CDM: Scope and Opportunities - EPCO

Kyoto ComplianceAnnex IEmission TradingClean DevelopmentMechanism1990 level-5%JointImplementationDomestic ActionsPresentday2012(BaU)2012with KPAssigned AmountsIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

The Kyoto compliance challenge• Compliance gap is 5 to 5.5 billion tonnes.• About 2.5 billion tonnes are expected to beachieved by domestic measures.• The demand from CDM, JI and ET is about 2.5to 3 billion tonnes.Introductory Session on CDMEPCO, Bhopal, 4 th April 2006

What is CDM?• CDM is a due-diligence process for theregistration of a project which has the potentialto reduce greenhouse gas (GHG) emissions.• The registered project produces GHG emissionsreductions during its operation, and these areverified and certified on an annual basis.• The certified emissions reductions (CERs) arepurchased by buyers in Europe, Japan andCanada who are under obligation to reduce theirGHG emissions; either by their own actions or bythe purchase of CERs and other emissionsallowances.Introductory Session on CDMEPCO, Bhopal, 4 th April 2006

For the CDM project,CERs are an additional source of revenueLoanInvestmentCERPowerERPARevenuePPARevenueElectricity BuyerIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

For the CER buyer,CERs are an additional source of complianceEAPaymentsOther Annex IIndustriesEmissionAllowanceLoanInvestmentInvestmentAnnex I CountryIndustryERER ActivityCERERPARevenuePowerPPARevenueElectricity BuyerIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

What are potential CDM projects?• Project activity should have lower GHG emissions thanin the baseline scenario; examples include:- Renewables- Energy efficiency- Waste-to-energy- Reforestation and afforestation- Projects reducing HFC, SF 6 , PFC or N 2 O emissions• Emissions should be additional to those that wouldhave occurred without the projects; illustrated by- Viability due to additional revenue- Mitigation of technological, market or policy risk- Larger project size because of additional resources- Sustainability due to additional revenueIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

How does the CDM due dilligence process work?Applicant EntityDesignProjectParticipantsExecutive Board andCOP/MOPAccreditation/designationDesignated Operational EntityDesignatedOperational EntityValidation/registrationCDM Executive BoardDesignated National Authority(DNA) for CDMMonitoringProjectParticipantsVerification/certificationDesignated Operational EntityCDM Executive BoardIssuanceCertified Emission ReductionsIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

What are the costs involved in obtaining CERs?• Preparation of Project DesignDocument (PDD)• Preparation of a new methodology• Validation• Annual Verification• CertificationRs. 2 lakhsRs. 2 lakhsRs. 4 lakhsRs. 2 lakhs20 ¢ per CERIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

What are the prices of CERs?• CERs are currently largely being sold throughforward contracts at $10-12 per CER• Issued CERs are being sold at $15-20 per CER• The only current mandated reductions are in theEuropean Union where designated companies needto show compliance at the end of the year – thisdiscounts price of forwards due to delivery risk• Kyoto Protocol compliance starts in 2008• From 2008, two other sources of emissionsallowances (Joint Implementation and EmissionsTrading – both between Annex-I Parties only) willalso be initiated; by that time CER supply will alsoincrease.Introductory Session on CDMEPCO, Bhopal, 4 th April 2006

Possible project ideas in M.P.• Private Sector- Renewables- Energy efficiency• Public –Private Partnerships- Municipal Solid Waste Management & EnergyRecovery- Sustainable Joint Forestry Management programs• Public Sector- Program of activities for provision of rural energyservices, especially through renewables- Upgradation of municipal infrastructure, e.g. streetlighting, pumping, etc.Introductory Session on CDMEPCO, Bhopal, 4 th April 2006

Structure of the Carbon Market• Till 2008– The EU Emissions Trading System is the only Kyotocompliantregulatory regime in force which will accept CERs– EU ETS requires delivery of CERs to meet regulatoryrequirements– As there are no CERs as yet, and few are expected in 2005and 2006, CDM projects are selling CER futures• During 2008-2012– Kyoto regime has to be in force in all Annex-1 countries– JI credits and ET allowances will also be in the marketalongwith CERsIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

The Carbon Market, 2005-07EU ETS – CDM LinkageEU Emissions Trading System2005-08 Expected emissions: 6572 Million2005-08 Required Reductions: 290 MillionVerificationCERRegistrationCDM ProjectProposed CDMProjectCERsFuturesContractsLinking DirectiveTotalReduction(200 Million)EU ETS TradingVolume : 200,000 per dayPrice : €21 - €23Volatility : HighIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

The 2008-12 carbon marketo Compliance gap is 5 to 5.5 billion tonnes.o Assume 2.5 billion tonnes are achieved bydomestic measures.o The demand from CDM, JI and ET is about 2.5to 3 billion tonnes.o As yet, expected CDM/JI supply is 0.5 billiontonnes by 2012.Introductory Session on CDMEPCO, Bhopal, 4 th April 2006

Carbon Market, 2008-2012CDM (from developing countries)Available : ? (375 Million +)Price : ?Integrity : HighDomesticReduction(3 Billion)FlexibleMechanisms(2.5 Billion)JI (from Economies in transition)Available : ?Price : > CDMIntegrity : HighTotal Reduction required inEU, Canada & Japan (2008-12)5.5 Billion CERsET (from Economies in transition)Available : ~ 2-3 BillionPrice : > $0Integrity : LowIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

Tradeoff in the Carbon Market, 2008-12High IntegrityLow availabilityCDMETLow IntegrityHigh availabilityIntroductory Session on CDMEPCO, Bhopal, 4 th April 2006

Price of CERs ?12ER Price, $/ER10864202002 2003 2004/05 2006 2007 2008 2009 2010 2011 2012Introductory Session on CDMEPCO, Bhopal, 4 th April 2006