State, Trends and Barriers to Carbon Finance in RBEC

1. State, Trends and Barriers to Carbon Finance in RBEC Marina Olshanskaya Regional Energy/Kyoto Protocol Specialist RBEC Energy and Environment Practice Meeting Wednesday 27th September, 2006 Bratislava, Slovakia

2. Presentation Overview • JI versus CDM • EU Emission Trading Scheme (EU ETS) • Green Investment Scheme (GIS) • Current status and potential for carbon finance • Key problems and barriers • Some good news and examples

3. CDM and JI Host countries • Countries listed in Annex I to UNFCCC: potential JI hosts (ERUs sellers) or CDM/JI investors (CERs/ERUs buyers) • With quantified GHG emission reduction targets: by 5.2% as compared to the baseline emission in 1990; • New EU member States, Bulgaria, Romania, Belarus, Russia, Ukraine, Croatia and Turkey • Non-Annex I to UNFCCC: potential CDM hosts (CERs sellers): • No quantified GHG emission reduction targets • South Caucasus, Moldova, Western Balkan, Central Asia, Cyprus • Kazakhstan – not ratified KP, would like to be included in the list of Annex I

4. CDM and JI: Similarities • Project-based mechanisms: a CDM/JI host country implements project, generates and sells CERs/ERUs to a CDM/JI investor (Annex I) country which use them to meet its national Kyoto target • Similar project development cycles (next presentation) • Same eligibility criteria: • CDM/JI project should result in measurable GHG emission reductions that are additional to what would have occurred in the business-as-usual scenario

5. CDM and JI: Differences • JI hosts are limited by their Kyoto target (amount of allocated Assigned Amount Units, AAUs) for ERUs they can sell, while CDM hosts are not • CERs can be issued for project implemented from 2000 through 2012, while ERUs only during 2008-2012 • Country eligibility criteria for participation in JI are more stringent than for CDM: • CDM: ratification of Kyoto Protocol and establishment of DNA • JI: CDM criteria plus calculation of AAUs, establishment of national registry (Track II), submission of national inventory, system for calculation of GHG emission/sinks (Track I)

6. RBEC JI Hosts and their Kyoto targets, 1mlntCO2eq

7. Green Investment Scheme (GIS) • Annex I countries with surplus AAUs can sell part of it to other Annex I countries; • Several Annex I parties indicated their willingness to buy provided the revenues from AAU sales are earmarked for “green” purposes (GHG mitigation project or other environmental projects) • Potential GIS hosts: Bulgaria, Ukraine, Russia, Belarus, Poland • Key issues to consider for GIS: • Need to meet Track I JI eligibility requirements (no country yet) • Need to design and establish GIS (governance structure, project development and implementation capacities, monitoring system, etc) • Calculation and justification of AAUs that can be sold through GIS

8. Kyoto Protocol (since 16.02.2005 in force) Reduction targets for Kyoto gases 2008 - 2012 over 1990 (base year) Industrialised countries: - 5,2 % EU 15: - 8 % Germany: - 21 % • To fulfil the national GHG reduction obligations, the EU has implemented the EU Emission trading scheme in 2005, involving companies from the industry and energy supply sectors • Within the EU, approx. 11,400 plants are obliged to take part in EU ETS. • Since 2005, these plants have received fixed quotas of CO2 certificates on which they must manage in future. Alternatives for compliance Buying of EU Allowances Purchasing certificates from CDM and JI projects EU Emission Trading Scheme: Motivation Emission Reduction e.g. plant modernisation

9. Emissions in reporting year Allocated allowances (EUA) Surplus of certificates Deficit of certificates EU Emission Trading Scheme EU ETS* Market CDM / JI ?? CER (Certificates from CDM projects) ERU (Certificates from JI projects) EUA (EU Allowances) Purchase Sale From 2008: further reduction of allocated allowances ? Banking 2005 2006 2007 2008 ... 1st trading period of EU ETS* 2nd trading period of EU ETS*

10. EU Emission Trading Scheme • Eligibility among RBEC countries: • All EU member states, Romania, Bulgaria, Croatia (after EU accession); • Preparation of National Allocation Plan (NAP) which assign GHG emission quotas to key GHG emitting facilities in country • CERs/ERUs can be used by EU ETS participants to meet their target under NAP (EU Linking Directive) • EU Linking Directive provides for legal basis for EU companies to use CERs/ERUs for compliance within the EU ETS: • Once CERs/ERUs are physically available, the should have the value of EUAs (EU Allocated Allowances) • Member States can set a maximum for the use of CERs • CERs have to fulfil certain additional conditions for EU ETS compliance use (e.g. Investor country approval, “World Commission on Dams” rules for hydropower, no Afforestration / Reforestration projects)

11. EU Green and White Energy Certificates • White/green Energy Certificates – market mechanisms introduced by EU to help countries meet their energy efficiency (white) or renewable energy (green) targets • No formal linkages with Kyoto/carbon market, unless special regulation is introduced by a host country • Different institutional arrangement, monitoring and verification protocols • In theory: one facility (e.g. Wind Park in Hungary) can generate and sell both ERUs (under JI ) and EU green energy certificates if the project meets the requirement of each mechanisms

12. Current status: RBEC’s share in CDM/JI market (# projects – September 06) RBEC - 130 11 CDM projects (Moldova, Armenia, Kyrgyzstan and Tajikistan) 119 – JI projects(Bulgaria, Romania, Czech and Slovak Republics, Poland, Hungary, Lithuania, Estonia, Ukraine, Russia)

13. Current status: RBEC’s share in CDM/JI market volume (tCO2 eq - September 06)

14. RBEC GHG Reduction Potential

15. RBEC: Carbon Intensity of GDP (tCO2eq/mln$GDPintl)

16. RBEC: Carbon Intensity of GDP (tCO2eq/mln$GDPintl), cont

17. Why: key issues and barriers • Poor investment climate and lack of underlying financing for implementation of projects • Carbon finance only marginally improves economics of potential projects, especially those with strong development dividend:

18. Why: key issues and barriers, cont • Limited knowledge of carbon finance, especially in national investment/banking sector • Lack of data and methodologies for estimation of baseline emissions (e.g. no approved CDM methodology for projects in district heating) • Absence/weakness of national institutional framework for JI/CDM (see How-to Guide) • Small/medium countries (most countries in RBEC) have scarce supply of project with large volume (above 100tCO2eq/yr) of CERs/ERUs, thus difficult to compete with large CDM/JI hosts • Low baseline GHG emission due to under-consumption of energy (lack of access or high costs)

19. There are good news – barriers are possible to overcome • Armenia: Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan(Japan) • Moldova: Moldova biomass heating in rural communities project(World Banks’ Community Development Carbon Fund) • Tajikistan: Pamir Energy – Pamir I Hydropower Generation (14 MW)(Unilateral – Aga-Han Foundation)

20. Thank you!