Basics of Carbon Finance Klaus Oppermann, World Bank Carbon Finance Unit Tenth Annual Financial Agent Workshop Washington DC, June 28, 2006
Overview Kyoto Protocol. Clean Development mechanism CDM. World Bank Carbon Funds. Impact of carbon credits. How to do a CDM project? CDM regulation. CDM methodology for chiller replacement project. CDM requirements for chiller project implementation.
Kyoto Protocol In force since February 2012. Annex I countries (most important: EU, Japan, Canada, Russia, Ukraine): commitment to reduce GHG emissions in total by 5.2% in 2008-12 in relation to 1990 (USA: out of KP; different individual targets e.g. EU:-8%, Russia: 0%). Compliance Instruments: domestic action, international emissions trading (emission rights: AAUs), project based mechanisms: CDM and JI (emission reduction credits: CERs, ERUs)
GHGs covered by the KP Carbon Dioxide CO2: GWP: 1 Methane CH4: GWP: 21 Nitrous Oxide N2O: GWP: 310 Hydroflurocarbons HFCs: GWP: > 10,000 Perfluorocarbons PFCs: GWP: > 10,000 Sulphur hexafluoride SF6: GWP: > 20,000 (GWP: metric tons of CO2e per metric ton of GHG) ODS (CFCs, HCFCs) are not covered by the KP
The CDM 860 projects representing > 1billion tco2e emission reductions by 2012 in UNFCCC pipeline Registered Projects: 225 with 445 Mio tco2e by 2012; issued CERs: 10 Mio t CO2e CDM is expected to deliver more than 30% of Annex I compliance gap Price per CER (tco2e) in pipeline: about US$ 6 CDM is transferring about US$ 1billion p.a. in developing countries by 2012 if pipeline is realized
CDM: host countries China India Brazil Korea Mexico Others Total 2012 CERs 33% 20% 15% 8% 5% 19% 100% Projects 8% 38% 18% 13% 6% 17% 100%
CDM: project types Industrial Gases HFCs, N2O Waste management CH4 Renewable Energy Energy Efficiency Cement Fuel Switch Total 2012 CERs 52% 20% 19% 6% 2% 1% 100% Projects 2% 20% 58% 13% 3% 4% 100%
The World Bank Carbon Funds Currently 9 World Bank carbon funds, one (PCF) in maintenance phase. Total capitalization reaches approximately US$ 1.6 billion. 50 projects already under contract: US$ 0.5 billion Blend of public and private capital. Partnership with 13 governments and 56 private sector entities. Partnership with host countries (Host Country Committee). Synergies with World Bank capacity building programs, in particular CF Assist
Impact of carbon Payment on delivery: fixed price, fixed quantity, hard currency (USD or EUR); long term contract (ERPA, 10yrs) improves cash flow. Big impact on end-of-pipe projects: HFCs/NO2 destruction, CH4 flaring: CDM only revenue. Renewable power: up to US$ 6/MWh. Energy efficiency: CDM revenues often low compared to savings in energy bill but important role of CDM to overcome barriers: CDM can fund incentive schemes or labeling programs.
How to do a CDM project? Check project eligibility and viability: host country has ratified KP, project type is eligible, project generates enough ERs to cover CDM transaction costs (in most cases: > 50.000 CERs p.a.). Find a buyer for the ERs (if World Bank: PIN). Preparation of CDM documentation (PDD, Monitoring Plan) possibly new CDM methodology. Host country approval; Approval of Annex I Party. Get the Project through the CDM regulatory process. CDM process: 6-12 month, new methodology + 12
CDM regulation CDM Executive Board elected by COP/MOP: 10 members, non-professional body, 4-6 meetings per year decides on approval of methodologies and project registration. DOEs: validation of projects, verification of emission reductions. So far 57 approved CDM methodologies (including simplified methodologies for small-scale project activities and methodologies for A/R projects). Development of new methodologies: bottom-up process.
CDM methodology for Chiller replacement project 1 Power savings through accelerated replacement of old CFC chillers by more efficient HFC chillers. Baseline power consumption: BAU remaining lifetime of old chillers (manufacturers). Power consumption of old chillers under operational conditions of new chillers (power consumption function for old chillers through measurement procedure). Applies up to capacity of old chillers. Project power consumption: measured (as well as operating conditions: output delivered).
CDM methodology for Chiller replacement project 2 Power savings translate in avoided CO2 emissions from power generation: approved combined margin approach (average of grid emission factor and build margin, most recent 20% capacity addition). CO2-equivalent of HFC losses out of new chillers has to be deducted (default values). (Core elements of) old chillers needs to be scrapped in order to avoid leakage. Additionality: project is not least cost option or prevented by barriers.
CDM requirements on the project implementation level Chiller owners transfer property rights to ERs to program implementing agent. Chiller owners agree to monitor new chillers (use of data locker systems) and to determine power consumption function for old chillers. Old chillers are scrapped. Chillers owners agree to provide evidence for scrapping (scrapping certificates). Independent third party (DOE) has to verify these requirements before CERs can be issued.
Thank you koppermann@worldbank.org On World Bank Carbon Finance: www.carbonfinance.org Official UNFCCC CDM website: www.cdm.unfccc.int Useful overview of CDM pipeline: www.cd4cdm.org