NOT AN OFFICIAL UNCTAD RECORD

Gas Flaring Reductions and

the Clean Development
Mechanism (CDM)
Lucas Assunção
Coordinator
BioTrade and Climate Change Programmes
UNCTAD, Geneva

UNCTAD/Earth Council Carbon Market Partnership

 Agenda
1. The Kyoto Protocol
2. The Clean Development Mechanism (CDM)
3. The emerging carbon market
4. CDM challenges and opportunities for gas
flaring reduction projects

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 The Kyoto Protocol:
Architecture
• Caps emissions of greenhouse gases (GHG)
by industrialized countries (Annex I)
– combined emissions are reduced by at least 5%
of their 1990 levels by the period 2008-2012
• Industrialized countries have access to 3
“flexibility” mechanisms
– to minimize the cost of reducing emissions
(flexibility)

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 The Kyoto Protocol as a
“cap & trade” system
• Collective problem-solving approach
– As a group, reduce GHG emissions by X
amount in X time to reduce concentrations
• Flexibility with regards to
– Measures – technology used, policy tools, etc.
– Allocation of emission “quotas” among
emitters
– Trading “quotas” among each other

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“Cap and Trade” analogy
• 10 passengers share a boat to cross a
river
• Due to river conditions, boat has now
to be lighter but should still
accommodate same 10 passengers
• The carry-on bags in which we all put
our “things” now needs to be smaller
• From now on, our “stuff” will have to
fit in the smaller bag
• If you have extra “space” in the bag,
you can trade it with someone who
needs the extra space

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 Why cap & trade is
preferred policy
• Drives down the costs of achieving environmental
objectives
– Acid Rain: from $1,000s to $100s (see next slide)
• Gives industry space to change and adjust
• Feeds on diversity of marketplace and differences in
abatement costs
• Drives innovation and efficiency

• So the bigger the market, the better

• But this also results in “winners and losers”

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 US SO2 Prices

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 Kyoto Protocol’s
Flexibility Mechanisms
• Classical “cap & trade” mechanism
– International emissions trading (ET) – trading of
emission “quotas” among industrialized countries
(AAU)
• “Offset” mechanisms
– Joint Implementation (JI) – emission reduction credits
resulting from offset projects in other industrialized
countries (ERU)
– Clean Development Mechanism (CDM) – crediting of
certified emission reductions resulting from offset
projects in developing countries (CER)

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What is the Clean Development
Mechanism
• KP mechanism that defines project activities
which reduce GHG emissions or increase CO2
sequestration implemented in developing countries
• Purpose:
– To support developing countries in achieving
sustainable development through the implementation of
project activities that reduce GHG emissions
– To assist industrialized countries in meeting their GHG
emission reduction commitments

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CDM Project Activity
(Methane recovery in landfill)
Sustainable Development
in developing countries

Certified Emission
Reductions Remove or retire CER
(CERs) from market (NGO)

Sell CER through market

Use CER to comply with

INVESTORS present or future GHG
emission commitments

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 CDM rules from Marrakech
• Undertaken in developing countries
• CERs may be used by Annex I countries
• Voluntary participation approved by each Party
• Real, measurable and long-term mitigation benefits
• Reductions are additional to any that would occur in the
absence of the project
• Promotes sustainable development, as confirmed by host
country
• Does not divert ODA
• Should lead to transfer of technology and know-how
• Refrain from reductions generated from nuclear facilities

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 The CDM Project Cycle
Process/Steps Key Actors
• Project Design • Project Developers
• Project validation • Nat’l CDM Office,
National Gov’ts
• Registration • CDM Executive Board
• Monitoring
• Project Operators
• Verification/Certification
• Independent Third Party
• Issuance of tradeable
credits • CDM Executive Board

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The Emerging Carbon Market
• In anticipation of the entry into force of KP, a
global market is emerging
• Fuelled by the perception that the future will be –
– “carbon-constrained” (environment) and/or
– have to be less fossil-fuel dependent (political
economy)
• The Dow Jones Sustainable Development Index
has outperformed the market

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 Market Actors
• Governments
– EU-wide emission trading scheme (starts in 2005)
– National emissions trading schemes – Denmark, UK,
Norway (early starters)
– The Netherlands – ERUPT and CERUPT – emission
reduction procurement tender – now joined by other
governments like Finland, etc.
• Corporations
– Corporate-wide: Shell, BP
– Procurement/Investment: TransAlta, OPG, Marubeni
– Chicago Climate Exchange

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Chicago Climate Exchange

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Carbon Finance @ World Bank

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 Market Forecast
• We are living in a carbon constrained
world. The urgency to control/stop the
radical change in the world’s atmosphere
and climate will only increase.

• Market mechanisms are the preferred policy

responses. But this will create winners and
losers at various points in time.

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 CDM Challenges and
Opportunities: in General
Challenges include -
• Lowering transaction costs
• Limit on use of credits by
industrialized countries
• “Additionality” issue
• Promoting CDM investments
• Ensuring that additional
revenue promotes sustainable
development
Opportunities include –
• Additional revenue stream
• More energy-efficient
technologies
• Better practices
• Greater environmental
awareness

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Gas Flaring Reduction
Projects: Challenges
& Opportunities

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Gas flaring and climate change
• CO2 emissions from flaring is about 10% of the
Kyoto emission reduction commitment of all
Annex-I countries (including USA)
• Energy wasted through flaring and venting is
prodigious
• The gas alone is enough to supply all of France’s
gas requirements
• Venting of associated gas (methane) directly into
the atmosphere is unrecorded and is 23 times more
potent than CO2 as a greenhouse gas

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 Economics of gas flaring
• About 8 billion standard cubic feet per day
of gas is wasted globally (= France’s gas
requirements)
• There are strong economic reasons to stop
the flaring and venting of gas resources
• Requires large capital investment that is
sensitive to a variety of risk factors

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 Major challenges for gas
flaring reduction as CDM
• “Additionality”
• Demonstrating Sustainable
Development
• Competition with other CDM projects

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 Additionality
• Given the economic importance of capturing
flared gas and the associated political and
regulatory pressures, it is difficult to establish

– Whether or not the planned reductions would take

place without the proposed CDM project
– What amount of reductions can be credited to the
CDM project

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 Demonstrating Sustainable
Development
• 3 categories of reduction projects
– Re-inject associated gas
– Improve efficiency of flares
– Utilization of gas for energy purposes
• Except for last category, projects do not
have high visibility impact in promoting
sustainable development – a key component

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 Competition with other
CDM projects
• Assuming that the carbon market is modest
and that prices stay at Euro 3-10

– Other CDM projects may be more attractive

than gas flaring reduction projects

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 Conclusions: Gas Flaring
Reduction Projects
• Viability & attractiveness of GFR projects is likely to
increase as the CDM market grows
• In a large CDM market, GFR projects offer highly
effective, measurable sources for large amounts of
CERs
• Uncertainties about gas flaring reduction projects can
be reduced by clearer regulatory policy
• For more information:
– CDM Online Course @ www.LearnSD.org
– The CDM Guide @ www.unctad.org/ghg

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