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The opportunities provided by the CDM and future carbon trading in se Asia*.

GIOVANNI RIVA^◊ - MAURO ALBERTI^♦

Abstract

A policy for energy utilisation of biomass to be effective must primarily ensure economic viability of projects. In this sense also complementary financing mechanisms (e.g. CDM or other Kyoto programmes) can be applied to increase financial viability of projects. Nonetheless, also other complementary policies (research on crops, research and demonstration of conversion technologies, standardisation of biofuels/waste, agriculture/forestry plans and regulations, plants authorisation procedures) are extremely important to create the conditions for a real growth of biomass sector. Therefore, all these arguments should be considered in detail also when analysing problems and opportunities for the development of biomass energy in SE Asia. Particularly, the issue of tariffs to be established for biomass electricity is extremely relevant and needs to be studied thoroughly.

Keywords: renewable energy, CDM, biomass projects, carbon credits.
 

1.1 Introduction
The matter considered here is the “Clean Development Mechanism”, which is part of a package of measures that were agreed at Kyoto in 1997 by 200 countries to limit the growth of emissions to atmosphere of gases (carbon dioxide, methane, etc.) emanating from the combustion of fossil carbonaceous fuels (coal, mineral oil, “natural gas”, etc.)¹.
CDM is an important issue for European Renewable Energy Policies insofar as it is to be utilised by European actors (companies and national governments) to promote renewable energy (and other) projects in developing countries to reduce GHG emissions. In fact, the European carbon market is EU-wide but taps emission reduction opportunities in the rest of the world through the use of CDM and JI (see below). A key option to reduce world-wide environmental impact (i.e. greenhouse gases) of energy production is indeed the application of proven and efficient technologies for biomass conversion in countries where the projects for emissions reductions can be decidedly less costly (in terms of investment/cost per unit of CO₂ reduction, €/t) than within European States. Moreover, this opportunity could lead to penetration of European (clean) technologies in different parts of the world, enhancing the situation of the European renewable technologies sector.
In this sense, the European Union Member States will probably in the next years look at countries in SE Asia as potential hosts of CDM projects that could lead to significant and cost-effective GHG emissions reductions and to corresponding carbon credits to be used in EU market.

1.2 Flexible mechanisms introduced in the Kyoto protocol
In Rio de Janiero in 1992, the United Nations agreed a Framework Convention on Climate Change (UNFCCC). Representatives of the countries that are parties to that Convention then met annually to develop secure mechanisms to counter climate-change, while taking due account of the many complex issues raised².
Five years later this process of development led to the “Kyoto Protocol”, which represents a binding commitment by its signatories to take specified actions. It set quantified targets for emissions of GHG in developed countries, and established the “Kyoto Mechanisms” (KM) to provide means for developed countries to meet those targets and, at the same time, to assist developing countries.
Those developed countries that have ratified the Protocol and thereby accepted emissions-reduction targets, may meet those targets by a combination of activities within their own boundaries and those covered by the KM, which fall into three categories:
Joint Implementation (JI);
(a) CDM; and
(b) International Emissions Trading (IET).
JI allows a country that has, under the Kyoto Protocol, accepted a reduction in emissions (Emission reduction unit – ERU) of GHG, or a target for limitation of such emissions (a so-called “Annex-1 country”), to meet part of its obligations by carrying out eligible activities in another Annex-1 country.
CDM is similar, but allows an Annex-1 country to meet part of its obligations by carrying out eligible activities in developing countries that have not accepted obligations under the Kyoto Protocol (i.e. non-Annex-1 countries). Those activities entail the development and implementation of projects that will result in reductions of emissions of GHG overseas, thereby generating credits for Certified Emissions Reductions (CER) that can be sold on the carbon-market (see Section 2.2), and which can therefore provide extra income-streams for developers.

1.3 The development and implementation of CDM projects
To be accepted within the agreed framework for CDM, projects must be developed within the following step-wise framework (Figure 1).
In general terms, the aim for developers is to find a particular contest in industrial/civil sectors (energy generation, waste management, specific industrial sectors, like iron and steel, cement, glass, ceramics as well as paper, etc.) in which, by applying an innovative (e.g. renewable) technology, GHG reductions are obtained and the project can earn credits for CERs.

 

Figure 1: Project cycle of CDM.

Therefore, a preliminary step to undertake a CDM project is to assess project additionality with respect to current conditions.
"A CDM project activity is additional if anthropogenic emissions of greenhouse gases by sources are reduced below those that would have occurred in the absence of the registered CDM project activity.“
CDM – Executive Board (EB, UNFCCC/CCNUCC³) defined a "Tool for the demonstration and assessment of additionality", which is dated October 22^nd 2004. Scheme proposed by EB is presented in Figure 2.

Figure 2: Additionality scheme proposed by EB

A wide range of technologies may be considered in the context of CDM projects and, certainly in the case of the more complex technology-trains, a more thorough study may be necessary to establish feasibility. Furthermore, a check must be made to ensure that the proposed project fully complies with any requirements imposed by the host-country.
If the feasibility-study indicates that it is possible in principle to develop a CDM project, the next step is to prepare a Project Design Document (PDD⁴) to set out the following information:
A general description of the activity.
(a) The baseline case (see above).
(b) Duration of the project/period expected for earning CER.
(c) The methodology and plan for monitoring.
(d) Calculation of emissions of GHG from the various relevant sources.
(e) Environmental impacts.
(f) Comments from stakeholders.
If there appears to be no methodology that has already been approved by UNFCCC for assessing (a) the baseline case, and (b) the proposed improved project, in terms of its emissions, the developer must propose a new methodology to UNFCCC for its approval. The same requirement for approval by UNFCCC applies also to the methodology and plan for monitoring.
Developers will also be required to provide information about the environmental impacts of each project, including trans-boundary impacts where applicable. In those cases where there may be significant impacts, a full Environmental Impact Assessment must be undertaken, and the report submitted to UNFCCC.
The next step for the developer is to submit the PDD for validation to a “designated operational entity” (DOE) that has been approved by UNFCCC. If the methodology that has been used for the baseline case is one that has already been approved by UNFCCC, the DOE will validate it immediately. But, if a new methodology has been proposed, the DOE will submit this and the rest of the PDD to the UNFCCC’s CDM Executive Board (EB) for review and approval.
The whole process of preparing and submitting for approval the PDD can be handled by the developer or by specialised consultants⁵.
Registration of approved projects signals formal acceptance of them by the EB. This is a prerequisite for the verification, certification and issuance of certificates for “certified emission reductions” (CER).
After approval, the project must be implemented in accordance with the PDD, including all aspects of monitoring set out therein.
The monitored reductions in emissions of GG must be periodically determined and verified by another DOE (i.e., except in the case of small projects, a DOE that is independent of the validator), which will then certify those reductions in a report to the EB, which will then issue the CC accordingly; the CC can then be sold into the market.

1.3.1 Methodologies for CDM Projects
At UNFCCC site it is possible to see a complete list of methodologies presented for CDM projects (http://cdm.unfccc.int/methodologies/PAmethodologies).
Some methodologies have already been approved by CDM Executive Board, while newly proposed methodologies are continuously being evaluated through a multi-stage process (see ANNEX A).

1.3.2 Methodologies for small scale CDM project activities
The Marrakech Accords⁶ establish the possibility of introducing fast-track modalities and procedures for small-scale projects, recognising that the sustainable development benefits of these projects can be high but that these projects may not have the economies of scale or levels of emissions reduction that larger projects enjoy⁷.
The definitions of small-scale projects, set out in the Marrakech Accords, are as follows:
1. Renewable energy project activities with a maximum output capacity equivalent of up to 15 MW (installed or rated capacity⁸); type I category covers renewable energy projects including: Solar, wind, hybrid systems, biogas or biomass, water, geothermal and waste.
2. Energy efficiency improvement project activities which reduce energy consumption on the supply and/or demand side, by up to the equivalent of 15 GWh per year; type II covers supply side projects and end-use projects including residential, service, industry, transport, agricultural machineries and cross-cutting technologies which result in improvement in per unit power for the service provider or in reduction of energy consumption in watt hour in comparison with the approved baseline.
3. Other project activities that reduce anthropogenic emissions by sources and that directly emit less than 15 kilotonnes of CO2 equivalent per year. Type III covers agricultural projects, fuel switching, industrial processes and waste management. Possible examples in the agricultural sector include improved manure management, reduction of enteric fermentation, improved fertilizer usage or improved water management in rice cultivation.
In order to reduce transaction costs for small-scale CDM, modalities and procedures are simplified as follows:
(a) Project activities may be bundled or portfolio bundled at the following stages in the project cycle: the project design document, validation, registration, monitoring, verification and certification. The size of the total bundle should not exceed the limits set out for the three project types (i) to (iii) above;
(b) The requirements for the project design document are reduced;
(c) Baseline methodologies by project category are simplified to reduce the cost of developing a project baseline;
(d) Monitoring plans are simplified, including simplified monitoring requirements, to reduce monitoring costs; and
(e) The same operational entity may undertake validation, and verification and certification.

A simplified baseline and monitoring methodology listed in Appendix B of Annex II to decision 21/CP.8 (FCCC/CP/2002/7/Add.3) may be used for a small-scale CDM project activity if the project participants are able to demonstrate to a DOE that the project activity would otherwise not be implemented due to the existence of one or more of the following barriers:
(a) Investment barrier: a financially more viable alternative to the project activity would have led to higher emissions;
(b) Technological barrier: a less technologically advanced alternative to the project activity involves lower risks due to the performance uncertainty or low market share of the new technology adopted for the project activity and so would have led to higher emissions;
(c) Barrier due to prevailing practice: prevailing practice or existing regulatory or policy requirements would have led to implementation of a technology with higher emissions;
(d) Other barriers: without the project activity, for another specific reason identified by the project participant, such as institutional barriers or limited information, managerial resources, organizational capacity, financial resources, or capacity to absorb new technologies, emissions would have been higher.
But these simplifying measures do not necessarily address the issues that concern buyers and traders. It will probably be necessary for one developer to aggregate projects so that sufficient CERs are on offer with adequate security to draw the attention of market-actors. Otherwise, perhaps several developers can find a secure way to act in a concerted entity.
A couple of examples of the scale of expectations for CER for various types of projects are given in ANNEX B.

1.4 The market-value of CER
It is important to realise that (a) the market for Carbon credits is young and thus illiquid at present; and (b) the rules and policies for trading in carbon are slightly different in various markets, but that such differences are likely to be ironed out over time. So, for example, whereas other states in the EU-ETS have used a tonne of carbon dioxide (CO₂) as the standard unit of emissions of GHG, the UK has used carbon. And, whereas the EU-ETS refers only to emissions of (CO₂), the UNFCCC’s systems offer credits for reductions in emissions of six GHG⁹.

Prices in European Trading Scheme (ETS)
Prices on the early trades of the EU ETS have reached values around 12-14 € in the end of year 2003-beginning of 2004, then they have been between 7 and 10 € in the second half of year 2004, but have increased substantially in 2005 (Figure 3, a) and overcome the value of 20 € in June 2005. However, as regards recent prices, it can be said that they have been rather volatile in June and July 2005 (Figure 3, b) , as the market is just starting to develop.

 

a)
 

b)

Figure 3: Prices of CO2 emissions in European Trading Scheme (ETS), €/t. a) Period May 2003-March 2005; b) Period 25/05-20/07, year 2005. Source: PointCarbon¹¹

CER/ERU Prices
The most important early buyers of carbon-credits have been large institutional bodies like the World Bank’s Prototype Carbon Fund (WBPCF) and national governments, such as the Dutch Government’s Carboncredits.nl Programme. According to publications of the CCPO (Climate Change Projects Office, 2004), the WBPCF was offering about 3 Euros/tonne of CO₂e about a year ago, but was planning to introduce another scheme that would offer a higher price for credits that demonstrate a high level of community benefits. CCPO’s document also refers to a Dutch system that then offered a range of values, from a maximum of about 3 Euros/tonne of CO₂e for a project entailing flaring methane at a landfill, to a maximum of about 5 Euros/tonne of CO₂e for projects generating electricity from renewable sources.
Current prices of flexible mechanisms certificates (CER and ERU) are, indeed, much lower than ETS certificates. Range of prices found for ERs, VERs, CERs¹² and ERUs from January 2004 to April 2005, are reported in Figure 4¹³.
 

Figure 4: average prices for non-retail project-based ERs (period january 2004-april 2005; in US $ per tCO2e). Source: IETA, 2005.

Most recent reports from Point Carbon (a major international carbon broker) point to recent upward movement in the CER price — driven increasingly by demand for them within the EU trading system. The June issue of the CDM & JI Monitor reports CER offer prices in the 5 to 7 Euro range (for abatement certificates from yet-to-be-registered CDM projects), and trades for registered CERs occurring at above the 10 Euro mark¹⁴.
Prices depend on structure, vintage, creditworthiness of seller (sometimes also buyer). CERs are created through the successful operation of an eligible project. They are lower than EUA prices due to risks affecting the CER/ERU creation (JI/ CDM eligibility, project performance risk and CER/ERU transfer risks).
It can be pointed out here that risk of eligibility of CDM projects is reduced as CDM EB has become operational and procedures clearer¹⁵. Besides, transfer and delivery risk is also reduced for CDM as CDM registry is being set up (first phase terminated)¹⁶.

How to trade ERUs, CERs, EUAs
Emission reductions certificates (ERUs, CERs, EUAs) can be traded by direct or indirect contracting.
Direct contracting can be done in two manners: a) Bilateral, i.e. two companies dealing directly (so that they have to be experienced counterparties) and b) through Broker, i.e. over the counter. In the latter case, key factors are: ability to achieve best price, access to large pool of buyers, expert advice on how to structure transaction, tailored transactions, assistance with technical, financial due-diligence, possibility to ensure anonymity, important if large volumes need to be traded. Exchanges do not yet exist, as there is still the necessity to develop clearing system and standardised contracts.
Indirect contracting is based on funds and financial institutions. This option is particularly good for inexperienced buyers, but it is characterised by inflexibility, as the client locks into a specific price for larger volumes. Besides, the client has to check out capabilities, capital, creditworthiness and track record of fund managers.

1.5 Use of CDM projects for compliance with EU ETS Directive – the Linking Directive
The EU emissions trading scheme (ETS) is based on a recognition that creating a price for carbon through the establishment of a liquid market for emission reductions offers the most cost-effective way for EU Member States to meet their Kyoto obligations (ANNEX D) and move towards the low-carbon economy of the future.
The scheme is based on six fundamental principles:
- It is a ‘cap-and-trade’ system
- Its initial focus is on CO2 from big industrial emitters
- Implementation is taking place in phases, with periodic reviews and opportunities for expansion to other gases and sectors;
- Allocation plans for emission allowances are decided periodically
- It includes a strong compliance framework
- The market is EU-wide but taps emission reduction opportunities in the rest of the world through the use of CDM and JI, and provides for links with compatible schemes in third countries.
As soon as a compromise on the ETS directive (2003/87/EC) was found, the European Commission proposed an amending Directive, which will allow operators in the ETS to use credits from the Kyoto Protocol project mechanisms - Joint Implementation (JI) and the Clean Development Mechanism (CDM) - to meet their targets in place of emission cuts within the EU.
The EU scheme is the first in the world that recognises most of these credits as equivalent to emission allowances (1 EUA = 1 CER = 1ERU) and allows them to be traded under the scheme¹⁷.
Nonetheless, the text of the Linking Directive finally adopted (2004/101/EC), introduces some qualitative limitations: 1) credits from land-use change and forestry (sinks) project are excluded for the period 2005-7 and their subsequent introduction will be determined by a Commission review. 2) Hydroelectricity projects are allowed, but it is required to take into account international criteria such as those elaborated by the World Commission on DAMs, especially for projects with a generation capacity of over 20 MW. 3) Credits from nuclear power projects are excluded, which reiterates the language under the Kyoto Protocol, which does not allow such projects to be counted as generating emission reduction credits.
A quantitative limitation is also defined for the period 2008-2012: Member States will have to specify (taking into account supplementarity requirement of the Protocol) a limit up to which individual installations will be able to use external credits to comply with the ETS, expressed in x% of initially allocated allowances for that installation.
Companies are not the only ones looking for emission reduction credits through JI and CDM. Member States intend to use such credits themselves to help meet their emission target under the Protocol. As of October 2004, Member States had provisionally indicated in their national allocation plans that they intend to procure 500–600 million tonnes of CO2 credits for the period 2008–12. Since the majority of JI and CDM projects tend to generate emission reductions averaging between 500.000 and one million tonnes of CO2, EU countries' demand for emission credits can only be satisfied through a great number of such projects. As 2008 draws nearer, EU Member States are actively seeking JI and CDM projects and a number of project contracts have already been signed (see, e.g., 1.5.1).
With this strong demand for emission credits building up rapidly, major European banks are becoming active in providing finance for prospective emission reduction projects. At the end of 2003, the European Investment Bank created a dedicated financing facility of € 500 million. Likewise, Germany’s European banks are considering similar initiatives.
It is likely that strong driver for CER, ERU prices will be the demand from governments and from EU, Canadian and Japanese companies.
In order to promote development of CDM projects, countries in Annex I are signing Memoranda of Understanding (MoUs) with non-Annex I countries.
A MoU is a bilateral (non-binding) agreement between two countries, which is intended to facilitate the processing of JI/CDM projects.
Agreements established by European Countries for CDM projects are reported in ANNEX D.
In the next paragraphs, the CDM policies of countries that are possible buyers of credits from Sri Lankan projects (i.e. The Netherlands and Italy) are presented.

1.5.1 The case of The Netherlands and CDM
The Netherlands are one of the first countries which have earmarked public funding for buying CO₂ reductions by CDM. The Ministry of Housing, Spatial Planning and the Environment (VROM) is responsible for the implementation of CDM schemes.
The Dutch government has a substantial budget available for the implementation of CDM. In April 2001, the Ministry of VROM set up a CDM Division as part of the International Environmental Affairs Directorate of the Ministry. The responsibility of the division is to use the funds allocated by the Dutch government to purchase Certified Emission Reductions (CERs) from sustainable projects in developing countries in a cost-effective manner.
The Ministry of VROM intents to purchase CERs through the following four tracks:
1. Multilateral international financial institutions;
2. SENTER International, a Dutch agency acting on behalf of several Dutch Ministries;
3. Private financial institutions;
4. Bilateral purchase-agreements with Host Countries.
Via the above ways VROM is contracting various organizations to act as intermediaries for the purchase of CERs. Under the guidance of VROM, these intermediaries select sustainable projects in developing countries and purchase the resulting CERs for the benefit of the Ministry. Investors from all countries may submit CDM-project proposals to these intermediaries that will judge these projects, including the compliance with the requirements.
Agreements with these intermediaries are described hereafter.
The World Bank¹⁸ announced an agreement with the Netherlands in May 2002, establishing a facility to purchase greenhouse gas emission reduction credits. The Facility supports projects in developing countries in exchange for such credits under the Clean Development Mechanism (CDM) established by the Kyoto Protocol to the UN Framework Convention on Climate Change (See ANNEX C)¹⁹.
Another new fund managed by the International Finance Corporation of the World Bank Group on behalf of the Dutch Government is the IFC-Netherlands Carbon Facility (InCAF). According to the IFC website InCAF is an arrangement under which the IFC will purchase CERs for the benefit of the Government of The Netherlands²⁰. The Netherlands will use these emission reductions to help meet its commitments under the Kyoto Protocol. It has allocated € 44 million for InCAF to be used over the next three years²¹.
Finally, within the context of establishing GHG opportunities on the buy and sell side, Latin American Carbon Program, (PLAC in Spanish) is engaged in diversifying the buyer pool of emission reductions which benefit CDM projects in Latin America and the Caribbean. An example of these activities is the current CAF-Netherlands CDM Facility or CNCF. The CAF-Netherlands CDM Facility focuses on public and private sector transactions, located in countries in Latin America and the Caribbean.
The Netherlands have already signed many contracts to buy emission credits from CDM and JI projects. The CDM projects are reported in Table 1.
 

Table 1: Dutch CDM Projects

1.5.2 The case of Italy and CDM
In Italy, project-based carbon credits are expected to offset national emissions reduction of the first CP between 10% and 50%. So, flexible mechanisms will complement Italian internal policies, on account of their greater convenience in terms of the unit cost for reducing emissions.
Flexible mechanisms will contribute to the overall foreseen reduction through activities sponsored by public institutions and activities carried out by private companies.
The exact extent, to which flexible mechanisms will contribute, will depend on the evolution of both the carbon market as well as national abatement costs.

Table 2: Emissions scenarios and reduction target for period 2008-2012 (Mt di CO₂).

Considering that target for Italy for period 2008-2012 is 487,1 Mt of CO2 emissions, it is necessary to identify policies and measures for a further reduction of 41 Mt CO2 (Table 2). To achieve this result, Italian Plan specifies two broad options of additional measures: national reduction measures and international flexible mechanisms, as reported in Table 3²².

Table 3: Options for the adoption of additional emission reduction measures.

It can be noticed that the entire gap to reach the final target could be covered by means of flexible mechanisms.
Italy has so far signed Memoranda of Understanding with several countries (see ANNEX D). Furthermore, Italy enhanced international cooperation programmes with the Balkans and Southern Mediterranean countries through the MEDREP initiative²³.
In order to explore the potentials of investment in credit generating mechanisms Italy has a) signed an agreement to contribute US$7.7 million to the World Bank's Community Development Carbon Fund (CDCF). The Fund supports small-scale projects in the least developed countries (LDC) and poor communities in developing countries which generate GHG emissions reductions; b) signed an agreement to contribute US$2.5 million to the World Bank's BioCarbon Fund. The Fund supports afforestation and reforestation projects; c) set up the Italian Carbon Fund with the World Bank for GHG emissions reductions.
The BioCarbon Fund will provide carbon finance for projects that sequester or conserve greenhouse gases in forests, agro- and other ecosystems. It is designed to ensure that developing countries, including some of the poorest countries, have an opportunity to benefit from carbon finance in forestry, agriculture and land management. The Fund will help reduce poverty while reducing greenhouse gases in the atmosphere²⁴.
Italian Carbon Fund (created in agreement by the World Bank and the Ministry for the Environment and Territory of Italy) is a fund to purchase greenhouse gas emission reductions from projects in developing countries and countries with economies in transition that may be recognized under such mechanisms as the Kyoto Protocol’s CDM and JI²⁵.

1.6 CDM projects in Sri Lanka²⁶
Sri Lankan project developers are currently proposing 19 CDM projects, which are in different states of the design/validation process. These projects are mainly based on the introduction of renewable/alternative energies (hydro, biomass and landfill gas) and of forestry initiatives.

Table 4: Sri Lanka CDM Projects
 

¹GEF is a partnership among UNDP, UNEP and the World Bank. It operates as a mechanism for providing new and additional grant and concessional funding to meet the agreed incremental costs of measures to achieve agreed global environmental benefits in the four focal areas - Climate change; Biological diversity; International waters; and Ozone layer depletion (in 2001, Persistent Organic Pollutants (POPs) program was also added in the GEF).
² The Asian Development Bank (ADB) is administering the Dutch funded Promotion of Renewable Energy, Energy Efficiency and Greenhouse Gas Abatement - PREGA - program which will help will carry out pre-feasibility studies of investment projects for financing consideration through commercial, multilateral, and bilateral sources, including specialized treaty-linked mechanisms such as the Global Environment Facility and the Clean Development Mechanism. It is being implemented in the following developing countries: Bangladesh, Cambodia, China, India, Indonesia, Kazakhstan, Kyrgyz Republic, Mongolia, Nepal, Pakistan, Philippines, Samoa, Sri Lanka, Uzbekistan, Vietnam.

Biomass potential for CDM projects
Figures of biomass availability for year 1997, obtained from the Sri Lanka Energy Balance, are presented in Table 5.

Table 5: Biomass availability in Sri Lanka (year 1997).

 
However, according to Biomass Energy Association of Sri Lanka (BEASL), there is a potential for using scrub lands all over Sri Lanka to support the growing of fuel wood species (Figure 5).

 

 
Figure 5: Land availability for dendro plantations in Sri Lanka.

Recent estimates show that available scrub lands add up to more than 1.6 million hectares. These energy plantations would lead to about 48 million tons per year of fuel wood²⁷. Accordingly, theoretic potential for installed power fuelled from short rotation coppicing could reach 4.000 electric MW.
Short term potential is, however, estimated in 50-80 MWe, which correspond to about 250-450,000 tons of CO₂ emissions avoided.
Besides, in the long term, at least 10 clusters of biomass power plants of 100 MWe each are estimated as feasible. In this sense a possible figure for biomass-generated carbon credits over the next ten years is 7 millions of tons of CO2, consisting of:
- 5 million tons for power generation;
- 1 million tons for industry;
- 1 million tons for forestry sequestration.
According to first pre-feasibility studies²⁸, economic incremental abatement cost of CO₂ for biomass projects could be around 3-4 $ / ton, while financial (incremental abatement) cost could reach values of 25-30 $ / ton.

Bibliography
CDM
CLIMATE CHANGE PROJECTS OFFICE, 2004. Several brochures: (a) A business guide to climate-change projects; (b) The Joint Implementation and Clean Development Mechanisms Explained; and (c) A beginner’s guide to the Clean Development Mechanism.
Conference of Parties, Framework Convention on Climate Change, 2002. Decision 21/CP.8 Guidance to the Executive Board of the clean development mechanism (FCCC/CP/2002/7/Add.3). 7th plenary meeting 1 November 2002.
http://cdm.unfccc.int/Reference/Documents/guidance_to_EB/English/7add3.pdf
Ecosecurities Ltd, 2002. Moving towards Emissions Neutral Development (MEND) - Final Technical Report. Oxford, September.
European Union (EU), 2002. COUNCIL DECISION of 25 April 2002 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder (2002/358/CE). Brussels, April 25^th.
European Union (EU), 2003. DIRECTIVE 2003/87/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC. Brussels, October 13^th.
European Union (EU), 2004. DIRECTIVE 2004/101/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 27 October 2004 amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms. Brussels, October 27^th.
IETA, 2005. State and Trends of Carbon Market 2005, Washington DC , May.
UNFCCC, CDM Executive Board, 2004. Tool for the demonstration and assessment of additionality. Sixteenth meeting (EB 16), Bonn, 21-22 October 2004.
http://cdm.unfccc.int/methodologies/PAmethodologies/AdditionalityTools/Additionality_tool.pdf
http://www.climatetech.net/publications/

Abbreviations.

The subject of this report is derived from newly implemented legal processes that have introduced new terms that are constructed from ordinary words, but which have special meanings. These terms are often referred to by the following abbreviations (which are used herein for both the singular and plural forms of the terms):
CCL - the UK’s Climate Change Levy.
CCPO = the UK Government’s Climate Change Projects Office.
CDM = the Clean Development Mechanism – a means within the KM to include those developing countries that are listed in Annex 2 of the Kyoto Protocol in the drive to reduce emissions of GHG.
CER = Certified Emission Reductions - verified credits granted to validated projects that can be sold on the carbon-market that can provide an extra income-stream for eligible projects in developing countries.
CO₂e = Carbon Dioxide Equivalent – the effect of six GHG on global warming expressed in terms of their equivalence in this respect to carbon dioxide..
DOE = Designated Operational Entity – a body that has been approved by UNFCCC to validate a PDD, and/or to verify CER. For any particular project, separate DOE are required for these two functions.
EB = Executive Board – the arm of UNFCCC that deals with CDM.
EU-ETS = the European Union’s Emissions Trading Scheme.
GHG = the so-called “Greenhouse gases”, which are a cause of global warming. The UNFCCC’s systems cover six GHG, which are measured, for the purposes of the CDM, in units of CO₂e.
IET = International Emissions Trading - a system to give market-value to CER, etc.
JI = Joint Implementation – a KM similar to CDM, but applicable to countries listed in Annex 1 of the Kyoto Protocol.
KM = Kyoto Mechanisms.
PDD = Project Design Document – a description of the proposed project that starts the legally secure process towards gaining CER.
UNFCCC - the United Nations’ Framework Convention on Climate Change.
WBPCF – the World Bank’s Prototype Carbon Fund.

2 ANNEXES

2.1 ANNEX A: Methodologies approved by CDM Executive Board (EB)
Approved methodologies can be found at UNFCCC/CDM site: http://cdm.unfccc.int/methodologies/PAmethodologies/approved.html. The methodologies are continuously revised and updated.
Approved methodologies for small-scale projects can be found at: http://cdm.unfccc.int/methodologies/SSCmethodologies/approved.html
The additionality of the project activity shall be demonstrated and assessed using the Tool for the demonstration and assessment of additionality.
Graphic overview of procedures for submission and consideration of proposed new methodologies can be found at:
http://cdm.unfccc.int/Projects/pac/howto/CDMProjectActivity/NewMethodology/graphmeth.pdf

2.2 ANNEX B: Examples of projects
Example 1. Using landfill-gas at a large landfill site.
Consider a landfill that contains about 1 million tonnes of mixed wastes that have been deposited within the past ten years, and is emitting substantial amounts of landfill gas (LFG) which, in the baseline case, is not controlled in any way. As a rule of thumb (which has to be checked by on-site pumping trials, etc.), there might be enough gas - say 600 Nm³/hour of LFG consisting of 50 per cent by volume of each of CH4 and CO2 – to run a generating set rated at 1 MWe. If that set is run for 8,000 hours/year, it will destroy 300 x 8,000 = 2.4 million Nm³/year of CH₄.
The density of methane at 0 oC and 1 bar is 0.717 kg/m³, so the annual mass of 2.4 million Nm³/year of CH₄ is about 1,720 tonnes which (in terms of effects on climate-change) is taken to be (using the factor of 21 – see above) equivalent to about 36,000 tonnes of CO₂.
In practice, the amount of CH₄ destroyed is likely to be larger because, to secure sufficient LFG for the generator(s), and over-sized gas-collection system would be installed because the output of LFG varies for several reasons. It is good practice to flare the excess LFG from such a system. It may be necessary to collect all of the LFG from the site for safety reasons, in which case even more LFG will have to be flared.
The treatment of this example will vary depending on the location of the site. Within the EU, the Landfill Directive requires the proper treatment of LFG, including drainage and high-grade flaring as necessary, and so, as that is a legal requirement anyway, a developer installing the necessary equipment could not expect attract credits under the JI. But that developer could expect credits in a JI from the displacement of electricity made from fossil fuels with electricity generated from LFG.
In contrast, in a developing country, there may be no such regulations, in which case, the develop would seek to receive credits under the CDM for both (a) the drainage and destruction of all of the treated methane (including that burnt in the generation of power), and (b) the displacement of electricity made from fossil fuels with electricity generated from LFG.
The exact basis for calculating CER has to take account of the particular circumstances offered by the project. For example, a typical power station burning hard coal emits about 0.80 tonnes of CO₂ for each MW_eh it generates, whereas the use of brown coal increases this to about 1.0 tonne of CO₂/MW_eh. And a generator running on diesel-oil also emits about 1.0 tonne of CO2/MWeh, while a power station fired with natural gas and using a combined-cycle gas-turbine emits only about 0.45 to 0.50 tonnes of CO2/MWeh, because of the better properties of the fuel and the more efficient process.

Example 2. Replacing coal with biomass at a power-station.
Consider as a baseline case a power station fuelled with coal that has a rated output of 30 MW_e, which operates at a conversion-efficiency of 33 per cent, and is run for 7,000 hours/year.
The properties of coal vary greatly. A medium-grade coal might have a gross energy-content of about 22 GJ/tonne (or about 6 MWh), and burning 1 tonne of that coal will produce about 2 tonnes of CO2. If that coal is burned in a power station having a conversion-efficiency of 38 per cent, there will be about 0.9 tonnes of CO₂ emitted for each 1 MW_eh generated.
A developer might look at replacing the coal-burning power station completely with one that burns biomass of various kinds, or alternatively consider keeping the existing station but replacing some of the coal with wood in a so-called “co-firing” project, interest in which has grown rapidly within the UK over the past three years. The potential for producing CER is easy to visualise in both of these options.

2.3 ANNEX C: Netherlands CDM Facility – Project Selection Criteria
Projects shall be selected in accordance with the following Project Selection Criteria:
(a) Consistency with United Nations Framework Convention on Climate Change (UNFCCC) and/or the Kyoto Protocol. Projects should comply with all current decisions on modalities and procedures adopted by the Parties to the UNFCCC and/or the Kyoto Protocol, as well as all future decisions on modalities and procedures, when adopted, in particular those pertaining to sustainable development and additionality.
(b) Consistency with Relevant National Criteria. Project designs should be compatible with and supportive of the national environment and development priorities of the Host Countries. In addition, the projects, the transfer of Emission Reductions (ERs) and the issuance of Certified Emission Reductions (CERs) should be consistent with the rules and criteria adopted by Host Countries regarding Clean Development Mechanism (CDM) projects.
(c) Consistency with the General Guidance Provided by VROM . Projects should comply with the VROM requirements and the general guidance provided by VROM at their regular meetings. (VROM is the State of the Netherlands, acting through the Ministry of Housing, Spatial Planning and the Environment.)
(d) Location of Projects. Projects should be located in Non-Annex I Countries which have (i) signed and ratified, accepted, approved or acceded to the Kyoto Protocol, or (ii) signed the Kyoto Protocol and demonstrated a clear interest in becoming a party thereto in due time, for example those that have already started or are on the verge of starting their national ratification, acceptance or approval process or (iii) already started or are at the verge of starting the national accession process.
(e) No Nuclear Energy. Nuclear energy projects are not eligible.
(f) LULUCF (Land-Use, Land_Use Change and Forestry). Projects involving land-use or land-use change (afforestation, reforestation) are only eligible after the COP/MOP has decided on the relevant modalities and guidelines and VROM has agreed to accept such projects.
(g) Environmental and Social Impacts. Projects that are expected to have large scale adverse social or environmental effects are not eligible.
(h) Advance Payments. Projects that will require Advance Payments from the NCDMF, shall not be eligible, unless at least 50% (fifty percent) of the total financing needs of such Project will be provided by other entities which are at least A+ rated by S&P or A1 rated by Moody's (bank rating or debt paper rating).
(i) Purchase Price. Projects that involve a purchase price of more than € 5.5 (five and a half Euros) per metric tonne of CO2 equivalent, calculated on the basis of ER Unit Price and the Kyoto Protocol Related Project Costs, shall not be eligible, unless they are expected, in VROM's opinion, to make a very significant contribution to sustainable development in the Host Country, preferably in Least Developed Countries.
(j) Proportion of Payments. The present value of the total payments (calculated at a discount rate of no more than 4% (four percent) to be made by the NCDMF for the purchase of ERs, shall not exceed 30% (thirty percent) of total financing needs of the project at commissioning, unless otherwise agreed by VROM.
(k) Financing of Projects. Of the total financing needs of each individual project at least 30% (thirty percent) shall be covered by co-investing entities meeting at least a rating of A+ by S&P or A1 by Moody's (bank rating or debt paper entities). If such is not the case, an extensive due diligence performed by the NCDMF may determine the project's eligibility.
(l) Complementarity with GEF(Global Environment Facility). Projects should be complementary to the GEF and not compete with the GEF's long-term operational program nor with their short-term response measures. In furtherance of this criterion, potential projects will be reviewed by the Secretariat of the GEF to determine their GEF eligibility. Only if it is determined that a potential project will not receive GEF financing will it be considered for inclusion as a NCDMF project.
(m) Complementarity with the PCF (Prototype Carbon Fund). The PCF shall have the right of first refusal of a Project.
(n) Cost-effectiveness and Sustainability. Cost-effectiveness and sustainability will play a major role in selection and approval of projects. Projects may be drawn from a broad range of technologies and processes in energy, industry, and transport, which provide various vehicles for generating ERs, which contribute to sustainable development and achieve transfer of cleaner and more efficient technology to Host Countries. VROM ranks technologies in the following descending order: (i) renewable energy technology, such as geothermal, wind, solar, and small-scale hydro-power; (ii) clean, sustainably grown biomass (no waste); (iii) energy efficiency improvement; (iv) fossil fuel switch and methane recovery; (v) sequestration. VROM expects this ranking to be reflected in the ER Unit Price.
(p) Additional Characteristics of Projects. Projects should generally entail manageable technological risk. The technology to be used in a project should be commercially available, have been demonstrated in a commercial context, and be subject to customary commercial performance guarantees. The technical competence in the Host Country to manage this technology should be established in the course of Project appraisal. Projected Emission Reductions over the life of the Project should be predictable and should involve an acceptable level of uncertainty.

2.4 ANNEX D: EU CO2 emissions reduction targets and CDM programmes
Emission allocations and number of installations covered by the EU emissions trading scheme per Member State (indicative table based on national allocation plans approved) and their Kyoto emission targets.
 

(*) Under the Kyoto Protocol, the EU-15 (until 30 April 2004 the EU had 15 Member States) has to reduce its greenhouse gas emissions by 8 % below 1990 levels during 2008–12. This target is shared among the 15 Member States under a legally binding burden-sharing agreement (Council Decision 2002/358/EC of 25 April 2002). The 10 Member States that joined the EU on 1 May 2004 have individual targets under the Kyoto Protocol with the exception of Cyprus and Malta, which as yet have no targets.
(**) Figures do not include some Spanish installations for which allocations are in preparation.
(***) Latter revised plan, which had an increase of emission allocations, has been rejected.
 

Agreements established by EU 25 Member States for CDM/JI projects are presented hereafter.

* EIT (Economy in transition): countries that are undergoing the process of transition to a market economy.
** Non-ANNEX I Party: countries classified as least developed countries (LDCs) by the United Nations.
 

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* Paper for the conference "issues for the sustainable use of biomass resources for energy", Colombo, 15-19th august 2005. ASIA PRO-ECO PROJECT "The way forward for the use of wood and agricultural waste for energy production in S.E. Asia".
◊ Prof. Engineer, Director of the Department of Applied Sciences to Complex Systems of the Technical University of Marche (Italy).
♦Engineer, Italian Thermo-technical Committee (CTI) - Research Sector. E-mail: alberti@cti2000.it.
1 These gases are hereinafter called Greenhouse Gases (GHG) because of their so-called Greenhouse Effect on climate-change.
2 For example, there is a great disparity between developed and developing countries in the amounts per capita of fossil fuels used and GHG emitted.
3 United Nations Framework Convention on Climate Change - Convention-cadre des Nations Unies sur les changements climatiques
4 A format for the PDD, and guidance for its drafting, can be down-loaded from the UNFCCC’s Web-site at: http://cdm.unfccc.int/Reference/Documents.
5 Further information on the process of validation and on DOE is available on the UNFCCC’s Web-site at: http://cdm.unfccc.int/Reference/Procedures and: http://cdm.unfccc.int/DOE. A list of DOEs can be found on: http://cdm.unfccc.int/DOE/list.
6 COP 7, Marrakech, Morocco, November 2001.
7 It may be the case, at least in the first compliance period (2008 - 2012), that the CDM market is limited, and that larger projects could 'crowd' out the smaller projects, due to the comparatively higher price of the emission reductions generated by small-scale projects.
8 On contrary, the load factor which would affect the real output is not taken into consideration.
9 To take account of their effects on climate-change relative to the influence of CO2, factors are applied to the other five GHG, and the totality is then expressed as “equivalent carbon dioxide” (CO2e). For example, one powerful GHG is methane (CH4), which is taken to have, volume for volume, 21 times more intensive effects on global warming than CO2.
10 In the UK, the Government’s Department of the Environment, Food and Rural Affairs has estimated that the real cost of emissions of fossil carbon is about £70/tonne (i.e. about 28 Euros/tonne of CO2), but the existing relevant environmental tax on electricity in the UK – the Climate Change Levy (CCL) – has been set at £4.30/MWeh, which is equivalent to £37/tonne of carbon, and thus to about 15 Euros/tonne of CO2. Incidentally, the CCL is not levied on residential users, who consume a very large quantity of fossil fuels for heating, etc. Furthermore, although it is levied on industrial companies, they can achieve large reductions in their tax-bills by engaging in approved programmes for promoting energy-efficiency, etc.
11 Point Carbon’s volume-weighted assessment is based on over-the-counter (OTC), brokered trades. Every day, active brokers in the EU emissions trading scheme volunteer to supply their market information at close of market to Point Carbon. Each broker acts with the permission of their management. The brokerages act independently from each other and the information they provide is confidential and held by Point Carbon. The data is not circulated outside Point Carbon and is used solely for compiling the market assessment. The price refers to one EU allowance, equivalent to one metric tonne of carbon dioxide emissions. Adopted methodologies are Volume-weighted methodology or Bid-offer close methodology.
12 CER = a unit of GHG reductions that has been generated and certified under the provisions of the Kyoto Protocol for Clean Development Mechanisms (CDM); VER = a unit of GHG reductions that is verified (by third parties) and traded outside of Kyoto compliant mechanisms. ER = a unit of non-verified/certified GHG reductions.
13 The best way to determine such values is to open discussions with potential buyers and traders who are interested in this market. Initial soundings suggest, for planning purposes, a prospective value of about 6 Euros/tonne of CO2e for suitable projects. At least two key issues arise in the consideration of what will constitute “suitable projects” for this purpose: potential buyers and traders will be seeking projects that are (a) large - generating more than, say, 50,000 CER/year; and (b) secure – their counter-parties will have to achieve high levels of credit-rating.
14 Point Carbon (2005), CDM Market Comment, CDM & JI Monitor, 14 June 2005 (p.2). www.pointcarbon.com.
15 On the contrary, JI Supervisory Committe is to be elected by COP/MOP 1 (The Conference of the Parties serving as the Meeting of the Parties), to be held in November/December 2005, together with COP 11.
16 On the contrary, for ERU, host country transfer risk is increased due to commitment period reserve (90% of AAUs or latest 100% of latest inventory).
17 Import of CERs is permitted from 2005, ERUs from 2008
18 International Bank for Reconstruction and Development (IBRD).
19 The Facility’s initial target was to purchase 16 million tons of carbon dioxide equivalent (mtCO2e) in the first two years of the agreement. The agreement has now been extended, with a firm commitment to purchase an additional five mtCO2e by mid-2005. The agreement also allows for a further purchase of up to approximately 11 million tons of carbon dioxide equivalent.
20 InCAF is looking for projects with the following characteristics:
- Location: projects can be located in most developing countries. Projects in newly industrializing countries in Central and Eastern Europe are not eligible. A list of eligible countries is available on request.
- Likely project closing: projects must be likely to reach financial closing within the short term.
- IFC and non-IFC investments: InCAF prefers to work with projects in which IFC is an investor but will also consider non-IFC financed projects. For non-IFC projects, the InCAF will look for well-established sponsors with access to confirmed sources of conventional financing. Non-IFC projects will require additional due diligence on project fundamentals.
- Environmental and social impact: all projects, including non-IFC financed projects, must comply with IFC’s environmental and social policies and guidelines. Projects that have large-scale adverse environmental or social impacts will not be considered.
- Host country approval: the government of the host country will have to approve the project. IFC can support the application of the project company to the government for such approval. The host country will also need to have ratified, or initiated domestic procedures to ratify, the Kyoto Protocol.
- Independent Verifications: the initial design of the project will need to be validated by an Operational Entity, as required under the Kyoto Protocol. Once a project is operational, the emission reductions produced by a project must be verified and certified periodically by auditors.
21 InCAF will provide additional revenues to eligible projects that generate emission reductions in developing countries. InCAF will make future payments to the project over a period of 7-14 years upon annual certification of actual greenhouse gas emission reductions. In return for these payments, The Netherlands will receive the CERs. It is possible that InCAF will consider advance payments under certain conditions. A contract between InCAF and the project will specify the volume of emissions that are expected to be reduced, the price agreed per ton of CO2 equivalent, and the crediting period.
22 Among the detailed measures, a selection will be made by Inter-ministerial Committee for GHG reduction. Priority criterion will be the cost-effectiveness of the various options.
23 The Mediterranean Renewable Energy Programme (MEDREP) was launched as a Type II Initiative at the World Summit on Sustainable Development in Johannesburg, following the recommendations of the G8 Renewable Energy Task Force. MEDREP projects are being developed under the framework of bilateral agreements between Italian Ministry of Environment and Territory (IMET), Algeria, Egypt, Morocco and Tunisia. The pilot projects will represent best practices to be replicated. IMET has allocated 8 million € to support the start-up of the projects. Where possible, MEDREP projects will be structured as carbon finance or green certificate transactions under the auspices of the Clean Development Mechanism or Green Certificate Trading regimes
24 The types of projects may include small, community-promoted plantations for timber, biofuel and other forest products. Though, these plantations have to fit within a broader landscape design. In this sense, the BioCarbon Fund does not exclude commercial scale plantations per se. However, in most cases such plantations will not meet the CDM additionality requirement, i.e. the plantation project could proceed without the incentives provided by the CDM.
25 Main features of Italian Carbon Fund are:
- The fund supports projects eligible under the Kyoto Protocol’s CDM and JI mechanisms through the purchase of credits;
- The fund is a public-private partnership currently endowed with US$ 15 million, but with a target size of US$ 80 million;
- The fund will buy emissions reductions credits, but at the same time will assist host countries in achieving sustainable development by leveraging substantial investments in modern energy services and technologies, including investments from the private sector;
- The fund is operational since January 28th, 2004;
- The income from payments received from the participants in the fund will be held in a separate trust and used for capacity-building and research—thus leading to the creation of supportive project approval systems in host countries;
- The Fund’s project portfolio is proposed to include support for a wide range of technologies and regions, including China, the Mediterranean Region, as well as the Balkans and the Middle Eastern countries.
26 Sri Lanka has recently (beginning of year 2005) signed a CDM MoU (Memorandum of Understanding) with Canada.
Moreover, the British Government conducted a study on CDM projects titled "Initial evaluation of CDM type projects in developing countries". Sri Lanka was one of the countries studied. The reports can be found at http://www.surrey.ac.uk/eng/ces/research/ji/cdm-dfid.htm. The UK Department for International Development (DfID) funded a project coordinated by Ecosecurities to examine the developmental potential of the CDM; to investigate strategies to encourage CDM investment flows in small to medium developing countries; and to suggest ways that donors could get involved in capacity building to facilitate the participation of these developing countries in the CDM. The project had four developing country partners - Bangladesh, Colombia, Ghana and Sri Lanka - for which country papers are available.
27 Yield of, e.g., gliricidia is considered to be about 30 tons/ha.
28 Pre-feasibility Study for 1 MW Biomass Power Plant & CDM Project – Sri Lanka, P.G.Joseph, Team Leader National Technical Expert - PREGA Pro

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