Clean Development Mechanism• Enables developed countries (known as

Annex B countries) to meet their emission reduction commitments in a flexible and cost-effective manner

• Assists developing countries (non-Annex B countries) in meeting their sustainable development objectives

• Investors benefit by obtaining Certificates of Emissions Reductions (CERs)

• Host countries benefit in the form of investment, access to better technology, and local sustainable development

Simplistic numerical example

Provide electricity for a barangay• “Business-as-usual” (baseline): Diesel

generator sets– Cost of project $10– Emissions 1 tC

• Cleaner project (CDM-eligible): Micro-hydro– Cost of project $13– Zero Emissions

Simplistic numerical example

• CDM Investor (e.g. Japan)– Invests $3 ($13-$10, difference between

cleaner and business-as-usual project)

– Gains Certificate of Emissions Reduction of 1 tC, which it can meet some of its Kyoto Protocol commitments to reduce emissions

CDM Project

• Achieves Sustainable Development objectives for the host developing country

• Reduces GHG Emissions

What are the Criteria for CDM Projects?

• Sustainable development– Host country criteria– Environmental Impact Assessment– Stakeholder consultations

• Greenhouse Gas (GHG) emission reductions– Environmental additionality

• Project additionality• Project viability

– Technologically proven– Financially sound

• Host country approval• Project validation and registration

Sustainable development

• Economic impacts Employment, livelihood

• Environmental impacts Local air/water pollution control

• Social equity Impacts on disadvantaged groups

Additionality

• Additionality is the key eligibility criterion in CDM projectsYou must do something that you would not

have done without the CDM

• Two types of additionality Project Additionality Environmental Additionality

Project Additionality

• Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur

Environmental Additionality

• If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.

Environmental additionality and baseline

CO2 Emissions

CDM project CO2 emissions (observable)

Real, measurable and long-termAdditional CO2

emissions reduction

Years

Baseline scenario CO2 emissions (that would occur)

Starting Point: Viable Project

• A potential CDM Project is a feasible project Technologically feasible Financially sound

• A potential CDM Project is a project which has an Environmental Compliance Certificate (ECC)

CDM Project Cycle

C D C D4 MICC C

Project Design & Formulation

National Approval

Validation / Registration

Project Financing

Monitoring

Verification / Certification

Issuance of CERs

Project Design Document

Monitoring Report

Verification Report / Certification Report / Request of CERs

Operational Entity A

Investors

Project Participants

Operational Entity B

EB / Registry

2. CDM Eligible Projects

CDM Eligible Projects

• Renewable energy• Fuel switching• End-use energy efficiency improvements• Supply-side energy efficiency improvements• Agriculture (reduction of CH4 & N2O

emissions)• Industrial processes (CO2 from cement,

HFCs, etc)• Sink projects (only afforestation &

reforestation)

Renewable energy

• Renewable energy for the grid• For electricity generation by households or

commercial users E.g., Solar home systems, solar water pumps,

photovoltaics, wind battery chargers

For mechanical energy by households or commercial users E.g. wind-powered pumps, solar water pumps, water

mills, wind mills

Renewable energy

• Thermal energy for households or commercial users E.g., solar thermal water heaters and dryers, solar

cookers, energy derived from biomass for water heating, space heating or drying

Biomass combined heat and power (co-generation) systems

End-use energy efficiency improvements

• Energy efficiency equipment Motors Lamps Ballasts

Refrigerators Fans

Air conditioners Appliances

Etc …

Agriculture

• Reducing emissions from agricultural soils Use of ammonium sulfate instead of urea Use of phosphogypsum in combination with urea instead

of urea

• Reducing methane emissions from livestock• Conservation agricultural tillage• Agricultural land management practices

Use of composted rice straw instead of fresh rice straw

Sink projects

• Afforestation Planting trees on agricultural land

Reforestation Planting trees on denuded forest land

Clean Development Mechanism

Types of small-scale projects that could qualify for fast-track approval procedures

• Renewable energy projects up to 15 megawatts (MW) of output capacity

• Energy efficiency improvements that reduce energy consumption on the supply and/or demand side by up to 15 gigawatt-hours (GWh)/year

• Other project activities that both reduce emissions at source and directly emit less than 15 kilotons (kt) of CO2 equivalent annually

3. CDM Transaction Costs

Pre-implementation costs

• Search costs

• Negotiation costs

• Baseline determination costs

• Approval costs

• Validation costs

• Review costs

• Registration costs

Implementation costs

• Monitoring costs

• Verification costs

• Review costs

• Certification costs

• Enforcement costs

Trading costs

• Transfer costs

• Registration costs

Transaction costs Relation to project size

Estimate (k€)

Search costs Fixed 15

Negotiation costs Degressive 25 – 400

Baseline determination costs Fixed 35

Approval costs Fixed 40

Validation costs Fixed 15 – 30

Registration costs Fixed 10

Monitoring costs Fixed 10

Verification costs Degressive 8 per turn

Certification costs Degressive NA

Enforcement costs Proportional

Transfer costs Proportional 1%

Registry costs Proportional 0.03%

Minimum fixed costs (k€) 150Source: Michaelowa et al (2003)

Economies of scale

• Economies of scale are the most important determinant of transaction costs

• Due to the important role of fixed cost components

Project size, types & total transaction costsSize Type Reduction

(t CO2 per yr)

€ / t CO2

Very Large

Large hydro, geothermal, landfill methane

>200,000 0.1

Large Wind power, solar thermal, energy efficiency

20,000 – 200,000

0.3 – 1

Small Boiler conversion, DSM, small hydro

2000 – 20,000 10

Mini Energy efficiency in housing & SME, mini-hydro

200 – 2000 100

Micro PV < 200 1000

Source: Michaelowa et al (2003)

Project size thresholds

• PCF considers any project with a volume below 3 million € greenhouse gas benefits would not be attractive due to transaction costs Threshold of about 50,000 t CO2 per year for

a 20–year project• Transaction costs should not be more than 25%

of proceeds of CER sales to make a project viable (Shell, 2001)

• Cost threshold of about 1 € / t CO2

Inferred Transaction Costs (TAC) of SSC project thresholds(Michaelowa, et al,2003)

Project type

Annual full load hours

GWh CERs per year

TAC/CER (€)

Hydro 15 MW

8000 120 108,000 0.5

Wind 15 MW

2700 40 36,000 2

Energy efficiency 15 GWh

NA 15 13,500 20

Fuel switch gas to coal

NA NA 23,350 5

Viability of CDM Projects

• Given CER market price estimates of 1 – 5 € pet t CO2 (Jotzo and Michaelowa, 2001)

• Given PCF transactions priced at 3 – 4 € per t CO2

Only projects classified as large and very large are viable

Many small-scale projects would not be viable

Ways to reduce transactions costs

Bundle projects to jointly undertake each step of the project cycle

1 2 3

4 5


• Do verification and certification not annually but at long intervals

• Exempt projects from one or more steps of the project cycle

• Streamline the information needs on each step of the project cycle

• Standardization of parameters



• Do unilateral CDM projects that reduce search and negotiation costs

• Registration and certification fees proportional to the size of the project

• Validation and verification fees proportional to the size of the project


Contrasting the New FundsContrasting the New Funds

CF to small-scale energy projects

Generate high-value ERs (contract prices: $4-5t/CO2e)

“Development + Carbon”

CDM countries only:

emphasis on smaller, poorer

countries and communities

Multiple tranches

Community Development Carbon Fund (CDCF) BioCarbon Fund

CF to agricultural, forestry, and land use

Generate cost-effective ERs (contract prices: $3-4/tCO2e)

Carbon + biodiversity cons., fight against desertification, reduction in rural poverty

CDM and JI

Learn-by-doing prototype

4. Challenge of Small-Scale Projects

Challenge of Small-Scale (SSC) projects

• SSC projects have substantial sustainable development benefits

• But unless high transaction costs are reduced, many SSC projects would not be viable

Small-scale (SSC) projects

• Solar home systems, photovoltaics, wind-powered pumps, solar cookers

• Pico-hydro

• Reducing methane emissions from livestock

• Community-based forest management

• Agro-forestry

• Watershed protection

Small-scale (SSC) projects

• SSC projects have the best potential for achieving sustainable development benefits

• SSC projects have the best potential for delivering benefits to the poor and to disadvantaged groups

Roberto C. Yap, S.J., Ph.D.

Environmental Economist

Climate Change Information Center

Manila Observatory

Ateneo de Manila University

Tel +63 2 426-6144

Fax +63 2 426-6070

[email protected]

mailto:[email protected]





contents

Documents

tccleaner project cdmeligible

proposed project

proposed cdm project

cdm projectsyou

microhydrocost of project

emission reduction commitments

usual baseline

etcsink projects