Clean Development Mechanism (In perspective & legal considerations)(In perspective & legal considerations)

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on behalf of theSouth African Designated National Authority

for the Clean Development Mechanism

Outline of Presentation

• IMBEWU Sustainability Legal Specialists.

• The CDM in perspective.

• Legal considerations.

IMBEWU Sustainability Legal Specialists (Pty) Ltd

• Specialist South African environmental, health & safety climate change (sustainability) legal consultancy.

• Johannesburg-based / Eastern Cape satellite office.• In conjunction with an Attorneys firm (Warburton Attorneys).• Wide range of South African environmental, climate change

health & safety and sustainability legal advice, electronic legal registers, legal training.health & safety and sustainability legal advice, electronic legal registers, legal training.

• Specialization: issues pertaining to implementation of climate change mitigation projects, e.g., CDM projects, in South Africa:– relevance of the international context, – project initiation and development, – authorisations and consents (including EIA), – negotiation and contractual matters (management

contracts, agreements for purchase and sale of emissions reductions).

The CDM in perspective

Some important abbreviations

• CDM: Clean Development Mechanism.

• CER: Certified Emission Reduction.

• DNA: Designated National Authority.

Some thoughts on the CDM

• A “market-based” mechanism intended to encourage a change in the behaviour of greenhouse gas emitters.

• Permits an entity in a developing country to:– implement a project which must achieve inter alia

greenhouse gas mitigation and sustainable development; greenhouse gas mitigation and sustainable development; – generate a so-called “carbon credit”; and,– sell this carbon credit into an international market.

• A carbon credit represents the absence of one tonne of CO2 that would - in a business as usual scenario – have been admitted to the atmosphere.

• The carbon credit generated by a registered CDM project is known as a Certified Emission Reduction (CER).

Thoughts continued

• The CDM’s location in international law is the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC).

• The CDM can still be thought of as being in a “learning by doing” phase: the end of the beginning.by doing” phase: the end of the beginning.

• South African industry has been slow to utilise the CDM – but this seems to be changing as the process becomes clearer and more streamlined and project costs are reduced.

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� Kyoto Protocol Art. 12:� To assist non-Annex 1 Parties in achieving sustainable

development (in accordance with that country’s understanding of sustainable development).

To contribute to the ultimate objective of the UNFCCC.� To contribute to the ultimate objective of the UNFCCC.

� To assist Annex 1 Parties in achieving compliance with “part”of their emissions reductions targets = “Supplementarity”.

� Lead to the transfer of environmentally safe and sound technology and know-how (UNFCCC, Art.4, KP, Art.10, Marrakech Accords).

Number Of Methodologies by Scope

( Large-scale (AM, AR-AM) , Small-scale (AMS, AR-AMS) , Consolidated (ACM) )

Energy industries (renewable - / non-renewable sources) 50 Energy distribution 2 Energy demand 14 Manufacturing industries 26 Chemical industries 18 Construction 0 Transport 7 Mining/mineral production 1 Mining/mineral production 1 Metal production 7 Fugitive emissions from fuels (solid, oil and gas) 8 Fugitive emissions from production and consumption of halocarbons and sulphur hexafluoride 8 Solvent use 0 Waste handling and disposal 18 Afforestation and reforestation 17 Agriculture 5

* A methodology can be linked to more than one scope

Legal considerations

Project implementation: to consider

• Conventional and carbon aspects of project implementation.

• Considerations associated with the conventional aspects of the project will be applicable, e.g.:– Technical, e.g., is the plant commissioned and operational;– Financial, e.g., has the project been capitalised; and,– Financial, e.g., has the project been capitalised; and,– Legal, e.g., does the project activity require environmental

authorisation to be undertaken?

• Considerations associated with the CDM carbon aspects of the project will also be applicable, e.g.:– Technical, e.g., is there an approved CDM Methodology?– Financial, e.g., is the project financially additional?– Legal, e.g., has the host country’s approval been

obtained?

Project implementation: applicable law(s)

• CDM project implementation is no different from the implementation of any other project but for the veneer of the international climate change regime.

• Law associated with CDM project implementation:

– “Although climate change is an environmental issue the scope of climate change law is much broader than the traditional “environmental law” areas of contamination, planning and development.” (Wilder, M., International Climate Law: Recent Developments and Key Issues, IETA, Greenhouse Gas Market Law: Recent Developments and Key Issues, IETA, Greenhouse Gas Market 2004).

– Therefore “Climate Change Law” might include:• (various aspects of) International Law• Foreign Investment Law• Public Procurement Regulations • Securities and Financial Regulation • Tax Regulation • Environmental Law • Property Law • Administrative Law

Overview of legal considerations

Environmental Authorisations: E.g.: - Water Licence - Waste Permit - Landfill Site Permit

CONVENTIONA L LEGA L ISSUES CARBON RELATED LEGA L ISSUES NATIONA L

CARBON RELATED LEGA L ISSUES INTERNATIONA L

CONTRA CTUAL ISSUES

DNA APPROVAL -Contribution to Sustainable Development

PIN AND/OR PDD

COUNTRIES AND DNA APPROVA L

ERPA

- Landfill Site Permit

Other Authorisations: E.g.: - Electric ity Generat ion

LINKED ENVIRONMENTAL AUTHORISATIONS EIA

VA LIDATION

REGISTRATION

MONITORING

VERIFICATION

CERTIFICATION

ISSUANCE

PDC

FUNDING

PROCUREM ENT TAX LAW

MFMA

Categories of authorisation

• International >> CDM project cycle.• Linked international and domestic:

– DNA;– EIA.– EIA.

• Domestic:– environmental legal authorisations to operate the

“installation”;– environmental legal authorisations to undertake the

CDM project activity;– municipal legal considerations.

Designated National Authority

• South Africa:

National Environmental Management Act, 1998: Regulations for the establishment of a Designated National Authority for the Clean Development Mechanism (Regulations 385, 386, 387, 21 April 2006).

– DNA operation.

– DNA duties.

– Contents of DNA Letter of Approval:• required in terms of Paragraph 40(a) of the CDM Modalities

and Procedures; and,• DNA Regulations.

Linked international / domestic authorisations:

Environmental Impact Assessment(EIA)

Is an EIA required to implement a CDM project?project?

(Climate Investment Newsletter, No. 4/2006, South African CDM Update, www.climatebusiness.net).

In order to undertake a CDM project:

• Comments by local stakeholders must have been invited and due account must be taken of the comments received. (CDM_M&P, paragraph 37(b))

• Documentation must be submitted on the analysis of the environmental impacts of the CDM project activity and, if environmental impacts of the CDM project activity and, if impacts are considered significant by the project participants or the host party, an EIA must be undertaken in accordance with the procedures as required by the host party. (CDM_M&P, paragraph 37(c))

• Opens the door to application of the domestic EIA regime.

South African EIA Regime

• National Environmental Management Act No. 107 of 1998 (Chapter 5).

• Regulations made in terms of Chapter 5 of NEMA• Certain “listed activities” are prescribed as triggering the

requirement for an environmental authorisation.• There are two types of assessment based on the • There are two types of assessment based on the

potential environmental impacts of the activity: A Basic Assessment and a full EIA.

• It is likely that larger-scale CDM projects will require a full EIA (this factor should be researched as part of the feasibility for a proposed CDM project because conducting a fully-fledged EIA process has time and cost implications).

• Screening of the listed activities is recommended to identify the type of environmental assessment required.

Domestic environmental legal authorisations

• To operate the “installation” at which the project activity is to be implemented:– Permitting of a landfill site.– Authorisation to operate an abbatoir.– Authorisation to operate a power generation facility.– “Water use” authorisations.

• To undertake the CDM project activity:– Water use.– Waste handling and disposal.– Electricity generation.– Air emissions.– Rezoning of land.

(In South Africa the question of authorisations may become very complicated because it is conceivable that there might be authorisation requirements at the national, provincial and municipal levels)

Examples of other legal issues

• Unilateral CDM.

• Municipalities and the MFMA:– MFMA;– Treasury Guideline (pending).

• Property nature of a “CER” and implications for ownership.

• REFIT and TRECs

• Tax:– Are CER sales to a party outside SA viewed as the export of a

commodity and thus zero rated for VAT?– Within the context of the income tax regime: are CER sales

regarded as “sales on account of revenue” or as “sale of capital”?

CDM and Municipalities

Municipalities are the project proponents in 20% of the South Africanregistered projects.

The types of projects in which municipalities have been involved include:

- Landfill-gas-to electricity project (La Mercy and Mariannhill Project –Durban)

- Energy Efficiency Project (Kuyasa Project – Cape Town)- Energy Efficiency Project (Kuyasa Project – Cape Town)

Advantages for Municipalities to participate in the CDM:

- Contribute to sustainable development- Income generation- Access to new technology- Access to foreign investment- Pro-active mitigation of climate change

• Text of the UNFCCC / Kyoto Protocol / Marrakech Accords:

• http/www.unfccc.int

• UNFCCC CDM website:• http/www.unfccc.int.cdm

• Other:• www.pointcarbon.com

• www.ieta.org• cdmwatch.org• cd4cdm.org

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