CARBON TRADING THROUGH CLEAN DEVELOPMENT MECHANISM FOR SMALL SCALE PROJECTS

Abstract

This dissertation covers review of Clean Development Mechanism as applied to small scale projects along with two case studies (Biogas Support Programme and Microhydro Village Electrification Project in Nepal). An international treaty on global climate protection known as the United Nations Framework Convention on Climate Change (UNFCCC) came into force on March 21, 1994. The Convention required industrialized countries (Annex I Parties) to take the lead in returning their greenhouse gas emissions to 1990 levels by the year 2000. During 3rd Conference of Parties (COP3) in Kyoto, Japan, , on 11 December 1997, a legally binding set of obligations called the Kyoto protocol for 38 industrialized countries and 11 countries in Central and Eastern Europe was created, to return their emissions of GHGs to an average of approximately 5.2% below their 1990 levels over the commitment period 2008-2012. The Kyoto Protocol entered into force on 16 February 2005 with its ratification by Russia and as on June 20, 2007, 175 Parties have ratified the Protocol. The targets cover six main greenhouse gases. Some activities in the land-use change and forestry sector, such as afforestation and reforestation, that absorb carbon dioxide from the atmosphere, are also covered. The Protocol establishes three cooperative mechanisms (International Emission Trading, Joint Implementation and Clean Development Mechanism) designed to help industrialized countries reduce the costs of meeting their emissions targets by achieving emission reductions at lower costs in other countries than they could domestically. The CDM is supervised by the Executive Board, composed of 10 members, including one representative from each of the five official UN regions (Africa, Asia, Latin America and the Caribbean, Central Eastern Europe, and OECD), one from the small island developing states, and two each from Annex I and non-Annex I Parties. All parties (Annex I and non-Annex I Parties) must meet three basic requirements to participate in CDM: i) voluntary participation, ii) establishment of the National CDM Authority, iii) ratification of the Kyoto Protocol. In order to make small projects competitive with larger ones, the Marrakech Accords establish a fast track for small-scale projects with simpler eligibility rules—renewables up to 15 MW, energy efficiency with a reduction of consumption either on the supply or the demand side of up to 15 gigawatthours/yr, and other projects that both reduce emissions and emit less than 15 kilotons of CO2 equivalent annually. The CDM project cycle follows seven steps 1) Project design and formulation, 2) National approval, 3) Validation and registration, 4) Project finance, 5) Monitoring, 6) Verification/certification and 7) Issuance of CERs. All countries wishing to participate in the CDM must designate a National CDM Authority to evaluate and approve the projects, and serve as a point of contact. In India, the Ministry of Environment and Forests (MoEF), which is the nodal agency for the subject issues of climate change, has been made the host of the DNA for dealing with the CDM and other climate change issues. In Nepal, Ministry of Environment, Science and Technology (MoEST) has been made to host the DNA for dealing with the CDM and other climate.change issues. CDM projects produce both conventional project output and carbon benefits (CERs). The value of carbon benefits and its impact on project viability are influenced by several factors such as the amount of CERs generated by the project, the price of CER and the transaction costs involved in securing CERs. The World Bank's PCF and the Dutch Government's C-ERUPT tender are the current main buyers of CERs through direct purchase transactions. Three new public-private partnership funds have been recently launched by the World Bank: the Community Development Carbon Fund, the Bio-Carbon Fund and the Italian Carbon Fund. The fragmented nature of the global carbon market generates differentiated prices for emissions reductions. Allowance markets generate high emission reduction prices since the delivery risks are believed to be minimal. The current price spread of CERs is US$ 3 — 6 per TCO2e. The total energy consumption in Nepal was 8.62 million toe in 2005, which translates to per capita annual energy consumption of about 15 Giga Joule (GJ), ranks among the lowest of the world. The energy mix is lopsided in Nepal, with biomass (fuel wood, agricultural residue and animal dung) being the main energy providers, supplying an overall 88% of the total energy consumed. Fuel wood, representing 78% of the energy consumption, is mainly used in rural Nepal. Energy end-uses of the domestic sector are mainly for cooking and lighting. The total demand of 331 million GJ in the domestic sector in 2004/05 was met mostly by fuel wood, followed by 16.2% agricultural residue. xii As part of this dissertation work, the project design document for two renewable energy projects have been prepared as case studies. The Nepal Biogas Support Programme is considered the project activity that installed a total of 9,759 small biogas digesters from April 07, 2005 to December, 2005 across various locations in 55 districts out of 75 districts of Nepal. It is estimated that the project activity will result in approximately 327,243 tons of net emission reductions over a crediting life of 7 years (2007-2014). The other Micro Hydro Village Electrification CDM Project aims to reduce GHG emissions and to contribute to the sustainable development of the rural villages by constructing micro hydroelectric power stations with .,a total power generation capacity of 2556 kW in the unelectrified 150 rural villages of 25 districts of Nepal which are off grid locations. It is estimated that the project activity will result in approximately 18771.26 tons of net emission reductions over a crediting life of 7 years (2009-2016). Carbon trading is in Nepal's favor. In order to benefit from these opportunities, such as Biogas Support Programme and Microhydro Village Electrification Projects under CDM should be considered on priority basis. Carbon revenues earned from selling the generated CERs helps in the sustainability of both Biogas Support Programme and Microhydro Village Electrification Project.