Financing Programmes for CDM Projects

Transcription

1 Financing Programmes for CDM Projects November 2003 European Commission (Directorate-General for Energy and Transport) Contract no. NNE5/2002/52: OPET CHP/DH Cluster

2 TITLE: Financing Programmes for CDM Projects Authors: Kostantinos D. Patlitzianas, Argyris G. Kagiannas, John Psarras Organisation: Decision Support Systems Lab (EPU-NTUA) National Technical University of Athens School of Electrical and Computer Engineering Address: 9, Iroon Polytechniou str., Zografou, Athens, Greece Tel.: / 2083 Fax: kpatli@epu.ntua.gr Web: - The project "OPET CHP/DH Cluster" has obtained financial support from the European Commission (Directorate-General for Energy and Transport) under the contract no. NNE5/2002/52 for Community Activities in the Field of the specific programme for RTD and demonstration on "Energy, Environment and Sustainable Development - Part B: Energy programme" The responsibility for the content on this publication lies solely with the authors. The content does not necessarily represent the opinion of the European Community and the Community is not responsible for any use that might be made of data appearing herein.

3 1. INTRODUCTION The need to reduce the emissions cause the greenhouse effect has been required internationally. Financial assistance to developing countries is needed in order to avoid high increase of their greenhouse emissions associated with their development. Most of the developed countries (Annex I) have undertaken their commitments to reduce greenhouse gases under the Kyoto Protocol. In 1992, the United Nations Framework Convention on Climate Change (UNFCCC) agreed on the principle that international cooperation is needed to finance development needs. Today, all major multilateral agencies are incorporating environmental considerations in their programmes. Although the share of financial assistance from the institutions is not as big as bilateral aid or private sector investment, they can play a pivotal role in promoting international cooperation in the new emerging mechanism. In addition, a large number of so-called Annex I countries are also setting up comparable programmes today. These include Denmark, Great Britain, Italy, Japan, Norway, Canada and Austria. More specifically, initial experiences have been gained from the Dutch CDM tender-programme - CERUPT and the World Bank Prototype Carbon Fund PCF. The most important result of these initial experiences is the creation of appropriate organisation structures and the use of qualified personnel by both the host and investor countries and the respective participants in the project, thus, building the capacity to facilitate the CDM. The main financing programmes for CDM projects are described in the following. 2. CERUPT 2.1 Objective Clean Development Mechanism (CDM) is a mechanism through which initiatives aimed at GHG emission reductions are realised by one country on the territory of another country. Certified Emission Reduction from these projects may be issued to the account of the investor country. In order to realise this, host country and investor country both approve the project as a CDM-project. Through CERUPT (Certified Emission Reduction Unit Procurement Tender), the Netherlands is aiming to attract the implementation of CDM projects by providing funds for acquisition of CERs. The responsibility for CDM in the Netherlands is with the Minister of Housing, Spatial Planning and the Environment. The Minister has appointed Senter International as tendering authority for CERUPT. Officially, CERUPT is a public procurement set up according to the EU directive for supplies 93/36/EEC. The CERUPT tender is an interesting case study because the tender is open for all CDM host countries and all project types. Besides, project identification and development is left completely to the project developers and host countries without any involvement of the Dutch tender agency. The main objective of CERUPT is to buy CERs at a low price and acceptable risk. Senter International, the organisation that manages the CERUPT for the Netherlands Government, therefore assesses primarily price and project risk and does not have a preference for specific project types, which means that the submitted project proposals most likely reflect the actual supply on the market. CERs are generated and delivered as follows: CERs are generated in CDM projects. To generate CERs a CDM project has to realise a GHG emissions reduction compared to the baseline scenario. The CDM project s feasibility should be proven at the moment of submission to Senter. The CDM project should be operational in the contract period. To ensure that all these requirements have been met, a business plan for the project must be included in the proposal. As mentioned before, CDM projects have to be part of one of the following project categories: Renewable Energy Sources (e.g. solar, wind, biomass, hydro) The replacement of CO 2 intensive fuels (e.g. oil to gas, coal to gas) Energy efficiency (e.g. CHP, lighting, insulation, process optimisation) Financing Programmes for CDM Projects Page 3

4 Waste processing (e.g. land fill gas extraction, wastes incineration) Other categories, subject to approval by the CDM EB. CDM projects have to assist host countries in achieving sustainable development goals. The host country has to confirm by means of a Letter of Approval. The host country will, furthermore, have to judge impacts on the environment of the CDM project. This may require an Environmental Impact Assessment on request of the Host Country. Public participation is essential in CDM projects. Local stakeholders are to be invited to comment the draft project design. The final project design should take these comments into account. Further general requirements are that: GHG Emission reductions should be additional to any that would occur in the absence of the CDM project. This must be demonstrated in a baseline study. CDM projects are validated by Designated Operational Entities and registered by the Executive Board. Emission reductions are verified and certified by DOEs, CERs are issued by the EB. CDM projects are subject to levies by the EB. The EB will withhold part of the CERs (2%) to cover administrative expenses and to assist Least Developed Countries in meeting costs of adaptation to the adverse effects of climate. CDM projects in one of the least developed countries are exempt from the adaptation levy. 2.2 The procedure of the CERUPT The relation between institutions involved can be schematically presented as follows: Figure 1: CERUPT - Relations between Institutions in a CDM project VI Registration Xa: Adapt. levy X Issue CERs Executive Board CDM Administration Adaptation Registry Fund Fund V request for registration IX verification and certification DOE Xb: CERs Xc: Adm. Levy IV request for validation IX request for certification IV Validation report VIII Certification reports 0 request for Approval Host Country Contractor government (Supplier of CERs) I Approval II Offer VII Documents XI Reports III Contract XI Payments Dutch government /Senter. Financing Programmes for CDM Projects Page 4

5 O: The supplier asks host country government to Approve of the project. I: The host country government issues a Letter of Approval for the CDM project, in which the host country government recognises the project as a CDM project. II: The supplier offers the CERs to Senter III: The Senter accepts the offer and signs a contract with the supplier. Through this contract it recognises the project as a CDM project. IV: The supplier submits PDD to the DOE for validation, upon which the DOE gives the supplier the validation statement. V: DOE requests the project to be registered as a CDM project with the EB. After registration the project can officially be called a CDM project. VI: Registration of the project by EB is finalised 60 days after the request, unless a review is requested. VII: VIII : Contractor submits documents. The operational project generates emission reductions, which are demonstrated in the monitoring report. The contractor submits this monitoring report for verification and certification to the DOE. The DOE will then issue a verification statement and emission reduction certificate to the supplier. IX: The DOE will request the EB to issue the CERs. X: The EB, through CDM Registry, will issue CERs: Xa: If applicable: 2 % of the CERs to the Adaptation Fund Xb: the remaining CERs (98 %) to the Netherlands Xc: The Netherlands government pays an amount to the Administration Fund XI: Contractor delivers the final reports, and Senter will make the payments upon delivery of the CERs. 3. PCF 3.1 Objective Recognizing that climate change will have the most impact on its borrowing client countries, on July 20th, 1999 the Executive Directors of the World Bank approved the establishment of the Prototype Carbon Fund (PCF). The PCF, with the operational objective of combating climate change, aspires to promote the Bank s tenet of sustainable development, demonstrate the possibilities of public/private partnerships, and offer a learning-by-doing opportunity to its stakeholders. The PCF has three primary strategic objectives: Show how project-based greenhouse gas emission reduction (ER) transactions can promote and contribute to sustainable development and lower the cost of compliance with the Kyoto Protocol. Provide the Parties to the UNFCCC, the private sector, and other interested parties with an opportunity to learn by doing in the development of policies, rules, and business processes for the achievement of emission reductions under JI and the CDM. Demonstrate how the World Bank can work in partnership with the public and private sector to mobilize new resources for its borrowing member countries while addressing global environmental problems through market-based mechanisms. 3.2 The procedure of the PCF This section provides a summary of the project identification, approval and design process for the Prototype Carbon Fund. Project sponsors/proponents submit potential projects for consideration to the PCF in the form of a Project Idea Note (PIN). The Project Idea is screened for basic eligibility criteria by the PCF Knowledge Manager, categorized and logged into the electronic project proposal database, and a preliminary response is sent to the project sponsor. Financing Programmes for CDM Projects Page 5

6 If the idea of the project meets the basic eligibility criteria the project is assigned to a technical specialist for follow up. If the technical specialist, in consultation with Team members, decides to clear the Project Identification Number (PIN) for further development a Project Concept Note (PCN) is prepared. The PCN is the document utilized in deciding whether or not to prepare a Term Sheet for the negotiation of the purchase of emission reductions (ERs). The PCN includes the preparation of the baseline concept, expected emission reductions, application of any World Bank operational policies (such as social and environmental safeguard policies), and an initial project risk assessment. If the PCN is approved after review by the Fund Management Committee (FMC), a Baseline Study and a Monitoring Plan (MP) will be commissioned for the project. After the Baseline Study and MP have been completed, the PCF (and/or the project sponsor) will prepare a Project Design Document (PDD). The Baseline Study, MP, PDD, and stakeholder consultation documentation will be submitted to an operational entity (OE) for validation in accordance with Decision 17/CP.7 of the Marrakesh Accords. Validation by an OE enables the PCF and the project sponsor to finalize the financial structure of the project and prepare and discuss the Emissions Reduction Purchase Agreement (ERPA) Term Sheet. Subsequently, the PCF will then seek to develop, negotiate and sign an ERPA with the Project Sponsor. The FMC approves the final legal agreements. The final stage is for an OE to submit a request to the Clean Development Mechanism Executive Board (EB) for registration of a project (together with a validated PDD, and a Letter of Approval, along with an explanation of how it has taken due account of comments received from Parties to the UNFCCC, stakeholders and UNFCCC accredited non-governmental organizations). In the event that an OE determines that a proposed project is not valid, the PCF shall consult with the Participants and the project sponsor on how to proceed and, if so decided by consent between these parties, make appropriate revisions to resubmit the project for validation and subsequent registration. The details of the procedure are presented as follows: Project ideas reviewed by PCF: o PCN prepared by project sponsor; o Host country endorsement sought; o Further work authorized by FMC & Participants; o PCF signals intention to purchase ERs. Baseline Study and Monitoring and Verification Plan (MVP): o Baseline study and MVP prepared; o PCF quality control of results; o Documents for Validation prepared by PCF and sponsor. Validation process: o PCF contracts the validator and submits documents; o Validator studies project design, baseline and MVP and consults with PCF and project participants; o Validator issues a report and opinion. Negotiation of Project Agreements: o PCF prepares terms sheets and draft legal documents; o Pre-negotiations workshop for project participants (optional); o Negotiations completed and project agreement initialled; o Project participants achieve financial closure and formal approval; o Signing of project agreements. Construction and start up: o At construction completion, verifier contracted by PCF;. Financing Programmes for CDM Projects Page 6

7 o Verifier checks that specifications of the MVP are met ( initial verification ); o Project implementation starts; o Project entity monitors in accordance to the MVP. Periodic verification & certification: o Verifier issues periodic verification report; o PCF pays project sponsor for ERs certified; o Certified ERs are issued as per distribution agreement; o Verification is undertaken annually or as deemed appropriate. Project completion: o Crediting period either; o 10 years fixed or; o 7 years RES (maximum 21 years). The above process for CDM emission reduction is presented in figure 2: 7. Project completion Figure 2: PCF - The process for CDM emission reduction 1. Preparation and review of the Project 6. Periodic verification & certification 1-3 years Up to 21 years 3 months 2 months 2 months 2. Baseline Study, Monitoring and Verification Plan (MVP) 3. Validation process 5. Construction and start up 3 months 4. Negotiation of Project Agreements 4. OTHER PROGRAMMES 4.1 CDM Programme of Canada s CDM and JI Office Under Action Plan 2000, the CDM & JI Office received funds for the period to pursue the following three objectives: Financing Programmes for CDM Projects Page 7

8 To strengthen Canada's capacity to take maximum advantage of the Kyoto Mechanisms. These include the Clean Development Mechanism, Joint Implementation, and emission trades backed up by emission reduction projects. To encourage and facilitate Canadian participation in the Kyoto Mechanisms by building awareness, promoting cost-effective opportunities and lowering transactions costs, while also engaging developing countries and countries-in-transition in such activities. To assist Canadian entities in obtaining emissions reductions credits from CDM and JI type projects according to international rules and guidelines which can assist Canada in meeting its Kyoto target. With the elaboration of international rules and guidelines at Marrakesh in November 2001, the Office is primarily focused on project facilitation including: Guiding companies on the technical requirements for CDM activities and issues related to ownership of emission reduction credits; Providing financial support for market identification studies, feasibility assessments, baselines and monitoring plans, risk assessments and environmental impact studies; Preparing Memoranda of understanding and project-specific agreements with host country governments; Matching project developers with project investors and credit buyers. Project proposals submitted to Canada's CDM & JI Office will be assessed in reference to the following key criterion: Promotion of the objectives of the (UNFCCC). The UNFCC seeks to stabilize GHG concentrations in the atmosphere at a level that does not create dangerous anthropogenic interference with the climate system. Contribution to the objectives of Canada's CDM & JI Office. Consistency with Canada's International Strategy on Climate Change Proposals must respond to at least one of the Strategy's objectives: o Maximise Canada's ability to meet its UNFCCC commitments and Kyoto Protocol targets at the lowest cost; o Contribute to the achievement of global climate change objectives; o Maximize business opportunities for Canadian business interests in international projects and initiatives on climate change. 4.2 Rabobank Fund In January 2003, the Rabobank Group concluded a contract with the Ministry of Housing, Spatial Planning and the Environment for the Dutch government to purchase ten million tons of certified greenhouse gas reductions from projects in developing countries via the so-called Clean Development Mechanism (CDM) of the Kyoto Protocol. This involves projects in which the Rabobank is involved via its network of international offices. The extra revenues from the sale of emission reductions make it easier for the Rabobank to realize other projects that are more difficult to finance. In addition to reducing CO 2 emissions, these projects also help strengthen the local economy, in part by improving the infrastructure and creating employment. 4.3 Singapore ASEAN Carbon Fund The Singapore-ASEAN Carbon Fund 2003 has been established to be administered through Electric Eye Pte Ltd in Singapore. It is an independent initiative that seeks to kick-start CDM projects under the Kyoto Protocol. The fund will be a 5-year closed-end investment fund, with a target capitalisation of 120 million. It will target energy efficiency and renewable energy in the ASEAN countries, and aims at tonnes CO 2 -eq in carbon credits per year. If successful it will function as model for a larger Asian carbon fund.. Financing Programmes for CDM Projects Page 8

9 4.4 Finland Programme Finland has a commitment of 8 % reduction of greenhouse gases according to the burden sharing agreement under the EU as a result of the Kyoto Protocol. The Ministry of Foreign Affairs (Development Cooperation) is currently exploring the possibilities of purchasing certified emission reductions via small-scale CDM projects. The guidelines for small-scale projects are simplified, reducing transaction costs, and small-scale projects are in general more beneficial for sustainable development than large-scale CDM projects. The government of Finland has published an invitation to submit project proposals. Financing Programmes for CDM Projects Page 9