International Climate Policy Hamburg Institute of International Economics International Climate Policy Options for making small scale CDM projects more attractive Side Event Small scale CDM projects New Delhi, Oct. 26, 2002 Axel Michaelowa Hamburg Institute of International Economics, Germany

International Climate Policy Hamburg Institute of International Economics International Climate Policy Structure of presentation Why small scale projects are unattractive Possible rules and their effects on transaction costs – thresholds – baselines – project cycle steps What project types could be attractive? Conclusions

International Climate Policy Hamburg Institute of International Economics International Climate Policy Why are small-scale projects not attractive? CDM buyer‘s market: price 3-5$ / t CO 2 Transaction costs of full project cycle several hundred thousand $ All projects reducing less than 20,000 t CO 2 per year will not be attractive

International Climate Policy Hamburg Institute of International Economics International Climate Policy Thresholds for small-scale projects and transaction costs

International Climate Policy Hamburg Institute of International Economics International Climate Policy Thresholds If a project has several components belonging to different categories each component will be treated as a single project 15 GWh – average or peak savings? 15 kt threshold can be interpreted creatively and lead to the acceptance of large-scale projects (see landfill gas example)

International Climate Policy Hamburg Institute of International Economics International Climate Policy Baseline options Pre-defined parameters for project-specific baselines depending on project type Proxies for project activity levels that influence baseline emissions – proof of existence – proof of functioning Country-specific pre-defined baseline or benchmark Global pre-defined benchmark for specific project types Global pre-defined baseline for specific project types

International Climate Policy Hamburg Institute of International Economics International Climate Policy Additionality tests No other project of the type exists in the host country A specified number of pre-defined investment barriers exists Project’s generation costs are higher than the generation costs of the country’s expansion plan in the case of grid-connected electricity generation projects

International Climate Policy Hamburg Institute of International Economics International Climate Policy Transaction costs on each step of the project cycle

International Climate Policy Hamburg Institute of International Economics International Climate Policy Options to reduce transaction costs

International Climate Policy Hamburg Institute of International Economics International Climate Policy Draft rules for small-scale projects Bundling allowed, but only up to threshold Same entity for validation and verification Partial standardisation of baseline methodologies and barrier assessment Exemption from leakage determination Only influences limited share of transaction costs Critical test comes when decisions on fees are made (5000 $ registration fee is still much too high) The rules cannot decisively reduce the disadvan- tage of projects below 20,000 t CO 2 annual reductions

International Climate Policy Hamburg Institute of International Economics International Climate Policy Conclusions Small-scale projects have an inherent disadvantage due to high unitary transaction costs and will thus not be attractive to private investors The suggested small-scale project rules alleviate, but do not solve the problem Projects near the thresholds may have a chance, especially if rules are interpreted creatively Subsidisation could make small-scale projects more attractive, but entails other problems.

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