carbon finance and the chemical industry - world...
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Carbon Finance and the Chemical Industry
Workshop Exploring Linkages Between Chemicals and Climate Change Agendas
Lasse Ringius. Carbon Finance Unit, ENV.
World Bank. Washington DC.June 14, 2006
U.N. Framework Convention on Climate Change (UNFCCC)
• Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere
• Developed countries (Annex I countries) aim to restore GHG emissions to 1990 levels
• Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change
The Kyoto Protocol
36 Developed Countries and Economies in Transition (namely Canada, Japan, EU15 and economies in transition) agreed in 1997 to:
• Reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012
• The total demand created for GHG Reductions: ~5 to 5.5 billion • Marrakech Accords agreed in Nov. 2001 sets the rules of implementationStatus: Kyoto Protocol came into force in February 2005• Coming into force: requires ratification of 55 Parties to UNFCCC
representing 55 % of CO2 emissions (US constitutes 36 %; Russia 17% ) • As of April 18, 2006, 163 states ratified, representing 66.1% of developed
countries• US / Australia will not ratify, but Australia will meet targets
How can Developed Countries/EITs meet their obligations under Kyoto?
• Domestic Reductions• Carbon Sinks: direct human-induced land use change and forestry
activities (limited to ~330 Mt/C02e)• International Credits (“Flexible Mechanisms”):
– International Emissions Trading– Project–Based activities: Joint Implementation – Project–Based activities: Clean Development Mechanism
Supplementarity: “...domestic action shall constitute a significant element of theeffort by each Party..”
World Bank Carbon Funds & Facilities
• Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose.• Netherlands Clean Development Mechanism Facility. $249.2 million (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects.• Community Development Carbon Fund. $128.6 million (closed). Multi-shareholder. Small-scale CDM energy projects.• BioCarbon Fund. $53.8 million (Tranche One closed). Multi-shareholder. CDM and JI LULUCF projects.• Italian Carbon Fund. $45.4 million (open to Italian participation). Multi-shareholder (from Italy only). Multipurpose.• Netherlands European Carbon Facility. $38 million (closed). Netherlands Ministry of Economic affairs. JI projects.• Spanish Carbon Fund. $202.7 million (open to Spanish participation). Multi-shareholder (for from Spain only). Multipurpose.• Danish Carbon Fund. $64.1 million (closed). Multi-shareholder (for from Denmark only). Multipurpose.• Umbrella Carbon Facility. [$677.1 million] (Tranche One closed). 2 HFC-23 projects in China.
Total funds pledged = US$ 1.6 billion (13 governments, 56 firms)
Key Features of Carbon Finance
• Both public and private capital – new and additional sources for sustainable development financing
• Payment on Delivery – payments are made upon annual independent verification that emissions reductions have occurred.– Unlike most buyers in the market, Participants in Bank Funds agree
to take Kyoto regulatory risk: Hence, our carbon fund contracts are “bankable”, allowing more projects to get financing than if regulatory risk remained open.
• Payment stream is in hard currency, reducing financing risk for foreign lenders
How Carbon Funds Work
Industrialized Governments
and Companies
Developing Countries and Communities
Bank Managed Carbon Fund
Bank Managed Carbon Fund
$$Technology
Finance $$Technology
Finance
CO Equivalent22
Emission Reductions
CO Equivalent22
Emission Reductions
Payment on delivery of emissions reductions, not up-front capital costs
EmissionReduction
Specific place in host party
GH
G em
ission projection
GH
G em
ission Project Scenario
Annex I Party (e.g EU country) which has an
emission cap
CER
Acquired CERsare added to the allowed emissions
Host Party benefits from technology and financial flows
$$
Emissions Trading under the KP
Baseline Scenario
Specific place in host party
Host Party which does not have an emission
cap
Contents
• General overview of sources of GHG from chemical sector.
• Review of CDM Methodologies for the chemical sector
• Assessment of impact of carbon finance on investment costs for registered projects
• Conclusions and comments on Post 2012• Pushing the agenda forward
Sources of GHG Emissions from the Chemical Sector
The chemical sector is energy intensive due to: – Energy intensive processes e.g. steam cracking to
produce ethylene, benzene, propylene etc. – Feedstock choice: gas and increasingly coal due to high
oil prices. Use of acetylene in VCM production. – Refrigeration, heating, etc. – Not energy efficient
CDM Status - Approved CDM Methsby Sector
Scopes: 1:Energy Industries 2: Energy Distribution 3: Energy demand 4: Manufacturing5:Chemical Industry 6: Construction 7: Transport 8: Mining and Minerals 9: Metal 10: Fugitive emissions from fuels 11: Fugitive emissions from HFCs/SF6 12: Solvent Use 13: Waste handling and disposal 14: Afforestation/Reforestation 15: Agriculture
Status of CDM projectslytic
N2O
destruction
in
the
tail
gas
of
Nitric
Ac
AM0028
Existing Methodologies for the Chemical Sector (Scope:5)
AM0001 Incineration of HFC23 waste streams ( 6 projects registered, 1 under review)
AM0021 Baseline Methodology for the decomposition of N20 from existing adipic acid production plants. (2 projects registered with method)
AM0027 Substitution of CO2 from fossil or mineral origin by CO2 from renewable sources in the production of inorganic compounds. (0 projects registered with method)
AM0028 Catalytic N20 destruction in the tail gas of Nitric Acid Plants. (2 projects at validation stage)
Understanding CDM Methodologies: The Baseline
time
emis
sion
s
Project emissions
baseline
Certified emissionreductions
The difference between the actual project emissions and the emission baselineconstitute the volume of CERs
Power sector projects and CERs depend upon an unknown counterfactual baseline: there is no “right answer”
Understanding CDM Methodologies: The Baseline Calculation
• In general baseline calculations:Production of chemical product X emission factor(tCO2/MWh)
• Different possible methodologies to calculate emission factor (tCO2e/MWh)
The challenge
NOTE: Exception to this approach when it is possible to measure GHG emissions directly e.g. for N20
Summary of Methodology Status
• There are few methodologies for the chemical sector. New methodologies are required
• Energy efficiency methodologies exist but more need to be submitted.
• Limited experience to date with the existing methodologies. (Only two projects registered under chemical sector methodologies and three under one of the large scale energy efficiency methodologies).
CF impact on investment costs
0.8453,752,80064,050,000N2O Emission Reduction in Onsan, Republic of Korea
0.4217,583,20041,700,000N20 emission reduction in Paulina (adipic acid) Sao Paulo.
Average abatement cost
(€/t CO2eq)
Total Costs crediting period
(Investment+ Operation)
Total CO2eq
crediting period
(7 years)
Registered Project Name
NOTE: Registered projects using AM0001 & AM0018 did not include investment information. Reasons: HFC23 destruction is end of pipe and clearly additional. The main barriers to EE projects
are not financial.
Insights Regarding Submission of New Methodologies – General
• Well-prepared chemical and E.E. sector methodologies can receive CDM Executive Board approval
• Very few chemical and E.E. methodologies approved, despite huge potential.
• Need to assess “what works” and “what doesn’t”(consistency, predictability)
• Quality of proposals submitted has varied widely
Rejected Methodologies - Common Problems
• Failure to:– Provide method to select baseline scenario– Justify appropriateness of benchmarking period– Take into account factors unrelated to EE measures that can affect
future emissions (e.g., product palette)– Consider autonomous EE improvements, equipment lifetime– Distinguish between discretionary retrofit and planned
replacement (“lost opportunity”) or new equipment markets– Justify/document assumptions (e.g., load factor, hours of
operation)– Give full consideration to leakage– Provide adequate guidance on developing a monitoring plan
Pushing the agenda forward
• Need to overcome initial barriers, e.g. PINs, pre-feasibility studies, development of methodologies…– Links with other MEAs like POPs Convention may
broaden the financing scope in the short term, while CF provides long term revenues
– Strengthen capacity on these links at local level during preparation of chemicals management strategies
– Private sector expertise is critical – Pilot projects for preparation of a menu of methodologies
in the chemical sector
Lead Time and Uncertainty Constraints on CO2/CH4 Segment of
CDM Market
2006 20082003 2012
OperatingWind, Efficiency, Waste to Energy and Small-scale projects
Large Hydro, Geothermal, Coal to Gas PowerCDM Investment Window: 3years
Window closes end 2006 unless there is a clear signal that a post-Kyoto post 2012 regime will buy emissions reductions from developing countries.
Operating
= Start of Construction
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THANK YOU
For more information please contact:Lasse Ringius [email protected] Aiello [email protected]