03.0 Clean Development Mechanism (CDM)

Solid waste and the environment

Principles of the Kyoto Protocol
1.2.: Clean Development Mechanism - Overview and Concepts

Outline



CDM Context within the Kyoto Protocol
Overview of CDM
Eligible Projects
 Basic Rules & Processes
 Baselines
 Sustainable Development
 CDM Concepts - Developing Projects




What does the CDM mean for Indonesia?

Opportunities
 Reality and Issues with CDM
 Next Steps


CDM Context (1)




The Kyoto Protocol commits industrialized
countries to legally binding GHG reduction
targets during the period 2008-2012
Most countries have to reduce GHG emissions
on ave 5% below their 1990 emission levels




results in a global target of ‘carbon’ reduction

These countries can choose to reduce
emissions
‘at home’ in their own country
 in other countries




Reducing emissions in Developing Countries is
eligible – known as CDM

CDM Context (2)
Benefit of the CDM is
 to help Annex 1 Parties to implement their
commitment to reduce GHG emission in
the most economical way
and
 To help developing countries (non Annex I
Parties) in achieving sustainable

development

Overview of CDM






CDM – Clean Development Mechanism
A mechanism by which Industrialised Nations
can achieve part of their reduction obligations
through projects that reduce or fix/sequester
carbon in Developing Countries.
The Certified Emission Reductions (CERs) are a
unit of carbon that is reduced or sequestered.
Industrialised Nations can submit their CERs to
meet their target in 2008-2012.
there is a worldwide demand for projects and
activities for ‘carbon’ reduction or fixation

 Many of these projects will be in Developing
Countries.


CDM Concept

Developed
Country


$
Investment

Developing Country
 Many opportunities
for projects that
reduce emissions eg


Govt and companies

want to reduce GHG
emissions




Invest in their own
country
Invest in a project in
Developing Country








CERs

Forestry planting
Renewable electricity
Energy efficiency
Clean transport
Biomass energy

Project Produces
CERs

Purpose of CDM
to assist developing countries in
achieving sustainable
development
2. to assist developed countries in
achieving compliance with part of
their quantified emission
reduction commitments.
1.

Types of CDM Projects



Energy efficiency
End use improvements
 Supply-side improvements









Renewable energy
Methane reduction eg landfill gas capture
Fuel switching
Agriculture (CH4 and N20)
Industrial processes
Sequestration/sinks – only afforestation

and reforestation

CDM Project Examples
End-use energy
efficiency

High efficient lighting;
efficient cook stoves;
vehicle efficiency

Supply-side
High efficiency turbine
energy efficiency replacement; combine cycle
Renewable
Biomass; Solar; Wind; Hydro
energy
Fuel switching

Gas conversion
Biofuels replace fossil fuels

Forestry

Afforestration; Reforestation
Community forestry

Summary of
basic CDM Rules

Baseline Concepts




The baseline is a measure of emissions
that would have occurred in absence of
project
Used to estimate emission reductions for
project – basis for CERs




On a project by project basis

Standard baselines for small scale projects
20 MW renewable energy
 20GWh energy efficiency


Baseline (PDD) Contents (1)
A. General description of project activity
B. Description of baseline methodology
C. Timeline Project
D. Monitoring methodology and Plan
E. Calculation of GHG emission by
sources
F. Assessment of Environmental impacts
G. Stakeholder’s comments

Baseline (PDD) Contents (2)
Annex I: Information of the parties
participating in the project
Annex II: Information of public investment
Annex III: New methodology to calculate
baseline
Annex IV: New monitoring methodology
Annex V: Baseline data

Baseline Methodologies


Approximately 50 baseline methodologies were
approved on the basis of:Business as usual (“BAU”) - future emissions would
been the same as current/historic emissions and
“Additionality”, meaning that the project would
otherwise not have occurred
 Market Conditions - the technology used in the
market is the baseline and market barriers prevent
new technology being adopted
 Best Available Technology - for markets where
conditions are changing, historic emissions are less
relevant – assume emissions for the technology that
would have been installed


Baseline Examples
Project

Baseline Approach

Type of CDM
Baseline

3 Microhydro
Guatemala

The 3 communities did not
have access to electricity, so
emission reduction based on
displacement of kerosene

Market
Conditions
(technology
used is the
baseline)

Biomass
power plant
El Salvador

Current electricity is fossil
fuels and future additions
would be similar. Current
emissions used as baseline.

BAU

Wind Power,
Honduras

This project is displacing the
Best Available
need for a new thermal plant. Technology
Emission reductions based
on average emissions of
typical thermal plants in
previous 5 years +

Basic Rules for CDM




Emission reductions from CDM project must be
additional in developing country
Use of CERs can only supplement emission reduction at
home in developed countries
CDM projects must:be approved by the host country
 lead to sustainable development in host country
 result in real, measurable and long-term benefits in terms of
climate change






Money for CDM projects not divert Official Development
Assistance (ODA)
Nuclear power projects are not eligible
Only afforestation and reforestation allowed

Small Scale CDM Projects
 Simplified

rules for small scale projects

 Simplified

baseline methodology, reduced
validation and registration requirements;
exemption from adaptation and admin
fees

 Examples
 Home

include

Bigoas (cooking and lighting).
Replace Kerosene
 Efficient woodstoves
 Mini-grid renewable energy

CDM Checklist
Project approved by
National Authority?
- consistent with
Sustainable Development
- consistent with national
+ local development
priorities;
- no negative environment
impact;
- has local support
Project leads to transfer
of new, environmentally
efficient technologies or
management practices?

Project validated,
registered
monitored,
verified and
certified?

Project results in
real, measurable +
long-term
emission
reductions?

The project does
not divert ODA.
Are the emission
reductions
additional?

CERs
Certified Emission
Reductions

Sustainable Development Criteria


Social Criteria
Improves quality of life
 Alleviates poverty
 Improves Equity




Economic Criteria
Provides financial returns to local entities
 Results in new investments
 Transfers new technology




Environmental Criteria
Reduces GHG and use of fossil fuels
 Conserves local resources
 Reduces pressure on local environments
 Provides health and environmental benefits


How does CDM
work in practice?

CDM Concept

Developed
Country


$
Investment

Developing Country
 Many opportunities
for projects that
reduce emissions eg


Govt and companies
must reduce GHG
emissions




Invest in their own
country
Invest in a project in
Developing Country








CERs

Forestry planting
Renewable electricity
Energy efficiency
Clean transport
Biomass energy

Project Produces
CERs

CDM Project Investment
PROJECT
$9 million
has emission
reductions and
eligible to
produce CERs
$

Project
Investors/Financiers: International or Local
Developers/Financiers
 Cambodian
Government
 International
Governments

CERs
$500,00
0

$

CDM Investors/Buyers: Multilateral CDM Funds
eg PCF; CERUPT
 Annex 1 Governments
 Private Companies
 Non-Annex 1
Governments
 Brokers/Traders

CDM Investment Structures


Full or partial equity in project
CER ownership becomes annex to the normal financing agreement
 Usually investing for more than just CERs




Financial contribution
Usually upfront payment and takes ‘rights’ to CERs as they are
produced
 Normally not more than 10% project cost




Loan




Company provides loan at concessional rates in return for CERs eg
payment of interest in CERs

CER Purchase Agreement
Company buys CERs as they are produced
 Becomes additional income stream to project finance


CDM examples
Project

Project
Cost

CER
Partner

Basis of
Structure
contribution

Wind Farm
Honduras

$58m

$4.05m

CER sale @
$3.50/ton

3 Micro-hydro
Guatemala

$320,00 $15,000 Value of
Upfront
0
4,755
payment
tonnes over
10 yrs

Annual CER
Purchase for
10 years

Biomass power $2.3m
plant
Nicaragua

$0.4m

Financing of
climate
friendly
component

10% pre; 40%
finance;
balance = $
for 5 years

Run-of river
Hydro plant
Chile

$3.4m

10% total
cost

Initial
payment +
ongoing CER

$34m

Case Study







3.65 MW micro hydro project Indonesia
Project offsetting diesel generation – 18,500t
$9.89m capital cost; $0.4m operating costs
Project executed by a local institute
16.5% IRR without CDM; 18.2% w CER @$5
Investment plan:Up to 70% of project capital through long term loan from
financial institution; rest through equity
 CDM investor options:

- Long term CER purchase agreement
- Equity (JV partner) + commitment to buy CERs
- Soft loan against realisation of CERs

CDM Case Study

Any Country
looking for CDM
Project


CDM Project Partner
 Long term CER
purchase agreement
 Equity in project
 Soft loan upfront in
return for CERs later

$
Investment

Indonesia
CDM Project







3.65MW hydro
$9.89m capital cost
$0.4m operating costs
Project offsetting diesel
emissions
Likely 18,500 CERs
basic CER value $92,500

looking for CDM
Partner
CERs

Choosing a Host Country
what do investors want?
1.

Clear CDM Policy




Willingness for investment in CDM
projects
Transparent and clear processes,
Quick and smooth government approval
Time, effort and resources to complete deal

2.

Secure investor climate


Political and economically stability
What could occur that could affect investment?

3.

Sound Techno-Economic potential
Based on report conducted by Point Carbon www.pointcarbon.com

What does CDM mean for
Indonesia?

Opportunities of CDM


CDM encourages developed countries to undertake
GHG reduction projects in developing countries.
Increased investment flows
 Attract capital for less carbon-intensive projects
 Technology transfer




Assist in development priorities and sustainable
development goals
Create new industries in environmentally sustainable
technologies
 Poverty alleviation through income and employment
 Assist in improving current and future environment
(including air quality)


CDM in Cambodia




Governments, Project Developers and Investors
are seeking out CERs and emission reduction
projects.
Emission reduction projects exist in Indonesia in
many sectors:Transport – establish intercity/intra-city transport
 Forestry – community forestry, replanting
 Energy –


- renewable energy (particularly in rural areas)
- Installation of cleaner technology (cogeneration)
- Energy usage – energy efficient technologies; building design


Waste management – capture of methane

Reality + Issues w CDM


CDM may tend towards large CDM Projects


High transaction costs with CDM projects
BGP experience = $100,000 – 150,000 per project



transaction costs similar for small or large projects
Solution - bundle small projects together
eg association of community forestry; many small scale hydro
projects



Larger developing countries more attractive
infrastructure & institution to deal with large projects
 Larger market = ability to do many similar projects
 Spreads the upfront cost in learning local conditions;
securing suppliers, local management, financial, legal and
contractual processes


CDM Transaction Costs
Preparation and review of the
• Upstream Due Diligence, carbon risk
Project

Project completion

assessment and documentation: $
40K
3m
hs

Up
to
2

1y

ea

rs

ont

All
expenses
$100-150 K

2 mo n

rs

2m
on

t hs

ths

ye a

• Supervision: $10-20K

1-3

Periodic
verification &
certification
• Verification: $10-25 K

• Baseline : $20 K
• Monitoring Plan: $10K

Validation process
• Contract, Processing
•and documentation: $30k

3 months

Construction and start up

• Initial verification at start-up: $15K

Project Appraisal and
Negotiation

Total through Negotiations

Reality + Issues w CDM (2)
 CDM

will be a competitive market

 Restricted

without the US
 Limit on amount of CERs developed
countries can use towards target (~20%)
 larger projects with low risk and smooth
approval/transaction procedures will be
preferred
 May limit opportunities in least
developed countries

Reality + Issues w CDM (3)
 Preparation

of developing countries

 poor

co-ordination among Ministries
 internal conflict over approvals
Only 12 National Authorities registered

 Capacity
 Weak

of developing countries

knowledge of CDM at all levels
policy-makers, businesses, finance +
legal institutions, NGOs

Summary


CDM presents an opportunity for Indonesia
developing energy infrastructure;
 forestry is significant activity




worldwide increased demand for projects that
reduce emissions




win-win situation for both parties

Indonesia must be prepared
Functioning approval body + smooth and transparent
approval process
 need a ‘pipeline’ of projects for investors when they
come investigating
 Need to improve investor climate


Acronymns



CDM – Clean Development Mechanism
CER – Certified Emission Reductions




PCF – Prototype Carbon Fund






World Bank CER Fund

ODA – Official Development Assistance




A standard unit of greenhouse reduction or sink

Part of 0.07% govt aid

IRR – Internal Rate of Return
DNA – Designated National Authority


The national body who assess +/or approves CDM
projects

Acronyms


Annex 1 countries




Approx. 40 industrialised countries and
economies in transitions listed in Annex 1 of
the convention who can invest in CDM
projects. These countries have emission
reduction obligations.

Non - Annex 1 countries


The countries who are not listed in Annex 1
of the Convention and who can host CDM
projects