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Should CMM Projects in China Consider Voluntary Emission Reduction Credits?

Explore strategies to optimize carbon credit value in the voluntary market using case studies and market insights from Chengdu workshop in 2009.

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Should CMM Projects in China Consider Voluntary Emission Reduction Credits?

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  1. CMM Recovery and Utilization & Methane Mitigation Workshop Chengdu, China April 7-8, 2009 Presented by: Ronald C. Collings, Michael M. Coté & Lu Tao Should CMM Projects in China Consider Voluntary Emission Reduction Credits?

  2. Questions for Chinese CMM Project Developers What are the options in today’s voluntary carbon market? What will be the value of CERs in a post-2012 Kyoto world? How much carbon financing is necessary to meet internal financial thresholds? What makes a project truly additional? 2

  3. CDM Success Rates for CMM Projects in China • Over 60 CMM projects in China have been submitted for CDM validation over the past 3 years • 14 projects registered by UNFCCC EB • 12 projects currently requesting registration • Nearly 40 projects remain at validation stage • Some have been at validation stage for 2 years • 2008 CERs left on the table

  4. CDM Validation Issues Lack of evidence that CDM was considered early on in project planning process Financial assumptions used in feasibility study reports (FSR) may differ than financials used in project design document Rules surrounding use of low-quality gas engines cloud the additionality testing Requirement to utilize high-quality CMM (>30% CH4) puzzles Designated Operational Entities (DOEs) 4

  5. CDM Validation Issues CMM projects already implemented without carbon finance Failure to install required monitoring equipment 5

  6. Over-The-Counter (OTC) Voluntary Carbon Markets Voluntary Carbon Standard (VCS) Uses ACM0008 methodology, CDM additionality guidelines, and same DOE validators Voluntary Carbon Offset Standard (VOS) Uses CDM/JI rules VER+ Standard Uses CDM/JI rules Gold Standard CMM not eligible 6

  7. Chicago Climate Exchange (CCX) Project eligibility extends back to 2003 Uses its own CMM project guidelines No financial additionality No project emissions calculation (replaced with methane GWP of 18.25) No additional offsets for grid-based electricity Uses similar methane monitoring methodology as ACM0008 Current crediting period ends 2010 Phase 3 will have crediting period 2011-2013 Volatile VER pricing $1-7 in 2008 7

  8. VCS Validation Issues Most are similar to CDM validation issues, however….. Can propose small deviations to ACM0008 New methodology approval process is more streamlined Corporate financial benchmarks are appropriate to use May be somewhat higher than ~13% IRR used in most PDDs Do not need DNA approval 8

  9. Meeting Your IRR Benchmark Internal Rate of Return $5.00/t CDM IRR Benchmark 9

  10. VER Buyers - What Drives Them? • Desire to manage their carbon footprint and climate change impacts • Corporate social responsibility • Pressure from stockholders • Public relations • Product branding (“carbon neutral”) • Need to prepare for pending GHG regulation • Carbon traders and hedge funds

  11. Voluntary Carbon Market – How Big is the U.S. Market? 11 Source: New Carbon Finance

  12. CMM Project Share of VER Market • In 2007, CMM projects represented only 7% of OTC market, but 30% of CCX market volume • 2007 average VER price for CMM projects in OTC market US$4.90/t • Overall, 2007 VER prices range from US$3.00-$6.00/t • VER and CER prices have declined at the end of 2008 12

  13. The Wide Range of VER Prices ETS EAUs Verified CERs Unverified CERs Verified VERs Climate Trust Increasing Value Unverified VERs RECs CCX $10 $15 $20 $5 $25 $30 Price of Offset Credits (per ton CO2e) Quality of Offset 13

  14. How CMM Projects Viewed by VER Buyers • Projects reducing methane emissions from landfills, agriculture, and coal mines appeal to certain VER buyers, but not all • Agricultural methane is preferred in U.S. • CMM projects viewed as less “attractive” than forestry or renewable energy projects • Certain VER buyers prefer ‘green’ industries, rather than creating additional revenue for those that generate GHGs such as coal industry • CMM project risk higher than agriculture or LFG 14

  15. Maximizing VER Value in Today’s Voluntary Carbon Market • Projects must demonstrate multiple environmental and social benefits • Reduction of other air pollutants (SOx, NOx, PM) • Sustainable development attributes • Job creation, education, technology transfer • Demonstrate new technologies • VAM, lean-burn gas engines • Increase in mine safety • Statistics showing results 15

  16. Furong CMM Example • Multiple usages of CMM on- and off-site 16

  17. High Quality VERs May Meet Pre-Compliance Requirements • “Early Action” projects being considered in U.S. compliance schemes • Projects must meet requirements of current voluntary GHG standards and registries • Project planning and implementation must be well documented and project registered in U.S. • Pre-CDM VERs could qualify as early action 17

  18. Transition to Pre-Compliance Carbon Market in U.S. Federal Legislation Proposed • At least 12 bills in congress, some include up to 15% of offsets can come from outside U.S. • Latest Dingell Boucher bill includes CMM as offset sector • Cap-and-trade may begin as early as 2013 • All bills include language for “early action” • Projects have 10-year crediting period • VERs may convert to compliance credits and values could exceed CERs 18

  19. Regional vs. Federal Compliance Carbon Markets in U.S. 19 Source: New Carbon Finance

  20. Impact of U.S. Compliance Market • U.S. EPA estimates that demand for international offsets could be at least 600 MtCO2e by 2020 20 Source: New Carbon Finance

  21. Opportunities Will Continue into Future for CMM Projects • Post-2012 demand for GHG offset projects in U.S. market to be significant • Long-term (post-2012) CER market demand unknown • VAM and low-quality gas technologies now emerging in CMM market • Australian GHG market to begin in 2010 • Limited Canadian GHG market (Province of Alberta) began in 2008 • Possible North American cap-and-trade 21

  22. Prepare for Future Markets • Plan to create “high-quality” GHG projects from the outset • Create innovative and new types of CMM project ideas • Consider carbon financing from the beginning of the planning stages • Learn lessons from current CDM cycle • Document according to ISO 14064 standards 22

  23. Thank You! Ruby Canyon Engineering, Inc. 743 Horizon Court, Suite #385 Grand Junction, Colorado USA 81506 www.rubycanyoneng.com ISO 14064-3 GHG Validators & Verifiers American Carbon Registry Verifiers since 2006 Chicago Climate Exchange Verifiers since 2007 California Climate Action Reserve Verifiers since 2008 23

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