1

Michael Lazarus

Stockholm Environment Institute (Seattle)

Visiting Researcher, LEPII-EPE, Grenoble

Member, CDM Methodology Panel

Perspectives on the Clean Perspectives on the Clean Development Mechanism and Development Mechanism and

Lessons for the Future Lessons for the Future

Perspectives on the Clean Perspectives on the Clean Development Mechanism and Development Mechanism and

Lessons for the Future Lessons for the Future

2

3

Stockholm Environment Institute - USStockholm Environment Institute - USStockholm Environment Institute - USStockholm 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 Five Perspectives on the Clean Development Mechanism (CDM)Development Mechanism (CDM)Five Perspectives on the Clean Five Perspectives on the Clean Development Mechanism (CDM)Development Mechanism (CDM)

Design Market Development Regulatory and Administrative Future Climate Policy

5

CDM DesignCDM DesignCDM DesignCDM 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 worksHow the CDM worksHow the CDM worksHow 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…It’s all about the baseline…It’s all about the baseline…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

8

9

10

Never before….Never before….Never before….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 PerspectivesCDM: Market PerspectivesCDM: Market PerspectivesCDM: Market Perspectives

12

Just ask Rhodia…Just ask Rhodia…Just ask Rhodia…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)CERs in the pipeline (May 2006)CERs in the pipeline (May 2006)CERs in the pipeline (May 2006)

Nearly 1000 projects with PDD (Project Design Document)

>1.3 billion credits expected to 2012

>300 Small-scale projects (200 renewable electricity generation)

Mt CO2-eq/year (2008-2012)

0

20

40

60

80

100

120

140

160

180

200

Sep-0

3

Dec-0

3

Feb-0

4

May

-04

Sep-0

4

Nov-0

4

Mar

-05

May

-05

Sep-0

5

Nov-0

5

Jan-

06

Mar

-06

May

-06

Mt/y

ear

Electricity

F-gas and N2O

Other

Landfill gas

CDM pipeline estimates, courtesy of Jane Ellis, OECD

14

CERs in the CDM PipelineCERs in the CDM PipelineCERs in the CDM PipelineCERs in the CDM Pipeline

Manure and wastewater, 4%

Transport1%

Other1%Sinks

2%

(Avoided) Fuel switch, 5%

Cement2%

Energy eff, heating and drying, 3%

Gas electricity generation, 6%

Other CH4 reductions 9%

N2O 14%

LFG capture9%

Renewable Electricity Generation, 20%

F-gas23%

Source: The Developing CDM Market, Jane Ellis and Ellina Levina, OECD/IEA Information Paper (2005)

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

15

Geographical distribution (Ellis 2006) Geographical distribution (Ellis 2006) Geographical distribution (Ellis 2006) Geographical distribution (Ellis 2006)

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

16

17

Development PerspectivesDevelopment PerspectivesDevelopment PerspectivesDevelopment 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

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

Why aren’t more CDM projects like this?Why aren’t more CDM projects like this?Why aren’t more CDM projects like this?Why aren’t more CDM projects like this?

19

CDM: Regulatory (Administrative) PerspectivesCDM: Regulatory (Administrative) PerspectivesCDM: Regulatory (Administrative) PerspectivesCDM: 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…It’s all about the baseline…It’s all about the baseline…It’s all about the baseline…

21

The Methodology Challenge: Some LessonsThe Methodology Challenge: Some LessonsThe Methodology Challenge: Some LessonsThe 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 PuzzlesCDM’s Unsolved PuzzlesCDM’s Unsolved PuzzlesCDM’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

AdditionalityAdditionalityAdditionalityAdditionality

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

“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)

24

CDM

Production of Inputs

Production

Distribution

Final Sale

Use

BiomassCultivation

Biofuel Prod.

Blender / Distributor

Filling Stations

Vehicles

CDM

Spot checks

Clearing point?

25

Use the right tool for the jobUse the right tool for the jobUse the right tool for the jobUse 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) – ????

26

27

EXTRASEXTRASEXTRASEXTRAS

28

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)

“Inf

rast

ruct

ure”

CDM Project CycleCDM Project Cycle| | PlayersPlayersCDM Project CycleCDM Project Cycle| | PlayersPlayers

Source: UNFCCC

29

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)

CDM project cycleCDM project cycle||Project Design Project Design stage- methodologystage- methodology

Source: UNFCCC

30

PP draft and submit

Secretariat re-checks

completeness Date of EB receipt

DOE/AEChecks

completeness

One panel member pre-

screen

1 = Meth Panel to consider (go to

step 2)

2 = Case not approved

Methodology ProcessMethodology Process||Procedure for Procedure for submission /considerationsubmission /consideration

31

Public

Desk reviews

EB4 months

15 days

Methodology ProcessMethodology Process||Procedure for Procedure for submission /consideration - 2submission /consideration - 2

(selects 2 experts from ROE)

Recommendation to Meth Panel -

standard format

Meth Panel

Recommendation to the Board –

standard format

Approval – A, B or C

10 days

7 weeks

Methodology Submitted

(= 1)

32

PPMeth Panel

Answers

Questions?

AEs/ DOEs Sec.

Comment

(10 days)Next Meth

Panel meeting

If co

mm

ents

Draft recommendation

EB

NO

co

mm

en

ts

Feedback loop Feedback loop for for “B cases”“B cases”

33

Procedures for submission and consideration of a Procedures for submission and consideration of a proposed new methodologyproposed new methodologyProcedures for submission and consideration of a Procedures for submission and consideration of a proposed new methodologyproposed new methodology

PP draftsand through

DOE/AE

Desk reviews

Recommendation – Check list

(select from ROE)

Meth PanelRecommendation

to the Board –standard format

Public

EB Decision

4 months

10 days

15 days

secretariat

Date of receipt

DOE/AEchecks

7 weeks

34

Evolution of a Methodology ProcessEvolution of a Methodology ProcessEvolution of a Methodology ProcessEvolution of a Methodology Process

2002Untested foundations, uncertain tasks

2003First meths, initial frameworks: forms, desk reviews, ratings, interactions

First tough issues: additionality, continuation of existing practices

2004/2005Floodgates open: >100 meths, >30 meths/meeting

National policies and perverse incentives, double countingFirst 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 –CDM project cycle –Roles and responsibilitiesRoles and responsibilities

Project Participant(PP)

Operational Entity (DOE)

Executive Board(EB)

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

PPMeth Panel

Answers

Questions?

AEs/ DOEs Sec.

Comment

(7 days)Next Meth

Panel meeting

If co

mm

ents

Draft recommendation

EB

NO

co

mm

en

ts

Feedback loopFeedback loop

37

Barriers to RE/EE Project DevelopmentBarriers to RE/EE Project DevelopmentBarriers to RE/EE Project DevelopmentBarriers 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 CDMRegulating and Administering the CDMRegulating and Administering the CDMRegulating 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

39

40

Meth Panel

PP via DOE

EB

Meth Panel

PP via DOE

EB

Final rec.A,B or C

NM000X-rev

B

C

A

NM000X

Prelim. rec. B (only 1 x)

Final rec.A or C

Re-submission by PPs

NM000X

NM000X-rev

A

C

Prelim. rec. B (only 1 x)