Cashing in on carbon by tyndale


									                                   ECO WINDFALL
Photo Credit: Camerapix Ltd

                                                                                  Cashing in
                                                                                  on carbon

                                Industrialised nations are turning to the developing world in the race to cut
                                their greenhouse gas emissions. James Knight discovers that Africa must
                                work harder to capitalise on the global carbon rush

                                   T ALL sounds a bit too good to be true        The carbon business is a complex and      smarter developing countries are already
                                   – save the planet, and make money.         risky beast, however, which requires co-     jostling for position in a kind of ecological
                                   Yet this is exactly what the fledgling     operation at a local and national            beauty pageant, seeking to present
                                   international carbon market aims to        government level to attract both project     themselves as the most desirable prospects.
                              do. Carbon finance deals can bring jobs,        and carbon finance. Governments and             “Certain responsibilities fall on the
                              money,       expertise      and     genuine     investors need to understand the hoops       shoulders of government to promote
                              sustainability benefits flooding in to a        they must jump through to take               Clean Development Mechanism (CDM)
                              region, but African states risk being           advantage. South Africa, Morocco and         activities and verify they contribute to
                              frozen out if they don’t start to wise up.      Uganda, for example, have bucked the         sustainable development,” says Asif Faiz,
                                 While the carbon market is on the            African trend by getting clued-up on         Carbon Finance Programme manager of
                              march, and other countries have seen            carbon, and attracting all-important         the World Bank. “A key element here is
                              finance flood in, this year Africa has seen a   project finance to get large energy          learning by doing. These are often
                              25 per cent decrease in the amount of           projects off the ground.                     innovative, quite complex schemes. Until
                              carbon credits it has sold. The continent          Investors can act as either carbon        a country has a good organisational
                              now accounts for only four per cent of the      financiers (promising to buy emission        capacity it will not be able to exploit
                              total market in emissions-reducing              reduction credits once they start to be      opportunities to the full.”
                              projects. This is a startlingly low amount.     produced), or as more conventional
                              Despite an upbeat assessment of the overall     project financiers. Significantly, private   How does the market work?
                              state of the carbon market this year, World     carbon investment accounts for 40 per           The Kyoto Protocol of 1997 sought to
                              Bank analyst Frank Lecocq concedes that         cent of all emission reduction projects in   set targets for reducing greenhouse gas
                              Africa is being “essentially bypassed”.         the developing world. As a result, the       (GHG) emissions among developed

                              16                 October - December 2004
                                                                                                                                ECO WINDFALL

countries (known as Annex 1 countries).                    most developed project is in the South
Following ratification by Russia, these                    African city of Durban. The eThekwini
targets come into effect between 2008-12                   Landfill to Gas project should provide an
(see box, below right).                                    internal rate of return in excess of 25 per
   Environmentally,     it   makes   no                    cent for the city, according to Lindsay
difference where reductions take place,                    Strachan, the project manager. The
since greenhouse gases mix uniformly in                    project agreement sells 3.8m tCO2e, at
the atmosphere. So Kyoto’s Clean                           the rate of $3.95 per tonne, to the World
Development       Mechanism      (CDM)                     Bank’s Prototype Carbon Fund (PCF),
                                                           one of its carbon finance funds, over the
                                                                                                         Ernst Schwanhold:
                                                           maximum period of 21 years. Of this           his company BASF
Smarter countries are                                      amount, $0.20 per tonne will be credited      has spent $2.5m on
already jostling for position                              to a social benefit. The project is           projects
                                                           expected to generate $55m net profit
in a kind of ecological                                    over 12 years, although, in addition, “the       “There are definitely buyers for the
beauty pageant                                             project may produce ongoing significant       CERs,” says Greg Dunne, director of the
                                                           profits by way of the sale of Certified       UK-based advisor LessCarbon. “And
                                                           Emissions Reductions (CER) to other           there are lots of projects, but none of
enabled companies and governments to                       buyers on the world market.”                  them is any good. Typically they are not
purchase emission reduction credits from                      CDM projects bring with them some
energy-saving projects in developing                       pretty strict regulations, however. Host
countries, and either offset them against                  countries require a Designated National       African states need to
their compliance targets, or trade them                    Authority (DNA), to oversee and sign          create a climate for carbon
on the open market.                                        off the carbon deals, and a Designated
   For example, converting a power                         Operational Entity (DOE) to operate           entrepreneurs to thrive
station in Zambia from coal to gas                         the project. The UN’s CDM Executive
represents a considerable reduction in its                 Board is ultimately responsible for           financed, the assumptions underlying the
carbon dioxide (CO2) emissions. If that                    assessing projects, and certifying            numbers are incorrect or incomplete;
saving can be measured, and verified, it                   emission credits, and is notoriously          there are big credit issues with the owners
can be converted into carbon credits, and                  stringent – anecdotal evidence suggests       of the credits.”
these credits can be sold on.                              not one project methodology has met              With compliance costs for CDM
   Trades are measured in metric tonnes                    with approval first-time.                     projects running to £170,000, according
of carbon dioxide equivalent (tCO2e),                                                                    to the UK’s Department of Trade and
and 64m of them were exchanged                             Why Africa lags behind                        Industry (DTI), investors are also
between January and May this year,                            Research carried out by PointCarbon, a     predominantly looking for attractive “low-
compared with 78m in the whole of 2003.                    carbon market analysis firm that predicts     hanging fruits” – large-scale projects that
   The potential benefits for host                         the total carbon market could be worth        offer a high yield of carbon credits. Africa
countries can be considerable. Africa’s                    $10bn by 2010, indicates that, of 648 CDM     cannot always compete: converting a
                                                           projects either proposed or underway          power station in Gujarat is a far more
Project developer’s guide to CDM                           worldwide, only 44 are in Africa (see         lucrative option than replacing a tea
                                                           charts, page 19). “The institutional          plantation’s diesel generators with solar
         Project            • Portfolio analysis                                                         panels on the slopes of Mt Kenya.
                            • Identification of projects   framework is generally poor,” says Kristian
                                                           Tangen, PointCarbon’s CEO. “The people
                                                           and procedures are not in place.”             All is not lost
                            • Quantify potential              Decent project developers, who can            Despite the gloom, at least one African
                               GHG benefits                establish, maintain and deliver viable        country ticks all the right boxes. “South
        feasibility         • Identify host
                                                           carbon reduction initiatives, are vital.      Africa is probably the most promising
                              requirements                 Without them, a vicious circle develops:      country in the world for CDM projects,”
                            • Develop Project Design       carbon buyers stay away because the           says Greg Dunne.
                              Document (PDD)               venture looks uncertain; consequently,           There is a considerable amount of
      development           • Obtain host country
                              government approval
                                                           the project finance never arrives.            other people’s money where his mouth is.
                            • Project validation
                            • Registration

                            • Install additional
                                                           Kyoto back on track
                              monitoring equipment
    implementation            (if necessary)
                                                              Russia’s recent decision to ratify the Kyoto protocol has been a long time
                                                           coming, but it represents a vital tipping point in the fight to reduce greenhouse
                                                           gas emissions. Almost seven years after the text of the Protocol to the United
                            • Monitor project              Nations Framework Convention on Climate Change (UNFCCC) was first adopted, the
       Monitoring             (and baseline)
                              performance                  protocol can finally enter into force, now that it has been ratified by 55 per cent of
                                                           Annex I countries. Russia’s co-operation was the result of patient work by the
                                                           European Union, which promised support for Russia’s bid to join the World Trade
                            • Have emission
       Verification/          reductions verified
                                                           Organisation in return for a firm commitment to the environment from President
      Certification/          and certified, after         Putin. Now alone among Annex I countries, the US and Australia have publicly
     Issue of credits         which the carbon             declared their intention not to ratify the Protocol – they oppose Kyoto because it
                              credits can be issued
                              and sold                     does not restrict the emissions of the non-Annex I powerhouses of the future, such
                                                           as China and India.
Source: Climate Change Projects Office

                                                                                                              October - December 2004             17

LessCarbon (along with Investec and              liquidity increases, analysts expect prices    found itself a de facto expert on the
Cumbria Energy), is an equity holder in          to rise, and Dunne is keen to sell at          carbon market; advising government,
IceCap, the world’s first private carbon         floating market rates.                         liaising with the UN Convention on
purchasing vehicle. LessCarbon is                   What is so tempting about South             Climate Change and ensuring projects
currently developing several projects in         Africa? “First of all, it’s predominantly a    meet the national interest. “It’s all about
South Africa, and hopes to have                  coal-based        economy,       so    the     building capacity and ensuring the things
agreements to purchase carbon from at            opportunities for fuel-switching are           that need to be done are done,” he says.
least two of them in place by year’s end.        enormous,” says Dunne. “It has an                  Apuuli says that having $4m of World
Once CDM-qualified, the resulting credits        established project finance structure:         Bank carbon finance in place for
will be acquired by IceCap, among others,        this is quite unusual for a CDM country        Uganda’s $18m West Nile Electrification
which plans to acquire up to 50m tCO2e           – some tend to have limited capital            Project acted as a “catalyst”. “Carbon
from projects across the developing              markets.” Investec, Nedbank, and               finance was part of the project, to attract
world. IceCap’s potential participants           Standard Bank, for example, provide all-       the project developer.” The project is due
may be developed world governments               important project finance.
with large carbon purchase programmes               “South Africa has high-energy
(Spain, Italy, and Austria for example),         intensive sectors, such as metals, mining      Developers need to prepare
energy-intensive process industries              and paper, and the dominant energy
involved in oil and gas, chemicals or            provider, Eskom, is expected to be
                                                                                                good projects, calculate
minerals, and electricity utilities, the         deregulated in the next couple of years.       baseline emissions and they
biggest emitters of all. The price at which      The country itself is committed to
emission credits are purchased is “open to       sustainable development at a national          need finance partners to
negotiation”, says Dunne. Current market         and local level.”                              put up capital
prices vary between EUR 4 and EUR 6 per             Elsewhere on the continent, Morocco
tCO2e, depending on the risk associated          and Uganda have both set up DNAs. Dr
with the project and its stage of                Bwango       Apuuli      heads    Uganda’s     to start producing its first emissions
development. As the market matures and           Metereological Department, which has           credits at the end of the year.
                                                                                                    When asked about the problems facing
                                                                                                African countries, he is clear: “There
                                                                                                aren’t many developers who are aware of
Nepad can make it work, says Pancho Ndebele                                                     these projects, and have the capacity to
                                                                                                make them happen. You need to prepare
    Apart from contributing to sustainable       Perhaps it is time for the Nepad Secretariat   good projects, calculate baseline
development, CDM has the potential to            to rise to the occasion.                       emissions, and you need finance partners
bring additional foreign direct investment           Nepad should investigate setting up a      to put up capital – many of these people
to Africa, technology transfer, improvements     Pan-African Designated National Authority      don’t see much in carbon. It takes time to
in operational efficiencies, proactive risk      (DNA) office to oversee CDM projects.          get partners to appreciate issues and
management, and contribution to global           Funding and support for such an initiative     commit finances and resources.”
greenhouse gas reductions. However, for          can be sourced from organisations such as          By contrast, other African countries are
this to happen there has to be an                the EU and UNEP Finance Initiative.            failing to capitalise on their potential. Oil-
environment that enables project                     The role of the Nepad DNA would be         rich states, such as Nigeria, are well-placed
developers and CDM entrepreneurs to              threefold: to approve CDM projects,            to attract CDM projects that can reduce
develop the carbon market.                       particularly those originating from            emissions during the refinement process –
    Industry has been slow to realise the        countries that do not have the skills and      the methane produced from flaring could,
potential opportunities that exist for their     capacity to set up and manage their own        for example, be captured and converted to
operations in Africa. Those who have been        national DNAs; to develop and implement        electricity. Yet Nigeria has not committed
active are the carbon brokers, in their quest    capacity-building programmes aimed at          itself to sustainable development by
to pick up any low-hanging fruit in the          raising awareness, highlighting potential      signing the Kyoto Protocol.
early phases of the fledging market. There       entrepreneurial and foreign direct
has been little to pick, as the real challenge   investment opportunities associated with
is to develop the projects that will             the emerging carbon market; to act as an       Value of small-scale reductions
generate tradeable CERs.                         African greenhouse gas clearing house,            The World Bank is particularly
    In South Africa, which is responsible for    managing the CER register for projects         concerned at Africa’s failure to cash in on
40 per cent of Africa’s greenhouse gas           approved by the CDM Executive Board.           the carbon market. The Bank currently
emissons, the DNA office went operational            Given Prime Minister Tony Blair’s          manages       $500m      of     purchasing
last month. There is a growing appetite          presidency of the G8 and the EU next year,     commitments for verified emission
from industry to explore the opportunities       both climate change and Africa should hit      reductions, on behalf of governments and
presented by the CDM, which has been             the spotlight. The EU, the UK Commission       private companies, across a portfolio of
triggered partly by the linking directive of     for Africa and Nepad should work together      six carbon funds. The Emission
EU emissions trading scheme. The linking         to realise such                                Reductions      Purchase       Agreements
directive allows CERs from CDM projects to       climate change                                 (ERPAs), through which the Bank
be traded in the EU scheme from the start        projects in Africa.                            purchases CERs reduce the risk. As a
of next year.                                        Any takers on that                         result of the World Bank’s involvement in
    For Africa to compete in attracting          thought?                                       Uganda’s West Nile project, one major
carbon finance, African states that are                                                         international bank is on the verge of
                                                 Pancho Ndebele is                              committing to project finance in the
signatories to the Kyoto Protocol need to
                                                 Sustainability Manager,
establish their DNAs, and to create a            The South African                              region. But it is still difficult to attract
climate for carbon entrepreneurs to thrive.      Breweries Limited                              investment. Of more than 30 PCF projects

18                  October - December 2004
                                                                                                                             ECO WINDFALL

                                                                                                                                                             Photo Credit: Camerapix Ltd
for which there are agreed terms, only
three have had access to commercial
financing, and, of these, only one has
reached financial closure.
   To combat the marginalisation of
small-scale developing economies that
lack much heavy industry, the World Bank
has set up the Community Development
Carbon Fund (CDCF) to purchase CERs
from smaller projects. The requirements
demanded by the CDM Executive Boards
have been made less stringent, to
encourage       participation.      Private
companies have so far contributed $70m,
attracted by the chance to demonstrate
their commitment to sustainable
development. The German chemical
giant BASF, for example, has contributed
$2.5m, some of which is being spent on a
wind and hydro project in the Jefferys Bay
area of South Africa, which aims to
reduce CO2 emissions by 300,000 tonnes                                                                 Opportunity chops: reforestation projects build up
                                                                                                       ‘sinks’ of carbon reserves, but their impermanence
over 14 years, and provides poor                                                                                      makes them a risky option for Africa
households with free energy.
   “By participating in these projects, we           countries,” says Faiz. “They are not only      set up a working group on methodologies,
want to emphasise our stance on                      buying ERs, but they are buying smiles on      to try and accommodate credits from sink
sustainable development and our                      the faces of African children – think of how   projects. If the issue of permanence is
commitment to the Kyoto Protocol,” says              well that plays in an end of year report.”     resolved, then Tangen believes “Africa
Ernst Schwanhold, president of BASF’s                                                               could be much more attractive.”
Environment,       Safety     &    Energy            The clock is ticking                              Whatever the solutions may be, the
competence centre. “These mechanisms                                                                clock is ticking. Kyoto takes no account of
                                                         Africa and carbon finance have an
are far better suited to reducing global                                                            what will happen after the compliance
                                                     uncertain future together. All eyes are
emissions of greenhouse gases than the                                                              period 2008-12. Without a future of
                                                     on the EU Emissions Trading Scheme
regionally-limited emissions trading                                                                emission reduction targets, the market will
                                                     (ETS), which kicks off at the start of
system in the EU.”                                                                                  lose value. CDM projects can take between
                                                     next year, and enables the buying and
   Although the emission reductions may                                                             three and seven years – to identify,
                                                     selling of emissions allowances across
be small, the PR benefits are huge: “CDCF                                                           hammer out methodologies, licensing,
                                                     Europe. Operating independently of
is quite attractive to sponsors in host                                                             financing and construction – before
                                                     Kyoto, it is the most significant
                                                     development to date in the carbon              investors start seeing certified emission
                                                     market. A vital linking directive enables      reductions. Without a subsequent treaty,
African CDM projects, by country                     entities to trade CERs from CDM                the window of opportunity is closing.
                                                     projects – good news for those African            The impetus lies with Africa. “In the
                                                     countries that want to attract interest. In    end the [African] governments must
                                o rc
                                                     typical EU hedging style however,              realise they are players in the carbon
                                                     generous emission reduction allowances         market,” says Faiz. “In order to sell
                                                     handed out to certain member states            emissions reductions they must produce
                                                     have lessened the urgency to start             them, and make buyers realise that what
                                Mo                   looking for CDM projects as a way of           they are offering is reliable and has good
                                   r                 meeting compliance regulations.                value. Without countries themselves
                                                         In predominantly rural economies,          taking charge, not much can happen.”
                                rr                   one controversial area in which Africa
                                M cr
                                                     could score big is reforestation, which
                          Source: PointCarbon        builds up “sinks” of carbon resources.
                                                     “This is where the opportunities really
African CDM projects, by type                        lie for Africa,” says Asif Faiz. What keeps
                                                     everyone jittery however, is the thought
                               Biomass power
                                                     that the carbon source could be        
                                    ro               chopped down at any time, which is why 
                                i        ower
                                    er e i ie
                                                     emissions credits arising from carbon  
                                a i        as        sink projects are not currently accepted
                                e ores a io
                                    ores a io        in the EU’s ETS.                       
                                o ar erma
                                    i i e as ap re
                                                         “There is a lot of risk associated with      climat/emission.htm
                                eo erma              sink projects,” says Kristian Tangen, citing
                                    o o o ai s
                                    e wi i
                                                     fierce opposition from NGOs. “Until sink
                                    er               CERs kick off, the market is going to be
                          Source: PointCarbon        meagre.” The CDM Executive Board has

                                                                                                        October - December 2004                        19

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