bilateral agreements as basis towards piloting sectoral market mechanisms

Bilateral Agreements as Basis Towards Piloting Sectoral Market Mechanisms

DEHSt Side Event at Carbon Expo 2014

Cologne, 29 May 2014

Carsten Warnecke

29.05.2014

© ECOFYS | |

Background

Interim results of research project:

“The fragmentation of the carbon market

and options for counteraction”

> Bilateral agreements for sector crediting

> Duration: Sept 2012 – Aug 2015

> Activity gap between existing and future market-based

mechanisms challenges maintaining the expertise of stakeholders

and testing of new approaches in practice

> Demand for „reduction units“ could be created based on bilateral

agreements between Parties as long as markets are not available

> EU ETS in article 11a (5),(6) considers bilateral agreements as an

option in case no new international agreements on climate change

has been agreed

29.05.2014 Carsten Warnecke

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Objectives

> Theoretic research to develop approaches based on a bilateral

crediting system that allows pilot activities

> Pilot activities shall have a

– sectoral coverage based on benchmarks

– high level of environmental integrity

– generate net emission reductions

> Open to further ETS and regional markets to join the initiative

> Research shall

– Identify suitable countries and sectors within these countries

for piloting

– Develop initial sector approaches including proposals for

benchmark concepts

– Elaborate preliminary recommendations for the design of such

bilateral agreements

– Recommend actions on the level of policy makers

10.11.2013 Carsten Warnecke 3

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COUNTRY SELECTION

METHODOLOGY

First part


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Country selection approach

Carsten Warnecke 10.11.2013

2. Below 30 € / tCO2

1. Global importance

2. Regional importance

Upper Middle Income Countries

3. Activity level

4. Ambition

level

Selected countries for

individual assessment

rating

exclu

sio

n

Shortlisted countries

-> Absolute GHG emission level

-> Good integration in the region, role model potential

-> Development of detailed and objective ranking methodology

-> Focus on carbon market and greenhouse gas mitigation related activities and ambition

5

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Criteria for ranking


Indicators for criterion “level of activity”:

Participation in the Clean Development Mechanisms

Activities under the Partnership for Market Readiness (PMR) of the World Bank

Activities around Nationally Appropriate Mitigation Actions (NAMAs)

Activities around Monitoring, Reporting and Verification (MRV) of greenhouse gases;

further described with the following sub-indicators:

o Submission of National Communications to the UNFCCC; existence of greenhouse gas

inventories

o Activities under the Global Environment Facility (GEF) and the MRV partnership

Indicators for criterion “level of ambition”:

Emission reduction pledges on an international level

Further targets: National energy efficiency or renewable targets

Engagement in Low Emission Development Strategies (LEDS)

Participation in regional or global networks

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Country selection

Upper middle income countries and territories (OECD 2012)

Albania China Iran Mexico Serbia

Algeria Colombia Jamaica Montenegro Seychelles

Antigua and

Barbuda Cook Islands Jordan Namibia South Africa

Argentina Costa Rica Kazakhstan Nauru St. Kitts-Nevis

Azerbaijan Cuba Lebanon Niue Suriname

Belarus Dominica Libya Palau Thailand

Bosnia and

Herzegovina

Dominican

Republic Macedonia Panama Tunisia

Botswana Ecuador Malaysia Peru Turkey

Brazil Gabon Maldives Saint Lucia Uruguay

Chile Grenada Mauritius

Saint Vincent

and the

Grenadines

Venezuela


Short list for ranking

Algeria Colombia Peru

Argentina Kazakhstan South Africa

Brazil Libya Thailand

Chile Malaysia Turkey

China Mexico Venezuela

Ranked countries Region

1 Chile Latin America

2 South Africa Africa

3 Mexico Latin America

… … …

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Sector selection

> two structurally different sectors are selected in the target

countries:


Power generation sector

(Chile)

Building sector

(South Africa)

Data availability Good, no confidentiality issue,

grid emission factor calculations Difficult

Success in the CDM

Well represented; several

methodologies, high share of

projects, first SBL

Limited, low penetration rate,

mostly single measures in

buildings

Barriers in the CDM

Large differences in regional

baseline and respective

incentive level

MRV, boundary setting, high

transaction costs, high “signal to

noise ratio”

Size of average projects in

terms of emission reductions Small to very large

Small, up-scaling desired but

difficult

Benchmarks in the EU ETS None, no free allocation None, not covered by the EU

ETS

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CONCEPTS FOR CREDITED

REFERENCE LEVELS BASED ON

BENCHMARKS

Second part


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Why benchmarks?

> Benchmarks as (simplified) means to politically agree on crediting

thresholds for piloting approaches


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Benchmark approach

(1) Definition of the system boundary

(2) Identification of the key performance indicator

(3) Selection of peers for comparison

(4) Data collection of peers for comparison

(5) Measurement of own current performance

(6) Definition of the benchmark level (stringency)

> Objectives:

– Apply existing approaches if possible (e.g. CDM)

– Ensure consistency with established schemes (e.g. EU ETS)

– High environmental integrity (ensure crediting threshold is

always below BAU)

– Preserve incentives for mitigation activities

– Provide a scientifically justified basis for political decisions


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Stakeholder interaction

Country experts and further stakeholder have been involved to

ensure appropriateness of considerations etc.

Exposé development

– Dissemination and presentation at expert workshop in Bonn

(June 2013)

– Further interviews and discussion / exchange with target and

partner countries

Valuable feedback from various public and private institutions

received and taken into account


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Chile‘s power generation sector

Main facts:

> Almost 1/3 of the GHG emissions stem from electricity and heat

generation

> Electricity generation is currently dominated by gas and hydro

power plants

> Future capacity additions will likely be based on coal (reducing

import dependence, responding to demand increases)

> Vast potential for RE (e.g. solar potential in the north, wind

potential along the coast, etc.)

> Chile requires electricity companies (>200MW capacity) to have a

share of at least 5% of renewable energy; increasing by 0.5ppts

annually until 2024 (10%)

> Chile is developing plans for a domestic ETS under the PMR

including the electricity sector

> Chile’s renewable energy NAMA is one of the first NAMAs to

receive international finance


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Electricity in Chile – benchmark concept

> CDM is a valuable framework which could be applied to a large

extent

> CDM has addressed most of the identified sector challenges with

its respective methodological tools and describes solutions that

constitute a consensus for many stakeholders

> Our suggested proposals follow the CDM approach to the extent

possible but also require a few important modifications that

increase pragmatism, ambition and suitability for sector coverage,

e.g.

– Geographic scope of the benchmark

– Existence of a grid connection

– Exclusion of low-cost/must-run power units

– Stringency levels beyond pure offsetting


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Stringency level setting

> The use of the current CDM framework:

– Application of the SBL approach and

the CDM tool to calculate the grid EF

– Net emission reduction ensured by

discount on standardised grid EF

> Application of a default value:

– Use of a politically set default value

– Benchmark below the CDM grid emission factor

– Reference e.g. EF of NG fired power plant, various EU ETS phase II NAPs set

such benchmark levels between 0.350 – 0.450 tCO2e/MWh

> Hybrid approach:

– Combination of the above

– RE by default get reduction units according to default BM value while fossil

fuel based activities apply for BM based on the (adapted) CDM approach

– Incentives also for new NG fired power plants and for efficiency increase in

existing fossil fuel fired power plants


Source: IGES, Ecofys

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CDM in the building sector

> CDM projects mostly refer to single measures in buildings

> CDM application in its current form to entire buildings lags behind

its enormous potential

> Low “signal to noise” ratio, high complexity

> Most available methodologies are either too specific or do not

provide practicable solutions to sector challenges

> CDM experiences show the need for

– Pragmatic MRV approaches

– Valuation of indirect and long term effects

– Bundling of less homogeneous single activities to facilitate

reaching a large coverage


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South Africa‘s building sector

> Large demand for low cost buildings to supply the growing

population with adequate housing facilities

> Government targets for new buildings

> Between 1994 and 2011, the government built around 3 million

homes, providing housing to 13 million people. By 2014, the

government plans to improve the housing situation for 500,000

further households by upgrading informal settlements

> Low income housing segment provides free housing to poorest

parts of the population

> such houses are usually constructed in a standard way, resulting

in a large number of similar homes

> Focus on sector sub-segment: „low income housing“

> Lessons learned with the use of the CDM and upscaling

approaches exist (Kuyasa CDM -> PoA -> “flagship” project)


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Benchmark concept

> Suggestion: Overcoming existing barriers through using most

pragmatic approaches, deviating from exact GHG quantification

– GHG emissions per standard housing unit

– Ex-ante modeling (default/unit)

– Simplified ex-post MRV

> The increase in uncertainty is levelled out by ambitious crediting

thresholds or conservative BAU definitions

> Transaction costs are reduced


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Stringency level setting

Option:

> BAU: incomplete building code implementation

> Reference level: assumption of full implementation of segment

specific building codes

> Mitigation aim: beyond building code

> However, in this sector …

– The required support exceeds offset prices

– Potentially low own contribution expected

– Disincentives for ambitious activities should be avoided

> Credited approach requires significantly higher prices

> Uncertainty whether reconnection to future carbon markets is

realistic


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Conclusions

> Bilateral agreements can provide a temporal solution to test

design and implementation of sectoral market-based approaches

in periods where markets cannot provide the required incentives

> In this way the transition period of the international carbon

market can be used to

– enter into methodical discussions (also towards NMMs)

– prepare for suitable sector definitions and approaches and

– raise awareness about countries’ capabilities, own

contributions and potential sectoral crediting thresholds

> Staying as close as possible to existing rules and knowledge

ensures that concepts are understood while simplifications regain

confidence in practical success of the instruments

> Maintaining intl. market compatibility should counteract market

fragmentation

> Reconnection to intl. carbon markets is however an option not a

must; Enabling GHG mitigation activities is key


© ECOFYS | | Carsten Warnecke

Thank you.

Ecofys:

Carsten Warnecke

Contact:

[email protected] Report:

http://www.ecofys.com/en/publication/carbon-markets-in-transition/

29.05.2014

mailto:[email protected]









bilateral agreements as basis towards piloting sectoral market mechanisms

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