BASIC CONCEPT OF CARBON FINANCE Moekti H. Soejachmoen 13 September 2006 (kuki@pelangi. or. id)
Structure of presentation • • Legal Basis Concept of CDM project: expenses & income Investment in CDM project CER price Risks Buyers and sellers
Legal Basis • United Nations Framework Convention on Climate Change (adopted: 1992/entered into force: 1994): … … to achieve … stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system … … … such a level should be achieved within a timeframe sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner … • Kyoto Protocol Article 12 (adopted 1997/entered into force: 2005)
Kyoto Protocol • Commitment of Annex B Countries: reduce GHG emissions at 5% below 1990 levels in First Commitment Period (2008 – 2012); • Flexibility mechanisms (Kyoto mechanism): – Emissions Trading; – Joint Implementation; – Clean Development Mechanism;
CDM: a market mechanism for sustainable development • To assist developing countries to support sustainable development and to contribute to the objective of the UNFCCC; • To assist industrialized countries to fulfill their emissions limitation and reduction commitments; $ 1990 level - 5% Certified Emission Reduction Targeted level Certified Emission Reduction Annex I Developing Countries
CDM project: expenses & incomes Expenses • Capital • Operation and maintenance • CDM related expenses – CDM documentation – CDM implementation (full cycle) – Brokerage Incomes • • Selling of commodities Selling of by-products Profit Selling of CERs IRR can be calculated based on this info
Investment • Underlying investment • CDM implementation investment • CDM development and transaction costs: – Documentation – DOE – Registration to CDM-EB: • Share of proceed: US$ 0. 10 per CER (first 15, 000 CER) and US$ 0. 20 per CER (rest of CERs) • Adaptation fund (2% of CERs) - Monitoring
CER Price CER issued project Registered project Early stage project
Risks Business risks increase of cost, market risk, counterparty credit risk, under performed, currency rate risk, force majeur (disasters) Registration risks Domestic: baseline and regulation International: approval of methodology and registration procedure
Risks Delivery risks Volume and price of CERs; project risk Internation CER transfer risk Registry system and Annex 1 eligibility Source: IGES- Indonesia CDM Country Guide
Carbon buyers Total transaction (Jan’ 05 – March’ 06) 453. 5 mill ton CO 2 e Source: World Bank, 2006
Carbon Sellers Jan – Dec’ 04 Jan’ 05 – March’ 06 Source: World Bank, 2006
Project Type Jan – Dec’ 04 Jan’ 05 – March’ 06 Source: World Bank. 2006
Contribution of Asian Countries (kt CO 2 -eq annually) Source: Ellis dan Levina, 2005
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