Technology Transfer and Investment Risk in International Emissions Trading (TETRIS)

Work Package 3: Permit Supply from the CDM(TETRIS Meeting, Amsterdam, 20-21 June 2006)

Contents

Brief overview of the approach applied for constructing MAC curves

Abatement costing studies and transaction costs Current status WP 3, progress and planned

activities Presentation of MAC curves for the major non-

Annex I regions

Objectives of WP3

To derive realistic and policy-relevant MAC curves for GHG emissions reduction options in non-Annex I countries

To analyze energy technology transfer as a result of the CDM

Approach to the project

Proposed/approved CDM projects

CDM project data base

Country abatement costing studies

GHG reduction options data base

Technology specific transaction cost

Non Annex I marginal abatement curve

General equilibriummodel

Technology Transfer

Comparison of information

Equilibrium credit price

Technology transfer criteria

CDM PROJECTINFORMATION

COUNTRY ABATEMENTCOSTING STUDIES

Work Package III

Abatement costing studies Country studies carried out in the framework of

capacity building programmes by local teams Information concerns national potentials and

average cost per ton CO2 eq reduction No common set of assumptions across studies

for context variables such as oil price, discount rate, timeframe, cost definition and development of reference scenario

Energy models used for the studies (LEAP,MARKAL) take into account the interactions between reduction options

Transaction Costs Based on detailed assessment of cost of each

component of the CDM project cycle Based on 10-year crediting period (sensitivity

analysis for 21-year crediting period) Dependent to a large degree on the size of the

project Form a short term barrier but not significant in the

longer term, except for very small technologies

Calculation of transaction costs for large scale GHG emissions reduction technologies

Spreadsheet for calculation CDM transaction costs (in US$)

days tariff Subtotal Total (10 yr) Total (21 yr)Project cycle component

upfront 55,900 71,5001. Project preparation and review 9,000 9,000

a) carbon risk assessment 10 600 6000b) documentation 5 600 3000

2. Project Design Document 5,400 9,000a) baseline study 3 600 1800b) monitoring plan 3 600 1800c) other PDD 3 600 1800

3. Validation 10 600 6000 6,000 18,000

4. Appraisal phase 29,500 29,500a) Negotiation costs 20 600 12000b) Registration 17500

5. Initial verification (start-up) 10 600 6000 6,000 6,000running 132,000 277,200

6. Periodic verification (yearly costs for monthly verification) 12 600 7200 72,000 151200

7. Certification (yearly) 10 600 6000 60,000 126000

Total transaction costs 187,900 348,700Costs per unit ($/ton CO2 reduced) 0.188 0.200

Current Status of the work Database containing GHG emissions reduction

options for 30 countries completed MAC curves developed for major non-Annex I

regions Database containing CDM project information

under development Analysis on transaction costs completed Analysis on technology transfer not yet done Draft report on WP3 produced and distributed

among project team members

Progress and planning for next months According to workplan WP 3 should be completed in June

2006. Implementation of WP 3 slightly behind schedule. Outstanding issues are:

– development of MAC for ‘rest of the world’– comparison of cost information obtained from CDM projects

and mitigation studies – more thorough analysis of functional forms – Analysis on technology transfer– Production of final report

Planning for coming months:– June: MAC curve for rest of the world– July: functional forms, technology transfer– August : comparison CDM projects and mitigation studies– September: production final report

Description of the country abatement costing database

Sector GHG emission reduction options

Energy intensive sectorCoal 2Crude oil 3Natural gas 1Petroleum and coal productsElectricity 115Iron and steel 4Paper product 4Non-ferrous metalsMineral products

Non-energy intensive sectorAgricultural products and forestry 32Transport 19Rest of Industry – other manufactures and service

86

Households 105Total number of reduction options 371

• Bottom-up cost information

• 371 options CDM eligible

• Country studies conducted for 30 Non-Annex I countries:

-Algas (’98)

-Worldbank NSS (’98-’05)

-UNFCCC NC : e.g. report Tunisia

-PEW Center (‘02): report India

-Jung (‘03): The role of forestry sinks in the CDM

-CCAP & Tsinghua University (‘05)

Limitation of the work• The abatement costing studies are far from comprehensive•Different assumptions and approaches across abatement costing studies make it difficult to reconcile and combine results• Estimates of abatement potential and incremental costs depend very sensitively on assumptions about the baseline scenarios•CDM transaction costs were assumed to be similar across world regions

Extrapolated MAC curve for the whole non-Annex I region

-50

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-20

-10

0

10

20

30

40

50

0 500 1000 1500 2000 2500

Cumulative GHG emissions reduction [MtCO2 eq]

Aba

tem

ent

cost

s [$

/tC

O2

eq]

• Extrapolation factor: 1.25

• Functional form: y = -0.07x3 - 0.0005x2 + 0.5x - 134 (R2 = 0.3022)

• Total identified abatement potential in the year 2010 at a cost up

to 50 $/ton CO2 eq. or lower is estimated at about 2.4 Gt CO2 eq.

Sectoral MAC curves for the whole non-Annex I region

•Total identified abatement potential at cost up to $50 per ton CO2 eq. in the

household sector and electricity sector amounts to about respectively 0.3 Gt CO2

eq and 1 Gt CO2 eq

•Other sectoral MAC curves are constructed for: forestry, transport and roi

-50

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-10

0

10

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40

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0 200 400 600 800 1000 1200

Cumulative GHG emissions reduction [MtCO2 eq]Ab

atem

ent c

osts

[$/tC

O2

eq]

-50

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0

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0 50 100 150 200 250 300 350

Cumulative GHG emissions reduction (MtCO2eq]

Abat

emen

t cos

ts [$

/tCO

2 eq

]

Households (91 options) Electricity (97 options)

Comparison of region-specific MAC curves

•Total identified abatement potential at cost up to $50 per ton CO2 eq. in China

and Rest of East south Asia amounts to about respectively 0.6 Gt CO2 eq and 0.2

Gt CO2 eq

China (27 options) Rest of East South Asia (97 options)

-50

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0

10

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0 50 100 150 200 250

Cumulative GHG emissions reduction [Mt CO2 eq]

Aba

tem

ent c

osts

[$/tC

O2 e

q]

-50

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0

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0 100 200 300 400 500 600 700

Cumulative GHG emissions reduction [Mt CO2 eq]

Aba

tem

ent

cost

s [$

/tC

O2

eq]

Conclusions•a significant amount of GHG emissions abatement potential exists in non-Annex I countries compared with the Annex I reduction requirements•The potential and costs estimates presented in this work should be viewed with caution• The identified potential in India and China already constitutes some 64% of the total identified reduction potential• The transaction costs related to the identification and development of a CDM project vary with project size and can form a major barrier for project investors