Dear reader!

The Cancun gamble paid off. In the wee hours of December 10, the courageous Mexican foreign minister hammered through the Cancun Agreement despite the formal objection of Bolivia, bringing international climate policy back on track. While enough challenges remain for 2011, the long-term future for market mechanisms has brightened considerably. But the CDM market’s short term future depends on the willingness of key countries to sustain CER demand. And here, the picture does not look pretty, with Japan being the latest country to abandon plans for a domestic emissions trading scheme and other countries also digging in their heels. The impending EU decision on quality restrictions for CER imports will play an important role in defining short-term market sentiment for 2011. The other mechanisms JI and international emissions trading face even stronger problems with many transactions mired in legal and political problems.

Postscript:The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH was formed on 1 January 2011. It brings together the long-standing expertise of the Deutscher Entwicklungsdienst (DED) gGmbH (German development service), the Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH (German technical cooperation) and InWEnt – Capacity Building International, Germany. For further information, go to www.giz.de.

Friedel Sehlleier, GTZ
Axel Michaelowa, Perspectives GmbH

UNFCCC, CDM-Executive Board and its panels

·  With expectations at a nadir, the Mexican presidency of COP 16 managed to pull off a small miracle and achieved an agreement that prevents immediate fragmentation of the climate policy system and provides a more optimistic outlook for post-2012. This was due to a very open negotiation strategy and the ability to isolate ideological opposition by some Latin American countries. Of course, this could only be achieved by deferring critical issues such as the legal nature of emissions targets and by just referring to the Copenhagen pledges. Nevertheless, industrialized countries are urged to raise their ambition level to -25 to -40% reductions below 1990 levels by 2020. Under the UNFCCC track, the 2° C target is mentioned, albeit in a weak fashion (“with a view to”). The key decisions that impact the CDM are as followso The Kyoto Protocol negotiation track specifies explicitly that “emissions trading and the project-based mechanisms under the Kyoto Protocol shall continue to be available to Annex I Parties as means to meet their quantified emission limitation and reduction objectives”. However, these positive signals are somewhat overshadowed by continuing uncertainty over the continuity of the Kyoto regime
o CCS is eligible under the CDM
o CDM projects are to generate CERs from the date of submission of registration request in case the project is registered automatically
o Standardized baselines are to be developed by the EB. Besides Parties and project participants, international industry organizations and admitted observer organizations can also make submissions of standardized baselines
o The waiting period before the start of the completeness check shall be shortened to 15 days
o A loan scheme for CDM activities in countries with less than 10 registered has been adopted. The Secretariat has launched a request for expressions of interest for administering the scheme
o The simplified modalities for additionality demonstration of micro projects are expanded to type III projects (agriculture, transport, fuel switch, methane recovery) with emission reductions below 20.000 tCO2e per year.
o The appeal procedure was deferred until COP 17 in Durban
o JI projects under Track I are to be charged fees
o JI projects can be launched in Kazakhstan and Belarus before the emission targets of these countries are set, but ERUs only accrue afterwards
o The establishment of new market mechanisms is to be considered by COP 17. Meanwhile the AWG-LCA will work out the potential design of such mechanisms

·  Open flanks of the Cancun Agreement that need to be closed in Durban are the future of the Kyoto Protocol. Japan and Russia heavily oppose a second commitment period. Whether and how Copenhagen targets will be made more stringent also remains on the table. The EU will have to decide whether it goes for a 30% reduction target.

·  The EB has launched two calls for public inputs. The first call is for public inputs on the three draft tools for: baseline identification; baseline emission calculation; and the determination of the most attractive alternative of a CDM project component. The second call is for public inputs on the draft revised “Guidelines on the assessment of investment analysis.”

·  In a crash exercise involving external consultants, the UNFCCC Secretariat removed the backlog of projects waiting for the completeness check.

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Discussion on new market mechanisms

·  The COP decisions have started a vigorous debate on new market mechanisms:o Submissions on the design of new market (and non-market) mechanisms are due February 21. Such mechanisms shall
o Complement other means of support for policies (NAMAs)
o Stimulate mitigation across broad segments of the economy
o Ensure a net decrease of global greenhouse gas emissions
o Inclusion of REDD in the market mechanisms will be on the plate of COP 17. The challenges involved were foreshadowed when at the COP Guyana’s president publicly attacked the World Bank for unwillingness to disburse Norwegian REDD money.

·  The World Bank has unveiled a “Partnership for Market Readiness” to support developing countries in setting up new and using existing market mechanisms, focusing on domestic systems for monitoring, reporting and verification, enhancing institutional capacity, and establishing policy and regulatory frameworks. 20 million $ have been pledged by various governments, but details of the initiative remain fuzzy.

·  The EU has announced a project to support China in the development of an emission trading system.

·  Two recent papers by the Wuppertal Institute assess the viability of new market mechanisms (sectoral crediting, sectoral trading, and crediting NAMAs): http://www.jiko-bmu.de/english/background_inform­ation/­publications/doc/961.php and the pros and cons of integrating REDD in the market mechanisms, see http://www.jiko-bmu.de/­english/­background_information/publications/doc/984.php.

·  Forest Trends published a new publication "Building Forest Carbon Projects: A Step-by-Step Guide to provide streamlined guidance to proponents and developers of forest carbon projects. Download at: http://www.forest-trends.org/documents/index.php?pubID=2555 (0.7 MB).

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Supporting up-scaling of mitigation through programmes and bundles

·  In December, 6 PoAs entered the validation pipeline - a green brick development programme in Vietnam, a domestic biogas programme in Pakistan, a sustainable housing programme in Mexico (applying 2 methodologies), a LEDs kick-off programme in South Africa, an efficient cook stove programme in Kenya and a solar PoA in India. Regarding the submissions India leads with 8 PoAs before China (7) and Vietnam (5). In total 28 host countries are involved, of which 5 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 28 PoAs, followed by biogas (18) and renewables (18).

·  A guidebook to successful PoA develoment has been published by South Pole: http://www.southpolecarbon.com/_downloads/PoA_Guidebook_SouthPole.pdf (0.6 MB).

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The CDM in Least Developed Countries and Sub-Saharan Africa

·  The South African treasury has published a discussion paper on a carbon tax, mulling tax levels of 10 €/t CO2, The tax might make CDM projects much more competitive. See http://www.treasury.gov.za/-public%20comments/Discussion%20Paper%20Carbon%20Taxes%2081210.pdf (1 MB)

·  The Africa Enterprise Challenge Fund (AECF) that provides grants and interest free loans to businesses has launched a new special funding window, Renewable Energy and Adaptation to Climate Technologies (REACT). REACT seeks proposals to transform the way in which clean energy is provided to rural businesses and households that should combine commercial viability with development impact, in Burundi, Kenya, Rwanda, Tanzania, and Uganda. The application deadline is January 31, 2011, see www.aecfafrica.org

·  Standard Bank Group is to help replace kerosene lamps with hand-held LED lights in 1.5-million homes in Tanzania, generating 100,000 CERs per year.

·  French carbon market NGO Nexus received a 1.35 million € grant from the French Global Environment Fund to “mass disseminate pro-poor low carbon technologies via the carbon finance market through capacity building, support for commercialization of charismatic credits and the improvement of direct sales channels".

·  Two projects from Least Developed Countries have entered the pipeline in December:o Tough Stuff Solar Panel and Lamp Sales (Madagascar, 8000 CERs by 2012)
o Oceanium mangrove restoration project (Senegal, 2000 CERs by 2012)

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GIZ CDM Capacity Building

·  As part of its training programme for energy managers in the textile sector of Pakistan, the GTZ Renewable Energy & Energy Efficiency (REEE) Programme Pakistan organised a CDM seminar providing an introduction to CDM and its opportunities in the textile sector. As a follow-up, a PIN development workshop will held in the first quarter of 2011.

·  GTZ REEE has developed the PIN for a grid-connected 4.8 MW hydropower project. The purpose of this effort was to disseminate the PIN amongst public and private sector organizations that could benefit from know-how on CDM project development. For this purpose, a PIN development workshop was held in November 2010 with participants from relevant federal and provincial government departments (such as the Alternative Energy Development Board and the Punjab Irrigation and Power Department) and several private sector companies and investors.

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Project developers, operational entities and consultants

·  In December, 120 projects entered the pipeline. The two largest are:o Energy efficient power generation at Kawai in Rajasthan (India, 1.1 million CERs by 2012)
o Farm Household Biogas Project Contributing to Rural Development in Can Tho City (Vietnam, 0.9 million CERs by 2012)

·  The International Hydropower Association has published a Sustainability Protocol (download at http://www.hydropower.org/Hydropower_Sustainability_Assessment_Protocol_November_2010.pdf) and hopes that it will enable trading of CERs from large hydro projects on EU exchanges. NGOs critical of hydropower denounce exclusion of Southern civil society groups and affected people from the process and argue that the Protocol does not define any minimal requirements of sustainability.

·  Philippine wind projects attract a lot of interest with international energy companies. Italian utility provider Brulli Energia is said to already conduct studies for a 200 MW wind farm
Chinese HCFC-22 manufacturers have threatened to switch off their HFC-23 abatement equipment in case they are unable to sell CERs.

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Incentives for CDM investment

·  The price for EUAs fell to 14.0 Euro for the spot market and 14.6 Euro for 2012 vintages. The spread to issued CERs remained at 2.1 Euro. For the first time, EU-ETS compliant post-2012 CERs are trading at a premium of 0.2 €.

·  The Japanese government has given in to industry lobbies, shelving introduction of emissions trading indefinitely. This is a severe setback to the CDM market, especially as Japan is more and more emerging as a reactionary force in climate policy. The Japanese government plans to cover a shortfall in CER delivery of 2 million by AAU acquisition. But an offer by France to sell AAUs was rebuffed by Japan.

·  In a similar vein, the Korean government has delayed its emissions trading bill for two months.

·  The EU member states’ climate change committee will decide on the proposed ban of CERs from HFC-23 and adipic acid projects on January 21.

·  While California has published regulations for its trading scheme due to start in 2012, key issues such as allocation of allowances remain to be decided. Up to 8% of compliance needs can be fulfilled through offsets, albeit only from Canada, the US and Mexico.

·  Issued ERUs are now traded on Paris-based Bluenext exchange, with prices equal to issued CERs.

·  The first 4.2 million Russian ERUs have been issued for two HFC-23 projects. However, a legal dispute between buyer and seller is already brewing because the original sales price of 9 € is below the price floor of 10 € specified by Sberbank that oversees approval of JI projects. So another chapter of the endless saga of JI in Russia unfolds.

·  Estonia is quietly selling AAUs to Japanese buyers in chunks of several million, having now made more than 10 transactions.

·  Former Ukrainian prime minister Julia Timoschenko faces criminal prosecution for alleged misuse of 200 million € from Ukrainian AAU sales for pension payments. In the Ukrainian parliament, a regular fight between opposition and government MPs erupted on this issue

·  In the unending AAU sales scandal simmering since 2008, the Slovakian government has launched a case against unknown criminals.

·  Two Finnish utilities have invested 18 million € into the Nordic Environment Finance Corporation’s post-2012 carbon fund.

·  The EU may get into legal trouble when expanding its emissions trading system to shipping according to a background report by the Joint Research Centre, download at http://ec.europa.eu/dgs/jrc/-downloads/jrc_reference_report_2010_11_ships_emissions.pdf (7.3 MB)

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Country of the month: Islamic Republic of Iran

Iran is a country with rich cultural heritage but difficult socio-political development in the recent decades. The theocratic political system faces a broad opposition amongst the population and is eyed with suspicion by western nations. Its economy is a mixture of market economy and central planning with average growth rates of 6 % in the last years. Iran has the second largest natural gas and the third largest oil reserves in the world. Most of the electricity is thus produced in thermal plants and fueled by natural gas (75%) and oil (18%). Hydropower has a minor share of about 7% and first wind, geothermal and concentrated solar power plants have been installed within the last five years.
Iran ratified the Kyoto protocol in 2005 and announced the set up of a DNA at COP 12 in Nairobi 2006. The DNA is established under the Department of Environment, however no website is currently available. The Soroosh & Nowrooz Early Gas Gathering and Utilization Project, an oil field gas flaring reduction activity, remains the only registered CDM project in Iran and no CERs have been issued yet. The validation pipeline currently comprises eight projects, of which six are oil to natural gas fuel switching projects, one energy efficiency in a natural gas plant and one a landfill gas project.
Capacity building is still required and first attempts were made by the Japan International Cooperation Agency and the Norwegian Ministry of Foreign Affairs through several CDM workshops in recent years. Noteworthy is the agreement of October 2009 between Swiss project developer South Pole Carbon and the Iranian Offshore Engineering and Construction Company to explore the potential for CDM projects in the country. In this regard, the improvement of existing thermal power plants ranks first amongst various interesting CDM project options. The potential for renewable energy is considerable, for instance for geothermal and tidal power but also for hydropower. Here, Iran´s relatively high grid emission factor favours further development of projects. Energy from biomass offers great potential, since the country has not yet utilized its agricultural waste. Estimates expect a biofuel potential that could replace 20-25% of conventional fuels. On the other hand, current political circumstances and a rather difficult business environment (Iran is ranked in the last quarter of the World Bank’s Ease of Doing Business Index) may impose barriers to successfully scale up CDM activities in Iran.

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Web news and downloads of the month

·  The UNFCCC Secretariat has put together a collection of factsheets showing how CDM projects are improving people’s lives and broadly contributing to sustainable development: http://cdm.unfccc.int/about/ccb/index.html

·  Background information on UNFCCC's recently published CDM Methodology Booklet: Three presentations showing the purpose and the contents of the booklet and instructions on usage can be found at: http://regserver.unfccc.int/seors/get_attachment?code=AK1NXVR2HDWCENALRXT7DWO35U3DMJOB (3.1 MB).

·  A presentation on CDM potential in Zambia with an outlook on implementing CDM projects in other African countries: http://regserver.unfccc.int/seors/get_attachment?code=CR9N4OQ1QZDCDH6A3WOENYWZ648Y9QS9 (0.7 MB).

·  A presentation by Axel Michaelowa about CDM barriers in LDCs and how to overcome them: http://regserver.unfccc.int/­seors/att­ach­men­ts/get_attachment?code=NR3AMXFGFTOAW12E7AHUMLL4411J8I7I (2 MB).

·  Short presentation of a study on the extent to which the CDM has “captured” mitigation potential in advanced developing countries: http://regserver.unfccc.int/seors/attachments/get_attachment?code=B5XBV3M64BLR5VB9A62P5626AK7CNJLV (0.1 MB).

·  The view of project developers on standardised CDM. Slides of a presentation by Kim Carnahan of IETA: http://regserver.unfccc.int/seors/attachments... (0.2 MB).

·  World Bank's Carbon Finance Unit released a snapshot brochure about insights from forestry CDM projects at http://siteresources.worldbank.org/.../BioCarbon_Fund_Experience_Insights_from_AR_CDM_Projects.pdf (0.4 MB).

·  The Stockholm Environment Institute published a rejoinder on industry criticism regarding its studies on N2O reduction projects in the adipic acid industry: http://www.cdm-watch.org/wordpress/.../SEI-Response-to-Criticism-Adipic-Acid12-9-10.pdf (0.2 MB).

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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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