Gas Flaring Reductions and the Clean Development Mechanism (CDM) - PowerPoint PPT Presentation

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NOT AN OFFICIAL UNCTAD RECORD

Gas Flaring Reductions andthe Clean Development Mechanism (CDM)

Lucas Assunção

Coordinator

BioTrade and Climate Change Programmes

UNCTAD, Geneva

UNCTAD/Earth Council Carbon Market Partnership

Agenda

The Kyoto Protocol
The Clean Development Mechanism (CDM)
The emerging carbon market
CDM challenges and opportunities for gas flaring reduction projects

The Kyoto Protocol: Architecture

Caps emissions of greenhouse gases (GHG) by industrialized countries (Annex I)

combined emissions are reduced by at least 5% of their 1990 levels by the period 2008-2012

Industrialized countries have access to 3 “flexibility” mechanisms

to minimize the cost of reducing emissions (flexibility)

The Kyoto Protocol as a “cap & trade” system

Collective problem-solving approach

As a group, reduce GHG emissions by X amount in X time to reduce concentrations

Flexibility with regards to

Measures – technology used, policy tools, etc.
Allocation of emission “quotas” among emitters
Trading “quotas” among each other

“Cap and Trade” analogy

10 passengers share a boat to cross a river
Due to river conditions, boat has now to be lighter but should still accommodate same 10 passengers
The carry-on bags in which we all put our “things” now needs to be smaller
From now on, our “stuff” will have to fit in the smaller bag
If you have extra “space” in the bag, you can trade it with someone who needs the extra space

Why cap & trade is preferred policy

Drives down the costs of achieving environmental objectives

Acid Rain: from $1,000s to $100s (see next slide)

Gives industry space to change and adjust
Feeds on diversity of marketplace and differences in abatement costs
Drives innovation and efficiency
So the bigger the market, the better
But this also results in “winners and losers”

US SO2 Prices

Kyoto Protocol’sFlexibility Mechanisms

Classical “cap & trade” mechanism

International emissions trading (ET) – trading of emission “quotas” among industrialized countries (AAU)

“Offset” mechanisms

Joint Implementation (JI) – emission reduction credits resulting from offset projects in other industrialized countries (ERU)
Clean Development Mechanism (CDM) – crediting of certified emission reductions resulting from offset projects in developing countries (CER)

What is the Clean Development Mechanism

KP mechanism that defines project activities which reduce GHG emissions or increase CO2 sequestration implemented in developing countries
Purpose:

To support developing countries in achieving sustainable development through the implementation of project activities that reduce GHG emissions
To assist industrialized countries in meeting their GHG emission reduction commitments

CDM overview

CDM Project Activity

(Methane recovery in landfill)

Sustainable Development

in developing countries

Certified Emission

Reductions

(CERs)

Remove or retire CER

from market (NGO)

Sell CER through market

INVESTORS

Use CER to comply with

present or future GHG

emission commitments

CDM rules from Marrakech

Undertaken in developing countries
CERs may be used by Annex I countries
Voluntary participation approved by each Party
Real, measurable and long-term mitigation benefits
Reductions are additional to any that would occur in the absence of the project
Promotes sustainable development, as confirmed by host country
Does not divert ODA
Should lead to transfer of technology and know-how
Refrain from reductions generated from nuclear facilities

Process/Steps

Project Design

Project validation

Registration

Monitoring

Verification/Certification

Issuance of tradeable credits

Key Actors

Project Developers

Nat’l CDM Office, National Gov’ts

CDM Executive Board

Project Operators

Independent Third Party

CDM Executive Board

The CDM Project Cycle

The Emerging Carbon Market

In anticipation of the entry into force of KP, a global market is emerging
Fuelled by the perception that the future will be –

“carbon-constrained” (environment) and/or
have to be less fossil-fuel dependent (political economy)

The Dow Jones Sustainable Development Index has outperformed the market

Market Actors

Governments

EU-wide emission trading scheme (starts in 2005)
National emissions trading schemes – Denmark, UK, Norway (early starters)
The Netherlands – ERUPT and CERUPT – emission reduction procurement tender – now joined by other governments like Finland, etc.

Corporations

Corporate-wide: Shell, BP
Procurement/Investment: TransAlta, OPG, Marubeni
Chicago Climate Exchange

Chicago Climate Exchange

Carbon Finance @ World Bank

Market Forecast

We are living in a carbon constrained world. The urgency to control/stop the radical change in the world’s atmosphere and climate will only increase.
Market mechanisms are the preferred policy responses. But this will create winners and losers at various points in time.

cdm challenges and opportunities in general

Challenges include -

Lowering transaction costs

Limit on use of credits by industrialized countries

“Additionality” issue

Promoting CDM investments

Ensuring that additional revenue promotes sustainable development

Opportunities include –

Additional revenue stream

More energy-efficient technologies

Better practices

Greater environmental awareness

CDM Challenges andOpportunities: in General

Gas Flaring Reduction Projects: Challenges & Opportunities

Gas flaring and climate change

CO2 emissions from flaring is about 10% of the Kyoto emission reduction commitment of all Annex-I countries (including USA)
Energy wasted through flaring and venting is prodigious
The gas alone is enough to supply all of France’s gas requirements
Venting of associated gas (methane) directly into the atmosphere is unrecorded and is 23 times more potent than CO2 as a greenhouse gas

Economics of gas flaring

About 8 billion standard cubic feet per day of gas is wasted globally (= France’s gas requirements)
There are strong economic reasons to stop the flaring and venting of gas resources
Requires large capital investment that is sensitive to a variety of risk factors

Major challenges for gas flaring reduction as CDM

“Additionality”
Demonstrating Sustainable Development
Competition with other CDM projects

Additionality

Given the economic importance of capturing flared gas and the associated political and regulatory pressures, it is difficult to establish

Whether or not the planned reductions would take place without the proposed CDM project
What amount of reductions can be credited to the CDM project

Demonstrating Sustainable Development

3 categories of reduction projects

Re-inject associated gas
Improve efficiency of flares
Utilization of gas for energy purposes

Except for last category, projects do not have high visibility impact in promoting sustainable development – a key component

Competition with other CDM projects

Assuming that the carbon market is modest and that prices stay at Euro 3-10

Other CDM projects may be more attractive than gas flaring reduction projects

Conclusions: Gas Flaring Reduction Projects

Viability & attractiveness of GFR projects is likely to increase as the CDM market grows
In a large CDM market, GFR projects offer highly effective, measurable sources for large amounts of CERs
Uncertainties about gas flaring reduction projects can be reduced by clearer regulatory policy
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