THE KYOTO PROTOCOL AND BEYOND: A LEGAL PERSPECTIVE, Siena June 10, 2006 The Clean Development Mechanism: Challenges and Opportunities Axel Michaelowa www.perspectives.cc

Structure of presentation The CDM and its rules The CDM project pipeline Baseline and additionality The international CDM supply, demand and prices Host countries and project types Buyers Price levels Challenges for the CDM

The principle of the CDM Emissions trading JI CDM CERs AAUs, ERUs To avoid fictitious reductions, a complex procedure has been established Country 1 Kyoto commitment Country 2 Kyoto commitment

Status of the CDM project cycle (31/5/2006) changes COP/MOP 3 members can propose review within 15 days to be donewithin 30 days elects 2% adap-tation tax Rulebook 29+9 baseline and monitoring methodologies elects Executive Board (10 members) decides on new rules within 4 months with-holds 4 industrial countries 5 develo-ping countries 1 AOSIS 53 methodologies pending comment new rules within 8 weeks accre-dits 15 spot checks Certifier (DOE): 16 3 members propose review within 8 weeks Certifier: 5 Countries Stake-holder Observers 200 Currently 18 applications is-sues comment within 30 days 60 registers 28 69 CDM pro-ject Project design document: Baseline Monitoring Approval Methodology if first of its kind 524 26 Monitoring report Verification Project partners Validation or for-warding of new metho-dology CERs 5 Investor countries 19 authorise authorise Certifi-cation Involved countries Project partners DNA Involvedcountries 76 Host countries

The baseline: emissions without the project a) old coal fired power station 1200 g CO2/kWh. b) gas turbine 450 g CO2/kWh c) 850 g CO2/kWh Factor of 3!

The additionality test Suggested by EB, but not mandatory Would the project have happened otherwise? Steps in the consolidated test Identification of alternatives to the project Investment analysis Determine that the project is not the most economically or financially attractive, or Proof of prohibitive barriers Common practice analysis Tricky because needs complete market overview Impact of CDM registration on overcoming barriers Initially many projects with doubtful additionality have been registered After setup of the RIT scrutiny has increased and 4 projects put under review

CER supply (million until 2012) Total CER estimate just passed the 1 billion mark!

CER supply (host countries) Registered projects (million until 2012)

CER supply (host countries) Submitted projects (million until 2012)

CER supply (project types) Registered projects

CER supply (project types) Submitted projects

Drivers and barriers for CER supply Availability of reduction options Large, cheap options are starting to get scarce HFC-23, N2O, large landfills Solution: bundling of smaller projects Availability of methodologies and related data Interesting project types still have no approved methodology Energy efficiency in generation, transport, PFC Approved methodologies have too narrow applicability criteria Data for using approved methodology may not be available Solution 1: deviation (Brazil, China) Solution 2: centralized data collection and publication (India) Availability of finance Limited willingness of local banks to provide finance International finance providers (Ecosecurities) can close gap

CER and ERU demand (million €) Total: > 3 billion € Wide range of buyers: 

Global transactions 2005 (million t CO2) Total: 800 million t Source: Point Carbon

CER price (€) Huge gap between different ”qualities” of CERs

Technology and Development Cooperation Two paths for post-2012 First Step Second Step Ultimate Regime 2008-2012 2013?-- 2030?-- “Cap First” Strategy Kyoto Protocol: Cap & Trade Regime Another Cap & Trade Regime Ultimate Regime: Consists of Cap& Trade, Technology, and Development Mutually Reinforce, Or Conflict? Technology and Development Cooperation “Empower First” strategy

Conclusions CDM has mobilized 1 billion t emission reduction in over 800 projects in non-industrialised countries Additionality of some projects is doubtful Complaints regarding sustainability benefits One tonne CO2 reduction can be sold for 5-15 €, total demand is over 3 billion € Recent price crash did not kill the CDM market CDM investment could dry up if the negotiations on the post-2012 climate policy drag on Programmes, sectoral CDM?

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