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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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slide1

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

slide2

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
slide3

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

slide5

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

slide6

Baseline principles

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

b) gas turbine 450 g CO2/kWh

c) 850 g CO2/kWh

slide7

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
slide8

Stringent decisions on baseline

methodologies enhance quality

Passed methodologies

are very project-specific

slide9

Submissions of baseline

methodologies: types

slide10

Submitted baseline methodologies

  • Multiple methodologies for same project type?
slide11

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
slide13

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.
slide14

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?
slide15

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?
slide18

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
slide19

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
slide20

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

slide22

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
slide23

Risks

Source: Janssen 2001

slide24

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
slide25

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
slide26

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
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