BRIDGING THE GAP BETWEEN SUPPLY-SIDE AND DEMAND-SIDE CDM PROJECTS

IN ASIAN CITIES

Brian H Roberts* Emeritus Professor University of Canberra Australia Brian.Roberts@canberra.edu.au

Michael Lindfield Principal Urban Development Specialist Asian Development Bank Philippines mlindfield@adb.org

Xuemei Bai, PhD Senior Science Leader, Urban Systems Program CSIRO Sustainable Ecosystems Australia xuemei.bai@csiro.au

* Lead author Summary The United Nations Framework Convention on Climate Change (UNFCCC) provides the protocol by which investors from developed countries can invest in greenhouse gas (GHG) reduction projects in developing countries under the Clean Development Mechanism (CDM) in return for carbon emission reduction (CER) credits.. Much of the focus of the CDM has been on energy-efficient supply-side (EESS) reduction projects involving the cleaner generation of electricity. EE demand-side (EEDS) projects, which aim to reduce energy demand, have received less attention. More than 90% of CERs issued to date have been purchased by EESS projects. This paper examines issues related to and potential ways of broadening the application of EEDS CDM and programmatic CDM projects to help reduce GHG emissions in Asian cities. Since many such projects are currently not financially viable, the paper discusses a proposal for international development banks and official development agencies to support a financial mechanism – a sustainability gap fund – to increase the uptake of EEDS CDM and pCDM projects in Asian cities.

Key Words: Clean Development Mechanism (CDM); programmatic CDM; climate change; Asian cities; sustainability gap fund

 

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BRIDGING THE GAP BETWEEN SUPPLY-SIDE AND DEMAND-SIDE CDM PROJECTS IN ASIAN CITIES

I. INTRODUCTION Human-induced climate change is caused primarily by the activities of people living in cities (Hardoy et al., 1999, Bulkeley and Betsill, 2003). As cities develop and become more industrialized, wealthy and consumer-driven, the demand for energy – and the consequent emission of greenhouse gases (GHGs) – increases correspondingly. Breaking this nexus is one of the greatest challenges for mitigating human-induced climate change and creating a more sustainable path to development. Integrating climate change concerns into urban management and development is a significant challenge for Asian cities (Bai, 2007). By 2030, Asian countries are predicted to be generating more than one-third of the world’s GHG emissions, with energy use in cities the principal contributor (Guttikunda et al., 2003).. The population of Asian cities is estimated to grow from 1.56 billion at present, to 2.65 billion people (around 60% of Asia’s total population) by 2030 (UNDP, 2005). Asian cities, by virtue of their size, density and rate or economic development sets themselves apart from cities in other regions and this makes the management and reduction of future GHG emissions and managing climate change in them more difficult. Addressing GHG emissions in Asian cities poses significant challenges to governments in the region (Roberts and Kanaley, 2006). The Kyoto Protocol, which was developed under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC), addresses the needs and responsibilities of ‘Annex I’ countries (industrialized countries) and ‘non-Annex I’ countries (developing countries) in addressing climate change. Among other things it establishes the Clean Development Mechanism (CDM), under which investors from Annex I countries can invest in developing countries to reduce GHG emissions in return for carbon emission reduction (CER) credits. The majority of CDM projects approved by the CDM Executive Board relate to GHG emissions reduction projects servicing the energy needs of cities. Much of the focus of the CDM has been on supply-side energy reduction projects involving cleaner and more efficient electricity generation. This paper examines issues related to and potential ways of broadening the application of demand-side CDM projects to help reduce GHG emissions in Asian cities. It begins with a brief explanation of the CDM and the current program of CDM activities in the Asian region. Reasons for the low level of investment in demand-side CDM projects and opportunities to increase this are discussed. Possible means for making demand-side CDM projects (e.g. more energy-efficient urban transport, heating, cooling and industrial systems) more feasible and bankable are discussed, including a possible new funding mechanism.

 

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II. GREENHOUSE GAS EMISSIONS ARE PRIMARILY AN URBAN PROBLEM

There is a strong causal relationship between the growth of cities and increasing GHG emissions (Holtz-Eakin and Selden, 1995). Some 78% of total carbon emissions from energy use can be attributed to the activities of people living in cities (Grimm et al., 2008:) for electricity generation, transport, and industrial and household uses. Growth in urban migration, population, employment, motor vehicle ownership and income all contribute significantly to a rise in per capita use of energy in cities, leading to growing demand for new and bigger houses, infrastructure, and transportation and communication services. The energy needed to keep cities functioning is not the only factor to be considered in the emissions abatement equation, however. The way in which cities are developed and constructed also affects energy demand. The form and density of the population, the spatial pattern of land-use activities, and the mode and design of urban transportation systems all have significant impacts on energy use and GHG emissions. Relative to national income it is generally believed that high-density cities have lower per capita ecological footprints, energy use and transaction costs compared to lower-density cities (Kenworthy, 2003, Rees and Wackernagel, 1996).Many higher-density cities in developing countries, however, have very serious environmental problems. High-rise development also has higher per capita energy demands compared to lower and medium density forms of development (Myors et al., 2005). Reducing GHG emissions will require both supply-side and demand-side approaches. Supply-side GHG emissions can be reduced through the greater use of renewable energy, improving the technological efficiency of power generation, and, possibly, increased carbon sequestration (e.g. clean coal technologies). Reducing demand-side energy use in cities is, however, much more difficult. It will require an improved understanding of the ways in which urban form, design, development density, logistics and urban management systems can be made more efficient. It will also require a greater effort to reduce industrial emissions through cleaner production and industrial ecology.

III. CDM AS A MECHANISM TO REDUCE DEMAND-SIDE GHG EMISSIONS IN CITIES

1. Demand-side and supply-side contributions to the GHG problem According to the Stern Report (Stern, 2006) the energy sector generates about 65% of GHG emissions (Figure 1). Electricity generation activities, which are the focus of most CDM projects, produce an estimated 24% of global GHG global emissions. CDM projects which aim to reduce GHG emissions from the generation of electricity are generally referred to as energy-efficient supply-side (EESS) projects. On the other hand, EE demand-side (EEDS) activities related to industry, construction, transport, heating and other uses contribute more than 41% of GHG emissions globally. Therefore, CDM projects that achieve a reduction of GHG emissions by improving urban and building design, reducing demand for energy in the transport and manufacturing sectors, and improving the efficiency of heating, air-conditioning and the management of utilities in cities could all significantly reduce overall GHG emissions.

 

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Figure 1: GHG emissions in 2000 by source

Pow er24%

Transport14%

Buildings8%Industry

14%

Other Energy Related

5%

Waste3%

Agriculture14%

Land use18%

ENERGY EMISSIONS

NON-ENERGY EMISSIONS

Source: Stern (2006) EESS projects target change in energy supply in its various forms, such as electricity, heat, steam and cooling, in order to reduce GHG emissions (Laurikka, 2002). EEDS projects aim to reduce the demand for energy (Hinostroza et al., 2007b). The latter might include: • Projects involving a technical retrofit to upgrade energy efficiency (e.g. improving

the energy efficiency of cooling systems in residential apartments). • Projects to reduce demand for energy at the consumer end (e.g. the replacement of

incandescent lamps with compact fluorescent lamps at the household level). • Regulations and standards (e.g. replacing electricity uniform-pricing policy with

an increasing block rate system). Demand-side CDM projects are a promising approach for achieving cost-effective global GHG emission reductions and sustainable development in recipient countries, but they are severely under-represented in the CDM portfolio (Figueres and Philips, 2007). Indeed, the view has been expressed that project-based CDM is far from delivering its full potential under the Marrakech Accords (Figurers 2005). Moreover, the complex definition of ‘project’ as it is applied to EEDS projects has led to an increasing number of voices in the international climate policy arena calling for improvements to the way in which the CDM functions (Sterk and Wittneben, 2006).

2. CDM as a Mechanism to Reduce GHG Emissions The general aim of the CDM is to encourage developing countries to adopt GHG reduction measures and to eliminate policies that might encourage the use of undesirable technologies and practices that would increase GHG emissions. This is because the Kyoto Protocol sets no compulsory GHG emissions targets for developing countries. In many developing countries, economic development usually involves substantial emissions of GHGs; the aim of the CDM is to create market-based incentives for developing countries to be involved in climate-friendly economic development measures while also offering industrialized countries the opportunity to offset domestic GHG emissions by funding projects in developing countries.

 

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Figure 2 Illustration of CDM’s function

Source: (Mizuno, 2007) The CDM is a flexible and complex mechanism used to issue CER credits; Figure 2 portrays its function in simple terms. Developed countries under Annex I of the Kyoto Protocol have committed to prescribed GHG emission reduction targets; as part of efforts to reduce the cost of meeting such targets, Annex I countries can, through the CDM, invest in emission reduction projects in developing countries (Michaelowa and Fages, 1999). In a hypothetical case, a CDM project in Developing Country A saves 100,000 tonnes of carbon dioxide per year and hence receives 100,000 CERs. Under the Kyoto Protocol, Industrialized Country B must reduce its GHG emissions by 1 million tonnes of carbon dioxide per year. By purchasing the 100,000 CERs generated by the CDM project in Country A, Country B reduces its reduction target to 900,000 tonnes of carbon dioxide per year, thus making the national target easier to achieve. This hypothetical explanation masks a number of methodological issues, some of which are discussed below.

3. CDM Activities Figure 3 shows and systemizes the three categories of CDM activities: single-site (or project-based); bundled; and programmatic (pCDM). Currently the CDM Executive Board excludes policies, standards and sectoral approaches from the CDM, although these are under negotiation for inclusion during the Kyoto Protocol’s second commitment period (Sterk and Wittneben, 2006). Various definitions of these CDM activity categories have been developed and described in the literature (ibid.), and there have been efforts to build a common terminology. Nevertheless, policymakers and researchers have defined, used and interpreted terms in different ways, which has created confusion. Table 1 shows the principal differences between single, bundled and pCDM project activities. pCDM involves the grouping of a series of smaller projects undertaking similar activities within a single Program of Activities (PoA) and their management under one project instrument, thereby significantly reducing project development costs and enhancing the investment attractiveness of marketing CER credits.

 

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Figure 3: Types of CDM activities

Source: Authors Most CDM projects implemented to date have been in the single-project category and have focused on alternative energy production and hydrofluorocarbon (HFC) emission reductions. Most (over 54%) of approved CDM projects are large. Several papers published by the Organisation for Economic Cooperation and Development ((Ellis, 2006, Ellis and Kamel, 2007, Ellis and Levina, 2005) suggest that the current interpretation and focus of CDM activities could be constraining the potential of the mechanism. Ellis (2006) recommends that consideration be given to broadening the interpretation and scope of CDM activities to include projects involving the funding of public transport systems, urban development and infrastructure projects that focus on demand-side reductions of energy and GHG emissions. International development agencies have shown growing interest in new ways of facilitating sustainable economic and social development while reducing environmental impacts in developing countries, such as through various forms of carbon trading. Such agencies could request the UNFCCC to broaden its application of the CDM to embrace such initiatives. There might be opportunities to develop bundled and pCDM projects for urban development projects that could reduce long-term energy demand and lead to the development of more sustainable cities. There is evidence that improvements to urban form and density and to infrastructure, transport and urban logistics systems can lower GHG emissions (Droege, 2008), with one report (Hinostroza et al., 2007a) suggesting that it should be possible to expand the scope of pCDM activities to include this area. Such a step would provide a parallel mechanism for addressing climate change through reductions in both supply-side and demand-side energy use.

Project-based CDM

CDM projects

Bundled CDM

Program of Activities OR Programmatic CDM

Policy-based CDM

Sectoral CDM

 

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Table 1: Differences between single, bundled and programmatic CDM projects

Single CDM Bundled CDM pCDM Who is involved One or several

agencies (such as governments and organizations)

One or several agencies (such as governments and organizations)

One or several agencies (such as governments and organizations)

Each activity is represented by a CDM project participant

Only the managing entity represents the project activity as a CDM project participant

Project participants are the entities achieving reductions

The project participant does not necessarily undertake the GHG-reducing activities, but rather assists others to do so

What is targeted One goal Similar types of activities One or more goals (such as cross-sectoral, local pollution, or natural protection)

Each activity in a bundle is an individual CDM project activity

The sum of all individual activities under the program is the CDM project activity. The program is the project

Several individual projects that are independent of each other and do not occur because of a particular program. Bundling helps to reduce transaction costs

A multitude of GHG-mitigating actions that occur under one program and because of the program. The program is to achieve GHG-mitigating actions

Where to implement Single site Ex-ante identification of exact sites Multiple sites (such as national scale or across several countries)

When activity/activities occur

Specific timeframe Specific timeframe – does not change over time

Probably open-ended, not known at time of registration and changes over time

Source: Hinostroza et al. (2006)

 

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There is a need to develop a better understanding of how urban form and density, and infrastructure, transport and urban logistics systems, influence urban sustainability and climate change, and to explore new CDM activities and projects to address demand-side factors and help reduce GHG emissions. This is important, as the built forms and urban systems that have been constructed, and will continue to be built, could last for hundreds of years and are not easily changed, while the technologies and resources used in energy and industrial production will inevitably change in response to technological obsolescence and the depletion of global petroleum reserves. The switch to alternative energy sources can be made relatively easily, compared with retrofitting the built environment and infrastructure to reduce energy demand.

IV. GROWING INTEREST BY ASIAN COUNTRIES IN THE CDM There is growing interest among developing countries in CDM projects. As of March 2009 there were more than 1424 registered CDM projects, with a further 4541 in the pipeline; more than 261,756,000 CER certificates had been issued. By 2012 the number of kCERs issued is expected to rise to about 1.3 billion. More than 54% of projects are large-scale (greater than 25ktCO2/yr), predominantly in hydro-, wind- and biomass-based energy generation; hydro and biomass energy also make up the largest number of small-scale projects. Almost 68% of all registered projects and 81% of the CDM kCERs issued have been to projects in China, India, Brazil and Korea (Table 3). The number of kCERs issued to EEDS projects is very small, representing less than 10% of the total. This is likely to change little over the next few years because the focus is set to remain very much on EESS projects. Table 2: Comparisons between CDM applications: number of large-scale and small-scale projects in each type (applications and approved March 2009)

Comparison between number of large-scale projects and small-scale projects in each type

In numbers In percentages Large-scale

Small-scale

Large-scale

Small-scale

Hydro 556 639 22.7% 30.6% Biomass energy 299 389 12.2% 18.6% Wind 448 213 18.3% 10.2% EE own generation 359 49 14.6% 2.3% Landfill gas 243 93 9.9% 4.5% Biogas 50 238 2.0% 11.4% Agriculture 64 167 2.6% 8.0% EE industry 34 147 1.4% 7.0% Fossil fuel switch 84 56 3.4% 2.7% N2O 66 0 2.7% 0.0% Coal bed/mine methane 66 0 2.7% 0.0% Cement 39 0 1.6% 0.00% EE supply side 36 16 1.5% 0.8% Fugitive 26 4 1.1% 0.2% HFCs 20 3 0.8% 0.1% Solar 3 26 0.1% 1.2% Reforestation 23 11 0.9% 0.5% Geothermal 13 2 0.5% 0.1% EE households 1 13 0.0% 0.6% Transport 5 4 0.2% 0.2%

 

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EE service 0 12 0.0% 0.6% Energy distribution 7 1 0.3% 0.0% Afforestation 1 4 0.0% 0.2% PFCs 8 0 0.3% 0.0% Tidal 1 0 0.04% 0.0% CO2 capture 1 1 0.0% 0.0% Total 2453 2088 100.0% 100.0% 54 % 46% Source: UNEP Risø Centre, 2008, at < http://cdmpipeline.org/cdm-projects-type.htm#1

Table 3: Top countries, by issued CERs (Jan 2009)

Country CERs issued Percentage Cumulative China 140,899,572 54.87% 54.87% India 33,216,679 12.93% 67.80% Brazil 19,789,442 7.71% 75.51% Republic of Korea 14,614,929 5.69% 81.20% Mexico 7,985,793 3.11% 84.31% Chile 4,363,520 1.70% 86.01% Nigeria 4,123,669 1.61% 87.61% Argentina 4,121,351 1.60% 89.22% Indonesia 3,226,218 1.26% 90.47% Malaysia 2,827,548 1.10% 91.58% South Africa 2,557,984 1.00% 92.57% Other 19,076,698 7.43% 100.00% total 256,803,403 100.00% Source: UNFCCC website

4. Bias towards supply-side CDM projects An analysis of the number of CDM projects approved by the UNFCCC found that 285 (69%) were EESS projects, three were transport projects, and 124 (30%) were EEDS projects (UNEP Risø Centre 2008; see Annex 1). The supply-side projects, however, generated 92% of CERs. This suggests that a significant opportunity to benefit from investment in EEDS projects is being overlooked. In marketing terms, supply-side CDM projects are ‘low-hanging fruit’. They are relatively easy to develop because generally only a small number of players is involved in the power generation sector. In contrast, the demand sector consists of many and diverse players. The networking required to cultivate these interests and to develop feasible projects is difficult, especially as the transaction costs associated with the development, approval and implementation of CDM projects are high. Nevertheless, if GHG emissions in cities are to be reduced (and given that most GHG emissions in cities do not arise from the supply-side sector), it is important to identify, develop and implement innovative EEDS CDM projects.

V. POTENTIAL TO EXPAND DEMAND-SIDE PROGRAM ACTIVITIES The preceding discussion identified possible opportunities for the application of the CDM to support energy-efficiency measures for reducing GHG emissions by improving the design and functionalities of cities. These opportunities can be grouped into five broad fields of activity that might provide the basis for sector CDM and pCDM projects: 1) urban

 

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development; 2) transport, technology and innovation; 3) industrial production systems; 4) environmental; and 5) policy. Significant investigations would be necessary to test the feasibility of some sector applications. Moreover, governance and economies of scale will be significant hurdles in developing CDM for many of these activities.

5. EE urban development According to a report by the International Energy Agency, existing buildings are responsible for more than 40% of the world’s total primary energy consumption and for 24% of global CO2 emissions (IEA, 2008). There is no shortage of proven, cost-effective designs and technologies for reducing energy consumption in residential buildings, yet the majority of global residential and commercial buildings are very inefficient users of energy and the potential to significantly reduce energy demand in this sector remains largely untapped. Coordinated approaches to maximize the efficiency of urban development, both new development and 'retrofitting' existing urban areas are necessary. The key elements of such an approach are set out in this and following sections but the crucial issue is their inter-dependence. Many interventions are useful n their own, but very significant in combination. Further, demand-side measures can be linked with supply-side projects such as distributed power generation and waste-to-energy to maximize the impact on climate. 5.1 Urban Land and Property Development Projects

EE CDM could potentially be applied at three levels in urban land and property development projects: 1) the construction of new urban areas (greenfield projects); 2) reconstruction and redevelopment; and 3) the re-engineering or retrofitting of older urban areas. In each, the result would be higher energy efficiency ratings than would be achieved if the activities were undertaken according to current regulations or practices.

Greenfield projects would involve new and planned urban development projects of a commercial and residential nature and the subdivision of non-urban land. Normally they would involve projects for new housing and new regional shopping and employment centres. The focus of the CDM would be on achieving: an urban development pattern that would substantially reduce embedded energy costs in construction; higher density development to support local public transport systems; energy-efficient buildings; and a pedestrian-friendly environment. The standard of development would be high in order to negotiate additionality against a baseline set by current practices for new development areas. Retrofitting projects would involve re-engineering and retrofitting existing residential, commercial and public buildings to improve their energy efficiency. Much can be done using the 80:20 rule to reduce energy demand and GHG emissions though selective programs to retrofit buildings, machinery and other utilities with new systems and other technology to improve their energy efficiency. Housing and commercial improvement projects for low-income areas to improve insulation and circulation and introduce more energy-efficient appliances might well form part of CDM projects. Redevelopment projects would involve the replacement of existing buildings with new and better-designed buildings and improved equipment, technology and systems which would match those associated with greenfield development. This might not always be possible: existing property boundaries, limitations to and the lower standards of existing utilities and infrastructure servicing redevelopment areas, along with other planning and environmental issues, might constrain or limit the potential to realise greater energy efficiency.

 

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5.2 EE Building Design and Materials

The development of large shopping malls, commercial centres and business parks throughout Asia offers opportunities for improved building design and construction (including a reduction in material use, and the use of new materials) that would enable significant energy savings. A report by UNEP (Hinostroza et al., 2007a) outlines a range of EE possible CDM projects for new and retrofitted installations in residential and commercial buildings. CDM projects could support improvements in building technology, a reduction in the materials used – or the use of alternative materials – to reduce embedded energy costs, and improved maintenance systems to ensure the efficient use of equipment.

5.3 Building Construction Systems

Most residential and smaller commercial developments in developing countries, especially for low- and middle-income groups, are self-built, generally to a poor construction standard. As a result, there are limited opportunities to introduce technologies or designs that would improve the energy efficiency of buildings. The introduction of building technology systems using standard module designs would enable economies of scale and the introduction of more energy-efficient measures for a marginal increase in overall costs. United States research suggests that improved energy efficiency in buildings could forestall 70% of the anticipated incremental demand for electricity by 2030, thereby reducing the need for additional power stations (Creyts et al., 2007). CDM projects that achieve a significant improvement in energy efficiency could therefore be established through national building industries, with support provided to building firms and companies involved in mass-housing or small commercial centre projects. For this to be feasible, it would be necessary to establish a baseline for GHG emissions based on existing housing construction development methods. There are possibilities for the application of CDM projects to international NGO-supported housing schemes and cooperative housing.

6. EE Transportation Projects Stern (2006) estimated that the transport sector contributes 14% of GHG emissions, although the percentage is much higher in cities. In most Asian cities, the trend toward lower-density living on fringe urban areas, coupled with increasing commuting time and private vehicle usage, is accelerating the rate of GHG emissions. A high proportion of passenger-carrying vehicles/vessels are not fuel-efficient. Reversing this trend will be difficult without significant changes in the way cities are designed and will require massive investment in improved mass transit and public transport systems. Several approaches could be pursued through single CDM and pCDM projects to significantly reduce the demand for energy in the transport sector.

6.1 Mass Transit Systems

Most Asian cities lack good public transport systems; buses, trains and ferries are overcrowded and operator networks service employment areas inefficiently. Governments have invested in the road transport sector in preference to public transport systems. Investment in large urban rail and bus-way systems is very expensive and, since they are most-used by lower-income people, their economics are marginal, often requiring significant government subsidies or price assurances for their private operation. Governments have therefore made increasing use of public/private-sector partnerships to build urban freeways to airports and urban fringe areas, thereby supporting the use of private vehicles by the growing middle class.

 

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A small but growing number of CDM projects are being developed to support mass transit systems in cities. The Trans-Milenio public transport system in Bogotá, Colombia, was the first mass transit system to qualify for the CDM. There are, however, significant problems associated with mass transit systems, especially in predicting the change in transport patterns that will occur once a project is completed. Land use and employment locations, frequency of service, and accessibility can have significant impacts on patronage.

6.2 Engine Conversion

Several Asian cities have supported projects to remove or replace two-stroke engines with four-stroke engines as a way of reducing particle emissions and improving fuel efficiency. In larger cities in the region the conversion of motor vehicles to cleaner fuels and combustion offers an opportunity for CDM projects involving local governments to help meet the cost of conversions. The ADB has given support to engine-conversion projects in Dhaka, Bangladesh, and Delhi, India. Similar types of project offer opportunities for the CDM to assist the conversion of vehicles from two-stroke to four-stroke engines and of buses from diesel to gas.

6.3 Smart Transport Systems

In many Asian cities, much of the transport network is inefficient, with a large number of competitors operating with excess carrying capacity on the arterial transport network; this is the case, for example, in Manila. The development of smart transport systems that improve the efficiency of vehicle carrying levels and limit the number of operators permitted to engage in intra-urban transport services would free up capacity on the road network and improve revenue flow for the private owners of public transport vehicles. The co-location of bus terminals with major retail, commercial and industrial employment areas, the development of inter-modal transfer stations and facilities for local-area services, and the introduction of congestion pricing are all measures that could boost the development and use of public transport systems and services in Asian cities and at the same time reduce per capita GHG emissions from the sector.

7. EE Industrial Area Design and Production Systems Industries are major contributors to energy demand and anthropogenic GHG emissions. The IEA (2006) estimates that implementing EE policies could reduce industrial energy consumption by 10% in developing countries by 2030. A number of measures that could be applied using the CDM for industrial projects could help to reduce energy demand. Two potential applications of the CDM related to industrial development are industrial area design and development, and cleaner production systems.

7.1 EE Industrial Area Design and Development

In many Asian countries, industrial land-use activities are responsible for the emission of high levels of toxins and particles, with minimal filtering. There is a tendency to segregate heavy industrial activities from lighter-scale industrial/commercial developments, which significantly reduces opportunities to create industrial synergies or clusters (Enright, 2000). Clusters help to reduce transaction costs through the sharing of common infrastructure, facilities and services. The development of integrated industrial development areas which encourage specialization and the clustering of industries offers a way of developing common user infrastructure, facilities and services for reducing energy demand, thereby reducing costs and enhancing industry competitiveness. Specialization leads to the development of other synergies associated with transport, logistics, education and training, and research and development.

 

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7.2 Cleaner Production Systems

Cleaner production involves the adoption of cleaner technologies to reduce material inputs and wastes from industrial processes. Significant opportunities exist under the CDM to support the conversion of boiler systems to more efficient and GHG-reducing fuels and the introduction of less-energy-intensive machinery and better technologies that reduce energy inputs. A wide range of new technologies are being developed that have the potential to reduce energy demand.4

7.3 Industrial Ecology

Industrial ecology is a relatively new concept designed to utilise industry waste-streams. The sharing of waste and heat exchange between industrial activities through industrial ecology (Chertow, 1998, Graedel and Allenby, 1995) has been demonstrated at Kalunborg in Denmark and in other locations (Verstegen, 2005, Heeres et al., 2004). Eco-industrial parks, developed as a physical manifestation of the industrial ecology development concept, offer significant opportunities for the application of single CDM projects to new and existing large-scale industrial estates in Asian cities. There are also opportunities to apply industrial ecology to the redevelopment of industrial areas to take advantage of new technologies and industries that facilitate the development of clusters. In Asia, the Chinese 'circle economy' concept5 embodies many industrial ecology principles.

8. EE Technology and Innovation Schemes The aim of EE technology innovation schemes is to support the production of equipment and appliances used in buildings and production systems that reduce energy demand. They might, for example, promote the use of solar power generators for onsite power, automatic switch-off mechanisms for appliances not in use, solar energy for water heating, and energy-efficient lighting in buildings and public places. The operation of the CDM for the introduction of improved technologies and appliances to reduce energy demand might best be implemented at the production source rather than through rebates to end-users. Firms producing EE technologies and appliances could receive CER credits based on the energy savings that would be made over the expected life of the technology or appliance. To maximise efficiency gains it would also be necessary to combine technological options with improved operation and maintenance procedures. According to IEA (2006), changing building practices and household appliances could reduce energy consumption in the residential and service sectors by 11% by 2030. According to Kamel (2007), in these sectors “EE options could also include heating and cooling processes that do not require electricity (such as better insulation, more efficient heat exchange and better steam), and electrical equipment (such as reducing transmission and conversion losses, ventilation, and efficient lighting)”.

9. EE Environmental Projects The increase in land surface cover in Asian cities creates heat sinks, which lead to increased demand for air-conditioning. The old parts of Hanoi and Ho Chi Minh City in Vietnam have 4% tree cover, which, when combined with the shading effects of local architecture, has a significant cooling effect at street level (Lebel et al., 2007). Trees, especially forest parklands, can assist in reducing ambient air temperatures (Oke, 1989) and in the absorption of carbon emissions (Chen Yan, 2006 , Kuchelmeister and Braatz, 1993). While 4 See, for example, the Journal of Cleaner Production for articles on ways to make industrial systems cleaner.

5 (http://www.indigodev.com/Circular1.html). 

 

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urban trees and parks have a low carbon absorption rate (less than 0.2% of emissions in Metro Manila, according to (Ono et al., 2002), cited in Lebel 2007), their value in reducing localised thermal sinks can be significant, reducing temperatures by 2–3°C (Oke, 1989), which in turn has the potential to reduce demand for electricity for air-conditioning. Whether this is sufficient to make a CDM project feasible has not yet been tested.

VI. FEASIBILITY OF EEDS CDM

10. Economic Feasibility of Single CDM Projects It is too early in the operations of the CDM to determine the economic viability of applying CDM to EEDS urban sector development projects. Very few urban sector projects have been approved by the CDM Executive Board; feasibility studies for CDM projects, however, suggest that some would generate project internal rates of return that would meet the financial feasibility requirements of development banks and other financiers, but others, which were economically viable, would not. The economic factors that will most affect the feasibility of EEDS CDM and pCDM projects in Asian cities are: • the price set for CERs by different buyers • the quantity of CERs generated from CDM or pCDM projects • the type and life of CER credits for projects • the availability of approved baseline methodology • the certainty of the governance of a country’s carbon trading scheme • currency exchange rates • transaction costs involved in the development of a CDM project • depreciation rates on capital, plant and equipment • satisfaction of applicability conditions of the selected methodology and compliance

with UNFCCC approval conditions • the size and number of expected projects in a PoA • validation costs • monitoring and verification costs. These factors need to be considered carefully in assessing the economic feasibility of single CDM and pCDM projects. The CDM offers a way to offset development, technology and other costs associated with a project that will reduce GHG emissions. These costs vary significantly between CDM projects depending on their type and scale. Economies of scale are not always achieved in CDM projects, especially if the projects within it are of dissimilar sizes, or if technology applications vary significantly between them. The more standardized the projects comprising a CDM project, the more likely it is to generate economies of scale. The most viable CDM projects are those associated with energy supply – especially large-scale power projects. The limited data available indicate that many demand-side CDM projects appear to generate lower rates of return and CER credits do not bridge the gap to financial viability. The evidence gathered from a selected range of EEDS CDM projects on the UNFCCC website suggests that waste management and cogeneration projects generate the best EERs and IRRs for EEDS projects (Table 2).

Table 2: IRR for projects with and without CDM

 

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Project title Location Category IRR, no

CDM

IRR, with CDM

Life years

cost per] CER (US$)

Feasibility Study of the Landfill Methane Gas Utilization Project in Semarang, Indonesia

Indonesia (Central Java)

Waste management

1.68% 9.43% 14 5.0

Ghabawi Landfill Gas Capture and Power Generation Project in Amman City, Jordan

Jordan (Amman)

Waste management

-0.01% 11.15% 14 8.0

Drisla Landfill Gas Capture and Power Generation Project in Skopje City, Macedonia

Macedonia (Skopje)

Waste management

minus 6.28% 9 15.0

Landfill Gas Capture and Power Generation Project in Zhitomir City, Ukraine

Ukraine (Zhitomir)

Waste management

minus 13.55% 15 9.3

Research for Methane Gas Collection and Energy Utilization at the Coastal Land Disposal Area in Carapicuiba City, Mogi Guacu City in Sao Paulo)

Brazil (São Paulo)

Waste management

6% 15 8.0

Landfill Gas to Electricity Project in Thailand Thailand (Nontaburi province)

Waste management/ energy

-5% 29.20% 10 3.0

Carbon credit from Landfill gas capture and electricity generation in Brazil

Brazil (São Paulo)

Waste management/ energy

14.8% 27.2 21 4.0

The investigation of the Non-Firing Bricks business production for effective use of the untapped natural resources in India

India (Orissa) Cogeneration NA 17.50% 10+ 5.0

CDM feasibility study of cogeneration with coalmine methane in Shanxi Province, China

China (Shanxi) Cogeneration 7.19% 80.10% 20 10.0

Source: Global Environment Centre Foundation: http://gec.jp/gec/gec.nsf/en/Activities-CDMJI_FS_Programme-List

Transport projects involving bus-way and bikeway systems are marginal and require carbon prices above US$10/tonne to be viable. A transport study of Santiago, Chile (Browne et al., 2005) – the only available CDM case study involving EE urban land use – found that costs associated with a bikeway system and improved bus technology for 462 buses achieved very limited benefits as a CDM project (Table 3). Interestingly, sub-projects to improve the location efficiency of non-residential and educational land uses generated positive outcomes at a carbon price of US$10/tonne. The description, scope and design of these projects were unclear from the study. If these types of projects are viable then there might be value in supporting CDM projects that result in the development of more efficient urban land-use patterns. Table 3 Comparison of case-study CDM transport projects, Santiago, Chile

Case study Project scale Annual CO2 savings (tonnes)

Project time period (years)

Cost per tonne* CO2 (US$)

Annual CER revenues at

US$10/tonne (US$)

Bus technology 462 buses 11,700 10 -80 117,000 Bikeway project 4.5 km

(1000 cyclists) 73 21 212 735

Bicycle network 1200 km 27,300–99,600 21 30–111 273,000–

996,000 Location efficiency: Schools**

Greater Santiago (34 communas)

500,000–650,000 21 2 5,000,000–6,500,000

Location efficiency: non-residential

850,000–1,200,000 21 27 8,500,000–12,000,000

Source: (Browne et al., 2005) * Assumes a 10% social discount rate for each case study. Transaction and monitoring costs are not included. Projects with 14 or 21 year timeframes will incur additional transaction costs for preparing and submitting renewal applications and updating the baseline. ** Annual savings grow over the 21-year timeframe.

 

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There are well established techniques for assessing CDM transport projects (Gojash and Fukuda, 2004, Kato et al., 2003 ); however, the assessment process is difficult. The timing and extent of switches to the use of public transport or demand for conversions are almost impossible to predict, only becoming known once a project is completed or at least well into its implementation stage. Projects that involve fuel or engine conversions appear to have the most promise as CDM projects – especially where these involve several cities. The Santiago study suggests that most urban transport projects are best developed as single CDM projects; their variations in scale are so significant that bundled and CDM is perhaps not the best mechanism for developing and approving them. Nor does bundling always help the economic feasibility of projects. A project in the Talubin River Basin in the Philippines for the establishment of two mini-hydro electricity schemes (TEPS, 2005) found that bundling reduced the IRR for the project; CDM for small-scale hydro projects might also be marginal. The issue of scale is important in determining the feasibility of CDM and bundling can make a large difference to the return on project investment. A project for the Talubin River Basin in the Philippines for two mini-hydro electricity projects (TEPS, 2005) found the IRR for the project was reduced when it was bundled. The issue is even more important for urban projects. 11 Project Scale Project scale has a significant influence on the viability of projects. Table 4 shows that more than 70% of approved and proposed projects involve greater than 25,000 tonnes of C02 per year, with the largest number of projects and biggest projects associated with electricity production from hydro schemes; the development of biomass projects represents nearly 16% of all CDM projects. Of the 1080 projects registered by the UNFCCC as of May 2008, 54% were large-scale projects. For projects in the pipeline, 56% were large-scale, suggesting that economies of scale are having a significant effect on the size and type of projects. The current trend towards larger projects suggests that bundled and pCDM have the potential to play an important role in achieving the economies of scale needed to ensure the viability of projects. Table 4 Number and percentage of projects, by size (May 2008)

Size (ktCO2/yr) Number of projects % of total number of projects 0–5 151 4.4% 5–10 217 6.4% 10–25 630 18.5% 25–60 771 22.7% 60–100 664 19.5% 100–500 853 25.1% 500–1000 62 1.8% 1000–5000 47 1.4% 5000–10,000 5 0.1% > 10,000 3 0.1% Total 3403 100.0% Source: http://cdmpipeline.org/cers.htm

11. Technical Feasibility Evaluating the technical feasibility of CDM projects has proved difficult, especially when different or new technologies are involved. Projects can be similar in type, but their feasibility can differ significantly depending on the technologies used. The UNFCCC has

 

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reported difficulties in assessing the feasibility of alternative technologies used in CDM projects to reduce hydrofluorocarbons in China and India. In some cases proposed technologies are not fully tested, making it difficult to determine additionality benefits and CER credits. The major challenge for the CDM regarding technology assessment is that technologies can change quickly. There are, therefore, many uncertainties over the measurement of technology benefits.

VII. ESTABLISHMENT OF A CDM SUSTAINABILITY GAP FUND The complexity and difficulties involved in developing and approving EEDS single CDM and pCDM projects suggests there is a need for fresh thinking on how to make the mechanism work more effectively. While much has been done to improve the development and assessment of supply-side CDM projects, EEDS projects are proving much more problematic. Given that about two-thirds of energy consumption contributing to GHG emissions is attributable to demand-side users and factors, a fundamental change is needed in the way the UNFCCC approaches the development of EEDS projects. The current approach to the development and approval of EEDS CDM projects is too complicated and beyond the design and development capabilities of many Asian urban management institutions. Moreover, the ERRs and IRRs of many such projects are too low to be of interest to the ADB or other investors. On the other hand, the risks associated with many EEDS projects are too high. For example, a CDM project for replacing single air-conditioning units with centralized or packaged systems for buildings assumes that all buildings have the same energy efficiency as well as uniform maintenance regimes. Many CDM projects also involve a certain level of innovation and experimentation, which adds to their risk. Significant subsidies or grant funding might be required to make them feasible. The challenge is to minimize the cost of the gap funding support that will be needed for meeting initial development and ongoing operational costs. The gap in development and operational costs of EE projects will only partially be met by the sale of CDM CER credits, especially with carbon emissions priced at around US$15 a tonne or less. In developed countries, the market is prepared to pay a premium for greener buildings and energy because of the long-term benefits of reducing operating costs. In most Asian countries, however, the willingness (or capacity) of governments and businesses to accept the additional development costs involved in making buildings and infrastructure more energy-efficient and sustainable is likely to be lower, except in some more-advanced economies. Assuming that the CDM is retained in the post-Kyoto climate change regime, the following describes how current practice could be improved. To make single and pCDM projects more attractive to investors, international development assistance is required to offset the additional development and operational costs of EE projects. A possible way to encourage investment in EEDS is for the ADB and other development banks to establish a sustainability gap trust fund (SGF) that would be used to help bridge the gap in development and operating costs between a business-as-usual case and a built EEDS project. The approach would involve reassessing the CDM value of the project once it is completed and operational. This would reduce the uncertainty and guesswork currently involved in determining additionality and the number of CER credits to be issued to a project.

 

17

Figure 4 shows a suggested framework for the SGF. Under the proposed approach, the project proponent, in association with the Designated National Authority, would establish an agreed baseline for the single, bundled or pCDM project. The SGF would enter into an agreement to fund the difference in project development and operating costs for a defined period of time. Since SGF projects would generate additionalities and reduce GHG emissions they should be eligible to be part of the CDM and to generate CER credits. A possible arrangement for trading CER credits generated by the SGF would be to transfer them to a fund like the ADB’s Asia Pacific Carbon Fund (APCF); the net proceeds from CER credit sales would then be transferred from the APCF to the SGF for use in other projects. Such an arrangement would reduce the level of subsidy to support the scheme. In the event that an SGF project generated CER revenues in excess of the cost of supporting the repayment of gap funds, the profits could be shared with the proponent and/or be added to the SGF to support new projects that may require a subsidy to make them viable. Figure 4 Proposed ADB CDM EE project support scheme

BAU

Business as Usual (BAU)

CERs

EE gap Support

ADB PACF to get CERs

CERsAcqu ired CERs are Added and Emission Cap

Increases

ADB CDM Sustainability Gap Fund (SGF)

If CER credits exceeds SGF support profits shared between ADB and DMC Developer

CER proceeds to support SGF

SGF

ADB Funded

DMC or ADB Fund for BAU

component of CDM or pCDM

Projects

Source: Authors Figure 5 shows the long-term funding arrangements that could be put in place for the SGF. As DMCs move to improve their energy-efficiency standards the requirements for the business-as-usual case will increase. This will reduce the quantity of CER credits that could be issued for a single, bundled or pCDM project. Carbon emission prices, however, can be expected to rise as new caps are negotiated under the UNFCCC, helping to offset gap costs. Returns from CER credits would decline to zero when the future business-as-usual baseline standards meet the EE designed standard used when projects were first developed. Any surplus revenues from the sale of CER credits generated before this point would be returned to subsidize the SGF, or shared with the project proponent.

 

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Figure 5 Long-term operational funding arrangements for SGF

BAU

EE Project Design

Sustainability Gap Fund

0 tn

CER $0

BAU0

CER Sales cover cost outlays

Surplus CER sales fund SGF deficit

CER Credits EE Design Standard meets new BAU standard

CER Credits

BAU

EE Project Design

Sustainability Gap Fund

0 tn

CER $0

BAU0

CER Sales cover cost outlays

Surplus CER sales fund SGF deficit

Development and operational deficit funded by SGF

CER Credits EE Design Standard meets new BAU standard

CER Credits

Source: Authors There are many advantages to the proposed SGF compared with the current CDM mechanism. The sale of CER credits would only be permitted once projects were operational and certified by the UNFCCC Executive Board. The additionality for which the CERs are issued would not be estimated but, rather, based on actual emissions measurement. Currently, CERs are available only for reductions in operational GHG emissions; the inclusion of embodied energy, however, could provide incentives for GHG reductions in construction. The approach would reduce errors in the estimation of CERs and opportunities for rent-seeking, both of which occur under current CDM credits generated by single or pCDM projects on a take-and-pay basis at the going market price of carbon. The approach would also allow CERs generated by single, bundled or pCDM projects to feed into a pool of CER credits that could be traded to help subsidize project development costs and to introduce best-practice technologies to developing countries in support of EEDS initiatives. The level of gap funds needed to support the initiative would be set by EE design standards, with GHG emission targets set for specific types of EEDS projects by each DMC.

VIII. CONCLUSION The economic feasibility of EEDS CDM and pCDM projects in the urban sector is problematic; it is important, however, that greater emphasis be given by the UNFCCC to these types of projects if there is to be a significant reduction in GHG emissions in cities. Cities in Asia will continue to grow, with the total urban population likely to nearly double in the next 20 years. It is essential that in the next round of negotiations on the Kyoto Protocol a greater focus is given to reducing the demand for energy in cities – especially in developing and newly industrialized countries. Extensive research is required to gain a better understanding of the spatial demand for energy by land-use and built-form types. Little is known about per capita energy demand for residential, industrial and commercial land uses in Asian cities. Energy audits are needed, especially for cities, but even many developed countries in the region have not yet completed or started these. The information that would be generated by such audits is necessary to establish baselines and

 

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additionalities to assess the potential for and feasibility of EEDS urban development projects. There is also a need to provide incentives and capacity building for Designated National Authorities in DMCs to develop CDM policy frameworks and guidelines to improve the preparation and evaluation of projects before they are sent to the CDM Executive Board for approval. Assuming that a scheme similar to the CDM applies in post-Kyoto arrangements, the most difficult challenge for the ADB will be to determine the best mechanism for funding CDM projects. The current CDM project development and approval mechanism is cumbersome and will prove difficult to apply to EE end-user projects for single or pCDM. Thus, and very importantly, some significant efficiencies are needed in the methodological and processing systems to accommodate the special characteristics of urban projects. In drawing a conclusion to the paper the authors believe a different approach to CDM project development and funding support is needed if the ADB and other development banks are to make a significant contribution to reducing GHG emissions in Asian cities. If EEDS single, bundled and pCDM urban-sector projects are to be feasible, an SGF should be established to support the difference in development and operating costs between a business-as-usual and EEDS project. Most developing countries in Asia are not in the position to support the additional costs associated with urban development projects to reduce energy demand without some form of subsidy or gap funding support. The ADB and other international development banks and assistance agencies are in the best position to establish such a fund. The SGF is unlikely to be attractive to other sectors of the banking and finance industry because there is a high risk that investment funds will not be recovered fully through the sale of CER credits. The SGF is thus an international public good and should, like the ADB itself, be capitalized by the governments involved. The scheme could become self-financing as the price of carbon credits rises, but this is by no means certain. In the event that surplus funds are generated from CER credit sales, these could be shared with project proponents or used to expand the base of the SGF. It is thus important that the language of any post-Kyoto agreement be able to encompass the inter-related capacity building, methodological changes and funding schemes proposed above. References Bai, X. (2007) Integrating Global Environmental Concerns into Urban Management: The Scale and Readiness Arguments. Journal of Industrial Ecology, 11, 15-29. Browne, J., Sanhueza, E., Silsbe, E., Winkelman, S. & Zegras, C. (2005) Getting on Track:Finding a Path for Transportation in the CDM. Manitoba, International Institute for Sustainable Development. Bulkeley, H. & Betsill, M. M. (2003) Cities and Climate Change: Urban Sustainability and Global London, Routledge. Chen Yan, W. (2006 ) Assessing the services and value of green spaces in urban ecosystem : a case of Guangzhou City Hong Kong, University of Hong Kong. Chertow, M. R. (1998) Waste, Industrial Ecology and Sustainability. Social Research, 65, 31-44. Creyts, J., Derkach, A., Nyquist, S., Ostrowski, K. & Stephenson, J. (2007) Reducing Green House Gas Emissions: How Much and at What Costs. US Greenhouse Gas Abatement Mapping Initiative. New York, McKinsey and Company. Droege, P. (Ed.) (2008) Urban Energy Transition, New York, Elsevier.

 

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