Introduction to Climate Change, Kyoto Protocol

1
Introduction to Climate Change, Kyoto Protocol
the Clean Development Mechanism (CDM)

• Joash Obare
• 27th May 2008

Associate
2
Contents

• Introduction
• Climate Change Global Warming
• Kyoto Protocol
• Clean Development Mechanism (CDM)
• CDM Project Cycle
• Project Screening
• Project Development National Approval
• Validation and Registration
• Implementation, Monitoring, Verification and
  Certification
• Project Market Types (if time allows)
• Small/Large Projects
• Voluntary/CDM Projects
• Gold Standard Projects
• Pricing Price Drivers (if time allows)

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Climate Change

• Climate change (global warming) is the variation
  in the Earths global climate or in regional
  climates
• A major contributor is human (anthropogenic)
  activities resulting in GHG emissions
• The United Nations Framework Convention on
  Climate Change (UNFCCC)
• An international environmental treaty established
  during the Earth Summit in Rio De Janeiro in 1992
• Aims to reduce GHG emissions
• Originally no emission targets set
• Includes provisions for update
• Principal update is Kyoto Protocol

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The Kyoto Protocol

• Negotiated in 1997, under the United Nations
  Framework Convention on Climate Change (UNFCCC),
  entered into force in 2005
• The Kyoto Protocol sets greenhouse gas (GHG)
  emission reduction targets for 2008-2012 for
  industrialized (Annex 1) countries
• Industrialized countries expected to achieve the
  majority of these reductions domestically
• Targets to be realised through three flexible
  mechanisms (CDM, JI or ET) for countries to
  purchase GHG emission reduction credits
• Established two project based mechanisms
• Clean Development Mechanism (CDM)
• Joint Implementation (JI)
• EU Emissions Trading Scheme (EU ETS) established
  in Europe
• Allowance based cap and trading scheme

5
Clean Development Mechanism

• The Clean Development Mechanism (CDM) provides
  for purchasing GHG emission reductions by Annex1
  countries from Non-Annex 1, while supporting
  sustainable development in Non-Annex 1
  (developing) countries
• It is project based
• Methodologies of determining baselines and carbon
  calculations regulated by the CDM EB

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Expectations from CDM

• CDM benefits (short, medium and long-term)
  vis-à-vis complexities
• Financial flow, technology transfer
• Sustainable development benefits
• Efficiency improvement, resource conservation
• Sectors priorities / preferential treatment
• Small scale versus large scale projects
• Rural development oriented projects
• High sustainable development projects (Gold
  standard)
• New markets have since evolved for non-CDM
  offset/voluntary emission reductions

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Benefits of the CDM to Project Developers

• Provides an additional source of (foreign
  currency) financing for emissions reducing
  projects
• Helps to remove barriers preventing the
  implementation of these projects
• Improves return on investment
• Allows the use of higher cost/higher performance
  technologies

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CDM Project Rules

• Project must produce real, measurable GHG
  emission reductions
• Project must reduce emissions below a baseline
  that would have occurred without the CDM
• Project must result in sustainable development
• Use of carbon sinks limited to reforestation and
  afforestation, to a maximum level per country.

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CDM Rules (contd)

• Allowable Credit Period for CDM projects
• Seven years with option to renew twice, or ten
  years without renewal
• Trading of CERs
• CERs generated by CDM projects are marketable
  commodities that can be sold on world market
• Simplified Procedures
• Small-scale CDM projects can use streamlined
  baseline and monitoring procedures and a simpler
  Project Design Document

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How It WorksThe baseline assessment
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Additionality

• To satisfy the additionality requirement, project
  proponents need to show that
• The project would not have occurred without the
  CDM-JI due to financial, political or other
  barriers (i.e common practices)
• The project goes beyond a business as usual
  scenario
• Greenhouse gas emissions are lower with the
  project than they would have been without the
  project (in other words, project emissions are
  less than the emissions projected in the baseline
  scenario).

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CDM Project Participants

• Project Proponent The local enterprise or
  organisation that develops and implements the CDM
  project
• CER Purchaser the company that invests in the
  project to obtain CERs, or purchases the CERs as
  they are produced
• Host Country The developing country in which the
  CDM project takes place.
• Executive Board UN Supervisory body of the CDM
  accountable to the Conference of the Parties
  (COP) to the Kyoto Protocol
• Operational Entity An independent legal entity,
  accredited and accountable to the Executive
  Board, that validates CDM activities and verifies
  emissions reductions

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Host Country Role

• Host country determines whether a project
• Results in sustainable development
• Needs an Environmental Impact Assessment (EIA)
• Incorporates stakeholder comments

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Sustainable Development Criteria

• Most host countries have prepared sustainable
  development criteria for CDM Projects
• Social criteria which focus on poverty
  alleviation and equity
• Economic criteria which includes financial
  returns to local entities and technology
  transfer
• Environmental criteria which addresses reductions
  in GHG, conservation and provides other health
  and environmental benefits

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Expert Poll Conducted by Point Carbon
(www.pointcarbon.com)

• CDM can increase the return on investment
• CDM will rarely change a bad investment into a
  good one as long as carbon prices are low.
• CER stream is rarely the most important factor in
  deciding whether a CDM investment is sound or
  not.
• It is much more important that a potential
  project is economically and financially sound as
  such.

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Key CDM Opportunities

• Energy Efficiency Projects
• Renewable Energy
• Biomass
• Wind
• Solar
• Biogas

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Project Cycle key documents
Assess potential project
Prepare Project Design
Project Design Document
Inform/Obtain approval from host country
PIN
PDD independently checked Validation
Validation Report
Registration (JI/CDM/vol standard)
Project Registered
Verification Report
Monitor calculate emission reductions (ERs)
Emission Reductions certified
Calculations checked independently Verification
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Project CycleTimeframes
Assess project
Depends on project may require commissioning of
full feasibility studies
c. 8 weeks (CDM delays likely in obtaining
host country approval)
PDD Inform host country
Validation

• 3 months (depends on size type of project)

Implementation monitoring
Depends on project
Verification
2 months (depends on size type of project)
Certification
Depends on standard
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Project CycleValidation Verification

• Validation
• Designated Operational Entities (DOEs) or
  independent organisation
• Full assessment of Project Design in accordance
  with relevant standard
• Submit corrective actions if necessary
• Produce Validation Report - including the
  Validation Opinion (confirming project design
  approval)
• Verification
• Designated Operational Entities (DOEs) or
  independent organisation
• Full assessment of monitoring reports
  calculations in accordance with the approved PDD
• Submit corrective actions if necessary
• Produce Verification Report including the
  Verification Certificate (summarising approval of
  approved emissions reductions)

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Project Market Types

• Small Scale Large Scale Projects
• Compliance/Formal Offset/Voluntary Markets
• Gold Standard a project with high
  development value (higher rates 10 per tonne
  plus)

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Summary

• CDM offers an opportunity to improve the internal
  rate of return for projects that result in real
  emission reductions
• Carbon finance will rarely improve the financial
  viability of a bad project
• CDM project cycle follows specific predefined
  steps involving various documentation and players
• Key documentation to provide needed reassurance
  Project Design Document, Validation report,
  Verification report
• JPMorgan Climatecare has in house capability to
  help you through the CDM project cycle and
  purchase the emission reductions generated

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Price Drivers for CERs

• Industrialised country emissions limits 2008-12
• Main Buyers
• Governments
• Carbon Funds Developers
• Companies with compliance targets
• Voluntary Emissions Reductions
• BUT
• USA not purchasing
• Many more credits from HFC in China than expected

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Price Uncertainty

• Level of emissions in industrialised countries
• Amount of emissions reductions made at home in
  industrialised countries
• Cap on number of imported credits to EU Trading
  Scheme
• Over supply of credits (market is long)
• Impact of Eastern Europe and its hot air
• Post 2012 uncertainty
• PRICES COULD FALL TO ZERO FOR CERs

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Pricing Future CERs

• Price dependant on stage in Project cycle
• Early stage there is no guarantee of any
  emissions reductions
• Buyers have to manage a portfolio with targets to
  reach objectives
• All about pricing risk
• Partner risk, validation risk, project risk,
  verification risk, Executive Board risk, market
  risk
• Timing of payments cost of capital

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Who Pays for What?

• Project Proponent will normally pay for
• Costs associated with developing the project
• Environmental Impact Assessment
• Ongoing monitoring (record keeping)
• Carbon Developer will normally pay for
• Development of the PDD 15,000
• Validation 12,000
• Annual Verification 8,000
• CDM Registration 5,000
• Emission reductions
• 2 of CERs UN Tax

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Questions, Comments Answers

• End
• Thank you

Joash Obare ClimateCare E-mail
joash.obare_at_jpmorganclimatecare.com Mobile
254-723596143 Office 254-203673183 Website
www.jpmorganclimatecare.com