power sao paulo, december 7 th, 2006 international cdm market dr. manuel fuentes

Power

Sao Paulo, December 7Sao Paulo, December 7thth, 2006, 2006

International CDM Market International CDM Market

Dr. Manuel FuentesDr. Manuel Fuentes

Sao Paulo, December 7Sao Paulo, December 7thth, 2006, 2006Power

International organisation International organisation consulting on energy, climate consulting on energy, climate change & international change & international developmentdevelopment

Established 1981 in UK Established 1981 in UK Clients include private Clients include private

companies and banks, UN companies and banks, UN Agencies, Multilateral Finance Agencies, Multilateral Finance Institutions, UK Government, Institutions, UK Government, EU and Bilateral Agencies EU and Bilateral Agencies

70+ staff worldwide70+ staff worldwide

IT Power – a brief IT Power – a brief introductionintroduction


Presentation contentsPresentation contents

Structure of Carbon MarketStructure of Carbon Market CDMCDM European Emissions Trading European Emissions Trading

SchemeScheme Voluntary marketVoluntary market


United Nations Framework Convention United Nations Framework Convention on Climate Change (UNFCCC)on Climate Change (UNFCCC)

First discussed at Earth Summit in First discussed at Earth Summit in Rio de Janeiro in 1992Rio de Janeiro in 1992

ObjectiveObjective: : “ “To achieve… To achieve… stabilisation of greenhouse gas stabilisation of greenhouse gas concentrationsconcentrations in the atmosphere at a in the atmosphere at a level that would level that would prevent prevent dangerousdangerous anthropogenic interference with anthropogenic interference with the climate system”the climate system”

Article 2, UNFCCCArticle 2, UNFCCC


Kyoto ProtocolKyoto Protocol Most important decision of UNFCCCMost important decision of UNFCCC Adopted in December 1997Adopted in December 1997 Developed countries agreed to reduce Developed countries agreed to reduce

emissions to emissions to 5.2 percent below 1990 5.2 percent below 1990 levelslevels,, within commitment period within commitment period 2008 to 2008 to 20122012

Kyoto Protocol enforced February 2005Kyoto Protocol enforced February 2005


1990

2000

2010

GH

G E

mis

sion

s

5.2 %

• Carbon Dioxide (CO2)• Methane (CH4)• Nitrous oxide (N2O)• Hydrofluorocarbons (HFCs)• Perfluorocarbons (PFCs)• Sulfur hexafluoride (SF6)


MechanismsMechanisms Clean Development Mechanism:Clean Development Mechanism:

– Aims to assist non-Annex I countries achieve Aims to assist non-Annex I countries achieve sustainable developmentsustainable development

– Annex I countries with emission caps pay to Annex I countries with emission caps pay to implement projects to achieve emission reductions in implement projects to achieve emission reductions in developing countries. Credits issues based on developing countries. Credits issues based on emission reductions of project.emission reductions of project.

Joint Implementation Joint Implementation – Annex I country assists another Annex I country to Annex I country assists another Annex I country to

implement project to reduce emissions.implement project to reduce emissions. International Emissions TradingInternational Emissions Trading

– Trade of emissions allowances or reduction credits. Trade of emissions allowances or reduction credits. Aim is to reduce total costs of achieving collective Aim is to reduce total costs of achieving collective emissions reductions. Total amount of emissions emissions reductions. Total amount of emissions reductions of Annex I countries does not change.reductions of Annex I countries does not change.


Why a Carbon Market?Why a Carbon Market? Regulatory pressure on firms, governments, Regulatory pressure on firms, governments,

and even individuals to constrain their and even individuals to constrain their greenhouse gases (GHGs) emissionsgreenhouse gases (GHGs) emissions

Voluntary reasons firms, governments, Voluntary reasons firms, governments, individuals and other organisations constrain individuals and other organisations constrain emissions – emissions – carbon neutralcarbon neutral

Both domestic reductions and purchase of Both domestic reductions and purchase of outside “GHG emission reductions” outside “GHG emission reductions”

As GHGs settle in the atmosphere, it does not As GHGs settle in the atmosphere, it does not matter where emissions are reducedmatter where emissions are reduced

Opportunity for countries such as Brazil to Opportunity for countries such as Brazil to benefit from investment in activities to reducebenefit from investment in activities to reduce


Structure of the Carbon Structure of the Carbon MarketMarket

Kyoto compliance

(Annex 1 Governments)

EU Emissions Trading Scheme

JI & CDM

Retail

Domestic trading schemes e.g. UK ETS, NSW GHG abatement scheme, Chicago Climate Exchange, Canada domestic scheme, Japan?

Voluntary

EU, Canada, Japan & New Zealand


Clean Development Clean Development MechanismMechanism

Carbon finance for sustainable development Carbon finance for sustainable development projects with benefits such as job creation, clean projects with benefits such as job creation, clean energy service provision etc.energy service provision etc.

Reduced Kyoto compliance costs of greenhouse Reduced Kyoto compliance costs of greenhouse gas reductions for industrialised countriesgas reductions for industrialised countries

CDM projects are undertaken in non-Annex I CDM projects are undertaken in non-Annex I countries and may becountries and may be

Unilateral (participants: host country only)Unilateral (participants: host country only) bi-lateral (participants: host country + Annex 1 bi-lateral (participants: host country + Annex 1

country)country) multi-lateral (participants: host country + a number multi-lateral (participants: host country + a number

of annex 1 country partners)of annex 1 country partners) The emission reductions credits achieved are The emission reductions credits achieved are

referred to as referred to as Certified Emission Reductions Certified Emission Reductions (CERs):(CERs):

1 CER = 1 tonne CO 1 CER = 1 tonne CO2 2 equivalentequivalent


CDM EligibilityCDM Eligibility

RealReal, , measurablemeasurable and l and long-termong-term benefits benefits related to mitigating climate change related to mitigating climate change

Voluntary participation of each party involvedVoluntary participation of each party involved Projects must result in GHG reductions that Projects must result in GHG reductions that

are are “additional”“additional” Project must help host country in achieving Project must help host country in achieving

sustainable developmentsustainable development CERs generated for 10 or 21 (7+7+7) years CERs generated for 10 or 21 (7+7+7) years

for reduced GHG (“basket of 6” - in COfor reduced GHG (“basket of 6” - in CO22eq) eq) emissions compared to “business as usual” emissions compared to “business as usual” scenario – scenario – baseline baseline


Small scale projectsSmall scale projects

Simplified procedures -administrative Simplified procedures -administrative levy halvedlevy halved

Possible project activities:Possible project activities:i.i. Renewable energy up to 15MWRenewable energy up to 15MW

ii.ii. Energy efficiency improvements up to Energy efficiency improvements up to equivalent of 15GWh/ yearequivalent of 15GWh/ year

iii.iii. Others which reduce emissions and which Others which reduce emissions and which directly emit less than 15 000 tCO2 per directly emit less than 15 000 tCO2 per year. E.g. improved fertiliser use, year. E.g. improved fertiliser use, management of rice cultivation…management of rice cultivation…


What is bundling? What is bundling?

Bundlingorganisation(e.g. ESCO)

CERInvestor

Multiplegreenhouse gasreducing projects

One singleCDM project


The EU Emissions Trading Scheme The EU Emissions Trading Scheme (1)(1)

An entity-based domestic “cap and An entity-based domestic “cap and trade” emissions allowance trade” emissions allowance programmeprogramme

Governed by Community Law using Governed by Community Law using a special unit of trade – “allowances”a special unit of trade – “allowances”

Compatible with international Compatible with international emissions trading under Kyoto, emissions trading under Kyoto, contributing towards Kyoto targetscontributing towards Kyoto targets


Summary:Summary: Phase 1: 2005-07Phase 1: 2005-07 Phase 2: 2008 -12Phase 2: 2008 -12 Covers the EU 15 Covers the EU 15

& the 2004 & the 2004 Accession StatesAccession States

50% of all carbon 50% of all carbon emissions in the emissions in the EU (EU (12,000 plants)12,000 plants)

The EU Emissions Trading Scheme The EU Emissions Trading Scheme (2)(2)


The EU ETS - who is affected?The EU ETS - who is affected?

Energy – combustion installations Energy – combustion installations over 20MWover 20MW

Ferrous MetalsFerrous Metals Minerals – kilns, glass, ceramic, Minerals – kilns, glass, ceramic,

cementcement OtherOther

– (Pulp and Paper)(Pulp and Paper) Renewables, transport & other Renewables, transport & other

sectors are NOT includedsectors are NOT included


EU AllowancesEU Allowances

1 EUA = 1 tonne CO2 equivalent = 1 EUA = 1 tonne CO2 equivalent = 1 CER1 CER

1 EUA trading for 15€1 EUA trading for 15€ Penalty value for failing to meet Penalty value for failing to meet

EUA = 100€/EUA for 2008-2012 EUA = 100€/EUA for 2008-2012 period!!period!!

1 CER trading for 6€1 CER trading for 6€ Higher risks associated with CER Higher risks associated with CER

investors…investors…


How can CERs and ERUs be How can CERs and ERUs be used in the ETS?used in the ETS?

EU ETS and Linking directiveEU ETS and Linking directive under the EU ETS each installation is required under the EU ETS each installation is required

to surrender a number of allowances to surrender a number of allowances corresponding to their verified emission corresponding to their verified emission volume for each calendar yearvolume for each calendar year

in the event that an installation has insufficient in the event that an installation has insufficient allowances for compliance, the shortage can allowances for compliance, the shortage can be covered by:be covered by:– purchasing additional allowance from the marketpurchasing additional allowance from the market– surrendering a specified number of CERs and, from surrendering a specified number of CERs and, from

2008, ERUs from its operator’s holding account 2008, ERUs from its operator’s holding account – surrendering of CERs and ERUs are subject to surrendering of CERs and ERUs are subject to

specified preconditionsspecified preconditions


Preconditions for surrendering Preconditions for surrendering CERsCERs

Since 2005 CERs can be used for complianceSince 2005 CERs can be used for compliance up to a percentage of the allocation to each up to a percentage of the allocation to each

installation - specified by its Member Stateinstallation - specified by its Member State CERs are not converted into EU allowances CERs are not converted into EU allowances

– but entered directly into the surrendered – but entered directly into the surrendered allowance tableallowance table

UNFCCC ITL required for the transfer of UNFCCC ITL required for the transfer of CERs into an EU registry –still to be CERs into an EU registry –still to be implementedimplemented


Voluntary Action by Firms, IndividualsVoluntary Action by Firms, Individualsand….even Governmentsand….even Governments

A large number of companies have engaged in A large number of companies have engaged in volunatry programs to reduce their GHG emissions volunatry programs to reduce their GHG emissions – e.g. Novartis (Swiss Pharmaceutical company) to reduce e.g. Novartis (Swiss Pharmaceutical company) to reduce

GHGs by 5% below 1990 levels over 2008-2012 (in line GHGs by 5% below 1990 levels over 2008-2012 (in line with government’s commitment)with government’s commitment)

Individuals and Firms have engaged in purchases of Individuals and Firms have engaged in purchases of small amount of emission reductions to become small amount of emission reductions to become “carbon neutral” (event, corporation, or product)“carbon neutral” (event, corporation, or product)– HSBC to become carbon neutral (made 1HSBC to become carbon neutral (made 1stst purchase of purchase of

170,000 tCO170,000 tCO22e assorted credits (3 mths offsetting)e assorted credits (3 mths offsetting)– IT Power offsets emissions from international travelIT Power offsets emissions from international travel

UK Government UK Government – chosen to offset emissions from staff/operations through chosen to offset emissions from staff/operations through

purchase of credits: 1purchase of credits: 1stst purchase from Kuyasa Gold purchase from Kuyasa Gold Standard CDM project in South AfricaStandard CDM project in South Africa

–


BuyersBuyers

Public funds (Government only)Public funds (Government only) Public-private funds (e.g. Community Public-private funds (e.g. Community

Development Fund, Baltic Sea Region Testing Development Fund, Baltic Sea Region Testing Ground Facility, Italian Carbon Fund);Ground Facility, Italian Carbon Fund);

Private funds (e.g. European Carbon Fund, Private funds (e.g. European Carbon Fund, Japan Greenhouse Gas Reduction Fund);Japan Greenhouse Gas Reduction Fund);

Private purchasing pools (e.g. CRM, ICECAP Private purchasing pools (e.g. CRM, ICECAP and GG-CAP).and GG-CAP).

World Bank and other multilateral World Bank and other multilateral organisations organisations

BrokersBrokers Direct investment by companiesDirect investment by companies

Many and the list keeps growing!!


Thank youThank you

Manuel FuentesManuel Fuentes

+44 1256 392700+44 1256 392700

[email protected]@itpower.co.uk

power sao paulo, december 7 th, 2006 international cdm market dr. manuel fuentes

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