting in a large number of similar homes
Focus on sector sub-segment: „low income housing“Lessons learned with the use of the CDM and upscaling approaches exist
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Benchmark concept
Suggestion: Overcome existing barriers by using pragmatic approaches, deviating from exact GHG quantification
GHG emissions per standard housing unitEx-ante modeling (default/unit)Simplified ex-post MRV
The increase in uncertainty is levelled out by ambitious crediting thresholds or conservative BAU definitions
Transaction costs are reduced
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Stringency level setting
BAU:incomplete building code implementation
Reference level:assumption of full implementationof segment specific building codes
Mitigation aim:beyond building code
However, in this sector …The required support exceeds offset pricesPotentially low own contribution expectedDisincentives for ambitious activities to be avoided
Credited approach requires significantly higher prices
Uncertainty whether reconnection to future carbon markets is realistic
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Conclusions
Bilateral agreements provide temporal solution to test design and implementation of sectoral market-based approaches
Transition period of international carbon market can be used toenter into methodical discussions (also towards NMMs) prepare for suitable sector definitions and approaches andraise awareness about countries’ capabilities, own contributions and potential sectoral crediting thresholds
Staying closely to existing rules and knowledge ensures that concepts are understood while simplifications regain confidence in the instruments
Maintaining intl. market compatibility counteracts fragmentation
Reconnection to intl. carbon markets is however an option not a must; Enabling GHG mitigation activities is key
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Outlook
Deeper investigation of aspects such as
Integration into the national and international policy landscape
Requirements and next steps towards implementation
Alternative pathways for immediate implementation action in a situation with no carbon market recovery
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Thank you for your attention!
Carsten Warnecke
Hanna Fekete
www.newclimate.org
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