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Demand and supply for emission credits of the project-based Kyoto Mechanisms CDM and JI

Workshop on Climate Policy and Energy Modeling Taipei, Oct. 11, 2004 Taiwan Research Institute, R esearch Center of Science, Technology and Society, NTHU. Demand and supply for emission credits of the project-based Kyoto Mechanisms CDM and JI. Axel Michaelowa

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Demand and supply for emission credits of the project-based Kyoto Mechanisms CDM and JI

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  1. Workshop on Climate Policy and Energy Modeling Taipei, Oct. 11, 2004 Taiwan Research Institute, Research Center of Science, Technology and Society, NTHU Demand and supply for emission credits of the project-based Kyoto Mechanisms CDM and JI Axel Michaelowa Hamburg Institute of International Economics, Germany a-michaelowa@hwwa.de www.hwwa.de/climate.htm

  2. Structure of presentation • CDM rules and their effect on supply • Methodology status • The EB‘s additionality test • Competition between the CDM and JI • The fragmented demand • Modelling the CDM and JI market • Acquisition programmes • The EU linking directive • How Taiwan could participate • Conclusions

  3. CDM ”valve“ Emissions trading JI CDM CERs AAUs, ERUs Tropical air? Country 1 Kyoto commitment Country 2 Kyoto commitment

  4. The CDM maze changes COP/MOP 3 members can propose revision within 15 days to be donewithin 30 days elects 2% adap-tation tax Rulebook Baseline and monitoring methodologies elects Executive Board (10 members) decides on new rules within 4 months with-holds 4 industrial countries 5 develo-ping countries 1 AOSIS Currently 20 applications: 7 Europe 5 Japan 2 US 2 Asia comment new rules within 8 weeks accre-dits spot checks Certifier (OE): 4 3 members propose revision within 8 weeks Certifier Countries Stake-holder Observers is-sues comment within 30 days 7 registers 3 CDM pro-ject 31 Project design document: Baseline Monitoring Approval Methodology if first of its kind Monitoring report Verification Project partners Validation orfor-warding of new metho-dology 32 methodologies pending CERs authorise Certifi-cation Involved countries Project partners Involved countries Involvedcountries

  5. The baseline effect on supply a) old coal fired power station 1200 g CO2/kWh. b) gas turbine 450 g CO2/kWh c) 850 g CO2/kWh Factor of 3!

  6. Case law and path dependency • The EB does not provide a basic set of rules beyond the Marrakech Accords text • Exception: small scale projects • Project pioneers have to propose a new rule (“methodology”) for each new project type • Higher validation costs • Delay of several months, if not years • Risk of refusal • The CDM regime is shaped by first proposers • Important role of validators, methodology panel and expert reviewers • “Guardians” of the CDM

  7. Stringent decisions on baseline methodologies Passed methodologies are very project-specific

  8. Submitted baseline methodologies • Multiple methodologies for same project type

  9. Approved baseline methodologies • Multiple methodologies for same project type! • EB started consolidation/standardisation • Landfill gas collection and use • Renewable electricity for grid (except biomass)

  10. Characteristics of approved methodologies • Data needs are high • Electricity grid data: grid average emissions, latest 20% additions, latest 5 power plants • Not available in most countries • Need to publish them in a coherent way • Source credibility • Monitoring can be complex • Methane flaring: continuous measurement • Additionality test is prescribed, but not comparable • Problem: Sudden revision due to comments by specific interest groups (HFC case)

  11. Renewable electricity for grid (except biomass) methodology • Operating Margin: • Coal 500 TWh @ 1100 g CO2 • Fuel oil 100 TWh @ 800 g CO2 • Natural gas 100 TWh @ 500 g CO2 • = 971 g CO2 • Build Margin: • Total grid: 15 GW • Last 20%: 3 GW, generation 200 TWh, 800 g CO2 • Last 5 plants: 1 GW, generation 80 TWh, 600 CO2 • 800 g CO2 • Weighted at 50%: 886 g CO2

  12. Projected CERs from projects with approved methodologies (million by 2012)

  13. CDM host countries (million CERs)

  14. 10th session of CDM EB (July 2003) stated: As part of [...] determining the baseline scenario an explanation shall be made of how, through the use of the methodology, it can be demonstrated that a project activity is additional and therefore not the baseline scenario. Additionality test • EB‘s stepwise consolidated additionality test • Early projects: proof of CDM influencing decision • Investment analysis for all realistic alternatives • Parameters differentiated according to scale of alternative • Test whether barriers are prohibitive and how they are overcome by the CDM project • Common practice test • Decided at EB in October 2004?

  15. Share of different project types in projected CER supply million 250 200 N2O-Adipic Acid 150 Other Flaring Landfill gas 100 HFC Decomposition 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Point Carbon 2004

  16. JI supply • JI currently much less discussed and prepared than CDM due to 2008 start date • Supervisory Committee has not been set up • Will CDM rules apply to Track 2? • Which countries fulfil the requirements for Track 1? • Some activity in EU new member states and accession countries • Bulgaria, Romania, Baltic states, ~15 million t • Early JI backed by AAU trade (Slovakia) • Big JI hosts Ukraine and Russia hampered by generally bad political and investment climate • Intra-OECD JI? • New Zealand, “national projects” within EU

  17. Required emission reductions from business-as-usual Source: Jotzo and Michaelowa, Energy Policy, 2003

  18. The modelling framework • Supply/demand model for a single commodity, carbon emission credits, in the year 2010 • Perfect international market • Marginal abatement cost curves calibrated with reference to results from the MIT’s EPPA model • JI mobilises 20% of macroeconomic abatement potential, CDM 10% • Linear phase-in of CDM 2003-2007 • CDM project types explicitly modelled • capture of flared gas in oil and gas extraction • capture of methane from landfills

  19. The standard scenario • US and Australia do not ratify the Kyoto Protocol • Hot air sales are limited to 400 Mt (i.e. 30% of potential) to maximise revenue • All CDM projects have positive implementation costs • Sinks project CERs are cheaper than energy and thus the ceiling of 1% of base year emission binds • Transaction costs • CDM: 0.25 €/tCO2, rising with the permit price until at 3.7 €/tCO2, marginal TAC is 0.75 €/t. DNA fee: 1%, CER taxation by host country: 10%, adaptation levy: 2% • JI: 0.20 € /tCO2, rising to 0.75 €/tCO2 at a permit price of 3.7 €/tCO2 • International emissions trading: 0.10 €/tCO2

  20. Shares of the mechanisms in the standard scenario Market price: 3.7 €/t CO2 , total CDM revenue 6.6 b € CDM revenue after TAC: 2.4 €/t

  21. Shares of the project types in overall CDM

  22. CDM and JI demand worldwide: current Kyoto gap (for 2008-2012) Million t CO2 eq.

  23. Current Kyoto gap: “Old” EU Million t CO2 eq. Statesmayrevert to hot air acquisition from new members and Russia/Ukraine

  24. Demand on the CDM and JI market (million $) • Pure CDM demand: about 800 million $, i.e. ~ 200 million t at current prices of 3-5 $/t CO2 • Price differentiation according to quality?

  25. EU as CDM leader • “Linking directive” agreed as law, April 2004 • CERs can be used in EU trading scheme from Jan. 2005 • No common CER import limit. Member state competence and thus unlikely to be implemented • The survival of the Kyoto Mechanisms without Kyoto entry into force is guaranteed • Sinks excluded at least until 2008, large hydro to follow WCD rules • Market impact • Private demand depends on national allocation plans. Most published plans are weak. EU Commission not able to refuse any of them. Tendency to shift demand from companies to governments • Depends on government CER / ERU import regulations / fees

  26. CDM/JI acquisition in EU ETS national allocation plans Million t CO2 eq.

  27. Technology D IRR % Hydro 0.8-2.6 Wind 1.0-1.3 Bagasse 0.4-3.6 Energy Eff.-District Heating ~ 2.0 Gas Flare Reduction 2-4 Biomass 2-7 Municipal Solid Waste >5 Impact of carbon finance on project revenues at 3 €/t CO2 Source: PCF 2003

  28. How Taiwan could participate • COP decision on waiving the ratification requirement due to the specific situation of Taiwan • Precedents: Turkey special role in Annex I • Iceland exception • Participation in Annex B or Non-Annex B? • Annex B would be more appropriate to economic situation of Taiwan • Domestic emissions trading • CDM investment on the mainland • Good signal for post-2012 negotiations • Look for allies in the EU

  29. Conclusions • CDM is complex but manageable • Baseline and additionality determination difficult, expensive - setbacks for project developers! • Bulk of current supply coming from unexpected technologies • Supply Oct. 1, 2004: 90 million t • JI is underdeveloped • ~ 15 million t • CDM+JI demand is picking up • Coming mainly from government; 1200 million $ • Reluctance to introduce tough domestic climate policy instruments that could serve as incentive for private sector involvement; 100 million $

  30. Thank you!Further information:www.hwwa.de/climate.htmor: climate@hwwa.de

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