Michael Lazarus Stockholm Environment Institute (Seattle) Visiting Researcher, LEPII-EPE, Grenoble

1. Perspectives on the Clean Development Mechanism and Lessons for the Future Michael Lazarus Stockholm Environment Institute (Seattle) Visiting Researcher, LEPII-EPE, Grenoble Member, CDM Methodology Panel

3. Stockholm Environment Institute - US • Autonomous since July 2006 (formerly linked to Tellus Institute); offices in Boston (Tufts U.), Sacramento, Seattle • Climate-related activities include: • State and local climate change policy • CA Climate Action Team, West Coast Governors GWI, Puget Sound/AZ/NM/MT stakeholder processes • Hydrogen transition assessment • Post-2012 global climate change policy • COP/MOP events; various N-S initiatives • Linking technology development and emissions commitments • Energy, climate, and development • CDM support • COMMEND initiative: energy planning for development • Renewable energy and development initiatives in Sub-Saharan Africa • Vulnerability, adaptation, and livelihoods • UNEP Collaborating Centre on V&A • Adaptation programs of action (NAPAs)

4. Five Perspectives on the Clean Development Mechanism (CDM) • Design • Market • Development • Regulatory and Administrative • Future Climate Policy

5. CDM Design • a mechanism to assign tradable credits (CERs) to emissions reductions from project activities in non-Annex 1 countries… that are additional to those that would otherwise occur • a single tool for several jobs • Economic efficiency (for industrialized countries) • Lower cost of compliance with Kyoto targets • Sustainable development (for developing countries) • Technology transfer

6. How the CDM works Source: CDM and JI in CHARTS Ver. 6.0, IGES, http://www.iges.or.jp/en/cdm/index.html

7. It’s all about the baseline… Source: CDM and JI in CHARTS Ver. 6.0, IGES, http://www.iges.or.jp/en/cdm/index.html

10. Never before…. • A baseline-and-credit emission trading program of this scale • A new and sizeable market “established” by an international (UN) “regulatory body” …with so many difficult and unanswered questions

11. CDM: Market Perspectives

12. Just ask Rhodia… Point Carbon News. 05.12.05 ”Chemical company Rhodia sees shares gain on CDM decision: Global chemicals company Rhodia has seen its share price jump almost 14 per cent since last week's announcement that its adipic acid N20 project in Onsan, South Korea received approval from the CDM Executive Board last week.”

13. CERs in the pipeline (May 2006) Mt CO2-eq/year (2008-2012) • Nearly 1000 projects with PDD (Project Design Document) • >1.3 billion credits expected to 2012 • >300 Small-scale projects (200 renewable electricity generation) CDM pipeline estimates, courtesy of Jane Ellis, OECD

14. CERs in the CDM Pipeline • 40% High GWP gas • HFC, N2O, handful of big projects • 20% Methane reduction • Landfill, manure, oil/gas • 20% Renewables • Bagasse cogen, wind, hydro • <5% Efficiency • Almost entirely industrial Source: The Developing CDM Market, Jane Ellis and Ellina Levina, OECD/IEA Information Paper (2005)

15. Geographical distribution (Ellis 2006) GHG emissions, 2000 Expected CERs, May 2006 Source: Ellis, 2006 (cait.wri.org)

17. Development Perspectives • Where is the sustainable development benefit? (poverty alleviation, jobs, cleaner technology, local social/environment improvement, ...) • Regional distribution • Project types • Project participants • Technology Transfer • Incremental vs. transformative change • Projects vs. policies, programs, and markets • Changing development patterns, capital flows, investment, policy preferences, technology choices

18. Why aren’t more CDM projects like this? • Challenges common to many development projects • CDM transaction costs • Lead times vs. 2012 • In general, direct competition with the rest of the CDM market • some added value in niche markets • SD criteria defined nationally (DNAs) SouthSouthNorth: Kuyasa low cost housing energy upgrade CDM project; Retrofit >2000 homes with insulated ceilings, solar water heaters and CFL’s Photos: from Emily Tyler, SouthSouthNorth, COP11/MOP1 Montreal, IISD Development Dividend Project

19. CDM: Regulatory (Administrative) Perspectives • Marrakech Accords (2001) define criteria and process • Bottom-up, case law process for baseline and monitoring methodologies, “transparent and conservative”, SD and methodology separated • Process takes off in 2002 with first submitted methodologies, and evolves • Project proponents submit, Meth Panel reviews (up to 3 “feedback loops”), recommends, Executive Board decides • Nearly 200 “new methodologies” submitted to date; about 40 approved (some are consolidations); many under review

20. It’s all about the baseline…

21. The Methodology Challenge: Some Lessons “Make everything as simple as possible, but no simpler” • Methodologies are harder to get “right” than often realized • Many require highly-specialized and scarce knowledge (F gases, N2O, CMM, methane decay) • Regulatory staff and resources are still inadequate • Bottom-up submission process: many benefits, many opportunity costs (QC) • Scarce panel & reviewer resources are spent reacting & critiquing rather than creating & fixing

22. CDM’s Unsolved Puzzles • A minefield of moral hazards and perverse incentives… • Buyer-seller dynamic • Additionality • National policies • New HCFC facilities • “Continuation of current practice” projects • Accounting, technical, and procedural challenges • Program CDM (great idea…not as simple as it sounds) • Double counting in its many forms • Producers vs. users of biofuels; how to avoid assigning “rights”? • Upstream (downstream) emissions (Full lifecycle impacts may be quite important, e.g. gas vs. coal, biofuels vs. fossil fuels) • Non-renewable biomass and avoided deforestation • Carbon capture and storage (Is CDM the right venue? Technical/monitoring standards? permanance and liability? Acceptable levels of physical leakage?) • Coping with high uncertainties (high noise-to-signal ratio (in many methodologies – open flare efficiencies, some mass balance meths)

23. Additionality “Never has so much been said about a topic by so many, without ever agreeing on a common vocabulary, and the goals of the conversation.” (Mark Trexler) • Additionality is inherently subjective, frequently not binary in nature (yes/no), and can be assessed using analytical tools, but never clearly resolved on a procedural/technical basis. • False positives and false negatives • Lost opportunities (false negative) increase CER prices, deny potential SD project benefits • Non-additional projects (false positives) suppress CER prices, contribute nothing to sustainable development, and increase global emissions • It’s a policy decision, pure and simple: program and project type preferences/eligibility • for instance, penetration rate thresholds can favor emerging technologies OR

24. Production of Inputs Production Distribution Final Sale Use BiomassCultivation Biofuel Prod. Blender / Distributor Filling Stations Vehicles CDM Clearing point? CDM Spot checks

25. Use the right tool for the job • Job: Economic efficiency, costs of compliance, working markets • CDM Market mechanism applied to project types where it works best • Job: Technology transfer, sustainable development (small, incremental) • Expand and simplify small-scale CDM (de facto “positive list”) for pre-selected project types and scales, lower transaction cost, target promising technologies and project types • Rethink interface with CER markets (set asides, minimums) • Job: Regulating the system • Full time, staffed, depoliticized, regulatory facility, with capacity to set policy not just react • Job: Technology transfer, sustainable development (transforming energy systems and development pathways) • ????

27. EXTRAS

28. “Infrastructure” CDM Project Cycle| Players • COP/MOP (COP until KP enters into force) • CDM Executive Board (supported by technical panels and working groups) • Designated operational entities (DOE) • Project participants • Designated national authorities (DNA) Source: UNFCCC

29. CDM project cycle|Project Design stage- methodology • Project Participant to assess and decide whether approved baseline and monitoring methodology is applicable to his project activity • If yes apply and proceed in project cycle • If not decide whether to: • Abandon • Propose new methodology (subject of remainder of the presentation) Source: UNFCCC

30. Methodology Process|Procedure for submission /consideration 1 = Meth Panel to consider (go to step 2) DOE/AE Checks completeness One panel member pre-screen Secretariat re-checks completeness Date of EB receipt 2 = Case not approved PP draft and submit

31. Methodology Process|Procedure for submission /consideration - 2 Recommendation to Meth Panel - standard format 10 days (selects 2 experts from ROE) Recommendation to the Board – standard format 7 weeks Meth Panel Methodology Submitted (= 1) Approval – A, B or C Desk reviews 15days Public 4 months EB

32. Questions? Draft recommendation Meth Panel PP Answers If comments Comment (10 days) Next Meth Panel meeting AEs/ DOEs Sec. EB Feedback loop for “B cases” NO comments

33. 10 days 7 weeks DOE/AE checks secretariat Date of receipt 15 days 4 months Procedures for submission and consideration of a proposed new methodology Desk reviews Recommendation – Check list (select from ROE) Recommendation to the Board – standard format Meth Panel PP drafts and through DOE/AE Public EB Decision

34. Evolution of a Methodology Process 2002 Untested foundations, uncertain tasks 2003 First meths, initial frameworks: forms, desk reviews, ratings, interactions First tough issues: additionality, continuation of existing practices 2004/2005 Floodgates open: >100 meths, >30 meths/meeting National policies and perverse incentives, double counting First consolidations, increased panel size 2005/2006+ Secretariat resources increase Upstream emissions, monitoring, hydro, CCS…additionality again? Key gaps remain in AM coverage (energy efficiency, transport, AR…) Consistency, consolidation, completeness

35. CDM project cycle –Roles and responsibilities Project Operational Executive Board(EB) Participant(PP) Entity (DOE) Project Design Validation/Registration * (within 8 weeks) Monitoring Verification & Certification Issuance of CERs * (within 15 days) * An automatic step unless a review is requested. COP/MOP Provide info1 Confirm thatrequirementsare met Implement Certify ERs Companies (private/public) Written letter of approval from DNA involved are required prior to request for registration.

36. Questions? Draft recommendation Meth Panel PP Answers If comments Comment (7 days) Next Meth Panel meeting AEs/ DOEs Sec. EB Feedback loop NO comments

37. Barriers to RE/EE Project Development • Old news: EE and RE face market impediments • access to finance, adverse incentives, imperfect information, etc… • CDM/JI can relieve barriers, but create others along the way • Procedural bottlenecks and transaction costs • a challenging new endeavor, a resource-constrained regulator, new institutions, and a bottom-up methodology process • Competitive disadvantage for smaller RE and EE projects • markets start with lowest hanging fruit and biggest trees • distributed technologies and buildings present particular challenges • Programs/policies vs. projects • clarifications and methods needed • Prospective CDM revenues do not guarantee access to project finance • Post-2012 uncertainty stifles long-lead time (RE) projects

38. Regulating and Administering the CDM • Makes inventories seem like child’s play • Additionality will never be resolved as a technical issue • Evolution to standards • Unless eligibility-type rules are established from the start, they will bog down the system for some time • Examples of other issues that don’t go away: • Second layer: Deep, technical issues have only begun to surface • Monitoring • CCS as great example

40. Final rec. A,B or C A A Final rec. A or C C C NM000X NM000X Meth Panel EB PP via DOE B Prelim. rec. B (only 1 x) Re-submission by PPs NM000X-rev NM000X-rev Meth Panel EB PP via DOE Prelim. rec. B (only 1 x)