Clean Development Mechanism (CDM)

Overview, DNA process and Current Project Activities

Philippine Designated National Authority for CDM

OVERVIEW
OUTLINE

Background (UNFCCC, KP) Overview of the Clean Development Mechanism (CDM) State and Trends of the Carbon Market Prerequisites for CDM Participation The Philippine DNA for CDM

UNFCCC
Noting that: the LARGEST SHARE of historical and current GHG emissions originated in developed countries, the PER CAPITA EMISSIONS in developing countries are still relatively LOW and the share of global GHG emissions from developing countries will GROW to meet their social and development needs, Developed countries: have the obligation to take the lead in combating climate change and the adverse effects thereof & have commitments to provide financial resources, including for the transfer of technology, for developing countries
CSE India presentation

KyotoProtocol: Taking Root

174 Countries & the EEC have ratified (as of June 06, 2007) = 61.6% of total carbon dioxide emissions, 1990 as the base yr Entered into Force on 16 Feb 05 Developed countries to implement domestic policies and measures to achieve the mandatory targets Three (3) innovative mechanisms supplemental to domestic action: - Joint Implementation - Emission Trading - Clean Development Mechanism or CDM

A legally binding instrument that strengthens the UNFCCC by committing developed countries which have accepted it to individual, quantified GHG emission and limitation targets (an average total cut in GHG emissions of 5% from 1990 levels for the period 2008-2012)

Clean Development Mechanism

Since the atmosphere is equally damaged by GHG emissions wherever they happen and equally helped by cutbacks in emissions wherever they are made, the CDM, as a market-based flexibility mechanism:

allows Annex I countries to earn certified emission

reduction units (CERs) that can be applied to partially meet their GHG reduction commitments under the KP whenever they undertake GHG-reducing projects that contribute to sustainable development in a non-Annex I Party, where land, technology and labor are less costly, & concomitantly result in real, measurable, verifiable and long-term GHG reductions that are additional to any that would otherwise occur
NON-Annex I Countries / Parties: developing countries not bound by emission reduction targets

Annex I Countries / Parties: UNFCCC Annex I list developed countries including Economies in Transition

CDM as a Market-based Mechanism

For Annex 1 countries:

For non-Annex 1 countries:

Enables developed countries to meet their emission reduction commitments in a flexible and costeffective manner As investors, developed countries benefit by obtaining Certified Emission Reduction units (CERs) for KP partial compliance

Assists developing countries in meeting their sustainable development objectives As host countries, developing countries benefit in the form of investment, access to better technology, and local sustainable development

CER: A special product

CER is a payment for the Project Developer not to produce - To reduce GHG emissions Thus, the importance of special requirements Definition of baselines Calculation of GHG emissions reductions Monitoring of GHG emissions reductions

Conditions for CDM Projects

Assist Non-Annex I Parties in achieving SD Additional if GHG emissions are reduced below those that would have occurred in the absence of the registered CDM project activity Annex I Parties are to refrain from using CERs generated from nuclear facilities to meet their quantified GHG reduction targets Public funding from Annex I Parties must not result in the diversion of ODA and separate from and not counted towards their financial obligations under the UNFCCC and KP LULUCF project activities presently limited to Afforestation and Reforestation

* PDD, Validation Report and Letter of Approval from Host Country are required in order to be registered as a CDM project activity

Requirements for participation in the CDM

Participate voluntarily
Establish a National CDM Authority

Ratify the Kyoto Protocol

CDM Fees

Kinds of Fees

Consulting fee for PDD production Fees to be paid to a Designated National Authority (DNA) Fees to a Designated Operational Entity (Validation, Verification) Fees to be paid to the UNFCCC (Request for registration, Share of Proceeds) Placement / brokering fees for CER sales

Cash outlays for fee payment can be made minimal

Annex I (investor) country subsidy CER Buyer agrees to bear the cost Intermediaries absorb the cost

CDM Project Activity Cycle

Stakeholder / Public Consultation

Project Implementation

Annex I Party

National Approval

Host Country Non-Annex I Party, e.g. Philippines

Timescale
CDM process Time required For regular project
~ 6 months 1-2 months 20-25 working days 1 month 1 month 8 weeks

For smallscale project

Usually not required 1-2 months 15-20 working days 1 month 1 month 4 weeks

Project Development: New methodology production and approval The PDD productiona The DNA approval (Philippines) Validation UNFCCC public comments Registration

aassuming ALL necessary information is available.

CERs from a CDM Project Activity

Host Party w/ no emission cap Annex I Party will get CERs A total emission cap of an Annex I Party
Acquired CERs are added and emission cap increases

Baseline Scenario

Specific Place in a Host Party

GHG Emissions Projection

CERs

Project Scenario

GHG Emissions

Non-Annex I / Host Parties will benefit from project activities resulting in CERs Sustainable Development

CER = 1 metric ton of CO2-e

CDM in Charts. IGES. July 2007. Photo fr www.vueweekly.com

State and Trends of the Carbon Market

GHG Emissions: A new commodity is emerging

Targets are expressed as levels of allowed emissions, or assigned amounts, over the 2008-2012 commitment period, divided into assigned amount units (AAUs) Annex 1 countries that have emission units to spare emissions permitted them but not used - are allowed to sell this excess capacity to Annex 1 countries that are over their targets Other units which may be transferred under the emissions trading scheme, each equal to one tonne of CO2:

A removal unit of (RMU) on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation An emission reduction unit (ERU) generated by a join implementation project A certified emission reduction (CER) generated from a CDM project activity

European Union Allowance (EUA) Carbon credits: both an environmental and a financial asset

Environmental asset: reducing carbon emissions which cause global warming & climate change Financial asset: being bought and sold in emerging carbon markets

Price and Payment

Price

Determined by supply and demand No official prices Most observers agree that issued CERs have a similar value to EU ETS (EU Emissions Trading Scheme) Allowances

Price and Payment

Contract Types and Pricing

Contract Now CER Delivery Immediate Payment Immediate Pricing No discount

Type I

II

Now

Future

Future (against delivery)

Some discount

III

Now

Future

Immediate (pre-payment)

Substantial discount

Price and Payment

Payment-against-delivery contracts

Most common arrangement under current practice No principal risk for buyer even in case of non-delivery (cf. pre-payment contracts) However, the buyer sustains reconstitution risk In case of non-delivery, the buyer will have to procure the contracted amount from other sources to stay in compliance. This could be expensive.

Price and Payment

Buyer Risks for Payment-againstdelivery contracts

Project status CDM qualification risk No Project implementation risk No Discounting Price example

CERs issued

No

USD 20

Registration completed

No

Yes

Some

USD 10

No PDD

Yes

Yes

Heavier

USD 5

Strategy for Sellers

Depends on several factors:

Up-front cash needs Ability to carry out CDM steps (with or w/o CDM professionals) Future price projection/minimum price expectation At what level are you willing to lock in the price under a payment-against-delivery contract?

Prerequisites for CDM participation

Participation in CDM is voluntary A non-Annex I Party may participate in CDM if it is a Party to the Kyoto Protocol Parties participating in the CDM shall set up a 12 June 1992 Date of signature Date of ratification national 2 August 1994 designated Date of entry into force 31 October 1994 authority (DNA) for CDM Kyoto Protocol
Climate Change Convention Date of signature 15 April 1998 Date of ratification 20 November 2003 Date of entry into force 16 February 2005 National Communication First National Communication 19 May 2000

Climate Change Convention Date of signature 12 June 1992 Date of ratification 2 August 1994 Date of entry into force 31 October 1994 Kyoto Protocol Date of signature 15 April 1998 Date of ratification 20 November 2003 Date of entry into force 16 February 2005 National Communication
Executive Order No. 320, series of 2004 First National

Ex

D e Pr Re Im D D

Communication Date of signature and

19 May 2000

25 June 2004

effectivity Promulgation of the Rules and Regulations Governing the Implementation of EO No. 320 Date of signature 31 August 2005 Date of effectivity 7 September 2005

Philippine DNA for CDM

DENR Secretary Organizational Structure
TEC for Energy-Related Project Activities

DOE

CDM Steering Committee

Chairperson DENR USec and an alternate Members and alternates: Philippine DOE, DOST, Private Sector, NGO

TEC for Afforestation & Reforestation Project Activities

FMBDENR

CDM Secretariat

EMBDENR

TEC for Waste Management Project Activities

EMBDENR

CDM NATIONAL APPROVAL PROCESS BASIC STEPS

Step 1 Project Application

Step 2 Project Evaluation

Step 3 Project Endorsement

Step 4 Project Approval/ Non-Approval

Project Proponent

TEC

CDM Steering Committee

DNA Head (Secretary of DENR)

Project Application Monitoring

CDM Secretariat

THANK YOU
For your questions / queries:
CDM Helpdesk DNA - CDM Secretariat Office
Environmental Management Bureau 2/F, HRDS Building, DENR Compound, Visayas Avenue, Diliman, Quezon City T: (+63-2) 920-2251; F: 928-4674

www.cdmdna.emb.gov.ph
joygoco@yahoo.com gmerilo@yahoo.com