michaelowa@perspectives perspectives

1. Key challenges and possible new formats for CDM post-2012 ECBI Fellowships, Oxford, Sep. 3, 2007 Axel Michaelowa, Perspectives GmbH michaelowa@perspectives.cc michaelowa@perspectives.cc www.perspectives.cc

2. Structure of presentation • The political framework • The quantitative role of CDM post-2012 • Aggregation of CDM • Policy CDM • Sector CDM • Programmatic CDM • Conclusions

3. The political framework • AWG Vienna: • “achieving the lowest stabilization level assessed by the IPCC to date would require Annex I Parties as a group to reduce emissions in a range of 25–40 % below 1990 levels by 2020” • “greater mitigation potential is at the disposal of Annex I Parties through the wider use of flexibility mechanisms” • Developing countries support expansion of CDM

4. The role of the CDM post-2012 • Assumptions for market demand • Commitment period 2013-2019 • -30% for the EU and other OECD compared to 1990 • -10% for Australia, Belarus, Japan, Russia, Ukraine and the US compared to 2012 • -5% for new OECD members Chile, Israel, Mexico and South Korea • No commitments for any other countries

5. The role of the CDM post-2012

6. The role of the CDM post-2012 • Total demand 18.8 billion t CO2 eq. • Banked volumes 7.1 billion t • = Net shortfall 11.7 billion t • Current CDM pipeline: 0.4 billion t/year • Likely that supply could triple until 2020 • Total CER supply 2013-2019: 5.5 billion • = Shortfall: 50%!! •  We need additional CER supply

7. How to aggregate CDM • Bundling of projects  • Programmes  • Sectoral benchmark for crediting of all projects below the benchmark without further additionality check  • Policies  • Sectoral no-lose target and ex-post trade –no CDM! • Sectoral cap and trade – no CDM!

8. Evaluating CDM aggregation • Bundling of projects • Sensible from transaction cost point of view but done rarely • Programme • Essentially project bundle (without any limit) with intermediary providing an incentive. Transaction costs likely to be significant. Experience remains to be gathered • Sectoral benchmark • Intensity benchmark makes sense for several important project types but not for all • Abolishing additionality testing is not sensible in situation without binding cap • Policy CDM • Requires sizeable resources on government level • Allocation of costs and benefits between different players is tricky

9. Defining policy CDM • Crucial role of government • A policy should have an incentive to participate (carrot / stick) • Baseline: status quo • Renewable electricity generation caused by the policy *weighted OM/BM (ACM 2) • Energy efficiency standard: average energy use of appliance before standard*current number of appliances*grid average emissions factor • LFG/HFC/N2O/PFC capture regulation: emissions of all now regulated sources before regulation • Fossil fuel subsidy removal: Fossil fuel use before subsidy removal*fossil fuel emission factor

10. Defining policy CDM II • Policy emissions • Renewable electricity generation: Zero • Energy efficiency standard: standard energy use of appliance*current number of appliances*grid average emissions factor • LFG/HFC/N2O/PFC capture regulation: current emissions of all now regulated sources • Fossil fuel subsidy removal: Fossil fuel use after subsidy removal*fossil fuel emission factor • Policy must be monitored throughout crediting period • Challenge: changes in economic activity levels over time • Avoid generation of CERs due to activity increase? • Possible solution: limit credit to activity level at project start

11. Definition of policy CDM III • Additionality test • Policy has costs compared to status quo • Costs directly accrue to private sector • E.g. renewable energy provision under a RPS is more expensive than fossil fuel • Mandated HFC-23 capture entails costs • Costs directly accrue to public sector • Subsidy programme for energy efficiency improvement • Should macro-economic benefits from policy implementation be taken into account in additionality assessment? • Incremental cost calculation of GEF…

12. Policy CDM – Responsibilities • Who is project participant? • Who does the monitoring? • Who retains the CERs? • Government • Addressees of the policy who bear costs • Probably latter would prefer pass-through of the revenues, not necessarily the CERs as such • Share revenues according to cost distribution • Government bears CDM registration and monitoring costs

13. Policy CDM – Incentives • CER put option (Müller 2007): right to sell CERs from policy CDM at a pre-determined price • Gives government certainty about minimum revenue • Challenge to define price (floor price of market) • Challenge to define quantity of put options and their allocation to selling countries • CER obligation (Müller 2003): requirement for countries with emission caps to use CERs for at least a pre-defined share of their emission budget • Gives certainty about minimum demand • Does not solve the price problem

14. Conclusions • Post-2012 CER supply under current CDM regime likely to be insufficient, if negotiations orient themselves on IPCC results (as done by AWG) • CDM aggregation may increase CER potential • Sectoral CDM does not make sense • Programmatic CDM is promising but not yet tested • Pilots should be supported • Policy CDM is very interesting but incentive problems remain to be resolved

15. Thank you!Further information:www.perspectives.ccor:michaelowa@perspectives.cc