Oct 13, 2011

CARBON FINANCING: NEW BUSINESS OPPORTUNITIES

Session 4: Flexibility Mechanisms of y KYOTO Protocol : Development of CDM
PartA: Part A: DevelopmentofCDM Development of CDM HistoricaldevelopmentofCDMmechanism CDMMechanisminBrief

PartB:

CleanDevelopmentMechanism(CDM)inIndia

PartC:CleanDevelopmentMechanismProjectIssues PDDISSUES Institutionalmechanism,Additionality,Baseline

Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

QUESTIONS?
What are the important terms for carbon finance? What is the procedure to execute the CDM project (in India)? Who is international monitoring body for CDM/carbon credits? What are the financing options for CDM projects (in India) ? How to prepare the CDM Project Carbon market/trading - What? Why?, How? Who? Where? What?, Why? Infrastructure required? What are the direct or indirect effect of carbon finance on growth of any industry ? How to assess carbon credit benefits of Industry likely to go for fuel switch from conventional to Natural gas? Does carbon credit exchange works? D b dit h k ? How to calculate the carbon credits? How the carbon footprints are measured for product, nation and city product What is carbon capture? Who can do? Effect on Economy?

Part A: Development of CDM

Historical development of CDM mechanism CDM Mechanism in Brief

BasicTerminologyandCDM KeyTerms HistoricalDevelopmentofCDM CDMPerspectives CDM Perspectives KyototoMarrakesh CDMModalitiesandProcedures CDMProjectCycle CDMMethodologies GlobalStatus
3

IMPORTANT TERMINOLOGY
Basic Terminology
Carbon Emissions, Intensity and offsets, GWP Emission factors (EFs) Kyoto felxi JI, CDM, ET Credit U it C dit Units Carbon Market / Carbon Exchange and Voluntary market Carbon Finance Peaking year Carbon infrastructure and Services

Agencies in CDM Project Host j Project Developer CDM Participants Focal Points CER Buyer DoE DNA EB

CDM Key terms

Annex I Industrialized countries + EITs First Commitment period: 2008-2012 CDM methodologies CDM PIN, PDD, MRV South-South CDM CDM Baseline, Additionalty, Sustainability

Clean Development Mechanism

Objective of CDM The CDM has the following three stated objectives: To assist Parties not included in Annex-I i.e. Developing Countries in achieving Sustainable Development To contribute to the ultimate objective of the Convention (i e stabilize Green (i.e. House Gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system) To assist Parties included in Annex-I (Developed Countries) in achieving compliance with their quantified emission limitation and reduction commitments under Article 3 of the Kyoto Protocol

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

HISTORICAL PERSPECTIVE
Pre Kyoto Protocol (till Dec, 1997) Dec CDM A Kyoto Surprise Green Development Fund (Brazil) endorsed by G77 +China and opposed by developed countries (viewed it non-compliance penalties) Developing countries opposed any Activities Implemented Jointly (AIJ) in Developing Countries to offset the commitment of Annex I countries I countries. US+Brazil suggested a combined scheme Annex I counties are allowed to exceed the emission quota through supporting the emission reduction projects in developing countries. Viewed largely as Sustainable Development + offsetting the developed countries commitments

PERSPECTIVE TO CDM
CDM as Cheap mitigation opportunities for Developed p g pp p countries CDM as Development Assistance CDM as M Money C ti mechanism Creation h i CDM (?) implementation flaw when only one party is committed for reduction of GHGs.

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CDM OPERATIONLISATION
Kyoto Protocol came in force Feb 2005
2005 : > 180 CDM 2008 : > 1400 2011 : > 5600 in pipeline of which
3517 are registered (2 07 million CER) gi t d (2,07 illi > 2000 in different stage
Source: UNFCCC

Making to significant part of Official Development Assistance Number of Stakeholders in North and South are large
Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CDM JOURNEY : KYOTO TO MARRAKESH (1997-2001)

Marrakesh Accord (N 2001) CDM operational g id li M k hA d (Nov 2001): ti l guidelines agreed g d Completed (2003) with inclusion of LULUCF CDM project guidelines The Flexibility mechanism were strongly objected by the NGOs CDM seen as By-pass of domestic compliance [A cap was proposed in Marrakesh, but was not agreed upon] Concerns expressed
Excess of emission credits Possibilities of inflatory strategic manipulation by buyer/seller of baseline Possibilities of KP loopholes --- Project basis Additionality test Conservative approach of EB for Validation of ERU Sustainable Development priorities test left to host countrys authorities

Strict limitations on LULCF CDM (Quality and Quantity): measurement uncertainties, Monoculture/Alien Species, Non inclusion of credits in EU ETS CDM cycle

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CDM PROJECT CYCLE (CONTD)

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

These six steps - validation, registration, monitoring, verification, certification and issuance - make up the CDM project cycle

CDM METHODOLOGIES
Approved methodologies
Approved Large Scale methodologies (AM) Approved Consolidated methodologies(ACM) Small Scale methodologies (AMS)
Scope Energy industries (RE/ non-RE) Energy di t ib ti E g distribution Energy demand Manufacturing industries Chemical industries Construction Transport Mining/mineral production Metal production Fugitive emissions from fuels Fugitive emissions from production and consumption of HC/SF6 Solvent use Waste handling and disposal Afforestation and reforestation Agriculture Methodologi es (Number) 62 4 21 30 21 0 12 1 7 8 10 0 20 21 6

Proposed New methodology p gy

GLOBAL STATUS: Major Sellers/ Hosts

Top 10 Country China India Brazil Republic of Korea K Mexico Indonesia Malaysia Chile Argentina Nigeria Reductions (Annual avg) CERs 335,418,712 60,148,267 23,549,471 19,441,537 , , 10,870,801 7,565,586 5,732,640 5,636,073 4,962,532 4 962 532 4,693,552
Source: UNFCCC, Oct 2011

Total CERs : 528,913,516

Source: UNFCCC

GLOBAL STATUS: HOST AND INVESTOR COUNTRY

Country(Host) Projects(No.) China India Brazil Malaysia Mexico Indonesia Chile 1618 734 196 102 133 71 51

Country Country (Investor) United Kingdom Switzerland S it l d Japan Netherlands Sweden Germany Spain

Projects(no.) 1207 822 449 417 281 196 114

Source: UNFCCC, Oct 2011

GLOBAL STATUS: WHAT TYPE OF CDM PROJECTS COMING-UP?

Energy industries(RE/nonRE):2778 Wastehandlinganddisposal :577 Manufacturingindustries:206 Fugitiveemissionsfromfuels:168 Agriculture:148
Source: UNFCCC, Oct 2011

2011

Source: UNFCCC

GLOBAL STATUS REGULATION GROWING TOUGHER

CDM IN 2007-08
CDM as part of Carbon Market All transactions in lieu of GHG emission credits Various form cash, equity, debt or technology transfer Allowance based Cap and trade regime; AAUs + EUAs (EU-ETs). Project Based JI and CDM + Non Kyoto transactions Non-Kyoto (Voluntary) Risk Profile variations
Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

REGULATORY ISSUES
Slow Regulatory development Lack of resources to match the market explosion Backlog of projects Regulatory Bottleneck Methodologies Development and Validation CDM project cycle (registration period) length decreasing today about 8-10 months as compare to earlier of more than 12 months 2011 DNAs in more than 125 countries including 91 developing countries
Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

PART B:Clean Development Mechanism in India

CDM in India CDM Potential In India P i l I I di Initial Response in India Status of Potential Harnessing CDM Issues: Institutional Baselines Establishment Technology Transfer Project Risk What need to be done? CDM in Future
Course Instructor: Er. Ashwani Kumar,
Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CDM PROJECT DEVELOPMENT PROCESS: CASE

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

Course Instructor: Er. Ashwani Kumar,

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

CDM POTENTIAL IN INDIA

One third of emission reduction targets (Annex 1) Identified potential in India : Energy, transport, agriculture, Energy transport agriculture waste and industrial Agriculture and Forestry have issues : Disaggregated, small landholdings, grazing requirements, transaction cost, carbon sink uncertainties. Carbon Mitigation Potential
Demand side EE Supply side EE Electricity T & D Renewable Electricity Tech Fuel Switching

INITIAL RESPONSE OF CDM

Buyers preference overridden the other robust criteria least cost mitigation, National Development Priorities Document lacks in
Content and form of PIN/PDD Articulation to related to Sustainable development/ National priorities i ii

Difference in states geographical location and economic development status

Coastline (Wind Energy, AP, TN, Gujarat) Sugar Industry (Cogeneration UP, Maharashtra) 12 no. Energy Intensive Industries (Steel, Cement Fertilizers etc. Fuel Switching and EE, All industrialized States)

INITIAL RESPONSE TO CDM

Some projects (cogen) shifted to CDM due to termination of subsidy and earlier ODA grant Steel and Cement Industries benefitted to improve on EE, process modifications/modernisation heat recovery modifications/modernisation, Electricity sector benefitted a lot Fuel switching, y g, Renewable Although least cost options Agriculture, Forestry and Transport were not in initial list

CDM STATUS OF POTENTIAL HARNESSING IN INDIA

Good Awareness among all stakeholders about CDM Ambitiously aimed renewable policies and elaborated environmental regulations Concerns exhibited on lower CER prices and uncertainties on protocol beyond 2012 Simplistically high benefit projections from CDM projects overlooking the ground level/implementation issues is harmful for long term CDM success Bias in favour of bil t l CDM projects with hi h costs over Bi i f f bilateral j t ith high t unilateral low cost projects Economic Rent or CERs vs. investment opportunity elsewhere E i R t CER i t t t it l h

CDM STATUS IN INDIA

Un exploited south-south CDM Sustainable development objectives are overlooked p j and viewed as external to project Risk

WHICH ARE THE CONSULTANT IN INDIA (DOE)?

Pricewater House Cooper E&Y Winrock DNV TERI

CDM ISSUES : INDIAN CONCERNS

Low Price of CER due to absence of strong buyers and number fC f of sellers Smaller projects are common?
Low project risk cover in CDM leading to small projects Unilateral projects have higher risk Capital scarcity Simplified procedure under Marrakesh Lower transaction cost L t ti t

Lack of identified portfolio of high mitigation potential large projects Countrys Political structure (Centre and State) leads to multiplicity of agencies and heterogeneous subsidy and pricing

CDM ISSUES : INDIAN CONCERNS

Range of technology from vintage to ultramodern g gy g Technologies Urban full-market functions and Rural incomplete Diverse and regional socio-economic context Di d gi l i i t t Host country approval / transaction costs

CDM INSTITUTIONAL ISSUES

Quick establishment of DNA in MoEF far away from effective functioning
Resources Long term institutional strategy Independence Professional incompetence Weak industry linkages

Participation of Financial Institutions Limited number of institutions

BASELINES ESTABLISHMENT

IN INDIA

: ISSUES

Project level CER accounting i sensitive the methodology and P j l l i is ii h h d l d baseline determination. Co-operative rule making Environmental Integrity Transaction cost Complexities vary from sector to sector Prevailing technology and practices Economic scale of operations

BASELINES ESTABLISHMENT
Diverse state policies Di li i

IN INDIA

: ISSUES

Sectoral structure, technology and practice diversity structure Average emissions (80%) or marginal emissions (20%) Reconciliation of National aggregation, State baselines trend and Project baseline Clarity f baseline b Cl it of b li become a prime criteria th th mitigation i it i than the iti ti potential or sustainable development alignment

TECHNOLOGY TRANSFER
Initial projects had low technology transfer potential Conventional route - open market acquisition than TT as integral part of CDM Existence vs. widespread of a technology Technology exports (south-south) ODA additionality

PROJECT RISKS
Overlapping regulations b multiple agencies O l i l i by li l i Legal Risk (location) Political Risk (Divergent views on several matters) Judicial Risk (power to reviews administrative actions, PIL, decision delays, CER treatment ) Ever shifting baseline and operating environment Contract enforcement IPR and technology risk Risk sharing mechanism

CDM AND DEVELOPMENT

Rapid changes in some sector ( p g (Energy, Service) gy, ) Declining energy intensity of GDP (sectoral reforms facilitating the technology, fuels quality, EE etc.) Faster Decoupling Instruments? F t D li g I t t ? Beyond Kyoto/ Copenhagen?

WHAT NEED TO BE DONE?

Capacity Building of local Consultants proponents etc. Consultants, etc Clear identification of CDM portfolio with National Priorities and Sustainable development goals Market development, Corrections and reforms DNA as Autonomous Institution Institutional Arrangement for co ordinating the capacity co-ordinating building, R&D, Awareness, project prospecting etc. Standardized CDM service formats

Part C: Clean Development Mechanism Project Issues PDD ISSUES Institutional mechanism, Additionality, Baseline

Asstt. Prof. Faculty of Planning, CEPT, Ahmedabad - 9

Course Instructor: Er. Ashwani Kumar,

Project Design Document

CDM process Stakeholders/Agencies p / g
Project Owner (Company) Project Developers Consultant (DoE) Service Agents DNA EB Verifier DoE Government Authorities (Ministry/Dept.) G t A th iti (Mi i t /D t ) NGO/Environmentalist User

PDD CONTENTS
1. 2. 3. 4. 4 5.

Project Description Baseline setting and Addtionality Screen Boundaries Crediting time line GHG reduction estimation Monitoring , reporting and Verification plan Environmental Impacts Stakeholders Consultation

6.

7. 7 8.

Project Design Document

1. 1 PROJECT DESCRIPTION
a) b) c) d)

Project/ Activity Title Project Purpose /Objectives; Project participants; Project Brief : Technical description (location, category, technical performance, information, opportunities for technology transfer, greenhouse gas reduction explanation, Justification that public funding, if used, is not being diverted from other uses Additional recommended information Project background Problems and barriers being addressed by the project; Project planning (timetable); Description of the key issues and stages in project development (milestones); and Any other information (relevant) within reason

e) f) g) h) i) j) k)

Project Design Document

2. A) BASELINE SETTING )
Adopting or creating a baseline methodology
Simplified methodology (Small projects) Approved methodology New Methodology

Establishing a credible and transparent baseline Choosing a baseline approach

Defining the project boundaries Emissions Forecasting under the business as usual scenario Assessing future emissions from the project (with CDM) Assessing leakage, and Projected emission reductions

2.

A) Baseline Setting

Project Design Document

BAU TECHNOLOGY/EMISSIONS
Existing, actual or historical emissions g, Emissions using economically attractive technology or course of action (investment barriers) BAU Technology in similar social, economic, environmental and technological circumstances BAU Technology (Averaged ) - Average emissions of activity in i general l BAU Technology (Marginal ) - Average technology of similar activities undertaken (in last 5 years)

Project Design Document

2. 2 B) ADDITIONALITY
a) b) c) d) e)

Public ODA funding Alternative Baselines screening Prevailing practices Alternative practices Barrier Analysis
a) b) c) d) e) f)

Financial Political Institutional Economic Technological .

f)

Financial (IRR) Analysis

Project Design Document

SOME BARRIERS
Market Barriers
Market tend to be missing or segmented Monopoly Entry barriers Externalities and public goods Price distortions and absence of price signals

Institutional barriers
Unreliability or absence of legal institutions Under developed financial markets Limited flow of information Administrative capacity constraints

In-flexibility and constraints of established technical y systems

Capital irreversibility (turnover, infrastructure) Specific technology innovation and learning aspects (i ti market l i g t (inertia, k t development needs) Economies of scale

Human capacity barriers

Insufficient education level and coverage Limited supply of skilled labor and pp y professionals

Project Design Document

3. 3 ENTITY AND BOUNDARIES

Define an entity (scope of project) Jurisdiction J i di i Management Control Defining Boundaries Geog ap ca Geographical Activities

Project Design Document 4. 4 CREDITING PERIOD

Crediting period: the time from where the carbon credits are g generated and delivered and upto what time they will be p y taken under the market
Retrospective Prospective

Project Design Document 5. 5 GHG REDUCTION ESTIMATION

Consolidated Statement on GHG Reduction with Project Annual Basis Activity-wise Break-up Activity wise Break up (Vertical and horizontal) Cumulative (During proposed crediting period ) As % of existing emissions

Project Design Document

6. 6 MONITORING, REPORTING & VERIFICATION PLAN
Monitoring (Approved methodology)
GHG reduction Sustainable development Other Component

Management Control and Responsibilites

Ultimate responsibility for carrying out all stages of monitoring proces Control procedures Quality control to deal with the monitoring process

Monitoring parameter and data gathering

How the data on non greenhouse gas environmental impacts will be collected and archived Method of measurements and calibration Data collection and quality control responsibilities Duration of the measurements Backup system for data collection Monitoring data archiving responsible and formats Explanation to deal with missing data, If applicable

Project Design Document

6. 6 MONITORING, REPORTING & VERIFICATION PLAN (CONTD) )
Leakage ?
Sources, practices and supporting activities % of total emissions and reduction achieved

Reporting formats Verification

Stages Parameters Controls points

Credit period (Retrospective or prospective)

Project Design Document 7. 7 ENVIRONMENTAL IMPACTS

Historical Track record Environmental Impact Assessment Public Hearing Gold Standard Over all environmental and social Integrity

Sustainable Development
Social Economic Environmental Technological

Project Design Document

8. STAKEHOLDERS COMMENTS
Two stage process Stage 1 : Public Hearing
Participants f from Local stakeholders (community, users and civil society) Comment on PDD Summary of the comments and review Provide address report for validation by DoE (demonstrating incorporation/addressing the relevant concerns)

Stage 2 : Consultation of Stakeholders (International)

Modified/Finalised PDD is put on website of DNA for comment by the International community and comments are communicate to Project Host and PDD modified

DISCUSSION ?

Thank Th k you

CourseInstructor: Er.AshwaniKumar,
Asstt.Prof. FacultyofPlanning,CEPT,Ahmedabad 9