Key challenges and possible new formats for CDM

Key challenges and possible new formats for CDM post-2012 ECBI Fellowships, Oxford, Sep. 3, 2007 Axel Michaelowa, Perspectives Gmb. H michaelowa@perspectives. cc 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 michaelowa@perspectives. cc www. perspectives. cc

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 michaelowa@perspectives. cc www. perspectives. cc

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 michaelowa@perspectives. cc www. perspectives. cc

The role of the CDM post-2012 michaelowa@perspectives. cc www. perspectives. cc

The role of the CDM post-2012 • Total demand 18. 8 billion t CO 2 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 michaelowa@perspectives. cc www. perspectives. cc

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! michaelowa@perspectives. cc www. perspectives. cc

Evaluating CDM aggregation • Bundling of projects § Sensible from transaction cost point of view but done rarely • Programme § Essentially 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 all § Abolishing additionality testing is not sensible in situation without binding cap • Policy CDM § Requires sizeable resources on government level § Allocation of costs and benefits between different players is tricky michaelowa@perspectives. cc www. perspectives. cc

Defining policy CDM • Crucial role of government • A policy should have an incentive to participate (carrot / stick) • Baseline: status quo § Renewable 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/N 2 O/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 michaelowa@perspectives. cc www. perspectives. cc

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/N 2 O/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 michaelowa@perspectives. cc www. perspectives. cc

Definition of policy CDM III • Additionality test § Policy has costs compared to status quo § Costs directly accrue to private sector • E. g. renewable energy provision under a RPS is more expensive than fossil fuel • Mandated HFC-23 capture entails costs § Costs 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… michaelowa@perspectives. cc www. perspectives. cc

Policy CDM – Responsibilities • Who is project participant? • Who does the monitoring? • Who retains the CERs? § Government § Addressees 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 distribution § Government bears CDM registration and monitoring costs michaelowa@perspectives. cc www. perspectives. cc

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 michaelowa@perspectives. cc www. perspectives. cc

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 tested § Pilots should be supported • Policy CDM is very interesting but incentive problems remain to be resolved michaelowa@perspectives. cc www. perspectives. cc

Thank you! Further information: www. perspectives. cc or: michaelowa@perspectives. cc www. perspectives. cc