国際大学グローバル・コミュニケーション・センター

CDM and its applicability to financing Clean Coal Technologies

Aki MARUYAMA
Jusen ASUKA*
 
 

1. CDM as another financial mechanism for clean coal technology (CCT) transfer

Considering the CO2 emission reductions aspect of clean coal technologies, Clean Development Mechanism (CDM), an emerging financial mechanism can be utilized to finance CCT, besides Global Environment Facility (GEF) which is an interim funding mechanism specified by UNFCCC (United Nations Framework Convention on Climate Change).

CDM is one of the flexibility measures (Kyoto Mechanisms1) introduced by the Kyoto Protocol adopted at COP3 in 1997. It has the possibility of playing a crucial role in paving the right path for developing countries' sustainable development, allowing for emissions reductions by Annex I countries by carrying out GHG mitigation activities in developing countries. The details of CDM governance, procedures and rules, including linkage with other Kyoto mechanisms, additionality2, supplementarity3, credit issues or establishment of baselines are yet to be decided at COP6 to be held in 2000. It is the governments of Annex I country (developed country) Parties, not private companies, that are responsible for the compliance with the Kyoto protocol. However, with declining allocation of ODA, limited financial resources of national governments, and the most relevant climate-friendly technologies owned by the private sector, it is expected that the major source of capital for CDM projects in the future will be the private sector. Provided that proper domestic policy to give incentives to the private sector of Annex I countries are in place, there would be potentially a wide range of financing tools under CDM, from a conventional project finance model to a multilateral fund model such as the Prototype Carbon Fund advanced by the World Bank. Mobilizing private capital, it can be argued that CDM can also be an innovative financial mechanism for CCT transfer in the near future, making possible choices of finance wider.

2. CDM - barriers and advantages-

Aside from incompletely-defined aspects of the mechanism itself, as experience with Activities Implemented Jointly4 (AIJ) shows, the CDM entails several barriers for investment by private companies. These include high transaction costs, time-consuming procedures for project implementation, and an adaptation levy (Article 12.8). Furthermore, fundamental problems associated with country risks of the projects in developing countries- i.e. regulatory risk (underdeveloped legislative framework in the field of assets, finance and accounting), political risks (war, nationalization or policy change) and economic risks ( foreign exchange, currency availability and transfer risk)- need to be addressed. In this connection, national credit export agencies and multilateral financial institutions would have a crucial role to play, especially in the area of credit enhancement and risk minimization through guarantees and insurance so as to support private sector investment.

Despite some barriers associated with CDM, it is also true that there are ample cost-effective emissions reduction opportunities in non-Annex I countries which can be coupled with corporations' willingness to explore new markets. Besides, investments in CDM projects are expected to contribute to economic growth and sustainable development of developing countries through technology transfer. They may also have secondary benefits such as local environmental improvements and employment opportunities creation. Another incentive for host countries is sharing of the CERUs (certified emissions reductions units) from the projects. Since CDM is expected to commerce in 2000, prior to the start of the first commitment period. (Art.12.10), private corporations may benefit by taking early actions for emissions reduction through the mechanism.
 

3. Possibility of CDM to finance CCT transfer

Given appropriate domestic policy arrangements to give incentives to the private sector, CDM can be cost-effective in transferring more efficient power plants, achieving additional emissions reductions compared with baseline cases at the same time. CDM may in particular be suitable for transfer of proven CCT in developed countries, such as supercritical unit, considering less technological risks to be covered by private investors involved. However, transferring energy efficient plant through the CDM itself does not necessarily address other emissions including So2, Nox and particulate to a desirable degree. Therefore, it is important to transfer supercritical plants with desulferization systems such as flue-gas desulfuruzation (FGD) as one unit. This would also be desirable in light of sustainable development of host countries. The problem with installation of FGD is that it would usually incur an increase in capital costs and additional operation and maintenance costs. Emissions reductions credit from CDM projects can be an effective way to cover these associated costs. Moreover, through flexible negotiations, various bilateral funding for FGD may be used in combination with conventional sources of funding in a project finance. Looking at relevant finance support in Japan, special environmental ODA, OECF Private Sector Investment Finance or the Green Aid Plan of NEDO may be available for the component of desulfurization devices.

In utilizing CO2 related finance options to transfer CCT, one needs to consider cost-effectiveness of CO2 reduction. Suitability of transferring technologies in terms of host countries' preference and capacity including possibility of the technology diffusion would also be one of the most important considerations. As we have seen, CDM has the potential to be an effective means to transfer CCT, especially for proven technologies in developed countries which are not yet commercially viable in developed countries. However, in order to address other emissions, appropriate domestic incentives for pollution control would be necessary. These may include inexpensive FGD which are domestically manufacturable; bi-products which may be usable as road reinforcement materials or fertilizer; enforcement of pollutants/ emissions control regulations and non-compliance measures; and at a more fundamental level, internalizing externalities of avoided costs of pollution control and damage costs into economic appraisal in the long term.

4. Possible project expecting investment under CDM - the case of Japan-

In the light of the present circumstance where GHGs emission quotas and carbon tax have not yet been domestically systemized in Japan, in order for private corporations to participate in the carbon offset mechanism, to select a project with high economic potential and with business opportunities as an AIJ/JI/CDM project would be a choice with the least risk. Moreover, with its close geographical, historical, and business relationship, a project with Asian countries as a host country would be considered attractive, because of its readiness in project finding, the future business opportunity, and the necessity of the emission reduction of GHGs and other air pollutants which has been causing serious health problem of the local people as well as the heavy damage on the ecosystem.

With regards to power plants, Japanese electric utility companies, manufacturers, and trading firms have already started survey on the possibility of efficiency improvement at aging power plants in developing countries as a part of international collaboration or as a candidate of an AIJ/JI/CDM project. To expect the active involvement of the private capital, several feasibility studies have concluded that constructing a new and middle-or-large sized thermal power plant would be more meaningful as well as economical than just improving efficiency of aging plant which, in some cases, requires enormous efforts as well as substantial fund which is not so different in size compared to that of the construction of new plant. Moreover, it is pointed out that the risk and the transaction cost of supply-side power generation projects are smaller compared with other industrial and demand-side energy-related projects. Therefore, new establishment of efficient coal-fired thermal power plants, such as a supercritical units, are considered appropriate for Japan's CDM projects with developing countries in Asia such as China.
 

5. Utilization of public funds in CDM -the case of Japan-

Asian countries, especially China, may be considering the existing financial & technological support from Japan as part of the post-war compensation. Therefore, it can be predicted that the issue of financial additionality, which states that the funds for the international collaboration for global warming mitigation measure should be new and additional, may strongly be persisted on. Moreover, even if the government of the host country approves utilizing the existing ODA, Japan will be forced to compromise in other parts, and as a result, it is possible that the cost becomes higher.

Therefore, in regards with public funds, it is better to clarify the distinction between the part dealing with fields such as global warming which is a multi-lateral international environmental policy based on economic rationality as well as a domestic industrial economic policy and the part dealing with bilateral development aid which is a diplomatic tool against developing countries with historical complications. Furthermore, it is considered that the Japanese Export/Import Bank loans that does not count as ODA, will be in practical use constructively in the international collaboration on global warming mitigation. In other words, by giving a part of the public fund a fresh new look, a title as such as in Climate Fund implemented by the Norwegian government, and a special budget on an onerous financial aid could be provided. Needless to say, such as an expansion of subsidies (i.e. the current Green Aid Plan by MITI) with energy-related tax as the originating fund and 'flexible' application of the Export Insurance by the MITI could be considered as well. For example , it could be considered that the Export Insurance system can be modified to be able to absorb the risk of the price volatility of the carbon credit. In this context, establishment of carbon tax as a fund source would be an important issue for further discussion in near future. In any rate, from both sides of the appeal to the international society and of the accountability to the domestic society, the consideration of the introduction of a new title and a budget regarding the public support of global warming mitigation by international collaboration would be desirable.
 

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Note

* Section 1-3 by Maruyama, section 4-5 by Asuka
 
 

Footnote

1 The so-called Kyoto Mechanisms consist of joint implementation (Article 6), clean development mechanism (Article 12) and emissions trading (Article 17)

2 Additionality of emissions reductions means "reductions in emissions that are additional to any that would occur in the absence of the certified project activity" (Art.12.5.c) Although there is no specification in the Kyoto protocol, importance of financial additionality, meaning funding for CDM projects are additional to existing mechanisms such as ODA or GEF is recognized among various Parties. Furthermore, financial additionality of a project -i.e. project investment would not occur in the absence of the CDM- is another contentious issue in the debate of additionality.

3 Supplementarity is, to put it simply, the extent to which an Annex I Party can use flexibility mechanisms (on top of domestic measures) to meet its national commitment.

4 AIJ is a process initiated in 1995 (COP1) aiming at achieving the most cost-effective emission reductions where Annex I countries carry out greenhouse gas mitigation projects in developing countries (including EIT countries) to make use of their experience for future joint mitigation efforts. It does not allow any crediting of emissions reductions.