Carbon Markets for Energy Access Projects

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 for stove projects. 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. 

The CDM is one of the three flexible 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 efficiency, project in a developing country can be sold to a country with commitments listed in Annex I of the Kyoto Protocol (Annex I Countries). 

The CDM has two primary goals: to assist Annex I countries in achieving their reduction targets, and 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 Clean Development Mechanism (CDM)

The CDM encompasses renewable energy, energy efficiency, and avoidance of GHG sources. 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 CERs.

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, which can be ten years or seven years and 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. It means that a CDM project activity is additional if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity. A CDM project must not be a project that would have been implemented under the business as usual scenario. The fulfilment 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) is the emissions reduction.                      

Baseline emissions under the selected baseline scenario are calculated according to an approved methodology, (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 month at a minimum; the procedures can easily take longer, possibly up to two years.

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. Some of the activities in the CDM project cycle are the same as those for any other investment projects. However, the steps to generate CERs are both unique and mandatory, as shown in Table 1 below. 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.

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
  

Table 1: Estimates for mandatory steps in developing a CDM project (2008)
Project Cycle	Description	Estimated costs
Planning a CDM project activity Preparing the PDD	Project participants employ a consultant 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 requirements 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 = USD 0.10/CER > 15 000 tCO2 = USD 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 that has validated the project.	10 000 – 14 000
Issuance of CERs	The EB will issue certified emission reductions equal to the verified amount.	2% of the CERs issued must be paid as adaptation fee. Least developed countries are exempted. Depending on national regulations other fees may accrue.
Distribution of CERs	Consultant works out agreements of CER distribution among project participants.	5000 – 10 000
	Broker markets the CERs.	To be negotiated

Programme of Activities (PoA)

The Programmatic Approach was officially established in 2007 by the adoption of Guidelines and Procedures for PoA by the CDM EB. Due to high transaction costs small single CDM projects had previously hardly been represented in the CDM portfolio. The PoA approach was designed in order to bring in the possibility for small projects. With the PoA approach the project approval process for many individual activities that are distributed over space and time are brought together.

A CDM PoA occurs at two levels: at the program level and at the activity level. At the program level, the PoA is the organizational and financial framework that provides structure to the activities, and is managed by a coordinating entity for a period of no longer than 28 years. At the program activity level, a single measure or a set of measures to reduce GHGs is applied to many plants/installations of the same type over the life time of the program. A CDM PoA is considered: "a voluntary coordinated action by a private or public entity which coordinates and implements any policy/measure or stated goal (i.e., incentive schemes and voluntary programs), which leads to GHG emission reductions or increase net GHG removals by sinks that are additional to any that would occur in the absence of the PoA, via an unlimited number of CDM program activities (CPAs)" (Annex 38, EB 32). On the other side, a CPA is more similar to a standard CDM project in the sense that both must comply with procedures and modalities of the CDM and each must include an activity that has a direct, real and measurable impact on emission reductions. By definition (Annex 38, EB 32), a CPA is: "a single, or set of interrelated measure(s), to reduce GHG emissions or result in net anthropogenic greenhouse gas removals by sinks, applied within a designated area defined in the baseline methodology".

A government or private entity can develop a PoA, which defines broaf parameters for project activities (CPAs). Once this PoA has been approved and registered by the CDM Executive Board, individual CPAs can be added without approval by the CDM EB provided they meet the requirements laid out in the registerd PoA.

The program is coordinated or managed by one entity, which can be private or public, and does not necessarily achieve the reductions but promotes others to do so. The coordinating entity is responsible for the CERs distribution and communication with the EB.

Advantages of a PoA compared to a set of individual standard CDM projects:

Multiplicity of activities to reduce GHG distributed in time and space	Numerous activities are participating in the program and resulting in GHG emission reduction in multiple sites over lifetime of the program. The sites could be located in one or more countries.
Lower transaction costs	Registration and verification processes for CPAs are greatly streamlined.
Reduced risk of non-registration	Since the time to registration and associated uncertainties are greatly reduced for CPAs compared with standard CDM projects it will become possible to provide pre-payments or other forms of securitization for future CDM revenues.
Duration (PoA and CPA)	The length of the PoA is up to 28 years (60 for afforestation/reforestation projects (A/R)). The crediting period of a CPA is either a maximum of seven years (20 for A/R project acitivities) which may be renewed at most two times, or a maximum of ten years (30 for A/R) with no option for renewal.
Size / Scalability	For Small-scale (SSC) programmatic CDM only the individual CPAs have to be under the SSC threshold, while the overall  program can go beyond. This reduces transaction costs and generates economies of scale.
Monitoring and Verification	A combination of several methodologies may be applied within a PoA.
No registration of CPAs	After the registration of the PoA, individual CPAs are not required to request registration. Instead the DOE includes the CPA after a check  that the CPA follows the rules for inclusion in the PoA.

CER prices - June 2010

• 7-7.5 Euro for high quality post-2012 vintages,
• 7.5-9 Euro for medium-risk forwards,
• 9-10 Euro for low-risk forwards,
• 10-11.5 Euro for registered projects,
• 12.62 Euro BlueNext spot price on Reuters.

The voluntary market

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/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 www.cdmgoldstandard.org the relevant guidance and the PDD formats for the generation of Gold Standard CERs and VERs can be found.

Links to General Information

• CDM Project Activity Cycle
• Statistiken ueber UNFCCC registrierte Projekte
• Gold Standard
• CDM/JI Manual - A general CDM guidebook published by the Japanese Ministry of the Environment
• KfW PoA Blueprint Book 2nd Edition - Excellent overview on PoA issues for different energy technologies
• A Primer on CDM Programme of Activities - A general overview on PoAs
• The World Bank: State and Trends of the Carbon Market 2009 (pdf, 656 kB)
• 10 Years of Experience in Carbon Finance - World Bank's lessons learned in 10 years of Carbon Finance projects
• Newsletter CDM Highlights www.gtz.de/climate

Technology-specific Information

Improved Cooking Stoves

In December 2007, stove projects were accepted under the Clean Development Mechanism (CDM) of the Kyoto Protocol, opening new funding possibilities. Emission reduction credits can be an additional source of funding for household energy projects.

Stove projects still account for a negligible share of the global voluntary and CDM carbon markets, the carbon market for improved stove projects has been growing rapidly ever since the introduction of the respective methodologies. New stakeholders and project approaches have entered the stove business.

For details on procedures see the HERA publication "Carbon Markets for Improved Cooking Stoves - A GTZ Guide for Project Operators".

• Carbon Markets for Improved Cooking Stoves - A GTZ Guide for Project Operators - HERA publication. Continously revised and updated.
• Emission Reductions Calculation Tool V. 1.3 (August 2010) - HERA Tool for calculating potential project emission reductions under the CDM AMS-II.G methodology; also available upon request from HERA.
• GTZ-HERA Discussion Group on Carbon Markets for Improved Cooking Stoves - restricted to GTZ/CIM staff: please contact Michael.Blunck@gtz.de for becoming a member
• http://www.hedon.info/CarbonSIG - Carbon special interest group (Carbon SIG)

Small Hydro Power

• KfW PoA Blueprint Book 2nd Edition - Includes a section on PoA issues for small hydro power 
• Experiences from the Small Hydro Power PoA in Indonesia - Presentation by Mirka Bodenbender (26.06.2010)
• A Guide to CDM and Family Hydro Power

Selected Small Hydro Power Carbon Finance Projects

• CDM PoA Small Hydro Power Generation in Indonesia: GTZ-supported PoA in cooperation with SouthPole.
• Phu Mau hydropower project (Vietnam): small scale run-of-river hydropower plant; three cascades with a total installed capacity of 5.6 MW. Crediting period 05 Jun 09 - 04 Jun 16.
• Sichuan provincial Longchi & Caoyuan Small-scale Hydro Power Bundle Project (China): two small-scale hydro projects - Longchi 5 MW + Caoyuan 4MW. Crediting period 28 Apr 09 - 27 Apr 16.
• Iruttukanam Small Hydro Electric Project (India): small scale run-of-river, 3 MW. Crediting period 01 Jun 09 - 31 May 19.
• e7 Bhutan Micro Hydro Power CDM Project (Bhutan): power generation capacity 70 kW. Crediting period 19 Aug 05 - 18 Aug 12.
• Sanquhar and Delta Small Hydro Power Projects (Sri Lanka): two small-scale, run of river hydropower plants, each with an installed capacity of 1.6 MW. Crediting period 01 Jan 04 - 31 Dec 10.
• Santa Lúcia II Small Hydropower Plant (Brazil): run-of-river small hydro plant with installed capacity of 7.6 MW. Crediting period 01 Oct 03 - 30 Sep 10.
• Feasibility of CDM as a financing model (Case studies from Ethiopia)

Biogas plants

The number of biogas projects that are under validation, requesting registration or registered is 516, or 11.6% of the CDM projects (UNEP Risoe, March 2009). However, the highest number of biogas projects is concentrated in 5 countries, namely: Thailand, India, China, Malaysia, and the Philippines. Most of the registered projects are situated on the commercial livestock farms and the main emission reduction takes place due to switch in those cases where biogas is used for energy generation. By installing the biogas unit the animal manure that was previously deposited in an open lagoon in the baseline scenario is fermented in the biogas digester and the methane emission is avoided. The generated biogas can either be flared or used for energy generation. Biogas can be used to replace fossil fuels for heating purposes, or for producing heat and electricity by introducing a CHP unit. Apart from the benefits of replacing fossil fuels and improving  the manure management system, the by-product after the fermentation of the manure is a digestate (bio-slurry) which could be used as high nutrient organic fertilizer.

• PoA CDM Manual - Mini Biogas Plants for Households (August 2009) - Very helpful overview on PoA for biogas projects.
• KfW PoA Blueprint Book 2nd Edition - Includes a section on PoA issues for domestic biogas plants
• Environmental Benefits of Biogas Plants

PV Solar Home Systems

PV Solar home systems (SHS) are an eligable technology for carbon finance projects. However, their GHG savings (carbon credit) potential is small compared to overall PV system costs.

Studies and Research Papers:

• Approaches to Integrate Carbon Finance into Energy Efficient Lighting Initiatives - Lighting Africa Presentation on Carbon Finance issues in off-grid lighting projects

Selected PV Solar Home System Carbon Finance Projects (August 2010)

• Photovoltaic kits to light up rural households in Marocco: Registered SHS CDM project. Dissemination of 101,500 SHS. Crediting period: 01 Jan 07 - 31 Dec 16.
• Installation of Solar Home Systems in Bangladesh: First Solar Home System PoA. Under Validation.

 

Pico PV (or micro PV systems), such as solar lanterns, are usually very small SHS with a module capacity of up to 10W and lamps or lanterns (often only one) with integrated batteries.  

 

Selected Pico PV and Solar Lantern Carbon Finance Projects (August 2010)

Currently there are two CDM projects (both in India) registered under the UNFCCC . Four more (Malawi, Zambia, Tanzania and India) are either already registered or pending under the Gold Standard.

 

CDM

• Rural Education for Development Society (REDS) CDM Photovoltaic Lighting Project: Registered Pico-PV CDM project in India. Dissemination of 300,000 PV-lamps (CFL & LED) for 60,000 sites (households and institutions). Crediting period: 10 Aug 09 - 09 Aug 19. Approx. 460,000 CERs.
• D.light Rural Lighting Project: Registered Pico-PV project in India. Dissemination of 1 Mio. PV-lamps (LED). Crediting period: 30 Oct 09 - 29 Oct 14. Approx. 450,000 CERs. Seen as preparation phase for a pico-PV PoA to come.

 

VCM - Gold Standard

• SolarAid Microsolar Solar Lantern Project for Malawi: VERs already issued. Replacement of 39,000 kerosene lamps through solar lamps with 1.8 W module and other renewable energy devices. Crediting period: 26 May 10 - 25 May 19. Focus on capacity development and partly local production. Total of approx. 19,000 VERs planned. Monitoring of the first project year showed 1.635 units sold (and in use).    
• SolarAid Microsolar Solar Lantern Project for Zambia: Verification pending. Crediting perdiod: 10 years. Project design same as Malawi Project. Total of approx. 25,000 VERs planned.
• D.light Rural Lighting Project Tanzania: 3.640,000 lamps of different models to be sold. Estimated total amount of VERs (depending on lamp types sold) approx. 500,000 VERs. Crediting period: 10 years.
• D.Light Rural Lighting Project India - PRE-CDM-VERs (of GS 600): PRE-CDM-VERs of above mentioned CDM project.

For further details on current CDM projects on pico PV see the following: CDM 

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