Institutional Arrangement for CDM: Case of Peru Case of Peru First Extended Regional Workshop CD4CDM Project Siem Reap, Cambodia March 2004 Sami Kamel, PhD UNEP RISOE Center, Denmark

2Background This presentation based on the results of the study: "Peru's Institutional Strategy to Promote the Clean Development Mechanism" (2004). This presentation based on the results of the study: "Peru's Institutional Strategy to Promote the Clean Development Mechanism" (2004). Authors Maria Paz Cigaran and Particia Iturregui, staff members of Peru's DNA. Authors Maria Paz Cigaran and Particia Iturregui, staff members of Peru's DNA. Study sponsored by UNEP RISOE Center as part of analytical work implemented under CD4CDM Project. Study sponsored by UNEP RISOE Center as part of analytical work implemented under CD4CDM Project. Purpose of study to present and disseminate Peru’s institutional CDM experience among other developing countries. Purpose of study to present and disseminate Peru’s institutional CDM experience among other developing countries.

3 Country Context Highest environmental authority is CONAM (National Council for the Environment) est. 1996: Highest environmental authority is CONAM (National Council for the Environment) est. 1996: Reports directly to Prime Minister’s office. Reports directly to Prime Minister’s office. An Environmental Affairs Office established in each ministry to strengthen issue of environment within operations of each ministry. An Environmental Affairs Office established in each ministry to strengthen issue of environment within operations of each ministry. All offices report to CONAM and operate under its directives. All offices report to CONAM and operate under its directives. They submit proposals for emission reductions, and perform quality assurance/approve EIAs. They submit proposals for emission reductions, and perform quality assurance/approve EIAs. All energy, mining, industrial processes, transport, infrastructure projects are required to submit an EIA for approval. All energy, mining, industrial processes, transport, infrastructure projects are required to submit an EIA for approval. FDI laws designed with various types of incentives to attract foreign investors. Allow for free access to local financing sources, free flow of profits and dividends. FDI laws designed with various types of incentives to attract foreign investors. Allow for free access to local financing sources, free flow of profits and dividends.

4 Continue: Country Context Climate Change a priority in government’s environmental agenda: Climate Change a priority in government’s environmental agenda: Political commitment to play a proactive role in CC and CDM negotiations. Political commitment to play a proactive role in CC and CDM negotiations. The National Strategy on Climate Change (mitigation, adaptation, & CDM) was incorporated into the National Environmental Plan in October The National Strategy on Climate Change (mitigation, adaptation, & CDM) was incorporated into the National Environmental Plan in October Regional governorates are required to formulate and approve climate change strategies. Regional governorates are required to formulate and approve climate change strategies. Submitted First National Communication to UNFCCC June Submitted First National Communication to UNFCCC June Peru ratified Kyoto Protocol September Peru ratified Kyoto Protocol September 2002.

5 Peruvian National Strategy Study (NSS) Implemented by World Bank, Swiss and national experts: Implemented by World Bank, Swiss and national experts: Assessed potential for CDM in the country. Assessed potential for CDM in the country. Identified a pipeline of 25 CDM projects: Identified a pipeline of 25 CDM projects: Feasibility study (3), Pre-feasibility (9), Project Profile (7), PIN (6). Feasibility study (3), Pre-feasibility (9), Project Profile (7), PIN (6). Energy, transport, LULUCF, solid waste, and industrial processes projects. Energy, transport, LULUCF, solid waste, and industrial processes projects. Proposed a national CDM strategy. Proposed a national CDM strategy. Created awareness & experience in project preparation among local CDM stakeholders during the preparation of the NSS. Created awareness & experience in project preparation among local CDM stakeholders during the preparation of the NSS.

6 Strategic Considerations When designing the national CDM strategy, Peru took into consideration: When designing the national CDM strategy, Peru took into consideration: Latin American countries have relatively high marginal abatement costs compared to Asian countries like India and China, two potential major CDM players. Latin American countries have relatively high marginal abatement costs compared to Asian countries like India and China, two potential major CDM players. In Peru, energy sector makes substantial use of hydropower & less dependent on carbon than many Asian countries. In Peru, energy sector makes substantial use of hydropower & less dependent on carbon than many Asian countries. Other Latin American countries have good experience in GHG market (75% of carbon financial flows for CDM in 2001/2002 were allocated to Latin America). Other Latin American countries have good experience in GHG market (75% of carbon financial flows for CDM in 2001/2002 were allocated to Latin America). At U$4 per tCO2, Peru has potential for exporting CERs worth U$5- 10 million per year (including LULUCF projects) through two to five projects per year, depending on size of projects. At U$4 per tCO2, Peru has potential for exporting CERs worth U$5- 10 million per year (including LULUCF projects) through two to five projects per year, depending on size of projects.

7 Continue: Strategic Considerations Peru should offer “Unique Window” where all CDM government issues be covered by only one state authority. Peru should offer “Unique Window” where all CDM government issues be covered by only one state authority. National CDM project approval process should be transparent with full public and private participation. National CDM project approval process should be transparent with full public and private participation.

8 CDM Project Approval Participants For CDM project approval, an Ad Hoc committee is formed per project- basis (meets only when there is a project to approve): For CDM project approval, an Ad Hoc committee is formed per project- basis (meets only when there is a project to approve): Permanent committee members: Permanent committee members: National Council for the Environment (CONAM) – DNA. National Council for the Environment (CONAM) – DNA. National Environment Fund (FONAM). National Environment Fund (FONAM). State Office for Promotion of Private Investment (ProInversion). State Office for Promotion of Private Investment (ProInversion). Ministry of Foreign Affairs. Ministry of Foreign Affairs. International Cooperation Agency. International Cooperation Agency. Project-related committee members: Project-related committee members: Line-ministry related to project sector. Line-ministry related to project sector. NGO (from project locality). NGO (from project locality). National EIA expert. National EIA expert. Other national expert(s) as needed. Other national expert(s) as needed.

9 National Council for the Environment (CONAM) Roles & Responsibilities: Peruvian Designated National Authority (DNA). Peruvian Designated National Authority (DNA). Hosts the Climate Change Unit (& national CDM office): Hosts the Climate Change Unit (& national CDM office): Monitor & register CDM activities in the country. Monitor & register CDM activities in the country. Follow up and comply with EB decisions. Follow up and comply with EB decisions. Devise actions to overcome barriers to CDM. Devise actions to overcome barriers to CDM. Produced the First National Communication for the UNFCCC. Produced the First National Communication for the UNFCCC. Issues CDM project approvals: Issues CDM project approvals: Possible Conflict of Interest if CONAM also promotes CDM Projects; task assigned to the Private Sector Investment Authority (Proinversion). Possible Conflict of Interest if CONAM also promotes CDM Projects; task assigned to the Private Sector Investment Authority (Proinversion).

10 National Environment Fund (FONAM) Roles and Responsibilities: Organizes and coordinates with CONAM national CDM capacity building activities: Organizes and coordinates with CONAM national CDM capacity building activities: Trained 55 people in different entities on developing PINs. Trained 55 people in different entities on developing PINs. Assists CDM project participants in pre-investment phase of CDM projects (identification, preparation, and data gathering). Assists CDM project participants in pre-investment phase of CDM projects (identification, preparation, and data gathering). Permanente member of all CDM Project Approval Committees. Permanente member of all CDM Project Approval Committees. National Focal Point for the Prototype Carbon Fund (PCF). National Focal Point for the Prototype Carbon Fund (PCF).

11 State Office for Promotion of Private Investment (ProInversion) Roles & Responsibilities: Promotion & marketing of Peruvian CDM projects through various channels. Promotion & marketing of Peruvian CDM projects through various channels. Act as the first window for international CDM investors interested in projects in Peru. Act as the first window for international CDM investors interested in projects in Peru. Identify & remove barriers to CDM project implementation and approval: Identify & remove barriers to CDM project implementation and approval: Organize capacity building programs for local private sector and project financing entities. Organize capacity building programs for local private sector and project financing entities. Voice the demands of local private sector in international CDM negotiations. Voice the demands of local private sector in international CDM negotiations. Work on incorporating CDM promotion strategies within the national Foreign Direct Investment (FDI) promotion plan. Work on incorporating CDM promotion strategies within the national Foreign Direct Investment (FDI) promotion plan.

12 Project Approval Procedure Procedure Responsible Party 1. Submit PDD & request national approval letter (PIN is optional) CDM Investor 2. PDD sent to all members of Ad Hoc CDM Project Committee DNA 3. Visit project location/interviews. Produce a report on sustainable development & locals’ opinion DNA 4. Call & hold the Ad Hoc CDM Project Committee meeting DNA 5. Committee meeting: Assess contribution to sustainable development (case by case analysis) & interview the investor Ad Hoc CDM Committee 6. Letter of Approval issued for investor & Executive Board DNA/CDM Committee Total Approval Process: 45 days Cost per project: $4,800

13 Incentives for CDM Investors A 45 days self-imposed deadline for completion of approval process (no specific penalty for delays). A 45 days self-imposed deadline for completion of approval process (no specific penalty for delays). Approval process (costing $4,800) is free of charge to minimize transaction cost: Approval process (costing $4,800) is free of charge to minimize transaction cost: Each concerned entity cover its own share of the cost for approval (67% covered by DNA). Each concerned entity cover its own share of the cost for approval (67% covered by DNA). Decision to be re-visited once Peru establishes its name as a CDM destination. Decision to be re-visited once Peru establishes its name as a CDM destination. Promote small social investment in project locality: Promote small social investment in project locality: Improves sustainable development prospects Improves sustainable development prospects Improves likelihood for approval by national CDM committee & EB. Improves likelihood for approval by national CDM committee & EB. Three to four CDM projects were approved using this process. All approvals completed within the 45 days deadline. Three to four CDM projects were approved using this process. All approvals completed within the 45 days deadline.

14 Key Challenges Complying with self-imposed 45 days deadline while securing full involvement of relevant entities (the more entities involved, the more likely the potential delay in the approval): Complying with self-imposed 45 days deadline while securing full involvement of relevant entities (the more entities involved, the more likely the potential delay in the approval): CONAM circulated and approved a National CDM Operational Procedure among all relevant ministries & stakeholders. CONAM circulated and approved a National CDM Operational Procedure among all relevant ministries & stakeholders. CONAM having an office in each line-ministry facilitates project approval process. CONAM having an office in each line-ministry facilitates project approval process. CONAM continuously holding various workshops and meetings to raise awareness among relevant stakeholders. CONAM continuously holding various workshops and meetings to raise awareness among relevant stakeholders.

15 Continue: Key Challenges Lack of CDM project formulation capabilities among public and private sector entities. Lack of CDM project formulation capabilities among public and private sector entities. Approach adopted by the government? Approach adopted by the government? Trained 20 national experts from industry, energy, waste management, agroforestry, and transportation sectors on CDM project structuring and formulation. Trained 20 national experts from industry, energy, waste management, agroforestry, and transportation sectors on CDM project structuring and formulation. Financing institutions received special training on evaluation of CDM projects. Financing institutions received special training on evaluation of CDM projects. Two key objectives for the government: Two key objectives for the government: Build local project formulation capacities in strategic CDM sectors. Build local project formulation capacities in strategic CDM sectors. Reduce local transaction cost through smooth and simple project approval process. Reduce local transaction cost through smooth and simple project approval process.

16 A Responsive Setup for DNA CONAM continuously assessing adequacy of current institutional setup and project approval process. CONAM continuously assessing adequacy of current institutional setup and project approval process. Portion of project approval cost covered by DNA is from CONAM budget. Portion of project approval cost covered by DNA is from CONAM budget. If number of projects increases beyond DNA capacity: If number of projects increases beyond DNA capacity: CONAM will allocate separate budget for DNA. CONAM will allocate separate budget for DNA. Will charge a fee for the 45 days-approval. Will charge a fee for the 45 days-approval. Will hire external consultants to review and assess submitted CDM projects to facilitate work of ad hoc committee. Will hire external consultants to review and assess submitted CDM projects to facilitate work of ad hoc committee.

17 Conclusion & Lessons Learned Key ingredients for a successful CDM sector in a host country: Key ingredients for a successful CDM sector in a host country: Political will within the government. Political will within the government. Clear & adequate institutional & regulatory arrangement for CDM. Clear & adequate institutional & regulatory arrangement for CDM. Requirements for compliance of CDM projects with national environmental & sectoral planning should be simplified to facilitate project approval process. Requirements for compliance of CDM projects with national environmental & sectoral planning should be simplified to facilitate project approval process. A host country should aim at minimizing local transaction costs. A host country should aim at minimizing local transaction costs. Local financial sector could play key role in CDM projects (core-financing portion). Local financial sector could play key role in CDM projects (core-financing portion).

18 Continue: Conclusion & Lessons Learned A host country should market its CDM projects to a diversified market and not to rely completely on one potential CERs buyer (e.g. PCF). A host country should market its CDM projects to a diversified market and not to rely completely on one potential CERs buyer (e.g. PCF). Operation of the DNA needs to be frequently assessed to maintain an efficient local CDM process. Operation of the DNA needs to be frequently assessed to maintain an efficient local CDM process. DNA budget could be initially covered by government but later a DNA should generate some sort of income. DNA budget could be initially covered by government but later a DNA should generate some sort of income.

19 Peruvian DNA web site for more information: