Gas Flaring Reductions and the Clean Development Mechanism (CDM)

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Gas Flaring Reductions andthe Clean Development
Mechanism (CDM)
NOT AN OFFICIAL UNCTAD RECORD

• Lucas Assunção
• Coordinator
• BioTrade and Climate Change Programmes
• UNCTAD, Geneva

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Agenda

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

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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)

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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

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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

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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

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US SO2 Prices
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Kyoto ProtocolsFlexibility 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)

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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

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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
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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

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The CDM Project Cycle

• Process/Steps
• Project Design
• Project validation
• Registration
• Monitoring
• Verification/Certification
• Issuance of tradeable credits

• Key Actors
• Project Developers
• Natl CDM Office, National Govts
• CDM Executive Board
• Project Operators
• Independent Third Party
• CDM Executive Board

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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

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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

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Chicago Climate Exchange
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Carbon Finance _at_ World Bank
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Market Forecast

• We are living in a carbon constrained world. The
  urgency to control/stop the radical change in the
  worlds 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.

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CDM Challenges andOpportunities 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

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• Gas Flaring Reduction Projects Challenges
  Opportunities

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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 Frances
  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

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Economics of gas flaring

• About 8 billion standard cubic feet per day of
  gas is wasted globally ( Frances 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

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Major challenges for gas flaring reduction as CDM

• Additionality
• Demonstrating Sustainable Development
• Competition with other CDM projects

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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

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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

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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

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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
• For more information
• CDM Online Course _at_ www.LearnSD.org
• The CDM Guide _at_ www.unctad.org/ghg