Clean Development Mechanism (CDM) - carbon financing for waste management projects

Transcription

1 K I Woo Clean Development Mechanism (CDM) - carbon financing for waste management projects As Asia-Pacific continues urbanizing in the 21 st century many countries are participating in international protocols, that allow them to partially fund waste-management projects by selling carboncredits to developing countries, that must reduce greenhouse emissions or fix or sequester carbon dioxide from the atmosphere. A recent UNESCAP report said that waste sector projects such as integrated resource recovery centers (IRRCs) featuring decentralized composting can qualify as small-and-large scale Clean Development Mechanism (CDM) projects. 1 1 See /index.html 42 Asia-Pacific Housing Journal

2 Eco-Efficient Waste Management ESCAP noted that based on present Certified Emission Reductions (CERs) or carbon credits, waste sector projects can recover between 50 and 100 per cent of capital costs from selling carbon credits. Examples of registered projects included landfill gas energy recovery, waste biomass to energy projects, controlled combustion, composting of urban organic waste, refused derived fuel, landfill gas flaring, gasification and anaerobic digestion. Clean Development Mechanism (CDM) Industrialized and developing countries created the Clean Development Mechanism (CDM) through broad-based efforts to protect the climate from greenhouse gas emissions such as carbon dioxide and methane. The Kyoto Protocol allows Annex-8 countries 2 to reach their emission reduction targets in different ways through flexibility mechanisms, that included the Clean Development Mechanism (CDM). CDM is the only Flexibility Mechanism that allows developed countries (Annex-B) to achieve part of their reduction obligations through investment in projects in developing countries that reduce greenhouse gas emissions or fix or sequester carbon dioxide from the atmosphere. UNFCCC The United Nations Framework Convention on Climate Change (UNFCCC) that came into force in 1994 established an international framework to address global climate change. The Convention s Parties agreed to stabilize greenhouse concentrations in the earth s atmosphere. Climate change - global challenge Climate change is a global challenge whose main burden must be borne by wealthy countries that have contributed most to global warming measured by per capita emissions. In the UNFCCC, industrialized countries agreed on voluntary measures to limit greenhouse gas emissions. However, it became clear very soon that voluntary targets would be insufficient to stop the increase of greenhouse gas emissions. Binding commitments became necessary Global warming and the Kyoto Protocol In December 1997, 160 countries completed negotiations at the third session of Conference of Parties (COP3) in Kyoto, 2 Annex B countries are 39 developed countries that signed the Kyoto Protocol in 1997 Asia-Pacific Housing Journal 43

3 Japan to finalize a protocol that outlined a timetable of greenhouse gas reduction targets. This agreement subsequently became known as the Kyoto Protocol. The most important aspect of the Kyoto Protocol is its legally binding commitments for 39 developed countries-known as Annex-B countries-to reduce their greenhouse gas emissions. These emission reductions had to be achieved by 2012: the so-called first commitment period. Under the Kyoto Protocol, industrialized countries and Eastern European countries in transition must reduce emissions from 2008 to 2012 by five per cent (compared to 1990 base) Emissions covered The Protocol covers emissions such as carbon dioxide, methane and nitrous oxide, along with releases of longlived hydrofluorocarbons and sulphur hexafluoride. Developing countries must report on the development of their emissions, but so far have no emission commitments. Nevertheless, they are be integrated into global climate policy at an early stage and be supported by industrialized countries How does CDM work? 3 CDM enables developing country entrepreneurs and others to attract investment to conduct projects that reduce emissions, according to two primary criteria: The project proponent must prove that the reduction of emissions would not have occurred in the absence of the project; and the project must promote sustainable development. CDM works as follows: 1. Finance flows from developed countries either up-front or from annual Certified Emission reduction (CErs) sales known as carbon credits. 2. In return, developing countries agree to reduce a certain quantity of greenhouse gas emissions. 3. Once these reductions are approved the Executive Board of the UNFCCC, they flow back to developed countries as CErs. 4. Throughout the project, an auditor monitors whether or not a project is actually reducing emissions as well as validating the baseline-the amount of emissions that would have occurred without the CDM project 3 Carbon Financing and Solid Waste Management, UNESCAP, 44 Asia-Pacific Housing Journal

4 Eco-Efficient Waste Management Funds to eliminate obsolete and wasteful processes Generally, industrialized countries use advanced and efficient technologies for electricity generation and industrial production, while most developing countries use obsolete processes that waste resources. For instance, coal-fired power stations have efficiencies of below 30 per cent, whereas new coal power plants in industrialized countries operate more than a third more efficiently 1. Industrialized countries are supported in reaching their emission targets 2. At the same time, developing countries are supported in sustainable development The CDM mechanism works because costs to improve advanced technology, are much higher than replacing obsolete plants. Therefore, the cost of reducing one ton of greenhouse gases in developing countries is much less than in industrialized countries. The second target can be achieved through the provision of urgently needed capital, know-how and technologies, particularly in the fields of renewed energy and energyefficiency improvement in developing countries. CDM - a promising quid pro quo A key Kyoto Protocol objective is achieving global climate protection and cost minimization by introducing an innovative mechanism, the Clean Development Mechanism (CDM) for cooperation in climate protection between industrialized and developing countries. 4 This project-based mechanism aims to combine two Conventional and Protocal targets: Basic idea - CDM Industrialized countries through the state or private companies invest in developing country projects that contribute to green house gas emission reductions. At the same time, developing countries, through state or private companies are allowed to implement such projects on their own. These CDM projects will not only modernize the respective development country sectors, but also contribute to global climate protection. 4 CDM, Clean Development Mechanism, What is it? How does it work?, Deutsche Gesellschaft fur Technische Zusammenabeit (GTZ) GmbH Asia-Pacific Housing Journal 45

5 The investing industrialized country can credit the emissions reductions achieved through developing country investments toward its own emission commitments. The developing country sells emission credits generated to developed countries. Greenhouse gases - irrelevant where it takes place A key premise is that is irrelevant to the world climate where greenhouse gas abatement takes place. The CDM generates advantages for all participants as the achieved emissions reduction is measured and credited towards the emissions commitments of the investing countries through emission credits (CErs). Thus both investor and host country profit from the CDM through cost reductions and support for economically, socially and ecologically sustainable developments. For example: 5 1. Zimbabwe analyzed how much electricity could be powered by power plants using waste wood from timber plantations and sawmills. Currently more than 90 per cent of woodwaste is simply burned. Power stations fired with this resource would not only cover the sawmills electricity needs, but could also feed electricity into the public grid. Depending on the baseline calculation, each power plant would reduce CO2 by between 7,000 and 24,000 tons per year Job creation benefits and new electricity generation methods were introduced 2. Indonesia developed a national CDM strategy for potential greenhouse gas reduction projects. The selection process had to be compatible with national energy policy, financial outlays and acceptability among decisionmakers This study estimated that Indonesia s CDM potential (up to 2012) was about 125 million ton of CO2 and suggested 10 specific projects. Sustainable development test CDM creates opportunities for mobilizing additional capital for investment in developing countries renewable energy and energy-efficiency industries. The projects must satisfy certain sustainability issues including: Local environmental protection Social (employment, low income group impacts, regional and sectoral integration, no resettlement and no destruction of the local population s habitat). Economic (balance of payments, cost efficiency, maximization of positive effects on the host country) 5 ibid 46 Asia-Pacific Housing Journal

6 Eco-Efficient Waste Management Technological (contribution to selfsufficiency, innovations and replication) For every project the host country national CDM authority must evaluate the project s sustainability that may include the above economic, social and environmental aspects. Each project also normally requires an environmental impact assessment. The project s sustainability is assessed by detailed project documentation that includes following crucial elements: 1. Technical project description 2. Baseline 3. Monitoring plan Chart ı : CDM stages toward emissions credit Project idea Project design document by project participants Approval by host and investor countries Validation by independent certifier Registration by CDM executive board Implementation and monitoring of the CDM project by project participants Recurrent verification by independent certifier Certification by certifier Issuance of emission credits by CDM Executive Board Source: CDM, Clean Development Mechanism, What is it? How does it work?, Deutsche Gesellschaft fur Technische Zusammenabeit (GTZ) GmbH Criteria for CDM host-country participation In order to be a CDM host country certain qualifications must be met: must have ratified Kyoto Protocol must be identified as a national CDM authority Is not listed in Annex B of the Kyoto Protocol (Annex B lists all industrialized countries that taken emission commitments) Asia-Pacific Housing Journal 47

7 Additionality of funds A critical element of CDM qualification is that all credited funds shall be additional and funding through official development aid is not possible. CDM projects shall not lead to diversion of development aid. Industrialized countries shall provide new funds for CDM projects and CDM projects with partial development aid funding-need additionality costs analyses. What is carbon trading? Carbon trading which is also referred to as emission-reduction trading is a relatively simple concept. It is an economic tool which allows for several parties to meet total emission reduction requirements at lower costs by working together. It allows any surplus emission reductionreduction beyond the required limits-to be traded to other parties needing to meet emission limits. In theory, one party can reduce emissions at a lower cost than a second party, then the first party could maximize emission reductions and sell any surplus reductions the second party to help meet its own reduction requirements. The aim is to improve the overall flexibility and economic efficiency of obtaining emission reduction Who are the buyers and sellers of carbon credits? Sellers of emission reduction, or carbon credits, have exceeded their regulated or voluntary emission reduction requirements, or are in possession of unused, banked or traded emission reductions, and selling these quantified emission reductions. The emission reduction must be real, surplus, quantifiable and verifiable. Under the Kyoto Protocol, all non-annex B countries under the Kyoto Protocol can be CErs or Verified/Voluntary Emission reductions (VErs) sellers-reducing greenhouse gas emissions by projects outside Kyoto Protocol. The buyers of CEr/VEr carbon credits are parties that must meet regulated or voluntary emission reductions. Buyers can also be investors that believe that the emission reduction values will increase. These credits can, subject to the trading system be bought, banked and traded (sold) by anyone and at almost anytime. Annex-B countries under the Kyoto Protocol are CErs buyers. Market price of carbon credits? On August 2010, the market price of emission reduction credits in existing carbon markets was between $US19 and $US22 per ton of carbon dioxide for CErs. 6 6 For more info on CEr price see 48 Asia-Pacific Housing Journal

8 Eco-Efficient Waste Management What is the crediting period? Project activities initiated after Jan 1, 2000 that meet all the CDM requirements and are registered with the CDM Executive Board are eligible for crediting after validation by a recognized operational entity. Emission reductions can be claimed for a maximum of 10 year without revision of the project baseline, or for seven years with two extensions of seven years each, provided the project baseline is revised at the time of each extension. How do public and private sectors benefit? A company or Annex-B country participating in a CDM project can finance their projects in developing (Non-Annex B) countries using any one of the following options: Full or partial equity: a company finance either all or part of a CDM project in return for full or shared financial return and CErs. Financial contribution: a company contributes financially toward the cost of a CDM project over and above the baseline technology, or finances the removal of market barriers in return for CErs. Loan: a company lends money to or leases-back the project at concessional rates in return for CErs CEr purchase agreement: a company agrees to buy CErs as they are produced by the project CDM and waste management Projects from the waste sector such as IRRCs and decentralized composting plants can be registered as CDMs, both as large-scale and small-scale projects. They can also be bundled together using a programmatic approach Examples of registered projects include landfill gas energy recovery, waste biomass to energy projects, controlled combustion, composting of urban organic waste, refusederived fuel, landfill gas flaring, gasification and anaerobic digestion. Based on the present price of CErs, waste sector projects can recover between 50 to 100 per cent of capital costs from carbon credits sales. 7 7 Carbon financing and waste management, UNESCAP,, Asia-Pacific Housing Journal 49

9 Carbon credits an incentive for better waste management Many waste management projects in the developing world are eligible for carbon credits through better waste management practices. Recent success stories of project developers in India obtaining carbon revenue for their MSW-based waste to energy projects are expected to motivate many local governments, and other project developers who are exploring new avenues for additional revenue, in addition to solving waste disposal problems. While Municipal Solid Waste (MSW) management is a project area that offers vast potential, it is one of the least considered methods of generating energy in terms of its potential and implementation, as well as a great opportunity to earn carbon credits. Rapid industrialization and urbanization in India has put tremendous pressure on local governments to manage their waste disposal. 8 This has been further aggravated by their poor financial health and lack of trained personnel as well as a lack of knowledge on efficient solid waste management techniques. Projects that generate methane, a potent greenhouse gas with a global warming potential of 21, are considered to have the greatest potential to obtain carbon credits in developing countries like India. Proving additionality Waste-to-energy projects require higher initial investments and would be economically unsustainable without government subsidies. However, the operating costs are likely to increase beyond projected values because of selection of the wrong treatment technology, poor plant design, and variable waste characteristics. These parameters dictate the plant operating hours and hence the revenue generation. Evaluating all of the options that could affect the project financials and providing necessary supporting documents will help the project developer to prove additionality of the project. Notably, there are quite a few projects in India already claiming revenue through the Clean Development Mechanism (CDM) of the Kyoto Protocol. 8 Sinclair Knight Merz Magazine 50 Asia-Pacific Housing Journal