Dear reader!

The post-2012 blues is weighing more and more on the CDM market. On the demand side, industrialized countries increasingly mistrust market mechanisms as shown by the Australian fixed price proposal that would ban imports, by continued EU pressure for a sectoral mechanism to replace the CDM and by defections from the regional US trading schemes. The bad mood on the supply side is reflected in announcements of major project developers to stop investment in the identification of new projects. The erosion of the market is also shown by the Carbon Markets Insights fair having its lowest attendance ever. Under these circumstances, it is not surprising that the CDM EB is now engaging in a marketing campaign to stress the virtues of the mechanisms. At the same time, the discussion about new market mechanisms is gathering steam in the UNFCCC negotiations.

Friedel Sehlleier, GIZ
Axel Michaelowa, Perspectives GmbH

UNFCCC, CDM-Executive Board and its panels

At its 59th meeting on 14-18 February, the EB took the following decisions

·  Martin Hession (UK) and Duan Maosheng (China) were elected as EB chair and vice chair. Both are experienced and have a reputation for a pragmatic and coordinated approach.

·  Congolese member Tosi Mpanu-Mpanu was replaced by Victor Kabelenge, who is a REDD expert.

·  Chairs and vice chairs of panels and working groups have in most cases just exchanged roles, apparently to sustain accumulation of experience.

·  Three new DOEs from CDM host countries (two from China and one from India) have been accredited.

·  The CDM Validation and Verification Manual (VVM) is to be changed into a Validation and Verification Standard (VVS), containing a consolidated validation and verification procedure, including a procedure to identify and correct significant deficiencies in validation and verification reports.

·  Two small-scale methodologies have been approved, both covering biomass use. Their replication potential is rather limited.

·  Projects that distribute efficient appliances to households no longer need to do a full investment analysis, a simple cost analysis is sufficient. This could lead to a lower performance of energy efficiency projects, as appliances given free of charge will not be treated carefully by the users.

·  Six small-scale methodologies were revised.

·  Four workshops to develop standardized baselines, discuss changes in PoA rules and explore innovative ways to demonstrate additionality are planned.

·  Ten standardized baselines are to be developed by the EB over the next two years.

·  All seven projects under review for registration were registered.

·  Out of 6 requests of issuance under review, two were rejected, totalling 0.27 million CERs.

·  From 11 December 2010 onwards, after project approval through the EB, the effective registration date of projects will be backdated to the date when a complete request for registration had been submitted. This is the case once both the initial registration request and the registration fee are received by the secretariat. In case no fee is required, it is the day on which the registration request was submitted. So far the secretariat has not reflected the changes on its website.

·  The vision underlying the 2 year CDM business plan of the EB is that the CDM “continues beyond 2012 to be the primary mechanism for generating emission reductions and removals in developing countries”.

·  The targets of the EB’s business plan are:
> Greater efficiency in the operation of the CDM
> Geographic expansion of the CDM
> Improved objectivity and integrity of the CDM and its requirements
> Enhanced transparency of the CDM
> Enhanced promotion of the mechanism

·  No new staff beyond the 177 approved posts is requested; at the beginning of 2011, the CDM support structure had 130 employees.

·  External experts are to be hired to address periodic peaks in workload, with two “assembly line” exercises similar to the one in December 2010 planned for 2011.

·  3,400 issuance requests are expected until the end of 2012.

·  The CDM budget surplus fell to 2.7 million Euros in 2010 and a deficit of 4.6 million Euros is forecasted for 2011. Over the last five years, the accumulated budget surplus has reached 45 million Euros.

·  Three of six EB meetings in 2011 will be held outside Bonn in conjunction with other international meetings such as the COP/MOP.

·  A process for direct interaction with stakeholders is to be elaborated.

·  A consultative mechanism to support the Board on regional and sub-regional distribution and capacity building will be considered.

·  The following issues were deferred
> Ulsan HFC crediting period renewal
> Definition of “first- of–its- kind” technologies in a host country
> Investment analysis guidance, with the EB admonishing the Meth Panel to be more transparent on assumptions, providing rationale for each of them, to be neutral on the selection of data, to consider the potential of national benchmarks and to provide an impact assessment.

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Discussion on new market mechanisms

·  20 countries have made submissions on new market mechanisms; 6 countries provided views on non-market mechanisms (download at unfccc.int). Highlights of these submissions are:
> AOSIS, Colombia, the EU, Norway and Switzerland call for a contribution of the new mechanisms to global reductions. Colombia proposes a discounting scheme proportional to the host country’s emissions level.
> AOSIS and the EU propose sectoral trading as well as sectoral crediting, with the EU stating that this could include NAMAs. Papua New Guinea proposes ex-post crediting and ex-ante trading on the basis of NAMAs. Russia supports sectoral trading. Korea proposes NAMA crediting on the basis of proxy indicators such as penetration of energy efficient appliances. Japan and Australia want a UNFCCC framework that guarantees fungibility for bilateral offset mechanisms. Bangladesh proposes generation of CERs by policies.
> China and Saudi Arabia want to limit new mechanisms to a project-specific approach.
> Ecuador wants to introduce crediting for net avoided emissions, a concept that it has long pushed for in the context of avoiding exploitation of the oil reserves in the Yasuni region.
> China and Singapore state that industrialized countries must adopt internationally legally binding reduction commitments as a precondition for using new mechanisms. Bangladesh wants to limit use of units from market mechanisms to 20 percent of national commitments. Saudi Arabia wants host countries to retain a share of the credits and states that the mechanism should not aim at the lowest cost mitigation options. Turkey wants to be able to participate in new mechanisms as a supplier.
> Japan wants to include all mitigation technologies while the EU and AOSIS propose a non-market mechanism for industrial gases. According to AOSIS, sectoral mechanisms should focus on power generation, steel, cement and transport. REDD should be excluded or at least separated from the rest of the market.
> Norway proposes common rules for baselines and MRV for all new mechanisms. The EU is open for both a centralized and a decentralized governance model. Papua New Guinea proposes a Carbon Regulatory Bank overseeing the market and a Sustainable Development Mechanisms Standard Board providing the rules.
> Bolivia and Venezuela reiterate their opposition against international market mechanisms. All other submissions, including the one by the EU stress that new mechanisms should not replace the Kyoto Mechanisms.

·  According to Commission officials, the EU currently plans no new restrictions for CER imports into the EU ETS but is considering necessary action in order to maintain the integrity of the scheme. The focus in this regard is on sectoral mechanisms, inter alia through a Market Readiness Fund; a hot candidate for a pilot is N2O emission reduction from adipic acid and nitric acid projects.

·  Peter Wooders of IISD discusses the applicability of sectoral approaches towards individual country realities in a paper available at: climatestrategies.org.

·  The Kenyan Kasigau Corridor project is the world’s first REDD project to issue credits. 1.45 million credits are verified under the Voluntary Carbon Standard for the initial six year crediting period.

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Supporting up-scaling of mitigation through programmes and bundles

·  In February, 4 PoAs entered the validation pipeline – two solar water heating programmes (South Africa and South Korea), one solar lamps programme in Tanzania as well as a stoves programme in Togo.

·  Regarding the submissions, India and China both lead with 10 PoAs before Vietnam (6). In total, 33 host countries are involved, of which 8 are Least Developed Countries.

·  With respect to consultancies, the World Bank leads with 10 before GIZ with 5 and South Pole with 4.

·  In terms of technologies, demand & supply side energy efficiency measures lead with 30 PoAs, followed by biogas (25) and renewables (16).

·  A new cross border efficient cook stove PoA is planned in Togo, Burkina Faso, Senegal and Gambia.

·  US company C-quest Carbon Capital has teamed up with efficient cook stove manufacturer Envirofit and the Shell Foundation to start a PoA that aims to distribute 2 million stoves in Nigeria within the next 7 years.

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The CDM in Least Developed Countries and Sub-Saharan Africa

·  The grid emission factor for the Pnomh Penh Electricity Grid in Cambodia has been calculated by IGES and is publicly available under: www.iges.or.jp

·  Bank of America Merrill Lynch has contracted several million CERs from the Rwandan company Nuru Energy which plans to replace kerosene lamps by disseminating efficient LED lights in Rwanda.

·  Carbon broker Noble Carbon doubts the existence of a significant potential for CDM in LDCs.

·  A nice web resource addressing carbon finance in Africa is the CASCADe Africa portal that holds country profiles, project descriptions and a forum – see www.cascade-africa.org/.

·  Uganda has introduced a Renewable Energy Feed-in Tariff (REFIT) that applies to small-scale systems between 0.5 MW and 20 MW installed capacity. Priority is given to solar PV and the tariff will be calculated based on updated levelised costs of production.

·  Respondents to Point Carbon’s annual survey expect 50-100 CDM projects in LDCs registered from 2011 to 2013.

·  One project from Sub-Saharan Africa entered the pipeline in February:
> 2.1 MW Vinasse based electricity generation at Mumias Sugar Company Limited (Kenya, 0.01 million CERS by 2012).

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GIZ CDM Capacity Building

In late August 2010 the public-private partnership agreement between GIZ and South Pole on the development of co-financing mechanisms for small scale hydro-power plants through CDM PoA has been extended from Honduras and Nicaragua to Guatemala, a country with considerable hydropower potential. Within the framework of the cooperation activities a half-day workshop on CDM PoA was held on 23 February in Guatemala City. As part of the efforts to spread CDM knowhow and develop capacities of potential Guatemalan CDM project developers, the workshop provided a comprehensive introduction into the CDM rules, procedures and timelines as well as on PoA. The 20 participants included representatives of the private and non-governmental sectors as well as of the Guatemalan Ministry of Environment and Natural Resources and experts from international cooperation agencies. A manual covering key aspects of developing small-scale hydro projects as CDM projects was distributed to the participants.

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Project developers, operational entities and consultants

·  In February, 103 projects entered the pipeline. The two largest are:
> Dapein Hydropower Project in Union of Myanmar (Myanmar, 1.1 million CERs by 2012)
> LCC Cement Blending CDM Project (Libya, 0.5 million CERs by 2012)

·  The UNFCCC Secretariat has published the results of the DOE performance monitoring in order to make the role of DOEs in the registration process more transparent. The results cover the period from 24 October 2010 to 31 January 2011 – see cdm.unfccc.int/... (127 KB). Information on projects that did not pass the completeness and information & reporting checks are available at cdm.unfccc.int/... (2.3 MB). Four out of nine DOEs (BVC, DNV and TUV Süd for registration and TÜV Nord for issuance) monitored for registration have been asked to address underperformance.

·  A new DOE/AIE lobbying group was launched in February. The Designated Operational Entities and Independent Entities Association (DIA) regards itself as a more proactive supporter of DOE/AIE interests in the UNFCCC processes than the already existing DOE Forum. It will be headed by Werner Betzenbichler, an old CDM hand.

·  The CDM Project Developer Forum expects more registration requests in 2011 than in 2012. This is surprising, given the rush to be expected to get pre-2013 registrations. However, this corresponds with the trend of developers to stop the development of new projects for the time being due to the persisting post 2012 uncertainty.

·  French chemical company Rhodia sold 6 million CERs to the World Bank´s Spanish Carbon Fund with delivery at the end of 2013. The credits origin from pre-2012 reductions of the adipic acid plant Paulinia in Brazil and thus will be eligible for EU ETS phase III. In 2010 Rhodia received 19.3 million credits from its plants, a 25 percent increase compared to 2009.

·  UK project developer Camco generated 8.1 million carbon credits from its projects in 2010, the majority being CERs. It posted a profit of 10 million Euro and plans to further invest in projects, mainly biogas and energy efficiency.

·  Norwegian company Pöyry has been assigned by the Tunisian National Water Distribution Utility to assess the feasibility of eight water desalination plants under the CDM.

·  A Practitioners Workshop on the Improvement of CDM Methodologies for Transport, organized by the UNFCCC, was held in Bonn on 3 March. The event brought together experts, project participants, and relevant stakeholders discussing potential improvements of existing methodologies for transportation in the CDM and brainstorming ideas for a topdown development of new CDM methodologies to be undertaken by UNFCCC in the nearest future. GIZ's Bridging the Gap Initiative participated at the event. A workshop summary and conclusions are available for download at www.transport2012.org.

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Incentives for CDM investment

·  The price for EUAs was 14.86 Euro for the spot market and 16.10 Euro for 2012 vintages at the end of February. The spread to issued CERs was 2.95 Euro.

·  After the shutdown of carbon trading at European carbon exchanges caused by the carbon theft incident in January, the main exchanges have recommenced trade in February. The Dutch Climex exchange however decided to close its carbon spot trade for good. Still half of EU member states’ registries remain closed due to security checks.

·  The World Bank launched a new post 2012 carbon fund worth 150 million Euro to be managed by the International Finance Corporation. Project developer Mercuria and Shell Trading have already committed investments into the fund. The post 2012 tranche of the Umbrella Carbon Facility is now fully subscribed with 105 million Euro.

·  Slovakia plans to sell a further 17 million AAUs, either via tendering, auctioning or bilateral negotiations. According to the Slovakian Environmental Minister József Nagy, the price per AAU is expected to range around 4 to 6.5 Euros, which indicates falling prices for AAUs. Currently Japan is the most active country in buying surplus emission rights.

·  Consulting company Climate Change Capital assumes a future price differentiation by project type which ascends from industrial gas over large hydro to non-renewable and LDC based projects. A 1 Euro premium is expected for EU ETS eligible CERs, while non-eligible CERs may trade at the level of AAUs (4.5 - 6 Euros).

·  Under the new CERplus December 2013 future contract of the GreenX carbon exchange, credits from large hydro plants are explicitly considered eligible for trading under the EU ETS. Large hydro projects require a specific compliance check as per criteria of the world commission on dams under the EU ETS. Currently the project pipeline comprises 633 large hydro power plants that expect to generate more than 350 million CERs until the end of 2012. The largest carbon exchange, the European Carbon Exchange does not include credits from hydro projects larger than 20 MW in its futures contracts.

·  The EU Commission sees no relevant CER import need for EU ETS operators in 2013-2020 if the EU retains its 20% target. The Commission does not rule out further restrictions of CER imports on quality grounds, but seems not to actively push for that after the recent banning of HFC-23 and N2O from adipic acid. However, 56% of respondents to the Point Carbon survey expect further restrictions.

·  After its campaign against industrial gas projects, CDM Watch plans to focus on supercritical coal projects.

·  The European Commission regards domestic offset projects within the EU as an option with limited potential for replacing JI but encourages pilot projects based on a JI track 2 procedures.

·  The Australian see-saw on domestic emissions trading has entered a new round: The government of Prime Minister Gillard is now determined to introduce a fixed price on carbon emissions from July 2012 onwards. The so called “carbon price mechanism”, which is essentially a carbon tax, shall cover the sectors energy, transport, industry and waste, while agriculture and forestry are excluded. After three to five years, the government plans to replace the price mechanism by a cap-and-trade scheme. Only few details on rules and procedures have been disclosed yet: No cap is planned on emissions and on the bankability of credits and the role of domestic offsets is unclear. International offsets are not going to be eligible during the initial fixed price phase, while for the cap–and- trade phase the proposal allows for offsetting with quantitative and qualitative restrictions. The Australian Parliament will consider the carbon price mechanism in July 2011 and the government hopes to have binding legislation in place before 2012.

·  Taiwan saw the first transaction under its new emissions trading scheme: In a symbolic trade some 200 allowances from a cement factory were traded at a price of 14 Euros. The scheme started in September 2010 and covers more than half of Taiwan´s GHG emissions.

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Country of the month: Republic of Madagascar

Madagascar offers a fascinating wealth of natural resources, but it is one of the poorest countries in the world. The exploitation of unique rainforests and the eradication of endemic wildlife are direct consequences of decades of poverty and political mismanagement, with the current self- proclaimed government not being recognized by the European Union and other international entities.

With regards to climate policy, Madagascar ratified the Kyoto Protocol in 2003 and installed a DNA under the Ministry of the Environment in the same year. Since 2010, the DNA is operating under the Climate Change Department of the Ministry, with an elaborated approval procedure in place (www.mef.gov.mg). In late 2010, Madagascar rolled out a national CDM strategy, which focuses on improving CDM capacities and governance structures, on institutional synergies, on attracting investments and on raising awareness within the country. Since only very few CDM related activities have been started in Madagascar so far, this strategy seems highly needed. Just one project has been registered so far - a small-scale hydropower plant in Sahanivotry. A reforestation project and a solar PV lamp dissemination project are currently under validation. 19 further projects are at earlier stages, comprising hydro, wind, forestry and biogas.
The project pipeline reflects the most promising sectors for CDM activities, which are renewable energy, energy efficiency, waste and forestry. For instance, the country has a large hydro potential estimated at 7,800 MW of which only 2% (39MW) are currently addressed through CDM activities. The agricultural sector, mining and oil exploitation activities offer interesting opportunities as well.

Capacity building missions have been conducted by UNEP and the World Bank. Nonetheless, the implementation of projects still struggles, primarily due to a lack of funding and political instability. In order to attract further investments the DNA currently conducts a study on the project potential of Madagascar.

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Web news and downloads of the month

·  A recent study by Axel Michaelowa assesses the conformity of grid emission factors published by host country governments with the CDM rules and finds serious deficiencies – see www.cdm-watch.org (482KB).

·  The Kyoto mechanism-related activities of the Nordic Finance Corporation in 2010 are described at: www.nefco.org (320 KB).

·  The initial issue of the Greenhouse Gas Measurement & Management journal is available for free download at:www.ghginstitute.com/.

·  CDM-Watch critically regards the use of CCS under the CDM in an article at: www.cdm-watch.org.

·  A comparison of MRV requirements across several offsetting programmes is available under: www.ieta.org (400 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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