Clean Development Mechanism

This presentation is about Clean Development Mechanism and focus is on power sector. key aspects covered are CDM world statistics, Indian scenario, CER prices, CDM project management, etc.

1. CLEAN DEVELOPMENT
MECHANISM

2. Roadmap
Kyoto Protocol
What is Clean Development Mechanism?
Certified Emission Reductions
Baseline Methodology
CDM Project Management
Project additionality test
Estimation of GHG emission reduction
Emission trading/CER prices
CDM Legal issues
CDM world statistics
Indian Scenario
Present risks of CDM promotion in India

3. Kyoto ProtocolKyoto ProtocolKyoto Protocol
The Kyoto Protocol is a legally binding The Kyoto Protocol is a legally binding
agreement that arose out of the UNFCCC to agreement that arose out of the UNFCCC to
tackle climate change through a reduction of tackle climate change through a reduction of
green house gas emissions. green house gas emissions.
Countries are legally bound to reduce man-Countries are legally bound to reduce man-
made green house gases emissions by made green house gases emissions by
approximately 5.2%.. approximately 5.2%..
The text of the protocol was adopted at the third The text of the protocol was adopted at the third
conference of the parties to the UNFCCC in conference of the parties to the UNFCCC in
Kyoto, Japan, on 11 December 1997.Kyoto, Japan, on 11 December 1997.

4. The Kyoto Mechanism
The protocol devised three innovative
mechanisms:
1)Joint Implementation (JI)
2)International Emission Trading (IET)
3)Clean Development Mechanism (CDM)
The first two mechanisms are more relevant to
developed countries whereas CDM is related to
developing countries like India.

5. What is Clean Development
Mechanism (CDM)?

6. Certified Emissions Certified Emissions
Reductions Reductions (CERsCERs)
A CER is given by the A CER is given by the
CDM Executive Board to CDM Executive Board to
projects in developing projects in developing
countries to certify they countries to certify they
have reduced green have reduced green
house gas emissions by house gas emissions by
one tonne of carbon one tonne of carbon
dioxide per yeardioxide per year

7. One CER is equivalent One CER is equivalent
to one tonne of carbon to one tonne of carbon
dioxide reduceddioxide reduced

8. ONE CER = $ 10
(CONSERVATIVE ESTIMATE)

9. 2390023900Sulphur hexafluoride (SF6)Sulphur hexafluoride (SF6)
7000-92007000-9200Perfluorocarbons (PFCs)Perfluorocarbons (PFCs)
140-11700140-11700Hydrofluorocarbons (HFCs)Hydrofluorocarbons (HFCs)
310310Nitrous Oxide (N2O)Nitrous Oxide (N2O)
2121Methane (CH4)Methane (CH4)
11Carbon dioxide (CO2)Carbon dioxide (CO2)
Global Warming potentialGas
Six green house gases
Source: IPCC Third assessment report,2001

10. What makes a project eligible for What makes a project eligible for
CDM?CDM?
A project is eligible A project is eligible
for CDM benefits if for CDM benefits if
the project will result the project will result
in a net decrease in in a net decrease in
green house gas green house gas
emissions – this is emissions – this is
called additionalitycalled additionality

11. CDM Projects
Renewable Energy Hydro/Wind/Biomass/Solar/Biogas based Cogeneration
Clean Energy
Energy Efficiency
Waste Heat Recovery and Utilization
Natural Gas
Green Building
Energy Efficient Lighting/Cooling/Heating
HFC/PFC Abatement Aforestation /Reforestation
Methane/Landfill gas recovery & Utilization Others
Types of CDM Projects

12. Project Activities under CDM must be…
Hosted by non-Annex I Parties (like India) that have ratified the
Kyoto Protocol and established a Designated National Authority
(DNA).
Developed by public or private entities authorized by the relevant
host Party and Annex I Party (like U.K.) involved in the project
activity.
Validated by a Designated Operational Entity (DOE) in accordance
with the CDM project eligibility and participation requirements.
Registered by the CDM Executive Board after review by a
Registration and Issuance Team to ensure compliance with the
international rules; and
Once commissioned and operational, verified and certified by a
DOE as resulting in real, additional, measurable and verifiable
reductions in greenhouse gas emissions below usual baseline
scenario.

13. Baseline
If a project gets 20,000 If a project gets 20,000
CER’s it means that CER’s it means that
it’s emissions are it’s emissions are
20,000 tonnes of 20,000 tonnes of
carbon dioxide less carbon dioxide less
than a reference point than a reference point
called a baseline.called a baseline.
A baseline for a CDM project gives the greenhouse A baseline for a CDM project gives the greenhouse
gases emissions that would have occurred in the gases emissions that would have occurred in the
absence of the proposed CDM project activityabsence of the proposed CDM project activity

14. Baseline Methodology
Step-1: Identify Baseline Scenario
Step-2: Define Data sources and Assumptions
Step-3: Estimating the Baseline
Step-4: Evaluating Baseline Methodology
Step-6: Monitoring of Baseline Methodology
Step-5: Assessment of uncertainties

15. Step 1: Identifying Baseline
Scenario
D
E
F
I
N
E
R
E
F
I
N
E
SELECT BASELINE SCENARIO
Survey of activities providing similar services as the Project
Define Spatial Scope – local/regional/national
Map technology/practices for Project Activity in Spatial Boundary
Identify policies/regulations that influence choice of
Technology/practices
Identify programs for promoting resource conservation
Technology/practices in the sector
Drop/Add alternatives to Baseline Scenarios

16. Step 2: Defining Data sources
and Assumptions
Describe Parameters and Assumptions
List the Data used and its Sources
Define the Vintage of Data
Determine the Spatial level of Data

17. Step 3: Estimating the Baseline
The three Baseline
Approaches (Any of the
following may be chosen)
a.Emissions actual or
historical.
b.Emissions of most
economic options.
c.Weighted average of
similar projects.
Justification of choice should
be done on following basis:
a.Consistency with the
context of applicable
project types.
b.Consistency with
underlying algorithms
and data sources used
in baseline
methodology.
c.One that most closely
reflects the process
used for calculating
baseline emissions.

18. Step 4: Evaluating Baseline
Methodology
Two parameters
for
Evaluation
Relevance Robustness
Applicability of
Baseline
Methodology
Strength and
Weakness
Transparency
Conservative-
ness

19. Step 5:
Assessment of
Uncertainties
Continuous monitoring should
be done to understanding:
a)Changes in scenario
b)Changes in underlying
assumptions
c)Impact of above
changes on original
estimates
Step 6:
Monitoring of
Baseline
Methodology
Uncertainties
Related to:
Assumptions Variables

20. 1
2
3
4
5
6
7
Preparation of Project Design Document (PDD)
Approval of Host Country
Validation of Project by DOEs
Registration of Project by UNFCCC
Monitoring of Project Activity
Verification & Certification of CERs by DOEs
Issuance of CERs by UNFCCC
One Time
Activity
Annually
For full
Crediting
period
Buyers pay to
Project owners
Signing
Contract
With
Buyers
CDM Project Cycle

21. Feasibility Study
Decision Making
Project Planning
Project Implementation
Project Operation &
Maintenance
CDM
CDM
CDM
CDM
Realization of CDM Revenue
Without CDM With CDM
Include CDM revenue in
project financials & IRR
calculation
If possible secure Bank
loan only on virtue of
CDM revenue
Include discussion of
CDM in all board meeting
Include all risk & barrier
in project DPR report
Involve CDM consultant
and develop PDD & PCN
Submit PDD to validation
agencies at least 4 month
prior to signing first
purchase order or EPC
contract for the project
Facilitate in CDM
registration
PDD: Project Design Document ,PCN: Project Concept Note, EPC: Engineering Procurement and Construction, DPR: Detailed Project Report
Project Management

22. Impact of CDM Revenue on the
Renewable Energy Project Cost
Source: Prototype Carbon Fund, World Bank 2005
>5.0Solid Waste Management (Methane Recovery)
<5.2Biomass
0.5-3.5Bagasse
1.2-2.6Hydro
0.9-1.3Wind
<1.0Energy efficiency (heating by solar panels)
IRRTechnology

23. Project’s Contribution to
Sustainable Development
Social Well Being - The project should lead to alleviation of
poverty by generating additional employment, removal of
social disparities leading to improvement in quality of life of
people.
Economic Well Being – The project should bring in additional
investment consistent with the needs of the people.
Environment Well Being – This includes a discussion of
impact of the project activity on resource sustainability and
resource degradation.
Technological Well Being – The activity should lead to
transfer of environmentally safe and sound technologies that
are comparable to best practices.

24. Project
Additionality
Test

25. STEP 0: CLAIMING CREDITS FOR PROJECT WITH START DATE PRIOR
to date of registration – if not applicable go to step 1 directly
STEP 1: IDENTIFICATION OF ALTERNATIVES
to the project activity consistent with
mandatory laws and regulations
STEP 3: BARRIER ANALYSIS
Is there at least one barrier
preventing the implementation
of the proposed project
activity without the CDM; and
(2) Is at least one alternative
Scenario, other than proposed
CDM project activity not
Prevented by any of the
Identified barriers?
STEP 2: INVESTMENT ANALYSIS
Does sensitivity analysis
conclude that the proposed
CDM project activity is
unlikely to be the most
financially attractive or
is unlikely to be
financially attractive?
STEP 4:COMMON PRACTICE ANALYSIS
(1) No similar activities can be observed?
(2) If similar activities are observed, are
they essential distinctions between
the proposed CDM project activity and
similar activities that can reasonably
be explained?

Project is additional Project is Not AdditionalClaim CDM Benefits
N
N
N
Y
Y
Y

26. STEP 2: Investment Analysis
Any financial returns from project
Other than the CER benefits?
Use simple cost analysis
Demonstrate costs and
prove no benefits accrue
No
Investment comparison
Analysis
Choose: IRR
1
, NPV, CB ratio
Or unit cost of service ($/kWh)
Benchmark Analysis
Choose: IRR
2
, NPV, CB ratio
Or unit cost of service ($/kWh)
1: Project or Equity IRR;
2: Project IRR.
Choose Benchmark:
GBR + Risk Premium, or
Cost of Cap or Req. return Rate, or
Company internal Benchmark
Yes
Indicator of at least
One Alternative > CDM Project
Indicator of CDM
Project < Benchmark
Sensitivity Analysis

27. STEP 3: Barrier Analysis
Determine whether the
proposed project activity
faces barriers that:
a)Prevent the
implementation of
this type of
proposed project
activity; and
b)Do not prevent the
implementation of
at least one of the
alternatives.
Types of barriers:
b)Investment barriers
(other than the
economic/financial
barriers in Step 2
above)
c)Technological barriers
d)Risk perception
e)Information
unavailability

28. STEP 4: Common Practice
Analysis
Analysis of any other activities implemented
previously or currently underway similar to the
proposed project activity.
Projects are considered similar if
In the same country/region
Rely on a broadly similar technology,
Are of a similar scale,
and take place in a comparable environment
(regulatory framework, investment climate, access to
technology, access to financing, etc.)
DO NOT INCLUDE Other CDM project activities

29. Estimation of GHG emissions
reduction
Emissions reduction (4-3)
NET
Baseline emissions (4)
LESS
Estimation of GHG emissions (1+2= 3) TOTAL
Estimation of Leakage (2)
ADD:
Estimation of GHG emissions (1)

30. Estimation of GHG emissions
reduction for SUGEN
3189704(5) Emissions reduction(=4-3)
7073040(4) Baseline emissions
3883336(3) Estimation of GHG emissions (=1+2)
301938(2) Estimation of Leakage
3581389(1) Estimation of GHG emissions
Tonnes (CO2e)

31. 31897040
Total
3189704 2018
3189704 2017
3189704 2016
3189704 2015
3189704
2014
3189704 2013
3189704 2012
3189704 2011
3189704 2010
3189704
2009
2392278 2008
Tonnes (CO2e) Years
Annual estimation of emission
reductions at SUGEN

32. Transaction cost for Acquiring
CERs
Transaction costs implementing CDM generally
comprise of costs towards:
Consultants for developing CDM projects.
Hiring designated Operational Entity (DOE) for
validation and Verification.
Registration of projects with CDM Executive Board.
Apart from CDM costs, 2% of the CERs will be
deducted adaptation fund by CDM Executive
Board.

33. Emissions trading is a market based system that allows firms
the flexibility to select cost effective solutions to achieve
established environmental goals.
Emission trading will allow countries and individual companies
to buy and sell carbon created by activities that reduce the
level of Green House Gas emissions.
Since carbon dioxide is the principal greenhouse gas, people
speak simply of trading in carbon. Carbon is now tracked and
traded like any other commodity. This is known as the "carbon
market."
Carbon credits are traded at CO2e exchange in UK, European
Climate Exchange, Chicago climate Exchange (CCX) and
Multi Commodity Exchange (MCX) in India.
Emissions trading

34. CER Prices as on 15/07/2009
Europe

35. CER Prices as on 15/07/2009
U.S

36. CER Prices as on 15/07/2009
IndiaRs.

37. Various factors influencing CER
prices in India
Supply-demand mismatch
Policy issues
Crude oil prices
Coal prices
CO2 emissions
Weather/Fuel prices
European Union Allowances (EUAs) prices
Foreign exchange fluctuations
Global economic growth

38. The Role and nature of Carbon
Contracts
CERC Regulations for sharing of
CDM benefits
CDM project Risk Identification
and Management
CDM Legal issues

39. The Role and nature of Carbon
Contracts
Contracting approaches to sell CERs can include:
Competitive tender processes.
Transacting through independent brokers.
Individual Contractual negotiations (e.g. spot
transactions, forward sales of CERs or option
contracts)
Alternatively, CERs can be sold through exchange
traded contracts.
ERPA: Emission Reduction Purchase Agreement

40. CDM contracts should cover following aspects:
Nature of the right being sold
Legal title to CERs
Transfer of legal title to CERs
Obligation to ensure that CERs are issued through buyer’s account
Quantity of CERs being acquired
Shortfall provision
Purchase price
Payment of costs
Provision of documents and other information
Liability and indemnities
Force majeure
Dispute resolution
The Role and nature of Carbon
Contracts (Contd…)

41. CERC Regulations for sharing of
CDM benefits
Present Sharing of CDM
benefits:
Proposed Sharing of
CDM benefits:
25%75%5
25%75%
6 and
onwards
25%75%4
25%75%3
25%75%2
25%75%1
Share of
beneficiar-
ies
Share of
project
developer
(Generation
co.)
Year
40%60%5
50%50%
6 and
onwards
30%70%4
20%80%3
10%90%2
Nil100%1
Share of
beneficiari-
es
Share of
project
developer
(Generation
co.)
Year

42. CDM project Risk Identification
and Management
Identification of risks:
Main categories of risk are:
Host country political and sovereign risk
General project risk

43. CDM project Risk Identification
and Management (Contd…)
Management of key project Risks:
Generally risk will be allocated to party which is best able to
control that risk.
The allocation of risk which neither party is able to control
should be reflected in price of CERs.
Risk allocations can be dealt through measures such as:
Conditions precedent in the contract.
Guarantees from host countries or parent companies.
Force majeure clauses.
Laying off risks to third parties such as contractors and
DOEs
Warranties, indemnities and rights of termination in
contract

45. CDM Statistics
Source:
India holds 2
nd
position with 442 registered projects

46. CDM Statistics (Contd…)
Source:
India expects 35,774,921 CERs from registered projects
i.e. 80940 CERs per projects

47. Source:
CDM Statistics (Contd…)
1256 registered projects

48. CDM Statistics (Contd…)

49. Benefits to Developed Countries
Reduction in emission mitigation costs
More flexibility for meeting their
commitment
Market for new and advanced
technologies
New investment opportunities

50. Benefits of CDM to Developing
Countries
New source of foreign Investments
Transfer of technology and expertise
Employment generation
Infrastructure development
Reduction in imported energy demand

51. India’s Position
No obligation to reduce
emissions
Per capita Carbon dioxide
emission of India is amongst
the lowest in the world.
4.53.89.820.61.2
Per capita CO2 emission
(tonnes of CO2 /annum)
WorldChinaU.KUSAIndiaCountry

52. Indian Scenario-CDM
Strong Industrial Base with more than 30
 industrial sectors cover CDM projects
Baseline Carbon dioxide emissions from
 power sector already in place.
In India, clearance for sustainability is
granted by the National CDM Authority
(NCDMA) and is spearheaded by the
Union ministry of environment and
forests (MOEF).
Dynamic, Transparent & Speedy
processing by Indian DNA (NCDMA) for
Host Country Approval.

53. Present Risks in CDM
Promotion in India
Clarity on Taxation Issues
Necessity of a Green Carbon Fund
Insurance Sector in India – yet to gear up
Lack of Resources for adequate Capacity
Building
Non-Ratification of USA

54. Webography
www.unfccc.int
www.cseindia.org
www.cdmrulebook.com
www.nymex.greenfutures.com
www.ecx.eu
www.mcxindia.com
www.ipcc.ch