Introduction to CDM and project development

Dr. B.M.S. Batagoda

Presented at the workshop organized by the Ministry of Environment and Natural resources and

the World Bank on 16th February 2007 in Colombo, Sri Lanka

Climate Change CO2 concentration of the atmosphere in the

year 1750 was 280 ppm and at present 360 ppm

By year 2100, projected CO2 concentration is about 540 to 970 ppm

Global average temperature is projected to increase by 1.4 to 5.80 C over the period 1990 to 2100

Fossil fuel burning will be the dominant influence on the atmospheric concentration of CO2

Source: IPCC

What is global warming ?

The effect of heat trapping due to the increasing presence of green house gases (i.e. Carbon dioxide, methane, nitrous oxides, chlorofluorocarbons, hydro-chlorofluorocarbons) in the earth atmosphere is known as greenhouse effect or global warming

. . .

Per capita emissions in South Asian countries in comparison to USA

Country Per Capita emissions (carbon tons )

1990 1996

USA 5.18 5.37

Bangladesh 0.04 0.05

Bhutan 0.02 0.04

India 0.22 0.29

Maldives 0.19 0.31

Nepal 0.01 0.02

Pakistan 0.16 0.18

Sri Lanka 0.06 0.11

UN Climate Change Convention adopted at Rio Summit,1992

Objectives of the UNFCCC

Stabilize the atmospheric greenhouse gases at a level that would prevent dangerous anthropogenic interference with the climatic system.

Sri Lanka became a member in 1994. Ratified 186 countries.

Kyoto Protocol

Major objective“Industrialized countries should

reduce their combined GHG emission by at least 5% compared to their emission levels in 1990 , during the period 2008-2012”.

•Kyoto targets

•Target is to reduce CO2 by 5%from the 1990 level

Country Target

USA 7%EU countries 8%

Japan 6%Croatia 5%Russia 0%

C lean D evelopm ent M echanismP ro je c ts in d e ve lo p ing co u n tries

- S u s ta in ab le D e ve lo p m e n t O b je c tive

Joint Im plem entationP ro je c ts be tw e e n co u n trie s w ith ta rg e ts

(A n n e x 1 co u n trie s)

In ternational Em issions TradingB e tw e en co u n trie s w ith ta rg e ts

(A n n e x 1 )

K yoto M echan ism s

Clean Development Mechanism

Implementing projects in developing countries, that reduce emissions of GHG or absorb GHG from the atmosphere and sell the amount avoided or absorbed to developed countries

Potential sectors

Two types of projects: Emission avoidance projects GHG Removal or sink projectsSectors Energy Industrial Agriculture Waste sector Forestry

Example - Power sector CDM project

- Coal power plant generate 1140 g CO2/kWh - Natural Gas Plant generates 360 g CO2 /KWh

Difference is 780 g if power generated using Natural Gas instead of Coal

This 780 g can be sold as CDM credits

Transport sector CDM project

- Diesel Vehicle emits 3.14 kg CO2/kg Fuel

- NG Vehicle emit 2.75 kgCO2/kg Fuel

Difference is 0.39 kgCO2/kg Fuel

This 0.39 kgCO2 can be sold as CDM

Landfill gas recovery CDM project

Baseline emissions = 1 tCH4 /year

(without CDM) = 1 x 21(GWP) tCO2/ year

= 21 tCO2/ year

Project scenario = 1 tCH4 – After flared 2.75 CO2

(with CDM) = 2.75 tCO2 /year

Example for forest CDM project

Agro-forestry sequester 2-5 t C ha-1 yr-1

Restoration of degraded forest sequester 0.25 – 0.9 2-5 t C ha-1 yr-

1

Industrial plantation take up 12 – 15 2-5 t C ha-1 yr-1

International

Market

Annual Volumes (tCO2) of Project-Based Emission Reductions Traded (Up to 2012 vintages)

Year Total Project -Based

Transactions

Compliance Voluntary Retail

1998 17,976,538 0 17,907,448 69,090

1999 35,423,491 0 35,265,724 157,767

2000 17,094,425 387,933 16,507,407 199,085

2001 13,004,103 4,724,591 8,161,652 117,860

2002 28,776,967 14,676,748 13,893,209 207,010

2003 77,641,815 70,429,780 6,773,367 438,669

2004 107,010,089 104,600,758 2,299,050 110,281

2005 (Jan-April) 42,863,095 39,823,182 2,995,000 44,913

Total 339,790,524234,642,9

92103,802,8

56 1,344,675

Annual Volume (Million tCO2) of Project Based Emission Reductions Traded (Up to 2012 vintages)

020

4060

80100

120

1998 1999 2000 2001 2002 2003 2004 2005 (Jan-April)

Mill

ions

Market Byers - Jan.2003-Dec.2004

Japan, 29%

Gov.Netherlands, 22%

UK, 6%

Other EU, 30%

New Zealand, 3%

Canada, 6%

Australia, 1%

USA, 3%

Market Buyers-Jan.2004-April 2005

Japan, 21%

Gov.Netherlands, 16%

UK, 12%Other EU, 32%

New Zealand, 7%

Canada, 5%

Australia, 3%

USA, 4%

Jan.2003-Dec.2004

Rest of Latin America, 23%

Brazil, 12%

Rest of Asia, 17%

India, 26%

Africa, 3%

Transition Economies, 9%

OECD, 10%

Jan.2004-April 2005

Rest of Latin America, 22%

Brazil, 13%

Rest of Asia, 14%

India, 31%

Africa, 0%

Transition Economies, 6%

OECD, 14%

Technolgy Share of Emission Reduction Projects - Jan.2003-Dec.2004

Landfill Gas Capture, 16%

Hydro, 9%

Wind, 8%

Biomass, 14%Forestry, 4%

HFC, 23%

N2O, 3%

Other, 8%

Energy Efficiency, 3%

Animal Waste, 12%

Technology Share of Emission Reduction Projects - Jan.2004-April 2005

Landfill Gas Capture, 10%

Hydro, 12%

Wind, 7%

Biomass, 11%

Animal Waste, 18%

Energy Efficiency, 2%

Forestry, 4%

HFC, 25%

N2O, 4%

Other, 7%

Sri Lanka

Market

Table 1: Annual tCO2 abetment (sector wise)

Hydro, 265625

Wind, 1290000

Bio Mass, 695212

Organicwaste treatment,

244000

Forestry, 803166

other, 1686000

Table2: Present status of the proposed projects

Approved, 4

Inprinciple, 14

Pin, 8

Only Concept paper, 2

PDD, 1

Table 3: District wise Distribution of Proposed Projects

Ratnapura, 5

N'eliya, 2

Gampaha, 2

Puttlam, 2

Kandy, 4

Gampaha, 2

Colombo, 2

Ampara, 1

H'thota, 1

Trncomalee, 1

Matale, 1

Apura, 1

Monaragale, 1

Galle, 1

Current CDM Buyers Bio-carbon Fund –World bank $100 m European Bank for Reconstruction and Development $ 100 m Denmark JI/CDM Fund E 100 M Development Bank of Japan $ 100 m Japan Bank for International Corporation $ 100 m

Current CDM Buyers

World Bank- Prototype Carbon Fund $180M Dutch – ERUPT/CERUPT $250MThe Netherlands – Carbon development Fund E 140 mAndean Development Bank E 40 mCommunity Development Carbon Fund – World Ban $100 mDeutsche Bank

India 10,566,516

Indonesia 271,938

Israel 93,452

Jamaica 52,540

Malaysia 1,615,972

Mexico 4,003,888

Mongolia 11,904

Morocco 223,313

Nepal 93,883

Nicaragua 336,723

Panama 60,343

Papua New Guinea 278,904

Peru 199,265

Philippines 56,788

Republic of Korea 11,075,612

Republic of Moldova 47,343

South Africa 25,739

Sri Lanka 104,130

Viet Nam 681,306

2

Expected annual CERs from registered projects by host country as at 12/09/2006

Lead time

The lead time for new CDM projects is four to five years

The ability to shorten project lead times appears to be very limited

Project developers have an economic incentive to get their project into operation as quickly as possible.

Economic viability

To be economically viable a CDM project should reduce emissions by at least 100

000 tC02e per year (IETA/World Bank 2005)

The average size of existing and identified projects is over 150000 tCOze per year

CER demand

Foreign direct investment (FDI) in developing countries averaged $140 billion per year during 1997-2002 and often varied by more than $10 billion from one year to the next.

The annual demand for CERs during 2008-2012 is estimated to be 250 MtC02e (range 50 to 500 MtC02e) and a market price for Kyoto units of about $11.40/tCOze in 2010 (range $1.00 to $33.00/tCOze).

Due to five year lead time the CDM would be limited to existing project ideas, which would yield an annual supply of 50 to 90 MtC02e.

A significant acceleration in the flow of new projects in 2008 could strain the capacity of the designated operational entities and the Executive Board.

CDM transaction cost estimates

Activity Consultant’s cost $

Feasibility assessment 5000 - 20000

Project Design document 25,000 – 40,000

Registration 10000

Validation 10000 - 15000

Legal work 20,000 – 25,000

Verification 3000 - 15000

CDM transaction cost Fichtner, et al. (2003) - Transaction costs

range from $0.05 to $26.11 tC02e and represent from 6% to 53% of the total project cost

to be viable as CDM projects were energy efficiency projects with total reductions greater than 20 000 tC02e per year and renewable energy projects with total reductions over 50 000 tC02e per year

Michaelowa, et al. (2003) estimate the minimum fixed costs for a CDM project at €150 000.

Transaction cost The Prototype Carbon Fund estimates the

transaction costs at approximately $250 000.

Shell believes transaction costs should not exceed 25% of the price

Fichtner, et al. finds that transaction costs represent 13% of the total cost for energy efficiency projects and 20% for renewable energy projects

Michaelowa, et al. finds that transaction costs average 20.5% for energy efficiency projects and 14.4% for renewable projects with some decline over time

Transaction cost –small project

De Gouvello and Coto (2003) estimates small-scale projects the transaction costs to between $8 000 and $80 000

The PCF estimates the transaction costs for small-scale projects at $105000, a reduction from $250 000 for regular CDM projects

Figure 2 - CDM Project Activity Cycle

Validation/registration

Monitoring

Verification/certification

Issuance

EB

DOE

Project Participants

Executive Board of the CDM (EB)

Design Operational Entity (DOE)

Designated National Authority for the CDM

Project ParticipantsDesign

DOE

EB& COP/MOP

An Applicant

Entity

Certified Emission Reductions

Accreditation/designation

CDM project development process Project developer identifies a potential CDM project: Identify project sector (e.g. grid-connected renewables,

energy efficiency etc) Decide whether small-scale CDM Inform DNA of the host country (e.g. using PIN) Prepare a Project Design Document (PDD) Select baseline methodology (new or approved) Select/designed monitoring plan Decide project crediting period (10 or 3 *7) Collect data from relevant national authorities Calculate emission reductions and expected CERs EIA for the project Validate Register Verify CERs

Key participants of a CDM Project Process

CDM project investor/Developer Designated National Authority (DNA) Designated Operational Entity (DOE) CDM Executive Board (EB) Conference of parties (COP) Meeting of Parties (MOP)39

CDM investor

Prepare Project Designed Document Propose baseline methodology Ensure additionality criteria Calculate expected GHG reductions

and CERs Obtain all permits and approval from

DNA Secure financing

Designated National Authority A country level focal point for CDM, based in

Ministry of Environment etc. Issue the letter of approval confirming CDM

projects contributes to sustainable development in the host country

Link between international CDM investors and potential projects in the country

May involve in marketing of CDM project pipeline Establish national CDM regulations, strategy, and

criteria for sustainability and approval Monitor CDM sector in the country

Designated Operational Entity (DOE)

Independent third party assigned by EB. Project developers choose the DOE they wish to deal with.

Responsibilities: Validate proposed CDM project Verify and certify GHG reductions from CDM

projects Maintain publicly available list of all approved

and on-going CDM projects and amount of CERs approved for each project

Post the PDD for 30 days for comments before final approval

CDM Executive Board (EB) Ten members (fixed) and ten alternating all with

specialized technical expertise Key responsibilities: Review & approve new methodologies related to

baseline and monitoring plan. Provision of simplified procedures for small scale

CDM Acceditation of Designated Operational Entities

(DOEs) Develop and maintain a CDM project registry Establish panels (Acceditation panel and

methodologies panel) Issue CERs

PDD contentsA. General description of the project activityB. Baseline methodologyC. Duration of the project activityD. Monitoring methodology and planE. Calculation of GHG emission by sourcesF. Environmental impactsG. Stakeholder commentsAnnex 1. Contact information on project participantsAnnex 2. Information regarding public fundingAnnex 3. New baseline methodologyAnnex 4. New monitoring methodologyAnnex 5. Table of baseline data

Note 1. Small scale CDM requires only annex 1 & 2Note 2. Annex 3 & 4 will be required for new methodologies

A. General Description of Project Activity

A.1. Title of the project activity A.2. Description of the project activity Purpose of the project

A.3. Project participants

A.4. Technical description of the project

A.4.1 Location of the project activity A.4.1.1. Host country party(ies) A.4.1.2. Region/state/province etc. A.4.1.3. City/Town/community etc. A.4.1.4. Detail of the physical location

A.4.2. Category of project UNFCCC CDM project categories

A. General Description of Project Activity

A.4.3. Technology to be employed by the project

A.4.4. Brief explanation on how anthropogenic GHG emissions by source to be reduced by the proposed CDM project.

A.4.5. Public funding of the project activity

A.4.6. Problems and barriers being addressed by the project

B. Baseline methodologyB.1. Title and reference of the methodology applied to the project Give reference to approved methodology or fill annex 3 for new

methodologies. Baseline data to be prepared in table in annex 5.

B.2. Justification of the choice of the methodology

B.3. Description of how the methodology is applied in the context of the project

B.4. Description of how the anthropogenic emissions of GHG by sources are reduced

below baseline - Why this project is additional and therefore not the baseline

scenario

B.5. Description of how the definition of the project boundary related to the baseline

methodology is applied to the project

B.6. Details of baseline development B.6.1. Date of completing the final draft of this baseline section (DD/MM/YYYY) B.6.2. Name of person/entity determining the baseline

C. Duration of the Project/ Crediting period

C.1. Duration of the project activity

C.1.1. Starting date of the project activity C.1.2. Expected operational lifetime of the project

C.2 Choice of the crediting period and related information C.2.1. Renewable crediting period C.2.1.1. Starting date of the first crediting period (DD/MM/YYYY) C.2.1.2. Length of the first crediting period (in years and

months) C.2.2. Fixed crediting period C.2.2.1. Starting date of the first crediting period (DD/MM/YYYY) C.2.2.2. Length of the first crediting period (in years and

months)

D. Monitoring methodology and plan

D.1 Name and reference of approved methodology applied to the project

D.2. Justification of the choice of methodology and why it is applicable to the project

D.3. Data to be collected in order to monitor emissions from the project activity and how this data will be archived

ID No. Data type

Data variable

Data units

Measured (m), calculated (c), or estimated (e)

Recording frequency

Proportion of data to be monitored

How is the data archived? (electronic/paper

For how long is archived data to be kept

Comments

D.4. Potential sources of emissions which are significant and reasonably attributable to the project activity, but which are not included in the project boundary, and identification if and how data will be collected and archived on these emission sources.

ID No. Data type

Data variable

Data units

Measured (m), calculated (c), or estimated (e)

Recording frequency

Proportion of data to be monitored

How is the data archived? (electronic/paper

For how long is archived data to be kept

Comments

D.5. Relevant data necessary for determining the baseline of anthropogenic emissions by sources of GHG within the project boundary and identification if and how such data will be collected and archived

ID No. Data type

Data variable

Data units

Measured (m), calculated (c), or estimated (e)

Recording frequency

Proportion of data to be monitored

How is the data archived? (electronic/paper

For how long is archived data to be kept

Comments

D.6. Quality control (QC) and quality assurance (QA) procedures are being undertaken for data monitored ( Data items in table D.3, D.4 and D.5 as applicable for this)

Data (indicate table and ID number e.g. D.4-1, D.4-2

Uncertainty level of data (High/Medium/Low

Are QA/QC procedures planned for these data

Outline explanation why QA/QC procedures are not being planned

E. Calculation of GHG emissions by sources

E.1 Calculation of total project GHG emissions

Total project emissions = Level of project activity (unit

of input or output * CO2 emissions factor of the project’s technology,

fuel or gas

E 1. Project emission calculation

Emissions from biomass power plantU = (V * Y1) + (W * Y2 ) + (X * Y3 ) where: U = Total emissions from the project emissions V = Amount of fuel wood used as input to the power plant in tons, which is 11200 tons/yearW = Annual energy use for transporting fuel wood, which is 2 MJ per ton km1. (Assumed that the project transport average distance of 5 km since maximum distance is only 10 km. Therefore to transport each ton of fuel wood requires 10 MJ of energy. Hence the total transport energy is 11200 * 10 = 112000 MJ = 0.112 TJ)X = Amount of foliage used for fertilizer production, which is 1800 tons/year (dry weight)Y1 = CO2 emission factor (CEF) of fuel wood (1.65 tCO2 per ton of Wood)Y2 = CO2 emission factor for transport fuel 74.1 tCO2/TJ2Y3 = CO2 emission factor for dry weight of foliage ( 0.26)3

Total project emissions = (11200 * 1.65) + (0.112 * 74.1) + (1800 * 0.26) =

18956.3 tCO2/year

E 1. Project emission calculation cont..

Example: Emissions from landfill gas recovery

Baseline emissions = 100 tCH4 /year(without CDM) = 100 * 21(GWP) tCO2/ year = 2100 tCO2/ year

Project scenario = 1 tCH4 – After flared 2.75 CO2 (with CDM) = 2.75 * 100 tCO2 /year = 275 tCO2/year

E.2 Calculation of Leakage

Total leakage emissions = Level of project activity outside

the project (unit of input or output

* CO2 emissions factor of the project’s technology, fuel or gas

E.2 Calculation of Leakage cont…

Example: Leakage emissions due to biomass power plant

U = V * Y1 where: U = Total emissions outside the project boundary

(without project control) V = Deforestation of 10 ha yr

Y1 = CO2 emission factor (CEF) of hectare of deforestation

(50 tCO2 per ha)

Total leakage emissions = (10 * 50) = 500 tCO2/year

E.3 - Total project emissions

Total project emission = E.1 + E.2

= Total project emission + Leakage

E.4 Baseline emission

Total baseline emissions =

Level of project activity (unit of input or output * CO2 emissions factor of the alternative to the project (baseline scenario)

F. Environmental impactsG. Stakeholder consultation

List all environmental impacts Include comments of stakeholder

consultation of the project

CDM PROJECTS ALREADY APPROVED in Sri Lanka

Projectname

Developer

Type Capacity

Emission reduction t/CO2 year

Status

Margal Ganga small hydropower project (bundled 3 projects)

Eco-Power (pvt) Ltd

Mini hydro

9.9MW 34000 Approved

Alupola & Badulu oya small hydropower project

Eco-Power (pvt) Ltd

Mini hydro

8.2 MW 31327 Approved

Hapugastenna & Huluganaga small Hydro power Project

Largerway Wind Turbaine Ltd

Mini hydro

13.55 MW 51435 Approved

CDM PROJECTS SUBMITTED FOR APPROVAL

Projectname

Developer Type Capacity Emission reduction t/CO2 year

Status

Bambarabotuwa mini hydropower project

Vidul lanka (pvt)

Mini hydro

3.2 MW 3917 Approved In principle

Colombo organic waste treatment plant

Bioland (pvt0 Ltd

Biogas 56784 MWh 244000 Approved In principle

Wind power plant Senok Trade Combined Ltd

Wind 20 WM 65,000 Approved In principle

Mini Hydropower project

Free Lnak (pvt) Ltd

Mini hydro

30300 MWh 30000 Approved In principle

CDM PROJECTS SUBMITTED FOR APPROVAL

Projectname

Developer

Type Capacity

Emission reduction t/CO2 year

Status

Gatembe small hydropower project

EML (pvt) Ltd

Mini hydro

12MW 42000 Approved In principle

Atambage small hydropower project

EML (pvt) Ltd

Mini hydro

3 MW 10500 Approved In principle

Puttalama Wind power project

Largerway Wind Turbaine Ltd

Wind 50 MW 175000 Approved In principle

Power generation & manufacture of coconut shell charcoal

Haycarb Ltd Heat recovery and power

8MW 28000 Approved In principle

CDM PROJECTS SUBMITTED FOR APPROVAL

Projectname

Developer

Type Capacity

Emission reduction t/CO2 year

Status

Briquetting of saw dusts and power generation to protect Lunawa lagoon

Seth Foundation

Biomass 10MW 435261 Approved In principle

Dendro power project

Lanka Transformers Ltd.

Biomass 6MW 21000 Approved In principle

Reduction of GHG from Brewery efficiency improvement

Lion Brewery Ltd.

Industrial efficiency improvement

10000 Approved In principle

Wind Power Project

David & M Engineering (pvt) Ltd.

Wind power

300MW 1050000 Approved In principle

Sri Lankan CDM potential Projected electricity demand in 2010 -

18800 GWh

Additional energy requirement in 2010 - 13200 GWh (Some of these energy may be produced as CDM projects

Existing scrub and open lands – 1.7 million ha (Part of this can be used for CDM

Sri Lankan CDM potential

Estimated wind power potential of 24000MW

Estimated Biomass (Dendro) potential of 5000 MW

Industrial efficiency improvement 40% of households have not been

provided with electricity – Solar home system potential

Sri Lankan CDM potential

Municipal solid wastes generation will increase to 3000 tons per day by 2010 in Western Province (present 1500 tons per day)

New Rubber Plantation and Rubber replantation (200000 ha)

Shade trees and forest plantation in marginal areas tea lands

Summary of National CDM Potential by Sector (Not Necessarily by 2012)

Sector Annual Energy Reduction/Substitution potential/ year

Annual CO2

Reduction Potential tonnes

CO2/year

Hydro Power 250 MW (35% p.f.)

613,200 tCO2/y

Wind 480 MW (20% p.f.)

672,768 tCO2/y

Solar PV 0 0

Biomass (Grid Power) 300 MW (80% p.f.)

1,680,000 tCO2/y

Biomass (Industrial Heat)

162 toe 512,000 tCO2/y

Biomass (Absorption Refrigeration)

100 MW (60% p.f.)

400,000 tCO2/y

Energy Conservation: Electricity (Industry)

20,400 toe 64,700 tCO2/y

Energy Conservation: Petroleum (Industry)

36,000 toe 113,800 tCO2/y

Transport 206,000 toe 600,000 tCO2/y

Agro Residue-Rice Husk

20 MW (80% p.f.)

112,000 tCO2/y

Agro Residue-Sawdust

20 MW (80% p.f.)

112,000 tCO2/y

Municipal Solid Waste

Forestry 52,000 ha 1,352,000 tCO2/y

Risks Regulatory risk Market risk Country risk Non-permanence risk Replacement risk Construction risk Performance risk resource risk technology risk Financial, business and regulatory risk Contract risk Counterparty risk Generic country risk