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  1. Unlocking private investments in energy efficiency through carbon finance Igor Shishlov www.cdcclimat.com March 26, 2013 – University of Twente, Netherlands Title Title Date JI Russia I 03/10/11

  2. CDC Climat Research • Independent economic research in: • Energy & Carbon Markets • Carbon Offsets, Agriculture & Forestry • Sub-national Climate Policies • Climate, Investment & Decision Making • Clubs: • Energy & Carbon Trends Club • Forestry Club • Agriculture Club • Cities, Local Governments and Climate Change Club • All publications available at www.cdcclimat.com

  3. Agenda • The role of energy efficiency • The CDM and energy efficiency • JI and energy efficiency • Different roles for different markets • The leverage effect

  4. “No-regrets policy” • “Energy Efficiency is key for low-carbon transition” (IEA): • 2/3 of GHG abatement by 2035 under “new policies scenario” • $158 billion annual investment required • Spillover benefits: economic growth, energy access, security… • Barriers: • High technical and financial risk • Imperfect information • Access to capital • Split incentives etc… • Targeted policies required: • From grants and subsidies to carbon finance and energy savings certificates trading

  5. The CDM scheme • Emissions reduction projects in non-Annex I countries: • Reduce abatement cost • Contribute to sustainable development • Spillover benefits: search function, technology transfer… Source: CDC Climat (2012)

  6. The CDM and EE • 472 EE CDM projects in 40 sub-types registered • 58 million CERs issued • 20 EE PoAs registered (lighting & cookstoves) Source: CDC Climat based on UNEP RisoeDatabases (2013)

  7. CDM PoA: household EE • PoA0070: Efficient Cook Stove Programme (Kenya): • Reduced CO2 emissions • Improved indoor air quality • Reduced burden on women and children who collect wood • Lessons: • PoA framework makes carbon finance increasingly suitable for LDCs • There is demand for high-quality carbon offsets

  8. The JI scheme • Emissions reduction projects in Annex I countries • ERUs are converted from AAUs • No change in the Kyoto cap • Can also be used domestically (ETS vs. non-ETS) Source: CDC Climat (2012)

  9. JI and EE • 125 EE JI projects in 25 sub-types registered • 103 kERUs issued • 24 PoAs registered (household and commercial buildings) Source: CDC Climat based on UNEP RisoeDatabases (2013)

  10. JI PoA: household EE • JIPoA0005: Active Climate Protection – CO2 Bonus natural gas (Germany) • Encouraging private households (28 000 participants expected) to reduce their gas consumption through energy efficiency measures

  11. Different roles of CDM/JI

  12. Investment leverage • Leverage compared to other international financial tools: • World Bank programs (GEF, CTF…) 6:1 to 9:1 • Multilateral Development Banks 2:1 to 8:1 *Note that the creditingperiod for the CDM iseither 7 years (renewable) or 10 years (non-renewable) compared to 5 years in JI, hence large difference in leverage ratios Source: CDC Climat based on UNEP RisoeDatabases (2013)

  13. Lessons • CDM/JI cannot • Achieve economy-wide emissions reduction (project-based) • Tackle sectors covered by a domestic ETS (double-counting) • CDM/JI can • Facilitate different types of energy efficiency projects: a public policy tool) • Leverage private investments: $4-9 per $1 of carbon “carrot” for energy efficiency projects • Spur innovation: “search function” • Help set efficiency standards • CDM/JI frameworks can be used as a flexible policy tool to leverage investments in energy efficiency

  14. To learn more… • Climate Brief n°27 « Unlocking private investments in energy efficiency through carbon finance » • Climate Report n°37 « 10 lessons from 10 years of the CDM » • Climate Report n°33 « Joint Implementation: a frontier mechanism within the borders of an emissions cap » • World Energy Outlook. International Energy Agency (2012) • Plugging the energy efficiency gap with carbon finance. International Energy Agency (2012)

  15. Thank you for your attention! igor.shishlov@cdcclimat.com Title Title Date JI Russia I 03/10/11

  16. Background slides Title Title Date JI Russia I 03/10/11

  17. The CDM in brief Heights achieved Turbulence experienced Environmental integrity (additionality & baselines) Administrative process Uneven coverage (geographical and sectoral) Supply-demand disequilibrium • The largest carbon offset mechanism in the world • >9 000 project pipeline • >1 billion GtCO2e abated • US$3.6 billion savings (mainly EU ETS) • US$215 billion investments (mainly private) • Innovation and learning curve 25 March 2013

  18. The CDM is a tanker… • Sunk investments => inelastic CER supply 25 March 2013 Source: CDC Climat Research, 2012

  19. ..approaching the iceberg • Market disequilibrium threatens the life of the CDM 25 March 2013 Source: CDC Climat Research, 2012

  20. EU ETS drives the CDM 56% EU ETS • 46% CERs are traded via commodity hubs – UK, CH • 74% CERs contracted by the EU ETS (World Bank 2012) • 56% CER already surrendered under the EU ETS 46% UK, CH 25 March 2013 Source: CITL (2012), National CarbonRegistries (2012), UNEP Risoe (2012)

  21. CDM reform is ongoing EB16: tool for demonstrating additionality COP16: positive lists, standardized baselines COP17: Materiality Standard EB47: PoAs EB27: methodology consolidation EB62: suppressed demand COP17: CCS EB22: E+/E- rules 2001 2012 EB27: combined baseline and additionality tool EB65: HFC revision EB48: prior consideration EB62: standardized baselines guidelines EB65: Project Standard, Validation and Verification Standard, Project Cycle Procedure EB55: Validation and Verification Manual EB39: ban on new HCFC plants 25 March 2013 Source:CDC Climat Research (2012) based on the EB and COP reports

  22. Streamlining procedures EB16: tool for demonstrating additionality COP16: positive lists, standardized baselines COP17: Materiality Standard EB47: PoAs EB27: methodology consolidation EB62: suppressed demand COP17: CCS EB22: E+/E- rules 2001 2012 EB27: combined baseline and additionality tool EB65: HFC revision EB48: prior consideration EB62: standardized baselines guidelines EB65: Project Standard, Validation and Verification Standard, Project Cycle Procedure EB55: Validation and Verification Manual EB39: ban on new HCFC plants 25 March 2013 Source:CDC Climat Research (2012) based on the EB and COP reports

  23. Expansion EB16: tool for demonstrating additionality COP16: positive lists, standardized baselines COP17: Materiality Standard EB47: PoAs EB27: methodology consolidation EB62: suppressed demand COP17: CCS EB22: E+/E- rules 2001 2012 EB27: combined baseline and additionality tool EB65: HFC revision EB48: prior consideration EB62: standardized baselines guidelines EB65: Project Standard, Validation and Verification Standard, Project Cycle Procedure EB55: Validation and Verification Manual EB39: ban on new HCFC plants 25 March 2013 Source:CDC Climat Research (2012) based on the EB and COP reports

  24. Additionality & baselines EB16: tool for demonstrating additionality COP16: positive lists, standardized baselines COP17: Materiality Standard EB47: PoAs EB27: methodology consolidation EB62: suppressed demand COP17: CCS EB22: E+/E- rules 2001 2012 EB27: combined baseline and additionality tool EB65: HFC revision EB48: prior consideration EB62: standardized baselines guidelines EB65: Project Standard, Validation and Verification Standard, Project Cycle Procedure EB55: Validation and Verification Manual EB39: ban on new HCFC plants 25 March 2013 Source:CDC Climat Research (2012) based on the EB and COP reports

  25. The CDM Policy Dialogue Reforms already on the way Standardize additionality and baselines Reform the CDM governance Enhance sustainable development Boost CER demand, keep an eye on supply Proactively diffuse the CDM and its toolbox across climate initiatives New Recommendations (to be implemented by end-2013) 25 March 2013

  26. JI weight is growing • JI will account for 1/3 of all Kyoto offsets by May 2013 Source: issuance from UNEP Risoe (2012), forecast by CDC Climat Research (2012)

  27. JI case 1: industry • RU1000227: Evaporation System Modernization at OJSC “Ilim Group” (Russia) • Objective: reduce power consumption of the pulp production process

  28. JI case 1: industry • RU1000227: Evaporation System Modernization at OJSC “Ilim Group” (Russia) • Additionality: investment, barrier and common practice analyses • Lesson: JI can enable large-scale industrial EE projects in the absence of the ETS improving their IRR 1Based on the wholesale gas price set by Gazprom in 2012 (http://www.gazprom.ru/about/marketing/russia/)

  29. JI case 2: agriculture • FR1000135: Alfalfa dehydration optimization Coop de France Andainage(France) • Flat pre-wilting of alfalfa to reduce energy consumption on 16 individual sites and use of biomass energy

  30. JI case 2: agriculture • FR1000135: Alfalfa dehydration optimization Coop de France Andainage (France) • Additionality: investment and barrier analysis • Lesson: JI can spur technological innovation and enable efficient agricultural practices – “search function”

  31. JI case 3: household EE • JIPoA0005: Active Climate Protection – CO2 Bonus natural gas (Germany) • Encouraging private households (28 000 participants expected) to reduce their gas consumption through energy efficiency measures

  32. JI case 3: household EE • JIPoA0005: Active Climate Protection – CO2 Bonus natural gas (Germany) • Additionality: barrier analysis (PoA), common practice analysis • Lesson: JI can encourage diffused household EE projects outside the ETS 1Based on Eurostat (http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/)