1. AAU trading standards: the Latvian Approach Ilze Prūse Head of the Pilot Projects Implementation Division of the Climate and Renewable Energy Department Ministry of the Environment, Republic of Latvia

2. Introduction Latvia intends to sell 8 – 10 million of its Assigned Amount Units (AAUs) through pilot transaction in 2008. The Ministry of the Environment has started negotiations with a limited number of reputable buyers with the intention to sign the pilot forward AAUs sale by June 2008 to gain experience and establish transaction standards for future deals.

3. Latvia’s participation in IET under Article 17 of the Kyoto Market position of Latvia Legal framework and earmarking of revenues from AAU sale GIS fund structure and institutional arrangements Environmental integrity – monitoring, auditing and reporting of greening results Indicative greening programmes Conslusions Main points of presentation

4. Current state of affairs  Eligibility  Cabinet of Minister decision on April 12, 2006 of participation in IET under Article 17 of the Kyoto protocol  Earmarking 40 million of AAUs to be potentially available during the first commitment period  Mandate to Ministry of the Environment to work out legal, institutional system of IET by May 2008. Implementation of the Kyoto Protocol by Latvia

5. Reserve for JI projects Decision about strategic allocation of AAU assets 1990 1995 2000 2005 2008 2010 2012 2015 Mln ton CO2E Kyoto target Surplus AAUs (potentially tradable) Reserve Mandatory set- asides (non tradable Kyoto target Buyer country Purchase of ERUs Domestic actions Actual emissions Purchase of AAUs Host country Actual emissions Traded: Green Investment Scheme Compliance (Including commitment period reserve)

6. Latvia can be a fast track provider of credibly greened AAUs with low risk and low transaction costs Comparative strengths of Latvia: Robust surplus estimates Advanced in compliance with Kyoto eligibility criteria Low reputational risk Solid legal background Strong political commitment to efficient, transparent and accountable GIS Efficient institutions of public and private sector Terms tailored to buyer expectations Market position of Latvia (1)

7. Market position of Latvia (2) Comparative weaknesses of Latvia:  Relatively small size of tradeable headroom  Limited opportunities for greening with direct reductions of GHG

8. Key elements of the Law (1) Ownership of AAUs Authorisation to the Cabinet of Ministers to make decisions on each sale of AAUs, including the price and specific conditions Authorisation to the Ministry of Environment and Ministry of Finance to prepare the sale of AAUs, including  Participation in negotiations  Drafting of an AAU Purchase Agreement Authorisation to the Minister of Environment to sign the AAU Purchase Agreement after the approval of the Cabinet of Ministers is received

9. Key elements of the Law (2) Principles for using the revenues from the sale of AAUs, including a clear provision stating that all income from the sale of AAUs shall be earmarked for “greening” projects Special budgetary arrangement  Money from the sale of AAUs is transferred to income budgetary account in State Treasury  Disbursements are organised under the budget programme “Climate change financial instrument”  In annual budget the financing for the Climate Change financial instrument is ensured in amount of received and unused proceeds from AAU sales in previous years (carry-over provision)

10. Key elements of the Law (3) Institutional set up for managing GIS fund Principles for environmental and financial monitoring, and reporting Provisions for supervisory function performed by the Ministry of the Environment on behalf of the Government Provisions for transparancy and accountability to public ensured by Advisory Council (representation by relevant stakeholders, including state institutions, non- governmental organisations and buyers) Delegation to the Cabinet of Ministers to pass secondary legislation on the implementation of IET (establishing a ‘green investment scheme’)

11. Implementation model Latvia will propose a programmatic model for the GIS. Most GIS programs will consist of a large number of small projects. Therefore Latvia would propose to buyers “wholesale” greening programs backed by a transparent, accountable and efficient national mechanism to “retail” AAUs revenues to multiple project owners. Latvia can offer robust GIS implemented by competent national institutions that require only minor and targeted institutional strengthening.

12. Contract and Payment Structure GIS Fund Manager Project Beneficiary Ministry of the Environment Commercial Banks Management contract Loan Agreement Financing agreement Legal agreement Payment flow Instruction on Release of Payment Performance-based grants paid to projects upon delivery of verified milestones and results Service payment State treasury (budget income account) Budgetary programme Climate change financial instrument Buyer (AAU PA conditions)

13. Monitoring will be undertaken in accordance with relevant standards under the International rules and GIS rules and regulations pursuant to the Monitoring principles Monitoring principles (applied annually): (1) financial audit (2) procedural conformity of GIS (3) assessment of greening results Report to the Government by April 1 every year, to buyers by June 1. Environmental integrity – monitoring, auditing and reporting

14. Use of revenues (“greening”) The Latvian government will ensure that every AAU sold will be used for “greening” purposes which means: increase of renewable energy use improvement of energy efficiency application of innovative low carbon technologies capacity building for climate change policy design an implementation

15. Sectoral breakdown of greenhouse gas emission sources in Latvia in 2004 EU ETS opertaors represent 27% of total emissions

16. Climate and energy indicators, Latvia Avots: LIAA

17. Energy intensity (2005) Source: IEA

19. Energy supply-side management  Promotion of biomass use including CHP plants  Biogas recovery and use  Solar heat, geothermal, small hydropower plants Energy demand-side management  Improved energy efficiency in buildings  Efficient public lighting  Heat distribution in DH systems  Industrial power intensity Integrated projects: Heat production – distribution – final use Indicative greening pipelines (1)

20. Indicative greening pipelines (2) Other  Lower carbon transportation systems  Other low and zero- carbon emission technologies  Capacity building for climate policy development and implementation  Capacity building for GIS management

21. Conclusions and the way forward Climate change is environmental and economic prerogative and a huge task of political engineering GIS as an instrument for structural change to deliver deployment and scaling up of climate change mitigation technologies In countries with limited possibilities of direct GHG reductions it is a leverage for low carbon economy GIS brings co-benefits of mitigation and opens new business opportunities GIS can be a testing ground for new generation of post- Kyoto flexible mechanisms:  more programmatic  lower transaction costs  relying more on certified host country systems

22. Further information Ministry of the Environment Republic of Latvia Phone: +371-7026 417 valdis.bisters@vidm.gov.lvvaldis.bisters@vidm.gov.lv www.vidm.gov.lv