ADDITIONALITY OF THE CLEAN DEVELOPMENT MECHANISM:

Transcription

1 ADDITIONALITY OF THE CLEAN DEVELOPMENT MECHANISM: INSIGHTS FROM CENTRAL AMERICAN CASE STUDIES Tufts Institute of the Environment 2008 Graduate Research Fellowship Report Research carried out by Abby Lindsay Master of Arts in Law and Diplomacy at The Fletcher School of Law and Diplomacy Master of Arts in Urban and Environmental Policy and Planning TUFTS UNIVERSITY May 2009 ADVISORS: Bill Moomaw, The Fletcher School of Law and Diplomacy Justin Hollander, Urban and Environmental Policy and Planning

2 INTRODUCTION The Clean Development Mechanism (CDM) was developed as part of the Kyoto Protocol and the international community s attempt to reduce global greenhouse gas emissions. It functions as a market mechanism to reduce emissions and encourage sustainable development by helping finance emission-reducing projects in developing countries through carbon credits that can be put towards developed country commitments. Since its start in 2005, the CDM has grown rapidly; there are over 4,252 projects either registered or in the process, which will amount to over 7,125,124 Mt CO 2 e reduced by CDM projects have been touted as having great potential to aid in the economic development of countries on a national scale and simultaneously help reduce poverty when coupled with energy access, but the implementation faces many barriers and is often more difficult than the theory. Much of the attention of the CDM has been on the large developing countries that provide the largest potential for emissions reductions, such as India, China, and Brazil, but it is often argued that less developed countries have a greater need for CDM projects because they are less affluent, lack universal energy access, and will be hit hard by climate change impacts. This study focused on the interaction between renewable energy, the CDM, and small developing countries in Central America specifically Honduras and Costa Rica. Why were CDM projects pursued in these countries? What were the barriers? Did the CDM provide sufficient incentive to tip the balance to decide to implement renewable energy over a fossil fuel source? This research project was composed of two main components: first it assessed the decision-making factors and barriers to implementation of renewable energy CDM projects, and second, it analyzed the additionality of the projects to reflect upon the CDM. Additionality is one of the core principles of the CDM, which states that in order for the credits to be used towards developed country commitments, the projects must not have occurred in the absence of the CDM. While additionality helps the CDM function on the global scale, the decision-making factors that determine whether or not a project is pursued do not always follow the theory. As the next round of international climate change negotiations near, reflection and analysis of past efforts is essential, so this study focuses on the implementation of the CDM in Central America. This study was developed with input from practitioners in order to focus on research that is lacking in the field and would be useful to a variety of actors. The TIE Graduate Research Fellowship enabled me to pursue research in the field, comparing theory with implementation. Similar to the mission of TIE, this researches policy in an interdisciplinary manner, recognizing that environmental and human welfare is linked to climate change and impacted by the policies that govern it. SUMMARY Case studies are often used to explain causal links or to describe an intervention and the context in which it occurred. To pursue this research, case studies were used to merge facts with first-hand experiences and perspectives. The research methodology applied

3 consists of triangulation between a variety of sources in order to combine existing data with first-hand experiences. This study uses an extensive, broad literature review, including reports, databases, and government documents, and it combines them with stakeholder interviews. The TIE Fellowship enabled me to travel to Honduras and Costa Rica in order to carry out interviews with government officials, renewable energy project developers, NGOs, and other stakeholders, and this allowed me to understand the broader interaction between renewable energy and the CDM, as well as evaluate specific projects. Through the interviews, barriers and decision-making factors that fed into the decisions to develop renewable energy projects in Honduras and Costa Rica were found. Few companies were involved with both renewable energy and fossil fuel-generated electricity, thus eliminating the trade-off between the two for most project developers. This was partially because many projects were based off of existing resources, such as sugarcane plantations, methane from waste, or biomass. It was also partially due to Costa Rica s limit on private electricity generation to renewable energy, although both governments had to make decisions on the trade-offs between different sources of energy. Government policies and their process of choosing projects were critical in the decision to construct the renewable energy projects. Although each project presented a different case, project developers decisions were focused primarily on four aspects; they considered the government policies (including the price of electricity and the process), the financial viability of the project alone, the financial viability of the project with the additional CDM credit revenue, and other barriers. More specifically: - Government Policies o Price paid for electricity o Lack of familiarity government institutions have of renewable energy (H) o Non-transparent price calculations o Difficulty of getting government contract o Limited private participation and uncompetitive market (CR) o Unclear regulatory frameworks (H) - Financial Viability without the CDM o Availability of financing poor loan terms (H) o Lack of investment allocated by Congress o Risk - Financial Viability with the CDM o Revenue from CDM credits (CERs) o Baseline (CR) o Time needed to complete CDM process o Transaction costs - CDM Project Cycle o Bringing all the decision-making factors together, it is important to look at the project cycle. By the time a project applies for CDM registration, it has already completed and paid for feasibility studies and project design; it has applied for and hopefully received a loan to finance the project; it has competed for a PPA if done by the private sector, or competed internally with other options if done by the government; and it has applied and likely

4 waited for environmental permits to be approved. Each of these takes time and money. If the project is rejected by the CDM Executive Board, will it really cease to be implemented, especially with these sunk costs? Furthermore, how does a project developer incorporate the risk that a project is not approved? One of the underlying themes throughout the research is the larger question of the factors that drive energy decisions within these countries. While the CDM was one element considered in the planning, for most projects it did not provide sufficient incentive to tip the balance towards renewable energy rather than fossil fuel-generated electricity. Although this was primarily because most project developers were only involved with renewable energy. Nonetheless, even for the decision of whether a single project should be constructed, the CDM was not a primary impetus to follow through with them. The CDM attracted several interviewees to renewable energy projects, but the decisions to follow through with them were more complicated and CDM credit revenue was rarely sufficient incentive to impact the decisions, especially in Costa Rica. It is widely recognized that renewable energy helps diversify energy supplies and decrease susceptibility to oil price fluctuations. Thus, these case studies reveal that if either country wants to increase its renewable energy projects, there are several measures that can be taken. In Honduras, one key action is to revise the renewable energy legislation to provide greater renewable energy incentives and not favor fossil fuels. Along with this, there should be improvement in the transparency of project cost calculations, education of government personnel about renewable energy, and promotion of awareness of the legislation. To leverage the use of the CDM, the agency that oversees the CDM could assist with the complex paperwork and continue to do awareness workshops. In Costa Rica, the barriers and decision-making factors are different than in Honduras, especially considering that the 15% of electricity supply the private sector is allowed to produce can only be renewable. More allowed private production and competition would likely increase private participation, but that is part of a larger debate already underway. For now, transparency in government energy price calculations, a greater focus on diversification of sources (rather than lowest-cost), and greater government investment in renewable energy would increase renewable energy production. Unfortunately, given Costa Rica s clean baseline (high existing percentage of renewable energy), there is not much else that the government can do to promote the CDM. The second part of the study used the barriers and decision-making factors found to analyze the additionality of the CDM projects. Additionality was one of the concepts used to reconcile the global and local scales; by proving that these projects would not have happened without the CDM, then they reduce global emissions and therefore can be traded into the developed countries carbon markets through credits. The difficulty is that the theory applied in the policy-making process does not always carry through as planned to implementation. Meanwhile, additionality adds complexity to the CDM process.

5 Implementation is filled with challenges and other factors feed into the decision-making process. It has been established that there is a range of barriers that can prevent a project from occurring, and the CDM Executive Board has worked hard to incorporate this into the additionality analysis by allowing projects to choose the investment or barrier analysis and by simplifying small-scale requirements. While this is a positive step in one sense because it realizes the complexity of the decision-making process; on the other hand, it may allow for additionality justifications that allow a project pass, even if the barriers were not strong enough to prevent the project from occurring without the CDM, as this research found. Although there are many shades of grey that are difficult to discern, if a project would be implemented without the CDM, it does not adhere to the principle of additionality. Furthermore, if there is not strict additionality, there are implications for the inclusion of CERs in cap and trade systems. Revisiting the underlying structure of the Kyoto Protocol, the emission caps placed on Annex I countries are intended to limit each country s emissions so the world can reduce emissions below the business as usual level. If projects that would have occurred in the absence of the CDM earn credits, and those credits are used to meet the Kyoto targets, then essentially the size of the cap is enlarged. This is not meant to draw specific conclusions as to how many projects are or are not additional, but rather meant to point out the consequences. Often the decision-making factors behind projects are more chaotic than theory predicts, and if projects are not strictly additional, there are negative implications for their impact on Kyoto reductions. It is important to note, however, that this research does not address all facets of the CDM, but just suggests that its reliance on additionality should be examined as post-2012 climate mechanisms are developed. As part of a global initiative, the CDM must be applicable to a wide range of countries from the size of Belize to that of China, from the affluence of Haiti to that of South Korea. As it is implemented in this variety of countries, the CDM must overcome the barriers present in each place, and these case studies reveal two pixels of the overall picture. Although global climate negotiations take on a political dimension, a post-2012 mechanism must continue to strive to reconcile the global level with the local and to make implementation reflect theory, or at least recognize when it does not.

6 BUDGET The original budget proposal included a 1.5-week trip to Honduras and a 1-week trip to Costa Rica, as well as a stipend. Travel in Honduras was both to Tegucigalpa as well as several project sites. In Costa Rica, most time was spent in San Jose, given that all government and private headquarters were located there. Proposed Budget Actual Expenditure HONDURAS RESEARCH TRIP (14 days) Flight $600 $800 Lodging $250 $200 Local Transportation $100 $100 Food and Communications $275 $100 COSTA RICA RESEARCH TRIP (11 days) Flight $550 $670 Lodging $210 $250 Local Transportation $40 $100 Food and Communications $200 $100 RESEARCH STIPEND $1000 $905 TOTAL $3225 $3225