Latin American Carbon Program

BLUEPRINT FOR CARBON MARKETS SECTION SEVEN Blueprint for Carbon Markets | Section 7 763 764 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf 7.1 Introduction Over the past decade, Latin America has played an integral role in the growth of global carbon markets. With experts estimating that the value of these markets could eventually exceed $3 trillion—from their current level of $118 billion—the region could benefit tremendously from future involvement in this sector. But after leading the market in its early stages, Latin America in recent years has fallen behind China and India, which are hosting bigger and more profitable projects. The competition to host carbon credit projects is not zero-sum in the long term, but short-term profit concerns are leading investors to seek faster and higher returns in different regions. Despite sustained support from several regional governments, more can and should be done to ensure that Latin America leads in helping the world achieve meaningful solutions to climate change. The region is among the world leaders today in hosting CDM projects. Along with Asia, the two together account for more than 95% of all projects globally. In Latin America, Brazil and Mexico stand out as regional leaders, supplying a majority of all projects in the region and together accounting for almost one-fifth of all projects globally. In addition to the CDM sector, Latin America and Asia are involved in the creation and implementation of projects designed for the voluntary carbon market, where Asia is also by far the world leader in terms of the number of voluntary offset projects hosted. Asia has over 40% of the global total, while Latin America, though active, garnered just 8% of global voluntary offset projects in 2007. While Asia is the leading region for hosting carbon projects worldwide, Latin America is a distant second but has considerable room for growth. Given Latin America’s natural resources and geographical endowments, which could allow for the enhancement of renewable energy projects, the region is well positioned to play a leading role in the global carbon market. But countries in the region must better utilize the resources they have to promote renewable energy projects, to initiate carbon accounting schemes, and to leverage climate change action plans to include better funding and to incentivize participation in this unique market space. The Asian Development Bank (ADB) has shown considerable innovation in helping countries to jump-start their carbon market programs, and so far with some success. While there are institutional and demographic advantages to carbon market development that are inherent to countries like India and China, the support given to countries throughout Asia has been important to their expansion. With assistance from institutions like the Inter-American Development Bank, Latin America can enhance its position in the global carbon market to play an even greater role while using the market to further its development goals. The country case studies in this section are regional CDM market leaders, representing diverse geographies, natural resource endowments, and populations. The five countries analyzed—Brazil, Chile, Colombia, Honduras and Mexico— account for about 80% of all CDM projects in Latin America and the Caribbean. Each of these countries provides a significant number and range of CDM project types, from which one can determine the relative strengths and weaknesses of that country’s carbon sector, and have also shown leadership in the voluntary carbon market, where they have undertaken unique projects on a smaller scale. The decision was taken not to include a Caribbean country in the case study analysis because of a lack of carbon market activity to date, primarily due to less institutional support for carbon projects generally and the difficulty in attracting investor interest for their implementation given the small size of the economies there. The carbon reduction projects chosen for analysis are representative of a common project type for an individual country, are innovative by type and/or how they have been implemented, and, in many instances, provide useful templates for potential projects in other countries. The projects investigated are diverse in terms of their size, type, geographical location and overall success. Different countries in the region face varied sets of challenges. Due to the complexity of these challenges and the fact that country circumstances are unique, this report does not offer one single solution for carbon market development. Rather, it seeks to address where gaps exist in order to bring about greater development and the tools necessary to make informed decisions about carbon market expansion in the region, including the use of carbon funds, greenhouse gas inventories, carbon project clearinghouses, and carbon auction schemes. While carbon markets are not a panacea for the world’s environmental ills, they do offer a promising starting point from which to fight global warming collaboratively. In the coming decades, these markets will become more sophisticated and may even rival the markets for established commodities such as oil and precious metals. Those who involve themselves in the market early will have a greater opportunity to shape it in the future. This section of the report will discuss the major trends affecting the development of the carbon sector in Latin America and will identify methods by which the IDB can assist the region in further enhancing this market. Beginning with the history and current trends in the carbon Blueprint for Carbon Markets | Section 7 765 market, particular emphasis will be placed on how carbon markets emerged from efforts to curb other environmentally harmful compounds. This section of the report will also assess the successes and shortcomings of international carbon markets, including regulated and voluntary markets. Special consideration will be given to Latin America’s place in this emerging world market and the niches in which the region is poised to make the greatest impact. Ultimately, this section will reach conclusions about the efficiency and utility of these markets in Brazil, Chile, Colombia, Honduras, and Mexico and will recommend ways for the IDB to provide regional and country-specific support in order to facilitate sector expansion, promote long term sustainability, and contribute to overall economic development. 766 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Blueprint for Carbon Markets | Section 7 767 7.2 Global Carbon Markets— Latin America in Context 7.2.1 WHERE WE STAND TODAY The worldwide carbon market is growing at a breakneck pace. After tripling in size between 2005 and 2006 to reach an estimated $30 billion, it doubled again in 2007.1 Analysts estimate that the world’s carbon markets reached a value of $118 billion in 2008.2 The regulated European Union Emissions Trading Scheme (EU ETS) accounts for about 80% of the current market.3 Regulated accounts will likely dominate for the foreseeable future, but the voluntary carbon market is emerging as a force of its own. In 2006, China was the largest beneficiary, selling 61% of all carbon credits, followed by India with 12%, and Brazil with 4%. The UK was the most prolific buyer of credits, purchasing 50% of the supply.4 Estimates of the eventual size of the market vary considerably, but all project massive growth. By one calculation, the global carbon market could reach $200 billion by 2010 and extend to $565 billion by 2020.5 Another estimate suggests that it will reach $3 trillion, or roughly the size of the current combined markets for oil, natural gas, electricity, and coal.6 Given estimates for the eventual size of the carbon market, it will be important for Latin America and the Caribbean to determine ways to enhance the region’s current capacity in this sector. While determining the best way to do this is best left to the case study analyses, countries in the region should continue to enhance their CDM markets almost across the board, while voluntary market enhancement should be pursued by fewer countries. This burgeoning growth comes against the backdrop of continuing increases in carbon and other greenhouse gas emissions worldwide, even in those countries that have committed to reduce emissions (see Chart 7.2.1a). Data for the 40 industrialized countries that have signed and ratified the UNFCCC indicate that while greenhouse gas emissions did decrease from 1990 to 2000, they rose by 2.6% from 2000 to 2005. Emissions in the US (not a UNFCCC signatory) increased by 16% between 1990 and 2005.7 Carbon markets are the product of a growing understanding that climate change is at least in part the result of human action and that humans can work together to address the problem. A majority of citizens in OECD countries now believe that global climate change is an irrefutable fact. The publicity garnered by the awarding of the Nobel Peace Prize to Al Gore has helped 0 5,000 10,000 15,000 20,000 25,000 30,000 Chart 7.2.1a Plenty of Carbon to Go Around: World CO2 Emissions from Fossil Fuels, 1980-2005 Source: Energy Information Administration, 2008 North America Latin America Europe Eurasia Middle East Africa Asia/Oceania 768 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf effective alternative to regulations, which would have required more costly technological change.9 The US Clean Air Amendments of 1990 (CAA) established a national sulfur dioxide (SO2) trading program to help control acid rain and to encourage states to reduce urban smog through emissions trading. The program was animated by market principles and sought to facilitate performance-based standards and emissions banking and trading schemes to phase out the use of ozone-depleting chemicals.10 The SO2 program was the first emissions trading scheme of its kind and served as a model for several of today’s carbon markets. The SO2 trading market took effect in 1995 under the Acid Rain Program, with each individual generator responsible for meeting certain emissions reductions targets.11 The overall objective of the Acid Rain Program was to mitigate acid rain by enforcing mandatory reductions in the SO2 and NOx emissions from the power sector.12 Specifically, it sought to reduce annual SO2 emissions by 10 million tons from 1980 levels.13 Polluters who achieved greater than required emissions reductions could sell their allowances to those who could not meet their goals. The SO2 trading program has had considerable success: from 1997 to 2007 it cut total emissions by more than 50%.14 SO2 emissions from power plants have dropped 41% from 1980 levels.15 The system’s flexibility has facilitated almost 100% compliance while achieving an estimated abatement cost savings of $10 billion.16 The next steps in emissions trading—a global attempt to reduce greenhouse gas emissions—were the 1987 Montreal Protocol and the 1992 UN Framework Convention on Climate Change (UNFCCC). The Montreal Protocol was designed to protect the ozone layer by phasing out the production of numerous substances believed to be responsible for its depletion. Although nonbinding, the UNFCCC treaty paved the way for a series of protocols to achieve mandatory emissions limits. The treaty was implemented in 1994 as a multinational framework to coordinate government efforts. It soon became apparent, however, that member states wanted to augment the Convention by mandating emissions reductions. Within the framework of the convention, states began working on a separate stand-alone protocol. The 1997 Kyoto Protocol was the product of those efforts. It is a legally-binding agreement through which 180 countries have agreed to reduce their greenhouse gas emissions an average of 5.2% by 2012 (from 1990 emission levels). The protocol covers six greenhouse gases: CO2, methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). It Number of CDM Projects 1-5 6-9 10-19 20-49 100+ None Map 7.2.1a CDM Projects in Latin America solidify the commitment to action. The recent Stern Review on the Economics of Climate Change gathered comprehensive data from the world’s most noteworthy scientists and concluded that “[a]n overwhelming body of scientific evidence now clearly indicates that climate change is a serious and urgent issue” that is mainly “a result of increases in greenhouse gases caused by human activities.”8 Carbon markets have emerged as one valuable tool for limiting the amount of carbon dioxide (CO2) and other GHG gases emitted into the atmosphere. 7.2.2 A SHORT HISTORY Despite Europe’s current domination of the world’s carbon markets, the continent has not always led the way. The US implemented the first major efforts to tackle emissions through trading systems. The first significant emissions trading program was adopted in 1976 by the US Environmental Protection Agency (US EPA), which permitted the construction of polluting plants in exchange for “offsets” that would reduce air pollution by a greater amount in the same region. A follow-up policy adopted in 1979 allowed polluting parties to meet certain emissions targets through any combination of on-site reductions. As the 1980s began, however, academics emphasized the importance of markets as a cost- Blueprint for Carbon Markets | Section 7 769 came into effect on February 16, 2005, 90 days after Russia’s signature. The Marrakech Accords of 2001 provided further detail on how the agreement would operate, and it is under this combined regime that the world’s largest emissions trading market has evolved.17 Kyoto requires most industrialized member states to reduce emissions by 8-10% of their 1990 emissions levels and seeks an overall reduction in global emissions of at least 5% during the 2008-2012 period. The European Union target range includes various emissions allowances per country, ranging from a 28% reduction target for Luxembourg to a 27% increase cap for Portugal. Member countries can meet their target in a variety of ways. Countries can, for example, partially compensate for their emissions by increasing sinks or forests that remove carbon dioxide from the atmosphere either domestically or in other countries. Countries can also fund other foreign projects that result in greenhouse gas cuts. The Protocol set up the first global emissions trading program, which went into effect in February 2005.18 Latin America played an integral role in the early development of the carbon market development. The first project set up and registered under the UN’s Clean Development Mechanism, La Esperanza hydroelectric project in Honduras, marked Latin America’s leadership in the CDM, which continued as the region hosted three of the mechanism’s first five projects. 7.2.3 MECHANISMS Carbon transactions can be grouped into two broad categories: allowance-based transactions and projectbased transactions. The main difference between the two is the nature of the asset being traded. In allowance-based transactions the asset exists before the transaction, and so the risk associated with the allowance is based solely on delivery. In project-based transactions, however, the asset traded is created during the process. This type of transaction carries an additional “non-creation” risk.19 The two types of markets work quite differently. Allowance-based transactions take place when a buyer purchases emissions allowances created or allocated by regulators under a cap-and-trade regime. The idea is to combine environmental performance with flexibility. Project-based transactions occur when the buyer purchases emissions credits from a project that can show GHG emissions reductions compared with what would have happened otherwise.20 Under Kyoto, each country has an “Assigned Amount,” the right to emit a certain number of tons of CO2e, and is given a number of “Assigned Amount Units” (AAUs) for use during the first Kyoto compliance period, which lasts from 2008 to 2012. Each AAU represents the right to emit one ton of CO2e. In order to stay below their Table 7.2.3b Sample of Regional, National and State-Level ET Schemes Worldwide Scheme Emissions Covered Location Emission Sources Targeted Targets Start EU ETS CO2 EU Large industrial and energy intensive installations Absolute 2005 NSW GGAS CO2, CH4, N2O, Australia Power generation, energy efficiency, industrial processes and forest carbon Relative 2003 PFCs, HFCs, SF6 sequestration RGGI CO2 US Electricity generators that have capacity equal to or larger than 25MW and Absolute 2009 burn more than 50% fossil fuels CCX CO2, CH4, N2O, US, Canada, Sources in the electric power sector and fossil fuel combustion Absolute 2003 PFCs, HFCs, SF6 Mexico, Brazil US SO2 SO2 Continental US Fossil-fuel burning units servings electric generating units greater than 25MW Absolute 1995 Source: Pricewaterhouse Coopers, Feb. 2007 Table 7.2.3a Size and Value of Carbon Markets Worldwide 2004 2005 2006 2007 Volume Value (MUS$) Volume Value (MUS$) Volume Value (MUS$) Volume Value (MUS$) (MtCO2e) (MtCO2e) (MtCO2e) (MtCO2e) Emissions Trading 16 N/A 328 7,908 1,131 24,357 2,086 50,121 CDM 97 485 351 2,638 562 6,249 791 12,877 JI 9 54 11 68 16 141 41 499 Voluntary 3 6 6 44 33 146 42 265 Source: State and Trends of the Carbon Market 2005, 2006, 2007 and 2008 7700 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf A Blueprint for Green Energy in the Americas 2008 | Garten Rothkopf emissions caps, parties to Kyoto can do several things: decrease production from their emissions sources, utilize new technology to generate less CO2e per unit of output, buy AAUs from a country that has a surplus, or purchase credits from companies and countries that have invested in Kyoto project mechanisms.21 The basic framework for the market is a cap-and-trade model with three “flexibility mechanisms”: Emissions Trading (ET), Joint Implementation (JI), and the Clean Development Mechanism (CDM). ET is an allowancebased transaction in which buyers purchase emissions allowances created and allocated or auctioned by regulators under the cap-and-trade regime. Emissions trading accounts for the bulk of the carbon markets worldwide in terms of both tCO2e transacted and value, followed by the CDM, JI, and voluntary markets. For Latin America and the Caribbean, however, carbon markets have become just as useful a tool for sustainable economic development as they are for limiting greenhouse gas emissions. In this context, both the mandatory and voluntary carbon markets play an integral role in channeling investment into projects that achieve sustainable development throughout the region. This section on carbon markets in Latin America will endeavor to tie these two benefits together on a project-by-project basis in our case studies portion, and in so doing highlight the ways in which Latin America and the Caribbean have already benefitted from the carbon market as well as offer recommendations for how the region might continue to enhance its carbon markets. First, however, we will discuss a short history of carbon markets worldwide and the mechanisms by which they work. Emissions Trading ET enables developed countries (Annex 1) to buy carbon credits from other developed countries in order to complete their emissions reductions commitments.23 The system ostensibly “encourages reductions to take place where they are the least costly” and offers “the potential to significantly reduce the overall costs of meeting climate goals.”24 Only countries with emissions limitations and reduction commitments can participate in emissions trading; these countries may transfer units when they no longer need them to meet their own emissions targets. The units available for transfer are each equal to one metric ton of emissions in terms of CO2 equivalent. “Cap-and-trade” is the most common design scheme for emissions trading worldwide, though an alternative approach is to impose relative targets. In a cap-and-trade system, an environmental regulator limits emissions from a designated group of polluters below current emission levels. The emissions allowed under this new cap are divided up into permits that represent the right to emit a certain amount. The restriction on pollution allowed gives these permits, or pollution rights, a financial value. The polluters can then buy and sell permits in order to continue their operations as they see fit. Polluters who can reduce their emissions at lower costs are able to sell excess permits to companies facing higher pollution mitigation costs. Proponents of the cap-and-trade systems argue that they offer companies flexibility regarding how best to achieve their emissions targets.25 Opponents of such a system cite that same flexibility as a key shortcoming. Cap-and-trade systems offer a level of certainty and credibility. Because emissions levels are actually governed by a cap, markets and market players know Emissions Trading 79% CDM 20% JI 1% Voluntary < 1% Chart 7.2.3a Percent Value of Global Carbon Markets, 2007 Source: State and Trends of the Carbon Market 2008 Blueprint for Carbon Markets | Section 7 771 what to expect when these caps are placed. Because cap-and-trade systems are governed and backed by standards, there is less question as to the validity of emissions rights. These benefits help make the system compatible with a long-term emissions price signal by maintaining market openness. Such benefits are fundamental to a smoothly functioning market. Joint Implementation JI involves project-based transactions that allow emitters in developed countries to purchase carbon credits generated in a developed country or in an “economy in transition.” JI credits are referred to as Emissions Reductions Credits (ERUs) and are issued by the national government where the credits are created.27 The most likely buyers of ERUs are those countries or companies that are or will become subject to emissions reduction commitments and face relatively high costs of reducing their own emissions.28 Defined in Article 6 of the Kyoto Protocol, JI allows developed countries to implement emissions-reducing projects, or projects that enhance emissions removal by sinks, in other developed countries. The sponsor of the project may then count the resulting ERUs towards its own Protocol target. Developed countries can also authorize legal entities such as businesses, NGOs or other bodies through national registry offices to participate in JI projects on the country’s behalf and under its responsibility. JI projects must have the approval of all parties involved and must reduce or enhance the removal of emissions in ways that would not otherwise have occurred. The 2001 Marrakech Accords provide the rules relating to JI. The Joint Implementation Supervisory Committee (JISC) supervises the verification of ERUs produced by JI projects. It has several other responsibilities, including reporting on its activities at each session of the Conference of the Parties (COP); accrediting independent entities; reviewing and revising reporting guidelines and criteria for baselines and monitoring; and elaborating upon any procedural rules overlooked in JI’s codification.29 The JISC has not yet approved baseline emissions and monitoring methodologies. That role is left to Accredited Independent Entities (AIEs), which assess the baselines and monitoring plans for each project based on the JI guidelines. The absence of centralized monitoring creates significant variation among JI projects. The current JI market is substantially different from its original conception. Part of this has to do with the enlargement of the EU, which in 2004 welcomed eight of the 13 “economies in transition” and accepted another two as members in 2007. These countries are subject to the EU Emissions Trading Scheme (ETS). In order to prevent double-counting of emissions reductions, installations that are covered by the ETS can only be involved in JI projects under unusual circumstances. The potential production of ERUs is therefore reduced in energy-related sectors, as emissions reductions occur under ETS instead of JI.30 In 2006, JI volumes increased 45% and reached more than 16MtCO2e transacted. Russia, Ukraine, and Belarus have provided more than 60% of transacted volumes so far.31 According to one report, the JI has substantial room 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 2004 2005 2006 2007 Volume (MtCO2e) Value (MUS$) Chart 7.2.3b Volume and Value of Global CDM Market, 2004-2007 Source: State and Trends of the Carbon Market 2005, 2006, 2007 and 2008 772 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf to grow in Ukraine and Russia, due to their huge oil and gas sectors as well as power sector projects.32 Clean Development Mechanism The CDM was a late invention in the Kyoto negotiations. Just six months prior to the Kyoto negotiations in 1997, the Brazilian delegation proposed the creation of a “Green Development Fund” (GDF) to be supported by countries out of compliance with their commitments and used to support mitigation projects in developing countries. To reach an agreement, the US and Brazilian delegations suggested that the GDF be turned into a scheme “whereby countries with commitments under the Kyoto Protocol would be allowed to exceed their emissions quotas by supporting emissions reduction projects in developing countries.” Unlike JI, however, the new mechanism would place as much emphasis on promoting sustainable development as it would helping developed countries meet their commitments.33 CDM is the only flexibility mechanism of the three designed under Kyoto to engage the developing world. The CDM’s aim is to “direct private sector investment into emissions-reductions projects in developing countries while promoting sustainable development in these countries.”34 Carbon offsets originating from approved CDM projects are called Certified Emissions Reductions (CERs). As defined in Article 12 of the Kyoto Protocol, the CDM allows developed countries to implement projects that reduce emissions in non-Annex I countries in return for CERs, which can then be used by developed countries to help meet their emissions targets. The aims of the CDM are to promote investment in developing countries as well as to transfer green technology. Developed countries may use CERs from CDM projects to help meet their own emissions targets, though they may do so only up to 1% of the country’s base-year emissions annually during the five-year commitment period. Essentially the CDM is a market-based trading mechanism that delivers a subsidy to the developing world in exchange for reduced greenhouse gas emissions.35 The central insight behind the CDM is that the marginal cost of emissions reductions in developing countries is less than in the developed world; it is cheaper to build a low-carbon energy infrastructure from scratch than it is to modify or replace existing technology in Annex I countries. CDM thereby helps to reduce the cost of complying with Kyoto.36 Jan 05 Mar 05 May 05 Jul 05 Sep 05 Nov 05 Jan 06 Mar 06 Sep 06 Nov 04 May 06 Nov 06 Jan 07 Mar 07 Jul 06 0 200 400 600 800 1,000 1,200 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 May 08 Jul 08 1,400 Sep 08 Nov 08 Chart 7.2.3c Total Registered CDM Projects Worldwide Source: UNFCCC/CDM A PATH TO GREEN GROWTH Since the first Latin American CDM project was registered in November 2004, the CDM has generated an estimated $5 billion in investment in the region. Blueprint for Carbon Markets | Section 7 773 Individual projects proposed under the CDM are validated by designated entities and have to be registered with the CDM Executive Board (EB), which acts as the mechanism’s governing body. Each project wanting to participate must prepare a Project Design Document (PDD), explaining the details of how its future emissions reductions will be real, additional, and not induce leakage. “Real” emissions are ones monitored to make sure that they actually occur. “Additional” emissions reductions are those that are in addition to what would have occurred without the CDM. “Leakage” of emissions occurs when emissions reductions that would have occurred “within a project absent the CDM subsidy instead occur outside it because of the subsidy.”37 The project must also specify how emissions reductions made by the project will be monitored. The CDM market today is the second largest part of carbon markets worldwide in terms of both volume of credits transacted and value. Asia and Europe account for about 80% of the sellers and buyers markets respectively.38 Several key issues confront the CDM market. The question of whether the program creates a loophole in Kyoto protocol has been debated continuously. During the negotiations that created the CDM, it was decided that the mechanism would have to prove that its projects were environmentally “additional.” Policymakers decided that “additionality” would be determined on a project basis and not at a program level as some had envisioned. The body designated by the Kyoto Protocol to supervise the CDM, the Executive Board, subsequently has taken a conservative approach to validating emissions reductions.39 CDM skeptics also are concerned that the program allows developed countries to meet environmental obligations at a lower cost because credits earned overseas are often less expensive than the emission reductions at home. Moreover, investors are often unable to identify baseline emissions values for projects. Baseline values are the “business-as-usual” scenario with which new project emissions are compared.40 Vague or uncertain baseline scenarios leave room for project parties to exaggerate emissions reductions. Less controversial but just as troublesome in the long run is that one third of CDM credits comes from projects aimed at controlling one industrial gas, trifluoromethane (HFC-23). A byproduct of industrial processes, the gas is almost 12,000 times as potent as CO2. All plants in the industrialized world have voluntarily installed inexpensive devices to remove the chemical. Manufacturers in the developing world, however, have identified a market loophole: by delaying installation of these devices, they can inflate their baseline pollution values and earn huge sums through CDM credits. One study has concluded that these industries will earn up to $12.7 billion through 2012 when only $136 million would be needed to pay for the HFC-23 removal technology.41 7.2.4 MANDATORY ALLOWANCE-BASED EMISSIONS SCHEMES WORLDWIDE There are several mandatory carbon dioxide trading schemes in the world, with the European Union Emissions Trading Scheme leading the way in terms of volume and value. Its relationship with Latin America, while limited today, is critical. The EU’s “Linking Directive” specifically recognizes CDM credits as equivalent to EU emissions allowances (EUAs) for use within the EU ETS. Hence, EU governments can buy CDM credits produced in places such as Brazil or Mexico in order to assist them in achieving their national emissions reduction targets. Alternatively, private firms can buy CDM credits to add to their EU allowances within the EU ETS. The global proliferation of emissions trading schemes bodes well for the future of international climate change policy and for the sustainable growth of the developing world. In Latin America, any number of emissions trading schemes in addition to the ETS that would accept projectBrazil 0 10% 20% 30% 40% 50% 60% Percent of CDM Projects Globally Percent of Avg. Annual Reductions (tCO2e) Globally Mexico Other LAC China India Other Asia/Pac Africa/ME Chart 7.2.3d CDM Projects and CERs Globally (%) Source: UNFCCC/CDM 774 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf based emissions reductions as part of their trading platform would mean increased interest, investment in and technology transfer to the region. As these programs become more complex and encompass more industrial sectors, emerging markets will likely play an increased role in helping to offset developed-world emissions. Particularly if a nationwide greenhouse gas-trading scheme is implemented in the US, Latin America’s role in the emerging global carbon market could expand considerably. Until that time comes, however, there is still opportunity for projects in the voluntary market to flourish in Latin America, as more companies seek to meet precompliance standards with the expectation that they will be required to meet emissions caps in the coming years. Europe European Union Emissions Trading Scheme (EU ETS) The EU Emissions Trading Scheme, launched in 2005, is by far the world’s largest. In 2007, more than two billion ETS allowances changed hands at a market value of $50 billion. These exchanges account for 62% of the volume and 80% of the value of global carbon markets.1 The market is a mandatory cap-and-trade system designed to reduce CO2 emissions across member states. The scheme currently encompasses six main sectors: electricity generation; heat and steam production; mineral oil refineries; processing and production of ferrous metals; cement, bricks and ceramics manufacture; and pulp and paper. The stated goal of the program is to reduce emissions 8% from 1990 levels by 2012. Established under the European Directive 2003/87/EC, the EU ETS originally covered more than 12,000 sources representing about 45% of the EU25’s CO2 emissions.2 Some companies began engaging in demonstration trade of spot and forward emissions allowances (EUAs) as early as 2003.3 EU members are expected to develop National Action Plans (NAPs) to set caps across 15,000 firms. Each firm then undergoes audits of its emissions. If a firm has gone over its cap, then it must purchase units from other EU firms that emitted less than their cap. Firms not in compliance are penalized €100 per ton CO2e over the cap in the 2008-2012 period. The NAPs are subject to approval by the European Commission and contain not only emission reduction targets, but also the methods the country will use to distribute the allowances.4 Though EU ETS has stimulated emissions abatement in both Europe and developing countries, the program has had to overcome several logistical challenges. Following the release of 2005 emissions data, for example, it became clear that the 2005-07 (Phase I) emissions cap had been set inappropriately, resulting in a highly volatile market for EU Allowances (EUAs). By May 2006, an audit revealed that several EU governments had issued permits for 66 million tons more CO2 than were actually being emitted. Because governments handed out too many allowances, the price of allowances plummeted from €34($42) per tCO2e in 2006 to about €1.20 ($1.56) per tCO2e at the beginning of 2007—far too low to induce investment in emissions reduction. As a result of 0 500 1,000 1,500 2,000 2,500 2003 2004 2005 2006 2007 MtCO2e Chart 7.2.4a EU ETS: Volume Exchanged (MtCO2e) Source: State and Trends of the Carbon Market: 2005, 2006, 2007 and 2008 Blueprint for Carbon Markets | Section 7 775 falling prices, the European Commission rescinded governments’ allocation plans for ETS Phase II, which runs from 2008 to 2012. The price of carbon for 2010 has subsequently risen to about €24 per tCO2e as of July 2008. Despite the correction, there is concern that industry behavior may not change before the scheme runs out with the Kyoto Protocol in 2012. The European Commission in January 2008 released a blueprint for Phase III of the EU ETS. Running from 2013 to 2020, Phase III would cut annual emissions allowances for heavy industry to achieve reductions of 20% on 1990 GHG levels by the end of the period. The EC is also seeking to produce 20% of its power from renewable sources during the same span. An important provision of the blueprint for Phase III is that reductions targets would be raised from 20% to 30% by 2020 if other major world emitters cap emissions as well. Another departure from the previous two phases is to completely scrap the NAP in favor of one EUwide emissions allocation, with each installation’s individual allocation decided by the European Commission.5 Australia New South Wales Greenhouse Gas Abatement Scheme (NSW GGAS) The New South Wales Greenhouse Gas Abatement Scheme is a mandatory state-level program designed to reduce greenhouse gas emissions associated with the production and use of electricity and to develop and encourage activities to offset the production of GHG emissions. It was launched in 2003, two years before the EU ETS, and covers all six greenhouse gases. It requires individual electricity retailers and other parties who buy or sell electricity in New South Wales to meet mandatory benchmarks based on their share in the electricity market. If emitters exceed targets, they have the choice of paying a penalty or purchasing offset emissions in the form of New South Wales Greenhouse Abatement Certificates (NGACs). GGAS is the world’s second-largest regulated cap-andtrade GHG market, with about 20.2 MtCO2e traded in 2006 at an estimated value of $225 million.6 It is linked to a scheme in the Australia Capital Territory and will operate until 2020. However, a national emissions trading model under development in the country differs significantly, and the New South Wales government has stated that its own plan could be curtailed if a federal government ETS becomes active.7 Any federal scheme to limit national emissions will face significant hurdles given mining laws in Australia, the world’s largest exporter of both coal and iron.8 The government of Prime Minister Kevin Rudd plans to introduce a national ETS in 2010.9 United States Regional Greenhouse Gas Initiative (RGGI) In 2003, 10 East Coast states implemented the Regional Greenhouse Gas Initiative (RGGI), a regional strategy to reduce CO2 emissions through a cap-and-trade program and market-based ETS. The agreement amounts to the first cap-and-trade system in the US to control emissions of carbon dioxide.10 Participating states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. RGGI, launched in January 2009, focuses on power plants that use fossil fuels to generate more than half of their electricity. The program covers only CO2 emitted by the electrical power sector, specifically from generators of 25MW and larger.11 Plants that sell less than 10% of the electricity they generate to the grid are exempt.12 A Memorandum of Understanding establishes each state’s emissions cap as its proportion of regional emissions, with the distribution of emissions allowances left to each state’s discretion.13 The RGGI Memorandum commits its members through 2014 to a regional cap of about 120 million tons of CO2, on par with 1990 emissions levels. Beginning in 2015, the cap will be reduced by an additional 2.5% annually through 2018. The goal is to cut 10% of regional CO2 emissions by 2017.14 Each state must allocate at least 25% of its budgeted allowances to a “consumer benefit” or “strategic energy purpose” account. These allowances are to be sold “to promote energy efficiency, to directly mitigate electricity ratepayer impacts, or to promote lower-carbon-emitting energy technologies.” Taking lessons from the First Phase of the EU ETS, some states have decided to auction 100% of their budgeted allowances.15 The first auction of RGGI allowances is scheduled for September 2008.16 RGGI faces several potential challenges. It is possible that the system will be “short”— that its actual emissions will be greater than the number of allowances that are issued. There are also concerns about liquidity. For any market to be liquid, there needs to be a diverse array of market players given that industries have varying marginal abatement costs. The generators in the RGGI region, however, are owned by a small number of firms that together currently account for just 4% of US electricity generation. By limiting the scope of this scheme to CO2, the project’s designers might have limited its liquidity.17 Emissions reductions are expected to reach approximately 30 MtCO2e by 2030.18 The program may become larger both in terms of scope and membership. Currently the state of Pennsylvania and 776 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf the Canadian province of New Brunswick are observers to the agreement and may ultimately join. Depending on the success of the current structure, RGGI may also be extended to cover sources of greenhouses gases other than CO2.19 Other Initiatives California has been a leader among US states in pushing climate change initiatives. The state’s Global Warming Solutions Act was the first state-wide program to cap all greenhouse gas emissions from major industries and impose penalties for non-compliance. Under the Act, the California State Air Resources Board is required to create, monitor, and enforce a GHG emissions reporting and reductions program.20 The Western Climate Initiative (WCI) is a regional and international collaboration established in February 2007. California has joined six other states (New Mexico, Oregon, Washington, Arizona, Utah and Montana) and two Canadian provinces (British Columbia and Manitoba) to implement a market-based regime by August 2008. WCI recently announced a GHG emissions target of 15% below 2005 levels by 2015. Participating states determine their own goals for greenhouse gas reductions, and California has adopted the most ambitious plan so far, seeking to return to 2000 emission levels by 2010, 1990 levels by 2020, and 80% below 1990 levels by 2050.21 There is considerable scope for enlargement of the initiative, as several US states and Canadian provinces are observers.22 Most recently, in November 2007, the governors of six US states and one Canadian province created the Midwestern Regional Greenhouse Gas Reduction Accord. The program commits its members—US states Wisconsin, Minnesota, Illinois, Iowa, Kansas, and Michigan, and the Canadian province of Manitoba—to create a carbon capand-trade scheme by 15 July 2010. Emissions reduction targets will be established for the entire region, consistent with individual state aims. It is expected, though not certain, that the accord will include all six greenhouse gases covered by the Kyoto Protocol. It will also seek to encompass as many emitters as possible.23 7.2.5 VOLUNTARY CARBON MARKETS The voluntary carbon market is developing rapidly, but is still highly fragmented. Whereas mandatory markets operate under regulation imposed from international, national, and sub-national entities, the voluntary market lacks any guiding regulation, rendering the market less liquid and more segmented. In a voluntary market, organizations such as governments (national, state, or provincial), private firms, or individuals may choose to reduce or offset their emissions. Because organizations are not obliged to participate, the impetus for capping emissions tends to stem from self-interest. Voluntary participation can help firms prepare for pending mandatory regulation, generate revenues through credit trading, and brand themselves as “green.” 2002 2005 2006 2007 CCX 0 2003 2004 OTC 30 35 20 25 10 15 5 Volume (MtCO2e) 45 40 Chart 7.2.5a Voluntary Carbon Market: Transacted Volumes (MtCO2e) Source: New Carbon Finance and Ecosystems Marketplace Blueprint for Carbon Markets | Section 7 777 Like mandatory markets, voluntary markets can be divided into two subsections: allowance-based markets, and project- or offset-based markets. The Chicago Climate Exchange (CCX) touts its reputation as North America’s only voluntary allowance-based market.1 The CCX is closely monitored and regulated, providing a much more streamlined platform for emissions trading than project-based markets. Private firms join CCX voluntarily and are allocated a set number of allowances (a “cap”) based on a baseline value. While participation is voluntary, the caps are legally binding. Allowance contacts are called Carbon Financial Instruments (CFIs), denoted in increments of 100 metric tons of CO2 equivalent. The CCX also trades project-based carbon offsets verified by CCX. Unlike the system under Kyoto, however, in which allowances are denoted as EUAs, and project-based offsets (credits) are denoted as Certified Emissions Reductions (CERs) or Emissions Reduction Units (ERUs), offsets on the CCX are also denominated as Carbon Financial Instruments (CFIs). This has important implications for pricing, as there is no spread between the prices of allowances and credits. Growth in the voluntary carbon market is driven primarily by the project-based offset market;2 however, this market is much more highly fragmented. First, no singular formal exchange exists: most transactions are conducted overthe-counter (OTC), meaning there are trades between private entities, such as brokerages, that are conducted on a deal-by-deal basis. Second, there is not one commodity that represents an “offset.” Much like under the Kyoto Protocol, projects must undergo rigorous thirdparty monitoring and verification to produce offsets, which are also known as “credits.” Unlike under Kyoto, however, there is no single verifying agency or system of verification; thus, a plethora of different standards and systems have arisen. Credits on the voluntary OTC markets are generally referred to as Verified or Voluntary Emissions Reductions (VERs). In part because the voluntary carbon market is not highly regulated, it has served historically as a source of experimentation and innovation in carbon markets. It is also the market that is most likely to reach poorer and smaller communities in developing countries. This is because these markets lack the bureaucracy and transaction costs of their regulated counterparts. By one assessment, because the project-offset market is “free of the stringent guidelines, lengthy paperwork, and high transaction costs, project developers have more freedom to invest in small-scale community-based projects.”3 On the downside, however, many analysts feel that they also lack credibility, as there is no accounting mechanism to track all the offsets undertaken. Nor is there a system of verification for monitoring the veracity of offsets once projects have begun. In this sense, the quality of offsets offered is one of the biggest obstacles to a bright future for voluntary markets. Still, there is ample room to be optimistic about the voluntary carbon market, and especially within the context of Latin America. For the region, the market could become an extremely useful way to ensure that small, rural projects do not get overlooked. As Latin America will continue to urbanize, larger CDM projects will logically be situated in and around cities, as many are today. Ensuring that smaller, innately less profitable projects are implemented throughout the region is a must for the future of sustainable development in the region. Furthermore, the voluntary markets could play a vital role in protecting Latin America’s forests, which work to soak up global carbon dioxide emissions on a vast scale. In this context, the voluntary market has huge potential in Latin America. And, with local circumstances unique to different places, the region has a great opportunity to bring innovation and sustainable development to places that have not yet enjoyed such benefits. Supplier Categories and the Value Chain As with the regulated carbon emissions markets, there are a variety of players in the voluntary offset market, each with distinct aims and motivations; however, unlike the regulated markets, compliance is not a primary goal, with the exception of project-based CFIs. There are four main categories of suppliers in the voluntary offset market: • Project developers originate the greenhouse gas emissions reductions projects and are exposed to the initial risks with which projects are associated. They may sell credits to any party willing to buy them; however, few end-users (such as individuals or large companies) purchase credits from project developers directly, and thus credits are usually sold, repackaged, and resold. • Aggregators and wholesalers purchase credits from a number of different projects and resell them in bulk, providing a more diversified portfolio. • Retailers tend to be smaller entities who sell individual and packaged credits to individuals or organizations (usually online). • Brokers do not retain an ownership stake in credits but trade them speculatively. 778 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Market Trends: Volume, Price, and Value Volume The voluntary carbon market is growing at a healthy pace. From 2005 through 2006, the volume of transactions on the CCX and OTC markets grew by over 200%, to reach 24.6 MtCO2e.4 Between 2006 and 2007, this volume nearly tripled, reaching 65.0 MtCO2e.5 This consists of 22.9 MtCO2e transacted on the CCX in 2007 (up 122% from 10.3 MtCO2e in 2006) and 42.1 MtCO2e transacted OTC in 2007 (up 194% from the estimated 14.3 MtCO2e in 2006). Data for volumes of transaction on the CCX include both allowance-based and project-based contracts, as both are denominated as CFIs and thus cannot be disaggregated from one another. Data for the OTC market were taken from a 2008 report released by New Carbon Finance and Ecosystem Marketplace, who surveyed roughly 150 suppliers from 13 countries.6 The report notes, however, that these figures are conservative because not all suppliers responded to the survey, and 37% of respondents did not disclose volume data. Major suppliers did respond, though, and they are likely to constitute a significant portion of the market.7 Price CCX: Since the market’s inception in 2004, CFI prices have fluctuated between $0.73 and $7.40, with a yearto-date low of $1.70 and high of $7.40. The average price since the market’s inception has been $2.73, and the average price in the past year-to-date has been $3.93. As noted above, CFI contracts represent 100 metric tons of CO2e. OTC: The price of carbon offsets on the OTC market varies greatly with its point in the value chain and the system of verification used (both discussed in greater detail below), as well as the type and location of the project. The study by New Carbon Finance and Ecosystem Marketplace estimates the average price of a carbon credit transacted on the OTC market in 2007 to have been $6.10, a 49% increase from the 2006 average of $4.10.8 Prices ranged from a low of $1.62 to a high of $300/tCO2e.9 Value The total value of the voluntary carbon markets for 2007, using the price and volume data above, is estimated to have been $300.8 million, constituting a growth of 240% from 2006, when the total calculated value was $96.7 million.10 This value consists of the OTC market, valued at $258.4 million, and CCX at $72.4. By one estimate, the “unregulated” market for carbon credits will reach $4 billion by 2010.11 The proliferation of government-regulated emissions schemes over the next few years, however, could derail the voluntary market from the tremendous growth seen in the past few years. Source: New Carbon Finance and Ecosystems Marketplace 2002 2005 2006 2007 CCX 0 2003 2004 OTC 300 350 200 250 100 150 50 Value (MU S$) Chart 7.2.5b Voluntary Carbon Market: Total Value (MUS$) Blueprint for Carbon Markets | Section 7 779 In Detail: Allowance-Based Markets Started in 2003, CCX is North America’s only legally binding, rules-based greenhouse gas emissions allowance trading system, as well as the world’s first.12 It works in emissions trading based on all six greenhouse gases. CCX members make a voluntary, but legally binding, commitment to meet annual GHG reduction targets. Those who reduce below the targets have surplus allowances to sell or bank; those who emit above the targets comply by purchasing CCX Carbon Financial Instrument (CFI) contracts. The CFI is the commodity traded at CCX, each unit of which represents 100 metric tons of CO2 equivalent. CFI contracts are comprised of Exchange Allowances and Exchange Offsets. Allowances are issued to emitting members in accordance with their emission baseline and the CCX Emission Reduction Schedule. Offsets are generated by qualifying offset projects. The Chicago Climate Futures Exchange (CCFE), a wholly owned subsidiary of CCX, is a derivatives exchange that offers standardized and cleared futures and options contracts on emission allowances and other environmental products.13 In addition to offering CFI and CER futures, event-linked futures (IFEX, or Insurance Future Exchange), it also offers diversified clean energy index (ECO) futures. Membership in CCX is divided into six categories: members, associate members, offset providers, offset aggregators, liquidity providers, and exchange participants: • Members are entities with direct greenhouse gas (GHG) emissions that make a legally binding commitment to reduce emissions. • Associate Members are “office-based businesses or institutions” with negligible direct GHG emissions that commit to reporting and offsetting 100% of emissions associated with energy purchases and business travel from year of entry through 2010. • Offset Providers own title to qualifying offset projects and register and sell offsets directly on CCX. • Offset Aggregators serve as the administrative representative on behalf of numerous providers or multiple projects. In general, projects that produce fewer than 10,000 MtCO2e annually are registered and sold through an aggregator. • Liquidity Providers are entities (such as brokerages) or individuals who trade on CCX for purposes other than compliance, e.g, speculative traders. • Exchange Participants are entities or individuals who purchase CFI contracts and retire them to offset emissions associated with special events or activities. At least nine Latin American companies are listed on CCX, with Brazil accounting for seven of these, and Chile two. Some of these companies include: Aracruz Celulose S.A., Companhia de Gas de São Paulo (Comgas), and Rhodia Energy Brazil Ltda. In Detail: Project-Based Markets Types of Projects No single project type dominates market share for Chart 7.2.5c Voluntary OTC Offset Project Types, 2007 Source: New Carbon Finance and Ecosystems Marketplace Non-REC RE 27% Energy Efficiency 18% Forestry 15% Fuel Switching 9% Coal Mine Meth 7% Landfill 5% Mixed 5% Other 9% 780 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf voluntary carbon offsets, as indicated in the figure above. In 2007, non-Renewable Energy Credit renewable energy projects, energy efficiency projects, and forestry projects accounted for 60% of voluntary OTC credits. Some brokerages believe that there has been a shift in the types of projects due to consumer preferences: As people are becoming more informed about different types of offset projects, they are starting to prefer some over others. Forestry — afforestation and reforestation of mixed native forests — has seen the most dramatic downward shift, constituting 31% market share in 2006 and only 15% in 2007.14 Also down are industrial gas projects, which fell from 20% in 2006 to 2% in 2007, and RECs, which fell from 17% in 2006 to 4% in 2007. Projects that have increased market share most significantly are energy efficiency (from 5% in 2006 to 18% in 2007), fuel switching (from 0% to 9% in 2006), and non-REC renewable energy projects (from 15% in 2006 to 27% in 2007). Prices also vary by project type but remain on average within the range of $2 and $9 per tCO2e. In general, project types that are more capital-intensive in the development stage, such as forestry, garner higher prices. By contrast, projects that generate offsets through GHGs with high global warming potential (GWP) values,15 such as industrial gas projects, are valued less.16 This price differential occurs from market fragmentation, presenting a stark contrast from offset prices under Kyoto, in which all offsets — once approved and verified — are priced the same. This has created an incentive for project developers to seek the “low-hanging fruit” of the voluntary area, that is, projects that generate a high volume of credits but require little capital investment (such as projects to decompose HFC23). Because of the price differential that exists in the voluntary OTC market, developers are not reducing emissions in the most cost-effective way possible. Like offset projects under the Kyoto Protocol, the largest proportion of voluntary OTC projects originate in Asia. This is, just as in the regulated market, partly due to the large scope for emissions reductions that exist in the region compared to others. In 2007, Asia accounted for 39% of all voluntary OTC projects, up from 23% in 2006. North America makes up the second largest market share at 28%, but this is down from 43% in 2006. Europe and Oceana both increased market share: Europe grew by 5% (from 3% to 8%), and Oceana grew by 6% (from 1% to 7%). Latin America had the same number of projects but saw a decrease in market share, from 21% in 2006 to 7% in 2007. Africa decreased in credits, losing 2% market share.17 Chart 7.2.5d Change in Market Share, 2006–2007 Source: New Carbon Finance and Ecosystems Marketplace 0 2007 2006 Other Mixed Industrial Gas Landfill Coal Mine Meth Fuel Switching Energy Efficiency RECs Non-REC RE Forestry 10% 20% 30% 40% Blueprint for Carbon Markets | Section 7 781 Types of Standards The OTC market consists of several types of commodities and is dominated by VERs, which constituted 66% of the market in 2007 (up 8% from 2006).18 The other commodities include CDM credits that do not make it to formal exchanges — either because they do not meet verification standards or simply due to supplier preferences — at roughly 16% of the market,19 and CCX-verified projects (CFIs) at 7%.20 While CDM and CCX credits have their own in-party verification systems, the unregulated VER market has engendered a range of different standards. These are now becoming more consolidated, with the Voluntary Carbon Standard (VCS), VER+, Gold Standard, and Greenhouse Friendly standards accounting for 62% of the VER market.21 This report details those standards below. Other standards include ISO 14064, Green-E, Climate, Community, and Biodiversity Standards (CCB), VOX, and retailer-specific standards. • Voluntary Carbon Standard: The Voluntary Carbon Standard (VCS) was developed by three organizations: the Climate Group, the International Emissions Trading Association (IETA), and the World Economic Forum (WEF). The latest version of the VCS was launched in 2007. According to VCS, “Offsets must be real (have happened), additional (beyond business-as-usual activities), measurable, permanent (not temporarily displace emissions), independently verified and unique (not used more than once to offset emissions).”22 As participation on the CCX is voluntary and binding, those companies that choose to be listed on it should be seen as leaders in their industry with respect to making solid commitments to mitigate their own emissions. That Brazil has seven companies on the exchange out of nine from Latin America further reinforces that country’s regional leadership in the carbon arena. • VER+ Standard: TÜV SÜD, a project verifier for Kyoto Protocol projects, developed the VER+ standard for voluntary offset projects. Projects must meet nine criteria in order to receive VER+ verification: eligibility (project types must be akin to those eligible under JI, barring location); additionality; permanence; exclusivity; avoidance of double counting; limitation of crediting period; baseline and monitoring methodologies; environmental and social impacts; and involvement of stakeholders.23 • The Gold Standard of VERs: The Gold Standard uses an applied version of the standard used for CDM projects, simplifying guidelines for “micro” projects delivering less than 5,000 tCO2e annually. These modifications include a “broader eligibility of host countries, lower requirements on the use of official development assistance (ODA), broader scope of eligible baseline methodologies, and no need for formal host country approval.”24 The standard focuses on renewable energy and energy efficiency. • Greenhouse Friendly: Launched in 2001 by the Australian Government, the Greenhouse Friendly initiative consists of a product-labeling program and an Chart 7.2.5e Voluntary Offset Projects by Location, 2006 and 2007 Source: New Carbon Finance and Ecosystems Marketplace 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Asia North America Oceania Europe Latin America Africa 2006 2007 782 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf offset-verification standard. Eligible projects must occur in Australia and demonstrate additionality. Project types include energy efficiency, waste diversion, capture and flaring of landfill gas (fugitive emissions), renewable energy, and forestry.25 As VERs move through this supply chain, they gain in value. As noted earlier, the average price of VERs has increased, which may indicate an increased demand or simply that the price of generating offsets is increasing as project developers turn from relatively inexpensive projects. Prices paid to project developers were, on average, $5 tCO2e, increasing slightly to an average of $6.60 paid to aggregators.26 The most appreciable jump in value was the price paid to retailers, an average of $11.30.27 Most retailers charge between $10 and $15 for offsets, with some discounts for bulk purchases.28 The Role of Registries Emissions registries are crucial to the functioning of any allowance or project-based emissions-trading scheme. Registries are designed to monitor and track the generation and movement of emissions allowances and credits and are a necessary first step in the development of any emissions-trading scheme. The first such registry, the Allowance Tracking System (ATS), was designed by the U.S. Environmental Protection Agency (EPA) in 1990 to register, track, and monitor conventional emissions credits (NOx and later SO2). Registries can be classified into two categories, depending on their function: • Emissions-tracking registries constitute a preliminary step in developing an emissions trading system, and they are a method by which organizations can establish and account for baseline emissions, as well as subsequent emissions reductions. Examples of this type of registry include the Canadian Greenhouse Gas Challenge and the Climate Registry in the U.S. • Credit accounting registries are more akin to the original ATS and are designed to track the movement of emissions credits or allowances. As such, they tend to underscore formalized exchanges but may track the movement of any commodity. Examples include the CCX Offset Registry and California Climate Action Registry (which in fact fulfills both roles, monitoring and establishing baseline emissions for corporations and tracking carbon credits). 7.2.6 OUTLOOK FOR THE FUTURE As countries cut their investments worldwide to deal with the global economic crisis at home, the Latin American and Caribbean region should be able to continue to develop its carbon market. Despite the recent global economic downturn, both the mandatory and voluntary carbon markets are expected to continue their robust growth. Several important considerations, however, will weigh heavily on the path that the region takes regarding the development of its carbon market including: the success of post-Kyoto climate discussions; US cap-andtrade policy development; and the maturation of the EU emissions trading scheme. For Latin America and the Caribbean, the realization of a post-Kyoto agreement could give renewed impetus to the CDM market in the region, as Annex I countries would seek to reinforce their commitment to emissions reductions and enhance their project portfolios— presuming that the CDM market will continue to exist after 2012, which most analysts predict is highly likely. Such an agreement may also lead to a similar, but alternative program to the CDM: given the criticisms of the existing CDM, a new framework may limit the extent to which large industrial projects (like most of those in China) are eligible. If this is the case, a successor mechanism to the CDM might be favorable to the LAC region and could level the playing field in terms of the amount of offsets that are feasible on a regional basis. This will be especially true if credits from avoided deforestation and reforestation are included. On the other hand, the absence of a deal in Copenhagen would also alter current trends in Latin America’s carbon markets. With Kyoto and its mechanisms limited in their usability to 2012, CDM market project implementation could instantly plateau worldwide as investors seek to move their assets into projects that they know will have continuity post-2012. In this scenario, voluntary projects in the region could become much more attractive to foreign project developers. This could give a lift to voluntary forestry projects throughout Latin America and the Caribbean. Future US climate change policy will also bear heavily upon the region. With President Barack Obama’s promise to reduce greenhouse gas emissions by 80% by 2050, a cap-and-trade scheme remains the favored mechanism for regulation, and would likely allow for the purchase of offsets internationally. In the short term, a new cap-andtrade scheme would prompt US companies to beef up their pre-compliance emissions reduction efforts in order to be as well placed as possible upon entering a scheme with emissions caps. This could increase investment in voluntary market projects throughout Latin America and the Caribbean in the short term, as setting up such projects takes less time in the voluntary market than it Blueprint for Carbon Markets | Section 7 783 would in the CDM. Given the extent of forest loss and the scope for forestry projects, the region has a lot to offer to US companies seeking to implement small-scale projects in relatively nearby locales in a short time frame. In the medium to long term, the effects of US climate change policy on the Americas depend upon whether or not the cap-and-trade scheme is treated the same way it has been in the EU ETS. It likely will be, and in such a case the CDM or a similar but improved mechanism would be utilized by US companies to meet their regulations, opening up the Americas to a slew of additional investment in new carbon projects. The strong support for emissions reduction already apparent throughout Europe will continue to open opportunities for carbon investment in the Americas. Whether or not a post-Kyoto deal is achieved, EU countries are already making ambitious emissions reduction targets, and in some cases, have set interim targets to be met. If this trend holds, EU countries will continue to invest in carbon projects throughout Latin American and the Caribbean, even in the absence of the CDM, especially if new and reliable standards for the carbon market develop over time, which is probable. Finally, Latin America could benefit greatly from the EU’s recent push to include forestry projects in the CDM market post-2012. This inclusion might represent the biggest untapped opportunity for Latin America, as 64% of the primary forest lost worldwide from 1990 to 2005 occurred in the region and the cost of implementation for these projects is relatively small. Including forestry in a postKyoto framework could be a huge boon for carbon market development in the region. All indications are that carbon markets in Latin America and the Caribbean have the potential to prosper in the medium- to long-term regardless of post-Kyoto and US cap-and-trade-scheme considerations. However, the form these markets take, the rules by which these markets operate, and the level of investment these markets attract will be affected by external policy factors. Countries in Latin America and the Caribbean that already have strong regulatory frameworks for carbon markets will be well placed to benefit from them whatever shape they take in the future. 784 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Blueprint for Carbon Markets | Section 7 785 7.3 Case Studies 7.3.1 BRAZIL Brazil was the first country to sign the United Nations Framework Convention on Climate Change (UNFCCC) in 1992 and played an integral role in the creation of the CDM. In June 1997, just six months before the negotiations on the Kyoto Protocol, the Brazilian delegation proposed the creation of a “Green Development Fund” that would support emissionsmitigation projects in developing countries. Along with U.S. negotiators, Brazil turned the scheme into one to allow countries with commitments under Kyoto to exceed their emissions quotas by supporting reduction projects in developing countries.1 The program is now known as the Clean Development Mechanism (CDM), and today Brazil ranks third in the world in terms of the number of CDM projects registered and CERs generated. With a population of 183 million and an annual gross domestic product (GDP) per capita of about $10,073, Brazil ranks as the fifth most populous country and the ninth-largest economy of the world. Regionally, it has a comparatively high level of industrialization and is the largest consumer of energy. It is also considered to be the fourth-largest emitter of greenhouse gases in the world, when taking deforestation into consideration.2 The Brazilian government has designed a number of programs and initiatives to engage a variety of stakeholders in the process of reducing greenhouse gases and mitigating climate change. Some of the programs to reduce greenhouse gases have been in place for decades. They include a diverse array of initiatives, including the Brazilian National Electricity Conservation Program (PROCEL) — established in December 1985 — and the Oil Products and Natural Gas Rational Use National Program (CONPET), which was implemented in 1991.3 More recently, several programs have been designed to take into account international trends as well as to meet domestic energy needs. After an energy crisis in 2001, for example, the government created the Program to Foster Alternative Sources of Electrical Energy (PROINFA), which introduced a new strategy for the sustainable implementation of alternative renewable energies in the Brazilian energy matrix. The program is coordinated by the Ministry of Mines and Energy and implemented by the Brazilian Electric Company (Eletrobras). The National Program for Biodiesel Production and Use (PNPB) is another example of bringing new players on board for the climate change fight. PNPB is used to extend lines of credit to family farmers; to promote technological development in the agricultural and industrial sectors, including tests in engines and components with different proportions of biodiesel/diesel 0 50 100 150 200 250 300 350 400 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 MtCO2 Chart 7.3.1a CO2 Emissions from Fossil Fuels (MtCO2), 1980–2005 Source: Energy Information Agency, 2007 786 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf mix; and also to support the creation of a national market for biodiesel. Other programs are the Motor Vehicle Air Pollution Control Program (Proconve), the National Electrical Energy Conservation Program (PROCEL), and the Amazon Deforestation Program (PRODES).4 All of these programs, taken together, help to account for the relatively clean energy matrix of the country, as well as the low levels of greenhouse gas emissions per unit of energy produced or consumed (energy intensity). Only Italy, India, and the UK, for example, have lower energy intensities among the world’s top 15 economies (see above). This comparatively green energy sector plays a key role in shaping the country’s participation in carbon markets. Many analysts and developers believe that the role of Brazil’s local governments will shape the country’s future approaches to the carbon market, with individual initiatives selectively tailored for certain regions. Selective energy-efficiency incentive programs and mandates for renewable energy usage are just a couple of examples of the type of policies that reinforce local climate change initiatives with national ones.5 Institutional Participation The Brazilian government is doing a considerable amount to support environmental initiatives as well as the CDM businesses in the country. Brazil has a very good knowledge of the carbon market and some of the strictest environmental laws in the world, which bring credibility to investors about long-term government commitment and social participation.6 The country has developed a number of the methodologies approved by the UNFCCC and its centralized energy sector allows the information to be available and organized. These institutional factors have certainly aided in the development of the carbon market in Brazil.7 In 1999, the government created the Inter-Ministerial Commission on Climate Change (CIMGC) in order to coordinate discussions on climate change issues and to integrate the discussions into government policies. CIMGC is composed of nine ministries and oversees the implementation of the CDM as the Designated National Authority (DNA) in the country. The institution is responsible for approving the project activities eligible for CDM as well as creating the definition of additional eligibility criteria beyond those rules established under the Kyoto Protocol.8 The government declared 2007 the “National Clean Development Year” as an additional means to further CDM participation. At its launch, 15 governmental bodies, financial institutions and national industries presented a protocol committing them to take action to reduce greenhouse gas emissions through the use of CDM projects. The protocol singled out the substitution of fossil fuels such as coal and petroleum as the key to reducing GHG emissions. This program created a framework for the preparation of 400 CDM project activities and also for the Chart 7.3.1b Energy Intensity of the World’s Top 15 Economies, 1980–2005 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 0 5,000 10,000 15,000 20,000 25,000 United States Japan Germany China United Kingdom France Italy Spain Canada Russia Brazil India South Korea Australia Mexico Source: Energy Information Agency, 2007 Blueprint for Carbon Markets | Section 7 787 training of technical staff in enterprises and financial institutions. A Carbon Market Observatory was also implemented in order to pursue research and analysis of the international carbon market, as well as to gather information on CDM project opportunities, including funding for project proposals.9 The Brazilian government has also struggled to ensure that its institutions function as efficiently as possible. A report in 2005 concluded that the lengthy CDM approval practice of the Brazilian Designated National Authority (DNA) was the biggest national constraint in terms of promoting additional projects in the country. Bureaucratic delays during the approval process, inordinately strict project requirements, poor communication with the applicant companies, and opacity in the decision-making process left much to be desired. Brazil ranked third in the region after Chile and Mexico and is sixth in the world in terms of the CDM investment climate index during the same year.10 At the time, it took two to six months to get a Letter of Approval from the government in order to pursue the implementation of a CDM project.11 Other Actors Brazilian Mercantile & Future Exchange and the Ministry of Development Besides providing the institutional framework and support for hosting CDM projects, financial and capital markets are also utilized as platforms to support the carbon market in the country. The Brazilian Carbon Market (MBRE), for example, was conceived as a joint program between the Brazilian Mercantile and Futures Exchange (BM&F) and the Brazilian Ministry of Development, Industry and Foreign Trade (MDIC) to develop a trading system for CERs that went along with principles of the Kyoto Protocol. Launched in September 2005, MBRE came into being with the implementation of the BM&F Carbon Facility, which acts as a host for the registration of projects validated by the Designated Operational Entities (DOEs). Those who register their CDM projects in the BM&F Carbon Facility use it as a promotional tool to attract funding or trade carbon credits. At the moment, the Mercado Brasileiro de Redução de Emissões (MBRE) has a particular system, installed in 2004, that depends on an internet database to work as a dealing desk where project operators can present their projects to prospective buyers of CO2 certificates. In a second phase, it is possible to trade with emissions certificates and options on pending projects with a capacity of 3,286 MW.12 These trading centers have allowed the country to participate actively in the carbon market in a unique way. Not only do they aim to stimulate the implementation of CDM projects and create different business opportunities in a structured and transparent manner, but they also have opened the door for investment in different sectors or in different conditions not pre-established by the Protocol and to increased leadership potential for the country. Given its huge levels of agro-production, the country’s aim in building the MBRE was to become the trading market of reference for Latin America in carbon emissions. This is because Brazil combines the presence of the carbon credits market with a significant agro-energy market. This combination contributes significantly to the economic development and to the financing of projects.13 Municipal initiatives are also enabling Brazil to be actively involved in the international carbon market. Brazil’s largest city, São Paulo, sold millions of dollars worth of carbon credits at auction in September 2007 in a deal that paved the way for other developing countries aiming to participate in the climate change cause. The Brazilian Mercantile and Futures Exchange’s (BM&F) sold $18.5 million in carbon credits held by the city government of São Paulo to Dutch-Belgian Fortis Bank for the right to emit 800,000 tons of carbon dioxide. The carbon credits were produced by the CDM-certified Bandeirantes Landfill, located at the northern edge of the city, and sold for the unexpectedly high price of $23 per ton of CO2.14 It was the first such sale to be held on a regulated stock market.15 The city of São Paulo announced that it will use the proceeds from the auction for a series of environmental improvements in the neighborhoods surrounding the landfill site.16 National Bank for Economic and Social Development (BNDES) In June 2007, Brazil’s National Development Bank (BNDES) announced the creation of the Program BNDES Desenvolvimento Limpo (Clean Development Program), launching two closed investment mutual funds to support projects that can generate certified emissions reductions (CERs). The Clean Development Program was structured by the bank’s Environmental Department in conjunction with its Capital Market Area.17 BNDES’s Clean Development Program was designed to encourage ventures that adopt clean technologies, and hence the promotion of carbon credits in the market. The program is implemented by the bank’s equity arm, BNDESPAR, and has a budget of about $104 million. The mutual funds invest in shares of companies that have CDM projects.18 BNDES approved the creation of the first investment fund, the Fundo Brasil Sustentabilidade (FSB), for $59 million in February 2008. FSB is run by an 788 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf independent investment company, Latour Capital do Brasil. The fund is exclusively for CDM projects that comply with the Kyoto Protocol. The bank will contribute as much as $236 million to FSB over its eight-year lifespan.19 The bank’s president, Luciano Coutinho, has also said that BNDES will check carbon emissions from the bank’s activities and implement “compensatory environmental projects,” such as investments in reforestation, to offset those emissions.20 The identification of greenhouse gas emissions from BNDES activities will help the institution to develop projects for offsetting these emissions. Foreign Governments In part because of the economic opportunity that Brazil represents in the region, foreign governments and their representatives have signed on as co-participants with project developers on 67% of all CDM projects in Brazil. This is one of the lower numbers in the region. The UK is by far the largest “other participant” foreign government in Brazil, participating in 60 CDM projects in the country. The Netherlands and Japan have so far taken part in 22 and 20 projects, respectively. In doing so, these governments have had to submit “a written approval [that] constitutes the authorization by a designated national authority of specific entity(ies)’ participation as project proponents in the specific CDM activity.”21 International Financial Institutions World Bank: The World Bank has supported four separate projects in Brazil through two different funds. Three projects generate CERs for the bank’s Prototype Carbon Fund: the Alta Mogiana Bagasse Cogeneration project, the Lages Wood Waste Cogeneration Facility, and the Plantar Sequestration and Biomass Use project. The Prototype Carbon Fund is a partnership among 17 companies and six governments to “pioneer the market for project-based greenhouse gas emission reductions while promoting sustainable development.” It became operational in April 2000 and has a total capitalization of $180 million.22 The final project, Restoration Around Hydro Reservoirs, is part of the bank’s BioCarbon Fund, which works to sequester and conserve carbon in forests and agroecosystems. The fund is a public-private initiative, administered by the World Bank, that delivers emissions reductions while promoting biodiversity conservation and poverty alleviation. This particular project is geared toward “the recuperation of native vegetation cover” located around four reservoirs created by hydroelectric plants in the State of São Paulo.23 For the World Bank, as well as for Brazil, the project highlights a desire to conserve and re-build the country’s diverse ecosystem. Inter-American Development Bank: The Inter-American Development Bank (IDB) has been involved in at least two projects directly linked with the voluntary carbon market. In 2006, as part of its “Carbon Neutral Initiative,” the Bank purchased 11,000 VERs from Brazilian NGO Ecologica Institute through the environmental brokerage firm CO2e (now CantorCO2e). The funds from the sale of VERs were used to finance the substitution of fossil fuels with biodiesel in Tocantins, with the biodiesel used to fuel water pumps for smallscale irrigation for small farmers. The project is to run for three years.24 Canada 2 Germany 4 Japan 20 Netherlands 22 Spain 4 Sweden 5 Switzerland 7 UK 60 Chart 7.3.1c Number of CDM Projects Involving “Other Parties” Source: UNFCCC/CDM Blueprint for Carbon Markets | Section 7 789 In August 2007, the IDB approved a $500,000 grant from its Infrastructure Fund for feasibility studies to support a program called “Portais da Cidade” in Porto Alegre. The funding is used by the city of Porto Alegre for preparation of a program that will later develop a sustainable Bus Rapid Transit (BRT) system, which will improve accessibility at the same time as reducing vehicle emissions by providing better transit infrastructure and technology. IDB resources are used to conduct technical, economic, and financial feasibility studies, including the evaluation of the potential of carbon credits from reductions of greenhouse gas emissions realized by the program.25 For the IDB, the Portais da Cidade project is a move in an increasingly popular direction. Bogotá’s BRT TransMilenio project, under the CDM, was among the most innovative in the world when it was introduced in 2006. There are still few transportation projects around the world that can generate carbon-offset credits, and they are likely to proliferate in the developing world as time goes on and the dual benefits of development and environment are obtained. CDM Market As of January 2009, Brazil has the third-largest number of CDM projects registered in the world after India and China. Its 149 projects account for about 11% of the total globally.26 Projects that seek to reduce carbon dioxide account for 67% of the country’s portfolio, with methane projects accounting for an additional 32%. Brazil’s place in the global carbon market is different from that of India or China because its energy matrix is considerably varied from those two countries. Brazil’s hydroelectric industry, for example, generates over 84% of the country’s electric energy needs, while India generates a comparatively small 15% by hydro, and China almost 17%.27 By comparison, Brazil’s main competitors, India and China, each generate over 81% of their electricity from fossil fuels. The country’s CDM potential is, therefore, relatively measured, as renewable energies produce fewer greenhouse gas emissions and therefore offer a comparatively unfavorable benchmark for CO2 savings.28 Given this, it is not surprising to see the recent relative success the two countries have had in comparison to Brazil (see Chart 7.3.1e). The southeast of the country hosts the majority of CDM projects. Taken together, the states of São Paulo, Minas Gerais, Rio Grande do Sul, and Mato Grosso — just four of Brazil’s 17 states that host projects — account for 47% of all projects countrywide. The strength of the region in the CDM is due to its resources and capacity. São Paulo is the major industrial and economic powerhouse of the Brazilian economy. With more money available for investment promotion of all sorts, the state’s Environmental Secretariat (SMA) has been promoting São Paulo as one of the best spots for CDM project development. This promotion includes proposing CDM voluntary projects in the areas of energy-intensity reduction, transport-based systemic projects like urban metro, and global widespread deployment of biofuels and other renewables within its boundaries.29 Jan 05 Mar 05 May 05 Jul 05 Sep 05 Nov 05 Jan 06 Mar 06 S Nov 04 May 06 Jul 06 ep 06 Nov 06 Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 May 08 Jul 08 0 20 40 60 80 100 120 140 160 Sep 08 Nov 08 Chart 7.3.1d Total Number of CDM Projects by Month Source: UNFCCC/CDM 790 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf The state of Minas Gerais provides another good example of local CDM promotion. Minas Gerais has developed different programs to encourage technology deployment and CDM project development, such as the PCH-MG program launched in November 2001. This program guarantees the purchase of electricity generated by small-hydro power plants at a rate equivalent to 100% of the value stipulated by the Brazilian Electricity Regulatory Agency (ANEEL). This program is limited to companies with a capacity of over 5MW specifically in Minas Gerais State.30 The active participation of municipal utility companies has also helped to determine the distribution of projects geographically. The Rio Grande do Sul State Power Utility (CGDE), for example, is investing $64.5 million in building 13 cogeneration plants, the installed capacity of which could reach 110MW. This would represent some 8% of the current installed capacity of the state.31 This type of initiative is frequently mentioned as potentially eligible for CDM projects but has not yet been completed. Unsurprisingly, the result of wealthier and more populous states in the country being able to promote CDM investment is a strong correlation countrywide between the more populated, wealthier states and the greater extent of their CDM portfolio. The poorer parts of the country, especially the north, host fewer CDM projects and, consequently, lose out on sustainable development projects relative to other parts of the country. The correlation should be a reminder to policymakers of the Chart 7.3.1e CDM Project Growth: Brazil, India and China Source: UNFCCC/CDM May 05 Jul 05 Sep 05 Nov 05 Jan 06 Mar 06 S May 06 Jul 06 ep 06 Nov 06 Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Mar 08 May 08 Jul 08 0 50 100 150 200 250 300 350 400 Brazil China India Sep 08 Nov 08 0 10% 20% 30% Alagoas Espirito Santo Mato Grosso Minas Gerais Parana Rio de Janeiro Rio Grande do Sul Santa Catarina Tocantins Population (Percent of Country Total) Number of CDM Projects (Percent of Country Total) Sao Paulo Rondonia Rio Grande do Norte Pernambuco Para Mato Grosso do Sul Goias Bahia Chart 7.3.1f Wealthier, More Populated States and Their CDM Portfolios Source: Garten Rothkopf Blueprint for Carbon Markets | Section 7 791 limitations to the CDM in reaching the poorest and most geographically isolated communities, and also to investors interested in pursuing voluntary carbon projects that generally work better in such settings. While the geographic location of CDM projects in Brazil is relatively limited, the diverse array of project types is not. Cogeneration, methane recovery, and hydroelectric projects are the most common in the country, with landfill gas also playing a prominent role. There is still ample opportunity in landfill gas generation, as about 60% of waste in the country is disposed in outdoor landfills without further treatment.32 The biggest project in terms of CERs produced in the country, in fact, the Bandeirantes Landfill Project, has generated eight million metric tCO2e annually. Of the CDM projects in Brazil, 56% are large-scale following the parameters of the Marrakesh Accords. Small-scale, community-based projects command less attention from investors, as the relative attractiveness of projects that generate large numbers of CERs redirects investment toward large-scale endeavors. The upfront expense of project development and implementation is another factor working against smaller projects. As these costs tend to be high, frequently only the biggest and most profitable projects are considered worthy of investment.33 Looking ahead, another challenge for the CDM in Brazil will be the undefined fiscal status of the projects. This could be a problem for the future development of the sector in the country, as there are no special laws regarding the fiscal treatment of CDM projects or income from emissions certificates. This issue has repeatedly come up for discussion, but nothing tangible has emerged so far. The Environmental Ministry’s legal advisor, however, said in May 2007 that Brazil has no plans to tax the proceeds generated from CDM projects.34 Experts in the sector believe that income generated from CDM projects is taxable. If so, the income generated from these projects could be put towards a national fund dedicated to the advancement of the sector, further enhancing Brazil’s leadership in the area. CDM Projects With 149 projects, Brazil’s CDM sector is the largest, and one of the most diverse, in Latin America in terms of project type. As one of the earliest producers of CERs on a large scale, Brazil has been at the forefront of the market since its inception. Though lately losing ground to India and China regarding the frequency with which it is chosen as a destination for CDM projects, Brazil still offers considerable opportunities for investors looking beyond the CDM to voluntary markets. In comparison to other countries in Latin America, it also has one of the highest percentages of large-scale projects (64%). 1. Bandeirantes Landfill Project The Bandeirantes Landfill Gas to Energy Project (BLFGE) is the largest public Kyoto project in Latin America and the largest biogas power plant in the world, and as such is a potent example of the leadership position that Brazil is capable of taking in the CDM market. From 1979 through Chart 7.3.1g CDM Projects by Sector Source: UNFCCC/CDM Biomass 6% Cogeneration 19% Hydro 21% Landfill gas 15% Methane recovery 24% Natural gas fuel switch 6% Other 7% Wind 3% 792 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf 2007, the landfill reached an area of 371 acres with a maximum depth 100 million, holding 30 million tons of waste.35 Through methane capture, the carbon credits generated from the landfill are equivalent to the sum of all other environmental projects developed in Brazil. In 2007, a public sale of the 808,450 carbon credits from the project generated almost $18 milion.36 According to the UNFCCC, about 80% of the total of carbon credits issued so far for landfill projects have been derived from the Bandeirantes Project.37 BLFGE was designed to utilize the landfill gas produced in Bandeirantes landfill. The project’s core idea is to avoid methane emissions from the landfill managed by Bandeirantes in the São Paulo municipality and to displace grid electricity, which is generated partly by fossil fuels and partly by the combustion of LFG. 1a. Implementation The project was developed by ARCADIS Logos in conjunction with Van der Wiel Stortgas BV and the Brazilian company Heleno Fonseca Constructechnica at a cost of about $30 million.38 In order to consolidate the operations side of the project, the three companies established a joint venture called BIOGAS, which is now responsible for the extraction. Unibanco, a Brazilian private bank, leases the electricity-generation equipment from Biogeracao, which owns the electricity generators and has a private agreement with Biogas on the distribution of the credits between them. The municipality of São Paulo, meanwhile, is the owner of 50% of the emissions reductions generated by the project.39 The site is located in the metropolitan region of São Paulo, a city that generates approximately 15,000 tons of waste daily.40 The estimated amount of GHG emission reductions from the project is 7.5 million tons of CO2e during the first crediting period (seven years), consisting of 7.2 million tons of CO2e from avoiding methane emissions and 300,000 tons of CO2e from electricity displacement. The result is an estimated average annual emissions reduction of 1.1 million tCO2e. 1b. Outcomes Until 2003, the landfill gas (LFG) was collected passively — that is, the LFG was vented and occasionally flared at the head of the wells for safety reasons and odor control. In December 2003, an LFG collection and treatment system was installed in order to increase the LFG collection efficiency to 80% and to use the collected LFG to generate electricity by installing 24 gas engines with a total capacity of 22MW.41 It is unique among Brazil’s LFG CDM projects in that it is gas-to-energy and does not rely solely on burning flares for the sale of CERs.42 It is also an important model for the type of project that can qualify under the CDM. As estimates for the percentage of Brazil’s population that is urban range from 60% to 80%, there is huge scope for landfill projects to qualify to generate carbon-offset credits. 2. Celulose Irani Biomass-to-Electricity Project Another unique CDM project is the Celulose Irani biomassto-electricity project, located in Vargem Bonita. It is the first pulp-and-paper CDM project ever developed. The facility generates sustainable energy for itself by using byproduct biomass from the paper-production process. 2a. Implementation A private developer, EcoSecurities, partnered with Celulose Irani to generate CERs from the operation of a new 9.43MW biomass-generation plant. The new installation succeeded in achieving a reduction in grid energy use of 33,271 MWh/yr from 2004 to 2007 and is expected to generate additional reductions of 52,035 MWh/year after 2008. Over the life of the project (2004–2025), the plant is expected to reduce emissions by 626,008 CO2e.43 Brazil’s long CDM project implementation process, hampered by a four-month wait for project approval, is an issue that must be addressed in order to enhance the success of the country’s carbon market. 2b. Outcomes Design of the project began in December 2003, and approval for project implementation was issued in the second half of 2005 — a span of more than 18 months from design to approval. The duration it takes to begin implementation of CDM projects is one of Brazil’s most pressing issues in terms of CDM. The country is one of only a few in the world that waits until the project validation process is complete before beginning the approval process. The minimum amount of time it takes to receive the Letter of Approval (LoA) after validation is complete is four months.44 Besides duration, the main barrier associated with the project was financial. The technological innovations implemented carried with them additional risk premiums that led to increased costs, especially given the capital costs of the project and high interest rates Blueprint for Carbon Markets | Section 7 793 in Brazil. The revenue generated from carbon offsets was, in this regard, a key matter for the pursuance of the project.45 Despite these hurdles, the project has been a success on several fronts so far. First, it utilizes new technology that makes it more efficient and able to use a more diverse range of biomass than Irani’s previous facilities. Doing so has meant that 120,000 tons of biomass otherwise destined for landfills are now put to better use. Irani also displaces fossilfueled grid electricity and, as such, has reduced greenhouse gas emissions while supplying the needed energy for production expansion.46 About 56% of the electricity consumed at the site is now produced on-site from two biomass units and three small-scale hydro plants.47 3. Forestry Forestry is at the center of today’s debate regarding the future of the CDM. The matter is an important one for Brazil, as it could represent a large opportunity for the country in the years to come. Whether it will pursue such an opportunity in the near term, however, is uncertain. What is certain is that deforestation is particularly serious in Brazil: Two-thirds of Brazil’s emissions of greenhouse gases and about 20% of global carbon emissions are due to deforestation. The Brazilian government currently opposes the inclusion of projects that avoid deforestation within the CDM, arguing that farmers would simply migrate to nonprotected areas and promote deforestation there. The government reiterated this opposition during the Poznan talks in December 2008, saying that the proposal would not do anything to pressure rich nations to reduce pollution. The very powerful lobby of the wood industry in Brazil also plays a role in the Brazilian government’s opinion in this regard. In addition, soya production and the expansion of biofuel exports do, to some extent, encourage deforestation.48 Despite these pressures, Brazil has taken the lead in such projects, which today account for fewer than 1% of all CDM projects. At the end of 2007, a Brazilian company, AES Tietê, secured the approval of its methodology by the Afforestation and Reforestation Working Group (A/R WG) of the UNFCCC.49 On the other hand, greenhouse gas (GHG) removal by afforestation — the process of establishing a forest — and reforestation project activities under the Kyoto Protocol’s Clean Development Mechanism (CDM) are vulnerable to a variety of risks and uncertainties.50 Conclusively solving these uncertainties would be a necessary step before going ahead to include such projects within the framework of any post-Kyoto agreement. If they are not included, such forestry projects are likely to continue to be pursued in the voluntary sector. To tackle the Amazonian deforestation problem on its own, Brazil announced in 2008 the launch of a new international investment fund to be managed by BNDES. The goal is to raise $20 billion by 2021 from international governments and businesses in order to invest in projects that promote alternatives to deforestation for Amazonian communities and also to protect nature reserves. Environmentalists said the creation of the fund marked the first time that the Brazilian government has explicitly linked deforestation with climate change. The Voluntary Market Brazil’s vast and diverse geography have allowed it to play an important role in the international voluntary carbon market, serving as the source of VERs for companies and individuals seeking to offset their carbon emissions. The active role in the voluntary market includes, for example, participation in the Chicago Climate Exchange (CCX). Several Brazilian companies are currently listed as members on the exchange, including Rhodia Energy Brasil Ltda, Aracruz Celulose S.A., Cenibra Nipo Brasileira S.A., Suzano Papel E Celulose S.A., and Companhia de Gas de São Paulo (COMGAS). As members of CCX, these companies have made legally binding emissions-reduction commitments. Non-Brazillian companies, such as Yahoo!, Marriott, and the Royal Bank of Scotland, are employing the use of carbon-offset projects in Brazil in order to reduce their own carbon footprints. Meanwhile, the scale of deforestation in Brazil has brought international attention to its cause, as companies have sought to protect the forest from logging and mining companies. Recently a number of companies with environmental commitments have begun to focus on saving the Amazon as a means of protecting ecological diversity at the same time as helping to mitigate atmospheric emissions. These projects include deforestation, afforestation, and conservation. It is easier for afforestation and reforestation projects to go through the voluntary market because rules written into the CDM are very restrictive in terms of project approval — only four such projects have been approved worldwide. The participation also includes the joint development of particular methodologies to measure and assess the success of specific projects in reducing emissions or carbon sequestering. That is the case of methodologies that are developed to be used on industrial forestry, which puts more emphasis on financial considerations when assessing projects. 794 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Among the different alternatives that have been proposed and implemented, the Reducing Emissions from Deforestation and Forest Degradation program (REDD) is one of the best structured. Under this program, forest carbon can be monetized, and emissions reductions traded, creating competing economic value for standing forests. REDD credits, according to the proposal, are additional in that they are scaled to the quantity of emissions prevented that otherwise would have been emitted into the atmosphere and are permanent. All emissions reductions from reduced deforestation will be expected to be permanent by UNFCCC standards (60 years) and will also be measurable in that all reductions in deforestation will be measured against rates of deforestation over an historical reference period with negotiated country-by-country adjustments.51 Brazil is a prime candidate for a REDD program, not only because it contains more carbon in tropical forest trees than any other country world, with approximately 47 billion tons in 3.3 million square kilometers of forest in the Amazon alone, but also because of its groundbreaking successes in reducing and monitoring deforestation and forest degradation in the Amazon region, where most of its emissions occur (~70%). For example, an ambitious federal government program to reduce Amazon deforestation succeeded in cutting rates in half from 2004 to 2006, (aided by the plummeting prices of soya and beef). More recently, the “National Pact for Valuing the Amazon forest and Ending Deforestation” — with political support from the federal government, four Amazon state governors, the environmental NGO community, and segments of the private sector — has proposed a seven-year target to reduce deforestation to zero. The Brazilian Congress has also developed legislation proposals that would establish national deforestation emissions-reduction targets.52 1. Juma Sustainable Development Reserve Marriott International, the U.S.’s largest hotel chain, recently signed a deal with the state of Amazonas to have the company launch a carbon-offset program for its guests and invest in a fund aimed at securing 1.4 million acres of Brazilian rainforest in the Aripuanã River basin at the Juma Sustainable Development Reserve. Marriott has invested $2 million in the fund in order to prevent deforestation in the region.53 By doing so, the hotel chain will offset carbon emissions associated with guest stays by the end of 2008.54 The project is the result of a process that started in the beginning of 2007, when Marriott established an executive-led green committee to determine what green opportunities existed for the company and how it could lessen its environmental impact. The chain hired Conservation International to determine the extent of its carbon footprint and also to determine the best way to go about offsetting it.55 The state of Amazonas then recommended the Juma reserve to Marriott.56 The recommendation came with the recognition that the area, particularly high in biodiversity, was critically threatened by logging, gold mining, and deforestation.57 Chart 7.3.1h Deforestation in Brazil (sq. mi.), 1988–2007 Source: Mongabay 0 2,000 4,000 6,000 8,000 10,000 12,000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Square Miles Blueprint for Carbon Markets | Section 7 795 It is believed that the public-private partnership is one of the first in the world to reduce greenhouse gas emissions from deforestation. Under the agreement, the joint effort will create a new Amazonas Sustainable Development Foundation, which will monitor and enforce protection of the reserve along with the state government of Amazonas. The project is estimated to support employment, education, and healthcare for 400 to 500 residents, all of which will be funded by the sale of carbon credits.58 The project is seeking certification under Climate, Community, and Biodiversity (CCB) Standards59 and is expected to be certified by an independent third partner by the end of 2008.60 2. Primavera Hydropower Project Yahoo! recently chose the Primavera Hydropower Project, in the town of Catorce de Abril, 1,400 miles northwest of São Paulo, to meet half of the 250,000 tons of carbon dioxide that the company is hoping to offset.61 The Primavera hydropower project is a small, run-of-river dam in Rondonia state that generates carbon-reduction credits from thirdparty provider Ecosecurities. Yahoo! also worked with CantorCO2e, a global environmental credit and renewable energy brokerage firm. Both Ecosecurities and CantorCO2e helped Yahoo! source, vet, and execute these projects. As the school at the village of Catorce de Abril was previously powered by diesel gas, the new hydroelectric power is a cleaner alternative that can generate carbon credits.62 In return for generating offsets, Yahoo! is connecting the community near the hydroelectric project to the Internet and providing a nearby school with computers.63 Market Considerations The CDM market is the most appropriate mechanism for developing Brazil’s carbon market. The size of the country’s economy and the scope and diversity of its needs necessitate larger carbon projects, whether in renewable energy or other sectors. This is evidenced by the fact that large-scale projects today account for 64% of the country’s total CDM portfolio. This emphasis on largescale carbon projects works to generate greater investor interest, as the country can provide investors with larger returns on their investments. The great potential for additional renewable energy projects in Brazil also points towards the appropriateness of the CDM to drive carbon market development: as the size and high upfront costs associated with these projects require greater assessment Source: UNEP RISO Center 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 India China Brazil Mexico Chart 7.3.1i CDM Projects in the Pipeline: India, China, Brazil, and Mexico 796 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf of risk, the CDM market is better suited to assuage investor concerns given that offsets can be verified with greater certainty than on the voluntary market. Enhancing the voluntary market in Brazil, however, should also be a priority given that avoided deforestation and forest degradation are not part of the Kyoto Protocol and there is ample opportunity for forestry projects throughout the country. The voluntary market could also be utilized for renewable energy project development, especially small hydro and biomass projects in remote areas of the country. Given these considerations, Brazil should pursue a dual track approach regarding its carbon markets, whereby the country should seek to enhance its voluntary carbon market sectors even as it augments its CDM market efforts. Doing so will ensure that the country does not lose out on the myriad types of projects that can be implemented throughout Brazil. Conclusion The level at which Brazil continues to participate in the carbon market will increase in the coming years. It has the resources and the institutional framework to keep participating as a significant player in the path toward carbon market maturity. Brazil has a host of favorable conditions for the CDM sector. The country has a good environment for local and foreign investors, consultants, project validators, and verifiers; it utilizes a wellestablished financial platform from which it can trade in carbon credits; and, as the income from CDM projects is not taxed, and most projects are profitable, Brazil has a reputation to live up to regarding its past CDM successes. Perhaps its biggest drawback, however, is the comparatively small scope for CO2 reductions that exist in the power sector. As there is very little that can be done about this, Brazil will have to rely on institutional and economic advantages in order to continue attracting investment in this sector. The country, moving forward, also faces several obstacles that will challenge its ability to enhance its carbon portfolio to the greatest extent possible: • CDM project competition with India and China • Comparatively small scope for CO2 emissions reductions in the power sector • Opacity of special laws stipulating the fiscal treatment of CDM CDM project competition with India and China Of these, the increasing attractiveness of India and China over the past few years is perhaps the most visible. As project developers and investors have realized that greater financial and emissions reduction gains can be made from investing in these two countries, fewer have invested in Brazil (and Mexico). In fact, the CDM pipeline over the past few years clearly shows that projects in the four largest CDM markets — Brazil, China, India, and Mexico — are moving from Brazil and Mexico to India Chart 7.3.1j CO2 Output (tCO2): U.S., China, India, and Brazil Source: Energy Information Administration 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Brazil China India US 2001 2002 2003 2004 2005 Blueprint for Carbon Markets | Section 7 797 and China. This shift in CDM projects in the larger countries largely mirrors a shift from CDM project development from Latin America to Asia. While CDM development is not a zero-sum game, it would appear that Chinese and Indian success has come at least in part to the detriment of Brazil. To some extent, Brazil simply cannot compete with India and China on the CDM market. The country’s natural resources, however, should enable it to continue to play one of the biggest and brightest roles on the voluntary market, as it already does in the CDM market, particularly because of the Amazon, which can and should play a large role in generating carbon credits. In this regard, the government should work with project developers to create projects that help sustain themselves financially by generating carbon offsets that are saleable on the international market. Doing so will not only help the government protect one of its greatest resources, but will also help it to do so in such a way that includes sustainable development. Comparatively small scope for CO2 emissions reductions in the power sector Brazil’s inability to compete at the same level with India and China is partly the result of its relatively small scope for CO2 reductions in the power sector. This lack is due to the country’s relatively green energy matrix. As mentioned earlier, the country meets 84% of its electric energy needs through hydroelectric power. The consequence of this cleaner power matrix in the context of the CDM is that there are, strictly speaking, fewer emissions reductions to be had. While China’s CO2 emissions increased 266% between 1980 and 2005, and India’s increased over 300% during the same period, Brazil’s comparatively clean energy matrix led the country’s CO2 levels to rise by just 95% (see below).64 These numbers are even starker when one considers that as much as two-thirds of Brazil’s greenhouse gas emissions come from deforestation and not industrialization.65 Opacity of special laws stipulating the fiscal treatment of CDM Another challenge for the CDM in Brazil will be the undefined fiscal status of these projects. This could be a problem for the future development of the sector in the country, as there are no special laws regarding the fiscal treatment of CDM projects or income from emissions certificates. This issue has repeatedly come up for discussion, but nothing tangible has emerged so far. The Environmental Ministry’s legal advisor, however, has said that Brazil has no plans to tax the proceeds generated from CDM projects.66 Experts in the sector believe that income generated from CDM projects is taxable. The issue will remain important. If the revenue generated by CDM projects is not taxed, the Brazilian government will miss out on an important potential means of funding for additional CDM promotion. On the other hand, taxable CDM revenue might make undertaking such projects less attractive to project developers. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 0 10 20 30 40 50 60 70 MtCO2 Chart 7.3.2a CO2 Emissions from Fossil Fuels, 1980–2005 Source: Energy Information Administration 798 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Brazil has obstacles to overcome if it is to be the leader in the world’s carbon market. The country already does more institutionally than others in Latin America to foment growth in this sector. But in order to be a global leader, it will have to set clear goals defining what type of leadership it wants to demonstrate on the international carbon market. Once it does that, it should have the institutional strength and commitment to pursue those goals without looking back. 7.3.2 CHILE Chile is characterized by its political and social stability as well as for being an upholder of competitive markets in Latin America. For the past two decades, the country has engaged in building its own network of international support and bilateral trade agreements, which give it privileged access to diverse markets all over the world. In addition, Chile has increasingly assumed regional leadership roles consistent with its status as a stable and democratic nation. Energy is one of the sectors in which Chile stands out, in terms of its institutional structure, policy development, and industry performance. The Chilean electricity sector has served as a model for diverse market reform across Latin America. At the moment, it is in private hands, with the government present only in a regulatory, monitoring, and planning capacity. The market is partly regulated and partly free. Consumers with a connected capacity of up to 2,000 Kw are part of the regulated market. Those with an electricity demand above that figure, or with other non-standard requirements, are free to negotiate their own contracts and account for about 55% of total electricity sales.1 The level of openness and international integration that exists in Chile is best exemplified by agreements that have been made in the country’s power sector. Natural gas supply agreements made with Argentina are of particular interest. Investments in gas pipelines and contracts were backed by the governments of both countries, and this created a boom in the electricity sector. Today, Chile imports 100% of its natural gas (20 million cubic meters per day) from Argentina, paying around $2 per million BTU. Private companies have invested in new power plants, and the regulating authority has overseen the price-fixing process for power-generating companies and proposed non-binding investment plans. Chile’s energy industry, however, took a hard hit at the end of 2004, when natural gas dispatches from Argentina were suddenly restricted. The natural gas industry was seriously affected, but there was also a serious impact on electricity-generating companies that used gas on a daily basis. It was clear that the power-grid system was getting dangerously close to a point where rationing would have to be considered, so back-up diesel systems have been implemented. As the situation could have evolved into an event with dramatic social and political ramifications, the government instigated a long-term plan to reconfigure the sector around energy diversification and independence.2 Energy supply constraints, therefore — together with high levels of outdoor pollution — have forced Chilean policy makers to consider energy policy as an area of key concern. Lack of investment owing to a flawed set of reforms from 1999 through 2004, as well as Argentina’s failure to honor contracted gas sales to Chile, has led the electricity balance to its limit. In response, the government has launched emergency measures geared to reduce electricity demand and prevent the introduction of a rigid electricity-rationing system that would have considerable economic costs. In 2008, for example, the end of the summertime hours was delayed by three weeks until the end of March, and all public-sector institutions were required to lower their electricity consumption by at least 5%. The private sector was invited to implement its own energy-saving plans, an appeal that encountered a strong response.3 In order to complement those policies, the government has implemented a set of strategies aimed at encouraging the modification of the country’s energy matrix. Among these, President Bachelet has designed a program to guarantee that 15% of incremental generation capacity up to 2010 comes from renewable sources. This plan reinforces Chile’s Programa Pais de Eficiencia Energetica (PPEE), which aims to encourage the usage of all energyefficiency capacity of the country among companies and citizens in general. Climate change mitigation and adaptation also have played a role in Chile’s policy framework. The country created the Country Program on Energy Efficiency (PPEE) in 2005 to enhance public awareness of the importance of energy efficiency for Chile’s development, and also to encourage energy efficiency at different levels and promote a cultural change toward energy usage. The starting points of the program are the economic and technical evaluations made for different sectors — transportation, industry, commerce, mining, housing and construction, and utilities — meant to encompass the interest of diverse stakeholders for regulation, promotion, and education.4 The government is also involved in designing financial instruments to fund projects within the country, such as special funds or loans from entities such as CORFO or Blueprint for Carbon Markets | Section 7 799 international allies. Furthermore, it publishes the CDM guidelines for the country and provides the institutional support of both the energy and the environmental commissions. These actions, along with policy reforms and the country’s economic performance in the last few decades, have helped Chile to succeed in being recognized as a leader host country and a very attractive destination for carbon-offset investors. From an investor’s perspective, Chile’s advantages, compared to other non-annex I countries — for example, economic and political indicators as well as its regulatory stability — put it in good stead among a diverse crowd jockeying for CDM projects.5 Economic and political stability have enabled Chile to be the only country in Latin America to be considered as having a “very good” climate for CDM project investors. This estimation, developed by DEG in 2004, calculated an index value for each of 149 countries that provided valuable information on the prevailing framework conditions for CDM projects. The last report was made public in April 2008, with Chile ranked first in the category of “Very Good CDM Investment Climate” along with South Korea. “The Chilean open economy is definitely an advantage,” the report states. “Chile is a little country that has lots of projects in the pipeline and is attractive for investors, and that is why most of the international companies have offices here.”6 Moreover, Chile is also building leadership toward the environmental service sector, including equipment and supplies, solid waste management, water treatment, consulting and engineering and industrial and emergency services. The growing demand for improved environmental management systems is expected to drive 7% to 10% of the growth in the global market.7 According to ProChile, the Chilean Trade Commission, these services are designed to meet the pollutionabatement and -prevention needs of industries under environmental management systems standards and include waste disposal, water, land- and air-pollution prevention and cleanup, and implementation of cleaner production and ISO standards.8 Chile is undergoing environmental policy reform. In the past two years, the government has created the Ministry of Environment and the Ministry of Energy, each aimed at giving institutional support to the national environmental commission and other entities. “Agenda CC,” for example, is being designed to complement the existing programs to tackle climate change in the country. Institutional Participation Chile’s Designated National Authority under the CDM is the National Commission on the Environment (CONAMA). Together with the Energy Commission, as well as other ministries and the Chilean State Economic Development Agency (CORFO), CONAMA has created a strategy to promote those sectors where CDM projects need to be developed while at the same time providing assistance and support to stakeholders.9 The support includes recommending specific technologies or procedures for potential CDM projects, like improvements in the combustion process in boilers or ovens, in vapor transportation, and in heat usage as well as the fuel switch to natural gas in industrial and mining installations.10 Canada 4 Germany 1 Japan 9 Netherlands 5 Spain 1 UK 8 France 2 Sweden 1 Chart 7.3.2b Number of CDM Projects Involving “Other Parties” Source: UNFCC/CDM 800 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf These strategies include bilateral agreements, with countries like Japan and Canada, not only to arrange technology-transfer agreements but also to prearrange CER’s trading contracts; the creation and implementation of CDM Promotion Entities within Chile; and the designing of a financing program to fund initiatives to be presented as CDM projects, and therefore to improve market conditions and to satisfy at the same timespecific productive-sector demands. Several stakeholders, however, still think the role of local authorities needs to be improved. Chile’s DNA, though related to the local environmental authority, requires that project developers ask separately for a Letter of Approval (LoA) to add new information even though the projects have already completed their Environmental Impact Assessment (EIA). Meanwhile, all LoAs are related to specific PDDs, not to projects. As such, any changes in the PDD require new LoAs, making the processes timeconsuming and driving up transaction costs.11 On the other hand, the Bachelet government is seriously committed to diversifying the country’s energy matrix, including a mandate that 15% of the new energy capacity of the country must come from renewable energy sources. Furthermore, innovative fields such as green buildings and energy-efficient construction are being encouraged by the state. Looking ahead, this strong government support for renewable energy projects will not only help to bring about sustainable development goals, but will also help to enhance carbon market development in the country. Other Actors Foreign Governments Eighteen of Chile’s 27 CDM projects include the support of foreign governments. Japan and the UK have supported the largest number of projects, with nine and eight, respectively. Other countries involved in CDM projects in Chile are Canada, Germany, the Netherlands, Spain and Sweden. Among the projects that Japan has undertaken in Chile is the Lepanto Landfill Gas Management Project, which seeks to develop works and equipment to capture and destroy the methane produced by the Lepanto Landfill using a controlled flaring system. In order to develop the project, developer Vertedero Lepanto Limitada incorporated a company called Aconcagua S.A. in conjunction with the Japanese company Mitsui & Co. Ltd. The new company created a series of biogas extraction wells and a biogas conveyance system so that it could properly capture and destroy the methane produced.12 International Financial Institutions World Bank: The World Bank Carbon Finance Unit has pursued two projects in Chile — the Chacabuquito Small Hydro project and the Pullihue Composting Project — through its Prototype and Spanish Carbon Funds. The Chacabuquito Small Hydro project is a 26 MW runof-river hydroelectric plant located about 60 miles northeast of Santiago. The project was developed by the AWMS 3% Biomass 13% Cogeneration 3% Fuel switching 3% Hydroelectric 31% Landfill gas 31% Methane capture 13% N2O 3% Chart 7.3.2c Registered CDM Projects by Type Source: UNFCC/CDM Blueprint for Carbon Markets | Section 7 801 power company Hidroelectrica Guardia Vieja S.A. at a cost of $37 million, and received $3.5 million from the Prototype Carbon Fund (PCF) for implementation. Chacabuquito is connected to a regional sub-system within a central system that accounts for about 75% of Chile’s power. The project will generate power for industrial and residential consumers in the region and will help to displace the coal that provides 25% of the region’s power. It was the first PCF project to become operational. It began generating electricity in July 2002, and by June 2003 German firm TÜV Süddeutschland verified the first emissions reductions from the project. To date, Mitsubishi Corporation has contracted for the purchase of 100,000 tons of greenhouse gas emissions reductions resulting from the project.13 This type of project is not only a great example of how renewable energy sources can be used to generate grid electricity, but also of how such sources can be further utilized to displace electricity produced by relatively dirty, greenhouse gas–laden coal. Inter-American Development Bank: In 2007, the IADB began a country-wide identification process to determine the country’s implementation of already existing CDM methodologies and to build institutional capacity for Chile’s Programa Pais de Eficiencia Energetica (PPEE). The Bank is also helping to work through the design of other methodologies for the development of CDM projects, which will be sent to the UNFCCC for approval when complete.14 CDM Market Chile is ranked sixth in the world, behind India, China, Brazil, Mexico, and Malaysia, in terms of the number of CDM project activities, with a total of 27. It ranks sixth in the world in terms of average annual reductions, accountable for a reduction of 4,336,652 tons of CO2e annually.15 Moreover, Chile is proactively using its knowhow to innovate in terms of project development. Three of 23 UNFCCC approved large-scale methodologies for CDM activities are based on Chilean projects. The country has three additional methodologies under consideration.16 The areas most heavily utilized by project participants and investors are the energy- and waste-management industries. In the energy sector, Chile’s CDM portfolio consists of nine hydroelectric projects and four biomass power plants, which together account for 48% of the projects developed. The number of renewable energy projects will increase in the future given government mandates that 15% of new energy resources are met by renewable sources. Waste-management and disposalsector projects, mostly landfills, account for about 37% of the projects. At the same time, among the portfolio of potential projects and projects in the process of registration, the National Environmental Commission has deemed 44 projects as being eligible for registration at the moment. From the total, 27% of them are landfill projects, followed in number by agricultural projects that account for a 20% of the total. The opportunity for different sectors that have been exhibiting great potential for new carbon-emission reduction includes mining, transportation, landfill gas capture, and geothermal and wind energy production. A starting point for the identification of promising areas for CDM projects is the contribution of greenhouse gas emissions of the various sub-sectors. Electricity generation, for example, is the second-largest source of greenhouse gases in Chile. Important future mitigation measures will include the replacement of power plants, energy-efficiency improvements in coal-fired and hydropower plants, and the expansion of cogeneration and the use of renewable energy sources.18 Projects are supported from the early stages by different programs like the one designed by the Chilean Economic Development Agency (CORFO) that works as a contest aimed at improving market conditions, reducing transaction costs, and encouraging project development by giving guidance and funding the best small projects proposed.19 With this type of program, CORFO intends to support enterprises and entrepreneurs while supporting the usage of renewable energy in the country and contributing to climate change mitigation and the improvement of Chile’s energy matrix.20 Three annual contests (2005, 2006, 2007) have gathered more than 120 projects, with a potential of almost 800 MW. The total investment is calculated to be $1.2 billion. Of the total number of projects approved in this program in the first two years, 44% were hydroelectric projects, 36% were wind, and 19% wereiomass projects.21 Table 7.3.2a Portfolio of CDM Projects in the Pipeline17 TYPE Projects Agriculture 9 Hydroelectric 8 Cogeneration - Biomass 7 Fuel Switching 1 Cogeneration (Natural Gas) 1 Wind power 1 Forestation 1 N2O 1 Water networks 2 Waste Compost 1 TOTAL 44 Source: Programa de Energía y MDL, CORFO, Nov. 2007 802 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Geographically, Chile is divided from north to south into fifteen different regions, with Santiago and Biobio accounting for the majority of CDM projects, or about 52%. These two regions, along with the Valparaiso and O’Higgins, host 74% of all CDM-registered projects in the country. 1. La Higuera Hydroelectric Project Two of the biggest projects developed in Chile in terms of CERs produced are La Higuera Hydroelectric Project and Loma Los Colorados Landfill Gas Project. La Higuera, approved in March 2005 and begun in 2006, uses the hydrological resources of the Tinguiririca and Azufre Rivers in a run-of-river scheme in order to generate zero-emission energy to the Chilean Central electricity grid (SIC). The project will generate certified emission reductions (CERs) by displacing electricity generation from grid-connected fossil fuel–fired power plants that would otherwise be generating electricity, and it will contribute to the social welfare in a region where local employment opportunities and infrastructure are poor.22 1a. Implementation La Higuera Hydroelectric Project was developed as a result of a joint venture between Pacific Hydro Limited (PHL), through its subsidiary Pacific Hydro Chile S.A (PHC), and Statkraft Norfund Power Invest (SNPI). 1b. Outcomes In total, the project is estimated to reduce emissions of greenhouse gases by over 3.3 MtCO2e over a period of seven years. The project was one of the first in the country to become registered within the CDM framework. The project was made financially feasible due to the prospects of earning carbon credits within the CDM framework. A number of factors seem to have influenced what the project developers perceived as a smooth and effective host country approval process. First, the hydroelectric plant is an important investment and a strategic project, considering Chile’s dependency on imported natural gas from Argentina. In line with the view of the CDM as a nontraditional export commodity, large foreign investors, such as Pacific Hydro, are considered important assets for the economic development of Chile. Second, the project is located in an area where harmful environmental impact can be minimized due to the region’s limited biodiversity and sparse population.23 2. Loma Los Colorados Landfill Gas Project The second-largest project registered in terms of CER’s produced is the Loma Los Colorados Landfill Gas Project. The project is located at the biggest landfill in Chile, a Chart 7.3.2d CDM Projects vs. CERs by State (%) 0% 5% 10% 15% 20% 25% 30% 35% 40% Antofagasta Atacama Biobio Coquimbo Magallanes Maule O’Higgins Santiago Valparaiso Percent of CDM Projects Percent of CERs Los Lagos Source: UNFCC/CDM Blueprint for Carbon Markets | Section 7 803 municipal solid waste (MSW) landfill located in the community of Til-Til, about 65 kilometers north of Santiago, Chile, near a village named Montenegro. The landfill covers almost 500 acres.24 2a. Implementation The site operations are managed by KDM, which had installed a different biogas capture facility in Chile in 1998. Using that facility as a basis for the design of future projects, Loma Los Colorados is now among the most modern of landfill operations in Chile.25 There are 79 landfill gas wells installed over an area of 120 acres, of which 12 are connected to a flaring station. The rest vent landfill gas to the atmosphere. In May 2003, construction of railway access was completed, and operation of a train was initiated to transport MSW to the landfill from the transfer station located in the community of Quilicura, Santiago. It is reported that more than 90 percent of the MSW deposited at the landfill is delivered by rail.26 2b. Outcomes The project faced both technological and prevailing practice barriers. In terms of technology, Loma Los Colorados lacked the properly trained labor to operate and maintain the technology utilized by the landfill gas project, and Chile has no institution to provide the needed skill. The project also faced a lack of infrastructure in the region in which it was implemented. Regarding prevailing practice, there were no similar projects operational in Chile when Loma was implemented. As a result, Loma was considered to be groundbreaking in scope. Voluntary Market Chile has a number of small projects that do not qualify by CDM standards, but present opportunities for investors who want to purchase offsets from the voluntary market. The political and economic stability also has allowed Chile to host a variety of agents who work in the voluntary market, from investors to independent brokers, who see the country as the ideal candidate for hosting small offset projects aimed at fulfilling the needs of investors involved in the non-regulatory carbon market. Visión de Valores S.A. – Comisionista de Bolsa, for example, together with OPTIM Consult, have worked with the Chilean company Tres Marias in the approval of the first voluntary Chilean forestry project registered by the Chicago Climate Exchange. Bosques Cautín S.A will be able to sell the offsets in the U.S. market from reductions made between 2003 and 2007 and also those to be made in the future.27 It is hoped that this project will set a precedent for forest carbon offset projects.28 1. El Rincón Hydroelectric Plant El Rincón is a small hydroelectric project, close to Santiago, that makes use of the natural energy in the flow of the rivers. It does not use dams to store water in reservoirs. It is owned by the Canal Maipo Association, which, due to the size of the project, decided that the CDM certification process would be a difficult one to undertake. It therefore chose to participate in the voluntary market instead.29 The consideration is a common one throughout Latin America, as smaller projects tend to have a more difficult time achieving CDM certification. El Rincón, though, demonstrates the sustainable development benefits that can be achieved through the voluntary carbon market as well. 2. Mapuche Reforestation in Chile One particularly interesting project that could qualify for voluntary carbon offsets in Chile, but does not, is the Mapuche Reforestation Project, located in Los Sauces commune, about 370 miles south of Santiago. The project is operated by the French Office National des Forêts (ONF) — which specializes in natural resource management — and supported by Action Carbone, a non-profit that is a joint project of France’s Agency for the Environment and Energy Management (ADEME) and GoodPlanet, another non-profit dedicated to the promotion of sustainable development.30 Begun in July 2006, the objective of the project is the reforestation of 200 hectares (about 500 acres) of degraded pasture lands, which are situated on small properties owned by local Mapuches.31 The reforestation is expected to sequester 60,000 tons of CO2 over 30 years, and in addition to capturing greenhouse gases, it strives to improve the environmental and living conditions of the local population.32 So far, the project has cost just over $30,000 to implement.33 As 82% of the Mapuche population lives below the poverty line, and natural resource disappearance and lack of water are recurring problems, the establishment of plantations on small Mapuche properties aims to solve two main problems: lack of economic opportunity in the region and high soil erosion and degradation due to the absence of vegetable cover and poor agricultural management. The establishment of these plantations aims to lead to better control of river water flow in order to prevent rivers from draining, while at the same time creating jobs for small plantation owners. It is estimated that the project will increase household revenues by about 30% in addition to providing training on forestry and commercial practices.34 804 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Market Consideration The Chilean government’s recent mandate that 15% of all new energy resources be met by renewable energy and the fact that the country is so highly urbanized indicate that the CDM market is the more appropriate market to pursue for carbon development. These two considerations reinforce each other. Given that 13 million of the country’s 16 million people live in Santiago and its environs, and that energy demand increases will primarily occur in these urban regions, the 15% renewable mandate will mean greater renewable energy project implementation in Santiago and the nearby provinces. These large renewable energy projects are best suited for the CDM market, as they often have high upfront costs and require certainty of project completion for would-be investors. While the voluntary carbon market can play a role in bringing projects to less populated and remote regions, the CDM market will be the most effective means by which to expand the country’s carbon market development. Conclusion The creation of the Ministry of Energy as an independent entity in 2008 is a clear indication that Chile’s government recognizes the importance of energy regulation. A new legislative initiative to promote the usage of renewable, non-conventional sources of energy in order to change the energy matrix even further is another sign that Chile is looking to diversity its energy matrix. The new law requires all energy companies to certify that 10% of the energy that they commercialize annually comes from renewable sources. There are many strengths working in Chile’s favor, perhaps the most important of which are the strong and sustained macroeconomic indicators that help to create a favorable climate for investment. Above-average development for the region is also attractive for investors, who are assured that infrastructural concerns are less pronounced in Chile as compared to other countries in the region. CORFO’s program of contests to find the most complete and viable small CDM projects is an innovative way to promote use of the CDM while also ensuring that the best projects succeed and that small projects do not get left completely behind. This vetting process is perhaps one reason why Chile has had just one project rejected by the CDM Executive Board. Despite these strengths, however, Chile could do even more to ensure that its carbon market functions to the best of its ability. Among the issues that need to be addressed in order for this to take place are: • A relative lack of voluntary projects that could qualify for carbon offsets • Often convoluted institutional procedures A relative lack of voluntary projects that could qualify for carbon offsets: Despite the strong support that the CDM gets in the country — and perhaps due to it — the voluntary carbon market is overlooked in Chile. This is especially disconcerting considering that the country’s development agency, CORFO, already has a process in place that is geared toward finding the best small projects to pursue in the CDM sector. With such a setup already extant, it should be relatively easy to harness small projects that are not pursued by CORFO and transfer them, somehow, into Chile’s voluntary market. As the supply of potential project developers exists, the issue will be taking the next step to find the investor demand to meet that supply. Thoroughly pursuing ways to connect project developers with project investors in the voluntary market would be a useful way for Chile to realize sustainable development and environmental goals in places where the CDM is currently not active. Only seven of the country’s 15 regions host CDM projects, so the voluntary market could be an integral way to ensure that small projects find hosts in relatively rural areas that likely need investment the most. Often convoluted institutional procedures CONAMA, Chile’s Designated National Authority (DNA), requires project developers to ask for a separate LoA or any new information that is added along the way during the course of project design and implementation. But because LoAs are related to specific Project Design Documents (PDDs) and not individual projects, any change made to a PDD requires a new LoA. This makes the project-approval process much more time-consuming and drives up transaction costs for all involved. Streamlining this process could clear up any bottlenecks that may build up. As there are today 27 projects registered in Chile and many more in the pipeline, avoiding such a bottleneck will be important to ensure that the country realizes its potential on this front. Looking ahead, it is clear that Chile has already accomplished a good deal regarding its CDM market. It is among the leaders in the region in terms of promotion and project registration, and it still has the potential for further Blueprint for Carbon Markets | Section 7 805 success. Realizing that potential should not be terribly difficult for Chile, which is already an attractive investment opportunity for many. Doing so, however, will require that it better utilize the institutions it has in place in order to harness the capacity of the voluntary carbon market, and also reform procedures in its DNA to lower transaction costs for project developers. 7.3.3 COLOMBIA Colombia has undertaken several activities to address the issue of climate change, even though its share of global greenhouse gas emissions is only about 0.3%. Since the ratification of the Kyoto Protocol in 2000, the country has pursued different strategies to become actively involved in environmental policy. The Ministry of Environment, Housing and Territorial Development, for example, has designed a complete framework strategy aimed at strengthening its institutional capacity in order to develop a portfolio of facilities to be presented as CDM projects, and to support and uphold the development of these projects.1 The country is the second most populated on the continent and the only one in South America that has significant coast lines on both the Atlantic and Pacific Ocean, as well as two major extensions of the Andean mountain chain that cut through its southern region. Colombia represents only 0.8% of the world’s surface area yet houses 15% of all known terrestrial species. By various measures, the country is among the world’s five most ecologically diverse countries in the world and possesses two of the world’s most important areas in terms of biodiversity: the biogeographical Chocó corridor and the Amazon Basin.2 The high mountains, deep fertile valleys, and rich coastal plains have had an impact on the socioeconomic development of the country. Colombia is energy self-sufficient. The electrical grid is principally supported by medium-sized hydro-power plants. It is extensive in the populated areas, while small to medium-sized rural towns are powered by small, standalone hydroelectric systems or oil-fired plants. The country also produces sufficient oil to meet its own needs. Energy demand is projected to outstrip production by 2010, however, so Colombia’s energy portfolio today reflects the proposal of the government to integrate the energy sector into the policymaking process in order to improve the energy matrix.3 Two fundamental goals are to support nonconventional energy and also its rational utilization.4 Both goals are integral parts of the country’s drive towards further development in the carbon market, as an increase in renewable energy projects and energy efficiency efforts can both be utilized to generate offsets. Institutional Responsibility The Colombian Climate Change Mitigation Office (OCMCC) was created as a division of the Ministry of Environment, Housing and Territorial Development to foster and support the process of CDM project Chart 7.3.3a CO2 Emissions from Fossil Fuels, 1980–2005 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 0 10 20 30 40 50 60 70 Source: Energy Information Administration 806 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf implementation following the rules of the National Development Plan (PND). The PND is a four-year strategy that includes the budgetary and political goals to form a cohesive agenda taking into account all institutions of the executive branch. President Uribe’s PNDs in 2002 to 2006 and also 2006 to 2010 gave special priority to environmental issues, natural resource conservation, greenhouse gas mitigation, and the need to promote sustainable development. As the Designated National Authority (DNA), the Ministry of Environment, Housing and Territorial Development is responsible for supporting the institutional structure of the country’s CDM portfolio, including the OCMCC as well as the analysis and evaluation of the sustainabledevelopment criteria that should be included in every proposal. There are legal requirements and principles that each project must fulfill in order to get approval: generation of new business opportunities, attractiveness to investors, and the reduction of emissions. Also important is the generation of positive externalities such as diffusion of new technologies, overall improvement of sustainable development in local communities, job creation, and capacity building. At the same time, projects have to be coherent with local, regional and sectorial regulations.5 Created in June 2002, the OCMCC was the first division to be created by the Ministry of Environment. Subsequent resolutions, 453/2004 and 454/2004, were published in order to formulate the parameters for project certification and sustainable development measurements, and also to create a technical committee for climate change mitigation. Through these resolutions, Colombia has become one of the only countries to have implemented an educational and informational program involving stakeholders from diverse sectors. This program emphasizes giving practical information about CDM project development and regulation to other ministries, local authorities, environmental organizations, privatesector representatives, scholars, and scientific institutions.6 As part of the education program, the Ministry of Environment has organized capacity-building workshops in baseline determination, quantification methodologies, trading, leakage, and design of forestry projects. It also organizes workshops for project development for augmenting the Colombian portfolio.7 Project analysis and guidance is only the first part of a four-part program by the OCMCC to engage different sectors at different levels. The second part is a scientific and research working group, lead by different ministries and supported by national scientific agencies such as COLCIENCIAS.8 For the energy sector, the Unidad de Planeación Minero Energética (UPME) performs assessments on the country’s potential for every type of technology that could be implemented for a CDM project. Documents such as the Wind Energy Atlas of Colombia have been released not only to include the capacity of the country but also to spell out the regulatory particularities and geographical opportunities and limitations.9 Such analysis is a useful conduit through which project developers can pre-vet their projects to determine what sorts of problems they might run into during the implementation process. UPME’s Wind Energy Atlas of Colombia has proven particularly useful, as it has helped to give an idea of the Chart 7.3.3b Number of CDM Projects Involving “Other Parties” Austria 1 Finland 1 Germany 1 Japan 1 Netherlands 2 Spain 1 Switzerland 1 UK 1 Source: UNFCC/CDM Blueprint for Carbon Markets | Section 7 807 potential that exists for further developments in wind energy. It mentions that the wind regime in Colombia is one of the best in South America, especially in the offshore regions of the northern part of the country, where winds have been classified as “Class 7” — over 10 meters per second (m/s). Furthermore, there is an estimated theoretical wind power potential of 21 GW just in the Guajira Department, which is enough to generate twice power to meet the national demand. The country, however, has an installed capacity of just 19.5 MW of wind energy.10 Despite this discrepancy, UPME is clearly helping the country to determine where the future diversification of its energy matrix is headed and is identifying opportunities for CDM projects. The third part of OCMCC’s four-part strategy is the “sector route map,” which delineates a unique perspective and approach to climate change by sector. At the moment, these are utilized in the transportation, energy and mining, and agro-forestry sectors. Each of these sub-sector programs brings together different stakeholders in order to help develop strategies to tackle climate change. The goal is to convene working groups composed of private-sector entities, policymakers, and experts and international consultants to guide the government in policy initiatives, specific projectmanagement processes, and route maps. The main idea is to enhance capacity building and identify feasible alternatives to develop CDM projects in every sector. The agro-forestry sector of the “sector route map” includes the Ministry of Agriculture, the Institute of Hydrology and Environmental Studies, the Center for Tropical Agricultural Research, and the National Development Department. Together, they have published the “Work Plan for Forest Projects for the Mitigation of Climate Change,” which includes the potential for CDM projects in Colombia, policy and program alternatives for the sector, and various guidance tools for developers.11 The plan specifically identifies the need for a social component to any forestry projects in the country. Given the levels of vulnerability and poverty of the rural population, it is aimed at improving living standards and enhancing the sustainable development component of the CDM projects.12 Some of the activities included as potential abatement projects in the forestry sector include: sustainable management of forest; the production, transportation, and conversion of biofuels for electricity generation; sustainable timber production; and afforestation and reforestation initiatives. OCMCC’s fourth feature is a tax-incentive program that the government has designed to reward adaptation technologies and climate change initiatives. The program calls for a 15-year exemption from payments on energy sales coming from renewable sources if the project developer produces and sells carbon credits from the project and if 50% of the revenues obtained are used to enhance sustainable development and improve the living standards of the communities involved.13 This law does not specify, however, when the exemption will go into force. Nor does it include useful renewable energy sources such as solar energy, small hydroelectric stations, and geothermal energy. In the same law, machinery and equipment designated to the development of projects or activities that issue carbon-emission certificates are also exempt. Although this law has established these tax incentives, the procedures to put them into practice are not well defined.14 Other Actors ICONTEC Colombia’s National Agency of the International Normalization Organization (ICONTEC) also plays a role in the regulation of the country’s carbon market. ICONTEC is the first Latin American body that has been accredited for the verification and certification of CDM projects as a Designated Operational Entity (DOE) in the sectors of energy distribution and energy demand. It is a fully Colombian-owned organization and is just the third institution of this type to come from a non-Annex I country. ICONTEC has been able to verify just one full project up to this point, as project developers still do not consider the institution a viable alternative to foreign DOEs such as Table 7.3.3a Portfolio of CDM Projects in the Pipeline25 Sector Type of project Number of Projects Potential emission reductions (CO2e) Energy 24 42,332,392 Waste Management 16 30,359,039 Industrial (Energy efficiency and fuel switching) 12 10,024,017 Transportation 6 6,790,000 Forestry 8 26,100,366 Total 66 115,605,814 Source: Colombian Ministry of the Environment 808 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf DNV (Norway), TÜV (Germany), and SGS (Switzerland), all of which have extensive global experience in implementing CDM projects.15 Its one verified project is the Santa Ana Hydroelectric Plant, which is a small run-ofriver hydroelectric plant introduced into the municipal potable water supply system of Bogotá, located on the outskirts of the city. It has a power capacity of 13.43 MW and is expected to reduce 206,424 tCO2e over a fixed crediting period of ten years, and started in the second half of 2005.16 The institution is also working on the AGA FANO Liquid CO2 Production Project at Ingenio Providencia. Located in the department of Valle, ICONTEC is working to verify the design and definition of baseline and monitoring plans to produce liquid CO2 that will achieve emission reductions with no use of fossil fuels.17 This project has not yet been completely verified and does not yet achieve CO2 emissions reductions. Foreign Governments Colombia counts the governments of Austria, Finland, Germany, Japan, the Netherlands, Spain, Switzerland and the UK as “other parties involved” in seven of the country’s ten CDM projects. The Netherlands is involved, along with Switzerland, in the country’s most famous CDM project, the BRT Bogotá TransMilenio Phase II to IV. The Corporación Andino de Fomento (CAF) acts as an intermediary for the benefit of the Netherlands for the purchase of emissions reductions.18 International Financial Institutions World Bank: The World Bank has five projects in Colombia by its various carbon funds, the most out of any country in Latin America.19 Both the Caribbean Savannah and the San Nicolás Agroforestry projects are part of the BioCarbon Fund, while the Furatena Energy Efficiency Project and the Rio Frio Wastewater Management project are tied to the Community Development Carbon Fund, and the Jepirachi Wind Farm is part of the Prototype Carbon Fund. Inter-American Development Bank: As part of the IDB’s “Carbon Neutral Initiative,” the Bank worked to make its 2007 annual meeting carbonneutral. In order to help achieve carbon neutrality, the IDB worked with 3C Consulting to invest in 5,000 VERs to replace fuel oil with hydroelectric power for indigenous communities in the NIZ of the Colombian rainforest, where the Colombian government’s feasibility studies have shown the difficulty of promoting the CDM. The IDB is also working with ECOPETROL, a Colombian oil company, to identify projects that could have emissions-reduction potential and that could qualify under the CDM. It is undertaking a similar project with BANCOLOMBIA, the country’s largest bank. Both of these projects are still in their identification phase.20 Chart 7.3.3c Registered CDM Projects by Type Fuel switching 15% Hydroelectric 31% N2O 15% Transportation 8% Waste management 15% Wind 8% Biomass 8% Source: UNFCC/CDM Blueprint for Carbon Markets | Section 7 809 Andean Development Corporation (CAF): Through its Latin American Carbon Program (PLAC), launched in 1999, the Corporación Andino de Fomento (CAF) undertook the expansion of a natural gas cogeneration facility owned by Empreses Públicas de Medellín (EEPPM). The facility, called “La Sierra,” involved a total investment of $124.6 million, of which CAF gave $92.2 million. Through this loan, La Sierra’s capacity was increased from 381 MW to 481 MW without any increase in fuel consumption, and CO2 emissions were also reduced from 642 to 405 tons per gWh. The project is in the final stages to determine whether it will be able to generate CERs.21 The CDM Market The Ministry of Environment, along with the OCMCC, has focused all of its attention on five specific sectors to promote initiatives that could lead to CDM project development: energy, industrial, transport, waste management, and forestry. The government has more actively studied all five since the designing of the National Strategy, and they are part of the initiatives headed by the Ministry.22 As shown in Table 7.3.3a, of the 66 projects included in the Colombian CDM pipeline portfolio, there are 24 in the energy sector (generation and cogeneration), 16 in the waste-management program, 12 in the industrial sector (energy efficiency and fuel switching), six in the transport sector, and eight in the forestry sector.23 The table also shows the current distribution of project activities in Colombia’s portfolio by type of prospective emission reductions. The government has set very high expectations in terms of project completion, mitigation, and adaptation programs. Colombia’s head of the Ministry of Environment, Juan Lozano Ramirez, has said that the Colombian portfolio of CDM projects will eventually reach 100 and that the country is engaging the climate change issue and wants to incorporate it strongly in the agenda.24 Regarding the location of CDM projects, the original idea of the government was to focus on noninterconnected zones (NIZs) in the country, including the departments of Amazonas, Guainía, Vaupés, and Vichada, along with some parts of the Cauca, Cesar, Chocó, Guaviare, Magdalena, Meta, Nariño, La Guajira, Putumayo, Sucre, and Valle del Cauca. These are mostly rural areas. As access to energy in these regions depends mostly on generation plants that operate on traditional fuels like diesel, gasoline, wood, coal and batteries, the idea of bringing clean energy sources to these regions is coherent with the main goals of the Kyoto Protocol’s CDM: the reduction of emissions and achievement of sustainable development. The CDM identification for the NIZs was made with three factors taken into account: technology, economies of scale, and the pre-existing NIZ portfolio developed by the Ministry of Energy. In terms of technology, small hydroelectric projects, wind, and biomass were all options. Given the present conditions of the generation and supply systems, however, providing NIZs with electricity not only does not help reduce greenhouse emissions but will actually increase them considerably.26 The Ministry of Environment and the Institute of Planning and Promotion of Energy Solutions (IPSE), as a result, have concluded that the implementation of CDM projects in these regions is not as feasible. They found that only those projects with renewable sources in places with daily generation capacity bigger than 50,000 kWh could benefit. Only Leticia, the capital of Amazonas, fulfilled that requirement. Even then, when a fuel-switching pilot project for CDM projects for NIZs was prepared for Leticia, it was given an unfeasible economic valuation due to the transaction costs associated with transportation of equipment and implementation of new technology in the region.27 At the moment, most projects are concentrated around the Andean region, where the extensive mountains and high rainfall were the determining factors in considering different types of energy projects, much in the same way that urban centers like Bogotá, Medellin and Cartagena have attracted investments to the industrial sector as well as to transportation programs. At the moment, out of the 13 registered CDM projects country-wide, the departments of Antioquia and Bogotá account for six. Furthermore, the geographical location of CDM projects is not in line with where CERs are produced — 48% of the total CERS are produced on the north coast (Barranquilla and Cartagena), which accounts for only 18% of the CDM projects developed. This problem highlights the barriers that CDM project implementation still faces in less populated areas of Latin America, where infrastructural resources are not as good and costs for implementation are much higher. 1. Project for the Catalytic Reduction of N20 Emissions at Abonos Colombianos S.A. The biggest project in the country in terms of certified emissions reductions is the project for the catalytic reduction of N2O emissions at Abonos Colombianos S.A. (“Abocol”), which accounts for about 35% of all CERs 810 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf generated in the country. The main purpose of this project is to reduce current levels of N2O emissions from the production of nitric acid at Abocol’s two nitric acid plants in Cartagena. 1a. Implementation Located in the department of Bolívar, the project was undertaken by Abonos Colombianos, S.A. — a major producer of ammonium and calcium nitrate for fertilizers, explosives, and textiles — in conjunction with German company N.serve Environmental Services GmbH. N.serve provided a database-management system that could conduct all statistical analyses and calculations required by the project’s methodology in order to derive baseline and project emissions and also to calculate the amount of emissions reductions resulting from the project activity.28 1b. Outcomes As none of the technology options for N2O destruction generated financial or economic benefit other than CDM-related income, their operation did not create any marketable byproducts. The generation and subsequent sale of carbon credits was important for the project’s viability, as the CERs were used to offset the capital and operating costs of the project. This allowed for the project’s continued operation throughout the crediting period.29 One of the benefits of this project has been the transfer of a new, clean environmental technology that is not common even among the developed world. The N20- abatement catalysts were leased to Abocol by Johnson Matthey PLC, requiring that Abocol return the catalyst at the end of its useful life and refine, recycle, or dispose of it per EU regulations.30 2. BRT Bogotá, Colombia: TransMilenio Phase II to IV Probably the most famous CDM project developed in Colombia is the BRT Bogotá, Colombia: TransMilenio Phase II to IV. The project’s main goal is to establish a sustainable mass urban transport system based on a Bus Rapid Transit (BRT) system in the capital, and at the same to establish an efficient, safe, rapid, convenient, comfortable, and effective modern mass transit system that would ensure high ridership levels. The project is a public-private partnership in that the public sector is responsible for the investment necessary to deploy infrastructure, while the private sector is responsible for the investment of the bus fleet, the selling of tickets, and the operation of services.31 2a. Implementation TransMilenio S.A., a public agency that works in coordinating construction and maintenance of infrastructure as well as managing contracts with the bus operators, is the main project participant. The Andean Development Corporation (CAF) is also involved, acting on behalf the Netherlands’ Ministry of Housing, Spatial Planning and the Environment for the purchase of Emission Reductions.32 Atlantico Capital District Cundinamarca 0 5% 10% 15% 20% 25% 30% 35% Antioquia Bolivar Cauca Guajira Tolima Percent of CDM Projects Percent of CERs Risaralda Source: UNFCCC/CDM Chart 7.3.3d CDM Projects vs. CERs by State Blueprint for Carbon Markets | Section 7 811 TransMilenio Phase II onwards is being implemented gradually. By 2012, it is expected that TransMilenio will consist of 130 km of new, dedicated lanes and truck routes, including new bus stations, around 1,200 new buses with a capacity of 160 passengers operating on truck routes, and 500 new large buses operating on feeder lines.33 Phase II has been completed as planned.34 2b. Outcomes TransMilenio ranks second in terms of the amount of CERs produced in the country. The project has also been receiving VERs from the voluntary market since 2001, during its first phase, when it was not yet registered under the CDM. It started receiving CERs in 2006. Figure 7.4.3e shows a calculation of the greenhouse reductions of TransMilenio according to Jürg M. Grütter’s calculations based on the TransMilenio data. In a project of such size, there were a number of barriers that had to be overcome, many of them political in nature. The long span of time for implementation, bridging government administrations, relied on the whim of political agendas in order to be completed. There was also resistance from bus owners who feared they would lose income as the result of its successful completion. This was especially true of the informal bus sector, which had a more general resistance to the switch to a formal transportation system. Very important to the project’s successful completion was the issue of investment. The project as a non-CDM entity was not considered viable given cost-per-kilometer calculations. Severe financial shortfalls after the successful completion of Phase I — before it was part of the CDM — resulted in the risk of non-continuation. Only after accruing sales of greenhouse gas offsets as an additional funding source did the project achieve financial viability and the continuation of Phase II.36 TransMilenio is not only the first CDM transport project in the world, it is also a model for strengthening transportation infrastructure in the cities of Cali and Pereira, also in Colombia. The TransMilenio system has attracted visits from city planners, engineers, development institutions, and politicians from across the globe, all of whom have come to learn about innovations in urban transportation. As privately operated, informal systems in cities across the world become increasingly inefficient, unsafe, and environmentally harmful, Bogotá has been inundated with experts looking to streamline their old bus systems.37 Despite the many hurdles, it was easier to develop this type of project in Colombia than it may have been in other countries in Latin America, given the fact that the government funded, by law, 40% of the masstransportation initiatives. These initiatives are appropriate for the carbon market and can even take advantage of the voluntary market in their early stages, before the regulatory ones, once they are in place. The TransMilenio model is being followed by cities like Pereira, where further BRT projects that count under the CDM have been developed, and “Portais da Cidade” in Porto Alegre, Brazil.38 TransMilenio has realized several notable successes, both in terms of environmental impact and sustainable development. Environmentally, there is an efficiency gain in terms of passenger traffic: Emissions per passenger have been reduced in order compared to the situation prior to the project. Reduced transport time also helps to cut down emissions. In terms of sustainable development, Phase II alone of the project created more than 1,500 temporary construction jobs for unskilled workers in surrounding communities and was also deemed accountable for societal improvements such as reduced transport time. 3. Jepirachi Wind Power Project The Jepirachi Wind Power Project (JWPP) consists of the development of a wind-based generation facility with a nominal power capacity of about 19.5 MW, located in the Wayúu Indigenous Territory in the department of Guajira.39 The project is estimated to displace 1.168 meter tCO2e during a period of 21 years.40 3a. Implementation Empresas Públicas de Medellín (EEPPM) undertook Jepirachi with the governments of Finland and the Netherlands, who participated through the World Bank as Trustees of the Prototype Carbon Fund (PCF). The PCF signed an agreement with EEPPM to purchase 800,000 tons of greenhouse gas emission reductions from the wind plant.41 JWPP was opened in January 2004 after an extensive consultation process that lasted from 1999 to 2002 with the Wayúu community determining the design of a social program along with it.42 This agreement to include a social development program was one of the first of its kind and was later used by the World Bank as a template for the design of its Community Development Carbon Fund.43 3b. Methodology JWPP was used as a basis upon which to propose a new baseline methodology to the CDM Executive Board (EB). The methodology was based on “leastcost analysis and optimization modeling for renewable energy capacity additions to existing power systems.” The project also became the basis 812 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf for the proposal of a new monitoring methodology for energy capacity expansion projects replacing electricity that other power plants otherwise would generate and take to the grid.44 The consultations regarding the social program to go along with the implementation of JPWW were supervised by Colombia’s Ministry of Interior, Department of Indigenous Community Affairs. In total, there were approximately 20 consultation meetings 3c. Outcomes As a pilot project for EEPPM, JPWW has been particularly important, given the learning process involved. EEPPM learned how to design and formulate a project, how and what to negotiate, how to design the calculation methodology to be used, and how to monitor and what to evaluate once the project began. At the moment, EEPPM’s CDM portfolio includes two registered projects and several others in the pipeline. JWPP led to the company’s formulation that the development of CDM projects not only helps for the financial leverage of the projects themselves, but also is a key element of its Corporate Social Responsibility. As a result, EEPPM is considering alternatives for abatement projects in the wind, hydro, transportation, methane capture, water treatment, and forestry sectors.45 JPWW has also contributed to the sustainable development of Colombia, as it demonstrates the potential for wind-based generation in the region on a commercial level. This is an important consideration looking ahead, as Colombia’s rich wind sources have a total potential estimated at 5,000 MW.46 The project has also increased the share of renewable energy in the national grid and contributed to the development of the Wayúu community through the support of communitydriven projects financed by a system of transfers and compensation agreed to by EEPPM. Voluntary Markets The voluntary carbon market is not very well developed in Colombia.47 It is, however, becoming an alternative for those developers that have faced obstacles succeeding in the regulatory market. In 2007, Alianza Visión de Valores S.A — Comisionista de Bolsa and OPTIM Consult succeeded in approving the first transaction of the U.S. voluntary market in the Andean region.48 The reductions are the result of the efforts by Colombina, a foodprocessing enterprise, in the Valle del Cauca region. The same two Colombian companies have joined a third party to incorporate the first Chilean forestry project into the voluntary market in the United States. According to the ministry official, in Colombia this is an alternative that both the private sector and the government should explore in order to generate future capacity, but there is not enough information about the potential of sectors, such as forestry, where the country could have an active role.49 1. Gran Resguardo Indígena Undertaken by the Inter-American Development Bank through 3C Consulting, the primary objective of the program is sustainable development among indigenous communities living in the “Gran Resguardo Indígena” nature reserve in the region of Vaupés. The small hydro plant constructed has a total installed capacity of 2 MW. The hydro technology used in the project was the first to be used in the Colombian tropical rainforest. Given the project’s location, considerable hurdles existed. In one of Colombia’s NIZs, the project was accessible by air only. The relative isolation and the environmental vulnerability led to high implementation costs. To overcome these costs and to improve the financial viability of the project, the developer — a state-owned agency — decided to sell carbon credits generated by the project in order to provide additional revenues.50 Market Considerations Colombia’s CDM participation has been limited in terms of the number of projects up to this point; however, the country’s size and the potential to augment its renewable energy capacity make the CDM market the most appropriate mechanism through which to pursue carbon market development. Colombia, the fourth largest economy in the region, has already demonstrated success in implementing large-scale projects that require high upfront costs. Given the CDM market’s leadership in verifying project offsets and the relatively low risk that investors face in implementing CDM projects in general as compared to those in the voluntary market, the country has much to gain from continuing to pursue such large-scale projects through use of the CDM. Also, given the great potential for Colombia to expand its renewable energy capacity—which is better pursued through the CDM due to cost considerations—the CDM market is the most effective mechanism for carbon market development in the country. However, there are still opportunities to pursue in the voluntary market: the country’s vast tracts of forest are today more suitable for projects designed and implemented on the voluntary market, which can also develop small-scale renewable energy projects. The voluntary market, though, is unlikely to be the most appropriate for Colombia in the years ahead given that Colombia’s security risks are likely to prompt Blueprint for Carbon Markets | Section 7 813 investors to look for greater funding, security and project completion assurance in the projects they seek to implement. Such assurance is more likely to be found in the CDM market, where strong institutional support for the implementation CDM projects already exists. Conclusion Colombia has a diverse spectrum of possibilities through which it can further develop its CDM portfolio. To some extent, the country already considers itself a regional leader in the carbon market, given the institutional support and previous limited, but successful, experience. As the country risk perception has improved in the past few years due to economic growth and political stability, so have the outlook and interest of international consultants, funds, and investors.51 At the moment, the country’s Planning Department (DNP) is developing its National Climate Change Policy, which will spell out the government’s formal commitment to participate actively in the development of emissionsabatement projects. The National Climate Change Policy is a document that the Ministry of the Environment, along with the National Departments of Planning (NDP), is structuring to define the new, integrated strategies for mitigation and adaptation to climate change in the country. The document will include the capacity-building strategy to reinforce research and information channels all over the country.52 Colombia also has a geography that is conducive to the successful implementation of projects that should be able to generate carbon offsets. Opportunities for the development of solar, biomass, and wind projects will be particularly attractive. Enhancing this attractiveness will be the government’s policy of granting tax incentives to certain green energy technologies that are used in the process of CDM implementation. Such a system is clearly designed to attract investment in the sector. On the other hand, Colombia will have a few issues to address if it is to create as robust a carbon market as is possible in the country: • Continued perception of political risk • Rather homogeneous energy matrix • Capacity building Continued perception of political risk While it is apparent that Colombia has made some progress in the past decade regarding its risk to investors, it still has some work to do. With a continued perception that the country has a measure of political risk, the country’s portfolio of carbon projects will remain less than it otherwise could be. Promotion of the steps that have been taken to assuage the skepticism of project developers that have worked in the country already, however, could go a long way toward convincing hesitant investors to take another look at the country. As the government is one of the strongest in the region regarding its carbon policy, the country can only help itself by promoting the help that investors can lend, by selling Colombia as an oasis for carbon projects waiting to happen. Rather homogeneous energy matrix This is both an issue and a blessing in disguise for Colombia. Today it is an issue because it limits the 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 600,000 500,000 400,000 300,000 200,000 100,000 0 VERs CERs Total emission reductions tCO2 Source: “Sustainable Transport: A Sourcebook for Policy Makers in Developing Cities.” Chart 7.3.3e GHG Reductions from TransMilenio35 814 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf country’s prospects for renewable energy projects that could qualify for the CDM. Moving forward, however, the country has a great opportunity to help itself diversify its energy matrix by tapping into its many natural geographical advantages. Doing so would not only help to qualify for carbon credits that could be sold, but it could also help to generate energy that could be sold to the national grid. If its full potential is realized, Colombia should not have to become the net energy importer that it otherwise is expected to become by 2010, when demand will outstrip supply. Capacity building Though the current regulatory framework has improved CDM procedures significantly in the country, topics like education and information remain to be addressed. The lack of knowledge regarding the carbon market does not exist in a technical way; rather, such diverse issues as accounting, taxes, and administrative and judicial gaps are the main drawbacks within the companies.53 Since these problems lead to doubling of efforts, transaction costs are driven up as a result, and potential projects become even more expensive. One option could be additional CDM and carbon-offset workshops focusing on topics like methodology application and additionality analysis. As the country generally has a dearth of professionals working on these projects, who are capable of giving such guidance throughout the development process, a concerted publiceducation program regarding carbon opportunities in Colombia could help to ensure that the best and the brightest are recruited to undertake new project proposals. To overcome this obstacle, the Ministry of Environment could strengthen the capacity of the Climate Change Mitigation Office, enhance outreach programs, and shift its approach from protecting ecosystems through the CDM toward industrial restructuring.54 7.3.4 HONDURAS In July 2000, Honduras became the 22nd country to ratify the Kyoto Protocol. Since that time the government has actively worked to take advantage of the flexibility mechanisms established by the agreement. Key to this equation has been the Honduran government’s vision of the Clean Development Mechanism not only as a business opportunity, but also as an important development strategy to supply basic services and infrastructure to isolated regions. As of March 2008, Honduras had 13 CDM projects, behind only Brazil, Mexico, and Chile in Latin America. Honduras’s position in the global climate change debate has been shaped by a historically vulnerable economy and a geography vulnerable to natural disasters but wealthy in biological diversity. With 7.4 million people and a per capita gross domestic product of about $3,300, Honduras is one of the poorest countries of the hemisphere. Almost half the population lives below the poverty line. In 1998, Hurricane Mitch severely damaged the country and prompted a significant economic contraction. However, current economic growth is strong, at about 6%.1 Chart 7.3.4a CDM Projects in Central America and the Caribbean Source UNFCC/CDM Costa Rica 14% Cuba 2% Dominican Republic 2% El Salvador 12% Guatemala 14% Guyana 2% Honduras 33% Jamaica 2% Nicaragua 7% Panama 12% Blueprint for Carbon Markets | Section 7 815 The country is extremely sensitive to fluctuations in world oil prices. It is also suceptible to climate variability from the El Niño Southern Oscillation (ENSO). The country’s own water shortages have in the past prevented the largest hydroelectric plant from running at full capacity, leading Honduras to generate more than 50% of its electric energy needs from fossil fuels and also to import energy from neighbors such as Costa Rica.2 These challenges have limited the extent to which the government can heavily invest in carbon market development and enhancement. Honduras’s situation is different from other countries in Latin America, however, in that its electricity service is mainly operated by government agencies. High poverty levels and a reliance on fossil fuels have prevented the government from investing significantly in research and development. This has sapped the potential for development of a diversified renewable energy matrix, which remains to be fully explored. The country’s Nation Secretariat of Natural Resources and the Environment (SERNA), however, has stated that there is great potential for power generation from hydroelectric, biomass, wind, solar, and geothermal sources.3 Thus far only the potential of the hydroelectric sector has been tapped. Institutional Responsibility The government drives CDM projects to the extent that they promote sustainable development within the context of this market, but small developers, NGOs, multilateral lending institutions and local initiatives have shaped Honduras’s CDM market as well. The institutional responsibility for developing the CDM business belongs to SERNA, which created a Climate Change Unit in 1998. In terms of CDM implementation, the Designated National Authority is the Office of the Clean Development Mechanism and Joint Implementation (OICH). This entity is responsible for approving the project activities eligible for CDM, supporting design and implementation, and developing strategies to attract foreign capital for CDM projects.4 The Dirección General de Energía (DGE) also helps to identify potential CDM projects in the energy sector. Other Actors Asociación Hondureña de Pequeños Productores de Energía Renovable (AHPPER) In 2000, AHPPER was established to advocate on behalf of the renewable energy industry in Honduras. The group is a private initiative to encourage the implementation of renewable energy projects. AHPPER has become important in providing viability studies, design, financing, operation and certification of different types of renewable energy projects, such as small hydroelectric and biomass. Membership in the association is open to all renewable energy stakeholders, including manufacturers, developers, consultants, operators, and financiers. The association is a self-funded non-profit organization financed by memberships and donations, but it also has direct credit lines with local and international finance corporations. Chart 7.3.4b Number of CDM Projects Involving “Other Parties” Source UNFCC/CDM Austria 2 Belgium 1 Canada 1 Denmark 1 Finland 5 Japan 2 Netherlands 1 Norway 1 Spain 1 Sweden 1 Switzerland 1 UK 3 816 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Several years ago AHPPER suggested legislative reforms to help Honduras embrace renewable energies. The group argued that doing so could provide a significant pool of carbon offsets and designed the first version of the “National Incentives Law for Renewable Energy Generation” in an attempt to make renewable energy products viable. The proposal’s key points included tax exemptions for equipment, services, or materials used for renewable energy products; a better price for renewable energy; and a simplification of the licensing process to construct and operate renewable energy projects.5 The lack of continuity among relevant government agencies, however, has hampered the law’s effect. Ironically, the law has acted as a disincentive to the development of new projects because the country’s national electric utility, Empresa Nacional de Energía Eléctrica (ENEE), has mandated that all power plants be connected to electric power substations rather than to the interconnected grid closest to their generator.6 Because ENEE cannot have a substation connected to five or ten different projects, AHPPER might lose the 23 to 25 projects that it has already developed.7 Unfortunately, this mandate limits the scope of viable renewable energy projects in the country, acting as a constraint in the extent to which new CDM growth can come about. Foreign Governments As with CDM projects in other countries, foreign governments and bilateral or multilateral funds are often involved. Ten of the 13 CDM projects in Honduras involved other parties, who typically approve of projects in the context of the CDM bylaws, provide extra financing, lend technical support, and even facilitate the transfer of technology. Finland, which is involved in five of the country’s CDM projects, is the most active foreign participant. In some cases, such as the Rio Blanco Small Hydroelectric Plant, the Finnish government approves the project in the context of Article 12 of the Kyoto Protocol, which established the CDM, and also confirms its purchase of CERs from the project.8 In other cases, like La Esperanza Hydroelectric Plant, the Finnish government provided funding and approved the project along with several other governments. International Financial Institutions World Bank: In addition to foreign governments, multilateral funds play an important role in financing projects in Honduras. The World Bank’s Community Development Carbon Fund and BioCarbon Fund have purchased carbon credits in order to help finance the projects from which they were generated. Inter-American Development Bank (IDB): The IDB has not involved itself directly in Honduras’s carbon market, though several projects on which the institution has worked may contribute to the market for voluntary carbon credits. The IDB’s Sustainable Energy and Climate Change Initiative (SECCI) supports SERNA in the development and implementation of pilot projects in energy efficiency.9 In December 2007, the IDB approved a $350,000 grant from its Fund for Special Operations to Honduras for energy and biofuel programs as part of SECCI. The grant supports the development of investment plans and loans for energy efficiency measures. It also provided for the development of technical studies, including ones related to the implementation of a national program to produce and promote biofuels.10 The project did not, however, help these energy efficiency efforts qualify as voluntary carbon offset credits, a step that would have enabled the project to generate additional revenue. The IDB has also been involved in Honduras through the Inter-American Investment Corporation (IIC), which has organized seminars for AHPPER. The goal of these seminars was to better inform small and medium enterprises about a new Certified Emission Reductions Sale and Repurchase Agreement (CERSPA), which is meant to help new carbon credit sellers participate effectively in the carbon market with more experienced buyers. The IIC seminars were funded by the Swiss State Secretariat for Economic Affairs and implemented in association with the consulting firm Climate Focus and the Ecuadorian law firm Manzano y Asociados.11 Central American Bank for Economic Integration (CABEI): CABEI has an energy sector lending portfolio of $674 million and has financed projects that qualify for carbon credits throughout the region, including in Honduras. The Map 7.3.4a Regions That Host CDM Projects in Honduras Source: UNFCCC/CDM Blueprint for Carbon Markets | Section 7 817 bank has partnered with the Global Environment Fund (GEF) and the United Nations Development Program (UNDP) to develop a program covering seven Central American countries and aimed at removing financial barriers to large-scale renewable energy projects. The strategy involves integrating small-scale renewable energy lending strategies and developing an active small-scale renewable energy pipeline in the bank’s lending portfolio. The project also seeks to expand financing opportunities and develop risk mitigation mechanisms in order to increase investment capital for small-scale renewable energy projects.12 CABEI is the only lender in the country for small-scale hydro projects, which are most likely to generate offset credits. The Japan Bank for International Cooperation (JBIC) also provides loans to finance the formation of CDM projects through CABEI. CDM Market Honduras is divided into 18 geographic departments, with only Atlántida, Colón, Cortés, Francisco Morazán, Santa Bárbara and Yoro hosting CDM projects (see map). The Northwestern department of Cortés hosts the majority of CDM projects in the country—more than 38%—and also accounts for the most certified emissions reductions (CERs). Yoro and Santa Bárbara, with two projects each, are the two other departments hosting multiple CDM projects. Together, the three departments account for almost 70% of Honduras’s CDM projects and 60% of CERs. CERs are generally produced where CDM projects are physically located. One exception is the department of Santa Barbara, which has two projects accounting for about 15% of the country’s total, but which produces less than 5% of total CERs. Both projects are minihydroelectric facilities developed in conjunction with the Finnish government. All of the country’s CDM projects are “small scale,” according to the Marrakesh Accords parameters. Recent CDM procedural guidelines may work to the country’s benefit in this regard. The “Programmatic CDM,” launched as an alternative in 2007 by the CDM Executive Board, allows project developers to submit for registration multiple projects within a single proposal. This pooling procedure allows small projects to meet the CDM’s size and capacity requirements and represents a good opportunity for Honduras. The sectors that project participants and investors have pursued most aggressively are hydroelectric and biogas recovery from palm oil methane capture. Hydroelectric projects, which account for about 70% of the CDM projects developed in the country, comprised 80% of the country’s total electricity generation in 1993. By end of 2003, however, 61% of energy in the country was generated by fuel oil and diesel and just 39% was generated by a combination of hydroelectric and biomass.13 CDM Projects 1. La Esperanza Hydroelectric Project La Esperanza micro-hydroelectric plant was the first facility to generate certified emissions reductions in the country under the Kyoto Protocol. Consorcio de Inversiones S.A. (CISA) constructed and operates the Chart 7.3.4c Registered CDM Projects by Type Source UNFCC/CDM Biogas 15% Hydro 69% Methane Capture 8% Cogeneration 8% 818 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf hydroelectric project and has implemented numerous community and environmental projects. No public funding was received for this project. 1a. Implementation La Esperanza has had to overcome both institutional and investment barriers. The project developer needed three years to complete the permit process to begin construction. Phase 1A of the project was privately financed by CISA and E+Co, a company that invests in clean and sustainable energy around the world. After completion of this first phase the hydroelectric plant could generate 485kW. Once it became apparent that La Esperanza was operational—even on a small scale—a local Honduran bank agreed to loan $700,000 to expand the project. The loan helped La Esperanza attain a generation capacity of about 1MW.14 Phase 2 of the project was made possible by a $9 million loan from the Central American Bank for Economic Integration (CABEI).15 Due to delays in construction and equipment, however, the project was delayed, and CABEI declined to offer an extension or additional funding. Eventually CISA found a local bank to take over the project’s debt at high interest rates, and by the end of the first year of operation the project was almost $1 million in the red. 1b. Methodology The phased approach utilized by La Esperanza’s project developers is a common one.16 In La Esperanza’s case, it was critical to obtaining the CABEI loan for Phase 2, as the institution would only fund after the first phase had been completed successfully.17 As such, project sponsors for La Esperanza were compelled to begin Phase 1 without guarantees that they would be able to implement the entire project, increasing project risk considerably. In the end, the project’s business model and its phased implementation were “crucial in demonstrating to local banks and other potential financiers that its sponsors were capable of constructing and managing the project,” and that they would be able to sell the energy to the state utility, ENEE.18 The phased investment model used in this case will be valuable for the country’s future CDM projects, many of which have adopted similar methodologies.19 More than three years were required to secure financing for the project. Local banks charge interest rates of up to 32% in local currency and 15% in US dollars, and local and international banks are for the most part unwilling to lend without significant guarantees. These obstacles to capital mean that energy projects that require high upfront expenditures, such as hydro, will remain particularly challenging.20 1c. Outcomes As only 37% of the country’s rural population has access to electricity, La Esperanza’s chief success has Chart 7.3.4d Percent CDM Projects Versus Percent CERs by Department Source: UNFCCC/CDM Percent of CDM Projects Percent of CERs 0% 5% 10% 15% 20% 25% 30% 35% 40% Atlantida Colon Cortes Francisco Morazan Intibuca Santa Barbara Yoro Blueprint for Carbon Markets | Section 7 819 been to provide electrical service to a remote and impoverished region.21 The energy it produces has helped to reduce the dependency on fuel wood, with the goal of decreasing the rate of deforestation.22 In addition, La Esperanza’s project developers have also undertaken a project they call “Generando O2,” a community-scale project that pays inhabitants to plant trees near the hydroelectric plants.23 Along with the Rio Blanco micro-hydroelectric facility, La Esperanza generated the world’s first CERs in October 2005.24 The 2,210 CERs issued by La Esperanza were a small but historically important step for the Clean Development Mechanism.25 La Esperanza still functions today, although as a consequence of changing climate patterns it has not ben able to generate at its full capacity. The project has been supported by the sale of 310,000 tCO2e emissions reductions to the World Bank’s Community Development Carbon Fund,26 and it is expected to continue generating 37,032 metric tCO2e per year throughout its life cycle. 2. Cortecito and San Carlos Hydroelectric Project The biggest project in the country in terms of CERs is the Cortecito and San Carlos Hydroelectric station, located in the department of Cortés. The project consists of two small containment run-of-river power stations 1km apart that utilize the Cortecito and San Carlos Rivers in the northwest of Honduras. Together, these facilities generate almost 51GWh annually. The main goal of the project is energy generation for sale to the national grid.27 The Honduran government has supported projects like La Esperanza because of the economic and infrastructure benefits they bring to rural communities in the absence of public-sector support. 2a. Implementation The company Hidro Centrales Eléctricas de Honduras S.A. (HIDROCEL) owns and develops the Cortecito and San Carlos Hydroelectric project and has implemented various additional community and environmental projects to benefit the surrounding community. HIDROCEL improved local roads leading into the area, increased funding for local education, improved the water supply, and created a watershed protection program that created additional jobs.28 2b. Outcomes As with La Esperanza, the Cortecito and San Carlos projects encountered financing issues.29 Foreign banks are generally not willing to lend into the country without significant Chart 7.3.4e Total Forest Loss 1990-2005 Source: Mongabay -40% -35% -30% -25% -20% -15% -10% -5% 0% Bolivia Brazil Costa Rica El Salvador Guatemala Honduras Mexico Nicaragua 820 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf guarantees and secured hard currency. As a result, the main source of local funding for the project has been CABEI, the primary lender for small-scale hydro projects. 3. Energeticos Jaremar Project Other than hydroelectric, biogas recovery from palm oil mill effluent (POME) is the most common type of CDM project in Honduras. The country has an abundance of palm oil. In 2005, Honduras produced as much as 250 million kilograms of African palm oil on about 68,000 hectares.30 The most recent of these CDM projects is the Energeticos Jaremar, registered in March 2008. 3a. Implementation The project was undertaken by Energeticos Jaremar, S.A. de C.V., part of a conglomerate of companies dedicated to the production and trade of agroindustrial and mass consumption products throughout Central America. During the project, OneCarbon B.V. acted as the CDM consultant, Ecofys Netherlands B.V. aided in the project design, and Biotec supplied the necessary technology. This project activity did not receive any public funding. The Energeticos Jaremar project involves covering two open anaerobic lagoons for the treatment of palm oil mill effluent. The biogas that is recovered is to be used on site for the production of heat and electricity. This particular project reduces greenhouse gas emissions in three different ways: by preventing methane emission into the atmosphere by biogas capture, by replacing residual fuel oil with biogas, and by replacing electricity consumption from the grid with electricity generated from biogas.31 3b. Outcomes The main hurdle to be overcome during the project’s implementation was technological. No Honduran company could supply a biogas recovery and utilization system, and Energeticos Jaremar had to rely upon technology supplier Biotec.32 As the operation of the palm oil mill and refinery required a continuous delivery of heat and electricity, Energeticos Jaremar chose to establish a permanent partnership with Biotec in order to secure optimal performance and minimize the risks with the biogas recovery system. The implementation of the project included training of personnel.33 Voluntary Market Honduras has potential for the development of projects that are often not big enough to qualify under CDM. As such, developers have been able to pursue small-scale opportunities in the country’s voluntary market. Investors, developers, and consultants increasingly are looking for openings in this market, even though it is less developed than in nearby Costa Rica, Guatemala, and Nicaragua.34 Chart 7.3.4f Carbon Dioxide Emissions from Fossil Fuels, 1980-2005 Source: UNFCCC/CDM 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 MtCO2 0 1 2 3 4 5 6 7 8 Blueprint for Carbon Markets | Section 7 821 Several carbon standards are now recognized and accepted as benchmarks for the certification of projects that fulfill the particular requirements and can be used to offset emissions. Examples include the Voluntary Gold Standard (VGS), the GHG Protocol for Project Accounting, and the Climate, Community and Biodiversity Project Design Standards. The Voluntary Carbon Standard (VCS), created by the Climate Group, the International Emissions Trading Association and the World Economic Forum in late 2005, is becoming the standard against which all voluntary offset projects are judged.35 Developing the voluntary market will be an important consideration going forward. Five CDM projects were developed in both 2005 and 2006, but 2007 saw the authorization and implementation of only two. Just one CDM project was launched in 2008.36 With Honduras’s CDM portfolio seemingly at a plateau, the voluntary carbon market will play an increasingly important role. 1. Río Frío Hydroelectric Project The Rio Frio Hydroelectric Project is a good example of the burgeoning voluntary carbon market. Rio Frio is a small run-of-river hydroelectric project being developed by the Climate Neutral Group on the Rio Frio River in the municipality of Santa Fe, Ocotepeque. The area is one of the poorest in Honduras, and has among the lowest levels of access to electricity. The full project development is expected to total 3.4MW and will contract 30,611 VERs over the next seven years. Taking its cue from the experience of La Esperanza, the project is to be built in three phases in order to ensure the proper financing.37 In keeping with the Voluntary Carbon Standard parameters, the project will have a positive social and environmental impact on the community. The project will generate enough clean electricity to supply about 2,000 households, reducing household usage of natural resources such as wood. Socially, the project is intended to help five communities near the project site benefit from new access to electricity from the grid. As the project is a private initiative and does not benefit from any governmental support, financial and technical barriers would be difficult to overcome absent the additional support created through the sale of carbon credits on the voluntary market.38 2. Fundación Parque Nacional Pico Bonito Forestry projects also present an opportunity for the voluntary market in Honduras. Forest covers almost 42% of the country’s total land area, but deforestation is taking its toll. Between 1990 and 2005, 37% of Honduras’s forests disappeared, and the current annual rate of deforestation is more than 3%.39 Both figures are among the highest in the region. Stemming this depletion in natural biodiversity represents a clear ecological and economic opportunity for the country and the world. Honduras recently formed the fourth forestry project of only eight worldwide to be certified as a producer of carbon credits in accordance with the Kyoto Protocol. The pilot project was started jointly by the Fundación Parque Nacional Pico Bonito (FUPNAPIB) and a US non-profit called the Ecologic Development Fund in June 2006, after a pre-investment phase that began in 2005. The pre-investment phase was funded by a $600,000 contribution from the Honduran government and with funding from the World Bank’s BioCarbon Fund. The project is slated to last for 30 years.40 Pico Bonito is unique in that it generates carbon credits both for the CDM and for the voluntary carbon market. The Kyoto Protocol does not yet recognize carbon credits generated from deforestation avoidance. Ecologic has found, however, that credits from avoiding deforestation at Pico Bonito sell well on the voluntary market. To begin the project Ecologic bought 2,500 hectares of deforested land surrounding Pico Bonito National Park and reforested it with indigenous trees such as mahogany, rosewood and cedar. More than 140,000 trees from 14 different species have been planted, employing 185 Hondurans.41 The project is partially financed by the sale of carbon credits, which are offered through the World Bank’s BioCarbon Fund (WBBF) to participating countries seeking to meet their carbon emissions reduction targets.42 The eventual goal is to reforest previously deforested land with an estimated 1.2 million trees. Doing so could generate as much as $400 million in timber and carbon credits.43 The project has encountered several barriers along the way. Obtaining CDM certification for the project’s methodology was long and costly. The fact that the project encompasses an entire area of forest made certification of emissions reductions a daunting task. The relative novelty of this type of project imposed a number of procedural and bureaucratic delays in certification. Obtaining investment has been a constant challenge, and the project still suffers from a dearth of investors.44 One significant hurdle in the implementation of similar projects will be the expense of monitoring. Acquiring CDM approval requires knowing precisely what is happening in newly planted forests. “Leakage”—the possibility that people displaced by reforestation projects might simply cut down forests elsewhere—is a significant concern. Keeping track of this information and ensuring that planted trees are not cut down is expensive and time consuming. 822 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Given the drastic reduction in the size of Honduras’s forests over the past two decades and the fact that offset projects often are not big enough to qualify under the CDM, reforestation and afforestation have emerged as potentially important ways of generating carbon credits in the voluntary market. The movement may allow the country to reclaim much of its biological robustness and develop economically through the sale of emissions credits, while fighting global climate change. According to the recent Stern Review, approximately 18% of all greenhouse gas emissions result from land use change, mostly deforestation. Furthermore, research done by NASA has suggested that deforestation from the Amazon through Central America influences rainfall patterns in Mexico, Texas, and throughout the Gulf of Mexico region.45 Honduras’s own efforts could become a model for a region where deforestation has become endemic. Market Considerations The voluntary carbon market is the most appropriate mechanism through which Honduras can pursue future carbon market development. Of our case-study countries, Honduras is the only one entirely composed of smallscale CDM projects, indicating that as a small economy with limited resources there are serious constraints on the extent to which it can garner additional investor interest for CDM project implementation. These constraints are reflected in the fact that Honduras has had more CDM project proposals rejected than any other country in the Americas other than Brazil or Mexico, both of which have implemented many more total projects. This suggests that the CDM market, which in Honduras is composed of entirely small-scale projects, may not be the most efficient way to move the development of the carbon market forward. The voluntary market, however, represents a much more appropriate mechanism for carbon market development given the extent to which it could help increase the number of small-scale carbon projects developed in the country. One opportunity in this market is small renewable energy projects in remote regions that currently lack grid connections. The country has already experimented with small hydro in this regard, and with good success. Another opportunity is in the forestry sector. Given that the country had the highest rate of forest loss in Latin America and the Caribbean during the 1990 to 2005 period, there is ample scope for interested voluntary market project developers to achieve conservation and sustainable development goals in the deforestation avoidance and forest degradation sectors. Pursuing these smaller-scale projects in the voluntary market, often in rural locales, will help to drive the country’s carbon market development looking ahead. Conclusion Both the CDM and voluntary carbon markets function rather well in Honduras. Its small size notwithstanding, the country has implemented numerous projects that have contributed in terms of positive environmental impact and sustainable development. Honduras was one of the first countries to take advantage of the CDM, but its carbon portfolio has stagnated recently. In order to become an attractive setting for future carbon investments, the country will need to regain the initiative first demonstrated in 2005 when the La Esperanza project generated the world’s first CERs. Project approval and implementation must be streamlined to reduce the high transaction costs that make small-project implementation less attractive to developers and investors. Among the country’s strengths are its potential for and experience with small-scale projects, its ecologic diversity, and its recognition that the CDM is a useful tool to help bring about sustainable development. All of these should be used to further the country’s carbon market. “Programmatic CDM,” which allows the pooling of multiple projects, is especially well suited to Honduras. Honduras’s ecologic diversity, while not unique in Central America, is an asset in marketing CDM and voluntary projects. Investors want to know that they are helping the countries in which they invest, and protecting ecological diversity is a clear benefit of investing in Honduras’s carbon market. Honduras’s government clearly recognizes the importance of the CDM to sustainable development. The government has supported projects like La Esperanza hydroelectric plant because of the economic and infrastructure benefits it brings to rural communities, benefits that the government often cannot provide. There are also, however, several obstacles that will need to be addressed in order to ensure that the carbon market in the country achieves its potential. These include: • Policy gaps • Institutional delays • Financing • Project size considerations • Technical support Blueprint for Carbon Markets | Section 7 823 Policy Gaps Even though Honduras was one of the first countries to develop an institutional framework to develop CDM projects, policy gaps have surfaced.46 Institutional approval for CDM projects is hampered by convoluted procedural standards that vary between government offices. The process for designing and implementing CDM projects is opaque, with frequent legal and licensing changes. Together, these weaknesses create enough uncertainty to deter some developers and investors.47 Placing CDM projects under the purview of one government office might significantly streamline the process. Institutional Delays Obstacles still remain in obtaining licenses from SERNA, and there are frequently long delays in completing feasibility studies. Project approval often appears to depend on the whim of the leadership. Because there is little continuity between political administrations, the drive to approve and help implement these projects waxes and wanes every four years.48 Another problem is the lengthy project approval process by the CDM Executive Board (EB). Frequently, several rounds of additional information requests are passed back and forth between the EB and the project validator in Honduras. While not unique to the country, the prolonged process drives up transaction costs that are already prohibitive in many cases. For a country that already has financing hurdles, lowering these transaction costs will be critical. This can be done either by helping project developers find upfront financing or by facilitating the completion of the rounds of paperwork necessary for the project’s approval. Financing Financing is the biggest hurdle for carbon markets in Honduras, and the CDM projects in particular. For Honduras, as well as other Central American countries, the government for the most part does not have the resources to help defray the upfront costs associated with project proposals. Seed funding would help, especially during the preliminary stages of projects, but no mechanism exists for connecting project developers with the private organizations that could provide it. A one-stop government office overseeing all CDM and voluntary carbon market projects would help to connect project developers with project investors. Creating a clearing house of sorts for all carbon-related information would ensure that the best project proposals have outlets from which to contact investors interested in funding. Project Size The scale of projects is also a constant concern. In many cases, proposed projects are too small to qualify as part of the CDM, and there is no mechanism to facilitate moving these projects into the voluntary market. Without such a mechanism, potentially worthwhile project proposals fall through the cracks. Bringing all projects designed to generate carbon offsets under the direction of one office—through the CDM or otherwise—would allow those projects that do not qualify for the CDM to seek alternative routes to implementation. Technical support Finally, a lack of technical support within the country has taken its toll—Honduras has had three CDM projects rejected inadequate documentation.49 Such rejections dampen the carbon sector’s momentum. Centralizing all carbon-related projects under an umbrella organization could help in this regard as well. Project developers could develop best practices for certain types of projects and warn each other of past failures, thus expanding opportunities in the carbon sector. 7.3.5 MEXICO Mexico became the 28th country to ratify the Kyoto Protocol in September 2000, and at the same time started a parallel process to develop an internal strategy on climate change. In the past few years, the federal government has established a multidisciplinary strategy to engage the country in the process of contributing to climate change mitigation. This strategy culminated in May 2007 with President Felipe Calderón’s presentation of a Climate Change National Strategy (ENACC) that, by mandate, must be included in future National Development Plans set out by the government.1 The 2007 National Strategy on Climate Change (ENACC) was created to identify specific measures for mitigation using estimates of their potential for emissions reductions. It proposed a suite of research objectives as a tool for laying out more precise mitigation targets and also outlined national requirements for capacity building for adaptation to climate change. The ENACC defined and contributed to the development of strategies, priorities, and policies for the government’s Special Program on Climate Change (PECC), which will become an integral part of the National Development Plan for the period 2007–2012.2 In terms of greenhouse gas mitigation, ENACC identifies sector opportunities and specific mitigation targets in two main areas: energy generation and use, and vegetation and land use. The Mexican government has recognized that its mitigation actions will not be sustainable without 824 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf clear economic strategies to promote them. As such, the government is seeking to utilize the social costs resulting from emissions produced by different economic agents so that they can become economic opportunities through cooperation agreements with private actors having mandatory emissions reductions targets.3 In accordance with the UNFCCC reporting guidelines, the Mexican government has prepared three National Communications in order to convey information on emissions and the removal of greenhouse gases. It is the only developing country that has presented more than two national reports to the UNFCCC so far. These reports are coordinated by the Instituto Nacional de Ecología (INE) and give an overview of the country’s improvements, programs, and future commitments regarding climate change goals. Mexico’s First National Communication (FNC) to the UNFCCC was in 1997. One of the most important pieces of the report was the first National Greenhouse Gas Emissions Inventory (NGHGEI) for the year 1990. The FNC also gave the results of the country’s first study on its vulnerability to climate change. Four years later, in 2001, the country presented its Second National Communication (SNC) to the UNFCCC, with an updated version of the NGHGEI for the period 1994–1998. The SNC also included estimates of emissions from land use, land use change, and forestry (LULUCF) reported for 1996, as well as a presentation indicating various scenarios for the path of future emissions reductions.4 This Third National Communication (TNC) presented an update of the emissions inventory to 2002, along with a study on climate change mitigation and adaptation and an outline on the government’s preparation of reference materials for disseminating national information on climate change. The TNC was different from the first two in that the planning process for future national communications included consultations with academics and representatives from government institutions and private-sector and non-governmental organizations in order to obtain the most diverse array of opinions as to what should be improved upon regarding the country’s approach to climate change. Finally, for a longer-term scenario to the year 2020 or 2030, other technologies for generating energy — such as nuclear power, fuel cells, hydrogen, and growing use of bioenergy — will enhance Mexico’s greenhouse-emissionsmitigation potential. On the demand side, very important technological changes can be made in the design of Chart 7.3.5a CO2 Emissions from Fossil Fuels, 1980–2005 Source Energy Information Administration 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 MtCO2 0 50 100 150 200 250 300 350 400 450 Blueprint for Carbon Markets | Section 7 825 lighting, electronic, and mechanical equipment, as well as in transportation systems. They may also be attained in land use; urban planning; and design of housing, businesses, factories, or offices, as well as in heating or cooling systems, ensuring that all of these are less energyintensive than current technologies5 Doing so would create a wealth of new opportunity for Mexico’s carbon market. Institutional Participation The Mexican government has played an integral role in shaping the country’s policies regarding climate change issues and its participation in the Clean Development Mechanism. The Inter-Ministerial Commission for Climate Change (CICC) acts as the Designated National Authority (DNA). It is made up of representatives from the Environment, Energy, Agriculture, Transport, Industry, Social, and Foreign Affairs Ministries, and is led by the Director General for Climate Change Projects. CICC has a reputation for efficient operations, relative to many other countries.6 Decisions for project approval can be expected in as few as 30 days after the submission of all required documents. By its own reports, the CICC does not have a very stringent approach to project appraisal. Independent analysts have found that Mexico is second in Latin America in terms of CDM investment-climate index, after Chile. Developers appear to agree with that perception, as Mexico’s advantage, compared to other non-Annex I countries, is that it has “a professional, capable and experienced DNA that allows for the effective and efficient promotion of CDM projects in the country.”7 Institutional support is thus one of the main reasons for the positive perception of Mexico’s environment for CDM developers and investors. Indeed, the various opportunities for emissions reductions, coupled with foreign investment perception of the country, make Mexico one of the best places in the world to develop CDM projects.8 Furthermore, the trade and investment environment in Mexico has changed dramatically since the launch of NAFTA in 1994. In part due to NAFTA, Mexico remains the largest host of foreign direct investment (FDI) in Latin America and is second only to China among all emergingmarket economies in terms of inward FDI stocks. The country attracted $23 billion of FDI in 2007, bringing its stock of FDI to $259 billion — equivalent to 29% of GDP. Investors consider President Calderon’s administration an ally in pushing ahead pro-market goals, particularly regarding the opening of the energy sector to foreign investment and the modernization of labor tax codes.9 For Mexico, NAFTA and its proximity to the U.S. could prove to be some of the best advantages, should the U.S. decide to adopt a carbon market of its own in the near future.10 Several factors, however, such as inconsistencies in political variables among regions, do not make for easy continuity of policies country-wide, and actually serve to increase the transaction costs of project implementation in the country.11 Several sources agreed that the political environment, as well as public-sector factors such as corruption, size of bureaucracy, and lack of institutionalized political will in support of the development of local technologies, work to constrain the huge potential that the country has for the development of a more robust CDM sector.12 Other Actors Secretaría de Medio Ambiente y Recursos Naturales The actions and participation of the Secretariat of the Environment and Natural Resources (SEMARNAT) have also contributed to the interaction among diverse stakeholders interested in climate change. One of the initiatives that makes Mexico such a unique destination for CDM development is the Mexican Carbon Fund (FOMECAR), which is designed to support activities related to emissions reductions. FOMECAR was created as the result of a joint initiative among the Centro Mario Molina, SEMARNAT, and BANCOMEXT, the country’s National Bank of Foreign Commerce. The goals of FOMECAR are to increase Mexico’s participation as a host country within the CDM, to benefit from foreign investments and technologies, and to play a significant role in the carbon market as a reliable and established emissions-trading partner.13 FOMECAR works to support CDM project strategies throughout the entire process of implementation, from previability studies to the issuance of CERs. The guidance it lends, available to all projects to be developed in Mexican territory, includes training and advising Mexican companies on project viability as well as giving financial advice related to CDM, paying for Project Idea Notes (PINs) and/or Project Design Documents (PDDs), and advising on the sale of carbon credits. FOMECAR is different from other carbon market funds around the world in that it is financed by contributions from entities as diverse as the Mexican Secretary of Government and the Inter-American Development Bank. It also creates alternatives for developers and small enterprises that do not have direct access to credit.14 The entity plans to develop the Programmatic CDM and to reach out to other markets in Latin America in order to 826 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf make FOMECAR even more attractive. During FOMECAR’s second phase, programs will aim to enhance Mexico’s participation in carbon markets. The institution’s goal will be to encourage the development of programmatic programs that target the implementation of smaller CDM projects. In this regard, FOMECAR hopes to become a guarantor for small project developers and may even try to expand its capacity across the national borders.15 SEMARNAT has also enabled the private sector to participate actively in Mexico’s carbon market. The Program GHG Mexico (GEI) is a voluntary national program for the accounting and reporting of greenhouse gases and the generation of emissions-reduction projects. GEI was created by SEMARNAT and the Commission for Private Sector and Sustainable Development Studies (CESPEDES) in order to give the industrial sector an opportunity to fight climate change voluntarily. It also receives technical support from the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). GEI has two facets: corporate greenhouse gas inventories and the promotion of greenhouse gas emissions projects. To date, the program has registered 45 Mexican companies, 30 of which have made their greenhouse gas inventories public.16 Foreign Governments The UK is, by far, the most prolific “other party” involved in Mexican CDM projects. Of Mexico’s 110 projects, either the British government or designated institutions have participated in 80 projects total. They have taken part in every type of CDM project that exists in the country except for wind. All four of the country’s wind projects involving other parties involved Spanish participation. International Financial Institutions World Bank: Three projects have been supported by the World Bank through the Spanish and Danish Carbon Funds: the CFE La Venta II Wind Farm project, the Mexico City Transport Corridor project, and the Monterrey II LFG-to-Energy project. The Spanish Carbon Fund was created in 2004 through an agreement between the Ministries of Environment and Economy and the World Bank in order to purchase greenhouse gas emission reductions from projects developed under the Protocol. The fund specifically seeks to mitigate climate change while promoting the use of cleaner technologies and sustainable development in developing countries. It has a total capital of almost $279 million, and is the largest World Bank carbon fund managed in conjunction with another national government.17 The Danish Carbon Fund, created in 2005 with two public sector participants — the Danish Ministry of Foreign Affairs and the Ministry of the Environment — has a total capital of $68.5 million. It also has three Danish privatesector participants: Aalborg Portland, Nordjysk Elhandel, and Maersk Olie og Gas.18 Of the three projects associated with the World Bank, the Mexico City Transport Corridor Project is perhaps the most unique. Supported by the Spanish Carbon Fund, it was created in August 2005 as a means to decrease traffic congestion in the Mexico City Metropolitan Area (MCMA). In order to improve bus service in the area, the municipal government designed a corridor with bus-only lanes, now known as the “Insurgentes BRT Corridor.” In addition to improving traffic conditions, the project is intended to reduce airborne pollutants and help the municipal government to develop the tools necessary to monitor carbon emission reductions from the transport sector. The lessons learned from the Insurgentes BRT Corridor will eventually enable a network of 33 corridors in the MCMA. A total of 354,607 tCO2e will be reduced as a result of the project, which runs its first phase through 2012 and might be renewed thereafter.19 Inter-American Development Bank: In March 2007, the IDB approved the Sustainable Energy and Climate Change Initiative (SECCI), which was designed to respond to the challenges of the effects of climate change on social well-being, agriculture, and the loss of biodiversity. In so doing, it seeks to expand the development and use of renewable energy sources, promote energy-efficiency technologies and practice and increase the use of carbon finance. In Mexico, SECCI has undertaken a number of projects. These include the backing of Mexico’s Climate Change Strategy and active support for Mexico City’s Bordo Poniente landfill-gas-capture and electricity-generation project, which includes a feasibility study for a multimillion-dollar waste-recycling and energy facility centered on public-private partnership schemes. It is also backing a study of the carbon finance potential in wastewater treatment in the Valley of Mexico.20 To this end, the IDB’s focus is the support of Mexican institutions in the implementation of greenhouse gas emissions-reduction projects and the generation of certified, verified, or other emissions reductions.21 Other Initiatives Consolidation of the virtual emissions trading scheme of the Mexican Oil Company (Pemex), setting limits on emissions from participating facilities, and linking them to the voluntary GHG accounting and reporting system, is Blueprint for Carbon Markets | Section 7 827 being promoted within the framework of the Special Plan on Climate Change 2008–2012. The plan is also integrating the Federal Electricity Commission (CFE), Mexico’s national utility, and the Central Light and Power Utility (LFC) with the voluntary emissions accounting and reporting system. The program will also help with the promotion of carbon-credit trading among other economic sectors, public or private, managed via projects with simplified criteria, based on the CDM.22 CDM Market Mexico has 110 registered CDM projects, the fourth most of any country in the world and about 8% of the world’s total. It has the second-highest number of CDM projects in Latin America after Brazil. In terms of CO2 reduction, Mexico ranks fifth in the world, with approximately 7,985,793 tCO2e per year. Most of the CDM projects are designed for methane recovery or animal waste management (see below), with projects located in 28 of Mexico’s 31 states as well as in the Federal District. The states of Jalisco, Mexico, Coahuila, and Sonora host the most projects. The country accounts for 65% of all AWMS projects registered around the world,23 and 21% of all Mexican registered projects are Animal Waste Management System (AWMS) greenhouse gas–mitigation projects. This type of project uses greenhouse gas–mitigation methodologies applicable to intensive livestock operations. The purpose of this type of project is to mitigate animal-effluent-related emissions by improving AWMS practices.24 Livestock activities (for example, swine and dairy cows) can cause profound environmental consequences, such as greenhouse gas emissions, odor, and water and land contamination from seepage, runoff, and overapplication that result from storing and disposing of animal waste. Project activities that mitigate AWMS emissions in an economically sustainable manner result in other environmental benefits at the same time, such as improved water quality and reduced odor. One peculiarity not seen in other Latin American countries in our study is the vast disparity between the number of CDM projects per state and the number of CERs that are generated in certain states. The states of Nuevo Leon and Oaxaca, for example, together account for fewer than 10% of the country’s CDM projects but more than 50% of the CERs generated in the country. This disparity is due to the particular circumstances of the projects in those states. Nuevo Leon hosts the only hydrofluorocarbon (HFC) recovery project in Latin America. As HFCs can be as much as 11,000 times more detrimental than carbon dioxide as greenhouse gases, projects specializing in HFC recovery can generate many more emissions reductions. The Quimobásicos HFC Recovery and Decomposition Project in Nuevo Leon accounts for 2,155,363 metric tCO2e reductions annually, or approximately 27% of the 7,985,793 tCO2e reduction the country realizes per year. As a result, the state plays a major role in the country’s emissions-reduction portfolio.25 In the state of Oaxaca, the disparity is not as drastic but is still quite large. This is due to the six wind projects that Chart 7.3.5b Number of CDM Projects Involving “Other Parties” Source: UNFCCC/CDM France 1 Japan 2 Netherlands 1 Spain 4 Switzerland 31 UK 83 828 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf exist there, which are the only ones in the country. Each of these projects is large in scale, and together they account for 1,976,031 tCO2e reduction annually, or about 25% of the country’s total. Together, these projects help to account for Mexico’s unique CDM portfolio vis-à-vis other Latin American countries in this study. Given the energy sector’s particular institutional structure, which is dominated by monopolies, its participation in CDM project development is relatively low, compared to other countries. Mexican state control of energy has been entrenched since oil nationalization in 1938 by President Lázaro Cardenas, and it remains a politically sensitive issue. The state-owned Comisión Federal de Electricidad (CFE) is responsible for transmission nationwide, and for distribution nationwide apart from in Mexico City and surrounding areas, which are the preserve of the state-owned Luz y Fuerza del Centro (LyFC). CFE and LyFC also account for the bulk of installed generating capacity.26 This monopolistic structure, along with fuel and electricity subsidies, constrains CDM project developers in Mexico. It does not allow for the private investment and participation of potential investors in activities designed by PEMEX renewable or otherwise. Energy reform, as such, would help to overcome this barrier to public-private partnerships, as would the promulgation of a legislative framework to incentivize the use of renewable resources.27 The administration of Vicente Fox did attempt an electricity-reform package, which was subsequently blocked. Many believe it would have strengthened the legal framework and facilitated growth in private investment had it succeeded. The Calderón administration is trying to push a similar project through.28 Regardless of the outcome, however, some believe that such reforms will not guarantee that structural problems regarding the energy sector will be solved. As the energy regulatory framework is generally unfavorable, deciding whether it should be liberalized or privatized will not be enough.29 CDM Projects 1. AWMS Greenhouse Gas Mitigation Project MX05-B-06 The biggest AWMS project is the AWMS GHG Mitigation Project, MX05-B-06, developed in Jalisco, in the state of Guadalajara. The goal of the project is to capture and combust methane gas produced from the decomposing manure of swine farms, and it proposes to move from a high–greenhouse gas AWMS practice at an open-air lagoon to a lower–greenhouse has AWMS practice with an anaerobic digester that will capture and combust the resulting biogas.30 1a. Implementation The project — implemented by AgCert International plc and AgCert México Servicios Ambientales, S. de R.L. de C.V., along with UK participation — is made up of 27 associated swine farms bundled together as one entity. It was the first AWMS project registered by the CDM Executive Board, in December 2005.31 The technology employed includes the installation of covered lagoons, creating an anaerobic digester that has sufficient capacity and Hydraulic Retention Time (HRT) to reduce the volatile solids loading in the effluent. The activity will result in the mitigation of Chart 7.3.5c Registered CDM Projects by Type Source: UNFCCC/CDM HFC recovery 1% Landfill gas 7% Animal waste management 21% Methane recovery 61% Wind 5% Hydro 3% Cogeneration 2% Blueprint for Carbon Markets | Section 7 829 anthropogenic greenhouse gas emissions by controlling the lagoon’s decomposition processes and collecting and combusting the biogas.32 The total estimated emissions reduction over the ten-year project period is 1,479,530 tCO2 equivalent. The crediting period for this project activity is from March 1, 2006 through February 19, 2016. 1b. Outcomes MX05-B-06 has had to overcome investment, technological, and legal barriers in order to function properly. Because the treatment approach that the project utilizes is considered one of the most advanced AWMS systems in the world — one that only a few others countries have implemented due to high costs — the investment required “o produce energy by utilizing biogas is still too high compared to electricity prices in Mexico. The energy market in the country does not offer incentives to sell biogas to the grid, so the project cannot profit in that way. Banks, as a result, have been unwilling to finance such activities without government guarantees or incentives.33 In terms of technological barriers, the systems used needed operations and maintenance for the technology that included a detailed monitoring program to maintain system-performance levels. This is because, so far, few anaerobic digesters in the world have achieved long-term operations, primarily due to inappropriate operations and maintenance. Implementation of such operations was an added cost. Legally, the project exceeded Mexican regulations for swine-waste treatment, which increased the time it took to get the project approved and, as a result, drove up the transaction costs of project implementation.34 2. Aguascalientes EcoMethane Landfill Gas Project The third-largest landfill project developed in Mexico is the Aguascalientes EcoMethane Landfill Gas Project, which was the first of its kind to be registered under CDM in the country. The Aguascalientes EcoMethane Landfill Gas (LFG) project deals with the LFG emissions from two local landfills, San Nicolas and Cumbres, by reducing greenhouse gases through the capture and flaring of the LFG. It also installed 2–4 MW of electricity, which reduces fossil-fueled grid energy. 2a. Implementation It was developed by Biogas Technology Ltd. and EcoMethane, an unincorporated joint venture dedicated to financing, constructing, and operating projects that capture and make productive use of methane emissions.35 EcoMethane worked exclusively with Biogas Technology Ltd. (Biogas) and the ENER*G Group PLC (ENER*G) to finance, construct, and begin operating the project. It also worked with EcoSecurities Ltd. to develop this project.36 Both the San Nicolas and Cumbres landfills are owned by the municipal government of Aguascalientes. Chart 7.3.5d CDM Projects vs. CERs by State Source: UNFCCC/CDM Aguascalientes 0% 5% 10% 15% 20% 25% 30% 35% Percent of CDM Projects Percent of CERs Baja California Chihuahua Coahuila Durango Guanajuato Jalisco Michoacan Nuevo Leon Oaxaca Puebla Queretaro San Luis Potosi Sinaloa Sonora Tamaulipas Yucatan Veracruz Mexico 830 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf 2b. Outcomes Prior to the project, there were no systems to capture or flare the LFG. Due mostly to the cost of implementation, there was neither economic incentive nor support to develop LFG projects in Mexico. Aguascalientes was the first to take advantage of such green opportunities and has succeeded in diversifying electricity generation sources. It has also created jobs, used clean and efficient technologies, and conserved natural resources.37 3. Eurus Wind Farm Project Almost one-quarter of the country’s emissions reductions are generated from wind projects, the biggest of which in terms of CERs generated is the Eurus Wind Farm. Eurus is a 249 MW project in the area of La Venta, in the state of Oaxaca. Eurus was established with the objective of promoting renewable energy projects, and its aim is to be competitive with the energy price of cement plants and other industrial plants. It is supported financially by the income generated from the sale of the carbon credits. 3a. Implementation Both the speed and quality of the wind resources in parts of Oaxaca are ideal for the implementation of renewable energy at the proposed site for the project. The project was developed by Eurus S.A. de C.V., which belongs to Cemex Mexico S.A. de C.V. Both construction and operation of the wind farm were performed by a private project developer using inhouse technology and procedures.38 3b. Outcomes The type of project, however, did not necessarily lend itself perfectly to Mexico’s situation. As there is no premium of any kind for energy generated from renewable sources in the country, Eurus had difficulty negotiating a sales price that would “ensure an attractive investment rate of return for the project or obtain project financing.”39 Additionally, lack of emissions rights for wind energy hampered project feasibility. Having such rights would have at least provided an extra source of income for each MW produced and would have helped to give the project a stronger bargaining position with financial institutions.40 Wind energy could, however, be an attractive alternative energy source for Mexico. In the country, wind power installations will comprise 0.9% of the total power installed within the energy system by 2014. Therefore, installing what will be probably the biggest wind farm in Mexico to date will not only contribute directly to the development of renewable energies, but it will also serve to show that in Latin America, too, wind power plants are already close to commercial viability, and perhaps it will encourage others to develop similar projects.41 The Voluntary Market The potential for the voluntary carbon markets in Mexico is promising. Voluntary projects allow more flexibility in terms of project design and are generally more adaptable to regional characteristics. Success in the sector, however, will depend on how barriers like CDM methodologies and verification systems will be overcome.42 Furthermore, as the United States considers its own climate change mitigation policies, companies and institutions there are increasingly interested in voluntarily offsetting their emissions in anticipation of federal regulations. As such, Mexico will be able to play an important role in terms of hosting voluntary projects for entities in the U.S. 1. Plan Vivo Plan Vivo (PV) is a Mexican voluntary carbon standard designed for community-based agro-forestry projects. Through the program, smallholder farmers can plant trees on their land and sell the emissions reductions in order to receive verifiable carbon credits.43 PV was initiated in the state of Chiapas in 1994 by the Edinburgh Center for Carbon Management, a consulting company that works on climate change-mitigation strategies and policies, in conjunction with El Colegio de la Frontera Sur (ECOSUR), the University of Edinburgh, and other local organizations that received funding from the UK Department for International Development. The first project implemented, “Scolel Te,” is the longest-running Plan Vivo project.44 The plan is managed by the PV Foundation, which certifies and issues credits that are known as “PV Certificates.” The foundation registers and monitors carbonsequestration activities implemented by farmers, who work with local promoters to draw up their own work plans for forestry and agro-forestry systems. It then assesses the projects in terms of technical feasibility, social and environmental impact, and carbon-sequestration potential. When a project is deemed viable, it is registered with a local trust fund, which then provides farmers with financial and technical assistance to implement their farm- or community-scale plans on the basis of the amount of carbon that will be sequestered.45 Blueprint for Carbon Markets | Section 7 831 2. Sierra Gorda Biosfera Reserve Located in the state of Queretaro, the Sierra Gorda Biosfera Reserve (SGBR) is situated between two mountain regions covering almost 1 million acres. It is considered to be one of the most ecologically rich and diverse places in the country. The project is run by Grupo Ecológico Sierra Gorda (GESG), which was formed in 1987 by a group of residents in the area who campaigned to have Sierra Gorda given the status of biosphere reserve by the Mexican government, which occurred in 1997.46 The carbon program has been operating since 2005, when GESG decided to undertake its own carbon sequestration. The project is supported by the UK’s Carbon Balanced, which is an ecological restoration project run by the World Land Trust (WLT). GESG issues Emission Reduction Credits after it sequesters carbon by reforesting lands previously converted to agricultural and livestock uses in the Sierras. Having already planted trees in the Sierra Gorda at its own expense, Carbon Balanced offsets that are generated as the result of the sequestering are re-invested into more conservation work. This creates a type of revolving fund whereby GESG sustains itself and the SGBR.47 In the first phase of the project, 5,230 units of emissions reductions were sold through the United Nations Foundation.48 Market Considerations Strong investor interest and the large scope for new renewable energy projects in Mexico indicate that the CDM sector is the most appropriate method through which to pursue carbon market development in the country. Of note is the success that the country has had in the CDM up to this point despite the very small contribution of renewable energy projects in the sector. Only 8% of the country’s CDM projects today are renewable energy projects—the figures for other country studies in this report range from 30% to 80%. While the CDM market in Mexico is already a global leader, there is even greater potential for it to develop renewable energy projects to drive carbon development. The voluntary market can still play an important role, however. Mexico’s total forest loss from 1990 to 2005, at 8%, is among the worst in Latin America. Forest degradation and avoided forestation projects are best addressed through the voluntary market, which is suitable for less populated and poorer regions. The voluntary market could also help to diversify Mexico’s energy matrix through renewable energy, with small hydro a prime candidate. While barriers remain in the monopolistic structure of Mexico’s state energy enterprise, voluntary market players can still implement renewable energy projects that achieve local benefits even if the energy generated from such projects cannot be grid connected. Given these considerations, Mexico should pursue a dual track approach of development, like Brazil, whereby it uses all the carbon assets available in the CDM and voluntary market. Conclusion Several ongoing processes will determine the future of the Mexican carbon market, including the publication of the Special Program on Climate Change 2008–2012. This will serve as a roadmap for further strategies in different sectors and will consolidate initiatives that are now taking place. Mexico is already doing a lot to take advantage of its strengths in order to realize a leading CDM and voluntary carbon market. It has a well-regarded DNA and strong institutional support in general, favorable conditions for investment, and a federal government that is committed to climate change mitigation. Strong institutional support, favorable investment conditions, and a commitment to climate change mitigation have made Mexico a leader in the world CDM market. Part of the reason as to why the Inter-Ministerial Commission for Climate Change (CICC) is such an effective Designated National Authority (DNA) is that it is made up of representatives representing diverse interests within the Mexican government. These different stakeholders from the environment, energy, agriculture, transport, industry, social and foreign affairs ministries approach the notion of climate change mitigation from unique perspectives, and, as such, enable the CICC to function as a truly national entity. The investment climate of a country is generally a good indicator of the attractiveness of that country’s CDM portfolio and the likelihood that project developers will want to commit to working there. When there is a strong institutional commitment to promote investment, and rule of law that lends credibility to the country’s political environment, investors find the atmosphere to be less risky. The same is true for CDM investors and those interested in working in the voluntary market. That the country has a long history of 832 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf working in carbon markets gives investors a certain amount of confidence that it is a good place to set up CDM or voluntary projects. As the only developing country to have submitted three national communications to the UNFCCC, Mexico is at the forefront of efforts to be as transparent as possible regarding emissions goals and realities. Central to this strategy is the belief that openness regarding emissions has two benefits: (1) It provides transparency that is key to attracting investment, and (2) it gives Mexico a set of benchmarks by which to measure the progress that it makes or hopes to make. Taken together, these strengths indicate that Mexico may play an even more significant role in the carbon market than it has up to this point. The country will be a very considerable presence in the international carbon market once it lives up to its potential.49 Reaching that point will mean that it must use its strengths to the fullest extent. It will also mean that the country must overcome its weaknesses, some of which exist mainly relative to other countries. Among Mexico’s chief weaknesses regarding its carbon portfolio are: • A state energy monopoly that crowds out private enterprise • A comparatively small renewable energy matrix A state energy monopoly that crowds out private enterprise One important part of developing CDM and voluntary carbon market projects in other countries in Latin America is visibly absent in Mexico: public-private partnerships in the energy sector. As a state monopoly, Pemex has resources in almost every region of the country more knowledge than most other companies of loca particulars. What it does not have is the constitutional mandate to enter into alliances with private enterprises, which would allow it to work together with project developers and private investors to take on renewable energy projects. This is especially stark, considering that the country’s oil production has been slowing over the past decade. There is a great opportunity for the state-owned enterprise to pool its expertise and capital resources with private efforts to reduce emissions and add generation capacity. A comparatively small renewable energy matrix About 8% of Mexico’s CDM projects are renewable energy projects. The number is low relative to other countries in our study. Renewable energy projects in Brazil, for example, account for almost 30% of total projects in the country, while they account for about 35% in Chile, 50% in Colombia, and over 80% in Honduras. These types of projects are important not only for the generation of saleable CERs but also as means to sustainable development, by providing electricity to rural areas. Additional revenue can be gained from the sale of the produced electricity to the national grid, as is done in other countries. Utilizing renewable energy’s twin benefits will help Mexico augment its energy-capacity and social development. Small hydroelectric, for example, is a common way to generate base power for rural communities that are not as easily connected to the national grid due to infrastructural concerns. Blueprint for Carbon Markets | Section 7 833 7.4 Global Case Studies 7.4.1 INTRODUCTION The first year of the Clean Development Mechanism, from November 2004 to November 2005, saw the development of 39 projects worldwide. Latin American and Caribbean projects accounted for 18 of these, including the first two to be registered and three of the first five. It was a promising start for the region in terms of the beginning of a new era in sustainable development. But while there is little question that Latin America has continued to benefit from the CDM, since the first year of the mechanism’s operation the region has lost ground to an increasingly competitive and assertive Asia. Today, Asia hosts more than 65% of all CDM projects in the world while Latin America hosts about 30%. While there are certain advantages that are inherent to each region, Asia has arguably pushed more forcefully and taken advantage of more opportunities to ensure its primacy in the sector. This section will place Latin America and the Caribbean in a global context. Though the carbon market is not zerosum, like any market, it is competitive. Investors seeking returns are more likely to invest in countries and regions where they feel they are better placed to benefit. This section is not a comparison of the Americas and Asia for the sake of comparison, but rather a means to better understand what competitors are doing so as to analyze how the Americas can assess its own efforts and potentially improve upon them. Doing so will be a key means to enhance the region’s market attractiveness for would-be project investors and subsequent carbon market development. The analysis that follows looks at India and China, the world’s leading countries in the CDM market, and the steps they have taken so far to develop their own carbon sectors. It also investigates the comparative advantages inherent to those countries, how they garner institutional support to drive development in the carbon market, and the main actors aiding the countries in enhancing their carbon market development. Understanding the ways in which China and India have succeeded is not meant to act as a template for how Latin American and the Caribbean can succeed; rather, this information should be used to analyze the Americas in the context of activity in other carbon markets. In doing so, the analysis endeavors to enhance the reader’s understanding of how carbon markets have evolved in different parts of the world, the strengths and weaknesses of these regional differences, and what they mean for Latin America and the Caribbean looking ahead. 7.4.2 PEOPLE’S REPUBLIC OF CHINA (PRC) The People’s Republic of China (PRC), the fourth-largest economy in the world and the country with the highest population, has maintained an approximate economic annual growth rate of 9% during the past two decades. This impressive growth led China in 2007 to overtake the U.S. as the world’s biggest emitter of greenhouse gases.1 Though the country has witnessed tremendous growth in Chart 7.4.1a Percent of Global CDM Projects by Region Source: UNFCCC/CDM India 30% China 27% Brazil 11% Other LAC 10% Other Asia/Pacific 10% Mexico 8% Africa/ME 4% 834 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf its emissions, China has taken steps to address the twin challenges of development and climate change. Though one recent climate change performance index has the country ranked 40th out of 562 — with the U.S. at 55th — another report puts the country ahead of the UK and into the top five countries in the world on the Renewable Energy Country Attractiveness Indices. 3 Clearly, the country has done more than many others to ensure that climate change is addressed. In terms of global carbon markets, China is the world leader. China’s three energy-intensive sectors — industry, construction, and transportation — have supported the country’s high GDP growth and subsequent improvement in living standards, largely by relying on fossil fuels. Still, the Chinese government has always regarded energy conservation as a major factor in macroeconomic control, and also as a driving force for transforming the pattern of economic development in the country and optimizing its economic structure. One of the approaches that China uses, for example, is improving energy conservation in industry. This is an important consideration vis-à-vis climate change, given industry’s high impact on energy consumption in the country. The government’s objective is to target industries with high energy-consumption levels, such as steel, nonferrous metals, coal, electricity, petroleum and petrochemicals, chemical engineering, and building materials. The government even launched an energyconservation drive among 1,000 enterprises with the focus on tightening control over those companies consuming 10,000 tons of standard coal or more annually. At the same time, China is launching a variety of energy-saving projects, including petroleum substitution, simultaneous generation of heat and power, surplus heat utilization, and the construction of energy-saving buildings.4 Coal provides about 76% of all energy produced in the country. The Chinese government, therefore, has formulated its energy-development strategy focusing mainly on adjusting the heavily fossil fuel–oriented energy matrix. This means diversification, energy conservation, the enhancement of environmental protection, and technology deployment. The principal objectives of the country’s energy plan include the utilization of clean energy sources like natural gas, hydropower, and nuclear power; the promotion of new energy and renewable energy; the reduction of the proportion of coal directly used for terminal consumption; and the sustainable development of energy, the economy, and the environment. At the same time, China’s Energy Development Program aims to restructure the energy industry and its institutions, to develop energy technologies and infrastructure, and to be able to measure the achievements.5 Inherent problems exist in any interpretation of China’s energy and climate change strategy. First, all economic and energy projections for China are uncertain due to the nature of the political landscape. Second, the feasibility of expansion in the country is questionable, given the state of infrastructure and environmental carrying capacity. 0 1,000 2,000 3,000 4,000 5,000 6,000 1980 CO2 Emissions form Fossil Fuels (MtCO2e) Coal Consumption (millions short tons) 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Chart 7.4.2a CO2 Emissions from Fossil Fuels (MtCO2) and Coal Consumption (millions short tons), 1980-2005 Source: Energy Information Administration Blueprint for Carbon Markets | Section 7 835 Both of those issues suggest that Chinese policy goals might not be realistic. Third, is that China’s institutions and stakeholders are often weak and decentralized, which means that implementing a central policy at the local level is very difficult.6 Directives from the central authority are often overlooked or simply ignored at a local level, due to incentives given for meeting certain economic goals. Institutional Participation China, along with the U.S., is at the center of the global climate change debate. Even if calculations that it has already surpassed the U.S. in its greenhouse gas emissions are not yet true, various estimates have the passing of this torch taking place in the near future.7 Still, it will be a long time before China’s cumulative emissions surpass those of the U.S. Furthermore, working in the country’s favor in the context of supporting global climate change policy is the fact that China approved the Kyoto Protocol in August 2002. In order to participate actively in the agreement as a host country, the Chinese government appointed the National Development and Reform Commission (NDRC) as the Designated National Authority (DNA) for the Clean Development Mechanism (CDM). In order to shore up support for its carbon market, the government developed the Official CDM Policy Guide, entitled “Interim Measures for Operation and Management of Clean Development Mechanism Project in China.”8 According to the measures, more than a dozen Chinese governmental institutions are involved in CDM-related affairs. Among the institutions directly involved in the management of CDM projects is the National Coordination Committee on Climate Change (NCCCC), which is in charge of the policymaking and the coordination of CDMrelated issues. At the same time, the NCCCC is responsible for negotiating with foreign parties who want to be involved in CDM projects in the country and for publishing national reports for the UNFCCC. In addition to the NCCCC, the National CDM Board, which works under the committee, is in charge of reviewing and assessing CDM projects, while the NDRC and a CDM project management institute established under the National CDM Board work together to ensure that the CDM market functions as smoothly as possible.9 As a result of the varied institutions that China utilizes to develop the CDM market, the Chinese government has a larger impact on CDM project design and implementation than other host countries. In particular, market legislation differs from that of other countries in Asia or in Latin America, especially in terms of property rights and taxation. It is important to mention that, despite their relative political and economic independence, local Chinese entities are not allowed to approve CDM projects independently of the central government. Chart 7.4.2b World Net Hydropower (Quadrillion Btu), 1980–2005 Source: Energy Information Administration 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 China Canada United States Brazil Quadrillion Btu 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 836 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf China’s low marginal abatement costs, due to its low efficiency and less-developed energy technology, make the country ideal for implementing CDM projects. This is especially true for wind and hydro projects, which have huge comparative advantages. According to estimates by the China Meteorology Research Institute, land-based, exploitable wind resources represent a potential powergeneration capacity of 253 GW. It is estimated that between 2020 and 2030, China’s small-scale hydropower resources will be almost fully developed, with a capacity of 100 GW. That will account for about 10% of China’s total installed power capacity at that time. With regard to hydropower, the government has designed different programs to encourage the development of micro hydropower plants. Such programs have contributed to making China the world leader today in terms of hydropower utilization (See Chart 7.4.2b). These programs include small-scale hydropower, which has been used as driver for rural electrification. Since 1949, small-scale hydro has helped rural electrification in China expand greatly, contributing to the sustained and steady development of the agricultural sector, rural economy, and quality of life for rural households. As a result, China has introduced electricity access to over 900 million rural residents in just over 50 years and has achieved an electrification rate as high as 98%. Many factors have contributed to the success of China’s rural electrification, though small hydropower has played a particularly significant role in remote rural regions. The process of rural electrification is just about complete today, with these regions almost fully integrated into the power sector in China. In regions of abundant small hydropower, integrated generation, supply, and utilization systems are formed in cooperation with small thermal power plants. In these cases, the provincial water resource bureaus or county small hydropower companies are responsible for supplying electricity to rural areas.10 The future looks bright as well. According to the National Renewable Energy Development Plan, the installed capacity of small-scale hydropower will reach as much as 75 GW, with annual power generation of 250 TWh by 2020. The carbon emissions reductions from this will be as much as 60 million tCO2e.11 Other Actors Foreign Governments Among the countries surveyed in this report, China generates the most foreign investment and expertise for the development of its CDM sector by far. Only seven of the country’s CDM projects, less than 3% of the total, were not undertaken along with foreign participation. As it does in India, the UK plays by far the largest role as “other participant” in China’s CDM sector, participating with other actors in 107 of the country’s projects. Switzerland and the Netherlands each play significant roles in their own right as well. International Financial Institutions World Bank: The World Bank Carbon Finance Unit is heavily involved in China, supporting 17 projects through the BioCarbon, Chart 7.4.2c Number of CDM Projects Involving “Other Parties” Source: UNFCCC/CDM Austria 7 France 7 Germany 25 Italy 12 Japan 8 Netherlands 27 Sweden 21 Switzerland 29 UK 91 Blueprint for Carbon Markets | Section 7 837 Community Development, Danish, Italian, Prototype, Spanish, and Umbrella Carbon Funds. Among these various projects, the “Facilitating Reforestation for Guanxi Watershed Management in Pearl River Basin” project stands as just one example of the tremendous efforts that China is undertaking to bring forests back to the country. In 2005, China began a tenyear, $2.4 billion plan to plant 170,000 square miles of trees in the country, or roughly the same size as California. That plan encompasses six separate projects that range from reforesting hillsides to creating protected grasslands and nature reserves.12 As part of the BioCarbon Fund, the Guanxi Watershed Management Project — the first Land Use, Land Use Change, and Forestry (LULUCF) project in China — seeks to alleviate local poverty and reduce threats to local forests at the same time. The project entails the afforestation of 4,000 hectares in the Guangxi Zhuang Autonomous Region. In addition to the sequestration of carbon resulting from the project, the new forests will also help to increase biodiversity in the nature reserves, to reduce soil erosion, to improve the regulation of hydrological flows (which is intended to reduce the risks of flooding and drought), and to provide incentives for people to invest in sustainable land use.13 Asian Development Bank: The ADB has helped China to play a leading role in the international carbon market. In fact, the ADB’s assistance to China’s energy sector is mainly within the realm of the carbon market. The Asia Pacific Carbon Fund, established by the ADB Carbon Market Initiative, has contracted for the purchase of emissions reductions from various projects in the country. One of these is the Erlongshan Hydropower Project in Gansu province, to which payments are made to the project company in advance of the clean power generation. The ADB has also extended over $2 million in non-lending assistance to encourage the usage and further implementation of additional clean energy projects in the country. Parts of that goal have been changed to increase the amount of biomass-based power generation in Heilongjiang province, the promotion of geothermal energy technology, and the more efficient use of external assistance to improve energy efficiency and develop renewable energy in the country.14 CDM Market China is divided into 22 provinces, five autonomous regions, and four municipalities. Every province has developed at least one CDM project within its territory, as have the four autonomous regions excepting Tibet, and two municipalities, Beijing and Chongging. The provinces of Gansu, Liaoning, and Shandong contain the majority of the registered projects, accounting for 12%, 11%, and 8%, respectively. Inner Mongolia is the leader in registered CDM projects among the autonomous regions, with 7% of the total projects registered in the country. After a slow start, China is now taking advantage of its considerable CDM potential. The country has 361 CDM projects, second only to India, and accounts for more emissions reductions annually than any other country in the world. The three biggest projects registered — the Project for HFC-23 Decomposition at Changshu, the Shandong Dongyue HFC-23 Decomposition Project and the N2O decomposition project of PetroChina Company — account for 31% of all the CER’s obtained. The projects receiving the most investment are wind (36%), hydroelectric (31%), and energy efficiency (9%). (See chart on next page.) But while these types of projects account for the greatest portion of CDM projects in the country, they do not necessarily provide the most CERs to the market. The Chinese carbon market has grown a lot in the last two years. This has been helped by a more proactive Designated National Authority in the CDM approval process. In 2006, for example, the DNA approved 47% of all its projects for that year in a two-month span between Source: UNFCCC/CDM Brazil 0 10% 20% 30% 40% 50% 60% Percent of CDM Projects Globally Percent of Avg. Annual Reductions (tCO2e) Globally Mexico Other LAC China India Other Asia/Pac Africa/ME Chart 7.4.2d Percent of CDM Projects vs. Percent of CERs Globally 838 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf the end of October and the end of December. One reason for the uptake is that, up until recently, only bilateral CDM projects were allowed, and the agreed CERs price had to be disclosed upfront.15 Financial incentives to develop renewable energy, energy efficiency, and coal-bed methane projects have also helped the process along.16 The first Chinese CDM project reached its validation phase in November 2004. Since then, the Chinese CDM pipeline has developed around a few core CDM methodologies. For example, 33% of Chinese CERs come from HFCs, even though HFC projects only account for about 6% of the country’s total. Another 16% of the country’s CERs come from hydro, and 9% from coal-bed methane projects. The Chinese CDM market is dominated by state-owned industrial and energy companies that develop mainly large CDM projects, with an average size of 270,000 credits per year.17 In terms of the widespread use of HFC-reduction projects, there are two implications. First, they are lowcost, and they use relatively easy procedures that generate additional incentives besides the large numbers of CERs produced. Second, the success of these projects has future implications for the success of this methodology. China’s pursuit of HFC projects has been particularly controversial. For example, HFC-23, a refrigerant, is almost 12,000 times more environmentally detrimental than is carbon dioxide, meaning that huge numbers of CERs can be generated from their destruction. In and of itself, this is not controversial. In fact, stopping the use of such harmful compounds has great environmental benefits. But many analysts feel that China is exploiting a loophole in regulations by installing $10 million to $30 million worth of “scrubbers” to achieve huge profits.18 In essence, Western companies pay China roughly $8 per ton of CO2 equivalent for destroying HFC-23 when they would have to pay far more to reduce emissions in their own countries. This gives investors a significant value. Regulators worry, meanwhile, that the carbon market actually encourages companies in China to make more of the refrigerant than they otherwise would so that they can produce more of it and make more money from it.19 As a cheap and effective refrigerant, it continues to be an important industrial chemical, produced in especially high volume by “rich developing” countries such as China, India, and Korea.20 While the particular type of project seems to have reached its peak in terms of investor interest, it still generates much criticism from environmentalists who do not believe such action should qualify for carbon-crediting purposes. China is marked by the pronounced institutional control of CDM. Given the way the country is situated politically, CERs are considered to be state-owned assets, and different levels of taxes are levied on CERs from different types of projects.21 The idea behind this concept of benefit sharing between enterprises and the state is that priority projects with high sustainable development benefits, such as renewable energy projects, will not be “taxed” at all, whereas projects with relatively low sustainable development benefits and low costs, such as HFC-23 decomposition, will have to deliver some revenues to the state. Until recently, only bilateral CDM projects were Chart 7.4.2e CDM Registered Projects by Type Source: UNFCCC/CDM Biomass 5% Coal bed 4% EE generation 9% HFCs 6% Hydro 31% Landfill gas 6% Wind 36% Other 3% Blueprint for Carbon Markets | Section 7 839 allowed, and the agreed CERs price had to be disclosed. Even if not declared officially, the agreed price must be at least equal to the government-set price floor, which is now around $8–9 and likely to rise in the future.22 Another interesting facet of the market is that only enterprises under sole Chinese ownership, or joint ventures with an aggregate foreign investment stake of not more than 49%, may qualify as project owners. Accordingly, foreign interest in China’s CDM market is confined largely to consultancies, which supply technology or equipment and buy carbon credits. Little technology transfer by foreign enterprises has taken place so far. The combination of technology supply and CER purchase appears to be a promising option. Shandong Dongyue HFC-23 Decomposition Project The biggest HFC-23 project of this type registered by China, in terms of CERs produced, is the Shandong Dongyue HFC-23 Decomposition Project, located in Shandong Province on the Pacific Coast in the east of China. Shandong Dongyue Chemical Co., Ltd. (“Dongyue”) is one of the largest manufacturers of HCFC22 in China. The HCFC22 that is used goes mainly toward refrigerant but is also used for other chemical products. The project activity collects HFC23 as a byproduct from the HCFC22 production facility in Dongyue and decomposes it in an incinerator.23 Given the harm that HFC-23 can do to the environment, its decomposition will contribute to the mitigation of global warming.24 This type of project does not necessarily bring about direct energy and local environment benefits. According to its developers, however, Shandong is a unique type of CDM project in that it contributes hugely to the country’s pool of CERs. It also does contribute, at least indirectly, to the promotion and usage of renewable energy projects in the country. This is because credits from projects that destroy industrial HFCs in China are now taxed at a rate of 65%, with the revenue that is generated by them placed into a renewable energy fund. This system was created as a response to the critics who claim that the projects do little to create sustainable development benefits.25 Voluntary Market China has a fairly active voluntary carbon market. Unlike India, its voluntary carbon projects are not necessarily inhibited by their small size. In part due to the macroeconomic setting, the voluntary market thrives much as much CDM market does because there is such considerable scope to generate emissions reductions in a country that relies so heavily upon fossil fuels to meet its energy demand. There is still considerable room for growth in this end of the market, especially as the Indian government ramps up energy supply in the coming years and seeks to find ways to improve rural coverage. The Qingdao Huawei Wind Farm Located in Qingdao, in China’s Shandong province, the Qingdao Wind Farm comprises the implementation of 15 wind turbine generators with a total installed capacity of approximately 16 MW. The power that is generated by the wind farm, about 30 MW per year, is fed into the regional grid.26 The program is supported by UK-based Climate Care — part of JP Morgan’s Environmental Markets group — a company that provides advice and support to companies and project developers in emerging markets to create emissions-reduction credits from projects that successfully reduce greenhouse gas emissions.27 So far, the project has generated 21,150 tons of emissions reductions, which have been sold in the form of VERs. The province of Shandong, right on the Pacific coast in northern China, is well endowed with wind resources utilizable for power generation. The 15 wind turbines are spread across three locations and generate approximately 30,000 MWh of electricity per year. The power is directly supplied to the heavily coal-dominated North East China Power Grid. As a result, the wind turbines help to improve air quality in the region and also to promote the development of the renewable energy industry. The local community has benefited from the wind farm through annual payments made by the farm company to a specially designed community fund, split among the five surrounding villages, which decide how the money is spent. During the three-year construction period of Qingdao Wind Farm, 120 people were employed, and today more than 30 workers are employed by the wind farm company to manage the operation and maintenance of the project.28 The project was implemented in 2003, and the crediting period began in January 2004. Qingdao is expected to be in operation for a period of 20 years, during which it will generate greenhouse gas emissions reductions by avoiding CO2 emissions from electricity generation by fossil fuel power plants that supply the area.29 The project is notable for the fact that the electricity generated is fed directly to a grid that is heavily reliant upon fossil fuel plants. Conclusion China has strengths and weaknesses in its carbon market. The country’s DNA, the NDRC, is regarded as a strict 840 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf authority regarding the CDM approval process. This helps to ensure that emissions reductions are strictly tabulated and enforced. The country also has a growing number of enterprises that see the CDM as a means to generate additional income. Several important challenges remain for China’s policymakers to address regarding the future of carbon markets in the country. China must act rapidly to facilitate generation of a substantial pipeline of CDM projects and must work to clarify the uncertainties that the present institutional framework presents.30 Based on the current status of CDM in China, a particularly critical focus at present should be on continued capacity building, including local public awareness and local promotion centers to educate the public about the use of renewable energies and incentivize their use.31 Among the most pressing weaknesses in the country are: • An inflated bureaucracy and opaque government apparatus • An overemphasis on the low-hanging fruit of CDM projects Regarding the first, the nature of China’s government breaks both ways. On the one hand, it brings political stability and strict implementation of CDM projects. On the other hand, the government’s lack of transparency and inflated bureaucracy can lead to legal uncertainties and insufficient protection of intellectual property. Additionally, a large number of the country’s CDM projects are in sectors to which the government attaches priority. HFC projects, for example, not only generate huge numbers of CERs but also generate tax revenues for the central government. It is impossible to separate such benefits from the state authority. Regarding the overemphasis of projects that are more easily identifiable and implemented, hydroelectric power in the country is one example. While China’s hydropower sector is world-leading in terms of size, its net environmental impacts in the country have been far from positive thus far. Not only have significant portions of the population had to be relocated as the result of government emphasis on this sector, but huge swaths of pristine land have been degraded and destroyed to make way for hydroelectric implementation as well. This again highlights the strength with which the central government exercises power over the carbon market. So far, the fact that no foreign entity is yet allowed to own more than 49% of any project in the country has not yet dissuaded many investors from taking part. Looking ahead, however, investors will likely play an increasingly important role in diversifying the country’s renewable energy matrix and will do better by being able to have a large stake in the outcomes of such undertakings. Chart 7.4.2f Percent of Global Average Annual Reductions (MtCO2e) Source: UNFCCC/CDM LAC Other 6% Brazil 8% Mexico 3% China 54% India 13% Asia/Pacific 11% Africa/ME 5% Blueprint for Carbon Markets | Section 7 841 7.4.3 INDIA The Government of India has played an active role in the climate change debate for years, having ratified the Kyoto Protocol in August 2002. As a developing country it is not obligated to have greenhouse gas reduction targets, but it is still taking steps in this direction. It has one of the largest renewable energy programs in the world, which includes government incentives for new technologies. The government’s wind energy program, for example, offers a five-year tax exemption on income from generation sales and the buy-back of power generation by state electricity boards at remunerative prices.1 The solar industry is also initiating rural programs for heating houses and developing ovens. India is the second most populous country in the world, with a population of 1.129 billion, approximately 17% of the world total. Although its economy has experienced an average growth rate of more than 7% since 1997, its per capita GDP is still only $4,182. One quarter of the population lives below the poverty line, and development in many rural areas is minimal.2 Due to its vast geography and regional differences in climate, development is quite uneven, with stronger growth and development in the southern and western states. Even though India’s outstanding economic performance remains a benchmark for the region, the sustainability of its current development has been debated. The connection between development, poverty reduction, and energy access is critical. Poverty reduction and economic growth remain the national priority, as more than 600 million Indians have little or no access to clean, modern sources of energy. Enhancing energy supply and improving access are, therefore, key components of the national development strategy. These priorities are reflected in a number of official initiatives, including the Energy Security and Climate Change report, published jointly by the Ministries of Environment and Power.3 This report reviews how the country can increase access to clean energy, enhance sustainable development, and adapt to climate impacts. It also provides an overview of current government policies, such as the promotion of energy efficiency at power plants, labeling programs for appliances, energy conservation, building code requirements, energy audits of large industrial consumers, and the accelerated introduction of clean energy technologies through the CDM.4 Even though India is the fifth-largest power producer in the world, it is plagued by substantial shortages estimated at around 6% of total demand, rising to more than 12% at peak times. Fossil fuels will remain India’s predominant source of energy for the near future. The government has committed to increased efficiency, however, as well as the development of renewable energy sources. New and renewable energy has been assuming increased significance in recent years given the growing concern for the country’s energy security. Chart 7.4.3a New CDM Projects in the Pipeline in Asia (by Quarter) Source: UNFCCC/CDM 0 50 100 150 200 250 300 350 400 Q1- 04 Q2- 04 Q3- 04 Q4- 04 Q1- 05 Q2- 05 Q3- 05 Q4- 05 Q1- 06 Q2- 06 Q3- 06 Q4- 06 Q1- 07 Q2- 07 Q3- 07 Q4- 07 Q1- 08 Asia & Pacific India China Number of CDM Projects 842 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Energy self-sufficiency was first identified as a national priority in the wake of the two oil shocks of the 1970s. In 1981, the increase in the price of oil and the uncertainties associated with supply led to the establishment of the Commission for Additional Sources of Energy in the Department of Science & Technology. This commission was responsible for formulating policies, implementing programs for the development of new and renewable energy, and coordinating and intensifying R&D in the sector.5 As a result, nuclear power now accounts for 3% of total electricity supply, while hydroelectric power contributes more than 14% of total supply and has the potential to increase three to four times.6 India has been able to reduce energy intensity in recent years through changed consumption patterns, enhanced competitiveness, energy efficiency policies, and more recently, the use of the Clean Development Mechanism to accelerate the adoption of clean energy technologies.7 The deployment of new technologies through the implementation of the CDM promises sustainable development benefits for India in the short run. The majority of rural households in India do not have access to electricity and frequent power supply shortages occur even in those areas where there is electricity. The Indian government has prioritized utilizing the CDM to encourage investment in rural electrification. The goal is a “triple-bottom-line” approach that will produce benefits in development, environmental protection, and profit. The largest sources of greenhouse gas emissions in India are the energy sector, the agricultural sector, and industrial sector. The government response to climate variability already exceeds 2% of the GDP. Agriculture, water resources, health and sanitation, forests, coastal-zone infrastructure, and extreme weather events are the leading areas of concern.8 The government has also launched several climate change mitigation initiatives, including the Energy Labeling Program for Appliances in 2006 and the Conservation Building Code (ECBC) in May 2007. India expects that renewable power generation will approach 60,000 MW by 2032. It is anticipated that renewable use in rural areas will increase in efficiency and will help encourage the development of these areas. As this occurs, India will move away from the centralized power grid and empower local communities to play a more direct role in poverty alleviation. Many hope that this will reduce the growing rural-urban divide.9 Institutional Participation The Indian government has shown strong interest in developing its CDM capacity and has implemented several initiatives to increase the country’s potential.10 In addition to assisting the training of professionals, it has helped to facilitate links among government actors, departments and institutions in order to improve reliability and encourage the participation of the private sector. India’s Designated National Authority (DNA) is the National Clean Development Mechanism Authority (NCDMA). Founded in December 2003, this entity is composed of eight representatives from six ministries (Environment, Foreign Affairs, Finance, Industry, Power and NonConventional Energy Sources) and a member of the Planning Commission. NCDMA is chaired by the Ministry of Environment and Forests (MoEF), which also assigns the Member Secretary responsible for coordinating the NCDMA.11 The NCDMA receives projects for evaluation and approval in accordance with the CDM’s guidelines and general criteria. The evaluation process includes an assessment of the probability of successful implementation and an evaluation of the extent to which projects meet national sustainable development objectives and priorities.12 The country has also signed memoranda of understanding with Italy and Canada. The latter agreement established long-term collaboration between Environment Canada and the Indian Ministry of Environment and Forests (MoEF). The two departments agreed to strengthen India’s institutional capacity to tackle pressing environmental issues, such as air quality, hazardous waste, and toxic substances through the exchange of information, joint workshops, training, technology demonstration, and the supply of emissions monitoring equipment.13 India is the only country with an exclusive ministry for new and renewable energy: the Ministry of Non-Conventional Energy Sources (MNES). This ministry includes specialized technical institutions such as the Solar Energy Centre (SEC), the Centre for Wind Energy Technology (C-WET), and the Sardar Swaran Singh National Institute of Renewable Energy (SSS-NIRE). Specialized financial institutions also play a central role. The Indian Renewable Energy Development Agency (IREDA), a non-banking financial institution under the administrative control of the Ministry of Renewable Energy (MNRE), provides term loans for renewable energy and energy efficiency projects.14 IREDA is a government company established in 1987 to promote, develop, and extend financial assistance for renewable energy and energy efficiency/conservation projects. It aims to operate a revolving fund for promotion, development and commercialization of new and renewable sources of Blueprint for Carbon Markets | Section 7 843 energy and to assist in upgrading technologies, as well as to extend financial support to energy efficiency and conservation projects and schemes. The main sectors financed are hydro, solar, wind, and bio-energy (biomass, waste, and biofuels).15 India is also starting to participate in the trading sphere. The Multi-Commodity Exchange of India (MCX), the country’s leading commodity exchange, has become the third exchange in the world with a license to trade in carbon credits, and since 2005 has had a licensing agreement with the Chicago Climate Exchange (CCX). Under this agreement, CCX lists smaller versions of its European Climate Exchange (ECX) Carbon Financial Instruments (CFIs) and Chicago Climate Futures Exchange, Sulfur Financial Instrument (SFIs) futures contracts on the MCX trading platform. MCX was inaugurated on November 2003, and the Indian government recognizes its role in facilitating online trading, clearing and settlement operations for the commodities futures market. The MCX-CCX alliance integrates the Indian market with its global counterparts to foster best practices in the emission trading market.16 Several problems remain, however. Indian projects approved by the national authorities do not always meet international standards. To date, almost 50% of CDM projects rejected by the EB are from India. Many projects have difficulty in providing clear evidence of emission savings. Others lack the demonstrable sustainable cobenefit that is one of the CDM’s primary goals. According to analysts, consulting firms are part of the problem. Since 2005, about 250 carbon consulting organizations have appeared in the country. Many of these firms have little expertise in the subject and sometimes prepare proposals in an assembly-line fashion and without adequate documentary support.17 Other Actors Foreign Governments The UK is the most important foreign participant in India’s CDM sector and is involved in 91 of the country’s projects. Switzerland supports 25 projects, and Germany, the Netherlands, Sweden and Switzerland also play significant roles. Other bilateral and multilateral agencies such as Japan’s Overseas Economic Cooperation Fund (OECF), Norway’s Agency for Development and Cooperation (NORAD), and the US Office for Overseas Development Assistance (ODA) have also shown interest in financially assisting various renewable energy projects. International agencies have also provided separate assistance to IREDA to fund CDM projects, to strengthen the capacity of IREDA in project appraisals, and to facilitate the sale of CERs.18 International Financial Institutions World Bank: The World Bank Carbon Finance Unit is heavily involved in India and supports seven projects through the BioCarbon, Community Development and Italian Carbon Funds. These projects are: Afforestation in Himachal Pradesh, Allain Duhangan Hydroelectric Project, FaL-G Brick and Block, Gypcrete Project, Improving Rural Livelihoods, Karnataka Municipal Water Pumping Improvements, and the Vertical Shaft Brick Kiln Cluster Project. Chart 7.4.3b Number of CDM Projects Involving “Other Parties” Source: UNFCC/CDM Sweden 57 Japan 52 Spain 14 Switzerland 69 Austria 13 UK 154 Netherlands 68 Italy 13 Other 29 844 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf The BioCarbon Fund’s Improving Rural Livelihoods project is the first Land Use and Land Use Change and Forestry (LULUCF) project in India. It will develop 3,500 ha (8,645 acres) of tree plantations in the eastern states of Orissa and Andhra Pradesh, and is meant to enable farmers to earn additional revenues through carbon credits by afforesting their degraded lands. Under the agreement, the BioCarbon Fund will purchase 276,000 tCO2e between 2008 and 2017, with the option to purchase an additional 370,200 tCO2e.19 In order to develop Improving Rural Livelihoods in Orissa and Andhra Pradesh, the World Bank partnered with JK Paper Ltd (JKPL). JKPL arranged short-term credit to cover farmers’ up-front investments. In addition to the extra income that the farmers will realize from the implementation of this project, the project will help halt erosion and protect water sources.20 Asian Development Bank: In Hyderabad in July 2007, the ADB proposed the implementation of the Technical Support Facility (TSF) as part of its Carbon Market Initiative (CMI). The CMI began in 2005 as part of the Bank’s Clean Energy and Environment Program, which seeks to provide technical support and up-front financing to clean energy projects with greenhouse-gas mitigation benefits.21 The project for the implementation of a TSF was supported by more than $4 million from the governments of Austria, Finland and Luxembourg, as well as the Spanish Cooperation Fund for Technical Assistance and the Swiss Cooperation Fund for Consulting Services. CDM Market India’s strong technical base and active authorities and stakeholders have allowed its CDM market to take a prominent role internationally. Some 380 projects are located in India, ahead of China (361), Brazil (149), and Mexico (110). But while India leads the world in registered CDM projects, China has moved ahead in planned CDM projects and leads in CERs issued to date. 27% of India’s CDM projects are categorized as renewable-energy projects, and 9% are considered energy-efficiency projects. In December 2007, India registered the world’s second CDM project in the transport sector. India’s use of the CDM to meet climate change policy goals is increasing.22 Of India’s 28 states and 7 union territories, 14 states have CDM project developments, with Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and Uttar Pradesh accounting for more than 50% of the total. The regional distribution of CDM projects is uneven, as are the CER units generated by them. The 10 largest projects in terms of CERs account for 55% of the total. Gujarat, which hosts about 7% of the country’s projects, is responsible for almost 35% of India’s CERs. Three of the country’s four largest projects are located in the state, two of which are hydrofluorocarbon (HFC) projects. Projects most in demand in India, such as HFC-23 removal, offer the greatest number of CERs but ultimately produce lower sustainable collateral benefits. Four of the ten biggest projects in India are of this type. Chart 7.4.3c Percent of Registered CDM Projects Nationwide by State Source UNFCC/CDM Andhra Pradesh 11% Chhattisgarh 9% Gujarat 7% Himachal Pradesh 4% Karnataka 4% Madhya Pradesh 3% Maharashtra 10% Orissa 3% Other 3% Punjab 5% Rajasthan 8% Tamil Nadu 10% Uttar Pradesh 11% West Bengal 5% Blueprint for Carbon Markets | Section 7 845 Installation of Low Greenhouse Gas Emitting Rolling Stock Cars in the Delhi Metro System This project allowed the Delhi metro system to replace conventional electro-dynamic rheostatic braking technology with regenerative braking technology. The new technology reduces energy consumption and greenhouse gas emissions.23 The technology for regenerative braking system was provided by Mitsubishi Electric Corporation of Japan, though without any technology transfer. The trains involved in the project have been in operation continuously and without outages since their commissioning between 2004 and 2006.24 Bundled Wind Power Project in Tamil Nadu One of the largest projects is the Bundled Wind power project in Tamil Nadu, co-ordinated by the Tamil Nadu Spinning Mills Association (TASMA). TASMA has demonstrated to its members that wind energy generation is a viable means of generation when CDM revenue is included. TASMA also promotes best practices among its members, including energy efficiency. This particular project is situated in Udumalpet, Ayakudi, and Aralvaimozhi in the districts of Coimbatore, Tirunelveli and Kanyakumari in the Indian State of Tamil Nadu. It involves 704 wind turbines owned by different agents and connected to the same grid. The small windmill subproject owners who operate the spinning mills have invested in wind energy generation, and the power generated is used to meet their needs and for export to the grid. This wind-based electricity generation totals 468 MW of installed capacity. The generation is approximately 860 GWh annually, with a credited period between 2003 and 2012. TASMA has already entered into a contract with the Swedish Energy Agency for the sale of CERs.25 The project brings together a number of investors with small power requirements who otherwise would have drawn power from the grid. By investing in wind turbines, they gained negotiating leverage with suppliers, enhanced infrastructure support, procured resources to obtain CDM benefits, and pooled power purchase agreements to their advantage.26 The program demonstrates the potential benefits of combining a relatively small number of users into a larger pool. Voluntary Market India has actively developed a voluntary carbon market. The low up-front investment costs of these projects and the country’s close relationship with European funding agencies and governments have made them particularly attractive. There is still considerable room for growth in this sector, especially as the Indian government seeks to increase its energy supply and improve rural coverage. International Small Groups Tree Planting Program (TIST) International Small Groups Tree Planting program (TIST) generates revenue for small producers through the sale of emissions reduction credits. The program operates in India, Tanzania, Uganda, and Kenya and involves more than 25,000 farmers.27 The program stands out because of its focus on poverty alleviation and use of cutting edge technology. Communities are trained in sustainable agriculture, microlending, and tree planting. The Clean Air Corporation (CAAC), in partnership with the Institute for Environmental Innovation, has created a carbon finance program Chart 7.4.3d CDM Projects by Type Source: UNFCC/CDM Biomass 3% Coal bed 5% EE generation 6% HFCs 5% Hydro 35% Landfill gas 5% Wind 32% Other 9% 846 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf combined with conservation-based agricultural management, food security, and business development program. Each small group agrees on setting aside 10% of its agricultural produce and business profits as an emergency fund for group members, and uses best practices to plant, care for, and establish a minimum of 1,000 trees per year. Payments to small groups are made on a quarterly basis via a network of rural banks. In order to create an incentive to preserve the trees, only those left standing qualify for payments. The CAAC manages the sale of greenhouse gas emissions credits to companies based in the north or on Ebay to be purchased by individual consumers.28 2. HSBC Carbon Neutral Pilot Project India is also part of the HSBC “Carbon Neutral Pilot Project,” developed by the bank in 2004 to offset its emissions through VER purchases throughout the world. Through the pilot project, the Vensa Biotek biomass cogeneration project aims to generate four megawatts of electricity from agricultural biomass for the production of liquid glucose and starch. The power generated replaces the power drawn from India’s Andhra Pradesh state electricity grid. Surplus power is also exported to the state grid. This project has had multiple benefits for the local population. The cogeneration facility augments renewable resource-based power supplied to the state grid, which reduces greenhouse gas emissions as well as particulate emissions and ash produced by the burning of coal, which is a major fuel in Andhra Pradesh. By feeding additional power to the state grid, the project improves the reliability of power supply and stabilizes the voltage. The business opportunities created help the economic development of rural Andhra Pradesh.29 Conclusion India has the world’s most robust CDM sector in terms of number of projects. The country’s very favorable macroeconomic environment, its supply of well-trained labor, its booming service sector, and a growing industrial base all position the country to play a leading role in the global carbon market. High-level stakeholder committees have allowed for the participation of various entities in integrating climate concerns with development goals. Regional programs to promote and take advantage of local climate realities and economic performance suggest that India is moving toward a decentralized energy matrix. The government acknowledges the difficulty of keeping pace with rising demand and is developing renewable sources of grid power at a healthy pace. Still, there are several challenges that India’s developing carbon market faces, including the poor condition of infrastructure and the country’s relatively low rate of technology transfer. Weak infrastructure impedes the expansion of needed energy generation and can be particularly problematic for renewable energy projects, which are often expensive to implement and frequently not profitable in the short term. India could leverage its positive macroeconomic environment to seek infrastructure investment that would allow it to diversify its energy matrix. It would at the same time be able to utilize these new energy resources within the realm of the carbon market. Wind energy may be particularly appealing to investors. The country’s more than 7,000 MW of capacity makes it the fourth largest in the world. The low rate of technology transfer is a disappointing result given the number of projects that have been introduced in the country and that one goal of the CDM is to specifically enhance technology transfer to the developing world. India has a lower-than-average rate of international technology transfer whether measured in terms of the number of projects—14% versus 39% internationally—or in terms of emissions reductions—40% versus 64%.30 The projects that do claim international technology transfer are larger than the average size in India. Still, projects like the Bundled Wind Power project in Tamil Nadu demonstrate the country’s ability to seek common ground and work together to solve difficult and pressing issues. India’s strength will be in small-scale projects in rural areas that are specifically designed to enable power generation for large populations without grid power. Blueprint for Carbon Markets | Section 7 847 7.4.4 LATIN AMERICA AND ASIA COMPARISON Latin America and Asia lead the world in hosting CDM projects, accounting together for more than 95% of all projects globally. In Latin America, Brazil and Mexico stand out as regional leaders, supplying a majority of all projects in the region. In Asia, India and China together account for over 85% of projects in the region and 56% of all projects globally. In addition to the CDM sector, these two regions are also involved in the creation and implementation of projects designed for the voluntary carbon market, where Asia is also by far the world’s leader in terms of the number of voluntary offset projects hosted. It has over 40% of the global total. Latin America, though active, garnered just about 8% of global voluntary offset projects in 2007.1 While Asia is the leading region for hosting carbon projects worldwide, Latin America is a distant second. India and China Asia in general, and China and India in particular, have a competitive advantage in hosting CDM and voluntary offset projects simply because aggregate CO2 emissions in the region are substantially higher than anywhere else in the world. Latin America cannot do much in the way of increasing its “emissions competitiveness” over Asia — to do so would mean emitting substantially more greenhouse gases, which is inimical to the fundamental goal of the CDM and of the Kyoto Protocol. However, Latin America could seek more projects in existing sectors associated with high emissions — if not electricity generation, then waste disposal, industrial materials production (such as cement), fuel switching, and eventually transport fuel. Still, Asia retains the majority of projects that offer the most cost-competitive emissions reductions. Fourteen of the world’s largest 15 CDM projects are located on the continent, 11 of which are in China, two of which are in India, and one of which is in South Korea. Just one project is hosted by a country outside Asia — an N20 decomposition project located in Brazil. Of these largest projects, 10 of the 15 are HFC-23 projects. As HFC-23 is almost 12,000 times more environmentally harmful than carbon dioxide, HFC-23 projects can deliver vast sums of emissions reductions as compared to more conventional projects, such as renewable energy, often with lower upfront costs. They are a boon for investors, though not necessarily in terms of sustainable development. Because of these huge reductions, there tends to be a higher disparity in certain countries in Asia, such as China and South Korea, regarding the number of projects that a country has versus the amount of CERs that are generated as a result. In China, HFC projects account for 6% of the total number in the country but about 51% of all CERs generated. In the region as a whole, there is very clearly a disparity between the number of projects that Asia hosts — 66% of the global total — and the portion of global CERs that it produces — 78%. This is because of the number of high-CER-generating projects like those based on HFC-23 reduction or decomposition, of which China has the most. Latin America, meanwhile, is very clearly the only region in the world where the percentage of CDM projects that it hosts is less than the portion of CERs that it generates. There, only three HFC-23 projects exist, helping to account for the smaller scope in emissions reductions that are available, and hence one of the reasons why investing in the region is often less attractive for those looking for big returns. Aside from the comparative advantage that places like India and China have in terms of the scope of emissions reductions available, these countries also have institutionalized the importance of the CDM and the continued development of the carbon market. India designed a completely new institution, the National Clean Development Mechanism Authority, to function as the country’s Designated National Authority (DNA). It is also the only country in the world with an exclusive ministry for new and renewable energy. This body, the Ministry of Non-Conventional Energy Sources (MNES), was designed to develop and deploy new and renewable energy projects to supplement conventional (fossil) energy projects and meet increased energy demand in the country. MNES is backed up with funding and expertise by the Indian Renewable Energy Development Agency (IREDA). Such institutions ensure that the CDM market in the country not only works, but that it also has an array of resources from which to draw expertise and support. In China, more than a dozen Chinese governmental institutions work on CDM-related issues.2 Among these are the National Development and Reform Commission, the National Coordination Committee on Climate Change, and the National CDM Board. As the result of the varied institutions utilized to develop the CDM market, both the Indian and Chinese governments have a large impact on project design and implementation and can help to guide interested investors in the right direction to ensure that the most appropriate projects are implemented as per local needs. These institutions also play an important role in keeping project transaction costs at a minimum. Because they are strong institutions — especially in China — transactions costs are lowered by lessening uncertainties and 848 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf shortening wait times for project certification and implementation. In India, high-level stakeholder committees allow for the participation of various ministries in integrating climate change concerns along with development concerns While such a method could be seen as the best way to foment inaction at the highest tiers of government, in India the varied perspectives provide information on how these projects will affect an array of sectors. This diversified consideration plan has tremendous benefits when it works. Taken together, India and China are both good examples of the success that can be achieved with sustained effort to enhance the burgeoning carbon market. While these countries have certain inherent advantages, it should be remembered that it took each country some time to get started on its path toward success in the carbon market area. While Brazil was an early leader in the market, growth in the CDM sector largely has plateaued. India, meanwhile, has maintained strong growth in the CDM market, and China is seemingly just beginning to take off. (See Chart 7.5.3d.) While the two countries also have such large carbon markets in part because they are the two largest countries in the world, merely being so populous is not a recipe for success in the area. Indonesia, Pakistan, and Bangladesh — all similarly populated countries — have yet to achieve the success that Brazil or Mexico has achieved in Latin America, and to which we now turn. Latin America It is easiest to compare Latin America’s two biggest carbon markets, in Brazil and Mexico, to those in China and India. Like China and India, these two countries have certain institutional advantages that have helped them to thrive. Other countries in Latin America, however, have also enjoyed some success due to institutional or methodological particularities. One reason for investors to look to implement projects in Latin America is the general treatment of climate change at the national level in many countries. Of the countries that were looked at in this study, Mexico has recently released its Climate Change 2008 to 2012 roadmap; the Brazilian government declared 2007 the “National Clean Development Year”; Colombia is gearing up to develop a National Climate Change Policy; and Chile in the past two years has created a Ministry of Environment and a Ministry of Energy, each of which are aimed at giving institutional support for the implementation of carbon projects. This open support for projects to help mitigate the effects of climate change is an indicator of the seriousness with which national governments treat the issue of sustainable development. Mexico’s institutional support for the CDM is an interesting case in point, as its design is at least partially akin to that of India. Mexico’s DNA, the Inter-Ministerial Chart 7.4.3b World Carbon Dioxide Emissions from Fossil Fuels (MtCO2), 1980–2005 Source: Energy Information Administration 0 5,000 10,000 15,000 20,000 25,000 30,000 1980 Asia/Oceania Africa Middle East Eurasia Europe Latin America North America MtCO2 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Blueprint for Carbon Markets | Section 7 849 Commission for Climate Change (CICC), derives its effectiveness from the diverse set of interests it represents within the Mexican government. Different stakeholders from the Agriculture, Energy, Environment, Foreign Affairs, Industry, Social, and Transport sectors approach the notion of climate change mitigation from unique perspectives, enabling the CICC to function as a cross-sector CDM national entity. Brazil’s Inter-Ministerial Commission on Climate Change (CIMGC) functions similarly. The difference with India, however, is that insiders, especially in Mexico, consider factors such as the size of the government’s bureaucracy and the array of institutions that handle carbon market–related issues as a drag on the development of a more robust sector, not as a key facet of its success. The former lowers barriers to corruption, while the latter engenders a lack of institutionalized political will. Together, these two issues raise transaction costs and lower investment. Still, the host of institutions that exist to deal with carbon markets in both Mexico and Brazil can be viewed as a good framework by which to support carbon initiatives. In Mexico, the CICC works alongside the Secretariat of the Environment and Natural Resources (SEMARNAT) and other private institutions to foment investment in the sector. Out of these public-private partnerships has come the Mexican Carbon Fund (FOMECAR), which was designed to support activities related to emissions reductions and which has the goal of increasing Mexico’s participation as a host country within the CDM. In Brazil, CIMGC works alongside the Brazilian Mercantile and Futures Exchange (BM&F), the Brazilian Ministry of Development, Industry and Foreign Trade (MDIC), and the National Bank for Economic and Social Development (BNDES) to support clean development in the country. Colombia, meanwhile, has the Climate Change Mitigation Office (OCMCC), the Colombian Institution for Scientific Development (COLCIENCIAS), and the National Agency for International Organization, all of which help to develop and regulate the country’s carbon sector. Clearly, the institutional capacity for the promotion of the carbon market already exists in many places in the region. That capacity must be channeled. Among other intricacies particular to the region are ecological diversity and great conditions for the development of small-scale projects. Ecological diversity is especially important in the burgeoning voluntary market, where calls to preserve and conserve forest resources in the region are growing. As Central America has had the highest rate of deforestation of any region in the world over the past 15 years — with Honduras leading the way — there is ample opportunity for investors to fund afforestation and reforestation projects. Stemming the tide of deforestation will provide huge sustainable development benefits down the road, especially in rural settings. Small-scale projects have considerable sustainable development benefits. In many cases, CDM projects that generate large numbers of CERs, such as HFC projects in Asia, do not actually provide as much in the way of sustainable development as the planners of the CDM had hoped.3 Smaller-scale renewable energy projects are widely considered more sustainable in terms of the benefits that they bring to communities. In this sense, the Chart 7.4.3c Percent Global CDM Projects Vs. Percent Global CERs 0 10% 20% 30% 40% 50% 60% 70% 80% Asia Africa/ME LAC Percent of Global CDM Projects Percent of Global CERs Source: UNFCCC/CDM 850 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf smaller scale of projects in Latin America could be an indication that its CDM projects are actually more successful in terms of local capacity building and rural electricity provision than are large projects in Asia. That is not to suggest that China and India rely solely on large projects for their success in the carbon market. They do, however, rely more upon high CER-producing efforts to provide a large portion of all the emissions reductions that they generate. Going forward, focusing on implementing more small-scale projects in Latin America could go a long way toward meeting sustainabledevelopment goals. Furthermore, these smaller-scale projects already play an important role in innovation. In Chile, the Economic Development Agency (CORFO) hosts an annual contest aimed at improving carbon market conditions, reducing transaction costs, and encouraging project development by giving guidance and funding the best small project proposals. By doing so, CORFO intends to support enterprises and entrepreneurs in the cause of supporting renewable energy and climate change mitigation in the country. The annual contests held so far have gathered more than 120 projects and have a production potential of more than 800 MW. This sort of undertaking is an innovative way to promote use of the CDM and also to ensure that the best project ideas do the appropriate attention. Non-Governmental Institutions Environmentally targeted funding by regional development banks is increasing everywhere and has been instrumental in the creation of new programs that are geared toward sustainability and new projects that fully integrate climate change considerations. There is a disparity, however, between what countries in Asia receive from the Asian Development Bank (ADB) and what Latin American countries receive in the way of support from the Inter-American Development Bank (IDB). This may also help to account for the differences in the carbon market between the two. Almost 62% of the ADB’s funding activities today, about $982 million, goes toward projects that have integrated climate change considerations into the implementation. In part, this is a reflection of a recent surge of environmental activity at the bank, beginning in 2005 with a $1 billion energy efficiency initiative. Even before that time, however, the ADB was taking a leading role implementing projects suitable for climate change mitigation. Under its Asia Least-Cost Greenhouse Gas Abatement Strategy (ALGAS) program, implemented from 1995 to 2000, the ADB developed the first set of national-level greenhouse gas inventories and identified mitigation projects in 11 countries.4 Chart 7.4.3d CDM Project Growth: Brazil, China, India and Mexico Source: UNFCCC/CDM 0 50 100 150 200 250 300 350 400 Jan 06 Brazil China India Mexico Feb 06 Mar 06 Apr 06 May 06 Jun 06 Jul 06 Aug 06 Sep 06 Oct 06 Nov 06 Dec 06 Jan 07 Feb 07 Mar 07 Apr 07 May 07 Jun 07 Jul 07 Aug 07 Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 06 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Blueprint for Carbon Markets | Section 7 851 The ADB has also pursued several initiatives to channel support for CDM-related activities. In 2003, it created the Clean Development Mechanism Facility (CDMF) to provide technical support for countries in terms of accessing additional financial resources for CDM-eligible projects. It also introduced the Carbon Market Initiative (CMI) in order to address the complex challenge of striving for energy and climate change security simultaneously. More specifically, the CMI supports sustainable development in member countries and assists them in meeting their emissionsreduction commitments under the Kyoto Protocol. The CMI’s main goal is to increase the number of clean energy projects that are developed in the region, providing countries with additional financial support during the early stages of project development and technical support to validate project designs and certify emissions-reduction credits that result from those projects.5 One innovative aspect of the CMI is the Asia Pacific Carbon Fund, which works as a trust fund established by the bank to obtain future flows of CERs on behalf of participants in return for upfront financial support. The (IDB) has also been involved in the promotion of sustainable development, though not for as long nor on the same scale. It has devoted a smaller portion of its funds than has the ADB to projects that fully integrate climate change considerations. Almost 12% of projects receive such funding, compared to the ADB’s 62%.6 Support for such initiatives has been much more recent, beginning with the introduction of the Sustainable Energy and Climate Change Initiative (SECCI) in 2006. Since that time, the IDB has helped to implement projects throughout Latin America in both the voluntary and CDM markets, through the use of feasibility studies, technical assistance, and funding. It has also undertaken the Carbon Neutral Initiative, which is based on four action items: calculating the bank’s carbon footprint, reducing the footprint, offsetting the footprint, and subsequently leading by example in the region. In fact, several of the carbon projects that the IDB has helped to implement — in Brazil, Colombia, Guatemala, and Peru — are carbon-offset projects that help the institution to reduce its carbon footprint while promoting sustainable development. Opportunities for Latin America In many cases, Latin America’s carbon market cannot compete on the same scale with Asia’s. The usage of carbon markets to promote sustainable development, however — whether CDM or voluntary — is not a zerosum game. The pie itself can be, and is being, enlarged. So, while comparisons between the two might not necessarily be fair, comparing the two is important, in order to identify key areas where Latin America can benefit from Asia’s experience. There are too many differences between the regions for a one-size-fits-all approach. Accordingly, there are niches within the carbon market and climate change policy that Latin America can utilize to its own advantage. Chart 7.4.3e Forest Cover Loss, 1990–2005: An Opportunity for Latin America Source: Mongabay -40% -30% -20% -10% 0 Bolivia Brazil Costa Rica El Salvador Guatemala Honduras Mexico Nicaragua 852 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf Greenhouse gas inventories To begin, the Latin American governments need to conduct a thorough inventory of their greenhouse gas emissions, including those from deforestation. The ADB helped 11 countries in Asia do this from 1995 to 2000, and the IDB should take the lead to help Latin American governments do the same. The IDB has taken an inventory of its own corporate greenhouse gases as part of its Carbon Neutral Initiative, and it should translate that knowledge to capacity building so that others will understand how to inventory emissions. Only by knowing the ins and outs of precisely what each government is dealing with, in an up-to-date fashion, sector by sector, can local and international institutions help to bring about the sustainable development projects that are most appropriate for each country. In Latin America’s case, this may mean large CDM projects in certain countries, like Brazil, and smaller-scale voluntary carbon projects in places like Central America. Centralized institutions for the coordination of all carbon projects Once that is done, the IDB should help individual governments create a central coordinating body for any project seeking carbon credits, from both the CDM and voluntary sector. This would help to ensure that each country properly utilizes all the carbon assets available. It would also ensure that projects that are too small to qualify for the CDM do not get lost and that the region’s carbon market becomes as robust as possible. These small projects, while perhaps not suitable for the CDM, still have sustainable development benefits that need to be considered and encouraged. Helping governments to centralize all matters regarding CDM and voluntary carbon offset project proposals would give project developers one place to submit their application for any project that they want to pursue. Utilizing this set-up would enable these centralized entities to transfer projects that fall short of CDM viability scale-wise to project developers who want to invest in the voluntary market. This would help the region to become more active and more innovative in the market could also help in terms of development on a very local level. Reforestation, afforestation, and avoided deforestation projects, especially, could be utilized to generate offset credits on the voluntary market as well as to protect biodiversity. Gaining ample experience in, and exposure to, this type of project could help the region to play a leading role in the creation of new methodologies for the CDM market in the coming years, and also to strengthen its claim for suitability for investors who want to invest in the voluntary market. While no such institution like this exists in Asia, it would prove an innovative way to give project developers a conduit through which to search for funding. With all projects centralized, these institutions can connect developers with organizations — non-profit or otherwise — that are interested in funding. It can also serve to help with technical support by bringing project developers together so that they can collectively determine best practices and aprise each other of past failures. Doing so would mean that the wheel would not have to be reinvented every time a proposal were made, and it would also ensure that the best designs for past projects are used and built upon in order to expand carbon opportunities for everyone. Improving public-private partnerships Multilateral institutions like the IDB will have a key role to play in bridging the public-private divide in Latin America. Brazil has done a good job of this so far, but more needs to be done and on a larger scale. Part of this will come in helping the private sector to implement renewable energy projects, such as wind. Demonstrating this to the fullest extent can make alternatives count significantly toward the country’s energy and sustainable-development goals while generating significant numbers of offset credits. Pursuing renewable energy projects throughout the region will help every country become less dependent upon foreign oil, which is especially important for smaller countries that do not have other options when oil prices fluctuate wildly. On the public side, continuing to support government efforts to be emissions-conscious nd transparent will greatly benefit the region in the long run. With most analysts expecting some form of emissions-trading market to develop in the United States in the coming years, Latin America should be poised to step up its carbon efforts. It has the right environment and location to play a major role in helping the US — now the second-largest carbon dioxide emitter in the world — to begin its own rigorous emissions-mitigation process Blueprint for Carbon Markets | Section 7 853 7.5. Conclusions and Recommendations Introduction Carbon markets have developed considerably since their introduction in Latin America. Some governments have maintained, and even enhanced, their enthusiasm for carbon projects, while others have become more complacent over time. Those that have innovative and aggressively sought carbon projects have been quite successful in becoming global leaders, and for those whose initial enthusiasm has faded, so too has their carbon sector. Whether leaders or laggards, a number of factors continue to challenge the region’s competitiveness, including limited access to financing for carbon projects, institutional and procedural gaps in project implementation, and the measured promotion of specific types of carbon projects. In spite of these barriers, there is great promise for the continued and enhanced expansion of carbon markets throughout the region. Latin America has the opportunity to strengthen its position relative to world leader Asia as well as other regions of the world, but countries in the region cannot simply try harder to make it so. While individual nations do need to enhance their climate change policies to include the greater use of the carbon market as a tool for emissions reduction and sustainable development, they will not be able to achieve this alone. That is what this report seeks to highlight—the role that institutions like the Inter-American Development Bank can play in facilitating the expansion of this market and its associated benefits. Regional Potential The following section highlights the regional leaders and recent developments that have occurred in the carbon market in Latin America. Most of the advances have been made in the CDM market, which is considerably larger, though some development has taken place in the voluntary market as well. While Brazil clearly leads the region in this area, other countries, notably Mexico and Chile, have developed strong markets for carbon projects and are moving forward with legislation to enhance national climate change strategies. These three countries in particular are well positioned to play leading roles in the global carbon market. Such a role is not unheard of for the region. During the first year of the Clean Development Mechanism, Latin American projects accounted for 18 of the first 39 globally, ushering in a new era in sustainable development for the region. But while there is little question that Latin America has continued to benefit from the CDM, Latin America has lost ground, since the first year of the mechanism’s operation, to an increasingly competitive and assertive Asia, which today hosts more than 65% of all CDM projects in the world. Latin America, in comparison, hosts about 30%. While there are certain advantages inherent to each region, Asia has arguably pushed more forcefully and has taken advantage of more opportunities to ensure its primacy in the sector. While Asia has been innovative in the way it uses the carbon market, Latin America has lagged behind. This should not necessarily be the case. There is ample room for greater carbon market adoption throughout the region. One reason for investors to look to implement projects in Latin America is the general treatment of climate change at the national level in many countries. Of the countries that were looked at in this study, Mexico has recently released its Climate Change 2008 to 2012 roadmap; the Brazilian government declared 2007 the “National Clean Development Year”; Colombia is gearing up to develop a National Climate Change Policy; and in the past two years, Chile has created a Ministry of Environment and a Ministry of Energy, each of which is aimed at giving institutional support for the implementation of carbon projects. This open support for projects to help mitigate the effects of climate change is an indicator of the seriousness with which national governments treat the issue of sustainable development. This section reviews the main advances that Brazil, Chile, Colombia, Honduras, and Mexico have achieved in the carbon sector. Following comments and conclusions for these countries, recommendations are offered for ways in which the IDB can spur carbon market growth in the region. Brazil The Brazilian government has demonstrated strong support for environmental initiatives, as well as for the CDM business in the country. As one of the earliest movers in the area, Brazil has a very strong knowledge of the carbon market and some of the strictest environmental laws in the world, helping to bring credibility for interested investors regarding Brazil’s longterm commitment and social participation. Brazil has developed a number of the methodologies approved by the UNFCCC, and its centralized energy sector allows the information to be available and organized. These institutional factors have certainly aided in the development of the carbon market in the country. 854 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf The fact that Brazil was an early mover regarding climate change policy has also helped. The government created the Inter-Ministerial Commission on Climate Change (CIMGC) in 1999 in order to coordinate discussions on climate change issues and to integrate the discussions into government policies. The country has also shown that it remains enthusiastic about its carbon prospects. The government declared 2007 the “National Clean Development Year” as an additional means to further CDM participation. At its launch, 15 governmental bodies, financial institutions, and national industries presented a protocol committing them to take action to reduce greenhouse gas emissions through the use of CDM projects. The protocol singled out the substitution of fossil fuels, such as coal and petroleum, as the key to reducing GHG emissions. This program created a framework for the preparation of 400 CDM project activities and also for the training of technical staff in enterprises and financial institutions. A Carbon Market Observatory was also implemented in order to pursue research and analysis of the international carbon market, as well as to gather information on CDM project opportunities, including funding for project proposals. Looking ahead, Brazil is likely to play a leading role in the global carbon sector despite institutional inefficiencies, which will need to be addressed for the country to be able to expand its carbon market to the fullest extent possible. Chile With recent policy initiatives to address climate change mitigation and adaptation strategies, Chile is well placed to play a more expansive role in the region’s carbon market. The implementation of the Country Program on Energy Efficiency (PPEE) in 2005, created to enhance public awareness of the importance of energy efficiency for Chile’s development and to encourage energy efficiency and promote a cultural change toward energy usage, is a great example of policy initiative. The starting points of the program were the economic and technical evaluations made for different sectors — transportation, industry, commerce, mining, housing and construction, and utilities — meant to encompass the interests of diverse stakeholders for regulation, promotion, and education. The Chilean government is also involved in designing financial instruments to fund projects within the country, such as special funds or loans. It also publishes the CDM guidelines for the country and provides the institutional support of both the energy and environmental commissions. These actions, along with policy reforms and the country’s economic performance in the last few decades, have helped Chile to succeed in being recognized as a leading host country and a very attractive destination for carbon-offset investors. From an investor’s perspective, economic and political indicators and regulatory stability in Chile are prime advantages compared to other Non-Annex I countries and help put it in good stead among a diverse crowd jockeying for CDM projects. The country’s open economy is definitely an advantage as well, though convoluted institutional procedures and a lack of voluntary projects that could qualify for carbon offsets have limited Chile’s success up to date. Colombia Colombia has undertaken several activities to address the issue of climate change and has pursued different strategies to become actively involved in environmental policy. The Ministry of Environment, Housing and Territorial Development, for example, has designed a complete framework strategy aimed at strengthening its institutional capacity in order to develop a portfolio of facilities to be presented as CDM projects, and to support and uphold the development of these projects. The country’s National Development Plan (PND), a four-year strategy that includes budgetary and political goals, has given special priority to environmental issues, natural resource conservation, greenhouse gas mitigation, and the need to promote sustainable development for the 2006 to 2010 period. Colombia is unique in that it has implemented an educational and informational program to give practical CDM project development information to stakeholders from diverse sectors. Additionally, Colombia is one of the only countries to have implemented an educational and informational program involving stakeholders from diverse sectors. This program emphasizes giving practical information about CDM project development and regulation to other ministries, local authorities, environmental organizations, privatesector representatives, scholars, and scientific institutions. As part of the educational program, the Ministry of Environment has organized capacity-building workshops in baseline determination, quantification methodologies, trading, leakage, and design of forestry projects. It also organizes workshops for project development for augmenting the Colombian portfolio. In the future, however, Colombia must address the continued perception of political risk and capacity-building measures in order to bring its carbon sector to the next level. Honduras Honduras was the first country in the world to generate credits under the Clean Development Mechanism, but Blueprint for Carbon Markets | Section 7 855 today it is lagging behind others in carbon market development. Though the country leads Central America in terms of the number of CDM projects implemented, high poverty levels and a reliance on fossil fuels have prevented the government from investing significantly in research and development. This has sapped the potential for development of a diversified renewable energy matrix, which remains to be fully explored but could enhance its carbon prospects if pursued. While the government has stated that there is great potential for power generation from hydroelectric, biomass, wind, solar, and geothermal sources, thus far only the potential of the hydroelectric sector has been tapped. In the absence of greater support, institutional delays, financing issues, and projectsize considerations will leave the country relatively hamstrung regarding future carbon market development. Mexico Mexico has recently led the way in demonstrating its commitment to implementing sound and effective climate change policies. The 2007 National Strategy on Climate Change (ENACC) was created to identify specific measures for mitigation using estimates of their potential for emissions reductions. It proposed a suite of research objectives as a tool for laying out more precise mitigation targets and also outlined national requirements for capacity building for adaptation to climate change. The National Strategy also defined and contributed to the development of strategies, priorities, and policies for the government’s Special Program on Climate Change (PECC), which will become an integral part of the National Development Plan for the 2007 to 2012 period. In terms of greenhouse gas mitigation, ENACC identifies sector opportunities and specific mitigation targets in two main areas: energy generation and use, and vegetation and land use. The Mexican government has recognized that its mitigation actions will not be sustainable without clear economic strategies to promote them. As such, the government is seeking to utilize the social costs resulting from emissions produced by different economic agents so that they can become economic opportunities through cooperation agreements with private actors that have mandatory emissions reductions targets. In addition, the Mexican government has prepared three National Communications in accordance with the UNFCCC reporting guidelines so as to convey information on emissions and the removal of greenhouse gases. It is the only developing country that has presented more than two national reports to the UNFCCC so far. These reports give an overview of the country’s improvements, programs, and future commitments regarding climate change goals, helping to guide investors along the way. But certain conditions will limit the extent to which Mexico enhances its carbon market if not addressed. Particularly important in this regard is the comparatively small renewable energy matrix. Enhancing the existence of renewables would be a useful way to generate CERs and also further sustainable development goals. Recommendations: A Blueprint for Carbon Markets in the Americas This report seeks to frame the discussion of carbon markets in Latin America in terms of critical components for their utilization and economic development. As in any sector, different countries have diverse needs and comparative advantages with respect to their naturalresource endowments, geography, and investment attractiveness. Individual countries, then, will have to tailor initiatives to match their particular resources and agendas. The following Blueprint is offered as a tool by which to understand how the IDB can better expand each country’s efforts to develop. I. Establishing the Potential for Carbon Markets The key to understanding the process of emissions mitigation is an all-encompassing view of national emissions portfolios. Fully comprehending the ins and outs of national emissions on a sector-by-sector basis can aid local and international institutions in bringing about the most appropriate emissions mitigation and sustainabledevelopment projects for each country. In Latin America’s case, taking stock of individual country endowments may mean a more nuanced approach to project development, and could help to identify specific potential emissions mitigation projects in each country. As the IDB has already accomplished an inventory of its own corporate greenhouse gases as part of its Carbon Neutral Initiative, it can translate this knowledge through capacity building in the region to help government institutions understand how to inventory emissions. This, in turn, will help countries identify emissions mitigation projects that may have been overlooked up to this point. PROGRAM IDEAS National Greenhouse Gas Inventories Project: The IDB should help countries to undertake a thorough inventory of their national greenhouse gas emissions, sector by sector throughout the region, including those from deforestation, in order to highlight troubling trends as well as to identify the potential for new types of emissions mitigation projects. Only by knowing the ins and outs of precisely what each government is dealing with, in an upto-date fashion, can local and international institutions 856 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf help to bring about the sustainable-development projects that are most appropriate for each country. In Latin America’s case, this may mean a greater emphasis on pursuing large CDM projects in certain countries, like Brazil, and smaller-scale voluntary carbon projects in places like Central America. Private-Sector Carbon Footprint Initiative: Promote private-sector emissions accounting through the bank’s own efforts as part of the Carbon Neutral Initiative and tie private carbon mitigation efforts regionwide to local offset projects in order to establish a link between local corporate efforts to reduce emissions and sustainable development projects to generate offsets. Not only will this step involve the private sector in emissions mitigation strategies, but it will go the extra step of finding local projects that can be used to partially offset corporate emissions. II. Streamlining Institutional Structures and Procedures Central coordinating bodies for the Clean Development Mechanism (CDM), referred to as Designated National Authorities (DNAs), already exist as important central institutions for the promotion and approval of carbon projects in many countries in the region. These institutions often play a key role in helping project developers design and implement the best projects possible. In many cases, however, these institutions also create a certain amount of institutional inertia, prolonging the project development process and raising transaction costs for all parties involved. In order for the project approval process to be streamlined, legal and procedural gaps need to be addressed so that fewer projects do not fall through the cracks. Furthermore, these DNAs only deal with the process of CDM project development. In order to facilitate broader participation, individual governments can create a single central coordinating body for any project seeking carbon credits, in the voluntary sector as well as the CDM. Doing so would ensure that each country properly utilizes all the carbon assets available, not just those that are the largest and seem the most lucrative. Such institutions could also help to facilitate an increase in the number of voluntary projects in a relatively short time span, as the voluntary market is unregulated and does not have to contend with the inefficiencies associated with policy, financial, or institutional gaps. This would help the region to become more active and more innovative in the market and could also help in terms of development on a very local level. PROGRAM IDEAS Institutional Capacity Building Plan: Identify legislative and procedural gaps that deal with the implementation of carbon projects by interviewing project developers, and build government capacity to fill these gaps by increasing technical support throughout the project development and implementation phases. This sort of project is especially important in smaller countries in the region, many of which do not have the resources to train new professionals in this sector properly. This work in smaller countries would have the added benefit of spurring carbon market development in some of the less developed parts of Latin America while bringing long-term economic benefits. Carbon Project Clearinghouse Program: The IDB can play an innovative role by helping countries to centralize all matters regarding CDM and voluntary carbon offset project proposals. This would give project developers a single place to submit their applications for any project that they want to pursue, no matter the size or type, and would ensure that small projects that do not qualify for the CDM are not abandoned but instead incorporated into the voluntary market. This carbon project clearinghouse would help to ensure that each country properly utilizes all available carbon assets. It would also ensure that projects that are too small to qualify for the CDM do not get lost and that the region’s carbon market becomes as robust as possible. At the moment, many small projects are not pursued, simply because they are less appealing as large investments. However, these small projects, while potentially unsuitable for the CDM, still have sustainable development benefits and should be considered and encouraged. Utilizing this set-up would enable these centralized entities to transfer projects that fall short of CDM viability scalewise to project developers who want to invest in the voluntary market. This would enable the region to become more active and more innovative in the market and could also help in terms of development on a very local level. Reforestation, afforestation, and avoided deforestation projects, especially, could be utilized to generate offset credits on the voluntary market as well as to protect biodiversity. Gaining ample experience in, and exposure to, this type of project could help the region to play a leading role in the creation of new methodologies for the CDM market in the coming years, and also to strengthen its claim for suitability for investors who want to invest in the voluntary market. This clearinghouse would also prove an innovative way to give project developers a conduit through which to search for funding. With all projects centralized, the clearinghouse could connect developers with organizations — non-profit or otherwise — that are Blueprint for Carbon Markets | Section 7 857 interested in funding. It can also serve to help with technical support by bringing past and future project developers together so that they can collectively determine best practices and warn new developers of past mistakes. Doing so would mean that the wheel would not have to be reinvented every time a proposal is made, and it would ensure that the best designs for past projects are used and built upon in order to expand carbon opportunities for everyone. III. Promoting Specific Types of Carbon Projects Many countries have already begun initiatives to harness the potential for renewable energy. Developing a plan for the implementation and use of a renewable energy sector is especially important for smaller countries in the region, which generally do not have sufficient alternatives to traditional fossil fuels when confronted with drastic oil price fluctuations. This can lead to considerable economic hardship. Pursuing renewable energy projects beyond the hydroelectric sector will help countries to become less dependent upon foreign oil through the diversification of energy matrices and will help to reduce national emissions portfolios. Pursuing renewable energy projects beyond the hydroelectric sector will help countries to become less dependent upon foreign oil through the diversification of energy matrices and will help to reduce national emissions portfolios. At the same time, there is a tremendous opportunity in the region for carbon offset projects in the forestry sector. Deforestation is rampant in the sector; from 1990 through 2005, it accounted for over 60 percent of global primary forest loss. Central America has the highest rate of deforestation of any region in the world over the past 15 years, with Honduras leading the way. Today, there are a number of forestry projects that are CDM-certified or exist as part of the voluntary market. Some pay communities to plant trees in previously forested areas, while others take a more holistic approach that emphasizes land management and sustainable agriculture in the context of the replanting of indigenous tree species. Given the staggering rate of deforestation in certain areas of the region and the sustainable development benefits that can be gained, there is today huge latent potential for the promotion of such a sector. PROGRAM IDEAS Renewable Energy Projects for the CDM Program: The IDB should undertake to aid governments in mapping national endowments for various types of clean energy and promote the implementation of renewable energy projects by offering preferential financing to private-sector project developers. Mapping national endowments would expand the sights of governments that, up to this point, may not have had a clear idea of where their comparative advantages lie. These data can be used to target carbon project investors in specific fields, such as solar or wind. Offering preferential financing to pursue these renewable projects is the second part of this program. Today, many project investors are wary of investing in certain types of projects due to financing uncertainties. Offering preferential financing could at least augment the scope for project proposals, allowing investors to take a little more risk in pursuing projects. In turn, these new proposals could be cross-referenced with the national endowment maps to determine whether projects are suitable for implementation. National Forest Protection Program: Under this program, the IDB would work with governments to map national deforestation, implement capacity-building measures to educate communities in those areas in long-term sustainable land use management, and finance initial replanting and avoided deforestation projects. These projects could then compensate communities in the long-term through the sale of voluntary carbon offsets. A National Forest Protection Program would not only enhance the scope of national carbon markets through the promotion of voluntary projects but would also give communities an active role to play in sustainable development. It would also present a major opportunity for countries in Central America, as well as Brazil and Peru. IV. Improving Access to Financing Lack of financing is one of the key hurdles inhibiting the growth potential of the carbon sector throughout the region. Some national institutions have addressed this shortcoming. Brazil and Mexico, for example, have instituted programs to help with the funding of emissions mitigation projects, through the Brazilian National Development Bank (BNDES) and the Mexican Carbon Fund (FOMECAR), respectively. These types of institutions play an important role in expanding the scope of projects suitable for the carbon market, and act as great examples of how relatively well-endowed countries can go the extra step in terms of market development. Most countries in 858 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf the Americas, however, do not have the necessary resources to fund such institutional programs. The ability of countries to fund carbon projects will be increasingly important as it will act to build investor confidence and to foment interest from project developers seeking to implement new projects. PROGRAM IDEAS Public-Private Partnership Working Group: The IDB could work to match interested private project developers with potential public works projects throughout the hemisphere that can be utilized to generate offsets, such as innovative low-emissions public transportation or landfill gas projects. Multilateral institutions like the IDB will have a key role to play in bridging the public-private divide in Latin America. Brazil has done a good job of this so far, but more needs to be done, and on a larger scale. Part of this will occur by helping the private sector to implement renewable energy projects, such as wind. Demonstrating this to the fullest extent can make alternatives count significantly toward the country’s energy and sustainabledevelopment goals while generating significant numbers of offset credits. Pursuing renewable energy projects throughout the region will help every country become less dependent upon foreign oil, which is especially important for smaller countries that do not have other options when oil prices fluctuate wildly. On the public side, continuing to support government efforts to be emissions-conscious and transparent will greatly benefit the region in the long run. With most analysts expecting some form of emissions-trading market to develop in the United States in the coming years, Latin America should be poised to step up its carbon efforts. It has the right environment and location to play a major role in helping the U.S. — now the second-largest carbon dioxide emitter in the world — to begin its own rigorous emissions-mitigation process. Latin American Carbon Fund: Create a trust fund to obtain future flows of certified emissions reductions (CERs) on behalf of participants in return for upfront project finance support. The Asian Development Bank has already implemented a similar setup to enhance carbon-sector support. The fund would pool carbon market expansion efforts and give a greater number of actors a greater stake to continue to expand the carbon market. A Latin American Carbon Fund could also be a very effective way to address the financing shortfalls that plague carbon-project development throughout the region today. Latin American Carbon Market Plan: The IDB could increase the number of bank-sponsored clean energy projects by providing additional early-stage project-development financing as well as technical support to validate project designs and certify emissions reduction that results from these projects. Such earlystage funding is pivotal to the success of many carbon projects in the region, without which many project developers would not be able to pursue project implementation past the proposal or design phase. Increasing the number of clean energy projects throughout the region will provide countries with the means by which to enhance their carbon sector while helping countries to reach sustainable development goals. Blueprint for Carbon Markets | Section 7 859 Endnotes Section 7.1 1 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2008.” World Bank, May 2007, p. 1. 2 Johnson, Keith. “Market Making: Carbon Keeps Growing.” Wall Street Journal, 26 Feb 2008. 3 Harvey, Fiona. “Carbon Credits Market Triples.” Financial Times, 2 May 2007. 4 Harvey, Fiona. “Carbon Credits Market Triples.” Financial Times, 2 May 2007. 5 Baker-Said, Stephanie. “Cashing in on Pollution.” Bloomberg Markets, Dec 2007. 6 Kennedy, Simon. “Carbon Trading Enriches World’s Energy Desks.” Marketwatch, 16 May 2007. 7 “Carbon Pollution from Industrialized Countries Rises Again.” Agence France Press, 20 Nov, 2007. 8 “Stern Review: The Economics of Climate Change.” P. 2. 9 “Carbon Trading.” Dag Hammarskjold Foundation, p. 56. 10 http://www.epa.gov/air/caa/overview.txt 11 Lokey, Elizabeth. “Valuing Renewable Energy in Emerging US Carbon Markets.” Electricity Journal, Vol. 20, No. 6, July 2007, p. 48. 12 “Building Trust in Emissions Reporting.” Pricewaterhouse Coopers, Feb 2007, p. 42. 13 http://www.epa.gov/airmarkets/progsregs/arp/basic.html#phases 14 Kennedy, Simon. “Carbon Trading Enriches the World’s Energy Desks.” Marketwatch, May 16, 2007. 15 Baker-Said, Stephanie. “Cashing in on Pollution.” Bloomberg Markets, December 2007. 16 Silayan, Alan. “Equitable Distribution of CDM Projects Among Developing Countries.” HWWA-Report 255, Hamburg Institute of International Economics 2005, p. 8. 17 Hamilton, Katherine; Bayon, Ricardo; Turner, Guy; and Higgins, Douglas. “State of the Voluntary Carbon Markets 2007: Picking up Steam.” New Carbon Finance, July 18th, 2007, p. 12. 18 Rothenberg, Eric B. and Rousakis, John. “Exploring the Carbon Trading Landscape.” New York Law Journal, 27 Jul 2007. 19 Lecocq, Franck and Ambrosi, Philippe. “The Clean Development Mechanism: History, Status and Prospects.” Review of Environmental Economics and Policy, Vol. 1, No. 1, Winter 2007, p. 139. 20 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2007.” World Bank, May 2007, p. 4. 21 “New Zealand Carbon Market Working Group Report: Carbon Markets 101.” 1 May 2007, p. 2. 22 State and Trends of the Carbon Market: 2005, 2006, 2007 and 2008 23 Hamilton, Katherine; Bayon, Ricardo; Turner, Guy; and Higgins, Douglas. “State of the Voluntary Carbon Markets 2007: Picking up Steam.” New Carbon Finance, July 18th, 2007, p. 12. 24 “Carbon Markets 101.” New Zealand Market Working Group Report, May 1, 2007, p. 1. 25 “Cap-and-Trade Systems.” Catalyst, Vol. 4., No. 1, Spring 2005. 26 Pricewaterhouse Coopers, Feb 2007 27 “A Beginner’s Guide to Joint Implementation.” Department for Environmental, Food and Rural Affairs, Climate Change Projects Office, March 2005, p. 2. 28 “A Beginner’s Guide to Joint Implementation.” Department for Environmental, Food and Rural Affairs, Climate Change Projects Office, March 2005, p. 2. 29 http://unfccc.int/resource/docs/2005/cmp1/eng/08a02.pdf#page=2, p. 4. 30 Karousakis, Katia. “Joint Implementation: Current Issues and Emerging Challenges.” Organization for Economic Cooperation and Development, Oct 2006, p. 7. 31 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2007.” World Bank, May 2007, p. 4. 32 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2007.” World Bank, May 2007, p. 27. 33 Lecocq, Franck and Ambrosi, Philippe. “The Clean Development Mechanism: History, Status and Prospects.” Review of Environmental Economics and Policy, Vol. 1, No. 1, Winter 2007, p. 134. 34 “The Clean Development Mechanism: A User’s Guide.” Energy & Environment Group: Bureau for Development Policy, 2003, p. 5. 35 Wara, Michael. “Measuring The Clean Development Mechanism’s Performance and Potential: Working Paper #56.” July 2006, p. 2. 36 Wara, Michael. “Is the Global Carbon Market Working?” Nature, Vol. 445, 8 Feb 2007, p. 595. 37 Wara, Michael. “Measuring The Clean Development Mechanism’s Performance and Potential: Working Paper #56.” July 2006, p. 10. 38 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2007.” World Bank, May 2007, p. 20, 22. 39 Lecocq, Franck and Ambrosi, Philippe. “The Clean Development Mechanism: History, Status and Prospects.” Review of Environmental Economics and Policy, Vol. 1, No. 1, Winter 2007, p. 136. 40 Cullenward, Danny and Victor, David. “Making Carbon Markets Work.” Scientific American, 24 Sep 2007. 41 Cullenward, Danny and Victor, David. “Making Carbon Markets Work.” Scientific American, 24 Sep 2007. Endnotes Section 7.2.1 1 “EU ETS Now Significantly Reducing Emissions.” Point Carbon, 13 Mar 2007, p. 1. 2 Lecocq, Frank. “State and Trends of the Carbon Market 2004.” World Bank, June 2004, p. 31. 3 Lecocq, Frank and Capoor, Karan. “State and Trends of the Carbon Market 2005.” World Bank, May 2005, p. 32. 4 “Building Trust In Emissions Reporting.” Pricewaterhouse Coopers, Feb 2007, p. 24 5 “Europe Reveals Tight ETS Phase III Plan.” CarbonPositive, 24 Jan 2008. 6 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2007.” World Bank, May 2007, p. 17. 7 “Building Trust In Emissions Reporting.” Pricewaterhouse Coopers, Feb 2007, p. 29. 8 “Carbon-Credit Forestry Companies Fears.” The Age, 19 Nov 2007. 9 Turnbull, Malcolm. “Cut Tax, Carbon to Green Economy.” The Australian, 27 Mar 2008. 10 Green, Andrew A. “MD. Joins Pollution Pact; Ten States to Seek Ways to Address Climate Change.” The Baltimore Sun, 21 Apr 2007, p. 1B. 11 Patrick, Jason. “Bicoastal Carbon Trading: California and RGGI Markets Mapped Out.” Evolution Markets Executive Brief, Edition 29, 11 Oct 2006, p. 1. 12 “Regional Greenhouse Gas Initiative Becomes Official.” Business and Environment, Vol. 17, No. 3, Mar 2006, p. 13. 13 “The Compact Clause and the Regional Greenhouse Gas Initiative.” Harvard Law Review, Vol. 120, No. 7, May 2007, p. 1960. 14 “Building Trust In Emissions Reporting.” Pricewaterhouse Coopers, Feb 2007, p. 32. 15 Holt, Charles; Shobe, William; Burtraw, Dallas; Palmer, Karen and Goeree, Jacob. “Auction Design for Selling CO2 Emissions Allowances Under the Regional Greenhouse Gas Initiative.” 26 Oct, 2007, p. 10. 16 “Design Elements for Regional Allowance Auctions Under the Regional Greenhouse Gas Initiative.” 17 Mar 2008, p. 1. 17 Patrick, Jason. “Bicoastal Carbon Trading: California and RGGI Markets Mapped Out.” Evolution Markets Executive Brief, Edition 29, 11 Oct 2006, p. 1. 18 Capoor, Karan and Ambrosi, Philippe. “State and Trends of the Carbon Market 2007.” World Bank, May 2007, p. 35. 19 “Building Trust In Emissions Reporting.” Pricewaterhouse Coopers, Feb 2007, p. 33. 20 “State of the Voluntary Carbon Markets 2007.” New Carbon Finance, 18 Jul 2007, p. 14. 21 “Western Climate Initiative Statement of Regional Goal.” 22 Aug 2007, p. 4. 22 See http://www.westernclimateinitiative.org/ for more information. 23 Doyle, Jim. “A New Direction.” Carbon Trading, Vol. 2, No. 2, Mar 2008, p. 40. Endnotes Section 7.2.2 1 Chicago Climate Exchange. 2 Brüning, Kristian. “Voluntary Carbon Markets—More Than Meets the Eye?” 3 Taiyab, Nadaa. “Exploring the Market for Voluntary Carbon Offsets.” International Institute for Environment and Development, London, p. 1. 4 “Picking Up Steam: State of the Voluntary Carbon Markets 2007.” New Carbon Finance, 18 Jul 2007, p. 5. This figure has been updated with newer figures for transacted volumes on the OTC market, reported in “Forging a Frontier: State of the Voluntary Carbon Markets 2008.” New Carbon Finance and Ecosystem Marketplace, 8 May 2008, p. 5. 5 “Forging a Frontier: State of the Voluntary Carbon Markets 2008.” New Carbon Finance and Ecosystem Marketplace, 8 May 2008, p. 5. 6 Ibid. 14. 7 Ibid. at 25. 8 Ibid. at 24. 9 Ibid. 10 Ibid. 11 “Carbon Credits Market Triples.” Financial Times, p. 1. 12 Chicago Climate Exchange. <http://www.chicagoclimatex.com/>. 13 Chicago Climate Futures Exchange. <http://www.ccfe.com/>. 14 2008 Report. P. 33. 15 The Kyoto Protocol recognizes six greenhouse gasses and renders them commensurate using CO2 “equivalent” values based on the particular gas’s global warming potential (GWP). For example, one ton of methane has the same environmental effect as 21 tons of carbon dioxide; thus, the GWP of methane is 21. 16 New Carbon Finance and Ecosystems Marketplace, p. 38. 17 Ibid., p. 41. 18 Ibid., p. 48. 19 Ibid., according to the graph on page 52, though the figures on page 47 indicate that CERs constitute 14% and ERUs constitute less than 0.5%. 20 Ibid., p. 47. 21 Based on data collected from New Carbon Finance and Ecosystem Marketplace. p. 52. 22 Voluntary Carbon Standard. 23 <http://www.tuev-sued.de/ uploads/images/1179142340972697520616/Standard_VER_e.pdf>. 24 <http://www.cdmgoldstandard.org/how_does_it_work.php?id=44>. 25 An Overview of the Greenhouse Friendly Initiative. <http://www.greenhouse.gov.au/greenhousefriendly/publications/fs-overview.html>. 26 2008 report, p. 30. 27 Ibid. 28 2008 Report. 860 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf 29 “State of the Voluntary Carbon Markets 2007: Picking Up Steam.” Ecosystem Marketplace, July 2007. 30 “A US Carbon Market Could Learn from Europe: IETA.” Gardner, Timothy. Reuters, Apr. 19, 2007. 31 “Brokers See Growing US Carbon Market”. Reuters, Aug. 29, 2007. 32 “State and Trends of the Carbon Market 2007.” The World Bank, May 2007. 33 Marques, Rafael. Chicago Climate Exchange. 34 “State and Trends of the Carbon Market 2007.” The World Bank, May 2007. Endnotes Section 7.3.1 1 Lecocq, Franck and Ambrosi, Philippe. “The Clean Development Mechanism: History, Status and Prospects.” Review of Environmental Economics and Policy, Vol. 1, No. 1, Winter 2007, p. 134. 2 “CDM In Brazil.” Sweco Groner, Aug. 2007, p. i. 3 “CDM Investor Guide”. United Nations Industrial Development Organization UNIDO, Brazil. Vienna 2003 4 “Brazil’s Contribution to prevent Climate Change.” Ministerio da Ciencia e Tecnologia, Brazil, 2007 5 Personal Interview. Erik Wurster, Carbon Finance Officer of E&Co. 6 Fernandes Stoque, Rafael. Phone Interview, 22 Apr. 2008. 7 Watanabe Jr., Shigueo. Phone Interview, 23 Apr. 2008. 8 Lopes Vidigal, Ignez. The Clean Development Mechanism (CDM): A Brazilian Implementation Guide. Getulio Vargas Foundation, Dec. 2002. 9 “Government Launches the National Clean Development Year.” The Embassy of Brazil in London, 20 Jul. 2007. 10 Hirschle ,Alexander. CDM Market Brief – Brazil, DEG (DEG - Deutsche Investitions) and bfai Bundesagentur für Außenwirtschaft/ German Office for Foreign Trade. Kyoto-Coaching-Cologne - KCC São Paulo, Sept. 2006. 11 “CDM in Brazil.” Sweco Grøner, Aug. 2007, p. 22. 12 Hirschle ,Alexander. “CDM Market Brief” – Brazil, DEG (DEG - Deutsche Investitions) and bfai Bundesagentur für Außenwirtschaft/German Office for Foreign Trade. Kyoto-Coaching-Cologne - KCC São Paulo, Sept. 2006. 13 Buonomo, Massimo. Phone Interview, 22 Apr. 2008. 14 Hirsch, Tim. “Fortis Group Buys Carbon Rights.” BBC News, 26 Sept. 2007. 15 “Stock market sells carbon credits.” Associated Press, 26 Sept. 2007. 16 Hirsch, Tim. “Fortis Group Buys Carbon Rights.” BBC News, 26 Sept. 2007. 17 BNDES Representative. Phone Interview 16 Apr. 2008. 18 “BNDES Creates BRL 200m Program To Encourage Negotiation Of Carbon Credits.” Banco Nacional de Desenvolvimento, 5 June. 2007. 19 “BNDES Approves New Environmental Fund.” Business News Americas, 26 Feb. 2008. 20 “Coutinho Announces Measures Reinforcing Commitment To The Environment.” Banco Nacional de Desenvolvimento, 5 June. 2007. 21 “Glossary of CDM Terms.” UNFCCC/CDM Executive Board, 30 Nov. 2007, p. 6. 22 “Carbon Finance at the World Bank.” World Bank Carbon Finance Unit. 23 “Brazil: Reforestation Around Hydro Reservoirs.” World Bank Carbon Finance Unit. 24 Inter-American Development Bank. 25 “IDB Approved US$500,000 for Preparation of Portais da Cidade Program in Porto Alegre, Brazil.” Inter-American Development Bank Press Release, 13 Aug. 2007. 26 UNFCCC/CDM. 27 Energy Information Agency, 2007. 28 Energy Information Agency, 2007. 29 Coelho, Suani T. and Lucon, Oswaldo. “CDM opportunities in São Paulo.” SMA - São Paulo Environmental Secretariat , Montreal 2005. 30 United Nations Industrial Development Organization UNIDO, CDM Investor Guide, Brazil. Vienna 2003. 31 United Nations Industrial Development Organization UNIDO, CDM Investor Guide, Brazil. Vienna 2003. 32 Cencig, Mario Oscar. “CDM Projects In Brazil: Opportunities For Renewable Energy.” Núcleo Interdisciplinar de Planejamento Energético (NIPE) State University of Campinas (UNICAMP). São Paolo Brazil, 2007. 33 IEI & Sweco Groner. CDM in Brazil, A SWOT study of the Clean Development Mechanism in Brazil. Aug., 2007. http://www.ieila.org/documents/CDMinBrazil_SWOT.pdf. 34 Point Carbon, 3 May 2007. 35 Nascimento Silva, Tiago. Phone Interview, 12 May 2008. 36 “60 second interview with Eduardo Jorge Martins Alves Sobrinho.” Environment Secretary São Paulo. Green Power Conferences. “Carbon Markets Americas.” 37 UNFCCC, 2008. 38 Nascimento Silva, Tiago. Phone Interview, 12 May 2008. 39 “Bandeirantes landfill gas to energy project (BLFGE)” DET NORSKE VERITAS. Brazil. Validation Report. REPORT NO. 2005-0387. 40 “BANDEIRANTES-SAO PAULO-BRAZIL” FOR CASE STUDIES OF CDM - LANDFILL GAS PROJECTS. World Bank, Apr. 2007. 41 “Bandeirantes landfill gas to energy project (BLFGE)” DET NORSKE VERITAS. Brazil. Validation Report. REPORT NO. 2005-0387. 42 Nascimento Silva, Tiago. Phone Interview, 12 May 2008. 43 “Celulose Irani Biomass to Electricity.” Ecosecurities. 44 Fernandez, Pablo. Phone Interview, 5, May 2008. 45 “Clean Development Mechanism Simplified Project Design Document For SmallScale Project Activities (SSC-CDM-PDD) Version 02: Celulose Irani Biomass To Electricity Project.” UNFCCC/CDM., p. 17. 46 “Celulose Irani Biomass to Electricity.” Ecosecurities. 47 “Clean Development Mechanism Simplified Project Design Document For SmallScale Project Activities (SSC-CDM-PDD) Version 02: Celulose Irani Biomass To Electricity Project.” UNFCCC/CDM. 48 Buonomo, Massimo. Phone Interview, 22 Apr. 2008. 49 Buonomo, Massimo. Phone Interview, 22 Apr. 2008. 50 Jenny Wong and Michael Dutschke. “Can Permanence be Insured? Consideration of some Technical and Practical Issues of Insuring Carbon Credits from Afforestation and Reforestation.” HWWA DISCUSSION PAPER 235 Hamburgisches WeltWirtschafts-Archiv (HWWA) Hamburg Institute of International Economics 2003. 51 Melnick, Don and Gibbs, Holly. “Reducing Emissions from Deforestation: combating climate change.” 52 “REDD Reducing Emissions from Deforestation and Forest Degradation.” The Woods Hole Research Center. United Nations Framework Convention on Climate Change (UNFCCC). Conference of the Parties (COP), Thirteenth session 3–14 Dec. 2007 Bali, Indonesia. 53 “Marriott In Carbon Offset Deal With Brazilian State.” Financial Times, 7 Apr. 2008. 54 “Marriott Pledges $2m to Protect Brazilian Rainforest.” GreenBiz, 9 Apr. 2008. 55 Hampton, Stephanie. Phone Interview, 29 Apr. 2008. 56 Mann, David. Phone Interview, 29 Apr. 2008. 57 “Juma Sustainable Development Reserve: Project Overview.” Secretariat of Environment and Sustainable Development of Amazonas State, Brazil (SDS). 58 Mann, David. Phone Interview, 29 Apr. 2008. 59 “Marriott and Brazilian State of Amazonas Partner to Protect Rainforest.” Corporate Social Responsibility Newswire, 7 Apr. 2008. 60 “Helping Protect The Amazonas Rainforest: The Centerpiece of Marriott’s Five-Point Environmental Strategy.” Marriott. 61 “Making Good On Our Promise.” Yahoo!, 21 Oct. 2007. 62 “Yahoo Picks Offset Projects.” Environmental Leader, 2 Nov. 2007. 63 “Yahoo To Get Carbon Neutral by 2007 With Projects in India, Brazil.” Carbonyatra, 23 Oct. 2007. 64 Energy Information Administration. 65 Buonomo, Massimo. Phone Interview, 22 Apr. 2008. 66 Point Carbon, 3 May 2007. Endnotes Section 7.3.2 1 Economist Intelligent Unit. Country Profile: Chile, April 2008. 2 Energy Market 3 EIU, Chile 2008 4 Programa Pais, Eficiencia Energetica. 5 Javier Garcia. Ejecutivo de Inversión en Energía y MDL. Corporación de Fomento de la Producción (CORFO)Gerencia de Inversión y Desarrollo. Personal Interview, April 15, 2008. 6 Paloma Sarria. Phone Interview 17 Apr. 2008. 7 Chile Info. 8 Chile Info. 9 See, for example, the creation of the Consultant National Committee Decreto Supremo N° 466 del Ministerio de Relaciones Exteriores 29 May 2996. 10 GTZ Climate Protection Program. (CaPP) National Strategy Study for the CDM in Chile. Summary. March 2003. 11 Paloma Sarria. Phone Interview 17 Apr. 2008. 12 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: Lepanto Landfill Gas Management Project.” UNFCCC/CDM, 1 Apr 2006, p. 2. 13 “Chile: Chacabuquito Small Hydro.” World Bank Carbon Finance Unit. 14 Meirovich, Hilen. Phone Interview. 28 May, 2008. 15 UNFCCC/CDM. 16 Chile Info. 17 Programa de Energía y MDL, CORFO, 14 Nov. 2007. 18 Sanhueza, Eduardo; Maldonado, Pedro and Neuenschwander, Aquiles. “National Strategy Study for the CDM in Chile.” Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, Mar. 2003. 19 CORFO. 20 Monge, Javier García. “Oportunidades de Inversión en Energías Renovables no Convencionales y MDL.” Presentation, Apr. 2007. 21 Monge, Javier García. “Oportunidades de Inversión en Energías Renovables no Convencionales y MDL.” Presentation, Apr. 2007. 22 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: La Higuera Hydroelectric Project, Chile.” UNFCCC/CDM, 1 Dec. 2005. 23 Lövbrand, Eva; Nordqvist, Joakim and Rindefjäl, Teresia. “Everyone loves a winner – expectations and realisations in the emerging CDM market.” Draft paper presented at the Amsterdam Conference on the Human Dimensions of Global Environmental Change, May 2007. 24 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: Loma Los Colorados Landfill Gas Project.” UNFCCC/CDM, 18 Dec. 2006, p. 4. Blueprint for Carbon Markets | Section 7 861 25 Arias, Arturo. Phone Interview 8 May 2008. 26 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: Loma Los Colorados Landfill Gas Project.” UNFCCC/CDM, 18 Dec. 2006, p. 3. 27 “Empresas Columbianas Impulsan Mercado de Carbono en Chile.” Asociación Colombiana de Generadores de Energía Eléctrica, 23 Jan. 2008. 28 “Empresas Forestales Chilenas Transan Bonos de Carbono.” Impacto Ambiental, 13 Mar. 2008. 29 “Reducciones Voluntarias: El “Mercado Paralelo” a Los Bonos de Carbono Que Mueve US$100.” Innovación, 5 Mar. 2008. 30 Action Carbone. 31 Tiberghien, Matthieu. Phone Interview, 5 May 2008. 32 “Project: Reforestation of Small Properties Belonging to Mapuche Indigenous Communities in Chile.” Action Carbone. 33 Tiberghien, Matthieu. Phone Interview, 5 May 2008. 34 “Project: Reforestation of Small Properties Belonging to Mapuche Indigenous Communities in Chile.” Action Carbone. Endnotes Section 7.3.3 1 Blanco, Javier Tomás. “Vivienda y Desrrollo Territoria, Estrategia Nacional para la Implementación del MDL en Colombia.” Ministerio de Medio Ambiente. 2 “Republic of Colombia, Mitigation Environmental Degradation to Foster Growth and Reduce Inequality.” World Bank, 25 Feb. 25 2006. 3 Sanchez Triana, Ernesto, Ahmed Kulsum and Awe Yewande. Environmental Priorities and Poverty Reduction. A Country Environmental Analysis for Colombia. World Bank, 2007. 4 “Unidad de Planeacion Minero Energética, Plan Energético Nacional Contexto y Estrategias 2006-2025.” Ministerio de Minas y Energía. 5 “Resolucion Numero 0453 DE 2004.” Ministerio de Medio Ambiente, Vivienda y Desarrollo Territorial, República de Colombia. 6 “Documento CONPES 3242: Estrategia Institucional Para La Venta de Servicios Ambientales de Mitigación del Cambio Climático.” Departamento Nacional de Planeación, 25 Aug. 2003. 7 “LAC Region Participation In The International Carbon Market.” Center for Sustainable Development in the Americas. Washington, D.C. 8 de Caldas, Francisco José. Phone Interview, 22 Apr. 2008. 9 See UPME.gov.co. 10 “Energias Renovables, descripción tecnologías y usos finales.” Unidad de Planeación Minero Energética (UPME), MINISTERIO DE MINAS Y ENERGÍA. Bogotá, Colombia. 11 Ministerio de Ambiente, Vivienda y Desarrollo Territorial. 12 Oficina Colombiana para la Mitigación del Cambio Climático — Ministerio del Medio Ambiente Plan de Trabajo para Proyectos Forestales de Mitigación del cambio climático Bogotá D.C. Oct. 2002. 13 Law 788/ 2002. Article 18th. 14 B.J. Ruiz and V. Rodríguez-Padill. “Renewable energy sources in the Colombian energy policy, analysis and perspectives.” Universidad Nacional Autónoma en México, Posgrado en Ingeniería Área Energía, Ciudad Universitaria, Edificio 83 Eduardo Quintana, Circuito exterior, Coyoacán, C.P. 04510, Ciudad de México, México 15 Juan Alberto Gracia. Phone Interview, 15 Apr. 2008. 16 “Clean Development Mechanism Simplified Project Design Document for Small Scale Project Activities (SSC-PDD v. 2): Santa Ana Hydroelectric Plant.” UNFCCC/CDM. 17 ICONTEC. 18 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: BRT Bogotá, Colombia: TransMilenio Phase II-IV.” UNFCCC/CDM, 6 Sept. 2006, p. 3. 19 World Bank Carbon Finance Unit. 20 Meirovich, Hilen. Phone Interview, 28 May 2008. 21 “Latin American Carbon Program (PLAC): A Concrete Product from a Latin American Bank.” UNEP. 22 Ministerio de Ambiente, Vivienda y Desarrollo Territorial. 23 Ministerio de Minas y Energía, Unidad de Planeacion Minero Energética, Plan Energético Nacional Contexto y Estrategias 2006-2025. 24 “El Cambio Climatico Es Prioridad Para Colombia.” Colombia.com, 30 Jan. 2007. 25 Colombian Ministry of the Environment. 26 “Estrategias para la implementación del Mecanismo de Desarrollo Limpio en Zonas No Interconectadas.” Oficina Colombiana para la Mitigación del Cambio Climático — Ministerio de Ambiente, Vivienda y Desarrollo Territorial Instituto de Planificación y Promoción de Soluciones Energéticas – IPSE Bogotá D.C., 2003. 27 Rodriguez, Humberto. “Asesoria Para la Utilización del MDL en el Sector Energía.” Academía de Ciencias Exactas, Físicas y Naturales, Bogotá. 28 “Clean Development Mechanism Project Design Document Form (CDM—PDD) Version 03: Project for the catalytic reduction of N2O emissions with a secondary catalyst inside the ammonia oxidation reactors of the NAN1 and NAN2 nitric acid plants at Abonos Colombianos SA.” UNFCCC/CDM, 24 Sept. 2007, p. 31. 29 “Clean Development Mechanism Project Design Document Form (CDM—PDD) Version 03: Project for the catalytic reduction of N2O emissions with a secondary catalyst inside the ammonia oxidation reactors of the NAN1 and NAN2 nitric acid plants at Abonos Colombianos SA.” UNFCCC/CDM, 24 Sept. 2007, p. 3. 30 “Clean Development Mechanism Project Design Document Form (CDM—PDD) Version 03: Project for the catalytic reduction of N2O emissions with a secondary catalyst inside the ammonia oxidation reactors of the NAN1 and NAN2 nitric acid plants at Abonos Colombianos SA.” UNFCCC/CDM, 24 Sept. 2007, p. 7. 31 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: BRT Bogotá, Colombia: TransMilenio Phase II-IV.” UNFCCC/CDM, 6 Sept. 2006, p. 3. 32 Grütter, Jürg. “Monitoring Report: CDM Project 0672: BRT Bogotá, Colombia: TransMilenio Phase II-IV.” Grütter Consulting, 23 Feb. 2008. 33 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: BRT Bogotá, Colombia: TransMilenio Phase II-IV.” UNFCCC/CDM, 6 Sept. 2006 34 Grütter, Jürg. “Monitoring Report: CDM Project 0672: BRT Bogotá, Colombia: TransMilenio Phase II-IV.” Grütter Consulting, 23 Feb. 2008. 35 “Sustainable Transport: A Sourcebook for Policy Makers in Developing Cities.” CDM in the Transport Sector. 36 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: BRT Bogotá, Colombia: TransMilenio Phase II-IV.” UNFCCC/CDM, 6 Sept. 2006, p. 12. 37 “Bogotá’s TransMilenio: Transformation of a City a la BoP.” World Resources Institute. 38 Grutter, Jürg M.. Interview, 22 Apr.2008. 39 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 02: Jepirachi Wind Power Project.” UNFCCC/CDM, 15 Dec. 2005. 40 Sandoval Sastre, Ana María; Vergara, Walter; Aramburo Penagos, Jaime Eduardo and Zuluaga Usme, Julio Eduardo. “Jepirachi Project—Colombia: Promotion of Renewable Energy to Address Global Climate Change; Promoting Socially Sustainable Development to Address the Quality of Life of the Local Community: LCR Sustainable Development Working Paper No. 20,” p. 81. 41 “Colombia: Jepirachi Wind Farm.” World Bank Carbon Finance Unit. 42 Sandoval Sastre, Ana María; Vergara, Walter; Aramburo Penagos, Jaime Eduardo and Zuluaga Usme, Julio Eduardo. “Jepirachi Project — Colombia: Promotion of Renewable Energy to Address Global Climate Change; Promoting Socially Sustainable Development to Address the Quality of Life of the Local Community: LCR Sustainable Development Working Paper No. 20,” p. 82. 43 Sandoval Sastre, Ana María; Vergara, Walter; Aramburo Penagos, Jaime Eduardo and Zuluaga Usme, Julio Eduardo. “Jepirachi Project—Colombia: Promotion of Renewable Energy to Address Global Climate Change; Promoting Socially Sustainable Development to Address the Quality of Life of the Local Community: LCR Sustainable Development Working Paper No. 20,” p. 82. 44 “Colombia: Jepirachi Wind Farm.” World Bank Carbon Finance Unit. 45 Aramburo, Jaime and Vélez, Olga L. Interview 3 Apr. 2008. 46 Sandoval Sastre, Ana María; Vergara, Walter; Aramburo Penagos, Jaime Eduardo and Zuluaga Usme, Julio Eduardo. “Jepirachi Project—Colombia: Promotion of Renewable Energy to Address Global Climate Change; Promoting Socially Sustainable Development to Address the Quality of Life of the Local Community: LCR Sustainable Development Working Paper No. 20,” p. 81. 47 Garcia, Edgar Botero. Interview, 13 Apr. 2008. 48 Garcia, Andrea. Phone Interview, 31 Mar. 2008. 49 Garcia, Andrea. Phone Interview, 31 Mar. 2008. 50 Inter-American Development Bank. 51 Garcia, Andrea. Interview, 31 Mar. 2008. 52 “DNP Destaca Importancia de Atención Temprana al Problema del Cambio Climático.” Hoy En Planeación. 53 Ibid. Jaime Aramburo and Olga L. Vélez. 54 Garcia, Edgar Botero. Phone Interview, 13 Apr. 2008. Endnotes Section 7.3.4 1 CIA World Fact Book. 2 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC-PDD) Version 01 (January 2003): Rio Blanco Small Hydroelectric Project.” 4 Nov 2004, p. 3. 3 “Manual: Sistema de Indicadores Ambientales de Honduras.” República de Honduras: Secretaría de Recursos Naturales y Ambiente, p. 44. 4 Mirza Osiris Castro, M. Sc., Secretaría De Recursos Naturales Y Ambiente, Unidad De Cambio Climático/ Dirección General De Energía. Estatus Legal Y Experiencias En Actividades MDL En Honduras. 5 “Renewable Energy State Of The Industry Report #7.” Winrock International, 2003, p. 10. 6 Leon, Cynthia. Phone Interview, 1 Apr 2008. 7 “Productores de energía renovable temen pérdidas a falta de contratos.” Diario La Tribuna, 27 Jan 2008. 8 “Letter of Approval by the Government of Finland: HEL0270-45.” Ministry of Foreign Affairs of Finland, 14 Sep 2004, p 2. 9 Sustainable Energy and Climate Change Initiative, Inter-American Development Bank 862 A Blueprint for Green Energy in the Americas 2009 | Garten Rothkopf 10 “IDB Approves $350,000 Grant to Honduras for Energy Efficiency and Biofuel Program.” Inter-American Development Bank Press Release, 10 Dec 2007. 11 “IIC Hosts Seminar in Honduras on New Carbon Credit Sale and Purchase Agreement Template.” Inter-American Investment Corporation Press Release, 16 Apr 2008 12 “Accelerating Renewable Energy Investments through CABEI in Central America.” United Nations Development Program, 23 Mar 2007. 13 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January, 2003: Cortecito and San Carlos Hydroelectric Project.” 21 Jan 2003, p. 6. 14 Turner, Ronald. Phone Interview, 11 Apr 2008 15 Turner, Ronald. Phone Interview 11 Apr 2008 16 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January, 2003: Cortecito and San Carlos Hydroelectric Project.” 21 Jan 2003, p. 10. 17 Turner, Ronald. Phone Interview 11 Apr 2008 18 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January 2003: La Esperanza Hydroelectric Project.” 21 Jan 2003, p. 10. 19 Leon, Cynthia. Phone Interview, 1 Apr 2008. 20 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January 2003: La Esperanza Hydroelectric Project.” 8 Aug 2005, p. 9. 21 “Honduras: La Esperanza Hydro.” The World Bank Carbon Finance Unit. 22 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January 2003: La Esperanza Hydroelectric Project.” 8 Aug 2005, p. 3. 23 Turner, Ronald. Phone Interview, 1 Apr 2008. 24 “First Kyoto Protocol Emission Credits Generated by Honduras.” Environment News Service, October 20, 2005. 25 “Honduras Hydropower Project Makes History Today for the Small Community of La Esperanza.” World Bank Press Release No. 2006/122/ESSD, Oct 20, 2005. 26 “Honduras: La Esperanza Hydro.” The World Bank Carbon Finance Unit. 27 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January, 2003: Cortecito and San Carlos Hydroelectric Project.” 21 Jan 2003, p. 2. 28 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January, 2003: Cortecito and San Carlos Hydroelectric Project.” 21 Jan 2003, p. 2. 29 Garcia, Rodrigo. Phone Interview, 15 Apr 2008. 30 “WWF Signs MoU With Palm Oil Producers In Honduras To Protect Biggest Reef In The Americas.” WWF Brazil, 19 Jun 2007. 31 “Project Design Document Form (CDM-SSC-PDD) – Version 03: Energeticos Jaremar – Biogas Recovery from Palm Oil Mill Effluent (POME) ponds, and Heat & Electricity Generation, Honduras.” 22 Dec 2006, p. 3. 32 Sambula Morales, Rafael. Phone Interview, 1 Apr 2008. 33 “Project Design Document Form (CDM-SSC-PDD) – Version 03: Energeticos Jaremar – Biogas Recovery from Palm Oil Mill Effluent (POME) ponds, and Heat & Electricity Generation, Honduras.” 22 Dec 2006, p. 15. 34 Castro, Mauricio. Interview 04/06/08. 35 Voluntary Carbon Standard 36 UNFCCC/CDM “Way cleared for Kyoto mechanism to boost green investment in developing countries.” UNFCCC/CDM Press Release – CDM Executive Board. Bonn, 27 June 2007 37 Carbon Catalog 38 Carbon Neutral Group. 39 “Tropical Rainforests: Honduras.” Mongabay, 2005. 40 Sambula Morales, Rafael. Phone Interview, 10 Apr 2008. 41 Emanuelsson, Anette. “Honduras Reforestation Project to Export Carbon Credits.” Honduras This Week, Online Edition 43, Nov 12, 2007. 42 “Pico Bonito Forests, LLC.” Ecologic.org. 43 Walker, Cameron. “Shaun Paul: The Angel Investor.” Ecosystems Marketplace, 6 Jun 2007. 44 Sambula Morales, Rafael. Interview, 04/10/08. 45 “Tropical Deforestation Affects Rainfall In The US And Around The Globe.” ScienceDaily, 18 Sep 2005. 46 Leon, Cynthia. Phone Interview, 01 Apr 2008 47 “Clean Development Mechanism Simplified Project Design Document For Small Scale Project Activities (SSC—PDD), Version 01 21 January 2003: La Esperanza Hydroelectric Project.” 8 Aug 2005, p. 11. 48 “Productores de energía renovable temen pérdidas a falta de contratos.” Diario La Tribuna, 27 Jan 2008. 49 See “Review of the Project Activity: Compañía Azucarera Hondureña S.A. Cogeneration Project (1035)”; “Review of the Project Activity: Chumbagua Cogeneration Project (1043)”; and “Review of the Project Activity: La Grecia Cogeneration Project (1056).” UNFCCC/CCNUCC, CDM Executive Board, 19 Oct 2007. Endnotes Section 7.3.5 1 “Presentación ENACC.” Secretaría de Medio Ambiente y Recursos Naturales, Subsecretaría de Planeación y Política Ambiental. Estrategia de México ante el Cambio Climático Global, México, Jan 2008. 2 “National Strategy on Climate Change: Executive Summary: Mexico.” Intersecretarial Commission on Climate Change, 2007. 3 “National Strategy on Climate Change: Executive Summary: Mexico.” Intersecretarial Commission on Climate Change, 2007. 4 “México: Tercera Comunicación Nacional ante la Convención Marco de las Naciones Unidas sobre el Cambio Climático.” Intituto Nacional de Ecologia, Comision Intersecretarial de Cambio climatico, Oct. 2006 5 “Towards a National Climate Change Strategy: Executive Summary.” Interministerial Commission on Climate Change, SEMARNAT. Mexico, 2006. 6 Ullrich Umann, “CDM Market Brief” – Mexico, DEG and DNA/Inter-Ministerial Commission of Climate Change (CICC – Comisión Intersecretarial de Cambio Climático), Aug 2007. 7 Mateus, Hernan. Phone Interview, 22 Apr. 2008. 8 Ramirez, Casiopea. Phone Interview, 8 Apr. 2008. 9 Economist Intelligent Unit. Country Report: Mexico. Apr. 2008. 10 Quadri de la Torre, Gabriel. Phone Interview, 22 Apr. 2008. 11 Quadri de la Torre, Gabriel. Phone Interview, 22 Apr. 2008. 12 Fernandez, Iria. Phone nterview, 20 Apr. 2008. 13 Secretaría De Medio Ambiente Y Recursos Naturales Subsecretaría De Planeación Y Política Ambiental. 14 Aguirre, Marian. Phone Interview, 22 Apr. 2008. 15 FOMECAR, Licenciada Barrientos. Phone Interview, 22 Apr. 2008. } 16 Programa GEI México. 17 World Bank Carbon Finance Unit. 18 World Bank Carbon Finance Unit. 19 “Mexico: Mexico City Transport Corridor.” World Bank Carbon Finance Unit. 20 “IDB Annual Report 2007.” Inter-American Development Bank, 4 Mar. 2008, p. 28. 21 Meirovich, Hilen. Phone Interview. 28 May 2008. 22 “National Strategy on Climate Change Mexico: Executive Summary.” Intersecretarial Commission on Climate Change, 2007. 23 UNFCCC, Apr. 2008. 24 “Project Design Document Form (CDM-PDD) Version 02: AWMS GHG Mitigation Project MX05-B-06, Jalisco, México.” UNFCCC/CDM, 11 Nov. 2005, p. 5. 25 UNFCCC/CDM. 26 The Economist Intelligence Unit. Country Profile: Mexico, Apr. 2008. 27 Quadri de La Torre, Gabriel. Phone Interview, 22 Apr. 2008. 28 The Economist Intelligence Unit. Country Profile: Mexico. Apr. 2008. 29 Fernandez, Iria. Interview, 20 Apr. 2008. 30 “Project Design Document Form (CDM-PDD) Version 02: AWMS GHG Mitigation Project MX05-B-06, Jalisco, México.” UNFCCC/CDM, 11 Nov. 2005, p. 5. 31 Díaz, Danae. Phone Interview, 6 May 2008. 32 “Project Design Document Form (CDM-PDD) Version 02: AWMS GHG Mitigation Project MX05-B-06, Jalisco, México.” UNFCCC/CDM, 11 Nov. 2005, p. 12. 32 UNFCCC, Apr. 2008. 33 Mirda, Michael. Phone Interview, 28 Apr. 2008. 34 “Project Design Document Form (CDM-PDD) Version 02: AWMS GHG Mitigation Project MX05-B-06, Jalisco, México.” UNFCCC/CDM, 11 Nov. 2005, p. 26. 35 “Ecomethane.” Ecosecurities. 36 “Project Design Document Form (CDM PDD) Version 02: Aguascalientes EcoMethane Landfill to Gas Energy Project.” UNFCCC/CDM, 2 May 2006. 37 “Case Study: the Aguascalientes EcoMethane Landfill Gas Project.” Ecosecuritites. 38 “Clean Development Mechanism Project Design Document Form (CCM-PDD): Eurus Wind Farm.” UNFCCC/CDM, 25 Oct. 2006. 39 “Clean Development Mechanism Project Design Document Form (CDM-PDD) Version 03: Eurus Wind Farm.” UNFCCC/CDM, 25 Oct. 2006, p. 13. 40 Farias, Luis. Interview, 25 Apr. 2008. 41 “Clean Development Mechanism Project Design Document Form (CCM-PDD) Version 03: Eurus Wind Farm.” UNFCCC/CDM, 25 Oct. 2006. 42 Fernandez, Iria. Interview, 20 Apr. 2008. 43 Hamilton, Katherine; Bayon, Ricardo; Turner, Guy and Higgins, Douglas. “State of the Voluntary Carbon Market 2007 Picking Up Steam.” New Carbon Finance & Ecosystem Marketplace, 17 July 2007. 44 Envirotrade. 45 Plan Vivo: Carbon Management and Rural Livelihoods. 46 Absalom, Rebecca. Phone Interview, 6 May 2008. 47 Carbon Balanced. 48 Bayon, Ricardo; Hawn, Amanda and Hamilton, Katherine. Voluntary Carbon Markets: An International Business Guide to What they are and How they work. Earthscan Publications, 2007. 49 Barrigh, Jorge. Person Interview, 5 Apr. 2008. Blueprint for Carbon Markets | Section 7 863 Endnotes Section 7.4.1 1 “China Overtakes US in Greenhouse Gas Emissions.” International Herald Tribune, 20 June 2007. 2 Climate Change Performance Index 2008, Germanwatch, December 2007. 3 See “China Leapfrogs UK on Renewables Index.” Environmental Data Interactive, 26 August 2008 and Renewable Energy Country Attractiveness Indices, Ernst & Young, Quarter1-2 2008. 4 “China’s Energy Conditions and Policies.” Information Office of the State Council of the People’s Republic of China, December 2007. 5 NREL National Renewable Energy Laboratory. Renewable Energy in China. Apr. 2004. 6 Logan, Jeff. “China’s Emissions Conundrum.” World Resources Institute, 9 Mar 2.007. 7 Netherlands Environmental Assessment Agency. <http://www.mnp.nl/en/dossiers/Climatechange/moreinfo/Chinanowno1inCO2emiss ionsUSAinsecondposition.html>. 8 “Measures for Operation and Management of Clean Development: Mechanism Projects in China.” Available at: <http://www.geichina.org/pro/cdm/file/Measures%20for%20Operation%20and%20 Management%20of%20Clean%20Development%20Mechanism%20Projects%20in %20China.pdf>. 9 CDM Country Guide for China: 1st Edition. Institute for Global Environmental Strategies; Ministry of the Environment, Japan; and the Chinese Renewable Energy Industries Association, 2005. 10 Stanford University. Program on Energy and Sustainable Development At the Center for Environmental Science and Policy. Rural Electrification in China 1950-2004 Historical processes and key driving forces. Working Paper #60 December 2006. 11 CDM country profile. By EU 2006. 12 “China Begins Huge Reforestation Effort.” Xinhua News, 15 May 2005. 13 “China: Facilitating Reforestation for Guangxi Watershed Management in Pearl River Basin.” World Bank Carbon Finance Unit. 14 “Developing the Carbon Market in the People’s Republic of China.” Asian Development Bank Annual Report 2007. 15 CDM & JI Monitor .Point Carbon CDM in China and India: different challenges ahead. Natalia Gorina, senior consultant with ICF International. 31 Oct. 2007. 16 CDM Country Guide for China 17 CDM & JI Monitor .Point Carbon CDM in China and India: different challenges ahead. Natalia Gorina, senior consultant with ICF International. 31 Oct. 2007. 18 Harvey, Fiona. “Chinese Factories and Carbon Traders Exploit Kyoto Loophole.” 18 Jan. 2007 19 Ball, Jeffrey; McKinnon, John D.; and Oster, Shai. “China Cashes in on Global Warming; Critics Fret Lucrative Carbon Credits Hurt Clean-Energy Efforts.” Wall Street Journal, 8 Jan. 2007. 20 Hefferman, Olive. “The Land of Unintended Consequences.” Nature, 22 May 2007. 21 Projects in energy efficiency, renewable energies, and methane avoidance or use, to which the Chinese government attaches priority, are required to pay 2% of their CER earnings. The rate is also a mere 2% for afforestation measures. The transfer benefit for N2O projects, in contrast, amounts to 30% and 65% for HFC and PFC projects, respectively. Projects already approved by the DNA before 12 October 2005 are exempt from transfer benefit charges regardless of category. 22 CDM & JI Monitor .Point Carbon CDM in China and India: different challenges ahead. Natalia Gorina, senior consultant with ICF International. 31 Oct. 2007. 23 “Clean Development Mechanism Project Design Document Form (CDM-PDD): Shandong Dongyue HFC23 Decomposition Project.” UNFCCC/CDM, 28 Dec. 2005. 24 Clean Development Mechanism in China, Office of National Coordination Committee on Climate Change. 25 Efstathiou, Jim Jr. “World Bank Carbon-Reduction Investments Criticized in Report.” Bloomberg, 10 Apr. 2008. 26 “Qingdao Wind Farm.” Carbon Catalog. 27 Climate Care. 28 Climate Care. 29 “Verification Report: Qingdao Huawei Windpower Company Limited: Verification of the Qingdao Huawei Windpoer Project China: Report No. 20070225.” TÜVRheinland, 31. Jan 2007. 30 The World Bank. CLEAN DEVELOPMENT MECHANISM IN CHINA TAKING A PROACTIVE AND SUSTAINABLE APPROACH. Second Edition. Sept 2004. 31 The World Bank. CLEAN DEVELOPMENT MECHANISM IN CHINA TAKING A PROACTIVE AND SUSTAINABLE APPROACH. Second Edition. Sept 2004. Endnotes Section 7.4.2 1 Kowalenko, Kathy. “Wind Power Blowing Worldwide.” IEEE Institute. 6 May 2002 2 Economist Intelligent Unit. Country Profile: India. June 2007 3 “Addressing Energy Security and Climate Change.” Ministry of Environment & Forests, Ministry of Power; Bureau of Energy Efficiency India: Government of India. October, 2007 4 “Addressing Energy Security and Climate Change.” Ministry of Environment & Forests, Ministry of Power; Bureau of Energy Efficiency India: Government of India. October, 2007 5 Government of India, Ministry of New and Renewable Energy. 6 Economist Intelligent Unit. Country Profile: India. June 2007 7 “Addressing Energy Security And Climate Change. Government of India.” Ministry of Environment & Forests, Ministry of Power; Bureau of Energy Efficiency India. October, 2007 8 “Addressing Energy Security And Climate Change. Government of India.” Ministry of Environment & Forests, Ministry of Power; Bureau of Energy Efficiency India. October, 2007 9 Government of India, Ministry of New and Renewable Energy (IREDA) 10 “India: CDM market brief.” DEG KFW Bankengruppe and BFAI, December 2006 11 Boris Alex, New Delhi; Martin Wiekert, Cologne . CDM-MARKET BRIEF- India . bfai - Bundesagentur für Außenwirtschaft/ German Office for Foreign Trade & DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH. December 2006 12 CDM India, Designated National Authority, Ministry of Environment & Forests 13 “Bilateral Relations: Canada—India.” Government of Canada. 14 Government of India, Ministry of New and Renewable Energy (IREDA) 15 Indian Renewable Energy Development Agency Limited 16 Multi Commodity Exchange of India Ltd. 17 Mishra, Ashish Kumar. “Carbon Credit Market Aims to Solve Key Problems.” The Economic Times, 1 Dec 2007. 18 Government of India, Ministry of New and Renewable Energy (IREDA) 19 “For the First Time in India, Subsistence Farmers to Earn Carbon Credits.” World Bank Carbon Finance Unit, 8 May 2007. 20“India: Improving Rural Livelihoods.” World Bank Carbon Finance Unit. 21 “Implementation of the Technical Support Facility Under the Carbon Market Initiative.” Asian Development Bank, November 2007, p. 4. 22 Deodhar, Vinay, Michaelowa, Axel and Krey, Matthias, “Financing Structures for CDM Projects in India and Capacity Building Options for EU-Indo Collaboration.” HWWA Discussion Paper No. 247, September 2003. 23 “Project Design Document Form (CDM-SSC-PDD) Version 03: Installation of Low Green House Gases Emitting Rolling Stock Cars in Metro System.” 22 Dec 2006. 24 Pitamah Marg, Bhishma and Vihar, Pragati. “First Monitoring Report: Version 01: Installation of Low Green House Gases Emitting Rolling Stock Cars in Metro System.” Delhi Metro Rail Corporation (DMRC), CDM Project References No. UNFCCC 1351. http 25 “Clean Development Mechanism Project Design Document Form (CDM-PDD), Version 03: Bundled Wind Power Project in Tamilnadu, India, Coordinated by the Tamilnadu Spinning Mills Associations (TASMA).” 28 Jul 2006. 26 “CDM at Work in India.” Tricoronia, 3 May 2007. 27 Leo Peskett, Cecilia Luttrell . “Making voluntary carbon markets work better for the poor: the case of forestry offsets.” Overseas Development Institute, Forestry Briefing 11, November 2006 28 Leo Peskett, Cecilia Luttrell . Making voluntary carbon markets work better for the poor: the case of forestry offsets. Forestry Briefing 11 Overseas Development Institute November 2006 29 “HSBC Carbon Neutral Pilot Project.” HSBC Holdings plc Group Corporate Affairs. October 2005 30 Seres, Stephen. “Analysis of Technol Endnotes Section 7.4.3 1 “Forging a Frontier: State of the Voluntary Carbon Markets 2008.” New Carbon Finance and Ecosystem Marketplace, 8 May 2008. 2 “Measures for Operation and Management of Clean Development: Mechanism Projects in China.” Government of the People’s Republic of China. 3 “Chinese Most Lucrative Carbon Credits Dry Up.” Reuters, 30 May 2007. 4 Asian Development Bank. 5 “Carbon Market Initiative: The Asia Pacific Carbon Fund.” Asian Development Bank, November 2006. 6 Nakhooda, Smita. “Correcting the World’s Greatest Market Failure: Climate Change and the Multilateral Development Banks.” World Resources Institute: WRI Issue Brief. June 2008, p. 9.