Difference between revisions of "Carbon Markets for Energy Access Projects"

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= Carbon Finance through CDM and VCM   =
 
  
Financial payments for reducing greenhouse gas (GHG) emissions can be an additional source of funding for energy projects. This so-called carbon finance can be accessed by implementing a project under the requirements of the Clean Development Mechanism (CDM) of the Kyoto Protocol (Kyoto Protocol) or for the Voluntary Carbon Market (VCM). This page focuses on the possibilities and challenges of successful carbon finance. The CDM provides a tool for accessing carbon credits for certified emission reductions of greenhouse gases (GHGs) in developing countries. The funds must be used to enable these reductions, which would otherwise not be possible. 
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= Overview<br/> =
  
<br>
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This page focuses on the possibilities and challenges of successful carbon finance. The [[Clean Development Mechanism (CDM)|Clean Development Mechanism (CDM)]] provides a tool for accessing carbon credits for certified emission reductions of '''greenhouse gases (GHGs)''' in developing countries. The funds must be used to enable these reductions, which would otherwise not be possible.
  
<br>
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<br/>
  
= The Clean Development Mechanism (CDM) =
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= Carbon Finance through Clean Development Mechanism (CDM) and Voluntary Carbon Market (VCM)<br/> =
  
The CDM&nbsp;is one of three felxible mechanisms under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. All these mechanisms aim to achieve GHG reduction in a cost effective manner.&nbsp;While Emissions Trading and Joint Implementation are reserved for countries with binding reduction targets, the CDM&nbsp;allows the participation of countries without targets.&nbsp;Emissions reduction credits that have been achieved through the CDM in a renewable energy or energy effiency prject in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Procol ([http://unfccc.int/national_reports/annex_i_natcom/submitted_natcom/items/3625.php Annex I Countries]).  
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Financial payments for reducing '''greenhouse gas (GHG''') emissions can be an additional source of funding for energy projects. This so-called carbon finance can be accessed by implementing a project under the requirements of the '''Clean Development Mechanism (CDM)''' of the Kyoto Protocol or for the '''Voluntary Carbon Market (VCM)'''.
  
<br>
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<br/>
  
The CMD has two primary goals: 1)&nbsp; to assist Ennex I countried in achieving their reduction targets and 2) to contribute to sustainable development in the host countries. The criteria for sustainable development are defined by the host country's national authority (the Designated National Authority - DNA).
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= The Clean Development Mechanism (CDM)<br/> =
  
<br>
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The CDM is one of three felxible mechanisms under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. All these mechanisms aim to achieve GHG reduction in a cost effective manner. While Emissions Trading and Joint Implementation are reserved for countries with binding reduction targets, the CDM allows the participation of countries without targets. Emissions reduction credits that have been achieved through the CDM in a renewable energy or energy effiency prject in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Procol ([http://unfccc.int/national_reports/annex_i_natcom/submitted_natcom/items/3625.php Annex I Countries]).
  
Regarding energy related projects, the follwing activities are - amongst others - typical examples for CDM projects: end-use and supply-side energy efficiency improvement, renewable energy applicatoins, fuel switches, solvent and other product use, waste management and the provision of GHG&nbsp;sinks by afforestation and reforestation activities. Relevant GHGs are Carbon dioxide (C0<sub>2</sub>), which also serves as reference value, Methane (CH<sub>4</sub>), Nitrous oxide (N<sub>2</sub>0), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF<sub>6</sub>). Tiny particles like soot and sulfate aerosols are not covered by the Kyoto Protocol, although they do cause global warming.&nbsp;The global warming potential of each gas is measured in CO<sub>2 </sub>equivalents, which describe the global warming potential of each gas over a given time period compared to CO<sub>2</sub>. The calculation of the achieved CO<sub>2</sub> reduction has to follow a methodology accepted by the CDM Executive Board (EB).
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<u>The CMD has two primary goals:</u>
  
== General CDM framework  ==
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#to assist Ennex I countried in achieving their reduction targets and
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#to contribute to sustainable development in the host countries. The criteria for sustainable development are defined by the host country's national authority (the Designated National Authority - DNA).
  
The CDM Executive Board supervises the CDM and reports directly to the Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC) and the Meeting of the Parties of the Kyoto Protocol. The board is responsible for approving new methodologies related to baselines, to approve monitoring plans, to accredit independent verifiers, review project validation and verification reports, and to issue the Certified Emissions Reductions (CERs) measured in tons of CO<sub>2 </sub>equivalents that are being reduced through the project in comparison to the baseline scenario.&nbsp;
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Regarding energy related projects, the follwing activities are - amongst others - typical examples for CDM projects: end-use and supply-side energy efficiency improvement, renewable energy applicatoins, fuel switches, solvent and other product use, waste management and the provision of GHG sinks by afforestation and reforestation activities. Relevant GHGs are Carbon dioxide (C0<sub>2</sub>), which also serves as reference value, Methane (CH<sub>4</sub>), Nitrous oxide (N<sub>2</sub>0), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF<sub>6</sub>). Tiny particles like soot and sulfate aerosols are not covered by the Kyoto Protocol, although they do cause global warming. The global warming potential of each gas is measured in CO<sub>2 </sub>equivalents, which describe the global warming potential of each gas over a given time period compared to CO<sub>2</sub>. The calculation of the achieved CO<sub>2</sub> reduction has to follow a methodology accepted by the CDM Executive Board (EB).
  
All countries that wish to participate in the CDM must (a) have ratified the Kyoto Protocol and (b) designate a national CDM authority. The Designated National Authority (DNA) evaluates and approves the projects and serves as a point of contact. It states that the project participants participate voluntarily in the project and confirms that the project activity assists the host country in achieving sustainable development. As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.
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<br/>
  
The CDM requires special documents of which the '''Project Design Document (PDD)''' is the central one. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary and leakages. The life time of the CDM-project is set,&nbsp;with the choice between&nbsp;a fixed crediting period of ten years or a flexible crediting period of seven year which can, if desired. be renewed twice. The PDD defines the anticipated emission reductions and the monitoring plan. It has to be validated by an independent operational entity (Designated Operational Entity, DOE) and is then submitted to the CDM-Executive Board for registration.
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== General CDM Framework<br/> ==
  
The preparation of the PDD is a complex task and has to follow the UNFCCC requirements. It is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements. All aspects are important; the most challenging aspects are dealing with establishing the baseline and assessing the project’s ‘'''additionality'''’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM.&nbsp;A CDM project must not be a project that would have been implemented under the business as usual scenario. The fullfilment of the additionality criteria is vital for the successful registration of a CDM project. The difference between the GHG baseline emissions and GHG emissions after implementing the CDM project activity (project emission)&nbsp;equals the CERs generated.<span>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; </span>
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The CDM Executive Board supervises the CDM and reports directly to the Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC) and the Meeting of the Parties of the Kyoto Protocol. The board is responsible for approving new methodologies related to baselines, to approve monitoring plans, to accredit independent verifiers, review project validation and verification reports, and to issue the '''Certified Emissions Reductions (CERs''') measured in tons of CO<sub>2 </sub>equivalents that are being reduced through the project in comparison to the baseline scenario.
  
Baseline emissions under the selected baseline scenario are calculated according to an approved '''methodology '''suitabele for the envisaged project type, (or maybe using a new methodology that is being introduced).  
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All countries that wish to participate in the CDM must (a) have ratified the Kyoto Protocol and (b) designate a national CDM authority. The Designated National Authority (DNA) evaluates and approves the projects and serves as a point of contact. It states that the project participants participate voluntarily in the project and confirms that the project activity assists the host country in achieving sustainable development. As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.
  
The process from project idea until registration as CDM project and final issuance of credits takes 6 months at a minimum; the procedures can easily take longer, possibly up to two years.  
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The CDM requires special documents of which the '''Project Design Document (PDD)''' is the central one. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary and leakages. The life time of the CDM-project is set, with the choice between a fixed crediting period of ten years or a flexible crediting period of seven year which can, if desired. be renewed twice. The PDD defines the anticipated emission reductions and the monitoring plan. It has to be validated by an independent operational entity (Designated Operational Entity, DOE) and is then submitted to the CDM-Executive Board for registration.
  
== The CDM project cycle  ==
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The preparation of the PDD is a complex task and has to follow the UNFCCC requirements. It is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements. All aspects are important; the most challenging aspects are dealing with establishing the baseline and assessing the project’s ‘'''additionality'''’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fullfilment of the additionality criteria is vital for the successful registration of a CDM project. The difference between the GHG baseline emissions and GHG emissions after implementing the CDM project activity (project emission) equals the CERs generated.<span></span>
  
All projects that aim to generate CERs under the CDM rules must meet the same criteria and complete the same steps. This process is commonly known as the CDM project cycle (see Table 1). The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs. Some rough estimates for current levels are given in the table.  
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Baseline emissions under the selected baseline scenario are calculated according to an approved '''methodology '''suitabele for the envisaged project type, (or maybe using a new methodology that is being introduced).
  
Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be said that a project activity should generate at least 10&nbsp;000 CERs to cover the costs for CDM preparation safely. If the emission reduction of a project activity is below that threshold, projects can be implemented as projects for the Voluntary Carbon Market (see below).  
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The process from project idea until registration as CDM project and final issuance of credits takes 6 months at a minimum; the procedures can easily take longer, possibly up to two years.
  
Small Scale CDM Projects often contribute clearly to the sustainable development aspect of the CDM. But transaction costs associated with developing small-scale projects are high relative to the emissions benefits that may be available. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.  
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As a new instrument to push the CDM for small-scale projects and make their management easier and more cost-effective, the [[Programme of Activities (PoA)|Programme of Activities]] '''(PoA)''' was created in 2007.
  
Small projects qualify as small-scale if they comprise the following:
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<br/>
  
*Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)  
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== The CDM Project Cycle<br/> ==
*Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
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*Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO<sub>2</sub> equivalent per year
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All projects that aim to generate CERs under the CDM rules must meet the same criteria and complete the same steps. This process is commonly known as the CDM project cycle (see Table 1). The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs. Some rough estimates for current levels are given in the table.
  
{| style="margin: auto auto auto 14.4pt; width: 450pt; border-collapse: collapse" cellspacing="0" cellpadding="0" width="600" border="1"
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Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be said that a project activity should generate at least 10 000 CERs to cover the costs for CDM preparation safely. If the emission reduction of a project activity is below that threshold, projects can be implemented as projects for the Voluntary Carbon Market (see below).
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'''Table 1: Estimates for mandatory steps in developing a CDM project (2008)'''
 
  
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Small Scale CDM Projects often contribute clearly to the sustainable development aspect of the CDM. But transaction costs associated with developing small-scale projects are high relative to the emissions benefits that may be available. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.
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<span style="font-size: 10pt">Project Cycle</span>
 
  
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<u>Small projects qualify as small-scale if they comprise the following:</u>
<span style="font-size: 10pt">Description</span>
 
  
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*Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)
<span style="font-size: 10pt">Estimated costs</span>
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*Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
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*Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO<sub>2</sub> equivalent per year
  
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! scope="col" style="background-color: rgb(204, 204, 204)" | Project Cycle
<span style="font-size: 10pt">Planning a CDM project activity</span>
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! scope="col" style="background-color: rgb(204, 204, 204)" | Description
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! scope="col" style="background-color: rgb(204, 204, 204)" | Estimated Costs
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|-
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! scope="row" |
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Planning a CDM project activity
  
<span style="font-size: 10pt">Preparing the PDD</span>
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Preparing the PDD
  
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|  
<span style="font-size: 10pt">Project participants employ a consultant for PDD writing, communication with DNA, EB, etc. The standard format for the PDD must be used</span>
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Project participants employ a concultant for PDD writing, communication with DNA, EB, etc.
  
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The standard format for the PDD must be used.
<span style="font-size: 10pt">Consultant: 30 – 40 person days, plus travel costs</span>
 
  
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| Consultant: 30-40 person days, plus travel costs
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|-
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! scope="row" | Getting DNA-approval from each party involved
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| The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development
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| Depends on DNA regulation
 
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! scope="row" | Validation
<span style="font-size: 10pt">Getting DNA-approval from each party involved</span>
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| Validation by the DOE is the independent evaluation of a project activity against the requirement of the CDM on basis of the PDD.
 
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| 10.000 - 14.000 €
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<span style="font-size: 10pt">The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development.</span>
 
 
 
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<span style="font-size: 10pt">Depends on DNA regulation</span>
 
 
 
 
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! scope="row" | Registration
<span style="font-size: 10pt">Validation</span>
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| The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.
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|  
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< 15.000 tCO<sub>2</sub>= no fee
  
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= 15.000 tCO<sub>2</sub>= $0.10/CER
<span style="font-size: 10pt">Validation by the DOE is the independent evaluation of a project activity against the requirements of the CDM on basis of the PDD.</span>
 
  
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> 15.000 tCO<sub>2 </sub>= $0.20/CER (max. 350.000)
<span style="font-size: 10pt">10&nbsp;000 – 14&nbsp;000 € </span>
 
  
 
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! scope="row" | Monitoring a CDM project activity
<span style="font-size: 10pt">Registration</span>
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| Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity.
 
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| 10.000
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<span style="font-size: 10pt">The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.</span>
 
 
 
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<span style="font-size: 10pt">&lt; 15&nbsp;000 tCO<sub>2</sub> = no fee</span>
 
 
 
<span style="font-size: 10pt">= 15&nbsp;000 tCO<sub>2</sub> = USD 0.10/CER</span>
 
 
 
<span style="font-size: 10pt">&gt; 15&nbsp;000 </span><span style="font-size: 10pt">tCO<sub>2</sub> = </span><span style="font-size: 10pt">USD 0.20/CER</span>
 
 
 
<span style="font-size: 10pt">(max. 350.000)</span>
 
 
 
 
|-
 
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! scope="row" | Verification and certification
<span style="font-size: 10pt">Monitoring a CDM project activity</span>
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| Verification is a periodic independent review and ''ex post ''determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE that is different from the one having validated the project.
 
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| 10.000 - 14.000 €
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<span style="font-size: 10pt">Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity.</span>
 
 
 
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<span style="font-size: 10pt">10&nbsp;000 €</span>
 
 
 
 
|-
 
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! scope="row" | Issuance of CERs
<span style="font-size: 10pt">Verification and certification</span>
+
| The EB will issue certified emission reductions equal to the verfied amount.
 +
|  
 +
2% of the CERs issued must be paid as adaptation fee. LEast developed countries are exempted.
  
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Depending on national regulation other fees may accrue.
<span style="font-size: 10pt">Verification is a periodic independent review and ''ex post ''determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE, that is different from the one that has validated the project.</span>
 
 
 
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<span style="font-size: 10pt">10&nbsp;000 – 14&nbsp;000</span> €
 
  
 
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|-
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+
! scope="row" | Distribution of CERs
<span style="font-size: 10pt">Issuance of CERs</span>
+
|  
 +
A consultant works out agreements of CER distribution among project participants.
  
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+
Broker markets the CERs
<span style="font-size: 10pt">The EB will issue certified emission reductions equal to the verified amount. </span>
 
  
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+
|  
<span style="font-size: 10pt">2% of the CERs issued must be paid as adaptation fee. Least developed countries are exempted.</span>
+
5.000 - 10.000 €
  
<span style="font-size: 10pt">Depending on national regulations other fees may accrue.</span>
+
<br/>
  
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To be negotiated
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<span style="font-size: 10pt">Distribution of CERs</span>
 
  
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<span style="font-size: 10pt">Consultant works out agreements of CER distribution among project participants.</span>
 
 
 
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<span style="font-size: 10pt">5000 – 10&nbsp;000</span> €
 
  
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<br/>
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<span style="font-size: 10pt">Broker markets the CERs.</span>
 
  
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<br/>
<span style="font-size: 10pt">To be negotiated</span>
 
  
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+
= The Voluntary Carbon Market (VCM)<br/> =
  
<br>
+
The compliance market regulated by the Kyoto Protocol or other mandatory reduction schemes, are not the only route to emissions trading. '''Voluntary Carbon Markets (VCMs) '''are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.
  
As a new instrument to push the CDM for small scale projects and make their management easier and more cost-effective, the [[Programme of Activities (PoA)|Porgramme of Activities]] was created.
+
Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’ by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.
  
== CER prices -&nbsp;June 2010  ==
+
They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as '''Verified Emission Reductions (VERs)'''.
  
*<font size="2"><font size="2">7-7.5 Euro for high quality post-2012 vintages,</font></font>
+
The VCM enables activities in unregulated sectors like aviation or maritime transport, or countries that have not ratified the Kyoto Protocol (such as the US), to participate in carbon trading. Companies can gain experience with carbon inventories, emissions reductions and carbon markets even if they are not yet required to accept mandatory commitments. This may facilitate future participation in a regulated ‘cap-and-trade’ system.
*<font size="2"><font size="2">7.5-9 Euro for medium-risk forwards,</font></font>
 
*<font size="2"><font size="2">9-10 Euro for low-risk forwards,</font></font>
 
*<font size="2"><font size="2"><font size="2">10-11.5 Euro for registered projects,</font></font></font>
 
*<font size="2"><font size="2"><font size="2"><font size="2">12.62&nbsp;Euro BlueNext spot price on Reuters.</font></font></font></font>
 
  
= The voluntary market<br> =
+
The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, management, and regulation as the compliance market, project developers are more flexible to implement projects that might otherwise not be viable (e.g. projects that are too small or too disaggregated). This provides opportunities for innovation and experiment.
  
The compliance market regulated by the Kyoto Protocol or other mandatory reduction schemes, are not the only route to emissions trading.&nbsp;Voluntary Carbon Markets (VCMs) are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.  
+
Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.
  
Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’&nbsp;by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.  
+
To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as ''the ''industry standard. A good overview of the Standards has been published by WWF in March 2008 ([http://assets.panda.org/downloads/vcm_report_final.pdf assets.panda.org]).
  
They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as Verified Emission Reductions (VERs).  
+
It is possible for project developers to try to get into the premium market for small projects with high development benefits. The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The Gold Standard is endorsed by over 38 non-governmental organizations worldwide. Under [http://www.cdmgoldstandard.org/ www.cdmgoldstandard.org] the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.
  
The VCM enables activities in unregulated sectors like aviation or maritime transport, or countries that have not ratified the Kyoto Protocol (such as the US), to participate in carbon trading. Companies can gain experience with carbon inventories, emissions reductions and carbon markets even if they are not yet required to accept mandatory commitments. This may facilitate future participation in a regulated ‘cap-and-trade’ system.  
+
-> VER Prices: [http://www.carbonpositive.net/searchnewsarticles.aspx?menu=1&s=1&categoryID=3&subcategoryID=22&results=10 Reports on VER market prices.]
  
The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, management, and regulation as the compliance market, project developers are more flexible to implement projects that might otherwise not be viable (e.g. projects that are too small or too disaggregated). This provides opportunities for innovation and experiment.
+
<br/>
  
Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.
 
  
To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as ''the ''industry standard. A good overview of the Standards has been published by WWF in March 2008 ([http://assets.panda.org/downloads/vcm_report_final.pdf assets.panda.org/downloads/vcm_report_final.pdf]).
 
  
It is possible for project developers to try to get into the premium market for small projects with high development benefits. The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The Gold Standard is endorsed by over 38 non-governmental organizations worldwide. Under [http://www.cdmgoldstandard.org/ www.cdmgoldstandard.org] the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.
+
= Technology-specific Information<br/> =
  
<br>
+
<u>For technology-specific information on carbon financing please refer to the following pages:</u>
  
VER Prices: [http://www.carbonpositive.net/searchnewsarticles.aspx?menu=1&s=1&categoryID=3&subcategoryID=22&results=10 Reports on VER market prices.]  
+
*[[Carbon Markets for Photovoltaic (PV) Systems|Carbon Markets for PV Systems]]
 +
*[[Carbon Markets for Biogas Digesters|Carbon Markets for Biogas Digesters]]
 +
*[[Carbon Markets for Small Hydro Power|Carbon Markets for Small Hydro Power]]
 +
*[[Carbon_Funding_for_Cookstoves|Carbon Funding for Cookstoves]]
  
<br>
+
<br/>
  
= Links to General Information  =
+
<br/>
  
*[http://cdm.unfccc.int/Projects/pac/index.html CDM Project Activity Cycle]
 
*[http://cdm.unfccc.int/Statistics/index.html Statistics on projects registered under the&nbsp;UNFCCC]
 
*[http://www.cdmgoldstandard.org/ Gold Standard]
 
*[http://gec.jp/gec/en/Activities/cdm/cdmjimanual2009e.pdf CDM/JI Manual ]- A general CDM guidebook published by the Japanese Ministry of the Environment
 
  
<br>
+
= Further Information =
  
*[http://wbcarbonfinance.org/docs/State___Trends_of_the_Carbon_Market_2009-FINAL_26_May09.pdf The World Bank: State and Trends of the Carbon Market 2009]&nbsp;(pdf, 656 kB)  
+
*[[Clean Development Mechanism (CDM)|Clean Development Mechanism (CDM)]]
*[http://siteresources.worldbank.org/INTCARBONFINANCE/Resources/Carbon_Fund_12-1-09_web.pdf 10 Years of Experience in Carbon Finance] - World Bank's lessons learned in 10 years of Carbon Finance projects  
+
*[[Programme of Activities (PoA)|Programmes of Activities (PoA)]]
*[http://cdmpipeline.org/ CDM pipeline] - UNEP Risoe Centre on Energy, Climate and Sustainable Development (URC)&nbsp;-&nbsp;news, statistics, etc.&nbsp;
+
*[http://cdm.unfccc.int/Projects/pac/index.html CDM Project Activity Cycle]
*Newsletter CDM Highlights [http://www.gtz.de/climate www.gtz.de/climate]  
+
*[http://cdm.unfccc.int/Statistics/index.html Statistics on projects registered under the UNFCCC]
 +
*[http://www.cdmgoldstandard.org/ Gold Standard]
 +
*[http://gec.jp/gec/en/Activities/cdm/cdmjimanual2009e.pdf CDM/JI Manual]- A general CDM guidebook published by the Japanese Ministry of the Environment
 +
*[http://wbcarbonfinance.org/docs/State___Trends_of_the_Carbon_Market_2009-FINAL_26_May09.pdf The World Bank: State and Trends of the Carbon Market 2009] (pdf, 656 kB)
 +
*[http://siteresources.worldbank.org/INTCARBONFINANCE/Resources/Carbon_Fund_12-1-09_web.pdf 10 Years of Experience in Carbon Finance] - World Bank's lessons learned in 10 years of Carbon Finance projects
 +
*[http://cdmpipeline.org/ CDM pipeline] - UNEP Risoe Centre on Energy, Climate and Sustainable Development (URC) - news, statistics, etc.
 +
*Newsletter CDM Highlights [http://www.gtz.de/climate www.gtz.de - climate]
 
*Worldwide news on the carbon market - [http://www.pointcarbon.com www.pointcarbon.com]
 
*Worldwide news on the carbon market - [http://www.pointcarbon.com www.pointcarbon.com]
 +
*[http://en.microsol-int.com/microsol/our-work Analysis of the potential to foster electricity and lighting access in the Andean region, thanks to carbon mechanism] - Microsol and Rexel Foundation, study led from June 2013 to May 2014.<br/>
  
= Technology-specific Information  =
+
<br/>
 
 
For further information on technology-specific information please refer to the following pages:
 
 
 
[[Carbon Markets for PV Systems|Carbon Markets for PV Systems]]
 
 
 
[[Carbon Markets for Biogas Digesters|Carbon Markets for Biogas Digesters]]
 
 
 
[[Carbon Markets for Small Hydro Power|Carbon Markets for Small Hydro&nbsp;Power]]
 
 
 
[[Carbon Markets for Improved Cooking Stove|Carbon Markets for Improved Cooking Stoves]]
 
  
<br>
+
= References =
  
[[Solar|⇒ Back to Solar Section]]
+
<references />
[[Hydro|⇒ Back to Hydro Section]]
 
 
  
[[Category:Hydro]] [[Category:Solar]] [[Category:Biogas]] [[Category:Cooking]] [[Category:Carbon_Market]]
+
[[Category:Carbon_Market]]
 +
[[Category:Clean_Development_Mechanism_(CDM)]]
 +
[[Category:Financing_and_Funding]]
 +
[[Category:Voluntary_Carbon_Market_(VCM)]]

Latest revision as of 10:48, 2 March 2021

Overview

This page focuses on the possibilities and challenges of successful carbon finance. The Clean Development Mechanism (CDM) provides a tool for accessing carbon credits for certified emission reductions of greenhouse gases (GHGs) in developing countries. The funds must be used to enable these reductions, which would otherwise not be possible.


Carbon Finance through Clean Development Mechanism (CDM) and Voluntary Carbon Market (VCM)

Financial payments for reducing greenhouse gas (GHG) emissions can be an additional source of funding for energy projects. This so-called carbon finance can be accessed by implementing a project under the requirements of the Clean Development Mechanism (CDM) of the Kyoto Protocol or for the Voluntary Carbon Market (VCM).


The Clean Development Mechanism (CDM)

The CDM is one of three felxible mechanisms under the Kyoto Protocol; the others being Emissions Trading and Joint Implementation. All these mechanisms aim to achieve GHG reduction in a cost effective manner. While Emissions Trading and Joint Implementation are reserved for countries with binding reduction targets, the CDM allows the participation of countries without targets. Emissions reduction credits that have been achieved through the CDM in a renewable energy or energy effiency prject in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Procol (Annex I Countries).

The CMD has two primary goals:

  1. to assist Ennex I countried in achieving their reduction targets and
  2. to contribute to sustainable development in the host countries. The criteria for sustainable development are defined by the host country's national authority (the Designated National Authority - DNA).

Regarding energy related projects, the follwing activities are - amongst others - typical examples for CDM projects: end-use and supply-side energy efficiency improvement, renewable energy applicatoins, fuel switches, solvent and other product use, waste management and the provision of GHG sinks by afforestation and reforestation activities. Relevant GHGs are Carbon dioxide (C02), which also serves as reference value, Methane (CH4), Nitrous oxide (N20), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulphur hexafluoride (SF6). Tiny particles like soot and sulfate aerosols are not covered by the Kyoto Protocol, although they do cause global warming. The global warming potential of each gas is measured in CO2 equivalents, which describe the global warming potential of each gas over a given time period compared to CO2. The calculation of the achieved CO2 reduction has to follow a methodology accepted by the CDM Executive Board (EB).


General CDM Framework

The CDM Executive Board supervises the CDM and reports directly to the Conference of the Parties to the United Nation Framework Convention on Climate Change (UNFCCC) and the Meeting of the Parties of the Kyoto Protocol. The board is responsible for approving new methodologies related to baselines, to approve monitoring plans, to accredit independent verifiers, review project validation and verification reports, and to issue the Certified Emissions Reductions (CERs) measured in tons of CO2 equivalents that are being reduced through the project in comparison to the baseline scenario.

All countries that wish to participate in the CDM must (a) have ratified the Kyoto Protocol and (b) designate a national CDM authority. The Designated National Authority (DNA) evaluates and approves the projects and serves as a point of contact. It states that the project participants participate voluntarily in the project and confirms that the project activity assists the host country in achieving sustainable development. As each DNA can establish its own working procedures, the project developer should be well informed about the requirements of the national DNA.

The CDM requires special documents of which the Project Design Document (PDD) is the central one. The PDD describes the technology used in the project activity, the relevant project participants and project location(s). It defines the methodology used to calculate emission reductions, including the baseline, project boundary and leakages. The life time of the CDM-project is set, with the choice between a fixed crediting period of ten years or a flexible crediting period of seven year which can, if desired. be renewed twice. The PDD defines the anticipated emission reductions and the monitoring plan. It has to be validated by an independent operational entity (Designated Operational Entity, DOE) and is then submitted to the CDM-Executive Board for registration.

The preparation of the PDD is a complex task and has to follow the UNFCCC requirements. It is the key document that the host country, investors, stakeholders and DOEs will use to evaluate the project’s potential, and to judge its achievements. All aspects are important; the most challenging aspects are dealing with establishing the baseline and assessing the project’s ‘additionality’. A project activity is ‘additional’ if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. This is the central point of the CDM. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fullfilment of the additionality criteria is vital for the successful registration of a CDM project. The difference between the GHG baseline emissions and GHG emissions after implementing the CDM project activity (project emission) equals the CERs generated.

Baseline emissions under the selected baseline scenario are calculated according to an approved methodology suitabele for the envisaged project type, (or maybe using a new methodology that is being introduced).

The process from project idea until registration as CDM project and final issuance of credits takes 6 months at a minimum; the procedures can easily take longer, possibly up to two years.

As a new instrument to push the CDM for small-scale projects and make their management easier and more cost-effective, the Programme of Activities (PoA) was created in 2007.


The CDM Project Cycle

All projects that aim to generate CERs under the CDM rules must meet the same criteria and complete the same steps. This process is commonly known as the CDM project cycle (see Table 1). The development of a CDM project documentation and the involvement of different institutions throughout the project cycle generate substantial costs. Some rough estimates for current levels are given in the table.

Transaction costs are particularly problematic when the volume of CERs being offered is relatively low. As a rule of thumb, it can be said that a project activity should generate at least 10 000 CERs to cover the costs for CDM preparation safely. If the emission reduction of a project activity is below that threshold, projects can be implemented as projects for the Voluntary Carbon Market (see below).

Small Scale CDM Projects often contribute clearly to the sustainable development aspect of the CDM. But transaction costs associated with developing small-scale projects are high relative to the emissions benefits that may be available. Due to the combination of perceived risk factors and lack of economies of scale, small-scale projects are challenging to transact in the market.

Small projects qualify as small-scale if they comprise the following:

  • Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent)
  • Energy efficiency improvement project activities which reduce energy consumption by up to the equivalent of 60 gigawatt hours per year; and
  • Other project activities limited to those that result in emission reduction of less than or equal to 60 kilotonnes of CO2 equivalent per year


Project Cycle Description Estimated Costs

Planning a CDM project activity

Preparing the PDD

Project participants employ a concultant for PDD writing, communication with DNA, EB, etc.

The standard format for the PDD must be used.

Consultant: 30-40 person days, plus travel costs
Getting DNA-approval from each party involved The written approval of the host country must include the confirmation that the project activity assists in achieving sustainable development Depends on DNA regulation
Validation Validation by the DOE is the independent evaluation of a project activity against the requirement of the CDM on basis of the PDD. 10.000 - 14.000 €
Registration The registration by the CDM EB is the formal acceptance of the validated project as a CDM project activity.

< 15.000 tCO2= no fee

= 15.000 tCO2= $0.10/CER

> 15.000 tCO2 = $0.20/CER (max. 350.000)

Monitoring a CDM project activity Project participants collect all relevant data necessary for calculating emission reductions by the CDM project activity. 10.000 €
Verification and certification Verification is a periodic independent review and ex post determination of the monitored emission reductions and results in the certification of the emission reductions. It is carried out by a second DOE that is different from the one having validated the project. 10.000 - 14.000 €
Issuance of CERs The EB will issue certified emission reductions equal to the verfied amount.

2% of the CERs issued must be paid as adaptation fee. LEast developed countries are exempted.

Depending on national regulation other fees may accrue.

Distribution of CERs

A consultant works out agreements of CER distribution among project participants.

Broker markets the CERs

5.000 - 10.000 €


To be negotiated



The Voluntary Carbon Market (VCM)

The compliance market regulated by the Kyoto Protocol or other mandatory reduction schemes, are not the only route to emissions trading. Voluntary Carbon Markets (VCMs) are developing rapidly. They function outside of the compliance markets and enable companies and individuals to purchase carbon offsets on a voluntary basis.

Companies and individuals are increasingly concerned about their environmental impact. Some will neutralise activities they cannot avoid by “offsetting” their own emissions. Individuals may seek to offset their travel emissions and companies claim they are ‘carbon neutral’ by buying large quantities of carbon offsets to ‘neutralize’ their own carbon footprint or that of their products.

They see voluntary offsetting as part of their corporate responsibility and/or as part of their image strategy. Emission offsets in this category are usually verified by independent agents and are commonly referred to as Verified Emission Reductions (VERs).

The VCM enables activities in unregulated sectors like aviation or maritime transport, or countries that have not ratified the Kyoto Protocol (such as the US), to participate in carbon trading. Companies can gain experience with carbon inventories, emissions reductions and carbon markets even if they are not yet required to accept mandatory commitments. This may facilitate future participation in a regulated ‘cap-and-trade’ system.

The voluntary market comprises more different project types than the compliance market. Because the voluntary market is not subject to the same level of scrutiny, management, and regulation as the compliance market, project developers are more flexible to implement projects that might otherwise not be viable (e.g. projects that are too small or too disaggregated). This provides opportunities for innovation and experiment.

Although VER projects are not necessarily required to go through the project cycle, they should be developed and documented according to CDM rules and procedures, for example, by using the PDD format to develop the project.

To provide evidence of its effectiveness, it is recommended that the project is validated, particularly as the voluntary offset market has been criticised for its lack of transparency, quality assurance and third-party standards. To address these shortcomings, several Standards have been developed on the Voluntary Carbon Market to ensure reliable emission reductions. Each standard has a slightly different focus, and none has so far managed to establish itself as the industry standard. A good overview of the Standards has been published by WWF in March 2008 (assets.panda.org).

It is possible for project developers to try to get into the premium market for small projects with high development benefits. The Gold Standard (GS) Foundation offers a quality label to CDM/JI and voluntary offset projects, fetching premium prices. Only renewable energy and energy efficiency projects with sustainable development benefits are eligible. The Gold Standard is endorsed by over 38 non-governmental organizations worldwide. Under www.cdmgoldstandard.org the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.

-> VER Prices: Reports on VER market prices.



Technology-specific Information

For technology-specific information on carbon financing please refer to the following pages:




Further Information


References