Instruments for financing carbon

savings for large programmes

Global Carbon Finance
Session 6
15th July 2020
A special Thanks to Prof. Amit Garg, IIM Ahmedabad for some slides 1
Baseline – Concept
“The baseline for a CDM project activity is the
scenario that reasonably represents the
anthropogenic emissions by sources of greenhouse
gases that would occur in the absence of the
proposed project activity.”

2
 Baselines
▪A baseline is a scenario that represents the GHG emissions in the absence of
the CDM project
▪ A baseline should be conservative and transparent
▪ Baseline is fixed for the entire project duration at the time of CDM project
approval. It does not change over time for that project.

Emissions
Baseline

Conservative Baseline

GHG reductions due

to the CDM project

Emissions from CDM project

Time
3
Baseline approaches
All new proposed baselines must follow one of these 3
Approaches:

▪ Existing actual or historical emissions; or

▪ Emissions from a technology that represents an
economically attractive course of action, taking into
account barriers to investment; or
▪ The average emissions of similar project activities
undertaken in the previous five years, in similar
social, economic, environmental and technological
circumstances, and whose performance is among
the top 20 per cent of their category.

4
Project boundary
“The project boundary shall encompass all
anthropogenic emissions and/or removals of GHGs
under the control of the project participants that are
significant and reasonably attributable to the project.”

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Leakage
“Leakage is defined as the net change in anthropogenic
emissions by sources of greenhouse gases which occurs
outside the project boundary, and which are
measurable and attributable to the CDM project
activity.”

Example: A rice husk plant uses up the rice husk so that

another rice husk plant has to switch to fossil fuel.

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Emission Reduction by a CDM Project in
power sector
ER = BE – PE – L

ER = Emission reduction by a CDM project

BE = Baseline emissions
= EG x EF
= Electricity supplied to the grid x emission
factor (e.g. using combined margin)
PE = Project emissions
L = emissions from leakages

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Additionality
▪Environmental additionality:
◦ The project activity is expected to result in a
reduction in anthropogenic emissions by sources of
greenhouse gases that are additional to any that
would occur in the absence of the proposed project
activity.
▪Financial additionality:
◦ The proposed project is not economically attractive
enough to become viable without carbon revenue; or
if it is viable – then it faces some barriers
(investment, technological, prevailing practices,
others).

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Additionality for Small-Scale projects
▪Show that the project would not have occured without CDM due to:
◦ Investment barrier
◦ Technological barriers
◦ Barrier due to prevailing practice
◦ Other barriers: Institutional, information, managerial, organizational
capacity, financial, or capacity to absorb new technologies
▪What are small scale projects?
◦ renewable energy project activities with a maximum output capacity
equivalent to up to 15 megawatts (or an appropriate equivalent);
◦ energy efficiency improvement project activities which reduce energy
consumption, on the supply and/or demand side, by up to the
equivalent of 60 gigawatt hours per year; and
◦ other project activities that both reduce anthropogenic emissions by
sources and directly emit less than 60 kilotonnes of CO2e annually

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CDM Project Cycle

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 CDM Project Cycle
Project description; baseline Project design Project design
& formulation document
methodology; monitoring
methods/plan; GHG emissions;
Statement of env. Impact; National approval
Stackholder comments Operational
Entity A
National CDM Authority; Validation/
Government consent; registration
Government confirmation
that the project assist in
Sustainable development Investors
Project financing
& implementation

Project
Monitoring participants

Monitoring
report

Verification / Operational
certification Entity B

Verification report/
Certification report/
Request for CERs

EB /
Issuance of CERs
registry

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Host Country Approval
▪Submit PCN and PDD to National CDM Authority
(NCDMA)
▪Total process takes around 60 days
▪HCA would mainly involve comments on:
◦ Sustainable development indicators (social, economic,
environmental and technological well beings)
▪Additionality and baselines

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Registration of CDM projects
▪The CDM registry is able to forward CERs to national
registries. It contains public information on all CDM
projects: issuance, holdings, transfer and acquisition of
CERs.
▪The International Transfer Log (ITL) connects all
registries.
▪The share of proceeds (SOP) to cover administrative
expenses will be 0.10$/CER for the first 15,000 tonnes
of CO2, and 0.20$/CER for the rest. At registration a fee
is paid using these values on the ex-ante reductions for
the first year. The SOP is reduced by that.

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CER Identification
Each CER shall have a unique serial number comprising the
following elements:
▪Commitment period: the commitment period for which the
CER is issued
▪Party of origin: the Party which hosted the CDM project
activity, using the two-letter country code defined by ISO
3166
▪Type: this shall identify the unit as a CER
▪Unit: a number unique to the CER for the identified
commitment period and Party of origin
▪Project identifier: a number unique to the CDM project
activity for the Party of origin.

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 Number of projects in different size intervals CERs issued in each category
3000
Demand-side EE
Fuel switch 0% Afforestation &
2500
4% Reforestation
Number of projects

Supply-side EE 0.8%
2000
5%
1500
Transport
1000 0%
HFCs, PFCs, SF&
CH4 reduction & & N2O reduction
500 Cement & Coal 45%
mine/bed
0 13%
10 - 25

25 - 60
5 - 10

500 - 1000
0-5

100 - 500
60 - 100

5000 - 10000

> 10000
1000 - 5000
Renewables
ktCO2 reduction per year 32%

Top countries by issued CERs

1200.0 100% India's Projects in CDM cycle

112 16

Share of all issued CERs

Millions of issued CERs

90%
1000.0 80%
800.0 70%
60% Withdrawn
600.0 50% 578
Validation terminated
40%
400.0 30% Validation negative

200.0 20% Rejected

10%
698 Registered
0.0 0%
China

India

Korea

Brazil

Mexico

Chile

Vietnam

Argentina
South

At validation

90
42
Total 1730 projects

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Carbon Risk Management

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 Risks
Project Risks Compliance Risks
▪ Construction risk ▪ Regulatory policy risk
▪ Technology performance risk ▪ Methodology approval risk
▪ Financial risk ▪ Host country approval risk
▪ Business (& interruption) risk ▪ Validation risk
▪ Regulatory risk ▪ Registration risk
▪ Credit risk ▪ Verification & monitoring risks
▪ Contract and Counter party ▪ Issuance success rate (Q) risk
risk ▪ Carbon price volatility (P) risk
▪ Natural peril ▪ Country risk (carbon related)
▪ Country risk (General)

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 Project and CDM: Key value drivers
100%

Operational “Spot” CERs

Construction
Primary forward CER contracts

Financial
Closure 100%

Approvals Early stage

Planning

0% PDD HGA Validation Registration Issuance

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Risk is spread across participants
▪ Buyers
◦ Compliance buyers
◦ Carbon Funds (3 types)
◦ Financial institutions
◦ Aggregators
◦ Others
▪ Suppliers
◦ Kyoto mechanisms (AAU, CER, ERU)
◦ Emission Trading Schemes (EUA etc)
◦ Voluntary markets
▪ Designated Operational Entities (DOE)
▪ Consultants
▪ Insurers
▪ Credit rating agencies

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 EUAs

Secondary CERs

Low
Primary CERs (Spot)

Primary CERs
(Forward)Guarantee

Delivery and Performance Risk Primary CERs

High

(Forward) No Guarantee
CER Price drivers: Risk sharing

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Slide 20