1. Technology Transfer and Investment Risk in International Emissions Trading (TETRIS) Work Package 3: Permit Supply from the CDM (TETRIS Meeting, Amsterdam, 20-21 June 2006)

2. Contents  Brief overview of the approach applied for constructing MAC curves  Abatement costing studies and transaction costs  Current status WP 3, progress and planned activities  Presentation of MAC curves for the major non- Annex I regions

3. Objectives of WP3  To derive realistic and policy-relevant MAC curves for GHG emissions reduction options in non-Annex I countries  To analyze energy technology transfer as a result of the CDM

4. Approach to the project Proposed/approved CDM projects CDM project data base Country abatement costing studies GHG reduction options data base Technology specific transaction cost Non Annex I marginal abatement curve General equilibrium model Technology Transfer Comparison of information Equilibrium credit price Technology transfer criteria CDM PROJECT INFORMATION COUNTRY ABATEMENT COSTING STUDIES Work Package III

5. Abatement costing studies  Country studies carried out in the framework of capacity building programmes by local teams  Information concerns national potentials and average cost per ton CO2 eq reduction  No common set of assumptions across studies for context variables such as oil price, discount rate, timeframe, cost definition and development of reference scenario  Energy models used for the studies (LEAP,MARKAL) take into account the interactions between reduction options

6. Transaction Costs  Based on detailed assessment of cost of each component of the CDM project cycle  Based on 10-year crediting period (sensitivity analysis for 21-year crediting period)  Dependent to a large degree on the size of the project  Form a short term barrier but not significant in the longer term, except for very small technologies

7. Calculation of transaction costs for large scale GHG emissions reduction technologies

8. Current Status of the work  Database containing GHG emissions reduction options for 30 countries completed  MAC curves developed for major non-Annex I regions  Database containing CDM project information under development  Analysis on transaction costs completed  Analysis on technology transfer not yet done  Draft report on WP3 produced and distributed among project team members

9. Progress and planning for next months  According to workplan WP 3 should be completed in June 2006. Implementation of WP 3 slightly behind schedule. Outstanding issues are: –development of MAC for ‘rest of the world’ –comparison of cost information obtained from CDM projects and mitigation studies –more thorough analysis of functional forms –Analysis on technology transfer –Production of final report  Planning for coming months: –June: MAC curve for rest of the world –July: functional forms, technology transfer –August : comparison CDM projects and mitigation studies –September: production final report

10. Description of the country abatement costing database SectorGHG emission reduction options Energy intensive sector Coal2 Crude oil3 Natural gas1 Petroleum and coal products Electricity115 Iron and steel4 Paper product4 Non-ferrous metals Mineral products Non-energy intensive sector Agricultural products and forestry32 Transport19 Rest of Industry – other manufactures and service 86 Households105 Total number of reduction options371 Bottom-up cost information 371 options CDM eligible Country studies conducted for 30 Non-Annex I countries: -Algas (’98) -Worldbank NSS (’98-’05) -UNFCCC NC : e.g. report Tunisia - PEW Center (‘02): report India - Jung (‘03): The role of forestry sinks in the CDM - CCAP & Tsinghua University (‘05)

11. Limitation of the work The abatement costing studies are far from comprehensive Different assumptions and approaches across abatement costing studies make it difficult to reconcile and combine results Estimates of abatement potential and incremental costs depend very sensitively on assumptions about the baseline scenarios CDM transaction costs were assumed to be similar across world regions

12. Extrapolated MAC curve for the whole non-Annex I region Extrapolation factor: 1.25 Functional form: y = -0.07x 3 - 0.0005x 2 + 0.5x - 134 (R 2 = 0.3022) Total identified abatement potential in the year 2010 at a cost up to 50 $/ton CO 2 eq. or lower is estimated at about 2.4 Gt CO 2 eq.

13. Sectoral MAC curves for the whole non-Annex I region Total identified abatement potential at cost up to $50 per ton CO 2 eq. in the household sector and electricity sector amounts to about respectively 0.3 Gt CO 2 eq and 1 Gt CO 2 eq Other sectoral MAC curves are constructed for: forestry, transport and roi Households (91 options)Electricity (97 options)

14. Comparison of region-specific MAC curves Total identified abatement potential at cost up to $50 per ton CO 2 eq. in China and Rest of East south Asia amounts to about respectively 0.6 Gt CO 2 eq and 0.2 Gt CO 2 eq China (27 options) Rest of East South Asia (97 options)

15. Conclusions a significant amount of GHG emissions abatement potential exists in non-Annex I countries compared with the Annex I reduction requirements The potential and costs estimates presented in this work should be viewed with caution The identified potential in India and China already constitutes some 64% of the total identified reduction potential The transaction costs related to the identification and development of a CDM project vary with project size and can form a major barrier for project investors