CDM and ENERGY EFFICIENCY PROJECTS



|CDM AND THE TRANSPORT SECTOR |

Transport and the greenhouse effect

Transport represents 25% of the world’s energy consumption, and 57.2% of the world’s fuel consumption in 2002 (source IEA)

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Source : IEA 2002

Furthermore, in the short term we expect a boom in the use of cars, especially in developing countries (DC) (growth observed in Asia of +7.3%/year in 2002).

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Source : IEA 2004

23% of the greenhouse gas emissions (GHG) in 2000 (25% in 2030) are due to the transport sector, and today it depends 95% on petroleum. According to the forecasts of the IEA, the global emissions of CO2 from the transport sector will increase at a rate of 2.5% per year until 2020, unlike the GHG emissions from other large sectors which should experience lesser growth. Hence, transport in developing countries could represent 60% of the increase of global emissions of CO2.

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Source : IEA WEO 2002

Urban transport in developing countries has experienced a very different evolution from industrialised countries. Whilst the number of vehicles per inhabitant in developing countries is still greatly below that of developed countries, the traffic and air pollution problems are often locally more serious because of the low energy efficiency of the vehicles and the poor maintenance technologies.

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Source : OECD Environment Directorate

It is unlikely that we can act on the reduction of CO2 emissions other than by strategies such as :

• reducing the energy intensity of vehicles

• transferring to other energy sources with lower GHG emissions

• reducing the use of motorised vehicles and modal shifts to public transportation.

In a context where the climate change is of rising concern, and where the pressure on the supply of petroleum products is particularly strong, the transport sector ought to be a priority target for Kyoto instruments. As the sector is the main emitter, it should be the priority for the Kyoto Protocol (KP) flexibility and mechanisms. However, in the context of the KP, the projects submitted to the Clean Development Mechanisms (CDM) in this sector are few and far between – essentially for lack of methodologies adpated to the specifics of the sector. Up to date only a single simplified methodology1 has been accepted by the Executive Board of the UNFCCC2.

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Traffic jams in Bangalore – India

For a sustainable development of transport

Whilst economic and social development is a priority in developing countries, the decisions taken today with regards to the transport sector do not include medium and long term economic, social and environmental aspects. There are clear externalities for urban transport, such has:

Economic impacts : Congestion is threatening the economic viability and aggravating pollution. It has been estimated that the Thai capital is losing 35% of its Gross Regional Product in congestion [Gakenheimer R., 1999].

Health impact : Besides the number of persons killed yearly in transport in developing countries, the direct costs of urban atmospheric pollution for health were estimated at almost USD 100 billion a year in 1995.

Social impact : The modes of urban travel are eminently not egalitarian, with the most underprivileged persons suffering the effects of congestion and pollution in an urban environment more than others.

What are tomorrow's modes of urban transport in the cities of the south ?

We can imagine three possibilities for urban development:

(i) the “automobile city”, by developing very large transport road infrastructure

(ii) the “public transport city”, by favouring collective transport in road, railway and waterway planning.

(iii) the “motorbike city”, which may often be seen as the first stage in the automobile city.

Conventional GHG reduction projects in the transport sector

Several measures can be taken for GHG emissions reduction linked to transport :

- Fiscal measures

- Political, financial and institutional measures

- Technological improvements

- Land use and town planning policies

- Public awareness

- Offering alternative means of transport

- Demand Side Management for Transport

However, modelling the direct impact in terms of demand for transport and further in terms of CO² emissions is complex to say the least.

IRIS Kyoto’s goal is to address project development and financing barriers to the successful implementation of the Kyoto Protocol’s CDM. Gathering a team of partners from France, Germany, India, Morocco and the UK, the project aims to build a practical methodology for implementing CDM project activities and investigate the issues of project risk analysis and spread.

Setting up CDM projects in the transport sector: serious limitations

With regards to the Kyoto Protocol flexibility mechanisms there are hardly any transportation projects in the pipeline and limited methodologies approved. We present hereafter the normal CDM project life cycle, which is in itself an already long and difficult process – then in the next section expand on the difficulties it poses for the transportation sector.

► Definition of indicators in the transport sector : the “baseline and its monitoring” :

The baseline represents the measurement of emissions which would have taken place in the absence of the project. Several technical difficulties have to be overcome when establishing a baseline for a CDM project : the lack and uncertainty of retrospective and current data and the hypothetical nature of the forecasts.

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Possible orientations :

The installation of a reliable counter for data is necessary to determine the consumption of energy or the volume of emissions of a fixed source. Hence, two solutions would enable the implementation of projects by virtue of the CDM, despite the lack of data :

(i) Restricting these projects to fleets of vehicles which have a centralised management.

(ii) Accepting the great deal of uncertainty on the data and establishing a baseline with a high degree of uncertainty

(iii) Working towards a standardization of the baselines for transport ? An information document published by the environment division of the OECD/IEA made an initial examination of the methodologies for fixing the baselines for emissions in the transport sector. The aim of standardising baselines is justified at several levels : mainly the reduction in transaction costs and the attenuation of the distortion effect

► The specifics of financing transport projects and the associated risks : impact of the CDM :

Most of the time, transport infrastructure projects in an urban environment come up against the following elements :

▪ a multiplicity of the players involved : institutions, technical and legal experts, suppliers, financial institutions, users, river residents, etc.

▪ large investments compared to low operating cash-flows and weak local entities;

▪ lack of statistics on the existing methods of transport, making the planning exercise difficult

▪ a pricing of services that needs to be controlled because of social issues and access to service;

▪ a complexity of the management of urban space, and the difficult interactions between town planning and transport, causing difficult and costly work realisation conditions,

This complexity entails numerous risks, which are even greater when the implementation of the project is long. The key risks are : Political risks (modification of the transport policy, nationalisation, energy crisis, etc), Financial risks (unforeseen change in the interest rate, inflation rate, foreign exchange rate, poor indexation, etc), Legal risks (poor accounting of the legislation, appearance of new constraints (environment, safety, etc.)), Building risks, Operating risks and Commercial risks.

Possible orientation :

The multiplicity of the organizational and financial schemes does not facilitate putting in place of CDM projects, for which we should clearly identify the entity (entities), taking in charge the transaction costs, the monitoring and the benefit of the CER.

► Impact of the CDM on project financing :

The public transport projects enable emission reductions, which, although relatively important, are generally very limited compared to the investment made. Hence credits would anyway have a negligible impact, representing a lot less than 1% of the equity invested in this type of project and the average value of the reduction of the emissions (about USD 10 / t CO2eq.). However, if one focuses on energy efficiency for a specific fleet of vehicles, the opposite conclusion will be drawn, as has been shown in the case of Bangalore Metro Road Transport – see full document on Web.

Possible orientation :

Other methods of evaluating the emission reductions could considerably change the result (cost/benefit analysis in which we integrate the positive and negative environmental and social externalities).

The European Trading Scheme

Today, the directive on the European Trading Scheme (ETS) only applies to certain sectors – and is currently opening to aviation but the transport sector is not included in the initial commitment phase of the European directive 2005-2007. Its introduction in the market is being studied but it is unlikely for the second phase of the directive (2008-2012).

The EU Emissions Trading Scheme (EU ETS) is one of the policies being introduced across Europe to reduce emissions of carbon dioxide and combat the serious threat of climate change. It is a cap and trade scheme with penalties up to 50€ per tonne, the linking directive allowing to trade in CERs from Kyoto instruments. Phase I of the Scheme began on 1 January 2005 and will run until 31 December 2007. Phase II will run from 2008-2012 to coincide with the first Kyoto Protocol commitment period. It is potentially a large window of opportunity, though the generous allocations of the first commitment period have led to disappointing transaction volumes and prices during the first semester of 2005

CDM transport projects : feedback and proposals

Up to now, no transport project has yet been validated (as of 22 April 2005) by a DOE, so no project has been registered by the CDM Executive Board (CDM EB).

Validation of the methodologies:

For the time being, only one CDM methodology concerning transport has been approved by the methodology panel (Meth Panel). It is the simplified methodology for the reference. However, we should point out that this methodology is not, for the time being, linked to any filed project.

Three methodologies relating the transport sector have been presented but were refused by the Meth panel (methodologies NM0052, NM0069, NM0083) and one methodology is at the moment under reviewing (NM0082). Details on these methodologies are available at the following address

The difficulties of inserting transport projets in CDM :

CDM are a completely innovative mechanism and we see how difficult it is to handle them in the transport sector. Now, the following questions are asked :

• Should we relax the EB CDM requirements with regard to the transport projects be relaxed?

• As there are many other externalities, and the CDM also has a clear development objective, a premium price should perhaps be offered for projects in this sector?

• Do we need mechanisms other than the CDM, which are more adapted to transport?

Full document available on project website:

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Funded by the European Commission Synergy Programme

1 III.C: emission reductions by low greenhouse gas emitting vehicles

2 United Nations Framework Convention on Climate Changes

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European coordinator and French Partner

Innovation Energie Développement

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French Partner

Agence de l’Environnement et la maîtrise de l’Energie

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Centre d'Information sur l'Energie Durable et l'Environnement

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Indian Partner

Energy Economy & Environmental Consultants

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Bangalore - 560 038

Tel +080 - 521 3986 - eeec@

UK Partner

Energy for Sustainable Development Ltd

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esd.co.uk

German Partner

Projekt-Consult GmbH

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Tel +49 - 6174-24031 konstantin.noerenberg@projekt-consult.de

projekt-consult.de

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