LEGAL & REGULATORY ASPECTS OF THE CLEAN DEVELOPMENT MECHANISM

1. LEGAL & REGULATORY ASPECTS OF THE CLEAN DEVELOPMENT MECHANISM JUAN RODRIGO WALSH

2. Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires understanding the underlying legal and institutional frameworks on several planes or levels: The International Legal Framework Investor Nation Regulatory & Institutional Issues Host Country Legal & Institutional Requirements Contractual Issues between Investors and Developers Contractual Issues related to sale of CERs

3. Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires understanding the existing International legal and institutional frameworks: The International Legal Framework UNFCC Kyoto Protocol COP/MOP Resolutions & Decisions Executive Board

4. History of the Negotiations THE KYOTO PROTOCOL: Together with the UNFCC, the Kyoto Protocol constitutes the most important global agreement on the environment to date. The Protocol establishes Emission Reduction Targets for the period 2008-2012 for industrialized countries 5,2% below 1990 level emissions Kyoto also creates the Clean Development Mechanism (CDM) for developing countries Emphasising cooperation and “flexible mechanisms” to achieve the Protocol’s goals These mechanisms are: Emissions Trading (ET) Joint Implementation (J I ) Clean Development Mechanism (CDM)

5. GHG Committments undertaken by Annexe 1 Countries The Kyoto Protocol mandates Developed Countries to reduce overall GHG emissions by 5 % during the period 2008-2012, against 1990 levels of emissions. Other Annex 1 Countries have committed to greater levels of reduction: Some Examples: • Canada plans GHG reductions of 6 % below 1990 levels.

6. Current Emissions versus Goals Source: Royal Institute of International Affairs

7. Flexible Mechanisms Introduced by the Kyoto Protocol The Kyoto Protocol establishes strict committments for Annex I Countries, allowing for compliance by means of “flexibility mechanisms” : • Emissions Trading (ET) 2008-2012 • Joint Implementation (JI) 2008-2012 • Clean Development Mechanism (CDM) 2000-2012

8. Emissions Trading (ET) • Article 17 of the Kyoto Protocolo provides for emissions trading transactions between Annexe 1 Countries • All ET Transactions must be supplementary to national policies adopted by governments pursuant to the quantifiable emissions reductions committed to by Annexe 1 Countries

9. Joint Implementation • Article 6 establishes that Emissions Reductions Units may be transferred between Annexe 1 Countries in the case of Joint Implementation Projects. • Joint Implementation Activities must be complementary to domestic emission reductions policies.

10. Clean Development Mechanism • Article 12 allows for projects to be jointly executed by developed and developing countries. • These activities may start in 2000. Developed Countries may therefore invest in GHG reduction projects in developing countries and utilise the credits obtained from these reductions toward compliance with national committments.

11. CDM projects must meet the following requirements: • Contribute to the sustainable development of developing countries • Have a demonstrable effect on climate change mitigation • GHG Reductions must be measurable and certifiable over a period of time • Environmental Benefits must be permanent and additional to any that might occur in absence of the project

12. CDM requirements • Acceptability • Host Country Acceptability • At an International Level • For the Investor Nation • Additionality • Must be real and measurable • Must consider existing and future trends • Externalities • Must consider social effects and sustainability • Must consider environmental impacts

13. What is Additionality ? • Environmental Additionality • Emissions reductions must be over and above a “business as usual scenario” • Financial Additionality • Investments must be real. Resources from Annexe 1 Countries must e additional to existing financial committments and ODA • Business as Usual Scenario • Some degree of Technical Innovation required

14. Carbon Quantification Additionality = project – Base Line Source: Ecosecurities 2002

15. Other Issues to be Considered in CDM Projects • Social Impacts • Employment: • Are jobs created ? • Infrastructure and Know How: • How does the project contribute to local expertise and infrastructure ? • Environmental Benefits • Other emissions reductions and environmental benefits

16. Required Phases for CDM Projects Pre-Investment Phase Project Design Base Line Determination Project Approval Project Registry Investment & Operation Implementation Verification Certification Monitoring Award of CERs

17. Pre-investment Phase Pre Feasibility Criteria • Carbon Issues • Project Timeframe • Defining the Baseline • Defining Additionality • Identifying “Leakages” • Net Carbon Benefits • Potential CERs • Other Considerations • Overall Environmental Impacts Biodiversity • Waste management • Watershed Management • Sustainable Development • Host Country Approval • Training requirements • Technology transfer

18. Implementation Phase Validation: Must be carried out by an Independent Third Party in order to obtain approval as a CDM Project Verification: Must also be carried out by an independent Third Party. Verification requires periodical control and ex post verification of emissions reductions o carbon sequestration in sinks Certification: Must also be carried out by an Independent Third Party. Certification consists in a formal, written statement to the effect that, during a certain lapse of time, a particular project has achieved the targets set for emissions reductions or sequestration, as verified. CERs awarded by the CDM Executive Board

19. What are CERs ? • Certificates of Emissions Reductions, measured in tons of CO2. (CERs). • Emissions Reductions must comply with the following criteria: • Measurable, and; • Verifiable by Independent Thir Parties . • They must also pass the test of “Additionality”

21. Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects usually requires understanding the existing legal and institutional framework in the “Investor Country” or the country of the purchaser of the CERs: Investor Nation Regulatory & Institutional Issues Annexe 1 Country Party to Kyoto? Domestic CO2 Programme? (ERUPT & CERUPT) Company to Company

22. Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires a fundamental understanding of the legal and institutional framework of the Host Country: Host Country Legal & Institutional Requirements Regulatory Requirements for approval Existence of a Host Country CDM office Environmental and Regulatory requirements applicable to the CDM Project Legal, taxation and other regulatory requirements for FDI

23. Host Country Approval Process: The case of Argentina Environment Secretariat Resolution 169/2001 Establishes the guidelines for evaluation and approval for projects submitted to the Secretariat acting as “Focal Point: Projects are subject to independent peer review and external evaluation Special “Climate Change Office” ( OAMDL) Coordination of environmental policies and Negotiating Positions at UNFCC and COP/MOP meetings

24. CLIMATE CHANGE MITIGATION STRATEGY: The Case of Argentina • Sectors to be given special attention: • Energy Sector, • Land Use, Land Use Change and Forestry Sectors (LULUCF), • Farming Sector • Waste Management Sector

25. SMAyDS Executive Committee Advisory Comittee • SAyDS • Sec. of Energy • Sec. of Industry • Sec. of Transport • Sec. of Science & Technology • Agriculture • Foreign Affairs Sector Committees • Business Associations • Academia • NGO’s • Energy, Industry & Transport • Forestry • Farming • Waste Management OAMDL

26. Identify prioritary sectors to implement CDM projects and activities • Define CDM Policy • Establish methodologies and procedures for identifying, preparing and evaluating projects • Full cycle management and Host Country approval of CDM projects • Establish relationships with sources of financing for projects National Climate Change Programs • Rules for submission of projects • Project Design Documents (PDD) • Evaluating Institutions Registry (RIE) CDM Project Management OAMDL FUNCTIONS OAMDL • Impacts & Adaptation • Mitigation • Awareness building & Participation

27. Organization of the National CDM Authority • Design of the legal context for the presentation and management of projects • Legal requirements • Policy Issues • Methodological support for the preparation and assessment of projects • Pre/ and feasibility Studies, Standardised Baseline Studies & Monitoring Programs • Policy Guidelines

28. Regulatory Aspects of CDM Projects and the Climate Change Office (OAMDL) • Registration and Acreditation of Evaluating Institutions for National Project Cycle Assessment • Adaptation of Project Presentation Documents and standardized formats (PIN, PDD, etc) • Evaluation Criteria and Sustainability Indices • Liaison Offices with Provincial and Local Governments • Proposals for simplified Project Evaluation

29. Technical Support provided by Climate Change Office • Colaboration in designing National Climate Change and Mitigation Strategies • Coordination of National Climate Change Programmes, Projects and related research activities • Establishment of Project data bases and general awareness building • Administrative Management of OAMDL Working Groups

30. OAMDL’s Activities Creation of sector-specific Committees • Sectors: • Energy, Industry & Transport • Forestry • Farming • Waste Management • Objectives: • Identify opportunities for projects for potential investors • Preparation of a strategy for the mitigation of GHG emissions on a sector-specific basis, in order to achieve the country’s best mitigation potential for each sector • Establishment of sector-specific baseline • Methodological Guidelines for projects

31. Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects also requires understanding the legal implications and potential risks for both Project Developers and Investors: Contractual Issues between Investors and Developers Applicable Rules for FDI Multilateral or Bilateral Investment Agreements Taxation & Repatriation of Profits Issues Technology Transfer & Intellectual Property Issues Project Due Diligence between Developers and Investors

32. Who is purchasing Certified Emissions Reductions (CERs) ? • Energy Sector Companies • Chemical Companies • Oil & Gas Companies • Paper, Cement, and Steel Industries • Investment Funds

33. Prices: Which Way?

34. What is the market paying for Carbon ? • PFC - US$ 3.5-5 / Ton CO2 (depending on risk factors) • ERUPT - Euro 5-9/Ton CO2 • Institutional Funds – On a one by one negotiated basis • Private Corporations - US$ 50cents to $1.50 per Ton CO2 ( Within or without Kyoto) • Options (depending on price and timespan US$ 25c to 75c/Ton CO2)

35. ERUPT Results www.senter.nl/erupt

36. Comparison of IRR in Carbon Projects: Renewable Energy Source: World Bank 2001

37. Selling Carbon Credits • This Phase is usually carried out simultaneously with the project design and approval phases • Early Identification of potential Investors • Enhanced security and feasibility for Project • Direct Negotiations • Involvement of Brokers: Success Fee for sale of CERs

38. Climate Change and CDM Projects: Understanding the Legal Issues at stake Designing and implementing CDM or related Greenhouse Gas (GHG) reduction projects requires understanding the legal aspects of the Carbon Market and the sale of CERs: Contractual Issues related to sale of CERs Long term purchase contracts Brokerage fees Monitoring requirements, auditing and Independent Verification Managing Risk: Insurance

39. The Way Forward • The Climate Change Regime has been controversial • The Kyoto Protocol has been rejected by the U.S. as “fatally flawed” • Entry into force requires at least 55 countries with 55% of global GHG emissions • Technical uncertainties (Forestry and LULUCF) • Russian ratification?

40. The Way Forward • Experience is growing • PCF • UK ETS • EU Directives • U.S. State regimes • Climate Change is a problem that will not disappear!!