The CDM: Setting the Scene

Robert Kelly
Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa robert.kelly@undp.org

March 28th, 2008

Agenda

The CDM what & how? Types of CDM projects The CDM project cycle

Energy efficiency in the CDM

1 1

The Kyoto Protocol provides the basis for the CDM market
Kyoto Protocol
The Protocol creates legally binding obligations for 38

industrialized countries to return their emissions of

greenhouse gases to an average of 5% below their 1990 levels by 2012

Marrakech Accords
Define the principles of the Kyoto Protocols flexible mechanisms: the Clean Development Mechanism (CDM),

Joint Implementation (JI) and Emissions Trading (ET)

2 2

The role of the Clean Development Mechanism (CDM)

Advantages for developed countries: Developed countries can reduce emissions anywhere in the world They can count these reductions towards their own targets

CDM allows developed countries to generate carbon credits (Certified Emission Reductions, CERs) in developing countries

relatively low-cost & politically acceptable

Advantages for developing countries: inward investment, environmental & technology benefits

3 3

How a CDM project generates carbon credits

Greenhouse gas emissions

Carbon credits (CERs) represent the difference between the baseline and actual emissions

Project start

Historical Trend

Time
4 4

Kyoto gases that can earn credits

There are over 30 atmospheric greenhouse gasesBut only 6 attract carbon credits: Carbon dioxide (CO2) Methane (CH4) Nitrous oxide (N2O) Perfluorocarbons (CxFx) Hydrofluorocarbons (HFCs) Sulphur hexaflouride (SF6)
5 5

Relevant to biocarbon & industrial projects

Relevant to industrial projects

Each of these gases has a different warming potential

Each of these gases has a different radiative forcing capability and a different atmospheric residence time

Need for a common currency, so that all carbon credits are denominated in the same way

Solution: develop a relative scale, using CO2 as a reference gas

6 6

Global warming potential

Greenhouse Gas (GHG) Carbon dioxide Methane Global Warming Potential (GWP) 1 21

Relative scale everything is measured relative to CO2

e.g. methane is 21 times more potent as a greenhouse gas than CO2 e.g. sulphur hexafluoride is 24,000 more potent!

Nitrous oxide
Perfluorocarbons Hydrofluorocarbons Sulphur hexafluoride

310
6,500 9,200 140 11,700 23,900

7 7

Global warming potential

Greenhouse Gas (GHG) Carbon dioxide Methane Global Warming Potential (GWP) 1 21

Carbon credits are always expressed in terms of carbon dioxide equivalence (CO2e)
e.g. 1 tonne of CO2 = 1 tCO2e (= 1 carbon credit = 1 CER) e.g. 2 tonnes of CH4 = 42 tCO2e (= 42 carbon credits = 42 CERs) e.g. 2 tonnes of SF6 = 47,800 tCO2e (= 47,800 carbon credits = 47.8 kCERs)

Nitrous oxide
Perfluorocarbons Hydrofluorocarbons Sulphur hexafluoride

310
6,500 9,200 140 11,700 23,900

8 8

Additionality
Environmental additionality the project produces fewer greenhouse gas emissions than the baseline scenario
It is essential that the project achieve environmental additionality otherwise, it will not generate any carbon credits! However, the project developer must also usually demonstrate that, without carbon revenues, the project would not be viable and/or commercially attractive this is known as financial additionality

9 9

Additionality 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
Carbon revenue makes the project attractive relative to investment alternatives Project without carbon revenue is profitable but not sufficiently profitable compared with alternatives

Revenue / NPV / IRR

Investment threshold

Project without carbon element

Project with carbon element

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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
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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
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Crediting period
A maximum of 10 years with no option of renewal

Greenhouse gas emissions

Emissions under the project scenario

Starting date of the crediting period

10 years

No renewal
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Why not maximise the crediting period?

Baseline must be reassessed by DOE at each renewal The baseline scenario may become less favourable

Greenhouse gas emissions

Emissions under the baseline scenario

Emissions under the project scenario

7 years
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Why not maximise the crediting period?

Baseline must be reassessed by DOE at each renewal The baseline scenario may become less favourable

Greenhouse gas emissions

Emissions under the baseline scenario

Emissions under the project scenario

7 years

7 years

7 years
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Programmatic CDM offers new opportunities

Size-Distribution of Potential CDM Project Sites

Regular CDM Single site, stand-alone projects Carbon upgrades Bundled CDM

Number of installations / units

Bundling several projects under a single PDD All projects must be identified ex ante, and must start at the same time Programmatic CDM Addresses the long tail of small units Permits sector-wide transition to low-carbon economy Particular relevance to Africa
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large

medium

small

Installation / unit size

Agenda

The CDM what & how? Types of CDM projects The CDM project cycle

Energy efficiency in the CDM

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In 3 years, the CDM has sparked a $5 billion/year market

Number of Projects in the CDM Pipeline, January 2005 February 2008
3,035 2,838 2,593

Compound Monthly Growth Rate = 13% Approximately 3 billion CERs by 2012

1,141 647 749 883 1,759 1,495 1,311 1,885

2,285

440 67 Jan 05 83 118 171 275

554

Mar May Jul 05 05 05

Sep Nov Jan 05 05 06

Mar May Jul 06 06 06

Sep Nov Jan Mar 06 06 07 07

May July Sep Nov Jan 07 07 07 07 08

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CDM project Atmospheric removal Bio-sequestration: Gas recovery & utilization Afforestation / Reforestation Mangrove / wetland

Emission reduction

End-of-pipe Storage

Avoiding new emissions

Destruction

Animal waste management Human Fuel sewage Substitution Urban landfill HFC decomposition

Reduce emission factor

Energy efficiency at generation

Reduce energy consumption Energy efficiency measures Cookstoves CFLs

Reduce energy losses during transmission/ distribution

Land-use mitigation Agricultural practices (e.g. reduced fertilizer use; zero tillage)

Renewable energy

Fuel switch

Waste heat/gas utilisation

GHG efficiency at production

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Gas recovery & utilization

End-of-pipe Storage

Avoiding new emissions

Destruction

Reduce emission factor Fuel Substitution Energy efficiency at generation

Reduce energy consumption

Reduce energy losses during transmission/ distribution

Land-use mitigation

Bio-fuel Renewable biomass substitution (e.g. Wind power ethanol, Renewable Hydro Fuel bio-diesel) Solar energy switch Geothermal

Waste heat/gas utilisation

Cement manufacture Brickmakers Bakeries GHG efficiency at production Sawmills

2020

Agenda

The CDM what & how? Types of CDM projects The CDM project cycle

Energy efficiency in the CDM

2121

The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

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The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

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The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

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The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

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The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

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The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

2727

The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

2828

The CDM project cycle

Project Developer 6 to 12 months
Project feasibility assessment / PIN CDM project development / PDD

1.5 months Crediting period of the project

DNA

Host country approval

CDM Executive Board

DOE

Project validation

Project verification

Project registration

CER issuance

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Costs of a typical CDM project

Pre-Registration CDM Costs Post-Registration CDM Costs 53,000

US$ 164,500

Indicative CDM Cost Profile For A Typical CDM Project

Assumes a 10-year project.

111,500

34,000 Ongoing Verification By DOE Recurrent costs discounted at 3% annual rate to express in present-value terms. Registration costs, Administration Fee and Adaptation Fund Levy not included.

77,500 67,500 51,000 38,000

10,000 16,500 Initial Monitoring Validation

13,000 PDD PIN

Ongoing Annual Monitoring

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Agenda

The CDM what & how? Types of CDM projects The CDM project cycle

Energy efficiency in the CDM

3131

The CDM project pipeline

Fossil fuel switch 3% Energy efficiency (industry), 4% Agriculture, 6% Biogas, 7% N2O 2% Other 7% Hydro 26%

Landfill gas, 8% Energy efficiency (own generation) 9% Biomass energy 16% Wind 12%
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Energy efficiency in the CDM

Energy efficiency (own generation) 277 projects (registered and at validation)

Waste heat recovery and co-generation (e.g. in cement factories, sugar factories, steel plants)

Energy efficiency (industry) 141 industrial energy efficiency projects Include waste heat recovery, steam reduction, improved boiler design, ore beneficiation, modification of clinker cooler, and demand-side measures.
3333

Energy efficiency in the CDM

Energy efficiency (households) Only 9 household energy efficiency projects have been registered. The atomised nature of these sectors has tended to act as a barrier to project development. This should be less of an obstacle with programmatic CDM e.g. compact fluorescent lightbulbs, cookstove rollouts Energy efficiency (service sector) 12 CDM projects Primarily demand-side measures, including in hotels
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Energy efficiency in the CDM

Energy efficiency (supply) 31 projects Conversion of thermal power stations from open cycle to combined cycle, thermal efficiency improvements

3535

CER volumes from energy efficiency projects

Average Annual CER Production by CDM Project-Type
4.5m 970,000

520,000 318,000 206,000 170,000 83,000 79,000 74,000 54,000 26,000 18,000

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Carbon revenues also vary on a project-by-project basis

7,934

Standard deviation (kCERs by 2012)

4,128 3,039

1,811

1,711 928

543 379 234

Markers indicate maximum, mean and minimum project size within each technology
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1,228

661 330 0 762

1,101 1,179 0 91 13 0

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End

Robert Kelly Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa robert.kelly@undp.org
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