michaelowa@perspectives perspectives

[email protected] [email protected] www.perspectives.cc

Key challenges and possible new formats

for CDM post-2012

ECBI Fellowships, Oxford, Sep. 3, 2007

Axel Michaelowa, Perspectives GmbH

[email protected]

[email protected] www.perspectives.cc

Structure of presentation

• The political framework

• The quantitative role of CDM post-2012

• Aggregation of CDM

• Policy CDM

• Sector CDM

• Programmatic CDM

• Conclusions


The political framework

• AWG Vienna: “achieving the lowest stabilization level

assessed by the IPCC to date would require Annex I Parties as a group to reduce emissions in a range of 25–40 % below 1990 levels by 2020”

“greater mitigation potential is at the disposal of Annex I Parties through the wider use of flexibility mechanisms”

• Developing countries support expansion of CDM


The role of the CDM post-2012

• Assumptions for market demand Commitment period 2013-2019 -30% for the EU and other OECD compared

to 1990 -10% for Australia, Belarus, Japan, Russia,

Ukraine and the US compared to 2012 -5% for new OECD members Chile, Israel,

Mexico and South Korea

No commitments for any other countries



8400

5000

1000

600

600

700

100

300

1700

-1300

-200

-1900

-3900

400

-4000 -3000 -2000 -1000 0 1000 2000 3000 4000 5000 6000 7000 8000 9000

EU-28

US

Japan

Canada

Other OECD

Australia

New OECD

Belarus*

Ukraine

Russia

Banked amount

Shortfall



• Total demand 18.8 billion t CO2 eq.

- Banked volumes 7.1 billion t

= Net shortfall 11.7 billion t

• Current CDM pipeline: 0.4 billion t/year

• Likely that supply could triple until 2020

• Total CER supply 2013-2019: 5.5 billion

= Shortfall: 50%!!

We need additional CER supply


How to aggregate CDM

• Bundling of projects • Programmes

• Sectoral benchmark for crediting of all projects below the benchmark without further additionality check • Policies • Sectoral no-lose target and ex-post trade –no CDM!

• Sectoral cap and trade – no CDM!


Evaluating CDM aggregation• Bundling of projectsSensible from transaction cost point of view but done rarely

• ProgrammeEssentially project bundle (without any limit) with

intermediary providing an incentive. Transaction costs likely to be significant. Experience remains to be gathered

• Sectoral benchmark Intensity benchmark makes sense for several important

project types but not for allAbolishing additionality testing is not sensible in situation

without binding cap

• Policy CDMRequires sizeable resources on government levelAllocation of costs and benefits between different players is

tricky


Defining policy CDM

• Crucial role of government

• A policy should have an incentive to participate (carrot / stick)

• Baseline: status quoRenewable electricity generation caused by the policy

*weighted OM/BM (ACM 2)Energy efficiency standard: average energy use of

appliance before standard*current number of appliances*grid average emissions factor

LFG/HFC/N2O/PFC capture regulation: emissions of all now regulated sources before regulation

Fossil fuel subsidy removal: Fossil fuel use before subsidy removal*fossil fuel emission factor


Defining policy CDM II• Policy emissions Renewable electricity generation: Zero Energy efficiency standard: standard energy use of

appliance*current number of appliances*grid average emissions factor

LFG/HFC/N2O/PFC capture regulation: current emissions of all now regulated sources

Fossil fuel subsidy removal: Fossil fuel use after subsidy removal*fossil fuel emission factor

• Policy must be monitored throughout crediting period• Challenge: changes in economic activity levels over time Avoid generation of CERs due to activity increase? Possible solution: limit credit to activity level at project start


Definition of policy CDM III

• Additionality testPolicy has costs compared to status quoCosts directly accrue to private sector

• E.g. renewable energy provision under a RPS is more expensive than fossil fuel

• Mandated HFC-23 capture entails costsCosts directly accrue to public sector

• Subsidy programme for energy efficiency improvement

• Should macro-economic benefits from policy implementation be taken into account in additionality assessment? Incremental cost calculation of GEF…


Policy CDM – Responsibilities

• Who is project participant?

• Who does the monitoring?

• Who retains the CERs?GovernmentAddressees of the policy who bear costs

• Probably latter would prefer pass-through of the revenues, not necessarily the CERs as such

• Share revenues according to cost distributionGovernment bears CDM registration and monitoring costs


Policy CDM – Incentives

• CER put option (Müller 2007): right to sell CERs from policy CDM at a pre-determined price Gives government certainty about minimum revenue Challenge to define price (floor price of market) Challenge to define quantity of put options and their allocation to selling countries

• CER obligation (Müller 2003): requirement for countries with emission caps to use CERs for at least a pre-defined share of their emission budget Gives certainty about minimum demand Does not solve the price problem


Conclusions

• Post-2012 CER supply under current CDM regime likely to be insufficient, if negotiations orient themselves on IPCC results (as done by AWG)

• CDM aggregation may increase CER potential

• Sectoral CDM does not make sense

• Programmatic CDM is promising but not yet testedPilots should be supported

• Policy CDM is very interesting but incentive problems remain to be resolved


Thank you!

Further information:

www.perspectives.cc

or: [email protected]

michaelowa@perspectives perspectives

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