Kyoto Protocol and
the CDM
Energizing Cleaner Production
Management Course
1
Session Agenda:
Introduction to climate change
The Kyoto Protocol and CDM at a
glance
CDM project cycle
CDM Pre-screen Tool for Industry in
Developing Countries
2
Introduction to Climate Change
Your task: answer these questions
• What causes climate change?
• Why are sea levels rising?
• Which greenhouse gas is more powerful:
CO2 or CH4?
• If we cut all GHG emissions, how long will
it take for climate
change to stop?
• How realistic was the
movie “The Day
After Tomorrow?”
3
Introduction to Climate Change
Some basic facts
• Human activities are releasing greenhouse
gases (GHG) into the atmosphere
• Climate change is a global issue:
1 tCO2 emitted in India = 1 tCO2 emitted in
USA
• Rising levels of greenhouse gases are
already changing the climate
• Climate models predict the global
temperature will rise by about 1.4 to 5.8
degrees by 2100
• Climate change is likely to have a significant
impact on the global environment, economy
and society
4
Introduction to Climate Change
The greenhouse effect
1) Solar radiation
5
2
2) Reflected back to space
3) Absorbed by atmosphere
6
1
4) Infra-red radiations
emitted from Earth
5) Some of the IR passes
through the atmosphere
4
3
6) Some is absorbed and
re-emitted by greenhouse
gas molecules
The effect is increasing temperatures on Earth
5
Introduction to Climate Change
1 oC increase since 1986
6
Introduction to Climate Change
The greenhouse gases
7
Introduction to Climate Change
Greenhouses are rising
8
Introduction to Climate Change
...and so is the temperature
9
Introduction to Climate Change
Trends for 2100
TEMPERATURE
PRECIPITATION
5 degrees = What separates us from the last glacial era (-15 000 BC)
Models’ forecasts : +1.4 to +5.8 degrees by 2100.
10
Introduction to Climate Change
Time needed to reach equilibrium
CO2 concentration, temperature, and sea level
continue to rise long after emissions are reduced!
11
Introduction to Climate Change
Visual impact at the polar ice cap
12
Introduction to Climate Change
Less visual but major impact
Consequences of
climate change:
Agriculture and food security
Crop yields, irrigation demands...
Forest
Composition, health and productivity...
Water resources
Water supply, water quality...
Coastal areas
Erosion, inundation, cost of prevention...
> Temperature increase
> Sea level rise
> More rain
Species and natural areas
Biodiversity, modification of ecosystems...
Human health
Infectious diseases, human settlements...
13
Introduction to Climate Change
Your task: answer these questions
• What causes climate change?
• Why are sea levels rising?
• Which greenhouse gas is more powerful:
CO2 or CH4?
• If we cut all GHG emissions, how long will
it take for climate
change to stop?
• How realistic was the
movie “The Day
After Tomorrow?”
14
Kyoto Protocol and CDM at a glance
Your task: answer these questions
• What is the main difference between
UNFCCC and the Kyoto Protocol?
• When did the Kyoto Protocol come into
effect, and why not before?
• What does it mean when we talk about
the “commitment period”?
• What are the “Flexible Mechanisms”?
• Why has USA not ratified the Kyoto
Protocol?
• What are the two main purposes of CDM?
15
Kyoto Protocol and CDM at a glance
United Nations Framework Convention
on Climate Change (UNFCCC)
• A global legal instrument (international
agreement) to protect the climate system
and stabilize GHG emissions
• Adopted in 1992, entered into force in 1994
• Status of participation: 189 Parties
• Contains 2 annexes:
– Annex 1: countries with obligations to take measures to
mitigate the effects of climate change
– Annex 2: countries with obligations to provide financing to
developing countries for their obligations under UNFCCC
16
Kyoto Protocol and CDM at a Glance
Kyoto Protocol – key points
• Adopted at third Conference of Parties
(COP) to the UNFCCC in Kyoto in 1997
• Required ratification of > 55 countries
representing > 55% of GHG emissions
• Entered into force on February 16th, 2005
after ratification of the Russian Federation
• Now 163 countries covering 61.6% of global
emissions have ratified the protocol
17
Kyoto Protocol and CDM at a Glance
Kyoto Protocol – key points
• Six emissions: CO2, CH4, N2O, PFCs, HFCs, SF6
• Binding emission reduction targets for Annex I
countries of 5.2% below 1990 over 2008-2012
• Non-Annex I countries have no binding targets
but must report on their actions
• Annex I countries can achieve targets through
domestic policies and three market mechanisms
• Non-Annex I countries can participate through
the Clean Development Mechanism to facilitate
sustainable development
• Rules for implementation worked out at annual
COP meetings
18
Kyoto Protocol and CDM at a Glance
Annex B countries
(= Annex I under UNFCCC)
Australia
Austria
Belarus
Belgium
Bulgaria
Canada
Croatia
Czech Rep
Denmark
EC
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Latvia
Liechtenstein
Lithuania
Luxembourg
Netherlands
New Zealand
Norway
Poland
Portugal
Romania
Russia
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
Ukraine
UK
USA
* Countries with economies in transition to a market economy.
* Countries which did not ratify Kyoto protocol.
19
Kyoto Protocol and CDM at a Glance
Emission trends in Annex 1
countries (2005)
Decreased emissions
(1990 baseline)
Increased emissions
(1990 baseline)
20
Kyoto Protocol and CDM at a Glance
Flexible mechanisms
ET - Emissions Trading
AAU (Assigned Amount Units) are exchanged
between Annex I countries
JI - Joint Implementation
Annex I investors receive ERUs (Emission
Reduction Units) by investing in a project in another
Annex I nation which reduces GHG emissions
CDM - Clean Development Mechanism
Annex I investors receive CERs (Certified Emission
Reductions) by investing in a project in a non-Annex
I nation which reduces GHG emissions
21
Kyoto Protocol and CDM at a Glance
What Annex I countries can do
Limitations of CO2 emissions in
developed countries (Annex I)
4 options for companies
1/ Pay expensive
fines.
2/ Carry out carbon
reduction through
processes
improvement.
3/ Buy emissions
4/ Carry out carbon
credits on the
reduction through
CO2 market (ETS). technology transfers
in CDM or JI project.
22
Kyoto Protocol and CDM at a Glance
Opportunities for industry
23
Kyoto Protocol and CDM at a Glance
Opportunities for industry
• Technology transfer to improve
process and energy efficiency
• Co-finance investments by selling
emission credits
• Prepare for future commitments
(after 2012)
• Achieve sustainable development
24
Kyoto Protocol and CDM at a Glance
Cleaner Production and Kyoto
Protocol Opportunities
Policy advice on industry’s
needs to enable JI/CDM
Submit pilot and full-scale projects to GEF.
Cleaner
Production
Activities
Engage in technology needs
assessments project
Propose JI/CDM projects
Raise awareness of JI/CDM opportunities
among local key industries and partners
Kyoto
Protocol
Assistance in formulation of National
Implementation Plans
(GHG inventories, needs, etc.).
25
Kyoto Protocol and CDM at a glance
Why CDM?
• Emission reductions more expensive
in developed than developing
countries
• Two objectives:
– Help Annex 1 countries meet their
objectives in a cost-effective way
– Contribute to sustainable development
of the host country
26
Kyoto Protocol and CDM at a glance
How the CDM Works
• Annex I country invests in GHG
reduction project in non-Annex I
country
• Annex I country receives CERs
• Non-Annex I country receives
revenues from CERs
27
Kyoto Protocol and CDM at a glance
Your task: answer these questions
• What is the big difference between
UNFCCC and the Kyoto Protocol?
• When did the Kyoto Protocol come into
effect, and why not before?
• What does it mean when we talk about
the commitment period?
• What are the “Flexible Mechanisms”?
• Why has USA not ratified the Kyoto
Protocol?
• What are the two main purposes of CDM?
28
CDM Project Cycle
Your task: answer these questions
• What is the difference between PIN
and PDD?
• What is the difference between the
baseline and the baseline
methodology?
• What is the role of the DOE?
• Does the size of my CDM project
matter?
• How are CDM projects normally
financed?
29
CDM Project Cycle
Overview: 9 steps
Project developer
DOE
1. Project Preparation
i.
Identification of project
ii.
Pre-screening of CDMApplicability
iii. Development of Feasibility
Study
(under consideration of CDM
Aspects)
2. Development of
Project Idea
Note (PIN)
DNA
EB
3. Development of Project Design
Document (PDD)
i. Project Description
ii. Select baseline approach
iii. Assess additionality
iv. Set baseline emission level
v. Set Crediting Period
vi. Calculate net emission reduction
vii. Develop a monitoring plan
viii.Assess environmental impacts
ix. Invite stakeholders for comments
8. Project
implementation
and monitoring
9.
Yearly
verification
and
certification
4. Submission of the
PDD and Host
Country Approval
to Validator
Registration of
the CDM project
Possible review
by CDM EB
Possible review
by CDM EB
7.
Submission of
Validation
Report and
PDD
of Project
6.
Validation
of Project
Host
Country
Approval
5.
Make PDD
publicly
available for
30 days
Registration of
the CDM project
30
CDM Project Cycle
CDM participants
• CDM project developer / operator –
e.g. government agencies, financial institutions,
NGOs
• CDM investors / CER purchasers –
usually corporation, government agency or NGO
in Annex I country
• Host government and Designated
National Authority – ratification of Kyoto
Protocol and approve CDM projects
31
CDM Project Cycle
CDM participants
Designated Operational Entities (DOEs)
• Domestic / international legal entities,
accredited by CDM Executive Board
• Responsibilities
– Validating CDM activities
– Making PDDs available
– Receive comments on CDM documents
– Verifying and certifying CERs during project
operation
32
CDM Project Cycle
CDM participants
• CDM Executive Board (CDM-EB)
– Reports to UNFCCC
– Ten members
– Reviews project validation and verification
reports
– Issues CERs
• Other stakeholders
– Local stakeholders: comment on PDD before
host country approval
– Other interested parties: comment on posted
PDD
33
CDM Project Cycle
Step 1. Project preparation
• 1-i. Identification of project
• Usually by comparison against approved
baseline and monitoring methodologies
• 1-ii. Pre-screening of CDM applicability
• Assessment of project against criteria
• CDM Pre-screen Tool can be used for this
step!
• 1-iii. Development of feasibility study
• Technical and economical feasibility
• Not required but recommended to prove
‘additionality’ of project
34
CDM Project Cycle
Step 2. Develop Project Idea Note (PIN)
• Project developer prepares PIN
• Not mandatory but helps to obtain
feedback from country / investors
• Five pages
–
–
–
–
–
Project type, size, location
GHG reductions
Suggested crediting life time and CER price
Financial structure
Other socio-economic and environmental
benefits
35
CDM Project Cycle
Step 3. Develop Project Design
Document (PDD)
A. General description of the project
B. Setting of the baseline
C. Duration of the project / Crediting period
D. Setting of the monitoring plan
E. Estimation of GHG emission reductions
F. Environmental impacts
G. Stakeholders’ comments
Annex 1: Contact information on participants
Annex 2: Information regarding Public Funding
Annex 2: Baseline information
Annex 3: Monitoring plan
36
CDM Project Cycle
Step 3. Develop Project Design
Document (PDD)
Baseline methodology: Approved
methodology
• Statement of which approved methodology has
been selected
• Description of how the approved methodology
will be applied in the context of the project
37
CDM Project Cycle
Step 3. Develop Project Design
Document (PDD)
Baseline methodology: new
methodology (to be submitted to the
UNFCCC Secretariat)
• Description of the baseline methodology and
justification of choice, including an assessment of
strengths and weaknesses of the methodology
• Description of key parameters, data sources and
assumptions used in the baseline estimate, and
assessment of uncertainties
• Projections of baseline emissions
• Description of how the baseline methodology
38
addresses potential leakage
CDM Project Cycle
Step 3. Develop Project Design
Document (PDD)
• Carbon credit (CER) can be
generated as from now:
– Banking by buyer for use towards compliance
in 2008-2012
– Banking by project proponent for sale in later
years
• Crediting period:
– Usually at start of project operation
– Fixed crediting period of up to 10 years
– Renewable crediting periods of up to 7 years
(maximum 3 x 7 years)
39
CDM Project Cycle
Step 4. Submission of PDD and host
country approval to validator
• Completed PDD and other reports
submitted to DNA for approval
– Ensures that governments retain sovereignty
over natural resources
– Confirm that project meets sustainable
development criteria
• PDD and host country approval
documents submitted to validator
(DOE)
40
CDM Project Cycle
Step 5 – 7: Public comments, validation,
review and registration of CDM project
Tasks of DOE
• Public consultation process (30 days)
• Validation of CDM project against
requirements
• Submission to CDM-EB
Tasks of CDM Executive Board
• Review (optional)
• Registration of CDM project
41
CDM Project Cycle
Step 5 – 7: Public comments, validation,
review and registration of CDM project
Number of projects registered or known to be prepared for registration:
End of 2004
Source: www.cd4cdm.org
End of 2005
42
CDM Project Cycle
Step 8: Project implementation and
monitoring
Monitoring required upon project
implementation
• In accordance with monitoring plan
of PDD
• For the entire crediting period
• Must at least cover technical project
performance
• Monitoring report submitted to DOE
for verification
43
CDM Project Cycle
Step 9. Yearly verification and
certification
Tasks of verification DOE
• Verification of data accuracy and
completeness and collection in
accordance with monitoring plan
• Preparation of verification report and
certification report to CDM EB & public
Tasks of CDM Executive Board
• Approval of issuance of CERs
• CER transfer into accounts
44
CDM Project Cycle
Fast track for small-scale projects
Reasons for “fast track”
• CDM process not feasible for small projects (high
transaction costs)
• Many small projects deliver significant local
sustainable development benefits
• Small-scale technologies are some of the most
promising for solving the long term problem of
climate change (e.g. solar; wind; fuel cells)
• CDM might lose public support if rules are biased
toward large capital-intensive projects
45
CDM Project Cycle
Fast track for small-scale projects
Three types of small-scale projects
• Type I: renewable energy projects with a
capacity of up to 15 MW
• Type II: energy efficiency projects with up to 15
GW/year (54 TJ) reduction on the demand and
supply side
• Type III: other projects which reduce emissions
and are emitting less than 15 kT CO2/year
46
CDM Project Cycle
How are CERs sold?
• Carbon funds are available through
– International tenders for CDM projects
– Voluntary corporate initiatives
– Multilateral Funds
– EU commitments for carbon purchase
– Bilateral negotiations with the
consortium of buyers
• Average price of 7,5 US$ / tCO2eq
in 2005 (3 to 14 US$)
47
CDM Project Cycle
How are CERs sold?
• What determines the CER price
– Likelihood Seller will deliver verifiable reduction on
schedule
– Creditworthiness and experience of project developer
– Technical / technological viability of the project
– Liabilities the Seller is willing to take if project fails to
deliver including penalties for non-delivery and willful
default / gross negligence
– Vintages: in some markets, early vintages (until 2012)
are priced higher because the Buyer’s willingness to
pay in order to meet compliance
– Likelihood of host country approval
– Environmental and social compliance and additional
48
benefits
CDM Project Cycle
Future demand for CERs
49
CDM Project Cycle
Your task: answer these questions
• What is the difference between PIN
and PDD?
• What is the difference between the
baseline and the baseline
methodology?
• What is the role of the DOE?
• Does the size of my CDM project
matter?
• How are CDM projects normally
financed?
50
CDM Pre-screen Tool
Purpose and content
• Helps companies determine if they
can and should participate in CDM
• Applied in step 1 of CDM cycle
• Tool consists of three parts
– Part I: is the project eligible for CDM?
(11 questions)
– Part II: GHG calculation
– Part III: Financial feasibility
51
CDM Pre-screen Tool
Part I: CDM eligibility
52
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
1. Has the host country ratified the
Kyoto Protocol?
2. Has the host country assigned a
Designated National Authority
(DNA)?
53
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
3. Will the project reduce emission
types under the Kyoto Protocol?
•
•
•
•
•
•
Carbon dioxide (CO2)
Methane (CH4)
Nitrous oxide (N2O)
Hydrofluorcarbons (HFCs)
Perfluorcarbons (PFCs)
Sulphur hexafluoride (SF6)
54
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
4. Does the country meet sustainable
development requirements of the
host country?
•
•
•
Economy, e.g. creation of employment
Ecology, e.g. reduction of air pollution
Social, e.g. improved availability of
public services
55
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
5. Are emission reductions additional?
GHG emissions
(tCO2eq)
1. Validation of project
design, baseline and
monitoring plan
2. Verification /
Certification of
emission reductions
Emissions baseline
ADDITIONAL
EMISSION
REDUCTIONS
Emissions after the project
Years
Project implementation
56
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
5. Are emission reductions additional?
Additional to what the company would
do under ‘business-as-usual’ scenario:
• Project required to meet country’s
legislative requirements
• Project follows country’s policies
• Technology corresponds to country’s
state-of-the art technology
• Project is financially feasible
57
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
6. Is the project not financed through
official development assistance
(ODA)?
•
•
CDM projects may not divert ODA
Examples:
•
•
Asia Development Bank
World Bank
58
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
7. Does the project fall into one of the
seven project type categories?
•
•
•
•
•
•
•
End-use energy efficiency
Supply-side energy efficiency
Renewable energy
Fuel switching
Methane reduction
Industrial processes
Sequestration and sinks
59
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
8. Does the project fall into type I – III
of small-scale projects?
•
•
•
Type I: renewable energy projects with a
capacity of up to 15 MW
Type II: energy efficiency projects with up to 15
GW/year (54 TJ) reduction on the demand and
supply side
Type III: other projects which reduce emissions
and are emitting less than 15 kT CO2/year
60
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
9. Does the potential technology meet
the following conditions?
•
•
•
Proven technology, although not necessarily
applied in the host country
Established and commercially feasible
technology, although not necessarily in the
host country
Replicable technology and/or one that can
effectively be transferred to the host country
61
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
10.Does the project result in significant
negative environmental impacts?
•
•
•
•
If “yes”, then environmental impact
assessment (EIA) required
Covers non-GHG impacts
Significant impacts may disqualify project
for CDM
EIA brings additional costs to the company
62
CDM Pre-screen Tool
Part I: CDM eligibility (cont)
11.Does the project have an
acceptable payback period
63
CDM Pre-screen Tool
Part II: GHG Calculation
64
CDM Pre-screen Tool
Part II: GHG Calculation (cont)
The baseline emissions and emission
reductions are calculated for four
emission sources:
•
•
•
•
Fuel combustion
Fuel for transport
Electricity consumption
Process related
65
CDM Pre-screen Tool
Part II: GHG Calculation (cont)
• Total CO2 reductions are calculated
per year and for total crediting period
• Basis for CERs
66
CDM Pre-screen Tool
Part III: Financial Feasibility
67
CDM Pre-screen Tool
Part III: Financial Feasibility (cont)
• Calculates the payback period of CDM
costs versus CER revenue
CDM payback period =
Transaction costs + Additional costs
Assumed CER price X Tons CO2-eq/yr
68
CDM Pre-screen Tool
Part III: Financial Feasibility (cont)
Indicative Timelines and Transaction Costs
under CDM
Preparation and review of the Project
Project completion
Upstream Due Diligence, carbon risk
assessment and documentation: $ 40K
Up
Supervision: $15-30K
t hs
Baseline : $20 K
Monitoring Plan: $20K
1-3
World Bank
Experiences
with
CDM Processes
nt hs
Verification: $15-30 K
on
2 mo
Periodic verification &
certification
to
21
3m
s
ar
e
y
Validation process
2
m
on
th
s
ars
ye
Contract, Processing
and documentation: $30k
3 months
Project Appraisal and Negotiation
Construction and start up
Initial verification at start-up: $ 25K
Total through Negotiations
Complete transaction costs for:
1 time 10 years CER period: 165,000 USD
3 times 7 years CER period: 195,000 USD
69
CDM Pre-screen Tool
Part III: Financial Feasibility (cont)
• Transaction costs ranges between
US$ 123,000 – 233,000 (indicative)
Transaction cost item
Project preparation and review
Baseline
Monitoring plan
Validation process
Initial verification at start-up
Periodic verification and certification
Minimum
36,000
18,000
16,000
12,000
11,000
30,000
123,000
Average
40,000
20,000
20,000
30,000
25,000
45,000
183,000
Maximum
54,000
28,000
24,000
35,000
32,000
60,000
233,000
70
CDM Pre-screen Tool
Part III: Financial Feasibility (cont)
Additional costs under the CDM, e.g.
• Internal personal costs for assisting with and
supervising the work of consulting companies
• Operation and maintenance (O&M) costs of the
monitoring system
• Purchase of monitoring equipment and system
CER revenue, which depends on:
• The (assumed) price per CER, e.g. US$ 5
• The crediting period: one time 10 years or up to
three times 7 years
71
For further information
•
•
•
www.energyefficiencyasia.org
www.unep.fr
www.cd4cdm.org
72

Kyoto Protocol and
the CDM
Thank you for your attention!
73
Acknowledgements
• This training session was prepared as part of the
development and delivery of the course “Energizing
Cleaner Production” funded by InWent, Internationale
Weiterbildung und Entwicklung (Capacity Building
International, Germany) and carried out by the United
Nations Environment Programme (UNEP)
• The session is based on materials from two projects
funded by the Swedish International Development
Cooperation Agency (Sida):
• The GERIAP project that resulted in the “Energy
Efficiency Guide for Industry in Asia”
(www.energyefficiencyasia.org)
• “Applying Cleaner production to Multilateral
Environmental Agreements” (ACME). ACME
74
project outputs are available on www.unep.fr.