Market Mechanisms

The Carbon Rush documentary trailer

March 22, 2013 | More on Market Mechanisms, Trade & Commerce, video, youtube | Brazil, Honduras, Panama | Comment

Venezuela’s Chief Negotiator Claudia Salerno at COP18

December 18, 2012 | More on International Climate Negotiations, Market Mechanisms, video, youtube | COP15, COP18, USA, USA-Latin America, Venezuela | Comment

The Squeezed Middle: Why Latin America Matters in Climate Politics

Monica Araya

Latin America matters in international climate politics. Its emerging leadership role at the international climate change talks, on low-carbon pathways and climate finance illustrate how some Latin American countries may shape the negotiations and the region this decade.

Cleantech: Challenges and Opportunities in Latin America

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March 23, 2011 | More on Market Mechanisms, Renewable Energy, video, youtube | Emisiones, Speeches, wind | Comment

Economics of Climate Change in Latin America and the Caribbean Summary 2010

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This document, published by the ECLAC and carried out in collaboration with regional governments, the EU, IDB and various other political, academic, and research institutions, summarizes the aggregate economic impact of climate change in Latin America and the Caribbean. On the basis of national and regional studies, the report offers important economic considerations concerning climate change, including an estimated 1% loss of annual GDP in the region’s countries between 2010 and 2100 unless a consensus on mitigation actions is reached.

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December 27, 2010 | More on Climate Finance, Economics of Climate Change, Market Mechanisms, Reading List | ECLAC, EU, Inter-American Development Bank | Comment

Climate Justice Movement increases potency in Cancun

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By Arielle Balbus, Brown University

On Tuesday, December 7^th, “1,000 Cancuns” recognized the Global Day of Action for Climate Justice. La Via Campesina, Klimaforum, and Dialogo Climatico-Espacio Mexicano as well as activists in over 20 countries worldwide took to the streets to make a strong statement about who is most affected by climate change and how it should be resolved internationally.

The official slogan of La Via Campesina’s march was “Small Farmers Cool the Planet”. From November 25-December 10, La Via Campesina convened the “Forum for Life, Social and Environmental Justice”, which focused on building a potent climate justice movement among the largely rural and indigenous groups who traveled in caravans from across Mexico and beyond.

Latin America, climate change and the countdown to Copenhagen: Interview 1*

Guy Edwards

In the run up to the Copenhagen climate change conference in December, Latino Cambio is running a series of interviews with Latin American citizens, regional and international researchers, policy-makers and scientists linked to the global warming debate. In this first interview we talk with Dr. Elizabeth Lokey, University of Colorado, who has recently published a book on Latin America, renewable energy and the Clean Development Mechanism (CDM).

1.Your book entitled, ‘Renewable Energy Project Development under the Clean Development Mechanism: A Guide for Latin America’, is described as the definitive guide to developing renewable energy CDM projects in Latin America. How would you sum up the scope of your book and its key messages?

This book offers insight into the key challenges that renewable energy and other energy project developers face in Latin America. Each country in the region runs its electricity sector differently, which presents challenges to foreign developers. The book not only explores the challenges to earning CDM revenues, but also investigates the various electrical sectors and lessons learned from developers in each country. CDM challenges which have largely been discovered and overcome by a process of trial-and-error are addressed. These challenges are related to the UNFCCC process, as well as domestic policies and processes specific to the new Mechanism.

2.The book is arguably the most up-to-date analysis of CDM in Latin America and is the only work that focuses specifically on CDM opportunities for renewable energy. How has your work been received in the region so far and is the book also available in Spanish and Portuguese?

I have received invitations to speak at various carbon conferences in Latin America, and much support from colleagues and friends. My hope is that the book will help guide project developers through the complex CDM process and allow for more renewable energy project development in the region. The book is not available in Spanish or Portuguese. If there is enough interest, then perhaps Earthscan will consider sponsoring a translation of the book.

3.Your methodology focused on interviewing project developers, policy-makers, NGOs and investors on the ground in the respective countries. As an example of a low carbon employment, do you think the CDM has proved helpful in creating low carbon jobs in Latin America and what is its potential?

Most of the people I spoke with were related to the energy sector or governmental appointees, who helped operate the internal CDM-approval process. However, it is hard to say how much CDM has contributed to job creation. Many of the government appointed people interviewed in the Designated National Authority (DNA) offices previously had governmental posts in the country’s climate change or environmental office prior to the DNA office being established. Their positions were simply expanded to include the procedural parts of the national CDM approval process and a new position was not created. Other countries did have CDM-dedicated approval personnel and promotion offices which were instigated by the CDM. The number of new governmental posts varied from country to country.

Within the industrial sector, the project developers interviewed were almost all in business before the CDM, and many had been trying to develop specific projects since the 1990s, before the advent of the CDM. In an ideal world, the CDM would provide a greater incentive to prompt large amounts of new renewable energy project developers. In reality, the CDM was just the icing on the cake for these developers, not the sole reason for their existence.

Another category of people interviewed included carbon project developers that help project developers take their projects through the CDM process and commercialize the emission reductions that are generated. They owe the existence of their work completely on the CDM. Yet, there may be only a few hundred of these consultants spread throughout the entire region.

4.You suggest that the promotion of (non-large hydro) renewable energy CDM projects helps achieve the CDM goal of sustainable development. As the sustainable development benefits of the CDM are often the most challenged aspect, could you elaborate a little further?

The book specifies non-hydro renewables because large hydro energy with dams, while mostly beneficial (except for the methane emissions from the flooded land) from a greenhouse gas standpoint, have left a scarring legacy throughout Latin America. Citizens in the region therefore have mixed feelings about hydro development. Due to global warming and seasonal fluctuations as a result of the Southern Oscillation, some hydro projects in countries like Chile are not always reliable.

Sustainable development is never mentioned in the Kyoto Protocol. The definition used in the book is borrowed from the 1987 Brundtland Commission. According to this definition, electricity resources that are derived from renewable sources qualify since they will provide electricity for future generations with resources that are replenishable. Since these energy resources are not based on a finite fuel and do not contribute to the accumulation of gases, they contribute to sustainable development.

5.One of the major barriers to CDM projects, which you identify, relates to the openness of a country’s electrical sector. Are private or stated owned electrical sectors better for CDM development?

The countries in Latin America are all in varying states of privatization, with some still dominated by a primarily state-owned electrical grid like Mexico, Costa Rica, and Uruguay and others with a completely privatised grid like Guatemala.

The countries with state-owned grids tend to be those with little renewable energy CDM development because of restrictions placed on the state entities for earning these revenues. Private developers can certainly access CDM revenues, but typically there are so many barriers to market entry for independent power producers in these countries that they are the minority. The state is the entity with the greatest ability to benefit from renewable energy CDM projects.

The CDM registration process relies heavily on a financial additionality test, which proves that the project relied on carbon revenues for its existence. State-run power producers are typically bound by law to develop the least-cost generation option for their constituents. This least-cost option, by definition, will not be financially additional, especially since the state can set the rate for cost recovery of the new capacity addition. States also produce future resource planning guides, which will mention large new capacity additions. If a project is mentioned in this future resource plan, then it could negate the project’s additionality since auditors could make the argument that the project was planned and would have been built even without the benefit of CDM revenues.

Countries with open electrical markets that allow the participation of independent power producers that are not bound by the least-cost generation requirement or the resource planning process are more able to have success with the registration of renewable energy CDM projects.

6.You argue a country’s renewable energy legislation can be both a blessing and a curse for renewable energy development as it can provide additional financing or complicate the process of showing project additionality. This has created a perverse incentive for developing countries to do nothing to address climate change. Can you expand on this?

One of the fundamental problems with the CDM is that
it requires projects to prove that they wouldn’t have occurred in a business-as-usual situation. If a country puts in place a policy or incentive for renewable energy, the argument could be made that that project would have occurred without the benefit of the CDM. In Chile where there is a 10% Renewable Portfolio Standard, any projects that fulfil this requirement and also receive CDM revenues could be argued as not regulatorily additional. In Ecuador, where there is an aggressive feed-in tariff for renewable energy, photovoltaic energy systems receive a fixed energy payment of 52 cents (USD) per kWh. Can systems that receive this payment prove that they would not have occurred otherwise?

The CDM Executive Board sought to clarify the issue of the perverse incentive in a decision in 2005 at its 22nd meeting which ruled that, “the baseline scenario need not take these policies (that lower emissions) into account . . .” There are still some concerns among project developers over how a CDM additionality argument can be constructed for a project that receives large government subsidies or is required to exist according to national law. CDM in its present form is problematic for instigating domestically-motivated reduction projects, although these types of projects are exactly what are needed in order to bring about significant reductions in emissions.

7.How effective are the various CDM actors (National CDM offices, Investment Promotion Agencies and Designated National Authorities) at working together to promote project development and sustainable development goals?

The degree to which each country has support structure in place for CDM project varies dramatically. This support comes in the form of: industry associations that promote renewables or a particular industry in general; carbon brokers who seek CDM projects and occasionally make project developers aware of the opportunity for carbon finance; and governmental offices with CDM officials called Designated National Authorities (DNAs), who make the final decision whether or not a project fulfils the mandatory goal of promoting sustainable development.

The degree of involvement of each of these actors depends on the country, its potential for CDM development and the emphasis the government has put on CDM. Some governmental offices in countries like Ecuador and Argentina can be very helpful in promoting CDM as a special promotion arm exists and is dedicated to helping educate project developers. Other DNA offices are less active or understaffed for the role because they have less resources. Some DNA offices serve as a hindrance to CDM because they charge a tax on each emission reduction created. This tax can vary between 3-6% in Ecuador, or as large as 15-35% as proposed by the Bolivian government. Because each DNA office decides what constitutes a project that promotes sustainable development, a complex and time-consuming domestic process can be required on top of the already complicated UNFCCC process.

8.Political instability is identified as a major turn off to potential investors in CDM projects. Do you think some of the current left leaning governments of Latin America and particularly the aversion to the CDM demonstrated by Venezuela risks jeopardizing Latin American enthusiasm for the CDM?

The political environment of a country has a large bearing on the success of a project. However, some countries with relatively violent pasts like Colombia have been successful with the CDM because of promotional activities ands recent years of stability. Other countries, like Nicaragua, have had less activity. These countries tend to require a higher internal rate of return on projects because of the political and economic risks associated with the host country. Developers are hesitant to invest unless there is an outstanding opportunity.

As an extreme example, Venezuela has not even set up a national Designated National Authority because President Hugo Chavez does not support the CDM as he claims it is a market-based mechanism.

Other countries like Paraguay and Bolivia may have relatively little CDM development because there are few opportunities for emission reductions. These countries have very clean electrical grids already and new renewable energy projects would be displacing small amounts of fossil fuels and therefore create few emission reductions. Typically, it is the countries like Mexico and Brazil with large amounts of emissions that have the best opportunity to create reductions. This has led to an inequitable distribution of projects.

9.The melting of glaciers presents a major challenge to those looking to develop CDM hydro-power projects, particularly in the Andes. During your research how did this issue present itself?

This issue was encountered in Chile where the melting of glaciers had become a significant issue for hydro developers. This issue certainly has implications for the hydro industry, and may decrease the number of new hydro applications in the country. Other CDM-specific barriers to large hydro projects also exist. The EU decided in 2007 that it would only allow CDM hydro projects from dams that were less than 20 MW, which greatly limits the participation of large hydro projects in CDM since the EU is the largest buyer of Certified Emission Reductions (CERs).

10.Finally, you put forward a number of solutions to overcome the barriers at the technical, social, financial, informational and institutional level within host countries and at the UNFCCC. Which are the most pressing in your opinion?

For a post-2012 offset architecture, the most pressing issue is how to allow host countries to implement their own reduction targets while still allowing for cost containment for Annex I countries and permitting offsets to be generated from that country. Reconciling this previously mentioned perverse incentive issue is essential to the assimilation of non-Annex I countries into a system where they will eventually have binding reduction targets.

For a post-2012 regime, the goals of the CDM need to be clear. If sustainable development is to be a goal of the CDM, then a clear definition of what constitutes sustainable development needs to be defined and consistently applied (as opposed to now where each country decides on this definition). If an equitable distribution of projects is part of this definition, then enhanced efforts to allow small-scale projects in regions like Sub-Saharan Africa and rural villages that have few emissions, and therefore the potential for few reductions, need to be made. A more streamlined approach for micro projects could help promote this type of development.

August 9, 2009 | More on Interviews, Market Mechanisms, Renewable Energy | Books | Comment

Dissatisfaction at carbon forum reminds us Latin American action on climate is not guaranteed

Guy Edwards

The Fourth Latin American Carbon Forum, hosted by the Panamanian National Environmental Authority (ANAM), starts tomorrow in Panama City. More than 400 local, regional and international participants from the private and public sectors are expected to attend.

The LACF is a regional platform established to promote knowledge and information sharing while facilitating business opportunities among the main carbon market players. The LACF is organized on a yearly basis in a joint effort by the World Bank, the International Emissions Trading Association (IETA), the Latin American Energy Organization (OLADE) and the UNEP Risø Centre.

The core objective of the LACF is to bring together the carbon market actors (e.g. National CDM offices, Investment Promotion Agencies and Designated National Authorities) in order to share experiences on the process of CDM projects, learn about the latest developments of emission trading schemes and the future of the CDM, analyze national and international climate change mitigation policies and facilitate the negotiation of emissions.

Highlights from the World Bank’s State and Trends of the Carbon Market 2009

Carbon price:

The World Bank report comments that the average price of a Certified Emission Reductions (CERs) in 2008 was €11.46 (US$16.78), up 16% over the average price in 2007. The average price reflects high prices paid in the first part of the year before the financial crisis began to bite, compared with much lower prices in the few transactions in the remainder of 2008. In the midst of the crisis, financial institutions and investors largely exited the market.

Geographical share:

The CDM pipeline now consists of over 4,500 projects in about 80 countries. However, in 2008 China dominated with a whopping 84% market share. With 4% and 3% market share each, India and Brazil rank second and third, respectively, with the rest of Latin America accounting for a weedy 2%.

Over haul of CDM required urgently:

The biggest contribution of the CDM has been to help change the mindset of governments and companies in developing countries to view climate change mitigation as an opportunity instead of a constraint to growth. Its has also provided experience and lessons on what has worked well and what could improve if markets are relied on in the future.

However, the possibility of achieving large potential volumes of CERs at present is contingent on overcoming myriad regulatory constraints of the CDM. Scaling up offset markets will require improving CDM efficiency and governance, starting with urgent attention to expanding alternative, conservative and simpler approaches to additionality.

Increasing the participation of developing countries will involve consideration of programmatic CDM and sector-based crediting, as well as including reducing emissions from agriculture and from deforestation and land degradation. Even though the greenhouse gas (GHG) mitigation potential in the agricultural sector is considerable, feasible and cost-competitive, under the CDM agricultural land management is not eligible (as a stand alone).

CDM Registration Process

Since April 2007, roughly 300 projects underwent review for registration, with hydro, waste gas/heat utilization, biomass energy and wind being the most frequently reviewed. In the same period, biomass energy, energy efficiency, waste gas/heat utilization and hydropower projects were the most frequently rejected, accounting for about three-quarters of the 90 projects that were rejected. Although there are fewer cement projects in the pipeline, they were rejected at a much higher rate than other projects due to the project developer failing to demonstrate additionality convincingly enough.

CDM & Development

CDM projects are expected to reduce emissions in a way that contributes to the host country’s sustainable development. CDM regulatory tools have focused single-mindedly on the carbon side by trying to precisely account for every ton of emission reductions. The potential to contribute to sustainable development has been sidelined.

Analysis:

Latin America was instrumental in developing the CDM, particularly Brazil. However, we should not assume their interest was necessarily based on environmental objectives but rather on securing another avenue for the region’s development and wealth creation.

There is a risk that if the CDM and carbon markets continue to under perform and fail to live up to expectations, Latin American enthusiasm for mitigating climate change and low carbon development may take a hit.

June 23, 2009 | More on Market Mechanisms, Renewable Energy | Latin-American-Carbon-Forum | Comment

Mexican attempts to cash in on CDM appear to be faltering

Guy Edwards

Tierramérica’s Emilio Godoy argues that this year’s World Environment Day host, Mexico, is lagging behind in developing renewable energy sources:

Despite its great potential for renewable energy, Mexico has not taken advantage of the Kyoto Protocol’s Clean Development Mechanism (CDM).

The most recent available official data on greenhouse gas emissions indicates Mexico released 643 million tons of carbon dioxide per year: 61 percent from the generation and consumption of energy, 22 percent from industry and 14 percent from deforestation.

Mexico could make better use of CDM projects to develop wind, solar and geothermal sources, energy efficiency and fossil fuel substitution, which would allow the country to cut its emissions by some 130 million tons, according to the Mexican Carbon Fund (FOMECAR).

However, “the CDM has turned into a way of marketing the credits, and has not met the objective of promoting sustainable development,” criticized María José Cárdenas, energy and climate change coordinator for the environmental group Greenpeace-Mexico.

In Mexico, “there is great potential for energy efficiency. A great deal of energy is consumed and there is a lot of waste,” said Miguel Breceda, researcher for the Energy Program at the Autonomous University of Mexico City.

The World Bank report, “State and Trends of the Carbon Market 2009,” estimated that in 2008 there were 705 million dollars in transaction, with certificates equivalent to 123 million tons of carbon. Latin America represents just four percent of that market.

A credit issued in Mexico is traded on the international carbon markets at 11 to 14 dollars, about a third of the value it had in July 2008. In this country, only 45 companies voluntarily reported their carbon emissions and 27 trade their reductions on the market.

The evolution of the CDM depends on the negotiation of a Copenhagen treaty that will replace the Kyoto Protocol after it expires in 2012.

“The CDM will have to remain for the countries that are not as developed, the smaller ones, not like Mexico, which can no longer play at being a country in transition,” said Cárdenas, who proposes an emissions reduction program for the most polluting sectors, like the petroleum, electrical and cement industries.

June 12, 2009 | More on Market Mechanisms, Renewable Energy | Mexico | Comment

Latin America and climate change: crisis or opportunity?

Guy Edwards

The World Bank’s 2009 flagship report on Latin America and the Caribbean (LAC), investigates the exposure of the region to climate change and what it can do to meets those risks and opportunities head on, both by itself and internationally, through a climate agreement being negotiated in December this year.

Crucially, emphasis is placed on the need for good adaptation policies to climate change which are complementary to the region’s development. LAC is well placed to move ‘ahead of the pack’ and take advantage of international cost-sharing mechanisms for deploying low-carbon technologies and build new comparative advantages. Interest in acting decisively now could ensure a faster recovery from the current economic slowdown and improve competitiveness.

The report entitled, Low Carbon, High Growth: Latin American Responses to Climate Change, urges the international community to look to Latin America for innovative solutions and leadership to avoid a climate crisis. The region is not the main source of emissions driving global warming, due to its clean energy matrix and its innovative policies to promote low carbon growth. Latin America produces only about six percent of global energy-related greenhouse gas emissions, or 12 percent of emissions from all sources, including deforestation and agriculture.

The region has piloted new technologies and approaches to reduce emissions:

• Mexico’s 2007 National Strategy on Climate Change adopts long-term, nonbinding targets. In the energy sector, the strategy identifies a total mitigation potential of 107 million tons of greenhouse gasses by 2014, a 21 percent reduction from business as usual over the next six years.

• Brazil is moving towards energy independence through the expansion of alternative energy sources such as hydroelectricity, ethanol, and biodiesel. Its sugar-based ethanol production is financially and environmentally sustainable without diverting land from food crops.

• Public and environmentally friendly public transport policies demonstrated by Curitiba (Brazil) and expanded in Bogota (Colombia) are now underway in dozens of cities in the region.

• Costa Rica has received worldwide recognition for its successful initiatives on payments for ecosystems services.

• Argentina is moving forward with renewable energy in rural areas, which provides affordable and reliable electricity to communities and has an impact on productivity and jobs.

Despite these innovations, LAC has been moving to a higher carbon growth path. Based on current trends, from 2005-2030 the projected growth of per capita CO2 energy emissions in the region is 33 percent (above the world average of 24 percent).

Therefore, a global climate agreement will be useless unless developing countries sign up to emission reductions, particularly the larger middle-income countries, such as Brazil and Mexico. Even if high-income countries acknowledge their historical responsibility for the majority of emissions and reduce them to zero, effectively becoming carbon neutral, this would still not be enough to keep the stock of greenhouse gases below “dangerous” thresholds. A strong Latin American presence at Copenhagen leading other developing countries is therefore imperative.

The report also documents some of the critical impacts of climate change in the region if the international community fails to act:

• By 2100, agricultural productivity in South America could fall by 12 percent to 50 percent.

• Climate-related natural disasters (storms, droughts and floods) cost, on average, 0.6 percent of GDP in affected countries.

• Hurricane damages will increase by 10 percent to 26 percent for each 1oF warming of the sea.

• The Amazon rainforest could shrink by 20 percent to 80 percent if temperatures increase by 2 to 3oC

• Many Andean glaciers will disappear within the next 20 years placing 77 million people under severe water stress by 2020.

• Caribbean corals will bleach and eventually die. Since the 1980s, 30 percent of corals already have died, and all could be dead by 2060.

• Increase in risk of dengue, malaria and other infectious diseases in some areas.

The study finds that keeping LAC on a high-growth and low-carbon path will require a coherent policy framework on three levels:

1. An international climate change architecture that creates enough momentum and is friendly to Latin America’s specific features, including: clear financial incentives to reduce deforestation; the expansion of carbon trading mechanisms to sectors; mobilization of financial flows to Latin America to facilitate deployment of “green technologies;” and the creation of a global market for sustainable bio-fuels, removing tariffs and other barriers.

2. Domestic policies to adapt to the inevitable climate change impacts on the region’s ecosystems and societies, incorporating climate-related threats into the design of long-term infrastructure investments, improving weather monitoring and forecasting, enhancing social safety nets so as to allow households to better cope with climate shocks, and improving the functioning of land, water and financial markets.

3. Domestic policies to exploit mitigation opportunities to make Latin America part of the global climate change solution. Many of the actions needed for mitigation are also good development policies. For example, reducing deforestation has social and environmental benefits; improving public transport can reduce congestion and local pollution with impacts on health, productivity and welfare; and expanding off-grid renewable energy can help reach rural populations without access to electricity.

Analysis:

The report reflects the difficulty of LAC countries embarking on a path to low carbon development. There may be a number of ‘low hanging fruit’ such as improving energy efficiency, which the region can utilize to reduce its emissions and adapt, but unless the region undergoes a fundamental shift across all sectors and government departments, these changes will be incremental at best. The report therefore fails to deliver a compelling narrative that challenges the current development paradigm.

Trade: the absence of any discussion on trade is notable given the commodities boom of recent years that has fueled the region’s economy, especially in the carbon intensive sectors of mining and hydrocarbons. As the region recovers from the economic crisis, a conversation on how climate change and a potential treaty will affect the region’s exports market is needed immediately. To stabilize greenhouse gas emissions concentrations to avoid dangerous climate change, over 50 percent of global mitigation potential would be located in developing countries. In the cases of industry, agriculture, and forestry, almost 70 percent of that mitigation potential is also in developing countries. This has the potential to hit Latin America’s export sectors hard.

Cities: LAC is the most urbanised region in the developing world with 77% of its people living in cities. According to the UN by 2030 the region’s urban population may surpass 600 million. The report focuses primarily on the advances and remaining potential in the transport sector in urban areas. However, it fails to link raising sea levels and the risk to urban areas located on the coast. This omission seems out of sync with the Bank’s World Development Report 2009, which argues that cities and towns will continue to act as dynamos in the global economy. As countries become richer, economic activity b
ecomes more concentrated in urban areas. However, if we take into account the revisions for sea level raises this century, the longevity of Lima, Buenos Aires and others may be in doubt and questions the validity of this statement in LAC.

LAC civil society and think tanks: The report fails to mention civil society, which seems at odds with the avalanche of social movements and civil society groups that rocked the political status quo in the wake of the redemocratisation process. Any discussion of responses to climate change void of considering the role of civil society is too blinkered. Secondly, a quick skim of the report’s bibliography reveals no references to Latin American research institutes or other organizations. Rather it is dominated by World Bank literature and academic journals, the majority of which are only published in English.

May 30, 2009 | More on Market Mechanisms, Public Climate Change Policies, REDD+, Regional Organisations | world bank | Comment