Introducing the Clean Development Mechanism
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The 1997 Kyoto Protocol contains provisions which will allow industrialised countries and countries with economies in transition, collectively known as Annex I countries, to gain credit for greenhouse gas (GHG) emissions reductions achieved through projects undertaken abroad. Annex I countries must reduce their emissions of GHGs by approximately 5.2% from 1990 levels by 2008-2012. Europe as a whole must reduce their emissions by 8%; the us by 7%; Japan and Canada by 6%. Russia and the Ukraine must stabilise emissions, while Australia is permitted an 8% increase. The UK's legally binding target is a 12.5% reduction in all GHGs and has set itself the target of 20% reduction in CO2 emissions. The purpose of Joint Implementation (JI) and the Clean Development Mechanism (CDM) is to help countries meet their commitments
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Under JI, an Annex I country or private company may develop projects in other Annex I countries, with the approval of all parties involved. As an example, a JAPAN company may invest in another Asian country, dependent on coal-fired electricity generation by building a biomass-fired power station. The resulting reductions in emissions provides the basis for the calculation of the Emission Reduction Units (ERUs) to be transferred to the JAPAN company.
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Under the CDM, an Annex 1 country or private company may develop projects in non-Annex I countries that reduce emissions of GHGs and help non-Annex I countries to achieve sustainable development. The Certified Emissions Reductions (CERs) or 'carbon credits' generated through CDM projects may be used by Annex I countries to meet their Kyoto commitments. The investor provides technical and financial assistance which will lead to cost-effective reductions in greenhouse gases in the host country.
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For projects to be eligible under the CDM, the emission reductions created, must be additional to those that would have occurred in their absence. CERs are calculated by subtracting lower project emissions from higher baseline emissions, for example, when a renewable energy power plant, providing rural electrification, replaces a fossil-fuel fired power plant.
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The Protocol permits CERs to be generated from the year 2000, to encourage an early start of the CDM.
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Once Carbon Credits have been awarded, they can either be used directly to offset against your emissions (if applicable) or they may be traded on – domestically or internationally. It may also be possible to bank them against a future commitment period ( i.e. after 2012).
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As yet there are no prices for these carbon credits as the market is still emerging and the rules for the mechanisms are still under negotiation. However, some non-JAPAN companies are anticipating future domestic regulatory liabilities and are investing in projects which may result in Carbon Credits. This risks the credits not qualifying under forthcoming international rules. At present, these credits are selling for $0.50 - $20 per tonne of carbon dioxide.
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An estimated $20 per Tonne will make a difference to the projects internal rate of return by 2-3%. CER's will not make a bad project good but should give a project which is financially viable an extra edge. The opportunity is in fact, to allow renewable energy projects to be implemented in areas where without this extra support the project may not go ahead. As a private investor the prospect of becoming involved in a CDM project cannot be based solely on revenue from the credits. The CDM offers a great opportunity to the investor for trade and investment.
EXAMPLES OF CDM BEING IMPLEMENTED
Work is underway throughout the world as countries start to pull together CDM strategies and initialise pilot projects or AIJ projects (Activities Implemented Jointly). Although not all countries are taking the Kyoto Protocol on board, many countries are. Indonesia for example is taking major steps to prepare a CDM strategy for itself. It has not ratified the Protocol but the process of preparing is imperative to work out if the CDM will benefit the country. Their concerns include the institution of CDM, procedures and sanctions, systems for validation, certification and accreditation.
In the Philippines the World Bank expressed interest to provide assistance for the 'Philippine Study on a National AIJ Strategy for GHG Reduction'. The study intends to develop a portfolio of projects for possible funding under the AIJ mechanism and provide a venue for national consultants on the CDM . The UNDP, in collaboration with the IACCCSecretariat, is currently undertaking 'Capacity Building in CDM Project Activities'. The CDM capacity building project intends to address on a practical level how cooperation under the CDM may contribute to the objectives of UNFCC within the Philippine context.
In Africa a major two year project is underway supported by the EC and the FCO through the Climate Change Challenge Fund. The project called CDM-SUSAC is a project working with governments, industry and key stakeholders in Senegal, Uganda and Zambia. The project is adapting a project investment focus that will identify all the key issues that have to be addressed in order to develop CDM projects in participating countries
These three examples of countries are just a few of the many countries planning the implementation of CDM. It is predicted that there will be considerable internal competition amongst developing counties for attracting investment under CDM. Only those best prepared with dynamic, streamlined project identification, verification and monitoring procedures will attract investment. This is good news for the investor interested in CDM investment opportunities in developing countries.
OTHER FACTORS TO CONSIDER
Other factors which need to be considered when developing a renewable energy project within the context of CDM is that the host country must require the project to meet its sustainable development needs. But why should the investor, of biomass to energy projects for example want to become involved? The project has to be economically sustainable in addition to being environmentally sustainable. The following points address a few questions likely to be raised by a project developer involved in renewable energy.
Other factors which need to be considered when developing a renewable energy project include.
- Where are investors prepared to invest.
- Economic and political stability
- Geography and Climate
- Natural resources
- Sound infrastructure
- Power demand
- Central/decentralised body
- Price
- Access to transmission lines
The size of the project which will make the investment commercially feasible
CASE STUDIES
The UK Government's Foreign and Commonwealth Office announced The Climate Change Challenge Fund early in 1999, a scheme to help business and developing countries meet the challenges of climate change.
Bronzeoak have been awarded contributory funding for early stage development of six projects world wide in Indonesia, China, and Central America. All projects have the potential to be CDM projects.
| Description: 10.5 MW Palm Oil Residue Power Plant, Perak, Malaysia, offsetting the use of diesel for electricity generation |
| Status: Full Feasibility Study in progress. |
| Carbon Reductions: Displacement of diesel will avoid approximately 570,000 Tonnes of Carbon over the thirty year life of the project. |
CONCLUSION
There will be considerable internal competition amongst developing countries for attracting investment under CDM. Only those best prepared with dynamic, streamlined project identification, verification and monitoring procedures will attract investment.
