Clean Development Mechanism • Enables developed countries (known as Annex B countries) to meet their emission reduction commitments in a flexible and cost-effective manner • Assists developing countries (non-Annex B countries) in meeting their sustainable development objectives • Investors benefit by obtaining Certificates of Emissions Reductions (CERs) • Host countries benefit in the form of investment, access to better technology, and local sustainable development

Simplistic numerical example Provide electricity for a barangay • “Business-as-usual” (baseline): Diesel generator sets • Cost of project $10 • Emissions 1 tC • Cleaner project (CDM-eligible): Micro-hydro • Cost of project $13 • Zero Emissions

Simplistic numerical example • CDM Investor (e.g. Japan) • Invests $3 ($13-$10, difference between cleaner and business-as-usual project) • Gains Certificate of Emissions Reduction of 1 tC, which it can meet some of its Kyoto Protocol commitments to reduce emissions

CDM Project • Achieves Sustainable Development objectives for the host developing country • Reduces GHG Emissions

What are the Criteria for CDMProjects? • Sustainable development • Host country criteria • Environmental Impact Assessment • Stakeholder consultations • Greenhouse Gas (GHG) emission reductions • Environmental additionality • Project additionality • Project viability • Technologically proven • Financially sound • Host country approval • Project validation and registration

Sustainable development • Economic impacts • Employment, livelihood • Environmental impacts • Local air/water pollution control • Social equity • Impacts on disadvantaged groups

Additionality • Additionality is the key eligibility criterion in CDM projects • You must do something that you would not have done without the CDM • Two types of additionality • Project Additionality • Environmental Additionality

Project Additionality • Without the ability to register under the CDM, the proposed project would be, or would have been, unlikely to occur

Environmental Additionality • If the proposed CDM project activity is not implemented, a less greenhouse gas friendly activity would have been initiated or continued instead.

CO2 Emissions Baseline scenarioCO2 emissions (that would occur) Real, measurable and long-term Additional CO2 emissions reduction CDM project CO2 emissions (observable) Years Environmental additionality and baseline

Starting Point: Viable Project • A potential CDM Project is a feasible project • Technologically feasible • Financially sound • A potential CDM Project is a project which has an Environmental Compliance Certificate (ECC)

CDM Project Cycle Project Design & Formulation Project Design Document National Approval Operational Entity A Validation / Registration Investors Project Financing Project Participants Monitoring Monitoring Report Operational Entity B Verification / Certification Verification Report / Certification Report / Request of CERs EB / Registry Issuance of CERs C C I C C D 4 C D M

2. CDM Eligible Projects

CDM Eligible Projects • Renewable energy • Fuel switching • End-use energy efficiency improvements • Supply-side energy efficiency improvements • Agriculture (reduction of CH4 & N2O emissions) • Industrial processes (CO2 from cement, HFCs, etc) • Sink projects (only afforestation & reforestation)

Renewable energy • Renewable energy for the grid • For electricity generation by households or commercial users • E.g., Solar home systems, solar water pumps, photovoltaics, wind battery chargers • For mechanical energy by households or commercial users • E.g. wind-powered pumps, solar water pumps, water mills, wind mills

Renewable energy • Thermal energy for households or commercial users • E.g., solar thermal water heaters and dryers, solar cookers, energy derived from biomass for water heating, space heating or drying • Biomass combined heat and power (co-generation) systems

End-use energy efficiency improvements • Energy efficiency equipment • Motors • Lamps • Ballasts • Refrigerators • Fans • Air conditioners • Appliances • Etc …

Agriculture • Reducing emissions from agricultural soils • Use of ammonium sulfate instead of urea • Use of phosphogypsum in combination with urea instead of urea • Reducing methane emissions from livestock • Conservation agricultural tillage • Agricultural land management practices • Use of composted rice straw instead of fresh rice straw

Sink projects • Afforestation • Planting trees on agricultural land • Reforestation • Planting trees on denuded forest land

Clean Development Mechanism Types ofsmall-scaleprojects that could qualify for fast-track approval procedures • Renewable energyprojects up to15megawatts (MW) of output capacity • Energy efficiencyimprovements that reduce energy consumption on the supply and/or demand side by up to15gigawatt-hours (GWh)/year • Other project activities that both reduce emissions at source and directly emit less than15kilotons (kt) of CO2 equivalent annually

3. CDM Transaction Costs

Pre-implementation costs • Search costs • Negotiation costs • Baseline determination costs • Approval costs • Validation costs • Review costs • Registration costs

Implementation costs • Monitoring costs • Verification costs • Review costs • Certification costs • Enforcement costs

Trading costs • Transfer costs • Registration costs

Source: Michaelowa et al (2003)

Economies of scale • Economies of scale are the most important determinant of transaction costs • Due to the important role of fixed cost components

Project size, types & total transaction costs Source: Michaelowa et al (2003)

Project size thresholds • PCF considers any project with a volume below 3 million € greenhouse gas benefits would not be attractive due to transaction costs • Threshold of about 50,000 t CO2 per year for a 20–year project • Transaction costs should not be more than 25% of proceeds of CER sales to make a project viable (Shell, 2001) • Cost threshold of about 1 € / t CO2

Inferred Transaction Costs (TAC) of SSC project thresholds(Michaelowa, et al,2003)

Viability of CDM Projects • Given CER market price estimates of 1 – 5 € pet t CO2 (Jotzo and Michaelowa, 2001) • Given PCF transactions priced at 3 – 4 € per t CO2 • Only projects classified as large and very large are viable • Many small-scale projects would not be viable

Ways to reduce transactions costs Bundle projects to jointly undertake each step of the project cycle 2 1 3 4 5

Ways to reduce transactions costs • Do verification and certification not annually but at long intervals • Exempt projects from one or more steps of the project cycle • Streamline the information needs on each step of the project cycle • Standardization of parameters Source: Michaelowa et al (2003)

Ways to reduce transactions costs • Do unilateral CDM projects that reduce search and negotiation costs • Registration and certification fees proportional to the size of the project • Validation and verification fees proportional to the size of the project Source: Michaelowa et al (2003)

4. Challenge of Small-Scale Projects

Challenge of Small-Scale (SSC) projects • SSC projects have substantial sustainable development benefits • But unless high transaction costs are reduced, many SSC projects would not be viable

Small-scale (SSC) projects • Solar home systems, photovoltaics, wind-powered pumps, solar cookers • Pico-hydro • Reducing methane emissions from livestock • Community-based forest management • Agro-forestry • Watershed protection

Small-scale (SSC) projects • SSC projects have the best potential for achieving sustainable development benefits • SSC projects have the best potential for delivering benefits to the poor and to disadvantaged groups

Thank you Roberto C. Yap, S.J., Ph.D. Environmental Economist Climate Change Information Center Manila Observatory Ateneo de Manila University Tel +63 2 426-6144 Fax +63 2 426-6070 rcyap@ateneo.edu

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