1. Clean Development Mechanism Environmental Friendly
~ It Pays to be
Environmental Friendly

2. Weather & Climate
Weather is the specific condition of the atmosphere at a particular place and time.
Climate is an average of weather (Temperature, Rainfall...) over a “long” time (more than 2-3 weeks).
climate (average min/max)

3. Global Climate Change

4. Evidence for recent unusual climate change
The average temperature of the earth is rising:
up 0.7±0.2°C in last 140 years (instrumental records);
19 of the 20 warmest years since 1860 have all occurred since 1980, the 11 warmest all since 1990;
1998 was the warmest year in the instrumental record and probably the warmest in 1,000 years (tree rings, ice cores); was the second warmest;
the last 50 years appear to have been the warmest half century in 6,000 years (ice cores);
compilation of worldwide ocean-temperature measure- ments shows significant ocean warming between the mid-1950s and the mid-1990s.

6. Bleached coral head: Bleaching occurs when high water temperature kills the living organisms in the coral, leaving behind only the calcium carbonate skeleton.

7. Soon Americans will have to settle for a Non-Glacier National Park.

8. Sea-ice extent has dropped by ~1.5 million km2 since 1970.

10. Satellite photo of smoke from S California wildfires, October 2003

11. So, global climate is changing…
in the direction of average warming,
accompanied by many phenomena consistent with this,
and at pace that is unusual in the recent historical record.

12. The main natural and human phenomena affecting climate are known.
NATURAL INFLUENCES ON GLOBAL CLIMATE
variations in the energy output of the Sun
variations in the Earth’s orbit and tilt
continental drift
changes in atmospheric composition from volcanoes, biological activity, weathering of rocks
HUMAN INFLUENCES ON GLOBAL CLIMATE
emission of “greenhouse gases” (GHG) as a result of deforestation, agricultural practices, fossil-fuel burning
emission of particulate matter from agricultural burning, cultivation, fossil-fuel burning,
alteration of Earth’s surface reflectivity by deforestation, desertification
cloud formation by aircraft contrails

13. Direct measurements of CO2 at a remote location began in 1958.
The Keeling Curve of CO2 in the atmosphere measured at Mauna Loa, Hawaii
The Keeling Curve of CO2 in the atmosphere:
The figure depicts atmospheric CO2 concentrations from 1958 to the present as
measured at Mauna Loa, Hawaii. These data, obtained by Keeling and Whorf
(1998), represent the longest continuous record of directly measured CO2
concentrations. As the graph of these data indicates, there has been a
substantial and sustained rise in the air's CO2 content over the past four
decades, from about 315 ppm to over 360 ppm.
Reference:
Keeling, C.D. and Whorf, T.P Atmospheric CO2 concentrations --
Mauna Loa Observatory, Hawaii, (revised August 1998).
NDP-001. Carbon Dioxide Information Analysis Center, Oak Ridge National
Laboratory, Oak Ridge, Tennessee.
Direct measurements of CO2 at a remote location began in 1958.

14. ...the increase in worldwide fossil-fuel combustion in the past 150 years.

15. CO2 Emission by Countries, 1990- 2025
CO2 Emissions by Country,

16. Power Infrastructure in India (17.1.2008)
Total: MW )
Cotd…

17. GHG Effect

18. Natural Greenhouse Effect
Solar Radiation
passes through the
clear atmosphere
Most of the radiation
is absorbed by earth’s
surface and warms it

19. Natural Greenhouse Effect
Most radiation is
absorbed by the earths
surface and
Infrared radiation is
emitted back into the
upper atmosphere

20. Natural Greenhouse Effect
Some of the infrared
radiation passes
through the atmosphere
and some is absorbed
and re-emitted in all
directions by
greenhouse gas
molecules
The effect of this is to
warm the earths surface
and the lower
atmosphere

21. Human Activities lead to generation of Green House gases through
- Combustion of fuel
– Land use changes
– Agricultural practices
– Various industrial processes
• The gases are
- Carbon dioxide
- Methane
- Nitrous oxide
- HFC/PFC
- SF6
Called Greenhouse gases

22. Global Warming Potential
Gas
Global Warming Potential
Carbon dioxide (CO2) 1
Methane (CH4) 21
Nitrous oxide (N2O)
310
Hydrofluorocarbons (HFCs)
140-11,700
Perfluorocarbons (PFCs)
7,000-9,200
Sulphur hexafluoride (SF6)
23,900

23. International Response to Climate Change
In 1990, the IPCC issued its First Assessment Report, confirming that climate change was indeed a threat and calling for a global treaty to address the problem.
The UN General Assembly responded to these calls in December of 1990, formally launching negotiations on a framework convention on climate change by its resolution 45/212.
Governments adopted the United Nations Framework Convention on Climate Change at the INC’s resumed fifth session on 9 May The Convention was opened for signature on 4 June 1992 at the UN Conference on Environment and Development (UNCED), the so-called “Earth Summit”, in Rio de Janeiro, Brazil, and came into force on 21 March A decade after its adoption, 186 governments (including the European Community) are now Parties to the Convention and it is approaching universal membership.

24. History (Last Decade)
1992
Rio Conference: 154 states signed the UN Framework Convention on Climate Change (UNFCCC)
1994
UNFCCC entered into force on 21 March 1994
1995
IPCC’s 2nd report concluded that “the balance of evidence suggests that there’s a discernible human influence on global climate.”
1997
The Kyoto Protocol was adopted in 1997 giving industrialised countries a legally binding commitment to reduce their GHG emissions.
2000
First credits from GHG emission reduction projects
2001
Finalisation of the operational details of the Kyoto Protocol at COP 7 in Marrakech Nov. 2001

25. The Kyoto Protocol (I)
The Kyoto Protocol makes the UNFCCC operational and legally binding.
The industrialised countries commit themselves to reduce their collective GHG emissions by at least 5% below 1990 emission levels.
Industrialised countries defined in Annex I of UNFCCC or Annex B in Kyoto Protocol

26. The Kyoto Protocol (II)
Actual emission reduction will be much larger than 5%: 6
Numbers for industrialised countries
-24%
-5%
Kyoto-Protocol
Source:
ABB Corporate Research 4
GtC 2
1990
2000
2010
2020

27. Kyoto Protocol –“Flexibility Mechanisms”
Provides for 3 co-operative implementation mechanism - Joint implementation (JI) – Annex-I Parties. - Emission Trading – Annex-I Govt. - Clean Development Mechanism (CDM) – Developed
& Developing Countries.
EU Emissions Trading Scheme (EU ETS) established in Europe - Allowance based cap and trading scheme

28. CDM What is CDM One of 3 flexibility mechanisms of the Kyoto Protocol
Projects that generate reductions in Green Houses Gases (GHG’s).
Accrues CERTIFIED EMISSION REDUCTION (CER) credits (equal
to 1 MT CO2 equivalent).
CER’s are traded for money on Climate Exchange.
Six Green House Gases have been identified : Carbon Dioxide,
Methane, N2O, HFC/ PFC, SF6.

29. CDM (cont..) Who Purchases CER’s Market Scenario
Kyoto Protocol (ratified by 200 countries) states that, the GHG emissions have to be reduced by 5 % below the 1990 level (baseline limit) in the period
CER’s are bought by companies which do not comply to the Kyoto Protocol (Annex I countries).
Companies not complying have to pay a penalty of 40 € per MT of CO2 emitted above the baseline limit till end 2010 and 100 € thereafter.
Market Scenario
CER market is estimated at $200 billion by
Current price of CER’s is at € 14.
Analyst predict an uptrend in the price from beginning 2009

30. CDM Project Cycle
How CDM Works?

31. BASICS Where is CDM applicable ?
Renewable energy > Wind power > Solar > Biomass power > Hydro power
Waste management > Capturing of landfill methane emissions to generate power > Utilisation of waste and waste water emissions for generation of energy
Energy efficiency measures > Boiler and steam efficiency > Pumps and pumping systems > Efficient cooling systems > Back pressure turbines > etc…
Cogeneration in industries having both steam and power requirements
Power sector > Induction of new technologies which are efficient (thermal) > Reduction in technical T&D losses
Fuel switching > From fossil fuel to green fuel like biomass…
Electrical energy saving 1 kWh = 0.8 ~ 0.9 kg CO2
Power generation (waste heat / renewable) 1 MW = ~ t CO2
Coal saving 1 kg = 1.3 ~ 1.6 kg CO2
Fuel oil saving 1 litre oil = 3 ~ 3.5 kg CO2
NG based power generation 1 kWh generation = 0.35 ~ 0.45 kg CO2 1 kg NG burning/saving = 2.4 ~ 2.5 kg CO2
Slide 11 – Where is CDM applicable ?
Examples of eligible projects:
- Fuel switch to lower carbon intensive fuels
- Installations based on renewable energy
- Combined heat and power (CHP)
- Supply-side energy efficiency improvements
- End-use energy efficiency improvements
- Agriculture sector (except land-use change)
- Reduction in methane emissions
- Reforestation/afforestation projects
The box in this slide indicates how different savings may be translated to GHG emissions. Please note that this is only indicative!

33. CDM Project Cycle
CDM Executive Board
Project Owner
Project Idea
Registration
Project Owner
Monitoring of Emission Reductions*
Project Owner
Project Design Document
Verification & Certification of Emission Reductions*
Operational Entity
DNA
Host Country Approval
CER Issuance *
CDM Executive Board
CDM Executive Board
Approval Baseline Methodology* *
Operational Entity
* periodically during crediting time * * unless approved method is used
Validation

34. Project Design Document
Most important document in the CDM project cycle and is the key input to the CDM EB for registration and verification.
PDD presents information on the essential technical and organizational aspects. Completed PDD must be submitted to DOE for validation.
Standardized format was developed by the CDM EB.
Contents of the PDD ...
General description of the project activity
Additionality
Baseline methodology
Monitoring methodology and plan
Estimation of GHG emissions
Environmental impacts
Stakeholders comments

35. The Project Activity is Additional
Tool for the demonstration and assessment of additionality – Version III
STEP: 1 Identification of project alternatives
Show that the project has realistic & credible alternatives permitted by the laws of host country and the candidate CDM project has not been made mandatory
STEP: 2 Investment analysis
Show that the candidate CDM project is not the most profitable option among the available alternatives for investment
Carry out comparative financial analysis
STEP: 3 Barrier analysis
Show that identified barriers to the candidate CDM project are not faced by at least one of the available alternatives identified in Step 1
STEP: 4 Common practice analysis
Show that the candidate CDM project (type & technology) has not diffused in the relevant sector & region OR show that the similar activities are happening because of additional revenue stream through CDM thus not part of baseline scenario
The Project Activity is Additional

36. Additionality Tool

37. Validation Designated Operational Entity (DOE)
A DOE under the CDM:
is either a domestic legal entity or an international organization accredited/designated by EB
Validates and subsequently requests EB for registration
the CDM EB has not yet accredited and recommended for designation of any Indian entity.
List of accredited and provisional DOEs:
KPMG Sustainability B.V. (KPMG)
Det Norske Veritas Certification Ltd. (DNVcert)
TUV Industrie Service GmbH TUV SUD GRUPPE (TUV Industrie Service GmbH TUV)
Societe Generale de Surveillance UK Ltd. (SGS)
Bureau Veritas Quality International Holding S.A. (BVQI Holding S.A.)

38. CDM Project submission to EB
Process: DOE shall
Submit CDM Project Activity Registration Form to EB for project/ methodology approval along with
CDM-PDD
Approval of host party
Registration Fee
Validation Report

39. Registration
DOE recommends for registration of the project activity with CDM EB if it decides the project is in line with CDM modalities and procedures
Registration process gets completed within:
4 weeks for small scale project activities
8 weeks for large scale project activities
Registration fees are payable to the Executive Board by the project participants depending on the quantity of emission reductions
<=15,000 t CO2e 0.1USD per CER
>15, USD per CER
Max. registration fee 3000 USD

40. Certification and Issuance of CERs
Certification by the CDM Executive Board on the basis of verification report
This is followed by the issuance of the CERs to the project applicant entity/ies
This step is repeated after every round of submission of verification report

41. Timeline Project Design Document Large scale : 3 to 4 months
Small scale PDD : 1 to 2 months
Host country approval : 2 to 4 months
Validation
Adopt an approved methodology : 2 to 4 months
Propose a new methodology : 6 to 12 months
Small scale PDD : 2 to 4 months
Registration
Large scale : 8 weeks after submission unless revision is requested by the parties
Small scale PDD : 4 weeks after submission unless revision is requested by the parties

42. Transaction Costs
Transaction costs are those which the project proponents have to invest to monetize the CDM Benefits.
Transaction costs mainly include
Costs towards consultants for developing CDM project (PDD)
Costs towards validation of the CDM project
Costs towards registration of the CDM project with EB
Apart from the above, CDM EB deducts 2% of the CDM revenues to Adaptation fund.

43. Sample Calculation
Project Type Grid connected power generation through renewable energy (small hydro power plant)
Capacity MW
Running period days/year
Availability %
Plant load factor (PLF) %
Units generated per year = 1x350x24x0.8x0.6 = MWH
GEF = approx 0.8 TCO2/MWH (1 TCo2 = 1 CER)
CERs generated = 4032x0.8 = 3225
1 CER = approx 15$, 1$ = approx Rs 50
Carbon benefit earned = 3225x15x50 = Rs = Rs 24.2 lac/annum (approx)

44. CDM Cost Revenue Sheet Plant Type/ Size – 5 MW hydro power plant
CER generation/period – CERs/year for 10 years
Upfront CDM investment in year 0 - Consultant Fee: Rs. 6 Lacs Validation Fee: Rs. 7 Lacs Fee to UNFCCC: $ 2100 or Rs.1 Lac (appox) Total Upfront Expenditure = Rs. 14 Lacs
Recurring investment every year for 10 years - Verification Fee: Rs. 4 Lacs Success Fee to Consultant: % of CER's Share of proceeds to UNFCCC: 2% of CER's
Annual Revenue from Sale of CER = 18000*15 $ * Rs. 50  = Rs. 135 Lac (appox) Total Recurring Expenditure: Rs. 13 Lacs
Profit or Loss (year wise)
Year 0 - Loss of Rs. 14 Lacs Year 1 to Year 10 - Profit of Rs. 122 Lacs

49. Types of Contracts
Spot : Credits are sold at issuance or just prior to issuance. These deals are for only one issuance, and payment is typically realized within 5-10 working days of issuance and transfer.
Plain Forward : Credits are sold on a forward basis, with the contract covering all credits generated up to 2012.
Forward with Advance Payment : This is a Plain Forward deal with the addition of an Advance Payment for a portion of credits generated. Generally upfront payment is made for 30-40% of the expected volume till 2012.

50. Pricing Mechanisms
Different pricing options can be worked out, depending upon the requirement of the Buyer and Seller.
CERs : Prices are usually marked to an exchange such as ECX, or an index such as the Reuters CER Index. A certain discount is incorporated to accommodate cost-of-carry, delivery risk and other related aspects. Prices for forward contracts can be fixed, floating, or a combination fixed-floating structure.
VERs : With the Voluntary market being more subjective than the Compliance market, pricing depends upon the project type, co-benefits involved, and other sustainability parameters. Prices for VER deals are fixed based upon knowledge of the current Demand-Supply scenario of various project types in the market. 

51. Emission Reduction Purchase Agreement (ERPA)

53. A legal agreement between Buyer and Seller for trading GHG emission reductions
Most of CER buyers conduct the forward purchase contract through an ERPA
Few buyers are open for equity participation and/or provision of debt using ERPA as the collateral
Buyers:
Multilateral funds
Bilateral funds
Brokers
Private entity

56. Purpose Record agreement Identify responsibilities Establish rights
Manage risk

57. ERPA in different contexts
Unilateral CDM Projects
Forward agreements
Spot agreements

58. ERPA Structure General Conditions standard terms conditions
rights/ obligations
Negotiated agreement
purchase amount
price, payment terms
Preconditions
warranties

59. Risk Allocation - Determinant of price of CERs for CDM Projects

60. Risk Allocation Risk is allocated to the party best able to bear it
Three key risk categories:
Traditional project risks
CDM process risks
ERPA terms risk /deal structure
Rules of thumb
Project risks borne by seller
CDM process risk primarily borne by the seller
ERPA terms risk important and matter of negotiation

61. Traditional Project Risks
Risk of the underlying project
finance, approval, construction, cost overruns, project underperformance, Reliability and level of complexity of the technology used
Generally borne by Project Entity but can be limited by
conservative ER estimates
Important price determinant as has direct impact on likelihood and timing of the physical ERs being generated

62. ERPA terms risk /Deal structure
CER delivery guarantees
If guarantees provided by seller, can get 10%-30% higher price but a
big risk to take
Large variation on how delivery guarantee defined
Advance Payments
Risk to buyer that the project is not completed and does not deliver
the emission reductions
The price may be discounted to reflect this risk taken by buyer
Can be mitigated by the seller providing a bank guarantee for the
advanced amount

63. ERPA terms risk/ Deal structure cont..
Transaction Cost
PDD, Validation, Verification and Registration cost
If buyer pays for them, may discount the price to reflect transaction cost
Delivery Rights
If buyer has rights to all/first CERs generated, likely to pay a higher price
Purchase beyond 2012
No Buyer is willing to commit
If committed discounted price

64. Design commercial strategy for ER sales carefully e.g.
Recommendation
Design commercial strategy for ER sales carefully e.g.
Sell all ERs or part of the ERs, save some for sale at the spot market?
Sell all ERs to one buyer or to several buyers?
Ensure all elements of your strategy are built in ERPA

65. Gold Standard Projects
Gold Standard VERs and CERs get a premium price as opposed to other CDM projects
The Gold Standard is built on the basic architecture of CDM projects
Using the Gold Standard methodology marginally increases development costs compared to a standard CDM project
The Gold Standard’s main purpose is to ensure that CDM projects are both reducing carbon dioxide (CO2) emissions and fostering sustainable development

66. Carbon Footprint
Recently, a new “carbon footprint” credit card was launched by Rabobank in Europe, in conjunction with environmental group WWF.
The card is now used by 1.1 million customers.
The bank assesses all products and services purchased with the card and gives a carbon rating to each transaction.
The carbon rating is used to estimate equivalent carbon dioxide emissions associated with purchases.
The total carbon footprint across all card usage is then offset by the bank paying for climate projects that reduce greenhouse gas emissions by the same amount.
The offsets are through projects certified under the Gold Standard for voluntary emission reductions, independently verified by third parties.

67. Global Crisis Affects Carbon Trading
US & EU are struggling to stick to their carbon emission targets.
Collapse of prominent US banks is having ripples on carbon trading also.
Two biggest buyer- US & EU suffer severe liquidity problem.
Industrial growth of EU has dropped down from 1% to 0.7% causing reduction in emission level of the industries there.
EU emitting 98 million tonnes above the cap (as imposed by Kyoto Protocol). In 2009 this is expected to reduce to 83 million tonnes.
Companies facing severe cash crush are selling off surplus CERs.
CERs prices have fallen from peak of 22 E in July 08 to E 15 now.
EU pushing for reducing the limits of carbon reduction.
At current price Indian companies could lose up to Rs1400 crore per annum.

68. Recent CER price variation
Some carbon exchanges are:- CCX, ECX, MCX, NCDEX etc.