CDM Market Potential

1. CLEAN DEVELOPMENT MECHANISM FACILITYAsian Development Bankwww.adb.org/cdmfBridging the Gap Towards Climate Change Mitigation in Asia and the Pacific6 December 2003, COP9-Milano

2. CDM Market Potential • Cost-effective compliance option, “inevitable choice” for Annex I countries (esp. First Commitment period) • Opportunity for developing countries (technology, financial resources, sustainable development goals) • 2/3rds Annex-I countries have net positive emissions, mitigation needs ~700 MtCO2e/yr • CER (CDM) potential ranges ~ 55-360 MtCO2e/yr • Annex I “planned” CER procurement thru’ 2012, ~ 100 MtCO2e/yr, likely to increase (eg., Japan- high domestic abatement costs, EU – 13 behind target, high EU-ETS penalties)

3. Gaps in the CDM Market • Almost everyone’s interested but very few “active” global players – Netherlands, Finland, WB (PCF, others). • Primarily Annex I buyer- driven and -dominated • Largely public sector (Annex I Govts.) -driven, while private sector is “responsible”, and key market driver • Large gap exists in global CDM market, actual/planned implementation far below planned procurement targets (completed transactions in 10’s not 100’s) • Slow Process - From 1997 to 2001 (Marrakech) to develop CDM Guidelines, Uncertainties continue….

4. Barriers in CDM Market • Barriers (and Possible Risk Mitigation) • Kyoto risk (55% Annex I ratification) – Russia?, USA? • Methodology (Additionality, Baseline) risk for validation, registration- transparent rules/modalities (esp. for increased private sector participation), guidance/standardization • Host country risk for endorsement/approval – ratification of KP, establishment of effective DNA, CDM policy and “mainstreaming” into other national policies • High transaction costs ($300K?)- standardization of procedures, development of country baselines, pilot PDDs • Lack of CDM professionals in host countries – capacity building including domestic financial sectors, OEs, etc. • Financial risks – ensure upfront underlying project finance

5. CDM Market in Asia & the Pacific • Relatively large potential (fastest growing energy sectors, high deforestation rates, etc.) • Currently little share in CDM Market, less than 20% (far behind Latin America, CEE-JI) • Lags behind on all fronts - Methodologies, Applicant OEs, Candidate/Approved Projects, Establishment of DNAs • Lack of understanding/information also leads to “perceived” risks (especially political/country risks), wide differences between price offers and price expectations • Focus on RE/EE but low CER prices make little difference to RE project IRRs, while EE baselines difficult to establish

6. ADB’s Clean Energy Initiatives & Experience • 62 member countries (44 in Asia and the Pacific) • Energy Sector lending share significant (18% of $5.7 billion total lending in 2002) • ADB’s Energy Policy – supports global environmental objectives and climate change mitigation, under the overarching goal of poverty reduction in Asia and the Pacific • Mix of policy and program lending, TA, cofinance • Climate Change Initiatives (Capacity Building and Investments)- covering over 25 countries in Asia • ALGAS • REACH (by Govt of the Netherlands, Canada and Denmark) • ESCO Equity Fund (Fegace Asia Sub-Fund) • CDM Facility

7. Potential CDM Projects (ADB Pipeline, Next 3 yrs) • Approximately 40 projects have CDM potential for saving of estimated annually 15-25 million tons of CO2 • Energy efficiency enhancement • Renewable energy development • Coal bed methane recovery • Clean energy • Methane capture from sanitary landfill • Different Stages (Feasibility, Project Preparatory Technical Assistance, Loan Design, Approved Loan…)

8. Clean Development Mechanism Facility at ADB • CDM Facility established by ADB in August 2003, Pilot Phase of 3 years, Cost-recovery basis • To assist DMCs in accessing opportunities offered by the Kyoto Protocol for mobilizing additional resources and technology flows to support GHG-reducing, clean energy projects and to assist meeting national pro-poor and sustainable development goals. • To assist developed countries to meet their commitments under the Kyoto Protocol • Broad range of technologies and processes in energy, industry, agro-forestry, urban services and transport that generate ER and contribute to sustainable development in DMC.

9. Modalities of CDM Facility ADB announces CDM facility to ·Potential buyers (countries and companies) ·Potential sellers (DMCs and DMC companies) The Clean Development Mechanism Process YES ADB sets up market intelligence system Transfer CERs to buyer Buyer decides to pay for the processing costs of CDM and purchase CERs at an agreed price CDM facility and ODs with support from OCO identify potential CDM-eligible projects in pipeline NO CDM facility assists ODs to satisfy all CDM requirements: 1)Project development 2)Validation and registration 3)Monitoring, verification, and certification of ER credits 4)Issuance of ER credits BUYER CDM facility screens initial project to assist ODs in preparing PIN CERs are produced by the project ADB notifies the DMC project owner if there is interest in pursuing development of CDM PIN YES DMC/DMC company decides to pay for the processing costs of CDM and will sell CERs in the open market YES SELLER NO Sell CERs to highest bidder in the market NO CDM activities STOP STOP CDM = clean development mechanism; CERs = certified emissions reduction credits; DMC = developing member country; ER = emissions reduction; OD = operating department; OCO = Office of Cofinancing Operations; and PIN = project identification number.

10. Features of CDM FacilityBridging the Gap in CDM Market • Mainstream CDM into ADB lending portfolio by assisting operational departments working with ER sellers (public and private entities in ADB’s Developing Member Countries). • Lower transaction costs by integrating CDM elements (PDD development) into project appraisal and processing (ADB Project Cycle) • Allow sellers to explore multiple offers from buyers (public and private sector players from ADB’s Developed Member Countries who join the Core Buyers Group) and select the most appropriate one • Provide market intelligence on demand, supply and prices of ERs

11. Features of CDM FacilityBridging the Gap in CDM Market • Assist in host country endorsement (e.g., engagement from Country Strategy & Programming Stage, Loan covenants) • Assist in developing, processing, validating and registering, monitoring CDM projects • Provide quality ERs through risk assessment and risk mitigation (underlying finance, host country endorsement, political risk guarantee) • Provide flexibility to buyers to exercise their preferences (country focus, RE vs EE, etc.) • Based on seller’s consent, provide buyers a chance to get in at early stage (project entails higher risk and lower prices for “verifiable” ERs) or late, mature stage (project entails lower risk and higher prices for certified ERs, which may be thru’ unilateral CDM)

12. CDM Facility - Integration with ADB Project Cycle

13. CDM Facility - Integration with ADB Project Cycle

14. CONTACT INFORMATION • Director, Finance & Infrastructure Division • Regional and Sustainable Development Department • Asian Development Bank • P.O. Box 789, 0980 Manila, Philippines. • Tel: (63-2) 632-6473 • Fax: (63-2) 636-2198 • E-mail: adbcdm@adb.org • www.adb.org/cdmf