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CLEAN DEVELOPMENT MECHANISM: OVERVIEW DENR Training Course November 4-6, 2003 Climate Change Information Center Manila Observatory Ateneo de Manila University Contents Problem of Climate Change UNFCCC & Kyoto Protocol Clean Development Mechanism CDM Eligible Projects

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CLEAN DEVELOPMENT MECHANISM:OVERVIEWDENR Training CourseNovember 4-6, 2003Climate Change Information CenterManila ObservatoryAteneo de Manila University


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Contents

  • Problem of Climate Change

  • UNFCCC & Kyoto Protocol

  • Clean Development Mechanism

  • CDM Eligible Projects

  • Environmental Benefits of CDM

  • Mechanics of CDM

  • Basics of CDM Financing

  • Philippine Participation in CDM



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Rising temperatures results in changing weather patterns

  • Melting polar caps, glaciers

  • Shifts in weather patterns

  • Increased occurrence of dramatic weather such as hurricanes

Historic Temperature Data


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Carbon dioxide (ppmv)

Temperature change (oC)

150 100 50 0

Thousands of Years ago

Atmospheric CO2 Concentration and Temperature Change


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Climate Change

  • Climate change is caused by both natural events (like volcanic eruptions) and human activities


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Transportation

Land Use:

Agriculture & Forestry

Energy Generation

Industrial Processes

Human Sources of GHGs

Carbon Dioxide (CO2) – Most prevalent GHG

Methane (CH4) – Second most common, 21x the potency of CO2

Nitrous Oxide (N2O) – 310x the potency of CO2

Other Gases – HFCs, PFCs, and SF6 = range 600 – 23900x potency of CO2

Transport


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GHG and Environmental Impacts

Changes in temperature, weather patterns and sea level rise

Human Health:

Weather related mortality

Infectious disease

Air quality - respiratory illness

Coastal Areas:

Erosion and flooding

Inundation

Change in wetlands

Water Resources:

Changes in water supply

and water quality

Competition/Trans-border Issues

Agriculture:

Changes in crop yields

Irrigation demands,

Productivity

Forests:

Change in Ecologies,

Geographic range of species, and

Health and productivity

Industry and Energy:

Changes in Energy demand

Product demand & Supply


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Philippine Rice Production.Arrows indicate El Niño events.(source: Food and Agricultural Organization)


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Vulnerability information systems

El Niño - La Niña Vulnerability Map

Support for Greenhouse Gas Inventory


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Sea level rise

3D modeling and visualization tools are used for

vulnerability assessment, exact location and quantification of areas which are susceptible to floods due to rise in sea level.

Study area: Northern part of Navotas, Metro Manila



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United Nations Framework Convention on Climate Change

Objective of the Convention

“Stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system. Such a level should be achieved within a time frame sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened, and to enable economic development to proceed in a sustainable manner.”


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United Nations Framework Convention on Climate Change

Commitments by the Parties to the Convention

  • Parties have common but differentiated responsibilities.


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Division of Parties by Annex

Annex I

Annex II

Australia / Austria / Belgium / Canada / Denmark / EC / Finland / France / Germany / Greece /Iceland / Ireland / Italy / Japan / Luxembourg / Netherlands / New Zealand / Norway / Portugal / Spain / Sweden / Switzerland / Turkey / United Kingdom / USA

Belarus / Bulgaria / Croatia / Czech Republic / Estonia / Hungary / Latvia / Liechtenstein / Lithuania / Monaco / Poland / Romania / Russian Federation / Slovakia / Slovenia / Ukraine

Non-Annex I Countries = All the Rest of Ratifying Countries


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Kyoto Protocol

  • The overall emission reduction target for Annex I Parties as a group is at least 5 percent below 1990 levels, to be achieved by the commitment period 2008 to 2012 (an average over the five years).

  • The Protocol covers six greenhouse gases (Annex A) - CO2, CH4, N2O, HFCs, PFCs, SF6

  • The negotiated targets for individual Annex I Parties are included in Annex B of the Protocol.


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Industrialized Countries

Australia 108

Canada 94

EC bubble 92

(Germany 75)

(Portugal 140)

Japan 94

Norway 101

New Zealand 100

USA 93 ???

Economies in Transition

Bulgaria 92

Baltics 92

Croatia 95

Czech Republic 92

Hungary 94

Poland 94

Romania 92

Russia 100

Ukraine 100

Selected Quantified Emission Limitation (%)


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Kyoto Protocol

  • The Kyoto Protocol was adopted at COP-3 in December, 1997, in accordance with “Berlin Mandate” of COP-1.

  • The Protocol will enter into force when not less than 55 Parties to the Convention, accounting for at least 55 percent of the 1990 total CO2 emissions of the Annex 1 Parties, have ratified the Protocol.

    • US: 34%; Russia: 16%; Japan: 8% ;EU: 23%;

    • Other Annex 1 Parties 19%


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Kyoto Protocol:Flexibility Mechanisms

Annex IGHG Emissions

Clean Development Mechanism

Emission Trading

1990 level

Joint Implementation

- 5%

Domestic Actions

Assigned Amounts

Present day

2012 (BaU)

2012 with KP



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Clean Development Mechanism

  • Enables developed countries (known as Annex B countries) to meet their emission reduction commitments in a flexible and cost-effective manner

  • Assists developing countries (non-Annex B countries) in meeting their sustainable development objectives

  • Investors benefit by obtaining Certificates of Emissions Reductions (CERs)

  • Host countries benefit in the form of investment, access to better technology, and local sustainable development


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What can the CDM do for developing countries

  • Attract foreign investment to countries engaged in the trading of CERs

  • Increase the profitability of cleaner more efficient technology in energy, industry, and transport sectors

  • Clean up waste management operations

  • Improve land-use strategies and practice

  • Contribute to sustainable development of the host country


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What are the Criteria for CDMProjects?

  • Sustainable development

    • Host country criteria

    • Environmental Impact Assessment

    • Stakeholder consultations

  • Greenhouse Gas (GHG) emission reductions

    • Environmental additionality

  • Project additionality

  • Project viability

    • Technologically proven

    • Financially sound

  • Host country approval

  • Project validation and registration



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CDM Eligible Projects

  • Renewable energy

  • Fuel switching

  • End-use energy efficiency improvements

  • Supply-side energy efficiency improvements

  • Agriculture (reduction of CH4 & N2O emissions)

  • Industrial processes (CO2 from cement, HFCs, etc)

  • Sink projects (only afforestation & reforestation)


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Renewable energy

  • Solar power

  • Hydro power

  • Wind power

  • Geothermal

  • Biomass

  • Tidal / Wave power


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Renewable energy

  • Renewable energy for the grid

  • For electricity generation by households or commercial users

    • E.g., Solar home systems, solar water pumps, photovoltaics, wind battery chargers

  • For mechanical energy by households or commercial users

    • E.g. wind-powered pumps, solar water pumps, water mills, wind mills


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Renewable energy

  • Thermal energy for households or commercial users

    • E.g., solar thermal water heaters and dryers, solar cookers, energy derived from biomass for water heating, space heating or drying

  • Biomass combined heat and power (co-generation) systems


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Fuel switching

  • For industrial facilities

    • From steam or compressed air to electricity

  • For buildings

    • From oil to gas

  • For vehicles

    • From diesel to LPG or to CNG


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End-use energy efficiency improvements

  • Energy efficiency equipment

    • Motors

    • Lamps

    • Ballasts

    • Refrigerators

    • Fans

    • Air conditioners

    • Appliances

    • Etc …


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Supply-side energy efficiency improvements

  • Generation

    • Efficiency improvements at power stations and district heating plants and co-generation

  • Transmission and Distribution

    • Examples:

    • Upgrading voltage on a transmission line

    • Replacing a transformer

    • Increased insulation of pipes


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Agriculture

  • Reducing emissions from agricultural soils

    • Use of ammonium sulfate instead of urea

    • Use of phosphogypsum in combination with urea instead of urea

  • Reducing methane emissions from livestock

  • Conservation agricultural tillage

  • Agricultural land management practices

    • Use of composted rice straw instead of fresh rice straw


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Industrial processes

  • Methane (CH4) recovery and avoidance from landfills, coal mines, agro-industries, waste water treatment facilities

    • CH4 has global warming intensity 21-times that of CO2

  • Cement production (CO2)

  • Electric equipment manufacturing (SF6)

  • PFC emissions from aluminum production

    • PCF gases have global warming intensity over 6000-times that of CO2

  • PFC and SF6 emissions from semiconductor manufacturing

  • Nitrous Oxide (N2O) emissions from adipic acid and nitric acid manufacturing

    • N2O has global warming intensity of 310-times that of CO2


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Sink projects

  • Afforestation

    • Planting trees on agricultural land

  • Reforestation

    • Planting trees on denuded forest land


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Clean Development Mechanism

Types ofsmall-scaleprojects that could qualify for fast-track approval procedures

  • Renewable energyprojects up to15megawatts (MW) of output capacity

  • Energy efficiencyimprovements that reduce energy consumption on the supply and/or demand side by up to15gigawatt-hours (GWh)/year

  • Other project activities that both reduce emissions at source and directly emit less than15kilotons (kt) of CO2 equivalent annually



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CDM Project

  • Achieves Sustainable Development objectives for the host developing country

  • Reduces GHG Emissions


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Simplistic numerical example

Provide electricity for a barangay

  • “Business-as-usual” (baseline): Diesel generator sets

    • Cost of project $10

    • Emissions 1 tC

  • Cleaner project (CDM-eligible): Micro-hydro

    • Cost of project $13

    • Zero Emissions


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Simplistic numerical example

  • CDM Investor (e.g. Japan)

    • Invests $3 ($13-$10, difference between cleaner and business-as-usual project)

    • Gains Certificate of Emissions Reduction of 1 tC, which it can meet some of its Kyoto Protocol commitments to reduce emissions


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Simplistic numerical example

WIN – WIN – WIN

  • WIN for the host country

    • Sustainable development benefit: Cleaner energy production technology

  • WIN for the Annex I country

    • Credits for emissions reduction

  • WIN for the Global Environment

    • Emissions reduction


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Additionality

  • Additionality is the key eligibility criterion in CDM projects

    • You must do something that you would not have done without the CDM

  • Two types of additionality

    • Project Additionality

    • Environmental Additionality


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Project Additionality

  • Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur


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Project Additionality

  • Baseline methodology evaluates whether or not the proposed CDM project activity would have gone ahead anyway.

  • Baseline methodology assesses why the proposed CDM project activity is less likely to occur than one or more of the other possible scenarios.


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Environmental Additionality

  • If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.


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Environmental Additionality

  • A CDM project activity is additional if anthropogenic emissions of GHGs by sources are reduced below those that would have occurred in the absence of the registered CDM project activity.

    -CDM M&P para. 43

Emission Reductions=hypothetical baseline emissions – effective (project) emissions


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CO2 Emissions

Baseline scenarioCO2 emissions (that would occur)

Real, measurable and long-term

Additional CO2 emissions reduction

CDM project CO2 emissions (observable)

Years

Environmental additionality and baseline



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Starting Point: Viable Project

  • A potential CDM Project is a feasible project

    • Technologically feasible

    • Financially sound

  • A potential CDM Project is a project which has an Environmental Compliance Certificate (ECC)


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CDM Project Cycle

Project Design & Formulation

Project Design Document

C

C

I

C

C

D

4

C

D

M


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Contents of CDM-PDD

A. General description of project

activity

B. Baseline methodology

C. Duration of the project activity/

Crediting period

D. Monitoring methodology and plan

E. Calculations of GHG emissions

by sources

F. Environmental impacts

G. Stakeholders comments


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CDM Project Cycle

Project Design & Formulation

Project Design Document

National Approval

C

C

I

C

C

D

4

C

D

M


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National Approval

  • Approval is by the Designated National Authority (DNA) for CDM

  • Main Criteria for Approval: Does project contribute to the sustainable development objectives of the Philippines?

  • Sustainable development indicators

  • Project type priorities

    • Positive list

    • Negative list


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CDM Project Cycle

Project Design & Formulation

Project Design Document

National Approval

Operational Entity A

Validation / Registration

C

C

I

C

C

D

4

C

D

M


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Validation

  • Designated Operational Entity

  • “External Auditor”

  • Validates the PDD

    • Including the Baseline Study and the Monitoring Plan

  • Recommends whether the project should be registered as a CDM Project


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Registration

  • Registration is done by the CDM Executive Board (presently based in Bonn, Germany)

  • CDM Project Registry


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CDM Project Cycle

Project Design & Formulation

Project Design Document

National Approval

Operational Entity A

Validation / Registration

Investors

Project Financing

Project Participants

Monitoring

Monitoring Report

Operational Entity B

Verification / Certification

Verification Report /

Certification Report / Request of CERs

EB / Registry

Issuance of CERs

C

C

I

C

C

D

4

C

D

M


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Verification

  • Verification of monitoring report of emission eductions by the project

  • Verification is done by another Designated Operational Entity

  • Operational Entity certifies the actual emission reductions by the project

  • Operational Entity submits certification to CDM Executive Board


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Issuance of CERs

  • Based on the certification by the Operational Entity, the CDM Executive Board issues the Certificate of Emission Reductions

  • Official registry of CERs

  • CERs are a tradable asset (like stocks or bonds)



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Total Project Costs and Sources of Finance

Total Project Cost Estimates

  • Investment costs, including development costs, up to commissioning of project

    Sources of Finance to be Sought or Already Identified

  • Critical to identify other debt and/or equity finance

  • Typical sources of funding: international development banks, government funding, private financing, supplier credit

  • CDM contribution = typically 5-15% of total project costs


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Financing Options in a CDM Project

Carbon Funds

  • Annex I investors contribute to a mutual fund

  • Mutual fund agrees to buy CERs as they are produced by the project

  • Examples

    • WB Prototype Carbon Fund

    • Netherland’s CERUPT


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Technology

$

Finance

CO Equivalent

CO Equivalent

2

2

Emission Reductions

Emission Reductions

How Carbon Funds Work..

Technology

$

Finance

Industrialized Governments and Companies

Developing Countries and Communities

Carbon Fund


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$

$

Carbon Fund

2

2

Emission Reduction

Purchase Agreement

Nature of Carbon Financing Contract

Investor

Banks

Equity

Debt

Power Purchase Agreement

$$

Electricity

$$

Carbon

Credits


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Financing Options in a CDM Project

Emission Reductions Purchase Agreement

  • Annex I investor agrees to buy CERs as they are produced by the project


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Emission Reduction Purchase Agreement

  • Will improve IRRs

  • Forward contract

    • Payment upon delivery of verified ERs

    • Upfront payments are rare

  • Will provide a hard currency revenue

  • Helps secure financing and reduce project risk

    • Future ER payments as collateral for project loans

    • Can be paid into an escrow account, protecting lenders from currency convertibility and transfer risks


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Without CERs not implemented;

with CERs implemented

Without CERs implemented

With CERs not implemented

No CDM

CDM

How CDM can matter

FIRR

CER income

0


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Impact of Carbon Finance on Project Financial Rate of Return

  • Revolution in Solid Waste Management

  • Important impact on small-holder crop-processors and animal production



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ODA and CDM Funding

  • Public funding for CDM Projects be additional to Official Development Assistance (ODA), Global Environment Facility (GEF) provided by Annex I Parties

  • Public funding for CDM projects must not result in the diversion of ODA

  • ODA can be part of the project financing as long as ODA financing does not claim emission reduction credits (WB PCF)


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$

$

Carbon Fund

2

2

Emission Reduction

Purchase Agreement

Emission Reduction Purchase Agreement

ODA

Investor

Banks

Non-ODA

Equity

Debt

Power Purchase Agreement

$$

Electricity

$$

Carbon

Credits



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Requirements for the Philippines to Participate in CDM

  • Process of Philippine ratification of the Kyoto Protocol

    • Senate Committee on Foreign Affairs has sponsored the ratification on the floor of the Senate, 2nd June 2003 (1st Reading)

    • 2nd Reading, Interpellation, 21st October 2003

    • Need 2/3 majority of the Senate to concur in the ratification of the Kyoto Protocol

  • Kyoto Protocol ratified, 22nd October 2003

    • Senate concurred in the ratification by a unanimous vote, 19 – 0 (3rd Reading)


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    Requirements for the Philippines to Participate in CDM

    • Status of efforts to establish CDM Designated National Authority (DNA)

      • Proposal to make the Inter-Agency Committee on Climate Change (IACCC) as the DNA

      • IACCC is composed of: DENR, DOST, DOE, DFA, DTI-BOI, DOTC, NEDA, DPWH, PAGASA, FMB, EMB, Philippine Network on Climate Change (NGO)


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    Thank you

    Roberto C. Yap, S.J., Ph.D.

    Environmental Economist

    Climate Change Information Center

    Manila Observatory

    Ateneo de Manila University

    Tel +63 2 426-6144

    Fax +63 2 426-6070

    rcyap@ateneo.edu