Carbon

1
Carbon Development A Reality for Cambodia?

• Presentation prepared by Sum Thy
• Bridget McIntosh,
• Cambodian Climate Change Office of the Ministry
  of Environment
• Climate Protection as a Development Opportunity
  Conference
• June 7-8 2004
• Hamburg Institute of International Economics

2
Presentation Overview

• A Snapshot of Cambodia
• The Reality of CDM for Cambodia
• Cambodias Institutional Preparation
• Premium Carbon as a Niche for Cambodia?
• Demand for Premium Carbon
• Developing Cambodias Supply of Premium Carbon
• Reality and Issues of this Market for Cambodia
• Options for Supporting Development and Carbon in
  LDCs
• Summary and Conclusion

3
Cambodia, a Snapshot

• One of 20 poorest countries in the world with
  GDP/capita of US290
• 36 of population live under the poverty line
• 85 of the population live in rural areas, most
  of which carry out subsistence agriculture
• GDP growth rate 4.5 (2002) 40 agriculture 40
  services 20 industry
• Main industry tourism, exports - garments, wood,
  rubber, rice, fish
• 15 of population have access to electricity 80
  energy consumption is fuelwood
• Highest electricity costs in ASEAN 9-53c/kWh,
  dependent on import fossil fuels

4
Cambodia, a Snapshot cont.

• High dependence on foreign aid ( 14 of GDP)
• Very low FDI
• Very high interest rates, difficult to access
  finance
• High sovereign risk, political risk, unofficial
  fees, particularly for large projects
• Very small and underdeveloped private sector
  very few local developers
• Low technology transfer eg most recent build is
  oil-fired powerstation
• Country in need of development and investment at
  large and small scale
• While country is supportive of investment there
  are still many financial, technical and social
  barriers

5
The Reality of CDM

• CDM favours
• Large scale projects with high volume CERs at low
  cost
• Economically/politically stable countries with
  better investment security
• Countries with large markets and more project
  replicability
• Countries with better CDM/Energy/Development
  Services
• For small least developed countries, large scale
  projects unlikely, except where capacity is weak
  and exploitation may occur???

6
CDM Cambodian Development Mechanism? Unlikely

• Reality of CDM in Cambodia
• Very few local developers identifying and
  developing projects small pipeline!
• Large scale projects face high sovereign risk
  difficultly accessing finance, relatively low
  transparency
• Good environmental laws, yet weak enforcement
• Small market compared to other countries little
  development of carbon services
• Unlikely to be able to produce large volume,
  low-cost CERs. Unlikely to attract international
  developers with little project replicability
• Yet, good opportunity for greenhouse gas
  reduction in energy, waste, sequestration
• Sound institutional Capacity for CDM but poor
  prospects for investment.

7
Institutional Capacity for CDM in Cambodia

• Due to excellent Donor support (Dutch, Japanese,
  GEF), Cambodia has relatively strong
  institutional capacity in Climate Change and CDM
• Established Cambodian Climate Change Office
  good capacity, interministerial members and
  excellent relationships with Ministries,
  stakeholders, private sector
• Designated National Authority as Ministry of
  Environment, working co-operatively with other
  Ministries to develop more representative DNA
• Developing Sustainable Development Criteria with
• Based on Gold Standard and SSN criteria
• Consulting with key government stakeholders
  (energy, forestry, environment) and NGOs
• Working to raise awareness of CDM and carbon
  but is it promoting a concept that may never
  eventuate

8
Development of DNA
9
Development of DNA cont.

• Cambodia is currently analysing different
  alternatives for DNA structures and assessment
  process to be submitted to the Government for
  consideration
• The process of DNA establishment is being carried
  out through cross-sectoral consultation with all
  relevant stakeholders
• The final recommendation on DNA structure is
  expected to be made to the Council of Ministers
  by August 2004.

10
Premium Carbon a Niche for Cambodia?

• Rationale
• little opportunity for investment in large scale
  CDM projects yet good opportunity for GHG
  reduction in energy, waste sequestration.
• Solution
• focus on small appropriate scale projects
  maximising development aspects.
• Sell carbon on basis of development aspects, not
  price
• Focus on buyers who are not price sensitive, and
  who see the benefits of small projects with
  significant impact for poor rural communities
  assisting in economic and social development
  good news stories!
• Question
• What is the demand for premium carbon? Could it
  support many projects, or one-offs?
• Need to understand Premium Carbon Market.

11
Demand for Premium Carbon

• Premium Carbon
• Carbon reduction with focus on more than just
  price. Usually focus on sound environment,
  community development aspects. Often for
  marketing, public relation purposes or to meet
  own companies ethical criteria.
• Two main types of Premium Carbon markets
• Retail Voluntary Carbon Market
• Offsetting emissions from conferences
  flights products business operation usually
  for PR/Marketing purposes
• Compliance Market demanding Premium Carbon
• Companies/countries seeking proportion of
  compliance from Premium carbon
• Note not all demand is for Kyoto Compliant or
  CERs ERUs etc. May be ERs or VERs.
• Discussion Points What is the volume of demand
  for Premium Carbon? What is demand from Premium
  Carbon from developing countries?

12
Characteristics of Retail Carbon Market Demand

• Voluntary offset of carbon emissions from
  activities eg conferences business operations
  flights. Usually for marketing/PR purposes or
  ethical criteria
• recent press release for German Renewables 2004
  Conference promoting the development aspects,
  good news story of solar community kitchens.
  Focus on more than just the carbon offset less
  focus on price (10 euro)
• Usually not price sensitive, but not always may
  simply want cheap carbon offset
• Smaller, often discrete volumes (eg conference)
• More lumpy demand ie many small buyers less
  long term contracts for set volumes. lead time
  of demand often short. Need for balance of
  supply/demand
• Therefore, usually sold through Retailer (eg
  Climate Care 500PPM Future Forests) or Broker
  (eg Natsource Nepal biogas). Less direct
  contracts with retail customer and seller.
• Not always required to be Kyoto
  Compliant/Certified (CER) but increasingly so
• Can also be activities in own country (eg Green
  Electricity Green-e in US) or from economies in
  transition (ERUs).
• Discussion Point what is the volume of demand
  for Retail Carbon? What share would be from
  developing countries?

13
Characteristics of Premium Compliance Market
Demand

• Mainly Kyoto Compliant carbon
• Government or Companies wishing to seek
  proportion or all of Kyoto Compliance through
  premium projects. Drivers
• For good news stories promotion/marketing/PR
• companies with proportionally small liability may
  choose premium carbon for all compliance and
  maximise PR benefit
• May compliment development priorities in some
  countries eg GTZ willing to pay higher price for
  a project where carbon takes a project to self
  sufficiency from carbon sales note no diversion
  of ODA (see later).
• May compliment Company activities or support
  marketing eg Shell BP promotion of solar PV or
  new market entry/discovery
• May buy through intermediatories eg WB CDCF or
  brokers or may buy direct through links with
  company or development activities
• Discussion Point Will buyers really seek a
  proportion of premium carbon? Should CERs be
  premium carbon anyway?

14
Cambodias Opportunity for Premium Carbon Supply

• Cambodia has high potential for projects to
  reduce or sequester GHG, that have great benefits
  for local communities and their development. The
  cost per tonne of carbon will be higher, but
  individuals benefits and poverty reduction
  greater.
• Small projects involving methane or other high
  value GHG are better
• Bundling micro/household activities
• Household biogas systems
• Improved cookstoves
• solar home systems
• Pico/micro hydro systems

15
Cambodias Opportunity for Premium Carbon Supply
cont.

• Small scale industry
• Wetwaste Biogas-electricity eg piggeries soy
  bean factories
• Establish mini-grid for local supply (currently
  Government plans to supply electricity to major
  provincial towns). Small towns have no supply
• Rice husk/woodwaste gasification
• Rice millers are small, locally owned. Very few
  large scale or co-operative milling
• Improved brick kilns design/efficiency
• Hotel energy efficiency improvement
• Community/provincial town waste composting
  (aerobic reduction)
• Provincial town sewage treatment methane capture
• Forestry Aggroforestry
• Small scale farmers planting income generation
  crops
• Community forestry regeneration of degraded land
• agroforestry

16
Considerations/Issues for this Market in Cambodia

• Small scale development projects have higher
  development costs
• less economies of scale
• dealing with more stakeholders (esp if bundling)
  often with lower capacity
• sound development require intensive consultation
  with local communities
• despite small amount of investment high cost of
  money
• Carbon transaction costs same, therefore
  proportionally higher per project
• Gold Standard transaction costs may be higher
• Some buyers may not need CERs, but still need
  monitoring/verification
• The premium market is not so price sensitive
  but to what point?
• More difficult to find Premium buyers less
  demand volume other competition from projects
  within countries and Economies in Transition
• Risk still applies. Need to be able to negotiate
  contract that will ensure benefits remain (eg
  shortfall provisions)
• Projects need long term monitoring and
  verification need to strengthen this capacity

17
Development of Cambodias Supply of Premium Carbon

• There are a number of steps that need to be taken
  for Cambodia to develop niche as supplier of
  premium carbon
• Develop project Pipeline
• Identify project concepts
• Prioritise project ideas/opportunities and
  identify local partners developers
• Undertake pre-feasibility studies for priority
  projects, including project financials PIN/PDD
  monitoring plan carbon volumes buyers
  investors DOEs etc
• Implement projects, monitor, verify etc
• Understand the Premium Market and Demand
• Build relationships with buyers (Retailers and
  brokers)
• Potentially work with Retailers/Intermediatories
  to promote product.
• Continue to build capacity of Cambodian Climate
  Change Office
• Build relationships and skills CCCO to facilitate
  and promote projects
• Support monitoring/verification of projects.
• Note conflict of interest as DNA secretariat

18
Options for supporting Carbon and Development in
LDCs

• There are a number of different model options for
  supporting the linkages with carbon and
  development
• Develop an International Carbon Finance mechanism
  for LDCs
• Could take similar philosophy/partnership with
  ECo (ie willing to accept higher risk willing
  to enter early markets willing to invest in
  small projects able to offer more up-front
  payment able to offer technical support and
  support/build lower capacity).
• WB CDCF is step towards this, however still very
  price sensitive somewhat risk averse, with high
  volume requirements.

19
Options for supporting Carbon and Development in
LDCs cont.

• Integrate Carbon and Development Programs
• There are significant development programs that,
  with innovation (not necessarily diversion), can
  result in GHG reduction and achieve development
  objectives. Both on small scale (eg village
  infrastructure biogas/pico hydro) or larger
  infrastructure scale eg waste management,
  wastewater treatment. Carbon sale can help
  justify projects.
• Many aid/development projects are seeking to
  support SME and private sector development.
  Carbon is a way of supporting emerging commercial
  opportunities eg local piggeries brick kilns
  food processing plants.
• Develop a seed/revolving fund for financing
  community based development projects, where
  carbon revenue feed back in or support
  transaction costs. These funds would need to
  accept the lower capacity higher risk. Focus on
  development objective first carbon sale second.
• Controversial relating to ODA. If follow
  definition of ODA diversion as not using ODA to
  buy CERs, then could separate out development
  investment to carbon purchase.
• Goes against principle of carbon market/carbon
  commodity. However, supports principle of CDM in
  GHG reduction and Sustainable Development,
  technology transfer in developing countries.

20
Options for supporting Carbon and Development in
LDCs cont.

• Develop an LDC Carbon Clearing House
• Based on the rationale for the development of
  Country clearing houses in Latin American this
  could be developed to represent a group of LDCs.
  An LDC like Cambodia may not have the capacity or
  the volumes to justify developing a clearing
  house to promote carbon on an individual country
  basis.
• This would be quite difficult to establish due to
  the differing circumstances in each LDCs (eg
  Cambodia/Laos as only LDCs in Asia). It could
  possibly work in collective African nations. It
  would require multilateral support.

21
Conclusion

• Least Developed Countries like Cambodia are
  unlikely to access development benefits from
  traditional CDM market
• Premium Carbon may be a niche for LDC counties
  like Cambodia
• May pay higher price for carbon that support
  development/environmental standards
• Allows development of small scale, locally
  appropriate projects less requirement for high
  investment and associated issues
• Cambodia has good institutional capacity for
  climate change with support could develop a
  pipeline of a niche supply
• However, Premium Carbon market small and
  uncertain
• Innovation and commitment to principle of GHG
  reduction and Sustainable Development in LDCs
  could result in increased participation of LDCs
  in carbon market
• Need to focus on the development and carbon
  benefits cannot isolate carbon
• Need to approach it from a LDC development
  perspective not a carbon price perspective.