BRIDGING THE GAP BETWEEN SUPPLYSIDE AND DEMAND-SIDE CDM PROJECTS
IN ASIAN CITIES
Brian H Roberts*
Emeritus Professor
University of Canberra
Australia
Brian.Roberts@canberra.edu.au
Michael Lindfield
Principal Urban
Development Specialist
Asian Development Bank
Philippines
mlindfield@adb.org
Xuemei Bai, PhD
Senior Science Leader,
Urban Systems
Program
CSIRO Sustainable
Ecosystems
Australia
xuemei.bai@csiro.au
* Lead author
Summary
The United Nations Framework Convention on Climate Change (UNFCCC) provides
the protocol by which investors from developed countries can invest in greenhouse
gas (GHG) reduction projects in developing countries under the Clean Development
Mechanism (CDM) in return for carbon emission reduction (CER) credits.. Much of
the focus of the CDM has been on energy-efficient supply-side (EESS) reduction
projects involving the cleaner generation of electricity. EE demand-side (EEDS)
projects, which aim to reduce energy demand, have received less attention. More than
90% of CERs issued to date have been purchased by EESS projects. This paper
examines issues related to and potential ways of broadening the application of EEDS
CDM and programmatic CDM projects to help reduce GHG emissions in Asian cities.
Since many such projects are currently not financially viable, the paper discusses a
proposal for international development banks and official development agencies to
support a financial mechanism – a sustainability gap fund – to increase the uptake of
EEDS CDM and pCDM projects in Asian cities.
Key Words: Clean Development Mechanism (CDM); programmatic CDM; climate
change; Asian cities; sustainability gap fund
BRIDGING THE GAP BETWEEN SUPPLY-SIDE AND
DEMAND-SIDE CDM PROJECTS IN ASIAN CITIES
I.
INTRODUCTION
Human-induced climate change is caused primarily by the activities of people living
in cities (Hardoy et al., 1999, Bulkeley and Betsill, 2003). As cities develop and
become more industrialized, wealthy and consumer-driven, the demand for energy –
and the consequent emission of greenhouse gases (GHGs) – increases
correspondingly. Breaking this nexus is one of the greatest challenges for mitigating
human-induced climate change and creating a more sustainable path to development.
Integrating climate change concerns into urban management and development is a
significant challenge for Asian cities (Bai, 2007). By 2030, Asian countries are
predicted to be generating more than one-third of the world’s GHG emissions, with
energy use in cities the principal contributor (Guttikunda et al., 2003).. The population
of Asian cities is estimated to grow from 1.56 billion at present, to 2.65 billion people
(around 60% of Asia’s total population) by 2030 (UNDP, 2005). Asian cities, by
virtue of their size, density and rate or economic development sets themselves apart
from cities in other regions and this makes the management and reduction of future
GHG emissions and managing climate change in them more difficult. Addressing
GHG emissions in Asian cities poses significant challenges to governments in the
region (Roberts and Kanaley, 2006).
The Kyoto Protocol, which was developed under the auspices of the United Nations
Framework Convention on Climate Change (UNFCCC), addresses the needs and
responsibilities of ‘Annex I’ countries (industrialized countries) and ‘non-Annex I’
countries (developing countries) in addressing climate change. Among other things it
establishes the Clean Development Mechanism (CDM), under which investors from
Annex I countries can invest in developing countries to reduce GHG emissions in
return for carbon emission reduction (CER) credits. The majority of CDM projects
approved by the CDM Executive Board relate to GHG emissions reduction projects
servicing the energy needs of cities.
Much of the focus of the CDM has been on supply-side energy reduction projects
involving cleaner and more efficient electricity generation. This paper examines
issues related to and potential ways of broadening the application of demand-side
CDM projects to help reduce GHG emissions in Asian cities. It begins with a brief
explanation of the CDM and the current program of CDM activities in the Asian
region. Reasons for the low level of investment in demand-side CDM projects and
opportunities to increase this are discussed. Possible means for making demand-side
CDM projects (e.g. more energy-efficient urban transport, heating, cooling and
industrial systems) more feasible and bankable are discussed, including a possible
new funding mechanism.
1
II. GREENHOUSE GAS EMISSIONS ARE PRIMARILY AN URBAN
PROBLEM
There is a strong causal relationship between the growth of cities and increasing GHG
emissions (Holtz-Eakin and Selden, 1995). Some 78% of total carbon emissions from
energy use can be attributed to the activities of people living in cities (Grimm et al.,
2008:) for electricity generation, transport, and industrial and household uses. Growth
in urban migration, population, employment, motor vehicle ownership and income all
contribute significantly to a rise in per capita use of energy in cities, leading to
growing demand for new and bigger houses, infrastructure, and transportation and
communication services.
The energy needed to keep cities functioning is not the only factor to be considered in
the emissions abatement equation, however. The way in which cities are developed
and constructed also affects energy demand. The form and density of the population,
the spatial pattern of land-use activities, and the mode and design of urban
transportation systems all have significant impacts on energy use and GHG emissions.
Relative to national income it is generally believed that high-density cities have lower
per capita ecological footprints, energy use and transaction costs compared to lowerdensity cities (Kenworthy, 2003, Rees and Wackernagel, 1996).Many higher-density
cities in developing countries, however, have very serious environmental problems.
High-rise development also has higher per capita energy demands compared to lower
and medium density forms of development (Myors et al., 2005).
Reducing GHG emissions will require both supply-side and demand-side approaches.
Supply-side GHG emissions can be reduced through the greater use of renewable
energy, improving the technological efficiency of power generation, and, possibly,
increased carbon sequestration (e.g. clean coal technologies). Reducing demand-side
energy use in cities is, however, much more difficult. It will require an improved
understanding of the ways in which urban form, design, development density,
logistics and urban management systems can be made more efficient. It will also
require a greater effort to reduce industrial emissions through cleaner production and
industrial ecology.
III. CDM AS A MECHANISM TO REDUCE DEMAND-SIDE GHG
EMISSIONS IN CITIES
1.
Demand-side and supply-side contributions to the GHG problem
According to the Stern Report (Stern, 2006) the energy sector generates about 65% of
GHG emissions (Figure 1). Electricity generation activities, which are the focus of
most CDM projects, produce an estimated 24% of global GHG global emissions.
CDM projects which aim to reduce GHG emissions from the generation of electricity
are generally referred to as energy-efficient supply-side (EESS) projects. On the other
hand, EE demand-side (EEDS) activities related to industry, construction, transport,
heating and other uses contribute more than 41% of GHG emissions globally.
Therefore, CDM projects that achieve a reduction of GHG emissions by improving
urban and building design, reducing demand for energy in the transport and
manufacturing sectors, and improving the efficiency of heating, air-conditioning and
the management of utilities in cities could all significantly reduce overall GHG
emissions.
2
Figure 1: GHG emissions in 2000 by source
Land use
18%
Pow er
24%
NONENERGY
EMISSIONS
ENERGY
EMISSIONS
Agriculture
14%
Transport
14%
Waste
3%
Other Energy
Related
5%
Buildings
8%
Industry
14%
Source: Stern (2006)
EESS projects target change in energy supply in its various forms, such as electricity,
heat, steam and cooling, in order to reduce GHG emissions (Laurikka, 2002). EEDS
projects aim to reduce the demand for energy (Hinostroza et al., 2007b). The latter
might include:
•
•
•
Projects involving a technical retrofit to upgrade energy efficiency (e.g. improving
the energy efficiency of cooling systems in residential apartments).
Projects to reduce demand for energy at the consumer end (e.g. the replacement of
incandescent lamps with compact fluorescent lamps at the household level).
Regulations and standards (e.g. replacing electricity uniform-pricing policy with
an increasing block rate system).
Demand-side CDM projects are a promising approach for achieving cost-effective
global GHG emission reductions and sustainable development in recipient countries,
but they are severely under-represented in the CDM portfolio (Figueres and Philips,
2007). Indeed, the view has been expressed that project-based CDM is far from
delivering its full potential under the Marrakech Accords (Figurers 2005). Moreover,
the complex definition of ‘project’ as it is applied to EEDS projects has led to an
increasing number of voices in the international climate policy arena calling for
improvements to the way in which the CDM functions (Sterk and Wittneben, 2006).
2.
CDM as a Mechanism to Reduce GHG Emissions
The general aim of the CDM is to encourage developing countries to adopt GHG
reduction measures and to eliminate policies that might encourage the use of
undesirable technologies and practices that would increase GHG emissions. This is
because the Kyoto Protocol sets no compulsory GHG emissions targets for
developing countries. In many developing countries, economic development usually
involves substantial emissions of GHGs; the aim of the CDM is to create marketbased incentives for developing countries to be involved in climate-friendly economic
development measures while also offering industrialized countries the opportunity to
offset domestic GHG emissions by funding projects in developing countries.
3
Figure 2 Illustration of CDM’s function
Source: (Mizuno, 2007)
The CDM is a flexible and complex mechanism used to issue CER credits; Figure 2
portrays its function in simple terms. Developed countries under Annex I of the Kyoto
Protocol have committed to prescribed GHG emission reduction targets; as part of
efforts to reduce the cost of meeting such targets, Annex I countries can, through the
CDM, invest in emission reduction projects in developing countries (Michaelowa and
Fages, 1999). In a hypothetical case, a CDM project in Developing Country A saves
100,000 tonnes of carbon dioxide per year and hence receives 100,000 CERs. Under
the Kyoto Protocol, Industrialized Country B must reduce its GHG emissions by 1
million tonnes of carbon dioxide per year. By purchasing the 100,000 CERs generated
by the CDM project in Country A, Country B reduces its reduction target to 900,000
tonnes of carbon dioxide per year, thus making the national target easier to achieve.
This hypothetical explanation masks a number of methodological issues, some of
which are discussed below.
3.
CDM Activities
Figure 3 shows and systemizes the three categories of CDM activities: single-site (or
project-based); bundled; and programmatic (pCDM). Currently the CDM Executive
Board excludes policies, standards and sectoral approaches from the CDM, although
these are under negotiation for inclusion during the Kyoto Protocol’s second
commitment period (Sterk and Wittneben, 2006).
Various definitions of these CDM activity categories have been developed and
described in the literature (ibid.), and there have been efforts to build a common
terminology. Nevertheless, policymakers and researchers have defined, used and
interpreted terms in different ways, which has created confusion. Table 1 shows the
principal differences between single, bundled and pCDM project activities. pCDM
involves the grouping of a series of smaller projects undertaking similar activities
within a single Program of Activities (PoA) and their management under one project
instrument, thereby significantly reducing project development costs and enhancing
the investment attractiveness of marketing CER credits.
4
Figure 3: Types of CDM activities
Sectoral CDM
CDM projects
Policy-based CDM
Project-based CDM
Program of Activities
OR Programmatic CDM
Bundled CDM
Source: Authors
Most CDM projects implemented to date have been in the single-project category and
have focused on alternative energy production and hydrofluorocarbon (HFC)
emission reductions. Most (over 54%) of approved CDM projects are large.
Several papers published by the Organisation for Economic Cooperation and
Development ((Ellis, 2006, Ellis and Kamel, 2007, Ellis and Levina, 2005) suggest
that the current interpretation and focus of CDM activities could be constraining the
potential of the mechanism. Ellis (2006) recommends that consideration be given to
broadening the interpretation and scope of CDM activities to include projects
involving the funding of public transport systems, urban development and
infrastructure projects that focus on demand-side reductions of energy and GHG
emissions.
International development agencies have shown growing interest in new ways of
facilitating sustainable economic and social development while reducing
environmental impacts in developing countries, such as through various forms of
carbon trading. Such agencies could request the UNFCCC to broaden its application
of the CDM to embrace such initiatives.
There might be opportunities to develop bundled and pCDM projects for urban
development projects that could reduce long-term energy demand and lead to the
development of more sustainable cities. There is evidence that improvements to urban
form and density and to infrastructure, transport and urban logistics systems can lower
GHG emissions (Droege, 2008), with one report (Hinostroza et al., 2007a) suggesting
that it should be possible to expand the scope of pCDM activities to include this area.
Such a step would provide a parallel mechanism for addressing climate change
through reductions in both supply-side and demand-side energy use.
5
Table 1: Differences between single, bundled and programmatic CDM projects
Who is involved
What is targeted
Single CDM
One or several
agencies (such as
governments and
organizations)
Bundled CDM
One or several agencies (such as
governments and organizations)
Each activity is represented by a CDM
project participant
Project participants are the entities
achieving reductions
One goal
Similar types of activities
Each activity in a bundle is an
individual CDM project activity
Several individual projects that are
independent of each other and do not
occur because of a particular program.
Bundling helps to reduce transaction
costs
Ex-ante identification of exact sites
Where to implement
Single site
When activity/activities
occur
Specific timeframe
Source: Hinostroza et al. (2006)
6
Specific timeframe – does not change
over time
pCDM
One or several agencies (such as governments
and organizations)
Only the managing entity represents the
project activity as a CDM project participant
The project participant does not necessarily
undertake the GHG-reducing activities, but
rather assists others to do so
One or more goals (such as cross-sectoral,
local pollution, or natural protection)
The sum of all individual activities under the
program is the CDM project activity. The
program is the project
A multitude of GHG-mitigating actions that
occur under one program and because of the
program. The program is to achieve GHGmitigating actions
Multiple sites (such as national scale or across
several countries)
Probably open-ended, not known at time of
registration and changes over time
There is a need to develop a better understanding of how urban form and density, and
infrastructure, transport and urban logistics systems, influence urban sustainability and
climate change, and to explore new CDM activities and projects to address demand-side
factors and help reduce GHG emissions. This is important, as the built forms and urban
systems that have been constructed, and will continue to be built, could last for hundreds of
years and are not easily changed, while the technologies and resources used in energy and
industrial production will inevitably change in response to technological obsolescence and
the depletion of global petroleum reserves. The switch to alternative energy sources can be
made relatively easily, compared with retrofitting the built environment and infrastructure
to reduce energy demand.
IV. GROWING INTEREST BY ASIAN COUNTRIES IN THE CDM
There is growing interest among developing countries in CDM projects. As of March 2009
there were more than 1424 registered CDM projects, with a further 4541 in the pipeline;
more than 261,756,000 CER certificates had been issued. By 2012 the number of kCERs
issued is expected to rise to about 1.3 billion. More than 54% of projects are large-scale
(greater than 25ktCO2/yr), predominantly in hydro-, wind- and biomass-based energy
generation; hydro and biomass energy also make up the largest number of small-scale
projects. Almost 68% of all registered projects and 81% of the CDM kCERs issued have
been to projects in China, India, Brazil and Korea (Table 3). The number of kCERs issued
to EEDS projects is very small, representing less than 10% of the total. This is likely to
change little over the next few years because the focus is set to remain very much on EESS
projects.
Table 2: Comparisons between CDM applications: number of large-scale and small-scale projects in each
type (applications and approved March 2009)
Comparison between number of large-scale projects and
small-scale projects in each type
Hydro
Biomass energy
Wind
EE own generation
Landfill gas
Biogas
Agriculture
EE industry
Fossil fuel switch
N2O
Coal bed/mine methane
Cement
EE supply side
Fugitive
HFCs
Solar
Reforestation
Geothermal
EE households
Transport
7
In numbers
LargeSmallscale
scale
556
639
299
389
448
213
359
49
243
93
50
238
64
167
34
147
84
56
66
0
66
0
39
0
36
16
26
4
20
3
3
26
23
11
13
2
1
13
5
4
In percentages
LargeSmallscale
scale
22.7%
30.6%
12.2%
18.6%
18.3%
10.2%
14.6%
2.3%
9.9%
4.5%
2.0%
11.4%
2.6%
8.0%
1.4%
7.0%
3.4%
2.7%
2.7%
0.0%
2.7%
0.0%
1.6%
0.00%
1.5%
0.8%
1.1%
0.2%
0.8%
0.1%
0.1%
1.2%
0.9%
0.5%
0.5%
0.1%
0.0%
0.6%
0.2%
0.2%
EE service
Energy distribution
Afforestation
PFCs
Tidal
CO2 capture
Total
0
12
0.0%
7
1
0.3%
1
4
0.0%
8
0
0.3%
1
0
0.04%
1
1
0.0%
2453
2088
100.0%
54 %
46%
Source: UNEP Risø Centre, 2008, at < http://cdmpipeline.org/cdm-projects-type.htm#1
0.6%
0.0%
0.2%
0.0%
0.0%
0.0%
100.0%
Table 3: Top countries, by issued CERs (Jan 2009)
Country
China
India
Brazil
Republic of Korea
Mexico
Chile
Nigeria
Argentina
Indonesia
Malaysia
South Africa
Other
total
CERs issued
Percentage
Cumulative
140,899,572
33,216,679
19,789,442
14,614,929
7,985,793
4,363,520
4,123,669
4,121,351
3,226,218
2,827,548
2,557,984
19,076,698
256,803,403
54.87%
12.93%
7.71%
5.69%
3.11%
1.70%
1.61%
1.60%
1.26%
1.10%
1.00%
7.43%
100.00%
54.87%
67.80%
75.51%
81.20%
84.31%
86.01%
87.61%
89.22%
90.47%
91.58%
92.57%
100.00%
Source: UNFCCC website
4.
Bias towards supply-side CDM projects
An analysis of the number of CDM projects approved by the UNFCCC found that 285
(69%) were EESS projects, three were transport projects, and 124 (30%) were EEDS
projects (UNEP Risø Centre 2008; see Annex 1). The supply-side projects, however,
generated 92% of CERs. This suggests that a significant opportunity to benefit from
investment in EEDS projects is being overlooked.
In marketing terms, supply-side CDM projects are ‘low-hanging fruit’. They are relatively
easy to develop because generally only a small number of players is involved in the power
generation sector. In contrast, the demand sector consists of many and diverse players. The
networking required to cultivate these interests and to develop feasible projects is difficult,
especially as the transaction costs associated with the development, approval and
implementation of CDM projects are high. Nevertheless, if GHG emissions in cities are to
be reduced (and given that most GHG emissions in cities do not arise from the supply-side
sector), it is important to identify, develop and implement innovative EEDS CDM projects.
V. POTENTIAL TO EXPAND DEMAND-SIDE PROGRAM ACTIVITIES
The preceding discussion identified possible opportunities for the application of the CDM
to support energy-efficiency measures for reducing GHG emissions by improving the
design and functionalities of cities. These opportunities can be grouped into five broad
fields of activity that might provide the basis for sector CDM and pCDM projects: 1) urban
8
development; 2) transport, technology and innovation; 3) industrial production systems; 4)
environmental; and 5) policy. Significant investigations would be necessary to test the
feasibility of some sector applications. Moreover, governance and economies of scale will
be significant hurdles in developing CDM for many of these activities.
5. EE urban development
According to a report by the International Energy Agency, existing buildings are
responsible for more than 40% of the world’s total primary energy consumption and for
24% of global CO2 emissions (IEA, 2008). There is no shortage of proven, cost-effective
designs and technologies for reducing energy consumption in residential buildings, yet the
majority of global residential and commercial buildings are very inefficient users of energy
and the potential to significantly reduce energy demand in this sector remains largely
untapped. Coordinated approaches to maximize the efficiency of urban development, both
new development and 'retrofitting' existing urban areas are necessary. The key elements of
such an approach are set out in this and following sections but the crucial issue is their
inter-dependence. Many interventions are useful n their own, but very significant in
combination. Further, demand-side measures can be linked with supply-side projects such
as distributed power generation and waste-to-energy to maximize the impact on climate.
5.1
Urban Land and Property Development Projects
EE CDM could potentially be applied at three levels in urban land and property
development projects: 1) the construction of new urban areas (greenfield projects); 2)
reconstruction and redevelopment; and 3) the re-engineering or retrofitting of older urban
areas. In each, the result would be higher energy efficiency ratings than would be achieved
if the activities were undertaken according to current regulations or practices.
Greenfield projects would involve new and planned urban development projects of a
commercial and residential nature and the subdivision of non-urban land. Normally they
would involve projects for new housing and new regional shopping and employment
centres. The focus of the CDM would be on achieving: an urban development pattern that
would substantially reduce embedded energy costs in construction; higher density
development to support local public transport systems; energy-efficient buildings; and a
pedestrian-friendly environment. The standard of development would be high in order to
negotiate additionality against a baseline set by current practices for new development
areas.
Retrofitting projects would involve re-engineering and retrofitting existing residential,
commercial and public buildings to improve their energy efficiency. Much can be done
using the 80:20 rule to reduce energy demand and GHG emissions though selective
programs to retrofit buildings, machinery and other utilities with new systems and other
technology to improve their energy efficiency. Housing and commercial improvement
projects for low-income areas to improve insulation and circulation and introduce more
energy-efficient appliances might well form part of CDM projects.
Redevelopment projects would involve the replacement of existing buildings with new and
better-designed buildings and improved equipment, technology and systems which would
match those associated with greenfield development. This might not always be possible:
existing property boundaries, limitations to and the lower standards of existing utilities and
infrastructure servicing redevelopment areas, along with other planning and environmental
issues, might constrain or limit the potential to realise greater energy efficiency.
9
5.2
EE Building Design and Materials
The development of large shopping malls, commercial centres and business parks
throughout Asia offers opportunities for improved building design and construction
(including a reduction in material use, and the use of new materials) that would enable
significant energy savings. A report by UNEP (Hinostroza et al., 2007a) outlines a range of
EE possible CDM projects for new and retrofitted installations in residential and
commercial buildings. CDM projects could support improvements in building technology, a
reduction in the materials used – or the use of alternative materials – to reduce embedded
energy costs, and improved maintenance systems to ensure the efficient use of equipment.
5.3 Building Construction Systems
Most residential and smaller commercial developments in developing countries, especially
for low- and middle-income groups, are self-built, generally to a poor construction
standard. As a result, there are limited opportunities to introduce technologies or designs
that would improve the energy efficiency of buildings. The introduction of building
technology systems using standard module designs would enable economies of scale and
the introduction of more energy-efficient measures for a marginal increase in overall costs.
United States research suggests that improved energy efficiency in buildings could forestall
70% of the anticipated incremental demand for electricity by 2030, thereby reducing the
need for additional power stations (Creyts et al., 2007). CDM projects that achieve a
significant improvement in energy efficiency could therefore be established through
national building industries, with support provided to building firms and companies
involved in mass-housing or small commercial centre projects. For this to be feasible, it
would be necessary to establish a baseline for GHG emissions based on existing housing
construction development methods. There are possibilities for the application of CDM
projects to international NGO-supported housing schemes and cooperative housing.
6. EE Transportation Projects
Stern (2006) estimated that the transport sector contributes 14% of GHG emissions,
although the percentage is much higher in cities. In most Asian cities, the trend toward
lower-density living on fringe urban areas, coupled with increasing commuting time and
private vehicle usage, is accelerating the rate of GHG emissions. A high proportion of
passenger-carrying vehicles/vessels are not fuel-efficient. Reversing this trend will be
difficult without significant changes in the way cities are designed and will require massive
investment in improved mass transit and public transport systems. Several approaches
could be pursued through single CDM and pCDM projects to significantly reduce the
demand for energy in the transport sector.
6.1
Mass Transit Systems
Most Asian cities lack good public transport systems; buses, trains and ferries are
overcrowded and operator networks service employment areas inefficiently. Governments
have invested in the road transport sector in preference to public transport systems.
Investment in large urban rail and bus-way systems is very expensive and, since they are
most-used by lower-income people, their economics are marginal, often requiring
significant government subsidies or price assurances for their private operation.
Governments have therefore made increasing use of public/private-sector partnerships to
build urban freeways to airports and urban fringe areas, thereby supporting the use of
private vehicles by the growing middle class.
10
A small but growing number of CDM projects are being developed to support mass transit
systems in cities. The Trans-Milenio public transport system in Bogotá, Colombia, was the
first mass transit system to qualify for the CDM. There are, however, significant problems
associated with mass transit systems, especially in predicting the change in transport
patterns that will occur once a project is completed. Land use and employment locations,
frequency of service, and accessibility can have significant impacts on patronage.
6.2
Engine Conversion
Several Asian cities have supported projects to remove or replace two-stroke engines with
four-stroke engines as a way of reducing particle emissions and improving fuel efficiency.
In larger cities in the region the conversion of motor vehicles to cleaner fuels and
combustion offers an opportunity for CDM projects involving local governments to help
meet the cost of conversions. The ADB has given support to engine-conversion projects in
Dhaka, Bangladesh, and Delhi, India. Similar types of project offer opportunities for the
CDM to assist the conversion of vehicles from two-stroke to four-stroke engines and of
buses from diesel to gas.
6.3
Smart Transport Systems
In many Asian cities, much of the transport network is inefficient, with a large number of
competitors operating with excess carrying capacity on the arterial transport network; this is
the case, for example, in Manila. The development of smart transport systems that improve
the efficiency of vehicle carrying levels and limit the number of operators permitted to
engage in intra-urban transport services would free up capacity on the road network and
improve revenue flow for the private owners of public transport vehicles. The co-location
of bus terminals with major retail, commercial and industrial employment areas, the
development of inter-modal transfer stations and facilities for local-area services, and the
introduction of congestion pricing are all measures that could boost the development and
use of public transport systems and services in Asian cities and at the same time reduce per
capita GHG emissions from the sector.
7. EE Industrial Area Design and Production Systems
Industries are major contributors to energy demand and anthropogenic GHG emissions. The
IEA (2006) estimates that implementing EE policies could reduce industrial energy
consumption by 10% in developing countries by 2030. A number of measures that could be
applied using the CDM for industrial projects could help to reduce energy demand. Two
potential applications of the CDM related to industrial development are industrial area
design and development, and cleaner production systems.
7.1
EE Industrial Area Design and Development
In many Asian countries, industrial land-use activities are responsible for the emission of
high levels of toxins and particles, with minimal filtering. There is a tendency to segregate
heavy industrial activities from lighter-scale industrial/commercial developments, which
significantly reduces opportunities to create industrial synergies or clusters (Enright, 2000).
Clusters help to reduce transaction costs through the sharing of common infrastructure,
facilities and services. The development of integrated industrial development areas which
encourage specialization and the clustering of industries offers a way of developing
common user infrastructure, facilities and services for reducing energy demand, thereby
reducing costs and enhancing industry competitiveness. Specialization leads to the
development of other synergies associated with transport, logistics, education and training,
and research and development.
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7.2
Cleaner Production Systems
Cleaner production involves the adoption of cleaner technologies to reduce material inputs
and wastes from industrial processes. Significant opportunities exist under the CDM to
support the conversion of boiler systems to more efficient and GHG-reducing fuels and the
introduction of less-energy-intensive machinery and better technologies that reduce energy
inputs. A wide range of new technologies are being developed that have the potential to
reduce energy demand.4
7.3
Industrial Ecology
Industrial ecology is a relatively new concept designed to utilise industry waste-streams.
The sharing of waste and heat exchange between industrial activities through industrial
ecology (Chertow, 1998, Graedel and Allenby, 1995) has been demonstrated at Kalunborg
in Denmark and in other locations (Verstegen, 2005, Heeres et al., 2004). Eco-industrial
parks, developed as a physical manifestation of the industrial ecology development concept,
offer significant opportunities for the application of single CDM projects to new and
existing large-scale industrial estates in Asian cities. There are also opportunities to apply
industrial ecology to the redevelopment of industrial areas to take advantage of new
technologies and industries that facilitate the development of clusters. In Asia, the Chinese
'circle economy' concept5 embodies many industrial ecology principles.
8. EE Technology and Innovation Schemes
The aim of EE technology innovation schemes is to support the production of equipment
and appliances used in buildings and production systems that reduce energy demand. They
might, for example, promote the use of solar power generators for onsite power, automatic
switch-off mechanisms for appliances not in use, solar energy for water heating, and
energy-efficient lighting in buildings and public places. The operation of the CDM for the
introduction of improved technologies and appliances to reduce energy demand might best
be implemented at the production source rather than through rebates to end-users. Firms
producing EE technologies and appliances could receive CER credits based on the energy
savings that would be made over the expected life of the technology or appliance. To
maximise efficiency gains it would also be necessary to combine technological options with
improved operation and maintenance procedures.
According to IEA (2006), changing building practices and household appliances could
reduce energy consumption in the residential and service sectors by 11% by 2030.
According to Kamel (2007), in these sectors “EE options could also include heating and
cooling processes that do not require electricity (such as better insulation, more efficient
heat exchange and better steam), and electrical equipment (such as reducing transmission
and conversion losses, ventilation, and efficient lighting)”.
9. EE Environmental Projects
The increase in land surface cover in Asian cities creates heat sinks, which lead to increased
demand for air-conditioning. The old parts of Hanoi and Ho Chi Minh City in Vietnam
have 4% tree cover, which, when combined with the shading effects of local architecture,
has a significant cooling effect at street level (Lebel et al., 2007). Trees, especially forest
parklands, can assist in reducing ambient air temperatures (Oke, 1989) and in the
absorption of carbon emissions (Chen Yan, 2006 , Kuchelmeister and Braatz, 1993). While
4
5
See, for example, the Journal of Cleaner Production for articles on ways to make industrial systems cleaner.
http://www.indigodev.com/Circular1.html .
12
urban trees and parks have a low carbon absorption rate (less than 0.2% of emissions in
Metro Manila, according to (Ono et al., 2002), cited in Lebel 2007), their value in reducing
localised thermal sinks can be significant, reducing temperatures by 2–3°C (Oke, 1989),
which in turn has the potential to reduce demand for electricity for air-conditioning.
Whether this is sufficient to make a CDM project feasible has not yet been tested.
VI. FEASIBILITY OF EEDS CDM
10. Economic Feasibility of Single CDM Projects
It is too early in the operations of the CDM to determine the economic viability of applying
CDM to EEDS urban sector development projects. Very few urban sector projects have
been approved by the CDM Executive Board; feasibility studies for CDM projects,
however, suggest that some would generate project internal rates of return that would meet
the financial feasibility requirements of development banks and other financiers, but others,
which were economically viable, would not. The economic factors that will most affect the
feasibility of EEDS CDM and pCDM projects in Asian cities are:
• the price set for CERs by different buyers
• the quantity of CERs generated from CDM or pCDM projects
• the type and life of CER credits for projects
• the availability of approved baseline methodology
• the certainty of the governance of a country’s carbon trading scheme
• currency exchange rates
• transaction costs involved in the development of a CDM project
• depreciation rates on capital, plant and equipment
• satisfaction of applicability conditions of the selected methodology and compliance
with UNFCCC approval conditions
• the size and number of expected projects in a PoA
• validation costs
• monitoring and verification costs.
These factors need to be considered carefully in assessing the economic feasibility of single
CDM and pCDM projects. The CDM offers a way to offset development, technology and
other costs associated with a project that will reduce GHG emissions. These costs vary
significantly between CDM projects depending on their type and scale. Economies of scale
are not always achieved in CDM projects, especially if the projects within it are of
dissimilar sizes, or if technology applications vary significantly between them. The more
standardized the projects comprising a CDM project, the more likely it is to generate
economies of scale.
The most viable CDM projects are those associated with energy supply – especially largescale power projects. The limited data available indicate that many demand-side CDM
projects appear to generate lower rates of return and CER credits do not bridge the gap to
financial viability. The evidence gathered from a selected range of EEDS CDM projects on
the UNFCCC website suggests that waste management and cogeneration projects generate
the best EERs and IRRs for EEDS projects (Table 2).
Table 2: IRR for projects with and without CDM
13
Project title
Location
Category
IRR,
no
CDM
IRR,
with
CDM
Life
years
Feasibility Study of the Landfill Methane Gas
Utilization Project in Semarang, Indonesia
Indonesia
(Central Java)
Waste
management
1.68%
9.43%
14
cost
per]
CER
(US$)
5.0
Ghabawi Landfill Gas Capture and Power
Generation Project in Amman City, Jordan
Jordan
(Amman)
Waste
management
-0.01%
11.15%
14
8.0
Drisla Landfill Gas Capture and Power
Generation Project in Skopje City, Macedonia
Macedonia
(Skopje)
Waste
management
minus
6.28%
9
15.0
Landfill Gas Capture and Power Generation
Project in Zhitomir City, Ukraine
Ukraine
(Zhitomir)
Waste
management
minus
13.55%
15
9.3
Research for Methane Gas Collection and
Energy Utilization at the Coastal Land
Disposal Area in Carapicuiba City, Mogi
Guacu City in Sao Paulo)
Brazil (São
Paulo)
Waste
management
6%
15
8.0
Landfill Gas to Electricity Project in Thailand
Thailand
(Nontaburi
province)
Brazil (São
Paulo)
Waste
management/
energy
Waste
management/
energy
Cogeneration
-5%
29.20%
10
3.0
14.8%
27.2
21
4.0
The investigation of the Non-Firing Bricks
India (Orissa)
NA
17.50%
10+
business production for effective use of the
untapped natural resources in India
CDM feasibility study of cogeneration with
China (Shanxi)
Cogeneration
7.19%
80.10%
20
coalmine methane in Shanxi Province, China
Source: Global Environment Centre Foundation: http://gec.jp/gec/gec.nsf/en/Activities-CDMJI_FS_Programme-List
5.0
Carbon credit from Landfill gas capture and
electricity generation in Brazil
10.0
Transport projects involving bus-way and bikeway systems are marginal and require carbon
prices above US$10/tonne to be viable. A transport study of Santiago, Chile (Browne et al.,
2005) – the only available CDM case study involving EE urban land use – found that costs
associated with a bikeway system and improved bus technology for 462 buses achieved
very limited benefits as a CDM project (Table 3). Interestingly, sub-projects to improve the
location efficiency of non-residential and educational land uses generated positive
outcomes at a carbon price of US$10/tonne. The description, scope and design of these
projects were unclear from the study. If these types of projects are viable then there might
be value in supporting CDM projects that result in the development of more efficient urban
land-use patterns.
Table 3 Comparison of case-study CDM transport projects, Santiago, Chile
Case study
Bus technology
Bikeway project
Bicycle network
Location
efficiency:
Schools**
Location
efficiency: nonresidential
Project scale
462 buses
4.5 km
(1000 cyclists)
1200 km
Greater
Santiago (34
communas)
Annual CO2 savings
(tonnes)
Project time
period
(years)
Cost per tonne*
11,700
73
10
21
-80
212
27,300–99,600
21
30–111
500,000–650,000
21
2
850,000–1,200,000
21
27
CO2 (US$)
Annual CER
revenues at
US$10/tonne
(US$)
117,000
735
273,000–
996,000
5,000,000–
6,500,000
8,500,000–
12,000,000
Source: (Browne et al., 2005)
* Assumes a 10% social discount rate for each case study. Transaction and monitoring costs are not included. Projects
with 14 or 21 year timeframes will incur additional transaction costs for preparing and submitting renewal applications
and updating the baseline.
** Annual savings grow over the 21-year timeframe.
14
There are well established techniques for assessing CDM transport projects (Gojash and
Fukuda, 2004, Kato et al., 2003 ); however, the assessment process is difficult. The timing
and extent of switches to the use of public transport or demand for conversions are almost
impossible to predict, only becoming known once a project is completed or at least well
into its implementation stage. Projects that involve fuel or engine conversions appear to
have the most promise as CDM projects – especially where these involve several cities. The
Santiago study suggests that most urban transport projects are best developed as single
CDM projects; their variations in scale are so significant that bundled and CDM is perhaps
not the best mechanism for developing and approving them.
Nor does bundling always help the economic feasibility of projects. A project in the
Talubin River Basin in the Philippines for the establishment of two mini-hydro electricity
schemes (TEPS, 2005) found that bundling reduced the IRR for the project; CDM for
small-scale hydro projects might also be marginal. The issue of scale is important in
determining the feasibility of CDM and bundling can make a large difference to the return
on project investment. A project for the Talubin River Basin in the Philippines for two
mini-hydro electricity projects (TEPS, 2005) found the IRR for the project was reduced
when it was bundled. The issue is even more important for urban projects.
11 Project Scale
Project scale has a significant influence on the viability of projects. Table 4 shows that
more than 70% of approved and proposed projects involve greater than 25,000 tonnes of
C02 per year, with the largest number of projects and biggest projects associated with
electricity production from hydro schemes; the development of biomass projects represents
nearly 16% of all CDM projects. Of the 1080 projects registered by the UNFCCC as of
May 2008, 54% were large-scale projects. For projects in the pipeline, 56% were largescale, suggesting that economies of scale are having a significant effect on the size and type
of projects. The current trend towards larger projects suggests that bundled and pCDM have
the potential to play an important role in achieving the economies of scale needed to ensure
the viability of projects.
Table 4 Number and percentage of projects, by size (May 2008)
Size (ktCO2/yr)
0–5
5–10
10–25
25–60
60–100
100–500
500–1000
1000–5000
5000–10,000
> 10,000
Total
Number of projects
151
217
630
771
664
853
62
47
5
3
3403
% of total number of projects
4.4%
6.4%
18.5%
22.7%
19.5%
25.1%
1.8%
1.4%
0.1%
0.1%
100.0%
Source: http://cdmpipeline.org/cers.htm
11. Technical Feasibility
Evaluating the technical feasibility of CDM projects has proved difficult, especially when
different or new technologies are involved. Projects can be similar in type, but their
feasibility can differ significantly depending on the technologies used. The UNFCCC has
15
reported difficulties in assessing the feasibility of alternative technologies used in CDM
projects to reduce hydrofluorocarbons in China and India. In some cases proposed
technologies are not fully tested, making it difficult to determine additionality benefits and
CER credits. The major challenge for the CDM regarding technology assessment is that
technologies can change quickly. There are, therefore, many uncertainties over the
measurement of technology benefits.
VII.
ESTABLISHMENT OF A CDM SUSTAINABILITY GAP FUND
The complexity and difficulties involved in developing and approving EEDS single CDM
and pCDM projects suggests there is a need for fresh thinking on how to make the
mechanism work more effectively. While much has been done to improve the development
and assessment of supply-side CDM projects, EEDS projects are proving much more
problematic. Given that about two-thirds of energy consumption contributing to GHG
emissions is attributable to demand-side users and factors, a fundamental change is needed
in the way the UNFCCC approaches the development of EEDS projects.
The current approach to the development and approval of EEDS CDM projects is too
complicated and beyond the design and development capabilities of many Asian urban
management institutions. Moreover, the ERRs and IRRs of many such projects are too low
to be of interest to the ADB or other investors. On the other hand, the risks associated with
many EEDS projects are too high. For example, a CDM project for replacing single airconditioning units with centralized or packaged systems for buildings assumes that all
buildings have the same energy efficiency as well as uniform maintenance regimes. Many
CDM projects also involve a certain level of innovation and experimentation, which adds to
their risk. Significant subsidies or grant funding might be required to make them feasible.
The challenge is to minimize the cost of the gap funding support that will be needed for
meeting initial development and ongoing operational costs.
The gap in development and operational costs of EE projects will only partially be met by
the sale of CDM CER credits, especially with carbon emissions priced at around US$15 a
tonne or less. In developed countries, the market is prepared to pay a premium for greener
buildings and energy because of the long-term benefits of reducing operating costs. In most
Asian countries, however, the willingness (or capacity) of governments and businesses to
accept the additional development costs involved in making buildings and infrastructure
more energy-efficient and sustainable is likely to be lower, except in some more-advanced
economies.
Assuming that the CDM is retained in the post-Kyoto climate change regime, the following
describes how current practice could be improved. To make single and pCDM projects
more attractive to investors, international development assistance is required to offset the
additional development and operational costs of EE projects. A possible way to encourage
investment in EEDS is for the ADB and other development banks to establish a
sustainability gap trust fund (SGF) that would be used to help bridge the gap in
development and operating costs between a business-as-usual case and a built EEDS
project. The approach would involve reassessing the CDM value of the project once it is
completed and operational. This would reduce the uncertainty and guesswork currently
involved in determining additionality and the number of CER credits to be issued to a
project.
16
Figure 4 shows a suggested framework for the SGF. Under the proposed approach, the
project proponent, in association with the Designated National Authority, would establish
an agreed baseline for the single, bundled or pCDM project. The SGF would enter into an
agreement to fund the difference in project development and operating costs for a defined
period of time. Since SGF projects would generate additionalities and reduce GHG
emissions they should be eligible to be part of the CDM and to generate CER credits.
A possible arrangement for trading CER credits generated by the SGF would be to transfer
them to a fund like the ADB’s Asia Pacific Carbon Fund (APCF); the net proceeds from
CER credit sales would then be transferred from the APCF to the SGF for use in other
projects. Such an arrangement would reduce the level of subsidy to support the scheme. In
the event that an SGF project generated CER revenues in excess of the cost of supporting
the repayment of gap funds, the profits could be shared with the proponent and/or be added
to the SGF to support new projects that may require a subsidy to make them viable.
Figure 4 Proposed ADB CDM EE project support scheme
AD B C D M Sustainability
Gap Fund (SGF )
U
A
B
r
o
f
d
n
u
F
B
D
A
r
o
C
M
D
M
D
C
p
r
o
M
D
C
f
o
t
n
e
n
o
p
m
o
c
ts
c
je
o
r
P
C ER proceeds
to su pport SGF
EE gap
Su pport
d
e
d
n
u
F
F B
G D
S A
CERs
)
U
A
B
l(
a
u
s
U
s
a
ss
e
n
i
s
u
B
C ER s
AD B PAC F to
get C ER s
U
A
B
Acqu ired C ER s
are Added an d
Emission C ap
In creases
If C ER credits exceeds
SGF su pport profits
sh ared betw een AD B an d
D MC D eveloper
Source: Authors
Figure 5 shows the long-term funding arrangements that could be put in place for the SGF.
As DMCs move to improve their energy-efficiency standards the requirements for the
business-as-usual case will increase. This will reduce the quantity of CER credits that could
be issued for a single, bundled or pCDM project. Carbon emission prices, however, can be
expected to rise as new caps are negotiated under the UNFCCC, helping to offset gap costs.
Returns from CER credits would decline to zero when the future business-as-usual baseline
standards meet the EE designed standard used when projects were first developed. Any
surplus revenues from the sale of CER credits generated before this point would be returned
to subsidize the SGF, or shared with the project proponent.
17
Figure 5 Long-term operational funding arrangements for SGF
Development and operational deficit funded by SGF
Surplus CER sales fund SGF deficit
BAU
EE Project Design
Sustainability
Gap Fund
CER Credits
CER Credits
EE Design Standard meets
new BAU standard
CER $0
CER Sales cover cost outlays
BAU 0
tn
0
Source: Authors
There are many advantages to the proposed SGF compared with the current CDM
mechanism. The sale of CER credits would only be permitted once projects were
operational and certified by the UNFCCC Executive Board. The additionality for which the
CERs are issued would not be estimated but, rather, based on actual emissions
measurement. Currently, CERs are available only for reductions in operational GHG
emissions; the inclusion of embodied energy, however, could provide incentives for GHG
reductions in construction. The approach would reduce errors in the estimation of CERs
and opportunities for rent-seeking, both of which occur under current CDM credits
generated by single or pCDM projects on a take-and-pay basis at the going market price of
carbon. The approach would also allow CERs generated by single, bundled or pCDM
projects to feed into a pool of CER credits that could be traded to help subsidize project
development costs and to introduce best-practice technologies to developing countries in
support of EEDS initiatives. The level of gap funds needed to support the initiative would
be set by EE design standards, with GHG emission targets set for specific types of EEDS
projects by each DMC.
VIII. CONCLUSION
The economic feasibility of EEDS CDM and pCDM projects in the urban sector is
problematic; it is important, however, that greater emphasis be given by the UNFCCC to
these types of projects if there is to be a significant reduction in GHG emissions in cities.
Cities in Asia will continue to grow, with the total urban population likely to nearly double
in the next 20 years. It is essential that in the next round of negotiations on the Kyoto
Protocol a greater focus is given to reducing the demand for energy in cities – especially in
developing and newly industrialized countries. Extensive research is required to gain a
better understanding of the spatial demand for energy by land-use and built-form types.
Little is known about per capita energy demand for residential, industrial and commercial
land uses in Asian cities. Energy audits are needed, especially for cities, but even many
developed countries in the region have not yet completed or started these. The information
that would be generated by such audits is necessary to establish baselines and
18
additionalities to assess the potential for and feasibility of EEDS urban development
projects.
There is also a need to provide incentives and capacity building for Designated National
Authorities in DMCs to develop CDM policy frameworks and guidelines to improve the
preparation and evaluation of projects before they are sent to the CDM Executive Board for
approval. Assuming that a scheme similar to the CDM applies in post-Kyoto arrangements,
the most difficult challenge for the ADB will be to determine the best mechanism for
funding CDM projects. The current CDM project development and approval mechanism is
cumbersome and will prove difficult to apply to EE end-user projects for single or pCDM.
Thus, and very importantly, some significant efficiencies are needed in the methodological
and processing systems to accommodate the special characteristics of urban projects. In
drawing a conclusion to the paper the authors believe a different approach to CDM project
development and funding support is needed if the ADB and other development banks are to
make a significant contribution to reducing GHG emissions in Asian cities.
If EEDS single, bundled and pCDM urban-sector projects are to be feasible, an SGF should
be established to support the difference in development and operating costs between a
business-as-usual and EEDS project. Most developing countries in Asia are not in the
position to support the additional costs associated with urban development projects to
reduce energy demand without some form of subsidy or gap funding support. The ADB and
other international development banks and assistance agencies are in the best position to
establish such a fund. The SGF is unlikely to be attractive to other sectors of the banking
and finance industry because there is a high risk that investment funds will not be recovered
fully through the sale of CER credits. The SGF is thus an international public good and
should, like the ADB itself, be capitalized by the governments involved. The scheme could
become self-financing as the price of carbon credits rises, but this is by no means certain. In
the event that surplus funds are generated from CER credit sales, these could be shared with
project proponents or used to expand the base of the SGF. It is thus important that the
language of any post-Kyoto agreement be able to encompass the inter-related capacity
building, methodological changes and funding schemes proposed above.
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