Carbon Market and Clean Energy Investment Opportunities in Nigeria Executive Summary Felix Dayo and Asmerom Gilau Triple E Systems Inc. Executive Summary 1. This report was commissioned by ICEED as part of its effort to promote and stimulate the participation of the Nigerian business community in the global carbon market. The global market had a financial value of about US$ 126 billion in 2008 with slightly over 25% of this value coming from the CDM process. 2. The desktop study that was carried out by Triple E Systems Inc., of Laurel, MD USA, focused on: the evaluation of the scope and potential coverage and size of Nigeria’s participation in the global carbon market; barriers that has been limiting the aggressive emergence of Nigeria’s participation in the recent past; and strategies that should be employed to reduce or completely eliminate these barriers. 3. Investment in clean energy facilities is recognized as the best way to increase the participation of Nigerian proponents in the CDM process and hence the global carbon market. Clean energy investment is defined as: investment in energy supply and utilization system that provides the required energy with minimal negative environmental and social consequences. Investment in clean energy systems can also be viewed as: investment in energy sources and technologies that are significantly less environmentally damaging than in the status quo case. The thesis of this desktop study can be summarized as follows: investment in clean energy system provides the most effective and optimally efficient path to increased CDM participation in Nigeria and hence effective participation in the global carbon market. 4. The salient characteristics of clean energy investment can be summarized as follows: o The resulting system results in little or no emissions of obnoxious gases and particulates; o The clean energy technologies have a carbon footprint that are much lower than the baseline emission scenario; o The technology is accessible and the required investment is available for adoption in developing countries like Nigeria; o Implementation of the clean energy technology will contribute to sustainable. 5. One of the conclusions of the desktop study we carried out is that clean energy facilities have not been extensively embraced in the different sector of the Nigerian economy. The following represent a partial list of potential clean energy opportunities in Nigeria: o More efficient passive and full utilization of solar technologies in the residential, commercial and industrial sectors; o Biogas from Waste as a source of cooking fuel in homes; o Energy Efficient Lighting; o Utilization of renewable biomass as a fuel in higher efficiency cook stoves; o Efficient Charcoal Production as Fuel in Homes and SMEs; o Use of Bio-fuels in Efficient Cooking Stoves and Lamps in Homes; o Energy Efficient Lighting; o Utilization of Compressed Natural Gas (CNG) as a Transport Fuel; o Utilization of Bio-fuels as Transport Fuel; o Introduction of Bus Rapid Transit (BRT) System to other Cities and Expansion of the Lagos System; o Shift from high carbon intensive fuels to natural gas for energy generation in industries; o Development of CNG Infrastructure to distribute natural gas to industries located at sites remote from existing pipelines; o Implementation of Combined Heat and Power (CHP) Facilities in Industries; o Implementation of Energy Efficiency Improvements in Manufacturing Industries o Implementation of CHP Facilities in Commercial Facilities; o Use of solar and wind energy for irrigation water pumping and farm electricity supply; o Utilization of agricultural residues for electricity generation; o Generation of biogas from wastes generated from livestock and animal husbandry sub-sector. 6. The KP of the UNFCCC provides a platform for the CDM process in Nigeria, which in turn provides the framework for participation in the global carbon market. Nigeria ratified and accepted the KP on 10th December 2004. The KP provides three flexible mechanisms, which Annex 1 Parties (mostly developed countries) who have mandatory emission limitations under the KP, can utilize to compliment their domestic efforts (actions) to cost- effectively meet their emission limitations. KP clearly defined quantified GHG emission reduction targets that Annex 1 Parties must meet. The GHG gases covered by the KP during its first commitment period (2008-2012) include: CO2; CH4; N2O; HFCs; PFCs; and SF6. The commitment scenario calls for each Annex 1 Party to reduce GHG emissions during the first commitment period by a certain % point below the 1990 base year level. 7. Non-Annex 1 Parties (developing countries) do not have emission limitations like their Annex 1 Party counterpart under the KP during the first commitment period. The KP however provides them with the platform through which they can also contribute towards global GHG emission reduction. Through CDM projects, which are hosted in non-Annex 1 Party countries, carbon credits generated in such projects are purchased by Annex 1 Parties to meet their KP mandated emission limitations. In addition to been paid for each tCO2e generated by the project, the CDM projects are also expected to contribute to sustainable development in the CDM host country. 8. Other flexible mechanisms allowed by the KP include: JI – a mechanism whereby an Annex 1 Party assists another Annex 1 Party to implement GHG emission reduction projects and the carbon credit so generated (known as ERU) contributes to the compliance of the Annex 1 Party; Emission trading (ET) - a mechanism whereby Annex 1 Parties trades their emission caps (known as AAU) to achieve their emission reduction targets. 9. CDM as a generator of carbon credits, which can be traded on the global carbon market can be developed through the following steps: o Identify the CDM project idea(s); o Decide on the CDM baseline and monitoring methodology that will be applied; o Prepare the CDM project PDD; o Get approval from the Host party country DNA; o Validate the PDD and register the CDM project with the UNFCCC; o Monitor the CDM project activities using the monitoring protocol included in the validated PDD; o Verify the monitored parameters using the services of a Designated Operating Entity (DOE) and certify the credits from the CDM project; o UNFCCC then issues the certified emission reductions (CER). An important activity which is implicitly implied as a component of one of the steps elucidated above is the discussion and negotiation leading to the emission reduction purchase agreement (ERPA) with the eventual buyer of the CER. This is an important step that will determine the monetary value of the CER. 10. There are two distinct segments in the global carbon market. These are: the compliance market - where carbon credits that are regulated under the national and international mechanism are traded. For example carbon credits generated from the three KP flexible mechanisms: CDM; JI; and ETS, are traded on the compliance market. The voluntary market is the segment of the global carbon market where corporate bodies, individuals, and other entities not subject to mandatory limitations, trades in GHG emission offsets. The two main VM operators are: the Chicago Carbon Exchange (CCX); and the Voluntary “Over-the- Counter” (OTC) schemes. In 2008, the market value of VM transactions has been estimated to be about US$ 705 million. 11. The volumes and value of the transactions on the global carbon market during the period 2007-2008 are shown in Table 1 below: Table 1: Compliance Section of the Global Carbon Market, Volumes and Values in 2007-2008 2007 2008 Volume Value Volume Value (MtCO2e) (MUS$) (MtCO2e) (MUS$) A. PROJECT BASED TRANSACTIONS Primary CDM 552 7,433 389 6,519 JI 41 499 20 294 VM 43 263 54 397 Sub-Total A. 636 8,195 463 7,210 B. SECONDARY CDM Sub-Total B. 240 5,541 1,072 26,277 C. ALLOWANCE MARKET EU ETS 2,060 49,065 3,093 91,910 New South Wales 25 224 31 183 Chicago Climate Ex. 23 72 69 309 RGGI NA NA 65 246 AAUs NA NA 18 211 Sub-Total C. 2,108 49,361 3,276 92,859 TOTAL 2,984 63,007 4,811 126,345 12. Demand for carbon credits on the compliance segment of the global carbon market is driven by the needs of carbon offsets to meet the emission reduction targets mandated by compliance agreements. For example, the demand for GHG emission reduction credits to meet the emission limitation of Annex 1 Parties under the KP determines the demand for such credits generated from CDM, JI and ETS. Off course, the demand for CDM carbon credits are dictated by the demand remaining after Annex 1 Parties have met their emission limitation requirements by: domestic actions; and trade on the EU ETS. As a matter of fact, the price obtainable for emission credits from CDM projects are directly correlated to the carbon credit price on the EU ETS. 13. Demand for CDM carbon credits in 2008 totaled about 1.5 billion tCO2e with the secondary CDM constituting over 70%. The weakening of the global economy and the uncertainties surrounding post-2012 climate change negotiations have weakened the global carbon market in recent months with the carbon price dovetailing from an average of about US$ 26/tCO2 e in 2008 to a range of between US$ 12-13 /tCO2e during the first two quarters of 2009. Factors expected to dictate the evolution of future demand for carbon offset in the market will include: the health of the global economy; the strength of the European economy which currently dictates the volume of credits needed to meet the mandatory KP emission limitations; and the future engagement of the US in the global carbon market. A weakening of the primary CDM demand has been predicted between now and 2012. It has also been predicted that the rebound of post-2012 demand will be guided by the eventual outcome of the post-2012 negotiations, especially the outcome of the forthcoming COP/MOP meeting in Copenhagen, Denmark in late 2009 and whether or not US is engaged in the global carbon market thereafter. 14. On the supply side, the EU ETS, CDM, JI and the VM were the main schemes for supplying carbon credits to the global carbon market in the recent past and the present. This trend is likely to continue into the future. During the year 2008 for example, over 86% of the credits traded in the market were supplied by the schemes listed above. The CDM market segment contributed about 30% of this fraction. Carbon transactions on: the New South Wales carbon market; the Chicago Carbon Exchange; and the Regional Greenhouse Gas Initiative, covering some states in the Northeaster USA and focusing on cap and trade of GHG emissions from the power sector (RGGI), constituted the balance. The CDM market segment in terms of geographical source was dominated by China, India and Brazil who contributed over 83% of the CDM carbon credits to the market. Carbon credits from Africa as a whole was only about 2% of the total market supply in 2008. By May 2009, of the total of about 30 CDM projects from Africa registered at the UNFCCC (with emission reduction totaling about 10 million tCO2e), South Africa accounted for 15 projects with a total emission reduction of about 3 million tCO2e, while the 2 CDM projects registered from Nigeria had emission reduction totaling slightly over 4 million tCO2e. 15. Factors that are likely to dictate future trend of supply of carbon credits into the global carbon market will include: the extent of the use of domestic action to meet compliance needs of countries with one form or the other of emission limitation types, e.g. KP Annex 1 Parties; clarity of national allocation plans in such countries; uncertainties in the outcome of the post-2012 negotiations; evolution of the global carbon price in the next few years; and the economic health of countries who will be buying carbon offset credits in the next few years, especially Annex 1 Parties and the US. 16. Seventeen technologies were identified in a recent World Bank study that focused on low-carbon energy study in Sub Saharan Africa (SSA), as available for CDM project development in Nigeria. Over 750 CDM project opportunities in Nigeria were identified in the report. It was concluded in the report that if all these CDM projects were implemented, slightly over 100 million tCO2e of GHG emission reductions can be generated annually in Nigeria. At the prevailing global carbon market price of about US$ 12.5/tCO2e, this can inject over US$ 1.25 billion into the Nigerian economy from the sales of carbon credits generated. This will be in addition to investment that will flow into the implementation of clean energy technologies for the underlying CDM projects, which has been estimated to be in the excess of US$ 18 billion. 17. Current CDM activities in Nigeria can be summarized along the following classifications: o CDM Projects Already Developed and Registered at the UNFCCC Recovery of associated gas that would otherwise be flared at Kwale oil-gas processing plant (NAOC/NNPC JV-1.497 million tCO2e/annum) The Ovade Ogharefe Gas Capture and processing Project (Pan Ocean/NNPC JV-2.53 million tCO2e/annum) o CDM Projects Already Developed and Currently Undergoing Validation and/or the UNFCCC Registration Process Efficient Fuel Wood Stoves for Nigeria (Nigerian DARE-30,000 tCO2e/annum) Municipal Solid Waste Compositing Facility in Ikorodu, Lagos State (EarthCare Nigeria Limited (ENL)-145,000 tCO2e/annum) Kanji Hydropower Rehabilitation Project (PHCN-1.24 million tCO2e/annum) o CDM Project Ideas that has been Identified and Under Development Blended Cement Production at the Lafarge/WAPCO Cement Facilities Gas Flare-out Project at Niger Delta Petroleum Ltd Oil and Gas Field 18. Many of the CDM project ideas mentioned in (16) can be developed and implemented to generate CDM credits in Nigeria, but their evolution have been impeded in past years by the existence of barriers. Key barriers to CDM project development in Nigeria exist under the following classifications: o Country Specific Barriers CDM process related barriers The Absence of Readily Usable Sustainable Development Indices Structure of the country’s economic development CDM project specific barriers o International Commerce Related Barriers Carbon credit buyer’s criteria CDM project specific risks 19. Some of the barrier mitigation recommendation discussed in this report, which in the opinion of the authors will assist in increasing CDM project activities in Nigeria include: o Strengthen and Revamp the DNA Institutional Infrastructure o Revamp Existing National Regulatory Framework to Promote Carbon Investment in Nigeria o Link National Investment Promotion and Economic Development Planning to the Opportunities of the Global carbon Market o Promote Awareness of the Benefits of the Global Carbon Market Among Nigerian Financial Sector Stakeholders 20. The foundation on which a CDM project host country’s regulatory and legal framework must be built if the CDM process is to succeed must include the following four pillars: o It must be compatible with international treaties and laws in general and especially to those where the host country is a Party o It must be compatible with the national laws of the host country o It must be enforceable in the context of the host country, and o It must be attractive enough to attract CDM investors. For CDM activities to be ramped up in Nigeria, institutional framework for the national management and governance of the process in Nigeria must be attuned to rest on these pillars. It is therefore necessary that an exhaustive evaluation of the compatibility of existing relevant regulations and laws with the CDM process be carried out to ensure that these pillars are in place. 21. In conclusion, investment in clean energy systems will provide significant benefits to the Nigerian economy, not only in-terms of providing development with better environmental footprints, but also in-terms of enabling increased flow of green investments, especially as foreign direct investment (FDI) into the economy. The increased flow of FDI will come not only from investment in the underlying clean energy projects but also from revenue that will be generated from sales of carbon credits that will result from such green projects. Organized private sector in Nigeria has a critical role to play if the goal of expanding the current marginal participation of Nigerian businesses in the global carbon market is to be realized. The aggressive participation of the Nigerian organized private sector in the global carbon market will catalyze the emergence of unilateral CDM project development in Nigeria which will facilitate the realization of identified potentials. There are strong evidences that Indian private sector patronized unilateral CDM strategies, which contributed in no small way to the success of CDM in India.