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National Office for Climate Change and Ozone Protection Hanoi, March 1, 2004. The CDM: latest status of international rules and the CER market. Axel Michaelowa Hamburg Institute of International Economics, Germany [email protected] www.hwwa.de/climate.htm. Structure of presentation.

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The cdm latest status of international rules and the cer market

National Office for Climate Change and Ozone Protection

Hanoi, March 1, 2004

The CDM: latest status of international rules and the CER market

Axel Michaelowa

Hamburg Institute of International Economics, Germany

[email protected]

www.hwwa.de/climate.htm


The cdm latest status of international rules and the cer market

Structure of presentation

  • CDM rules

    • Methodology status

    • The unresolved additionality issue

  • The fragmented market

    • Competition between the mechanisms

    • Different domestic trading schemes

    • The EU linking directive

  • Share of CERs in total project revenue

  • Important stakeholders

  • Chances for Vietnam


The cdm latest status of international rules and the cer market

Steps of international climate policy

“Russian doll“ structure of agreements:


Cdm valve

CDM ”valve“

Emissions trading

JI

CDM

CERs

AAUs,

ERUs

Tropical air?

Country 1

Kyoto commitment

Country 2

Kyoto commitment


The cdm latest status of international rules and the cer market

The CDM maze

changes

COP/MOP

3 members can propose revision within 15 days to be donewithin 30 days

elects

2% adap-tation tax

Rulebook

Baseline and monitoring methodologies

elects

Executive Board

(10 members)

decides on new rules within 4 months

with-holds

4

industrial

countries

5

develo-ping countries

1 AOSIS

Currently

20 applications:

10 Europe

6 Japan

2 US

2 Asia

comment new rules within 8 weeks

accre-dits

spot checks

Certifier (OE)

3 members propose revision within 8 weeks

Certifier

Countries

Stake-holder

Observers

is-sues

comment within 30 days

registers

CDM

pro-ject

Project design document:

Baseline

Monitoring

Approval

Methodology if first of its kind

Monitoring report

Verification

Project partners

Validation

orfor-warding of new metho-dology

37

applications

pending

CERs

authorise

Certifi-cation

Involved countries

Project partners

Involved countries

Involvedcountries


The cdm latest status of international rules and the cer market

Baseline principles

a) old coal fired power station 1200 g CO2/kWh.

b) gas turbine 450 g CO2/kWh

c) 850 g CO2/kWh


The cdm latest status of international rules and the cer market

Case law and path dependency

  • The EB does not provide a basic set of rules beyond the Marrakech Accords text

    • Exception: small scale projects

  • All rules are developed by case law

  • Project pioneers have to propose a new rule (“methodology”) for each new project type

    • Higher validation costs

    • Delay of several months

    • Risk of refusal

  • The CDM regime is shaped by first proposers

  • Important role of validators, methodology panel and expert reviewers


The cdm latest status of international rules and the cer market

Stringent decisions on baseline

methodologies enhance quality

Passed methodologies

are very project-specific


The cdm latest status of international rules and the cer market

Submissions of baseline

methodologies: types


The cdm latest status of international rules and the cer market

Submitted baseline methodologies

  • Multiple methodologies for same project type?


The cdm latest status of international rules and the cer market

Approved baseline methodologies

Rang Dong

  • Multiple methodologies for same project type!

  • EB starts consolidation/standardisation


The eb s additionality tests

10th session of CDM EB states:

As part of [...] determining the baseline scenario an explanation shall be made of how, through the use of the methodology, it can be demonstrated that a project activity is additional and therefore not the baseline scenario.

The EB‘s additionality tests

  • Flow-chart / series of questions that lead to a narrowing of potential project options

  • Qualitative / quantitative assessment of different potential options and an indication of why the non-project option is more likely

  • Qualitative /quantitative assessment of one or more barriers facing the proposed project activity

  • Project type is not common practice in the proposed area of implementation, and not required by recent/pending legislation/regulations


The cdm latest status of international rules and the cer market

Additionality tests - not comparable

  • Flow-chart / series of questions

    • Stringency depends on type of questions. Essentially no test, but could be framework for test

  • Why is the non-project option more likely?

    • Should essentially be the outcome of all tests applied, is no test in itself

  • Barrier assessment

    • The key issue is how important barriers are

  • Project type not common practice and not required by legislation

    • Only test which is objective, but does only specify necessary, not sufficient conditions for additionality. Still needs another test.


The cdm latest status of international rules and the cer market

Stringency of tests

  • Series of questions: Unpredictable

    • Does question address the real barriers?

    • How will answers be evaluated?

      • Example from latest hydropower methodology

  • Barrier test: Level of barrier counts

    • There will be some barrier for every project. Otherwise everybody would start projects every day. The crucial issue is when a barrier would prevent a project (“decisive” barrier) developed by a capable developer. Can we capture this objectively? What level of barrier is decisive for project decision?


The cdm latest status of international rules and the cer market

Current demand on the CDM and JI market (million $)

  • Pure CDM demand: about 600 million $, i.e. about 150 million t at current prices of 3-5 $/t CO2

  • Price differentiation according to quality?


The cdm latest status of international rules and the cer market

International market differentiation


The cdm latest status of international rules and the cer market

National markets


The cdm latest status of international rules and the cer market

The EU as driver of the CDM market

  • Decisions are taken jointly by Council of Ministers and European Parliament

  • Council position, January 2004

    • No reference to entry into force of Kyoto Protocol

    • CERs accepted from 2005; conversion 1:1

    • Cap and sinks competence of member states

  • EP environment committee position, Jan. 2004

    • Hydro > 20 MW only under WCD criteria

    • CERs from 2005

    • Linking with schemes in non-ratifying countries

    • Cap at 50% of necessary reductions


The cdm latest status of international rules and the cer market

EU as CDM leader

  • Negotiations Council - Parliament, April 2004

    • Likely: exchange of cap against limits of sinks

    • The survival of the Kyoto Mechanisms without Kyoto entry into force is guaranteed

    • Adoption of linking directive will spur private demand for CDM

  • Market impact

    • Depends on national allocation plans. UK plan is strong, Austrian, Dutch and German likely to be weak

    • Depends on government CER / ERU import regulations / fees


The cdm latest status of international rules and the cer market

Technology

D IRR

Hydro

0.8-2.6

Wind

1.0-1.3

Bagasse

0.4-3.6

Energy Eff.-District Heating

~ 2.0

Gas Flare Reduction

2-4

Biomass

2-7

Municipal Solid Waste

>5

Impact of carbon finance on project revenues at 3 €/t CO2

Source: PCF 2003


The cdm latest status of international rules and the cer market

Thresholds for small-scale projects and transaction costs


The cdm latest status of international rules and the cer market

The role of financial institutions

  • Packaging projects

    • Development of project pipelines

    • Portfolio generation

  • Financing projects

    • Project finance

    • Venture capital

    • Special mutual funds

    • Corporate finance

    • Lending

  • Bringing in expertise in checking viability of a project proposal

    • Due diligence

  • Insurance


The cdm latest status of international rules and the cer market

Risks

Source: Janssen 2001


The cdm latest status of international rules and the cer market

Important stakeholders

  • Policymakers

    • Develop a CDM strategy

      • Priority sectors

      • SD criteria

      • Outreach

  • Get DNA operational

    • Decide on competences /rules

    • Decide on resources. Fees?

  • DNA staff

    • Ability to make objective decisions

    • Ability to market host country


The cdm latest status of international rules and the cer market

Private sector

  • Project developers

    • Understand CDM incentive

    • Understand principles of CDM rules

    • Understand differences between technologies

  • Consultants

    • Understand CDM and are able to find their niche

    • Become able to deliver high-quality service according to CDM rules

    • Network with Annex B buyers /investors


The cdm latest status of international rules and the cer market

Chances and challenges for Vietnam

  • Institutional homework done

    • Kyoto ratified, DNA set up

  • Interesting potential in several sectors

    • Gas flaring reduction

    • Renewable energy

      • Agricultural wastes

      • Hydro

    • Industrial energy efficiency

    • Forestry

  • Private sector remains to be integrated

  • Transparent rules for project approval remain to be defined


The cdm latest status of international rules and the cer market

Thank you!Further information:www.hwwa.de/climate.htmor: [email protected]


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