0. A Really, Really Quick Overview
The CDM:
A Really, Really Quick Overview
Robert Kelly
Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa

1. Agenda Misconceptions about the CDM CDM concepts & terminology
The CDM project cycle

2. Three misconceptions…1
The CDM is all about climate change

3. Actually, the CDM is ‘climate neutral’
Annex 1 country buys CERs
Acquired CERs are added and national emissions cap increases
CERs generated by CDM projects
Actual greenhouse gas emissions
‘Business as usual’ emissions

4. Environmental Benefits Sustainable Development
The CDM is all about development
Technology Transfer
Poverty Reduction
Environmental Benefits
ODA
GEF
PES
CARBON
Sustainable Development
Carbon finance represents a supplementary source of funding for some projects – and a means of catalysing development

5. 1 2 3 Three misconceptions… The CDM is all about climate change
The CDM is too difficult 3
Sub-Saharan Africa offers few CDM opportunities

6. In 3 years, the CDM has sparked a $5 billion/year market
Number of Projects in the CDM Pipeline, January 2005 – March 2008
3,265
3,035
2,838
Compound Monthly Growth Rate = 11%
Approximately 3 billion CERs by 2012
2,593
2,285
1,885
1,759
1,495
1,311
1,141
883
749
647
554
440
275
171 67 83
118
Jan 05
Mar 05
May 05
Jul 05
Sep 05
Nov 05
Jan 06
Mar 06
May 06
Jul 06
Sep 06
Nov 06
Jan 07
Mar 07
May 07
July 07
Sep 07
Nov 07
Jan 08
Mar 08

7. Current value size of the international carbon market
CDM:
> 1000 projects registered
cumulative > 3(?) bn tonnes CO2e reductions up to 2012
(About India & Japan’s inventory for a year – or nearly 10% of global annual emissions)
2005 ~ $1 billion
2006 ~ $5 billion
2007 ~ $12 billion
2008 …???
JI 2007 < $1 billion
EUETS 2007 > $60 billion (?)

8. Seems like CDM is a roaring success…. BUT:
Under Kyoto, CDM purpose is to deliver low cost emission reductions
AND
assist developing countries achieve sustainable development.
Many CERs come from ‘end of pipe’ projects, not really SD
HFC & N2O reduction 40%
Renewable Energy 23%
CH4 reduction 16%
Energy efficiency 7%
Cement & Coal mine/bed, 7%
Fuel switch, 7%
Afforestation & Reforestation, 0.2%

9. Geographical imbalance in the CDM
4 countries (China, India, Brazil and South Korea) account for 80% of credits through to 2012
Within these countries, not necessarily impact poorest
Arab States, Africa, Central Asia underrepresented
88 non-Annex 1 countries have yet to benefit from any registered CDM project activity
Location of CDM Projects

10. 1 2 3 Three misconceptions… The CDM is all about climate change
The CDM is too difficult 3
CDM offers few opportunities outside industrialised countries

11. The CDM is about more than just heavy industry…
Clean energy
Use of renewables (e.g. hydro power) to supply electricity to the grid, to local communities and to commercial facilities
Use of biomass residues for energy generation / cogeneration – e.g. bagasse from the sugar industry, coffee husks from the coffee industry, etc.
Wind power
Run-of-river hydro
Bagasse
Timber residues

12. The CDM is about more than just heavy industry…
Waste management
Capturing the methane from animal waste, human waste (sewage), agricultural waste (biomass) and urban landfills
Can be combined with electricity generation to produce a second stream of carbon credits
Animal waste
Sewage / wastewater
Landfill

13. The CDM is about more than just heavy industry…
Bio-carbon
Forestry plantations – e.g. restoration of mangrove forests
Agro-forestry – e.g. shade crops, nitrogen capture in soils
Bio-fuels – e.g. bio-ethanol from molasses, bio-diesel from palm oil
Forestry
Agro-forestry
Bio-fuels
Transport

14. China’s registered CDM projects
Other, 3%
Coal Mine Methane, 5%
Biomass Energy, 5%
Industrial Gas (HFCs), 6%
Wind Power 37%
Landfill Gas, 6%
Energy Efficiency, 7%
152 registered CDM projects
Approximately $915 million in carbon revenue per year
Hydro Power 31%

15. Agenda Misconceptions about the CDM CDM concepts & terminology
The CDM project cycle

16. Mitigation versus sequestration
Mitigation/avoided emissions – reduction or prevention of greenhouse gas emissions from a source
E.g. methane from animal waste
E.g. carbon dioxide from burning fossil fuels
E.g. nitrous oxide from agricultural soils
REDD
Sequestration – removal of greenhouse gases from the atmosphere
E.g. forestry – absorption of CO2 through photosynthesis
E.g. grassland sequestration
E.g. ‘Geo-engineering’ – Carbon Capture & Storage (CCS), marine phytoplankton; absorptive gels; reaction with suspension of chalk in water (to produce CaCO2)

17. Types of CDM projects Carbon project Emission reduction
Atmospheric removal
End-of-pipe
Destruction
Storage
Gas recovery & utilization
Avoiding new emissions
Reduce emission factor
Reduce energy consumption
Land-use mitigation
Reduce energy losses during transmission/ distribution
Renewable energy
Fuel Substitution
Waste heat/gas utilisation
Fuel switch
Reduce emission factor
Energy efficiency at generation
GHG efficiency at production

18. ‘Kyoto gases’ that can earn credits
Carbon dioxide (CO2)
Methane (CH4)
Nitrous oxide (N2O)
Relevant to almost all projects including bio-carbon & industrial projects
Relevant to industrial projects
Perfluorocarbons (CxFx)
Hydrofluorocarbons (HFCs)
Sulphur hexaflouride (SF6)

19. Greenhouse gas emissions
How a CDM project generates carbon credits
NOTE: greenhouse gas emissions must also include project emissions – emissions occurring within the project boundary:
e.g. fossil fuel emissions from construction
e.g. soil disturbance from tree-planting
Greenhouse gas emissions
Historical Trend
Project start
Carbon credits (CERs) represent the difference between the baseline and actual emissions
AND: leakage – emissions occurring outside the project boundary
Time

20. Leakage leakage nearly always negative (increase emissions)
Leakage refers to an increase in emissions outside of the project boundary
There are 2 principal forms of leakage for carbon projects: 1
Emission shifting: displacement of GHG activities to other locations/sources
e.g. Shift in grazing activities from a forestry project site
e.g. Protected forest makes shift from wood to kerosene
e.g. Protected forest results in more intensive agriculture (and fertiliser use)
Investment crowding: eg: public demand for (& willingness to pay for) protected areas (eg: national parks & nature reserves) diminishes as more areas are protected.
leakage nearly always negative (increase emissions)
May be positive – eg: adopting EE technology can result in CO2 mitigation as well as increase profitability. If other firms adopt similar practices to increase profits, more CO2 mitigated than from just the original project activity.

21. Leakage 2
Temporal leakage: also known as ‘non-permanence’ and ‘reversibility’. With sequestration projects, greenhouse gases can be re-released into the atmosphere over time
e.g. a forest plantation may burn down, re-releasing its stored carbon
e.g. vegetation may be washed away in flash floods
Non-permanence only affects sequestration projects – not mitigation projects. It can be addressed at a project level and at a systemic (institutional) level

22. Baseline study Every carbon project requires a baseline study
The purpose of the baseline study is to determine the baseline scenario for each GHG component of the project
The baseline must be explicitly defined
Selection of the baseline must be justified in a transparent manner
Being counterfactual in nature, some aspects of the baseline scenario cannot be observed and thus remain uncertain
In order not to exaggerate the emission reductions achieved by the project, the baseline study must adopt a conservative approach whenever assumptions about future developments need to be made
The principle of conservativeness

23. Additionality Has been defined as:
Environmental additionality – reductions in GHG emissions
Financial additionality – the project only happens because of the financial incentive offered by carbon credits
Legal additionality – the project does more than what is required by local law
The Kyoto Protocol is somewhat vague, stating simply:
“Reductions in emissions must be additional to any that would occur in the absence of the project activity”
Assessment of additionality is intrinsically linked with baseline establishment

24. Additionality
Ideally, a project should demonstrate a combination of these forms of additionality
It is essential that the project achieve environmental additionality – otherwise, it will not generate any carbon credits!
Typically, a project developer also demonstrates that, without carbon revenues, the project would not be viable and/or commercially attractive
The CDM Executive Board has developed an ‘additionality tool’ for CDM projects

25. Project with carbon element
Financial additionality – benchmark analysis
Benchmark analysis
Choose an appropriate financial indicator and compare it with a relevant benchmark value: e.g. required return on capital or internal company benchmark
Carbon revenue makes the project attractive relative to investment alternatives
Investment threshold
Revenue / NPV / IRR
Project with carbon element
A project can be money-making and qualify as ‘additional’!
Project without carbon revenue is profitable – but not sufficiently profitable compared with alternatives
Project without carbon element

26.  ?  Some examples of additionality
Capturing methane from an urban landfill and flaring it
Carbon credits represent the only source of income for undertaking this activity 
Capturing methane from an urban landfill and utilising it to generate electricity
Project developer would have to demonstrate that the electricity revenue alone would not make this project attractive ?
Building a large hydro project for the grid in Ethiopia
Questionable additionality: there is already plenty of hydro activity in Ethiopia 

27. Crediting period CDM mitigation projects
Project developers have two crediting period options:
A maximum of 7 years, which can be renewed up to 2 times (i.e. a potential total crediting period of 21 years)
A maximum of 10 years, with no option for renewal
CDM sequestration projects (forestry)
Project developers have two crediting period options:
A maximum of 20 years, which can be renewed up to 2 times (i.e. a potential total crediting period of 60 years)
A maximum of 30 years, with no option for renewal

28. Crediting period A maximum of 10 years with no option of renewal
Emissions under the baseline scenario
Greenhouse gas emissions
Emissions under the project scenario
Starting date of the crediting period
No renewal
10 years

29. Baseline must be reassessed by DOE at each renewal
Why not maximise the crediting period?
Baseline must be reassessed by DOE at each renewal
The baseline scenario may become less favourable
Emissions under the baseline scenario
Greenhouse gas emissions
Emissions under the project scenario
7 years

30. Why not maximise the crediting period?
Baseline must be reassessed by DOE at each renewal
The baseline scenario may become less favourable
Emissions under the baseline scenario
Greenhouse gas emissions
Emissions under the project scenario
7 years
7 years
7 years

31. Baseline & monitoring methodologies
A CDM project must use an approved CDM methodology. If no relevant methodology exists, the CDM project developer can design a new methodology and submit it for approval
A CDM methodology contains 2 components:
A baseline methodology is an application of a baseline approach to an individual project activity, reflecting aspects such as sector and region
A monitoring methodology refers to the method used by the project developer for the collection and archiving of all relevant data necessary for the implementation of the monitoring plan
The baseline methodology and monitoring methodology must be used in combination
CDM methodologies approved by the CDM Executive Board are publicly available on the UNFCCC CDM website

32. = X – = X = Estimating emission reductions Baseline emissions
What would the level of emissions be in the absence of the project?
Baseline emissions
‘Guesstimate’ of baseline activity
Emissions factor associated with activity = X –
The baseline scenario:
Existing or historical emissions
Emissions from economically attractive alternative technologies
Average emissions of similar project activities
E.g. the default IPCC emissions factor for kerosene is 71 tCO2/TJ
What is the level of emissions in the presence of the project?
Project emissions
Project activity
Emissions factor associated with activity = X =
e.g. fossil fuel consumed
e.g. IPCC default emission factor
Emissions reductions
Denominated in tonnes of CO2-equivalent
1 tCO2e = 1 CER

33. Agenda Misconceptions about the CDM CDM concepts & terminology
The CDM project cycle

34. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

35. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

36. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

37. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

38. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

39. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

40. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

41. The CDM project cycle 6 to 12 months 1.5 months
Crediting period of the project
Project Developer
Project feasibility assessment / PIN
CDM project development / PDD
Host country approval
DNA
Project validation
Project verification
DOE
CDM Executive Board
Project registration
CER issuance

42. Project Idea Note (PIN)
PDD
Designated
Host country approval
national authority
Validation
Operational entities
Registration
Financing & implementation
Project owner
Monitoring
Verification & certification
Executive Board
Issue CERs

43. End
Robert Kelly Regional Coordinator, CDM Capacity Development, Southern & Eastern Africa