Challenges in Creating Liquidity in the Carbon Market:

CDM Projects

Architrandi Priambodo

TBLI Workshop on Carbon Market,

Bangkok, 29 may 2008

Carbon Market at present

Why CDM?

CDM Challenges

Risks associated with the projects

Risks associated with Validation and verification

Validation and Verification Experiences

Ensuring the CER liquidity

Contents

Carbon market at present

Source: State and trend of Carbon market 2008, The World bank

Why CDM?

CDM initiates involvement of Developing countries in Climate change action

The only scheme under Kyoto Protocol that involve developing countries

CER contributes significant carbon credit transaction: but how about its liquidity?

The CDM’s biggest strength has been its ability to bring developing and developed countries and the public and private sectors together to reduce emissions cost-effectively

CDM ChallengesOut of 3,188 projects in the currently pipeline, 2,022 are at validation stage.

Market participants report that it is currently taking them up to six months to engage a Designated Operational Entity (DOE), causing large backlogs of projects even before they reach the CDM pipeline

Projects face an average wait of 80 days to go from registration request to actual registration. The Executive Board has requested a review of several projects received for registration, has rejected some of them, and has asked project developers to re-submit their projects using newly revised methodologies. There is a very short grace period allowed to grandfather the older methodology, and the additional work adds to delays and backlogs.

Projects are currently taking an average of 1-2 years to be issued from the time they enter thepipeline. Over 70% of issued CERs come from industrial gas projects, with the vast majority of energy efficiency and renewable energy projects remaining stuck somewhere in the pipeline

Source: State and trend of Carbon market 2008, The World bank

CDM: Risks associated with the projects

Project finance: there are cases where project finance of the project are delayed, or financial closure could not be reached

Delay in construction: e.g, in fuel switching project, delay in gas supply may prevent the project operation, in other cases, equipment delay would be the source of the problem.

Project owner credentials: financial condition of the project owner and experience in doing similar type of project activities,

Local permits, licences, depending on type of projects: e.g., power purchase agreement for a power generation project powered by renewable energ resources, Environmental Impact Assessment, etc

Risks associated with Validation and verification

The main constraint of the current CER delivery: Time spent during validation and verification

Problems faced during validation and verification:

Baseline and Monitoring methodology Instrumentation and monitoring equipments Additionality Time schedule of the Designated Operation Entity: some

validation process have taken more than a year CDM modalities and procedures: Need to follow EB schedule! CER Issuance: under delivery

Validation and Verification Experiences (1)Dealing with Designated Operation Entity (DOE):

Be transparent but concise Do not show unnecessary details which creates confusion Get DOE timeline and always remind their time schedules Confident and clear in responding the questions

Appropriate instrumentation and monitoring equipments according to the approved baseline and monitoring methodologies some examples:

In a project where flare needs to be measured, the required thermocouple used is type N which can measure temperature of 5000CThe required calorific value to be monitored is Net Calorific Value, while in the practical condition, data that could be obtained is Gross Calorific ValueThe type of flowmeterCalibration requirement

Monitoring frequency and how data is stored needs to be stated clearly in the PDD. The record of monitoring frequency should be available for verification purpose

Additionality Most project rejection is because additionality is not clearly demonstrated The project developer should keep the record to demonstrate The chronology of the project, particularly the decision of

the project to be a CDM project In demonstrating the financial analysis, a selection of appropriate financial threshold (IRR, or FIRR, or NPV) is very

crucial Please be prepared to provide anecdotal evidences, such as journals, literatures, etc

Validation and Verification Experiences (2)

Additionality

Not being able to demonstrate additionality: Main cause of rejection of CDM project registration

Important feature: evidence that CDM has been considered in the beginning of project

Financial analysis: selection of the appropriate parameters (IRR? Project IRR? Equity IRR? NPV?) and the appropriate benchmark/financial threshold (Commercial interest rate? WACC?)

Ensuring the CER liquidity

Risks mitigation at preliminary stage: carbon due dilligence to assess not only the potential carbon credit to be generated but also the additionality point of view and the required monitoring equipment and apparatus. Compared with the economic/financial benefits of the project and the potential carbon credit generated

Make sure that the appropriate baseline/monitoring methodology is applied

Selection of DOE: based on credential, time delivery and workload

Appropriate monitoring equipment

Human resources!

Asia Carbon Global: An overviewGroup’s activities conceptualized, researched and developed since 2001

Founded : Feb 4 2003 two years ahead of Kyoto coming into force

One stop shop services : Carbon Advisory through Carbon Trading

New services : VERs Trading & Registry & Projects monitoring

Presently operating 17 entities in 9 countries

Presence in The Netherlands (Annex I) : to aggregate Buyers

Asian presence in Singapore (Non Annex I) to develop unilateral CDM projects and

also Aggregate Sellers of CERs

Strategic Alliance – Japan, China, Australia, Korea, Bangladesh & Pakistan

Centres of Excellence in Singapore, Vietnam, India, Indonesia

Collaborating with Centre of Excellence in China

Recently launched operations in UAE including Pakistan

Current portfolio includes over 165 projects with over 35 Mn CERs potential

The supreme reality of our time is the vulnerability of our planet.” The supreme reality of our time is the vulnerability of our planet.” – John F. Kennedy– John F. Kennedy

Thank youThank you

Asia Carbon Emission Management Asia Carbon Emission Management (Thailand) Co. Ltd(Thailand) Co. Ltd

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IndonesiaIndonesia chitra@asiacarbon.comchitra@asiacarbon.comwww.asiacarbon.comwww.asiacarbon.com