Governance

Three pillars
Governments Institutions Markets

When one fails other compensates When one fails it either self corrects and evolves with new attributes. Or depends on the other pillars for a change. The cycle should repeat it self.
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Global Warming
Its responsible for life on Earth Water Vapor, CO2, Methane, N2O caused natural GW Historically Industrialization has magnified the emissions of GHGs exponentially Increase in temperature, increase in sea water level, extreme movements of draught/ hurricanes/ floods expected
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IPCC, UNFCCC, Kyoto Protocol

Intergovernmental Panel on Climate Change United Nations Framework Convention on Climate Change North & South agree to mitigate climate change before it is too late Agree that they have Common but Differentiated responsibilities. Kyoto Protocol which in details describe how the GHGs can be reduced entered into force on 16th February 2005.
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The Kyoto protocol

Annex I Non-Annex I Not ratified

Kyoto Protocol
It relies on market based flexible mechanisms to reduce GHGs emissions to mitigate GW.
Emission trading (trading of allowances between Annex I governments) Clean Development Mechanism (CDM) (projects in Non-Annex I countries with participation of Annex I countries) Joint Implementation (JI) (projects between Annex I countries)
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Carbon Credits are also Known as

Emission reduction unit (ERUs), Certified emission reduction (CERs), Assigned amount unit (AAUs) Removal unit (RMUs) Voluntary emission reduction (VERs)

Supposed benefits of the market mechanisms

Help identify lowest-cost opportunities for reducing emissions and attract private sector participation in emission reduction efforts. Cost of limiting emissions varies considerably from region to region, the benefit for the atmosphere is the same, wherever the action is taken. Developing nations benefit in terms of technology transfer and investment brought about through collaboration with industrialized nations under the CDM.

The Carbon market (1)

International agreements to reduce greenhouse gases: EU Emissions Trading System (EU-ETS) requires EU countries to reduce emissions of greenhouse gases by 6% during 2005-2007 Kyoto Protocol requires Annex I countries (West and Eastern Europe, North America, Japan, New Zealand, Australia) to reduce emissions of greenhouse gases by 5.2% during 2008 2012

The Carbon market (2)

Voluntary participation of Non-Annex 1 countries (Brazil, China, India, South Africa, etc.) The Linking Directive allows credits from Clean Development Mechanisms (CDM) and Joint Implementation (JI) projects to help companies comply with their obligations

Registry systems under Kyoto (1)

National Registries: containing accounts within which units are held in the name of the government or in the name of legal entities authorized by the government to hold and trade units CDM registry: for issuing CDM credits and distributing them to national registries. Accounts in the CDM registry are held only by CDM project participants, as the registry does not accept emissions trading between accounts.
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Registry systems under Kyoto (2)

In addition to recording the holdings of Kyoto units, these registries settle emissions trades by delivering units from the accounts of sellers to those of buyers, thus forming the backbone infrastructure for the carbon market

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Registry systems under Kyoto (3)

Each registry will operate through a link established with the International transaction log put in place and administered by the UNFCCC secretariat. The ITL verifies registry transactions, in real time, to ensure they are consistent with rules agreed under the Kyoto Protocol. The ITL requires registries to terminate transactions they propose that are found to infringe upon the Kyoto rules
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Registry systems under Kyoto (4)

In verifying registry transactions, the ITL provides an independent check that unit holdings are being recorded accurately in registries. After the Kyoto commitment period is finished, the end status of the unit holdings for each Annex B Party will be compared with the Partys emissions over the commitment period in order to assess whether it has complied with its emission target under the Kyoto Protocol 13

Registry systems under Kyoto

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Requirements for South for participating in CDM

The host country where the project is executed is a Kyoto signatory. The project meets the sustainable development criteria framed by the country. The projects results in real, measurable, long-term GHG reduction. The projects must be Additional (i.e. must face some financial, technical, common practice barriers. It should be proved that the project must not have been commissioned without the CDM)
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Basic data needed for CDM!

Evidence of CDM consideration Start & commissioning dates Financial analysis (IRR calculation)

Electricity saving data

Barrier analysis information EIA report, if required by law Contractual agreement between each individual sub-project and the bundling agency
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CDM Sectors
All types of Renewable energy Energy Efficiency in Industry (demand & supply) Mining & Mineral Production Energy Distribution loss prevention Construction

Transport

Fugitive emissions from fuels

Fugitive emissions from production and consumption of halocarbons and Sulphur hexafluoride Agriculture

Solvent use

Waste Handling and disposal

Afforestration and reforestation

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Possible CDM projects in Energy Sector for example

Renewable Energy (wind, solar, biomass, hydro, geothermal etc.) Energy Efficiency Combined Cycle Gas Turbines (CCGT) Super Critical Technology for Power Generation Renovations & modernization of Power plants Reduction in T&D loss Fossil fuel switch - Coal to Gas, Oil to Gas Waste gas: heat, pressure, electricity SF6 abatement Biomethanation Coal Mine Methane (CMM)
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Possible CDM projects in Oil & Gas Sector for example

Gas flaring reduction, Re-injection, Associated gas recovery, prevent pipeline leakage, Geological storage of GHGs

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Possible CDM projects in Iron & Steel Sector for example

Cleaner and more efficient coke production Furnace efficiencies and upgrades Heat Recovery from Direct Reduction Kiln Energy Capture from Waste Gas Fuel switch to natural gas / biomass, for various ovens and kilns Green Belt Development & Afforestration to act as a sink for CO2
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Possible CDM projects in Chemical Industry

Energy Efficiency Wastewater/ Methane Avoidance Biodiesel and Biofuels Biomass Energy Fossil fuel switch - Coal to Gas, Oil to Gas Gas pipeline leakage HFCs abatement Renewable Energy: Biomass, Geothermal, Hydro, Solar, and Wind Waste gas: heat, pressure, electricity Process modification Forestry - Afforestation and Reforestation etc.
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How is CDM relevant for Businesses?

Annex I party

Emission reduction project

Carbon Credits The CDM project reduces the carbon emissions in the CDM country

Emission cap

Actual emissions

Carbon value ()

Buyer

By selling the emission reductions from a project to a Annex I party additional cash flows can be realised.

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Impact on the IRR of The Project

16 %
The gap between the project return and the required return on investment threshold 15 %

CDM cash flow

12 %

IRR Benchmark
Project return excluding CDM revenue Project return including CDM revenue

The CDM cash flow increases the IRR of the project making it more interesting for investors. (2%-100%, diversification, offshore revenue stream) 23

Project Example
Waste heat Power Generation
50 MW combined cycle gas-steam turbine (CCGT) 12 MW condensing steam generator (CSG) 85% load factor Displaces 500 GWh / a of fossil grid electricity CERs: 400,000/p. a = Rs. 660 million up to 2012

Biomass Power Plant

10 MW Rice Husk plant supply and grid export 70% load factor Displaces 70 GWh / a of fossil grid electricity CER: 55,000 p a = Rs. 90 million up to 2012

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Energy Efficiency Projects for Example

Doing the same with less
Potential & Opportunities
Cogeneration waste Heat/ gas Recovery Energy Management System Combustion Control Fuel Switching High efficient Refractory Industrial Process Modifications/Fuel Savings
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Types of project
Measures/technologies
Diffuse/small scale energy efficiency:
Energy efficient devices (bulbs, motor controller, appliances)
Distribution Labelling/government programme

Buildings energy efficiency (insulation, SSC renewable, etc)

Large scale (industrial) energy efficiency (demand/supply side)

Pure energy efficiency Waste heat/gas recovery Fuel switch
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Methodologies
Pure EE:
AM0018 Steam optimization AM0020 Water pumping efficiency improvement AM0038 Improved electrical efficiency in SiMnmetal production ACM0007 Single cycle to combined cycle power generation AM0017 Natural gas cogeneration (BSL=gas-heat + grid-elec) AM0029 Construction of new natural gas power plants AM0036 Fuel switch Fossil fuel to biomass for heat generation ACM0003 Fuel switch in cement plants ACM0009 Fuel switch coal or petroleum to Natural gas AM0024 Waste heat recovery in cement plants AM0032 Cogen from waste gas/heat AM0037 Flare reduction and gas utilisation at oil & gas facilities ACM0004 Waste gas/heat for power generation

Fuel switch:

Waste heat/gas recovery:

Applicability conditions!

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Traditional project risks

Project does not meet regulatory commitments

Project does not operate reliably

Community protests lead to permit denial or revocation

Regulatory and political risks

Operational risk Technical risk Project does not pass completion tests

Threats to project
Social acceptability Completion risk

Project boycotts

Market risk

Financial risk

Not enough financing to complete project

Bankers reluctant to lend

Source: Miller and Lessard, 2000

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Additional CDM project risks

Institutional and regulatory risk Methodology risk Host country risk Validation risk Registration risk Monitoring and verification risks
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Time frame and uncertainty

Step Propose methodology Validatio n LOA Annex 1 Registration appr oval Request for review

Consult.

3 weeks

30 days

Variabl e

Not requ este d 1-3

Up to 8 weeks LS

Up to 2.5 months

Time fram e

Up to 2 years

2-6 mont hs

1 mo nth 3 ye ars

Up to 6 mo, if reviewed wee ks

Up to 3 months

Rejectio n Leve l

~50%

Not

Variabl know e n

Not kno wn

Up to 70% request for review

~33% formal review

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Time frame and uncertainty

Formal review Verificati on Request for review Up to 1.5 Month Formal review

Step

Issuance

Consult

N/A

N/A 2-4 Mont hs

15 days Up to 5 Weeks

N/A

Up to 4 Time Frame Months

Up to 4 Up to 2 Months Months

Rejection Level

Not Up to 75% Know request for 26% rejected n review

Up to 66% formal review

None Yet
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Project Risks
- Equipment - O&M - Management

Apparent costs

- Opportunity costs (late start) - Overrun budgets

Total real costs

Operational risks: - Reduced CER generation - Equipment failure - Administrative expenses and other transaction costs (lawyers, consultants)

Hidden costs

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The CER Price Structure

CER Price
Counterparty & Default Risk Commissioning Risk Late Delivery Risk Underperformance Risk Asset Transfer Risk Baseline & CER Calculation risk Registration Risks Volatility risk International Transaction Log & Cap risk Hot Air & Supply Risk UNFCCC Policy Risk, Political Risks EU ETS market price

EURO

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The Myth of the Carbon Credit

EUA ERU European Union Emission Allowance Reduction Unit Existence Allocated by Annex I countries: Real Commodity AAA rated companies No risk No risk high Created by JI projects CER Certified Emission Reduction Created by CDM projects

Ownership

Medium and large scale companies Medium risk Medium risk Medium

Small, medium & large sized companies High risk High risk
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Country- and project risk Delivery risk Price

Low

Contract Types
1) Seller does its utmost to deliver a flexible/non-firm volume, buyer
guarantees to buy - Few preconditions
2) Seller does its utmost to deliver a flexible/non-firm volume, buyer guarantees to buy - The contract is only valid on a set of preconditions 3) Seller guarantees to deliver a firm volume, buyer guarantees to buy - The contract is only valid on a set of preconditions 4) Seller guarantees to deliver a firm volume, buyer guarantees to buy - Non-delivery: seller pays mark-to-market/liquidated damages CERs or cash
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Cost of developing a CDM Project

Apart from the project development, implementation cost. The developer has to pay for
The consultant fees Registration with the Designated National Authority (MOEF)
Public hearing

Validation fees (to Designated Operational entity) Registration fees at the UNFCCC Monitoring & Verification fees (to third party DOE) CERs Issuance fees Contribute to the UNFCCC adaptation fund

Then bargain for the price of the CERs with the Buyers A picture of Market Failure!!
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CDM Market in India is

Consultant driven Buyers are there but few and offer low price Brokers promise good price but reliability record is poor Size of the projects is very small though the quantity is large hampers bargaining capacity of the project developer Most project developers hoard( do not sell) CERs in expectation of higher price Most projects face problems in implementation.
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Why CDM is a market failure? (1)

Too sophisticated/complex a market Too expensive to enter The future beyond 2012 is yet uncertain Does not survive the Cost Benefit analysis Huge Markets like agriculture untouched Forestry projects are too complex The project developer doesnt get a fair price The ultimate buyer doesnt get a fair price
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Why CDM is a market failure? (2)

Profits go in the pocket of middlemen CDM popular only in developing countries not in Lower developed countries Technology transfer which CDM promises already exist with South in some cases Little initiative by government entities to take up CDM projects Proving additionality is very difficult in most of the cases Carbon exchanges have played limited role till yet
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Critiques & Concerns (1)

Some emission reductions under the CDM are false or exaggerated In 2007 the CDM was accused of paying 4.6 billion for projects that would have cost only 100 million if funded by development agencies Where as the project developers feel they did not get a fair price
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Critiques & Concerns (2)

The first commitment period of the Kyoto Protocol excluded forest conservation/avoided deforestation - carbon emissions from deforestation represent 18-25% of all emissions, and will account for more carbon emissions in the next five years than all emissions from all aircraft since the Wright Brothers until at least 2025.
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Market strategy one should adopt (1)

Enter as early as possible.project conceptual stage Educate oneself and staff thoroughbefore going to consultant Invite a buyer as a project participant at an early stage Appoint a consultant for CDM PDD writing and handling UNFCCC mattersnote your job is to execute the project Option of in-house PDD development can also work for youdelegate the job
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Market strategy one should adopt (2)

Sell some CERs in advance and hold some portion for expectation of higher pricedont hold all the CERs Carbon market will stay in some way or the other.the market will correct itself or be get corrected Expect local carbon markets in the future.say in next 7-12 years
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Conclusion
The market need a major makeup Simplify Active role from institutions to take up programme of activities CDM Efficient, transparent, carbon exchanges More information and education Considering other than market approach to mitigate climate change
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