Dear reader!

The resilience of the CDM market to nasty surprises is really remarkable. The clearing of the backlog at the UNFCCC Secretariat led to a record issuance of 60 million CERs and to breaking through the magic threshold of 500 million issued CERs. Almost 100 projects received their first CERs. Moreover, January saw the highest inflow of new projects in the last 27 months. This contrasts with two market scares for which the EU is to blame. Credits from HFC 23 and adipic acid projects have been banned under the EU ETS from 2013, which already led to a differentiation of CER prices. In addition, the prolonged shutdown of the EU ETS due to a proliferation of thefts from company EUA accounts paralysed trade and shattered confidence in market security in an unprecedented manner.

Friedel Sehlleier, GIZ
Axel Michaelowa, Perspectives GmbH

UNFCCC, CDM-Executive Board and its panels

·  The UNFCCC Secretariat’s hiring of external consultants for clearing the backlog of projects waiting for completeness check has borne fruit. The waiting time for the start of the completeness check for registration is now less than three weeks compared to three months in mid-2010; for issuance this time has gone down to one month from 3.5 months in mid-2010.

·  The SSC Working Group met in mid-January and proposes
> Two new methodologies, for biomass use in manufacturing and biogas/biomass use by households. In the former case, a simpler baseline would be available for projects with less than 20,000 t annual emission reduction.
> To allow a simple cost analysis for household energy efficiency projects where the appliances, e.g. CFLs, are distributed free of charge. This would strongly simplify validation of such projects.

·  CDM audio files of the UNFCCC are now also available in French: www.cdm.unfccc.int.

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Discussion on new market mechanisms

·  Market readiness for new market mechanisms is analyzed in a pre-Cancun paper of the OECD, available at www.oecd.org (1 MB).

·  The Forest Carbon Partnership Facility (FCPF) has released a report summarizing experiences and lessons learned so far with REDD plus projects. See www.worldbank.org (1.5 MB).

·  The recent issue of Joint Implementation Quarterly discusses the latest developments in domestic offsetting and looks at a carbon intensity quota for developing countries, available at: www.jiqweb.org.

·  A US study discussing general regulatory issues for carbon market mechanisms is available at www.cftc.gov (2.6MB).

·  KPMG proposes a framework for mobilizing private capital and incentivizing investment in NAMAs through public private partnerships and carbon credits. See www.kpmg.com (780 KB).

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Supporting up-scaling of mitigation through programmes and bundles

·  In January, 5 PoAs entered the validation pipeline – two CFL dissemination programmes in China, one coal mine methane in China, one biomass energy in Sri Lanka, as well as one methane avoidance in households programme in Bangladesh.

·  Regarding the submissions India and China both lead with 10 PoAs before Vietnam (6). In total 30 host countries are involved, of which 6 are Least Developed Countries.

·  With respect to consultancies, the World Bank leads with 9 before GTZ with 5 and South Pole with 4.

·  In terms of technologies, demand & supply side energy efficiency measures lead with 29 PoAs, followed by biogas (24) and renewables (13).

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The CDM in Least Developed Countries and Sub-Saharan Africa

·  South African renewable energy project developers fear that they would no longer qualify for CDM if they got the government’s feed-in tariff.

·  The UNFCCC CDM website now displays all projects that were notified as “prior consideration” six months before the project start. According to the list several Least Developed Countries with no registered CDM projects such as Benin, Burkina Faso, Eritrea, Sierra Leone and Togo have announced CDM projects to start within the next six months.

·  20 CDM service providers from African countries are listed on the networking website “Clean Development Mechanism in Africa Network” cdminafrica.ning.com.

·  A SADC DNA Training Workshop is planned for 21-24 February 2011, Livingstone, Zambia. For more information see www.sadcdna.wordpress.com.

·  No project from Least Developed Countries entered the pipeline in January.

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GIZ CDM Capacity Building

·  After receiving a lot of positive feedback for the 2010 edition of the carbon market guidebook for cooking stove projects, the GIZ Household Energy Programme HERA has come up with a major revision for 2011. Besides a large number of minor corrections and updates, a new chapter on “Implementing a Carbon-funded Cooking Stove Project” with information on how to practically design a carbon-funded stove project has been added. The chapter includes information on stakeholders’ roles and responsibilities, the CDM-PoA approach, recommendations on the use of carbon revenues as well as an overview on expected costs and revenues from a stove project on the carbon market. Information is available at www.giz.de (1.2 MB).

·  A two-day workshop on programmatic CDM was organized by the CDM-Initiative Brazil – funded by the German Ministry of Environment, BMU – together with local development bank CAIXA in Brasília in November 2010. The workshop gave an overview of programmatic CDM issues and served as forum for discussion of specific political and technical questions. The workshop was well-attended, including participants from the Brazilian DNA, the Ministry for Environment as well as the Ministry for Urban Development and CAIXA. For furtherinformation please contact Arnd Helmke.

·  The stove dissemination activities of GIZ’s Programme for Basic Energy and Conservation (ProBEC) have been handed over to a consortium comprising Islan Asset Management Sàrl and Ecoinvest Carbon S.A. The consortium will manage a regional PoA in Southern Africa and develop carbon assets based on the foundation laid by ProBEC’s work on promoting efficient cookstoves over the past 10 years. Islan manages financial and commercial aspects of the PoA, Ecoinvest serves as technical advisor. ODA-support for ProBEC ended last year, though the carbon funding stream will enable continuation and expansion of cookstove distribution activities. For more information, please go to www.islan.ch and www.probec.org.

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Project developers, operational entities and consultants

·  In January, 129 projects entered the pipeline. The two largest are:
> Tongliao Jianhua Erhao 300 MW Wind Farm Project (China, 0.9 million CERs by 2012)
> Gansu Guazhou Beidaqiao No.4 200 MW Wind Farm Project (China, 0.7 million CERs by 2012)

·  Citigroup and project developer Gazprom Marketing & Trade entered into an interesting post 2012 purchase contract worth 10 million Euro. Under the agreement, Gazprom will guarantee volume and EU ETS eligibility of the CERs for each year from 2013 to 2015.

·  In the latest instance of consolidation on the CDM market, Swiss company Vitol has taken full ownership of the British project developer Carbon Resources Management (CRM). CRM has a portfolio of 45 million tCO2e and more than 200 projects, mainly in China.

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Incentives for CDM investment

·  The price for EUAs was 14.15 Euro for the spot market and 15.39 Euro for 2012 vintages at the end of January. The spread to issued CERs was 2.90 Euro.

·  A new scandal hit the EU ETS in late January: Cyber criminals had hacked into accounts of private companies and governmental registries and stole 3.1 million EUAs. Reacting immediately, the European Commission froze all EU ETS registries and carbon exchanges suspended the spot trade. Only after a massive ramp-up of security measures and the installation of software for detecting the stolen allowances, the registries of France, Germany, the Netherlands, Slovakia and the UK reopened in early February. In addition, Bluenext and Leipzig EEX restarted spot trading EUAs, while the European Carbon Exchange ECX remained closed. Although the theft did not result in any losses to account holders, the reputational damage for the largest carbon market in the world is vast. The EU Commission said that almost half of the member states’ registries lack up-to-date security measures. Implications for trading and prices remain to be seen.

·  The EU Climate Change Committee, comprising representatives of EU Member States, adopted a ban for HFC 23 credits and N2O credits from adipic acid production under the EU ETS from 2013 despite massive industry lobbying. The new legislation still needs to be ratified by the European Parliament.
> In a concessional move, the Committee decided to align the ban with the reporting period of the EU ETS and thus prolong the use of the respective credits until April 2013. This essentially allows to free phase III EUAs by maximizing the use of industrial gas CERs.
> According to the minutes of the meeting, the European Commission is considering to set up a sectoral market mechanism for N2O projects.
> The ban for N2O projects might be reconsidered if a benchmark is introduced that is as strict as the EU ETS benchmark. N2O is covered under the EU ETS in phase III.
> Speculations are running wild on what could happen to the huge volume of industrial gas credits in the market after the EU ETS ban. Smaller carbon markets with mandatory goals such as New Zealand are unlikely destinations since the amount of available CERs would exceed the national demand. China could use the cheap reductions for domestic compliance, once its national legislation is set up.
> The EU decision prompted Société Générale (SG) to split its CER price forecast in EU ETS eligible CERs and other CERs. SG expects a premium of 2.2 Euro for eligible CERs in 2011, widening to 4 Euro in 2012.

·  The ECX launched CER future contracts from 2013 to 2020, and thus covers the entire EU ETS phase III with credits for delivery.

·  A brief overview of EU ETS phase III governance provisions and plans by the EU Commission is available here (154 KB).

·  The Chinese city of Chongqing has officially set up a pilot emissions trading programme for industrial companies, called the Environmental Resources Exchange Centre. It is regarded as a test balloon to promote the use of market mechanisms for domestic use in China.

·  Three countries set up DNAs within the last six months: Oman (October 2010), Haiti and Libya (both January 2011).

·  The World Bank has launched the second tranche of its Umbrella Carbon Facility with an initial funding level of 68 million Euro for investment in post 2012 reductions from the first crediting period of seventeen CDM projects, of which four are located in Africa. The projects and programmes comprise renewable energy, waste, energy efficiency and transport measures and shall generate up to 26 million CERs. Credit buyers are the World Bank, Deutsche Bank, GDF SUEZ, and the Swedish Energy Agency.

·  Norway and Sweden have committed 40 million Euro to the World Bank's Carbon Partnership Facility, boosting its total budget to 140 million Euros.

·  The second JI tender conducted by the Russian Sberbank selected 18 JI projects on 30 December 2010. The projects comprise landfill gas, energy efficiency in industry, mainly metal production and fugitive emissions. This round of project approval almost doubled the number of Russian JI projects to a total of 33.

·  The Austrian government plans to buy further 4 million carbon offsets in 2011 in order to complete its 2008-2012 procurement programme covering 45 million tonnes CO2e. The purchase shall comprise CERs, ERUs and AAUs from Green Investment Schemes.

·  The ADB launched the third tranche of the Himachal Pradesh Clean Energy Development Investment Program with loans of 150 million Euro for the development of four run-of-river hydro power plants in Himachal Pradesh, India. The projects which apply for the CDM have an aggregated installed capacity of 856 MW and shall be operational in 2016.

·  CER imports into New Zealand have picked up because the CER price has fallen significantly below the price cap of about 14 Euro for New Zealand allowances.

·  The perception of market uncertainties by large market players is reflected in presentations by Bluenext (159 KB), JP Morgan (190 KB) and Orbeo (170 KB).

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Country of the month: Republic of Azerbaijan

Lying at the crossroads of Europe and Asia, Azerbaijan is the largest country in the Caucasus region. The huge oil fields near Baku made Azerbaijan a forerunner of oil production in the late nineteenth century and played a core role for the economic upswing of the Soviet Union. In recent years, the wealth of oil and gas resources allowed two-digit economic growth rates. However, the country is still recovering from Soviet exploitation and requires reforms of its public institutions as well as a diversification of the private sector. Poverty is a huge problem and widespread corruption hinders Azerbaijan from progressive development. In addition, secession disputes over parts of the nation’s territory disturb the political situation since the early nineties.

Azerbaijan ratified the Kyoto Protocol in 2000 and established a DNA in 2005, which is located at the Climate Change and Ozone Center under the Ministry of Ecology and Natural Resources. The DNA is divided into five technical workings groups and has set up national criteria for CDM projects.

The country has no registered CDM projects yet, but the validation pipeline comprises five projects (two supply side energy efficiency, one fossil fuel switch, one hydropower and one oil flare reduction). Further twelve projects are at earlier stages. There have been several capacity building initiatives led by various organizations, for example UNDP or the Norwegian Ministry of Foreign Affairs. In addition, the DNA conducted several national capacity building measures.

Azerbaijan’s overall project potential is moderate, but remains largely untapped. Significant project opportunities can be found in the oil and gas industry, the agricultural sector and the renewable energy sector. However, the heavily subsidized electricity price is a major barrier for energy diversification and conservation projects. On the other hand, Azerbaijan’s grid emission factor is quite high at about 0.75 tCO2/MWh. Regarding wind power, the Caspian Sea zone and some other regions of the country offer good conditions; currently a 105 MW wind farm near Baku is being developed. With respect to hydro power, no more than 20 to 25% of the financially feasible generation has been utilized. UNDP promoted the development of small-scale hydro power between 2007 and 2010. In the agricultural sector, there is good potential for the generation of power from biomass residues. Interestingly, Azerbaijan is the fourth largest producer of raw cotton in the world. Waste products from cotton cultivation are already used as fuel by private households offering a possible starting point for PoA.

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Web news and downloads of the month

·  Eva Filzmoser of CDM Watch gives a constructive but critical outlook on CDM challenges in 2011 (288 KB).

·  Steve Weissmann dissects the transaction costs of project based offsetting and compares them with a fund based approach under: www.boalt.org (470 KB).

·  A critical assessment of key CDM criteria and a discussion for post 2012 reforms of the mechanism are available at: www.climatepolicyinitiative.org (470 KB).

·  Axel Michaelowa discusses key policy questions for a standardization of the CDM (77 KB).

·  The experiences of applying the flexible mechanisms in an urban context are discussed under www.oecd-ilibrary.org (1.63 MB).

·  A 4 pager on experiences with forestry CDM is available at: www.worldbank.org (473 KB).

·  The UNFCCC Secretariat released a set of fact sheets that showcase the co-benefits of CDM project activities under www.cdm.unfccc.int.

·  A comprehensive COP 16 analysis by The Climate Group is available at: www.theclimategroup.org (893 KB).

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In charge of this newsletter: 
Friedel Sehlleier (climate@giz.de), GIZ Climate Protection Programme,
a project carried out on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ)

Editor(s):
Friedel Sehlleier (climate@giz.de), GIZ
Axel Michaelowa, Perspectives GmbH (Author)

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