Agenda. Page 2. The Use of Carbon Credit Mechanisms to Finance Transportation Improvements in the Developing World Nelson, Nelson and Bakker-Kruijne

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1 CODATU XV: The role of urban mobility in (re)shaping cities The Use of Carbon Credit Mechanisms to Finance Transportation Improvements in the Developing World Tuesday 23 October 2012, African Union Addis Ababa Nels O. Nelson, Horn of Africa Regional Environmental Center, Addis Ababa, Ethiopia David O. Nelson, Jacobs Engineering Group Boston Massachusetts USA Eline Bakker Kruijne, Independent Researcher, Addis Ababa, Ethiopia

2 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 2

3 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 3

4 1997 Kyoto Protocol Worldwide Summit on Climate Change Established global goals for reductions in Green House Gas (GHG) emissions that are the main causes of climate change Introduced the Clean Development Mechanism (CDM) Industrialized countries can finance projects that reduce GHG emissions in developing countries Industrialized nations purchase Certified Emission Reductions (CERs) that result from project activities Industrialized nations achieve Kyoto emission targets Developing nations receive development aid Developing nations avoid GHG emissions Nelson, Nelon and Bakker-Krujne Page 4

5 Carbon Finance = Cap & Trade + Global Marginal Cost of Abatement Page 5

6 Clean Development Mechanism (CDM) Administered by UN Framework Conference on Climate Change (UNFCCC) First project in 2001 First Certified Emission Reduction (CER) in 2005 Nelson, Nelon and Bakker-Krujne Page 6

7 Almost 4,400 Certified CDM Projects August 2012 Nelson, Nelson and Bakker-Kruijne Page 7

8 Certified Emission Reductions (CERs) UNFCCC certifies emission reductions and transfers CERs to project proponents 1 CER = 1 tonne Carbon Dioxide equivalent (tco 2 e) CDM projects must be additional verifiable Nelson, Nelon and Bakker-Krujne Page 8

9 Key Concept: Additionality To be certified a project must face significant barriers that would prevent its completion without the benefit the CDM. A CER cannot result from business-as-usual Additionality is established by demonstrating Project would not occur without funding from carbon financing Lack of local capacity to implement, operate or maintain the project Unavailability of project technology, or High level of technological risk in local context. Nelson, Nelon and Bakker-Krujne Page 9

10 CDM Certification Process CDM process requires careful planning and documentation six to eighteen months $60,000 and $200,000 Project proponent creates Project Design Document (PDD) Establishes a carbon emission baseline absent the CDM financed project Sets methodology to monitor emission reductions for verification Methodologies often very data-intensive and specific Credits are generated over single ten-year term or twice renewable seven-year term for a total possibility of 21 years. Nelson, Nelon and Bakker-Krujne Page 10

11 CDM Market Developments CDM evolves as new methodologies are added Price collapse to 1.50/CER down from a high of 15 Decreased demand from depressed European market Increasing CER supply from middle-income countries such as China, India, and Brazil. European Union will stop accepting new CDM projects from middle-income countries in 2013 EU to only accept from Least Developed Countries (LDCs) starting in 2013 Nelson, Nelon and Bakker-Krujne Page 11

12 Who are the Least Developed Countries? Poverty - GNI per capita of less than USD $905 Low nutrition, health, education and adult literacy Instability of agricultural production, instability of exports of goods and services, etc. Nelson, Nelon and Bakker-Krujne Page 12

13 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 13

14 CDM Market Alternatives The Voluntary Market uses methodologies adopted by UNFCCC or their own methodologies to issue Voluntary Emission Reductions credits outside the UN system VERs are purchased by countries, companies, and individuals who wish to voluntarily reduce their emissions VER pricing is not centralized, and varies substantially between projects Buyers will pay a premium for attractive projects with related development outcomes Multiple registries, including Gold Standard (GS) and Verified Carbon Standard (VCS) Nelson, Nelon and Bakker-Krujne Page 14

15 CDM Market Alternatives The Nationally Appropriate Mitigation Action (NAMA) program Will orient established patterns of international aid to more explicitly support climate change goals without a transaction unit (i.e. no CERs) NAMA projects are to be developed and marketed to attract a larger fraction of the overall supply of discretionary foreign aid Certified projects on NAMA database provide menu of candidate projects for industrialized countries to support that will Provide a structured avenue for investment, capacity development and technology transfer to developing nations on projects elected by host country Foster development towards climate change goals Nelson, Nelon and Bakker-Krujne Page 15

16 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 16

17 CDM Methodologies Large catalog of methods for reducing GHG emissions 87 UNFCCC methodologies for large scale projects 84 UNFCCC methods for smaller scale projects Separate catalog for forestry projects Transport catalog features 19 methodologies Some energy methods can also apply to transport investments But only six methodologies have been employed for successfully registered transport projects. Nelson, Nelon and Bakker-Krujne Page 17

18 Carbon Finance Methodologies for Transport Projects Project type tco2 per Year Number of Methods Number of Projects CDM Large >60, CDM Small <60, Voluntary 3 0 Nelson, Nelson and Bakker-Kruijne Page 18

19 Accepted Large Scale Methodologies Code Description Registered Projects AM0016 Mass rapid transit 5 AM0017 Production of waste cooking oil-based biofuel AM0031 Bus rapid transit 9 AM0090 Cargo mode shift from road to water or rail AM0101 High speed passenger rail Nelson, Nelson and Bakker-Kruijne Page 19

20 Accepted Small Scale Methodologies Code Description Registered Projects AMS-III.C. Emission reductions by electric and hybrid vehicles 2 AMS-III.S. Low-emission commercial vehicle fleets AMS-III.T. Plant oil production and use for transport applications 1 AMS-III.U. Cable Cars for Mass Rapid Transit 1 AMS-III.AA. Transportation Energy Efficiency Retrofits AMS-III.AK. Biodiesel transport fuel AMS-III.AP. Transport energy efficiency activities AMS-III.AQ. Bio-CNG in transportation applications AMS-III.AT. Commercial truck fleet efficiency improvements AMS-III.AY. LNG buses AMS-III.BC. Improved fleet efficiency of vehicle fleets Nelson, Nelson and Bakker-Kruijne Page 20

21 Methodologies for Voluntary Projects Code Description Number of Projects VM0019 Ethanol for Flex-Fuel Vehicle Fleets 0 GS VER Biodiesel from waste oil/fat 0 VCS Bicycle Sharing 0 Nelson, Nelson and Bakker-Kruijne Page 21

22 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 22

23 18 Registered Transport Projects Project type Bus Rapid Transit Mass Rapid Transit Cable Car Mass Transit Method Number of Projects Total Project Value Millions Registered CERs Millions of tonnes Carbon Finance Amount Millions AM , AM , AMS-III.U Electric & Hybrid Vehicles AMS-III.C Plant Oil Fuel Production David O. Nelson English Conversation: Topics in Transport Operations and Management AMS-III.T Page 23

24 Transport Project Locations BRT Metro Other Nelson, Nelson and Bakker-Kruijne Page 24

25 Bus Rapid Transit Projects Location CER Finance ( Millions) Bogotá, Colombia 6.31 Zhengzhou, China 4.98 Chongqing, China 4.94 Cali, Colombia 4.43 Medellin, Colombia 3.86 Mexico City, Mexico 3.18 Barranquilla, Colombia 1.26 Guadalajara, Mexico 1.16 Mexico City, Mexico 0.89 Lima, Peru 0.69 Johannesburg, South Africa 0.4 Nelson, Nelon and Bakker-Krujne Page 25

26 Metro Rail Projects Location CER Finance ( Millions) Delhi, India 92 Mexico City, Mexico 23 Mumbai, India 14 Nelson, Nelon and Bakker-Krujne Mumbai Rendering Page 26

27 Other Projects Location CER Finance ( Millions) Cable Car Medellín, Colombia 3 Low GHG Metro Rolling Stock, India 3 Rail Transport of New Automobiles, India 2 Plant-Oil Fuel Production, Paraguay 1 Nelson, Nelon and Bakker-Krujne Medellin Cable Car Terminal Page 27

28 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 28

29 Financial Benefits 403 million in finance for 4.5 billion in transport project investment Approximately 10% of initial project costs for all 18 projects. But most CDM finance goes to non-transport projects CDM transport investment has been historically limited to only a few nations that have been actively involved in the program. Columbia, Mexico, India, China developed 83% of the registered projects Nelson, Nelon and Bakker-Krujne Page 29

30 Investment and CER Details for Registered Transport Projects David O. Nelson English Conversation: Topics in Transport Operations and Management Estimated Initial Investment (Millions of Euros) Crediting duration (years) Total estimated ERs (Millions of tco2) Estimated ER income (Millions of Euros) CDM Finance as % of Project Cost BRT Chongqing Lines 1-4, China % Cable Car Metro Medellín, Colombia % Plant-Oil Fuel Production, Paraguay % BRT Barranquilla, Colombia % BRT Macrobus Guadalajara, Mexico % BRT Metrobus Insurgentes, Mexico % BRT Lines 1-5 EDOMEX, Mexico % BRT TransMilenio Bogotá, Colombia % Rail Transport of New Automobiles, India % Low GHG metro rolling stock, India % Metro Delhi, India 1, % Metro One Mumbai India % BRT (COSAC I), Peru % Metro Line 12, Mexico City 1, % BRT Rea Vaya, South Africa % BRT Zhengzhou, China NA NA BRT MIO Cali, Colombia NA NA BRT Metroplus Medellin, Colombia NA NA Totals 4, Page 30

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33 Nelson, Nelson and Bakker-Kruijne Page 33

34 Project Lifetime CER Revenue as Percentage of Initial Investment Nelson, Nelson and Bakker-Kruijne Page 34

35 Concerning Carbon Finance of Transport Projects 1. Most of transport CDM projects are developed in the middle-income countries % of all transport project were financed on just four countries; Colombia, Mexico, India and China. 3. CER finance as a fraction of initial investment project costs varies widely from a high of 97% to a low of 1%. 4. Capital intensive metro rail investments tend to be inefficient producers of carbon credits relative to total project cost. Nelson, Nelson and Bakker-Kruijne Page 35

36 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 36

37 Transport Challenges for CDM Finance Methodologies for evaluation of mode shift projects are complex and data intensive. Data collection cost can exceed what CDM credits pay $300, ,000 up-front costs for data collection $60, ,000 per year for on-going monitoring, Default values can sharply underestimate total benefits Start the CDM process early in the project lifecycle Enlist the support of successful experts Nelson, Nelson and Bakker-Kruijne Page 37

38 Transport Challenges for CDM Finance Transport Sector awareness and comfort with CDM is obviously limited Most projects are funded in a limited number of countries These projects are not unique but they enjoy significant funding benefits from CDM Awareness and familiarity with CDM will create new mechanism for funding sustainable transport investment in the least developed nations. Nelson, Nelson and Bakker-Kruijne Page 38

39 Agenda UNFCCC Clean Development Mechanism Complementary and Alternative Programs CDM Transport Methodologies Registered Transport Projects Financial Benefits Challenges Strategies for Success Nelson, Nelson and Bakker-Kruijne Page 39

40 Strategies for Success Start Early To avoid delays and uncertainty, begin exploring the potential for CDM finance early in project development. Leverage the Work of Others Study the publicly available project documents for comparable projects Enlist support from successful CDM transport developers. Focus on CDM Efficiency Focus on projects where the ratio of carbon finance to overall project cost is most favorable. Nelson, Nelson and Bakker-Kruijne Page 40

41 Comments and Questions? Nelson, Nelon and Bakker-Krujne Page 41

42 CODATU XV: The role of urban mobility in (re)shaping cities The Use of Carbon Credit Mechanisms to Finance Transportation Improvements in the Developing World Tuesday 23 October 2012, African Union Addis Ababa Nels O. Nelson, Horn of Africa Regional Environmental Center, Addis Ababa, Ethiopia David O. Nelson, Jacobs Engineering Group Boston Massachusetts USA Eline Bakker Kruijne, Independent Researcher, Addis Ababa, Ethiopia