demand and supply for emission credits of the project-based kyoto mechanisms cdm and ji

Hamburg Institute of International Economics International Climate PolicyInternational Climate Policy

Demand and supply for Demand and supply for emission credits of the emission credits of the

project-based Kyoto project-based Kyoto Mechanisms CDM and JIMechanisms CDM and JI

Workshop on Climate Policy and Energy ModelingTaipei, Oct. 11, 2004

Taiwan Research Institute, Research Center of Science, Technology and Society, NTHU

Axel MichaelowaHamburg Institute of International Economics,

[email protected]

www.hwwa.de/climate.htm


Structure of presentationStructure of presentation• CDM rules and their effect on supply

– Methodology status – The EB‘s additionality test– Competition between the CDM and JI

• The fragmented demand– Modelling the CDM and JI market– Acquisition programmes – The EU linking directive

• How Taiwan could participate• Conclusions


CDM CDM ”valve“”valve“

AAUs, ERUs

CERsCDM

Kyoto commitment

Kyoto commitment

Country 1

Country 2

Emissions trading JI

Tropical air?


4 industrialcountries

5 develo-

ping countries

1 AOSIS

COP/MOP

accre-dits

elects

Project design document:BaselineMonitoringApprovalMethodology if first of its kind

Certifier (OE): 4

Project partners

CountriesStake-holderObservers

comment new rules within 8 weeks

comment within 30

days

Verification

Involved countries

3 members propose revision within 8 weeks

CDMpro-ject

Monitoring report

Certifier

Validation

or for-warding of

new metho-dology

Involvedcountries

3 members can

propose revision

within 15 days to be donewithin

30 days

CERs

Involved countries

RulebookBaseline and monitoring methodologies

is-sues

decides on new rules within 4

months

wit

h-holds

2% adap-tation tax

spot checks

changes

registers

Certifi-cation

Project partners

elects

Executive Board(10 members)

The CDM mazeThe CDM maze

Currently20 applications:

7 Europe5 Japan

2 US2 Asia

32 methodologies

pendingauthorise

331

7


The baseline effect on supplyThe baseline effect on supply

a) old coal fired power station 1200 g CO2/kWh.

b) gas turbine 450 g CO2/kWh

c) 850 g CO2/kWh

Start of CDM Time project

Emissions gCO2/ kWh 1000

500

Baseline a: current emissions

Baseline c: average of “similar” projects

Baseline b: economically attractive investment

Factor of 3!


Case law and path dependencyCase law and path dependency• The EB does not provide a basic set of rules

beyond the Marrakech Accords text– Exception: small scale projects

• Project pioneers have to propose a new rule (“methodology”) for each new project type – Higher validation costs– Delay of several months, if not years– Risk of refusal

• The CDM regime is shaped by first proposers• Important role of validators, methodology panel

and expert reviewers– “Guardians” of the CDM


Stringent decisions on baselineStringent decisions on baseline methodologiesmethodologies

012345678

1stroundApril15,

2003

2ndround,May 29

3rdroundJuly 16

4thround

Sep. 15

5throundJan 23,

2004

6thround

April 15

Pass

Pass afterrevisionRevise

Fail

Passed methodologies are very project-specific


Submitted baseline methodologiesSubmitted baseline methodologies

15

11

10

7

4

4

33

2 1 1 Biopower

Landfill/waste gas

Energy efficiency

Hydropower

Fuel switch

Cement

Industrial gases

Windpower

Geothermal

Gas flaring

Transport

• Multiple methodologies for same project type


Approved baseline methodologiesApproved baseline methodologies3

7

1

1

10

11 0 Biopower

Landfill/wastegasHydropower

EnergyefficiencyFuel switch

Windpower

Gas flaring red.

Industrial gases

Cement

• Multiple methodologies for same project type!• EB started consolidation/standardisation

– Landfill gas collection and use– Renewable electricity for grid (except biomass)


Characteristics of approved Characteristics of approved methodologiesmethodologies

• Data needs are high– Electricity grid data: grid average emissions, latest

20% additions, latest 5 power plants• Not available in most countries• Need to publish them in a coherent way

– Source credibility• Monitoring can be complex

– Methane flaring: continuous measurement• Additionality test is prescribed, but not

comparable• Problem: Sudden revision due to comments by

specific interest groups (HFC case)


Renewable electricity for grid Renewable electricity for grid (except biomass) methodology(except biomass) methodology

• Operating Margin: – Coal 500 TWh @ 1100 g CO2

– Fuel oil 100 TWh @ 800 g CO2

– Natural gas 100 TWh @ 500 g CO2

– = 971 g CO2

• Build Margin:– Total grid: 15 GW– Last 20%: 3 GW, generation 200 TWh, 800 g CO2

– Last 5 plants: 1 GW, generation 80 TWh, 600 CO2

– 800 g CO2

• Weighted at 50%: 886 g CO2

7005001008001001100500


Projected CERs from projects with Projected CERs from projects with approved methodologies (million by 2012)approved methodologies (million by 2012)

29,8

2,7 5,20,1 0,4

39,8

0,2 4,7 6,8

01020304050

Gas ca

ptureHyd

ro

Biomass

Energy e

fficien

cyWind HFC

Fuel sw

itch

Gas fr

om biomas

s

Gas fla

ring re

d.


CDM host countries CDM host countries (million CERs)(million CERs)

6,50,7

13,7

4,70,9

29,8

0,9 1,3 3,8

12,6

0,66,8

0

10

20

30

40


Additionality testAdditionality test10th session of CDM EB (July 2003) stated:

As part of [...] determining the baseline scenario an explanation shall be made of how, through the use of the

methodology, it can be demonstrated that a project activity is additional and therefore not the baseline scenario.

• EB‘s stepwise consolidated additionality test• Early projects: proof of CDM influencing decision• Investment analysis for all realistic alternatives

•Parameters differentiated according to scale of alternative• Test whether barriers are prohibitive and how they are overcome by the CDM project• Common practice test• Decided at EB in October 2004?


0

50

100

150

200

250

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

N2O-Adipic AcidOtherFlaringLandfill gasHFC Decomposition

Share of different project types Share of different project types in projected CER supplyin projected CER supply

Source: Point Carbon 2004

million


JI supplyJI supply• JI currently much less discussed and prepared than

CDM due to 2008 start date– Supervisory Committee has not been set up– Will CDM rules apply to Track 2?– Which countries fulfil the requirements for Track 1?

• Some activity in EU new member states and accession countries– Bulgaria, Romania, Baltic states, ~15 million t– Early JI backed by AAU trade (Slovakia)

• Big JI hosts Ukraine and Russia hampered by generally bad political and investment climate

• Intra-OECD JI?– New Zealand, “national projects” within EU


Required emission reductions from business-as-usual

EIA 2002 International EnergyOutlook reference case (CO2

from combustion only)

Sinks credits under Article 3.4 (forestmanagement and agricultural soils) as

quantified by the ”Marrakech Accords” Country/region Mt CO2/year Mt CO2/year

-56Western Europe 693(-22 forests, -34 ag. soils)

-49Japan 330(-48 forests, -1 ag. soils)

-66Canada and New Zealand 253(-45 forests, -21 ag. soils)

-171Aggregate OECD Annex B (withoutUSA and Australia) – excluding sinksunder 3.4

1,276(-115 forests, -56 ag. soils)

Aggregate OECD Annex B (withoutUSA and Australia) – including sinksunder 3.4

1,105

-179EIT countries (Former Soviet Union,Eastern Europe)

-1,162(-142 forests, -37 ag. soils)

-190Memo: United States and Australia 2,225(-103 forests, -87 ag. soils)

Source: Jotzo and Michaelowa, Energy Policy, 2003


The modelling frameworkThe modelling framework• Supply/demand model for a single commodity,

carbon emission credits, in the year 2010• Perfect international market• Marginal abatement cost curves calibrated with

reference to results from the MIT’s EPPA model• JI mobilises 20% of macroeconomic abatement

potential, CDM 10% • Linear phase-in of CDM 2003-2007• CDM project types explicitly modelled

– capture of flared gas in oil and gas extraction– capture of methane from landfills


The standard scenarioThe standard scenario• US and Australia do not ratify the Kyoto Protocol• Hot air sales are limited to 400 Mt (i.e. 30% of potential) to

maximise revenue• All CDM projects have positive implementation costs• Sinks project CERs are cheaper than energy and thus the

ceiling of 1% of base year emission binds• Transaction costs

– CDM: 0.25 €/tCO2, rising with the permit price until at 3.7 €/tCO2, marginal TAC is 0.75 €/t. DNA fee: 1%, CER taxation by host country: 10%, adaptation levy: 2%

– JI: 0.20 € /tCO2, rising to 0.75 €/tCO2 at a permit price of 3.7 €/tCO2

– International emissions trading: 0.10 €/tCO2


Shares of the mechanisms in Shares of the mechanisms in the standard scenariothe standard scenario

36%

26%

5%

33%Hot air

DomesticabatementJI

CDM

Market price: 3.7 €/t CO2 , total CDM revenue 6.6 b €

CDM revenue after TAC: 2.4 €/t


Shares of the project types in Shares of the project types in overall CDMoverall CDM

57%

18%

8%

17%Energy sector+ industryGas flaring

Landfill gas

Sinks


CDM and JI demand worldwide: CDM and JI demand worldwide: current Kyoto gap (for 2008-2012)current Kyoto gap (for 2008-2012)

12001135

840

500

200

400

600

800

1000

1200

1400

Canada EU Japan others

Million t CO2 eq.


Current Kyoto gap: “Old” EUCurrent Kyoto gap: “Old” EU

85 75 6525

0

150

20 40

340

10

8040

0

360

00

50100150200250300350400

Austria

Belgium

Denmark

Finland

France

German

y

Greece

Irelan

dIta

ly

Luxembourg

Netherlan

ds

Portugal

Sweden

Spain UK

States may revert to hot air acquisition from new members and Russia/Ukraine

Million t CO2 eq.


Demand on the CDM and JI Demand on the CDM and JI market (million $)market (million $)

180

50 40

680

16040 20 10 8 5 0

100

0

200

400

600

Committed Planned

•Pure CDM demand: about 800 million $, i.e. ~ 200 million t at current prices of 3-5 $/t CO2

•Price differentiation according to quality?


EU as CDM leaderEU as CDM leader•“Linking directive” agreed as law, April 2004

• CERs can be used in EU trading scheme from Jan. 2005 • No common CER import limit. Member state competence and thus unlikely to be implemented• The survival of the Kyoto Mechanisms without Kyoto entry into force is guaranteed• Sinks excluded at least until 2008, large hydro to follow WCD rules

• Market impact• Private demand depends on national allocation plans. Most published plans are weak. EU Commission not able to refuse any of them. Tendency to shift demand from companies to governments• Depends on government CER / ERU import regulations / fees


CDM/JI acquisition in EU ETS CDM/JI acquisition in EU ETS national allocation plansnational allocation plans

3522 18,5 15

0 0

18,5 15

100

32,5

0

100

00

20

40

60

80

100

120

Austria

Belgium

Denmark

Finland

France

German

y

Greece

Irelan

dIta

ly

Luxembourg

Netherlan

ds

Portugal

Sweden

Spain UK

Million t CO2 eq.


Impact of carbon finance on Impact of carbon finance on project revenues at 3 €/t COproject revenues at 3 €/t CO22

Source: PCF 2003

2-4Gas Flare Reduction

1.0-1.3Wind

~ 2.0Energy Eff.-District Heating0.4-3.6Bagasse

>5Municipal Solid Waste2-7Biomass

0.8-2.6Hydro

IRR %Technology


How Taiwan could participateHow Taiwan could participate• COP decision on waiving the ratification

requirement due to the specific situation of Taiwan– Precedents: Turkey special role in Annex I– Iceland exception

• Participation in Annex B or Non-Annex B?– Annex B would be more appropriate to economic

situation of Taiwan• Domestic emissions trading• CDM investment on the mainland

– Good signal for post-2012 negotiations• Look for allies in the EU


ConclusionsConclusions• CDM is complex but manageable

– Baseline and additionality determination difficult, expensive - setbacks for project developers!

– Bulk of current supply coming from unexpected technologies

– Supply Oct. 1, 2004: 90 million t• JI is underdeveloped

– ~ 15 million t• CDM+JI demand is picking up

– Coming mainly from government; 1200 million $– Reluctance to introduce tough domestic climate

policy instruments that could serve as incentive for private sector involvement; 100 million $


Thank you!

Further information:

www.hwwa.de/climate.htm

or: [email protected]

demand and supply for emission credits of the project-based kyoto mechanisms cdm and ji

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