Clean Development Mechanism Handbook for Armenia Handbook for Armenia October 2006 September 2006

The European Union’s TACIS programme for Eastern Europe, the Caucasus and Central Asia

Clean Development Mechanism Clean Development Mechanism Handbook for Armenia Handbook for Armenia October 2006 September 2006

A project implementedA project implementedby by A project implemented by Fichtner-FraunhoferFichtner-Fraunhofer ISI-Linden -CESI ISI-Linden Consortium -CESI Con CDM Handbook Armenia_FINAL Oct 2006_English.doc Fichtner-Fraunhofer ISI-Linden -CESI Consortium Contact details

For Part I Sarweystraße 3 • 70191 Stuttgart Postfach 10 14 54 • 70013 Stuttgart Germany Tel.: ++49 (0) 7 11 89 95 - 0 Fax: ++49 (0) 7 11 89 95 - 459

Contact person: Simone Ullrich Extension: -327 E-mail: [email protected]

For Part II Ministry of Nature Protection of the Republic of Armenia

Government Building #3, Republic Square Yerevan 375010, Republic of Armenia Tel.: ++ 37 410 - 521099, 583934 Fax.:++ 37 410 - 583933 E-mail: [email protected] Web: www.mnp.am

Contact person: Artem Kharazyan Extension: + 37410 58 39 34 E-mail: [email protected]

CDM Handbook Armenia_FINAL Oct 2006_English.doc Published October 2006 Copyright  2006 by EuropeAid, European Commission Enquiries concerning reproduction should be sent to the Tacis Information Office, European Commission, 170 Rue de la Loi, B-1049 Brussels

This report has been prepared by the Fichtner/Linden/Fraunhofer ISI/CESI Consortium. The findings, conclusions and interpretations expressed in this document are those of the Consortium alone and should in no way be taken to reflect the policies or opinions of the European Commission.

The images on the cover page: top left: Ararat-mountain; top right: Mika-Cement Plant (CDM Project in planning); bottom left: Yerevan HPP (CDM Project in planning); bottom right: Afforestation Project in Armenia (in planning).

CDM Handbook Armenia_FINAL Oct 2006_English.doc FOREWORD

This CDM Handbook compiles internationally available and recent information regarding the implementation of Clean Development Mechanism (CDM) projects. It has brought together leading CDM political, technical, financial and legal expertise from the project Consortium team members.

The intention of the CDM Handbook is to provide project developers in the Republic of Armenia with information and advise on how to identify, develop and manage CDM projects.

This handbook was developed by Fichtner - Fraunhofer ISI - Linden - CESI Consortium in close cooperation with the Armenian Office in the framework of the EuropeAid project on «Technical Assistance to Armenian, Azerbaijan, Georgia and Moldova with respect to their Global Climate Change Commitments» Regional Project.

The Armenian project team would like to express its gratitude to the following experts who provided a number of articles to the development of the second part of the handbook: Astghine Pasoyan, Mikhail Vermishev, Norik Manoukyan, Artur Gevorgyan, and Ruzanna Ghazaryan.

We would like to specially thank Ms. D Harutyunyan for her assistance in coordination of efforts directed towards the handbook development, provision of information support, contribution to editing and proofreading of all the manuscripts.

We would like to express our gratitude to Mr. Aram Gabrielyan, Head of Environmental Protection Department of the Ministry of Nature Protection of Armenia and UNFCCC National Focal Point, for his valuable comments and recommendations which have made this handbook an informative tool introducing project developers, investors, stakeholders, decision makers and the general public to the process of CDM development in Armenia, as well as informing on legislative and institutional norms that promote and regulate this process.

The present CDM Handbook for the Republic of Armenia is available in English and Armenian language. The Handbook is divided into two major parts.

Part I : General Information on CDM Projects Part I comprises general information on the legal framework and operational climate change issues such as the United Nations Framework on Climate Change Convention, the Kyoto Protocol, the Marrakech Accords, and the CDM. It further elaborates on the CDM project cycle, stakeholders involved and their mutual interactions. Further, information is provided on how to develop a CDM project for both broad project categories: greenhouse gas mitigation projects in the energy, waste and industrial sector and carbon sequestration projects. Most of the guidance for CDM project development refers to the modalities and procedures for the CDM that were drafted by the Conferences of Parties (CoP) of the United Nations Framework Convention on Climate Change (UNFCCC) and have been

CDM Handbook Armenia_FINAL Oct 2006_English.doc adopted by the MoP. Further guidance is made available through the CDM Executive Board. Relevant reference material for CDM project developers is explained in more detail and sources for receiving further information are provided. Finally, Part I provides also a discussion on the current Carbon Market, CER prices, risks and legal issues such as Emission Reduction Purchase Agreements (ERPAs), CER registries and transfer possibilities.

Part II: Country Information for the Republic of Armenia Part II provides the reader with rather country specific information regarding the greenhouse gas situation in various sectors. CDM project potentials are identified in the country. The section also elaborates on the institutional arrangements of the CDM to receive governmental CDM project approval. In addition, CDM projects that are currently under development in the Republic of Armenia are included to illustrate practical experience with the CDM to date.

Annexes The CDM Handbook includes a Glossary that contains explanation of commonly used terminology in the CDM and that is referred to in the Handbook. Further, two example ERPAs are included (in English version only) for information. Finally reference for further readings and contact details of the DNA are provided.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Table of Contents

Part I: General Information on Developing a Clean Development Mechanism Project

1. The Clean Development Mechanism 1-1 1.1 The purpose of CDM projects 1-1 1.2 Legal background 1-1 1.2.1 The Climate Change Convention 1-1 1.2.2 The Kyoto Protocol 1-1 1.2.3 The Marrakech Accords 1-2 1.2.4 The CDM Executive Board 1-2 1.3 CDM participation & project cycle 1-7 1.3.1 Key participants in CDM projects 1-7 1.3.2 Designated Operational Entity 1-9 1.3.3 Applicant entities (AE) 1-11 1.3.4 The CDM Project Cycle 1-11 1.3.4.1 Stage 1: Project development (PIN and PDD) 1-12 1.3.4.2 Stage 2: Host country project approval 1-13 1.3.4.3 Stage 3: Project validation and registration 1-13 1.3.4.4 Stage 4: Project implementation and monitoring 1-14 1.3.4.5 Stage 5: Verification, certification and issuance of CERs 1-14 1.4 Project categories 1-16 1.5 Contribution to sustainable development 1-18 1.5.1 Sustainable development criteria 1-18 1.5.2 Applying sustainable development criteria to projects 1-19 1.5.3 Steps to evaluate projects towards sustainable development 1-20 1.6 Project Additionality 1-21 1.6.1 The “Tool for the assessment of additionality” (for mitigation projects) 1-21 1.6.2 The Tool for the assessment of additionality (for afforestation/reforestation projects) 1-23 1.6.3 Tips for successful argumentation of additionality 1-27 1.7 Official Development Assistance (ODA) 1-27 1.8 Project and CDM Risks 1-28 1.8.1 Overview of risks 1-28

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1.8.2 Risk mitigation measures 1-29

2. Calculation of greenhouse gas emission reductions and project monitoring 2-1 2.1 GHG mitigation projects to reduce sources of GHG 2-1 2.1.1 Small-scale CDM mitigation projects 2-1 2.1.2 Large scale CDM mitigation projects 2-2 2.2 GHG sequestration projects 2-5 2.2.1 Small scale afforestation and mitigation projects 2-6 2.2.2 Large scale afforestation and reforestation projects 2-7 2.3 Proposing a new baseline and monitoring methodology 2-8 2.3.1 New methodologies for mitigation projects 2-8 2.3.2 New methodologies for A/R projects 2-9 2.4 Quantifying GHG emissions by sources 2-9 2.4.1 Project boundary 2-9 2.4.2 GHG emission factors 2-10 2.4.3 Global Warming Potential 2-11

3. Project financing, costs and value of CERs 3-1 3.1 Transaction costs 3-1 3.2 Securing project & carbon finance 3-3 3.2.1 Project financing 3-3 3.2.2 International Carbon financiers 3-4 3.2.3 Private Carbon buyers 3-4 3.3 Impact of CER sales on project financing 3-9 3.4 The Value of CERs and price evolution 3-9

4. Legal Issues in the CDM 4-1 4.1 The international legal framework 4-1 4.1.1 Legal Status of the Kyoto Protocol 4-1 4.1.2 Compliance with the Kyoto Protocol (Marrakech Accords) 4-2 4.2 Domestic law Issues 4-4 4.3 Legal Issues in the development of a CDM Project 4-4 4.4 Legal Arrangements 4-7 4.4.1 The entitlements to create legal ownership of CERs 4-7 4.4.2 Legal Nature of CERs 4-8

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4.4.3 Taxation 4-11 4.5 CER Transactions 4-11 4.5.1 Contractual Arrangements 4-12 4.5.1.1 Emission Reduction Purchase Agreements (ERPAs) 4-12 4.5.1.2 Comparison of ERPAs – Lessons learnt 4-14 4.5.1.3 Risk sharing and CER price determination 4-18 4.5.2 The CDM Registry 4-19 4.5.2.1 Trading/transfer arrangements 4-21 4.5.2.2 The International Transaction Log 4-22 4.5.2.3 The case of unilateral CDM projects 4-22 4.5.2.4 The European Union Emissions Trading Scheme (EU-ETS) 4-22

5. General Country Information 5-1 5.1 Country Overview 5-1 5.2 Overview of GHG emission inventory according to the First National Communication 5-4 5.3 Enabling activities for the preparation of the Second National Communication 5-8

6. CDM Policy Framework in Armenia 6-1 6.1 Background 6-1 6.2 Implementation 6-2 6.3 Institutional set up of the Armenian DNA 6-3 6.4 DNA Secretariat 6-4 6.5 Expert Group 6-4 6.6 Procedure proposed for CDM project approval in Armenia 6-5 6.7 Conclusions 6-5

7. CDM Project Approval Process 7-6 7.1 Background 7-6 7.2 Procedure proposed for CDM project approval in Armenia 7-7 7.2.1 The voluntary stage 7-7 7.2.2 The mandatory stage 7-9 7.3 CDM projects approval criteria 7-11 7.4 General national requirements to CDM projects 7-12 7.5 Sectors prioritized by the Armenian DNA for CDM project implementation 7-12

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7.6 Letter of Endorsement 7-14 7.7 Letter of Approval 7-15

8. Sector and Policy Information 8-1 8.1 Energy Sector 8-1 8.1.1 Current situation in the energy sector of Armenia 8-1

8.1.2 CO2 emissions from the sector 8-7 8.1.3 Renewable Energy Potential in Armenia 8-10 8.1.4 Laws regulating the energy sector of Armenia 8-12 8.1.5 Governmental incentives in the energy sector 8-13 8.1.6 Current research activities in the energy sector of Armenia 8-13 8.1.7 National short, medium and long-term development goals in the energy sector 8-15 8.1.8 Grid emission factors for the Armenian energy system 8-16 8.2 Forestry and Land Use sector 8-18 8.2.1 Forest Definition 8-18 8.2.2 Legal issues 8-19 8.2.3 Forest Policy 8-19 8.2.4 Other issues 8-20 8.2.5 International Cooperation 8-21 8.3 Industry Sector 8-22 8.3.1 Sector overview 8-22 8.3.2 Legislation and research activities 8-24 8.4 Waste Management Sector 8-25 8.4.1 Municipal Solid Waste (MSW) 8-25 8.4.2 Institutional and legislative aspects for MSW 8-27 8.4.3 Wastewater 8-28 8.4.4 Governmental incentives and initiatives 8-29 8.5 Transport Sector 8-30

9. The CDM Potential in Armenia / Technology transfer 9-1 9.1 CDM project opportunities in the various country regions 9-1 9.2 Demand for Technology Transfer 9-5 9.2.1 Power industry 9-5 9.2.2 Heat supply 9-6 9.2.3 Gas Supply 9-7

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9.2.4 Production processes 9-8 9.2.5 Transportation 9-8 9.2.6 Agriculture 9-9 9.2.7 Forestry 9-9 9.2.8 Waste management 9-9 9.2.9 Agriculture 9-10

10. Existing CDM Projects in Armenia 10-1 CDM project opportunities in various regions of Armenia 10-1 10.2 Project Summary for Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan 10-2 10.3 Project Summary for Lusakert Biogas Plant (LBP), methane capture and combustion from poultry manure treatment 10-6 10.4 Project Summary for Community SSC Afforestation / Reforestation CDM project 10-10

11. Fiscal and Financial Issues 11-1 11.1 Aspects affecting the development of CDM pojects 11-1 11.1.1 Taxation system 11-1 11.1.2 Guaranties 11-5 11.1.3 Customs duties 11-6 11.1.4 Value Added Tax 11-6 11.1.5 Excise Tax 11-9 11.2 Accessing funds/loans 11-11 11.2.1 Renewable Energy Project (IDA Credit and GEF Grant) – administered under R2E2 Fund 11-11 11.2.2 EBRD Armenian Renewable Energy Programme 11-12 11.3 The Cafesjian Family Foundation 11-12 11.4 German-Armenian Fund (GAF) Renewable Energy Program 11-13 11.5 Support to the Energy Policy of Armenia (EuropeAid/120653/C/SV/AM) 11-14

12. Legal issues regarding CDM in Armenia 12-1 12.1 Definition of the legal nature of CERs in Armenia 12-1 12.2 Regulatory framework for foreign direct investments 12-2

CDM Handbook Armenia_FINAL Oct 2006_English.doc CDM Handbook Armenia_FINAL Oct 2006_English.doc Annexes

Annex 1: Glossary

Annex 2: CDM Emission Reductions Purchase Agreement© v. 2.0 2004 (IETA)

Annex 3: Example CDM Emission Reductions Purchase Agreement issued by Danish Environmental Protection Agency of the Ministry of the Environment

Annex 4 Contact Details DNA Armenia

Annex 5: References

CDM Handbook Armenia_FINAL Oct 2006_English.doc Part I General Information on Developing Clean Development Mechanism (CDM) Projects -

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1. The Clean Development Mechanism

1.1 The purpose of CDM projects

The Clean Development Mechanism (CDM) is a project-based mechanism designed to promote investment in projects that reduce or sequester emissions of greenhouse gases in developing countries. Developing countries are referred to Non-Annex I countries to the UN Framework Convention on Climate Change (UNFCCC). The CDM is the only mechanism under the Protocol promoting partnerships between developed (also referred to Annex I countries to the UNFCCC) and developing countries. The CDM rules, however, do not explicitly exclude projects from being undertaken by partnership between one or more developing countries; these are referred to as ‘unilateral’ or ‘South-South’ projects.

The CDM has three stated objectives: To assist Parties not included in Annex I (i.e. developing countries) in achieving sustainable development; To contribute to the ultimate objective of the Convention to stabilise greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system; and To assist Parties included in Annex I (developed countries) in achieving compliance with their quantified emission limitation and reduction commitments under Article 3 of the Kyoto Protocol.

1.2 Legal background

1.2.1 The Climate Change Convention

The United Nations Framework Convention on Climate Change (UNFCCC) is an international framework agreement (or treaty) governed by the principles of public international law. It provides for Parties to the UNFCCC to negotiate subsidiary international instruments under the UNFCCC to develop further the nature of the obligations it creates.

1.2.2 The Kyoto Protocol

The Kyoto Protocol was adopted at the Third Session of the Conference of the Parties (COP 3) to the United Nations Framework Convention on Climate Change (UNFCCC) in Kyoto, Japan, on December 11, 1997. As of 16 February 2005 the Kyoto Protocol is ratified by Parties to the Convention. It entered into force ninetieth day after the last (the Russian Federation) of at least 55 Parties to the UNFCCC (involving Annex I Parties that

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-1 together accounted for at least 55% of total carbon dioxide emissions for the 1990 base year) deposited its instrument of ratification. The Kyoto Protocol defines three innovative “flexible mechanisms” that are available to lower the overall costs of a country in achieving its emission reduction target. These mechanisms also enable Parties to access cost-effective opportunities that can help reduce emissions or remove carbon from the atmosphere in other countries. While the cost of limiting emissions varies considerably from region to region, the benefit to the atmosphere is the same wherever the action is taken. These three mechanisms are as follows: Emissions trading (ET) provides for Annex I Parties to ac-quire “Kyoto Protocol” units from other Annex I Parties and use them towards meeting their own emission reduction tar-gets under the Kyoto Protocol. Joint implementation (JI) provides for Annex I Parties to implement projects that reduce emissions or remove carbon from the atmosphere in other Annex I Party countries in re-turn for emission reduction units (ERUs). The ERUs generated by JI projects can be used by Annex I Parties towards meeting their emissions targets under the Kyoto Protocol. The Clean Development Mechanism (CDM) provides for Annex I Parties to implement project activities that reduce emissions in non-Annex I Party countries in return for certified emission reductions (CERs). The CERs generated can be used by Annex I Parties to help meet their emission reduction targets under the Kyoto Protocol. These three mechanisms are provided with channels for obtaining credits and meeting the emission reduction targets of Annex I countries where the lowest-cost emission reductions occur.

1.2.3 The Marrakech Accords

Negotiations continued after Kyoto to develop the Protocol’s operational details. While the Protocol identified a number of modalities to help Parties reach their targets, it does not elaborate on the specifics. After more than four years of debate, Parties agreed at COP 7 (2001) in Marrakech, Morocco to a comprehensive rulebook – the Marrakech Accords – on how to implement the Kyoto Protocol. The Marrakech Accords also provide Parties with sufficient clarity to consider ratification.

1.2.4 The CDM Executive Board

Article 12 of the Marrakech Accords made provision for the establishment of an independent governance body, the CDM Executive Board (CDM-EB), to oversee the implementation and administration of the CDM. The CDM-EB will be the ultimate point of contact for CDM Project Participants to arrange for the registration of projects and the issuance of CERs. The Parties have given the CDM-EB a number of specific tasks and powers that significantly influence how the CDM develops. It is to: Develop procedures for the CDM; Approve new methodologies related to baselines and monitoring plans;

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-2 Accredit Designated Operations Entities (DOEs) acting as stakeholders for CDM project validation, the verification and certification of Certified Emission Reductions (CERs); Register projects (in accordance with specific procedures); Issue CERs (in accordance with specific procedures); Make publicly available information on proposed CDM Project activities in need of funding and investors seeking opportunities; Maintain a public database of CDM Project activities containing information on registered Project Design Documents, comments received, Verification Reports, CDM Executive Board decisions and information on all CERs issued; and Develop and maintain the CDM registry.

The first meeting of the CDM-EB was held during CoP7 on 11 November 2001. Until July 2006 it met 25 times for formulating subsequent decisions and issuing further guidance on CDM project development. The CDM-EB has provided the following key guidance and decisions that are relevant for project developers. All guidance and decision can be found at http://cdm.unfccc.int/EB. It should further be noted that the CDM-EB often updates the PDD format and issues revisions of approved, approved consolidated and small-scale baseline and monitoring methodologies. Project developers should always use the most recent format and methodologies. Information can be found at http://cdm.unfccc.int/methodologies (for checking the latest version of methodologies that can be used for large and small-scale CDM projects), http://cdm.unfccc.int/Projects/pac (for latest PDD version and guidance of how to complete a PDD), and http://cdm.unfccc.int/EB (for the most recent decisions the CDM-EB takes).

EB Meeting Theme Guidance / Decision relevant for project developers Methodologies The Board approved the following proposed methodologies: for baselines and Annex 2: Approved baseline and monitoring methodology AM0035 monitoring plans (applicable for SF6 emission reductions in electrical grids) Annex 3: Approved baseline and monitoring methodology AM0036 (applicable for fuel switch from fossil fuels to biomass residues in boilers for heat generation) Annex 4: Approved baseline and monitoring methodology AM0037 (applicable for flare reduction and gas utilisation at oil and gas EB 26 processing facilities) (26- 29 Annex 5: Approved baseline and monitoring methodology AM0038 September (applicable for improved electrical energy efficiency of an existing 2006) submerged electric arc furnace used for production of SiMn) Annex 6: Approved baseline and monitoring methodology AM0039 (applicable for methane reduction from organic waste water and bioorganic solid waste using composting) Annex 7: Approved baseline and monitoring methodology AM0040 (applicable for project activities using alternative raw materials that contain carbonates in clinker manufacturing in cement kilns) The Board further consolidated AM0006 and AM0016 to ACM0010 applicable GHG emission reductions from manure management

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-3 EB Meeting Theme Guidance / Decision relevant for project developers systems. AM0006 and AM0016 were withdrawn (see Annex 11 for ACM0010) Further, guidance is provided by the Board on double counting for project activities using blended biofuel for energy use (see Annex 12, EB26 Meeting) Continued Issues relating to The Board approved a new baseline and monitoring methodology AR- EB 26 procedures for AM0004 (applicable for reforestation and afforestation for land afforestation and currently under agricultural use, see Annex 15, EB26 Meeting) reforestation Several revisions to existing approved methodologies were made. project activities Procedures to demonstrate the eligibility of lands for afforestation and reforestation project activities were provided by the Board (see Annex 18) Revisions to PDD form for A/R projects were made Issues related to Annex 26: AMS.III.J was introduced and is applicable for avoidance small-scale CDM of fossil fuel combustion for carbon dioxide production to be used as project activities raw material for industrial processes. Annex 27: Conversion factor for solar collectors to calculate output capacity from the area Methodologies The Board agreed to keep the methodologies AM0006 and AM0016 for baselines and “on hold”. The Meth Panel is requested to take into account among monitoring plans others the comments received during a public call for comments on both methodologies and separate expert opinion. Annex 1: Approved baseline and monitoring methodology AM0031 (applicable for Bus Rapid Transport Projects) Annex 2: Approved baseline and monitoring methodology AM0032 (applicable for waste gas or waste heat based co-generation systems) Annex 3: Approved baseline and monitoring methodology AM0033 (applicable for: Use of non-carbonated calcium sources in the raw mix EB 25 for cement processing) (19 – 21 July 2006) Annex 4: Approved baseline and monitoring methodology AM0034 (applicable for: Catalytic reduction of N2O inside the ammonia burner of nitric acid plants) Several revisions of approved and consolidated approved baseline and monitoring methodologies Annex 15: Revised CDM-PDD format (latest Version No. 03 as in effect of 28 July 2006) Annex 16: Revised guidelines for completing the CDM-PDD and the CDM-NM (the proposed new baseline and monitoring methodology) Annex 17: Revised procedures for the submission and consideration of a proposed new methodology, Version 11 Continued Issues relating to Annex 24: Revised procedures for the submission and consideration of EB 25 procedures for a proposed new methodology for afforestation and reforestation afforestation and project activities under the CDM, Version 05 reforestation project activities

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-4 EB Meeting Theme Guidance / Decision relevant for project developers Issues relating to Annex 25: Revision of AMS.III.D methodology small-scale CDM Annex 26: Revision of AMS.III.G methodology project activities Annex 27: Revision of AMS.III.I methodology Annex 28: Revision of AMS.III.H methodology Annex 29: Revision of AMS.I.D. methodology Annex 30: Revision of AMS.III.C methodology Annex 31: Revision of AMS.III.B methodology Annex 32: Revised General Guidance on output capacity of renewable energy equipment. Annex 35: Revisions to guidelines for completing CDM-SSC-PDD Methodologies The EB agreed that the methodologies AM0006 and AM0016 should for baselines and be put “on hold” in accordance with the procedure for revision of monitoring plans approved methodologies. Annex 1, 2, 6 – 9 Revision to approved consolidated methodology (ACM0006, ACM0005, ACM0001, ACM0002, ACM0003, ACM0009) Annex 3, 4, 5 – Revision to approved methodology AM0001, AM0019, AM0026 Annex 10 – Revised methodology AM0013 incorporating elements of EB 24 NM0038-rev. (10 – 12 May Issues relating to Annex 19 – Afforestation/reforestation in the baseline scenario 2006) procedures for Annex 20 – Revision to AR-AM0001 – Reforestation of degraded afforestation and land reforestation project activities Issues relating to § 64 of the Report – EB agreed to develop new type III categories. small-scale CDM Interim solution: “This category is applicable for project activities project activities resulting in annual emission reductions lower than 25,000 tonnes CO2e. If the emission reduction of a project activity exceeds the reference value of 25,000 tonnes CO2e in any year of the crediting period, the annual emission reduction for that particular year is capped at 25,000 tonnes CO2e. EB 23 Methodologies Annex 5 – Definition of thresholds in terms of power density (22 - 23 for baseline and February monitoring plans 2006) Issues relating to Annex 15 (a) – Revised CDM-AR-PDD procedures for Annex 15 (b) – Revised Guidelines for CDM-AR-PDD and CDM- afforestation and AR-NM reforestation project activities Annex 16 (a) – Small-scale afforestation and reforestation project design document (CDM-AR-SSC-PDD) Annex 16 (b) – Guidelines for Small-scale afforestation and reforestation project design document (CDM-AR-SSC-PDD) Annex 19 – Guidance of national and/or sectoral policies and circumstances particular to A/R project activities

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-5 EB Meeting Theme Guidance / Decision relevant for project developers Issues relating to Annex 26 – Revision of the simplified Project Design Document for small-scale CDM small-scale CDM project activities “CDM-SSC-PDD” project activities Annex 33 – Additional guidelines for monitoring included in the general guidance of the simplified modalities and procedures for small-scale CDM project activities Matters relating Annex 35 – Revised registration fee to the registration of CDM project activities Methodologies Annex 2 – Guidance related to methodological issues (LCAs, for baseline and operational margin and build margin weighting treatment of the monitoring plans lifetime of plants and equipment, sampling, emission sources) Annex 3 – Additional clarifications regarding the treatment of national/sectoral policies and circumstances EB 22 Annex 8 – Revised tool for the demonstration and assessment of (23 - 25 additionality (version 02/28 November 2005) November Issues relating to Annex 16 – Procedures to define the eligibility of lands for 2005) procedures for afforestation and reforestation project activities afforestation and reforestation project activities

Methodologies Annex 6 – Revised “Procedures for the revision of an approved for baseline and baseline or monitoring methodology by the Executive Board”(version monitoring plans 2) Annex 7 – Recommendations on multiple regression analysis to estimate baseline emissions or project emissions Issues relating to Annex 16 – Tool for demonstrating the additionality of afforestation procedures for and reforestation afforestation and Annex 19 – Guidelines for completing the project design document reforestation for A/R (CDM AR PDD ), the proposed new methodology for A/R: project activities EB 21 Baseline (CDM-AR-NMB), and the proposed new methodology for (28 – 30 A/R monitoring (CDM-AR-NMM) September 2005) Annex 20 – Clarifications regarding ex-ante estimations of actual net GHG removals by sinks and identification and justification of most likely baseline scenario Annex 22 – Amendments to the simplified methodologies for small- Issues relating to scale CDM project activities (Appendix B) small-scale CDM project activities Management Annex 26 – Recommendation on share of proceeds plan and resources for the work on the CDM Annex 4: “CDM Proposed new methodology: Baseline (CDM-NMB)” EB 20 and ist guidelines (version 2) (6 – 8 July 2005) Annex 7 – Clarifications on procedures and documentation which need to be used for the renewal of a crediting period

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-6 EB Meeting Theme Guidance / Decision relevant for project developers Annex 8 – Clarifications on definition of biomass and consideration of changes in carbon pools due to a CDM project activity Annex 14 – Simplified project design document for small-scale CDM project activities and its guidelines EB 18 Annex 4 – Clarifications regarding submissions of proposed new (23 – 25 baseline and monitoring methodologies for afforestation and February reforestation project activities under the CDM 2005) EB 17 Annex 4 – Revision of the “CDM Glossary of terms” regarding (1 – 3 approval of proposed CDM project activities by parties and September authorization 2004) Annex 1 – Tool for the demonstration and assessment of additionality EB 16 (first version) (21 – 22 October Annex 3 – Clarifications on the treatment of national and/or sectoral 2004) policies and regulations (paragraph 45(e) of the CDM Modalities and Procedures) in determining a baseline scenario Annex 9 – Guidelines for completing the project design document for EB 15 afforestation and reforestation project activities (CDM-AR-PDD), the (1 – 3 proposed new methodology for afforestation and reforestation project September activities: Baseline (CDM-AR-NMB) and the proposed new 2004) methodology for afforestation project activities: Monitoring (CDM- AR-NMM)) Annex 6

EB 14 Guidelines for completing the Project Design Document (CDM-PDD), (12 – 14 June the proposed new methodology: Baseline (CDM-NMB) and the 2004) proposed new methodology: Monitoring (CDM-NMM) (Version not to be used anymore) CDM Project Design Document (Version 02, not to be used anymore) Table 1-1: Overview of latest CDM-EB Meetings with key decisions and guidance for CDM project developers

1.3 CDM participation & project cycle

A number of various stakeholders participate in the development, approval and operation of CDM project. The following table outlines key participants with their major roles and responsibilities.

1.3.1 Key participants in CDM projects

Abbreviation Full Name Tasks and Responsibilities in the CDM Approves CDM projects by issuing a letter of approval. DNA Designated National Has the responsibility to decide whether the CDM project Authority activity makes a contribution to achieving the country’s sustainable development goal, whether the country agrees to participate in the project and whether the country is of the opinion that GHG emission reductions as under the Kyoto Protocol defined will be generated. DOE Designated Represents a legally independent entity accredited by

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-7 Abbreviation Full Name Tasks and Responsibilities in the CDM Operational Entity CDM Executive Board that can validate proposed CDM Projects and verify and certify Greenhouse Gas emission reductions. The DOE prepares a validation report and submits it to the CDM-EB, together with the PDD, approval letter from the host country, and an explanation on how comments are taken into account in order to apply for registration. The DOE is to maintain a publicly available list of all CDM projects for which it has carried out validation, verification and certification. CDM-EB CDM Executive Oversees the implementation and administration of the Board CDM. Among others CDM-EB puts the validation report and PDD of the proposed project activity on the UNFCCC Web site for public comments. [-] CDM Project Typically a private entity in a Non-Annex I country Developer (developing country) develops a CDM project and prepares the required documentation (Project Design Document – PDD) to receive host country project approval through the DNA, project validation and GHG emission reduction verification and certification through the DOE. As long as a project developer becomes the projects operating entity, it will also be responsible for project monitoring and sending periodic monitoring reports to the DOE contracted for GHG emission reduction verification and certification. If operating entities will set up for the purpose of monitoring the project, monitoring responsibilities shift to those stakeholders. A project developer may also act as project financier through provision of private equity to the project investment costs and is to submit new baseline and monitoring methodologies to the DOE once no approved methodology can be applied. [-] Project Investor Apart from the project developers through equity provision in a CDM project, international banks and foundations provide major capital in CDM project investment. National or regional banks in developing countries could principally also act as financier, however, financing schemes through these entities is rare today. As far a Carbon Financing (CER purchase) is concerned, either Annex I country governments or private entities could take this role. [-] Annex I country Annex I countries could either act as Carbon Purchaser in the CDM. Further, Annex I countries may provide the required technology to the developing country through appropriate private entities. Annex I countries, when recognised as a project participant, have to also issue a letter of approval for the proposed CDM project. Technical consultants Technical consultants assist CDM project developers / CDM Specialists with a number of services that a project developer may not undertake itself due to unfamiliarity with CDM procedures and modalities or due to the CDM not becoming a core business of its activities in the long run.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-8 Abbreviation Full Name Tasks and Responsibilities in the CDM Technical consultants assist in developing the PDD including data collection, could interacting with DOEs for the purpose of refining the PDD based on DOEs comments, undertake project monitoring, support development of periodic monitoring reports, develop new baseline and monitoring methodologies if needed and could play a role in commercialising CERs. Legal experts Legal experts – once drawn in by project developers – assist with working out Emission Reduction Purchase Agreements (ERPAs) required between the party entitled to hold CERs (it could be a consortium of entitled parties) and the potential CER buyer to formulate general conditions of contract for CER transfers. Table 1-2: Key participants in CDM projects

1.3.2 Designated Operational Entity

The following table provides an overview of accredited Designated Operational Entities (DOEs). DOEs are accredited by the CDM-EB upon application and successful completion of an extensive checking procedure of the applicant. DOEs can be approached for contracting CDM project Validation and / or CER Verification and Issuance.

Name / Website link Contact Postal Address Phone/Fax/E-mail name E-0001 Mr. Akasaka Twin Tower P:+81-3-6212-9333 Japan Quality Assurance Kameyama Main Bldg 2-17-22, kameyama- Organization (JQA) Yoshikazu Akasaka, Minatoku [email protected] http://www.jqa.jp Tokyo 107-0052 Japan E-0002 Mr.Yoshihir Address Bldg. 2-19 P:+81 35 572 1721 JACO CDM.,LTD (JACO) o Otsuka Akasaka 2-chome, Minato- F:+81 35 572 1757 http://www.jaco-cdm.com ku, Tokyo 107-0052 [email protected] Japan [email protected]

E-0003 Mr Michael Corporate Headquarters P:+47 67 57 95 14 Det Norske Veritas Lehmann Oslo F:+47 6757 9911 Certification Ltd. (DNVcert) Veritasveien 1 Michael.Lehmann@dnv. http://www.dnv.com 1322 Høvik com Norway [email protected] om E-0004 Mayumi Kasumigaseki Bldg, 32F, P:+81 3 5532 3905 ChuoAoyama Sustainability Yoshida 3-2-5, Kasumigaseki [email protected] Certification Co., Ltd Chiyoda-Ku c.com Tokyo 100-6088 Japan E-0005 Mr. Werner TÜV SÜD P:+49 89 57 91 2170 TUV Industrie Service Betzenbichl AGWestendstraße 199 F:+49 89 57 91 1551 GmbH TUV SUD GRUPPE er D-80686 München Werner.Betzenbichler@ (TUV Industrie Service Germany tuev-sued.de GmbH TUV) [email protected] http://www.tuev-sued.de

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-9 E-0006 Mr. Hiroshi MS Shibaura Bldg P:+81 3 3769 4143 Tohmatsu Evaluation and Inanaga 13-23 Shibaura 4-Chome F:+81 3 3769 4143 Certification Organisation Minato-ku, hiroshi.inanaga@tohmat (TECO) Tokyo 108-0023 su.co.jp http://www.teco.tohmatsu.co Japan .jp E-0007 Mr. Masaki Sumitomo Fudosan P:+81 3 3263 Japan Consulting Institute Okada. Kudanshita Bldg. 3F, 0318/3222-8107 (JCI) Kanda-Jinbocho 3-5, F:+81 3 3263 http://jci-plant.or.jp Tokyo #101-0051 0319/3222-8107 Japan okada-cdm@jci- plant.or.jp [email protected] E-0008 Mr.Yukinob 1-2 Tsukudo-cho P:+81 33 266 7520 AZSA Sustainability Co., u Matsuo Shinjuku-ku F:+ Ltd. (Former ASAHI & Co.) Tokyo 162-8554 [email protected] Japan pmg.com E-0009 Mr. Flavio Tower Bridge Court P:+44 20 7661 0700 Bureau Veritas Quality Gomes 224 - 226 Tower Bridge F:+44 20 7661 0790 International Holding S.A. Road [email protected] (BVQI Holding S.A.) London, SE1 2TX veritas.com http://www.bvqi.com United Kingdom [email protected] m E-0010 Ms. Pauline Rossmore Business Park P:+44 1276 697 810 SGS United Kingdom Ltd. Earl Ellesmere Port F:+44 1276 697 696 (SGS) CH65 3EN Ellesmere Port P:+44 151 350 6666 www.sgs.co.uk United Kingdom F:+44 151 350 6600 [email protected] [email protected] om E-0011 Mr.Han 1157 Pungdeokchon-2- +82-31-260-4543 The Korea Energy Seung-Ho dong, Yongin, Gyeonggi +82-31-260-4453-4 Management Corporation 449-994 [email protected] (KEMCO) Republic of Korea [email protected] www.kemco.or.kr E-0013 Mr. Am Grauen Stein P:+49 221-806-2413 TÜV Industrie Service Christian 51105 Köln F:+49 221-806-114 GmbH, TÜV Rheinland Rathje Germany EMS-Cert- Group (TÜV Rheinland) [email protected] http://www.de.tuv.com [email protected] E-0014 Mr. Eric National Office P:+31 30-658-1887 KPMG Sustainability B.V. Koudijs KPMG Building [email protected] (KPMG) Burgemeester Rijnderslaan P:+31 20 656 7890 http://www.kpmg.nl 10-20 F: +31 20 656 7700 1185 MC Amstelveen Postal address P.O. Box 74500 1070 DB Amsterdam Netherlands E-0018 Mr. Tim BSI Management Systems P:+44 20 8996 7662 British Standards Institution Sunderland 389 Chiswick High Road F:+44 20 8996 7359 (BSI) London W4 4AL M:+44 77 8856 8480 http://www.bsi-global.com United Kingdom tim.sunderland@bsi- global.com

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-10 E-0021 Génova, 6 (+34) 902 102 201 Spanish Association for 28004 Madrid [email protected] Standardisation and Spain Certification (AENOR) http://www.aenor.es E-0022 Kronprinzenstr. 30 +49 (0)201/12 52-0 TÜV NORD CERT GmbH 45128 Essen +49 (0)201/12 52-145 (RWTUV) Germany [email protected] http://www.rwtuev.de E-0025 Mr. Byung- 13F, Woolim Lion’s P:+(82-2) 2025-9062 Korean Foundation for yong Lee Valley B. Bldg F:+(82-2) 2025-9069 Quality (KFQ) Mr. Jong- 371-28 Gasan-Dong [email protected] or www.kfq.or.kr mun park Geumcheon-Gu [email protected] Seoul 153-803 Korea E-0029 Immink, Johannesburg P:+27 11 797 4732 PricewaterhouseCoopers - Harmke PricewaterhouseCoopers M: 083 228 1781 South Africa (PwC) Inc [email protected] 2 Eglin Road c.com Sunninghill 2157 South Africa Table 1-3: Contact Details of DOEs

1.3.3 Applicant entities (AE)

An Applicant Entity is an entity applying to become an accredited DOE. An AE shall meet the following operational requirements of Marrakech Accords: Work in a credible, independent, non-discriminatory and transparent manner, complying with applicable national law and meeting and, Have adequate arrangements to safeguard confidentiality of the information obtained from CDM project participants.

The list of applicant operational entities successfully accredit from EB can be seen at UNFCCC-Site link: http://cdm.unfccc.int/DOE/ListIL

1.3.4 The CDM Project Cycle

All CDM project activities must go through a project cycle. Although some steps in this cycle are the same as those applied by project developers, financiers and investors for normal projects, there are several aspects of the CDM process that are unique to emission reduction activities pursued under the CDM. The five major stages of the CDM project cycle are: (1) Project Development; (2) Host Country Project Approval; (3) Project Validation and Registration; (4) Project Implementation and Monitoring; and (5) Verification, Certification, Issuance of CERs.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-11 The key steps in the project cycle are described below and are presented in a flow diagram. These procedures will apply to all CDM projects, excluding those that fall within the ‘small-scale’ project categories. Small-scale projects will be ‘fast tracked’ through more simplified and streamlined procedures.

1.3.4.1 Stage 1: Project development (PIN and PDD)

During this phase, project developers are recommended to start drafting a project identification note (PIN).1 A PIN includes preliminary information on the content of the project, the project owner, the anticipated financing plan, and a first estimate of GHG emission reductions. Such PIN can be brought to the attention of the DNA (see Step 2) to receive a first indication on the likelihood of national project support through a Letter of Endorsement (LoE) or a Letter of No-Objection. In a second phase, the project developer must design the project, define the potential CDM project activity and obtain financing. A Project Design Document (PDD) according to UNFCCC standard, latest version (Version 03 as of 28 July 2006), has to be prepared. Please refer to most recent version http://cdm.unfccc.int/Reference/Documents/cdmpdd. For developing a PDD or for proposing a new baseline and monitoring methodology project developers should consult the latest version of “Guidelines for completing the Project Design Document (CDM-PDD), and the Proposed New Baseline and Monitoring Methodology (CDM-NM). The most recent version at the time of writing the handbook is Version 06. Compared to its previous version the documentation requirements are further streamlined and facilitated. The document is also available under the above mentioned Weblink. The PDD must provide comprehensive and accurate information on the potential CDM project activity, including a baseline study, and a monitoring plan. The PDD has to demonstrate that the proposed CDM project would be additional to what would have happened in the absence of the project. Further it must mention the crediting period that is chosen and has to show the average annual GHG emission reduction and the total expected CER volume during the crediting lifetime. Further, and for the purpose of receiving host governmental approval, the project developer has to discuss the environmental, economic and social impacts of the anticipated project and should state how it perceives to contribute to sustainable development in the project host country. It should be noted that development of a PIN may not be necessary from the perspective of the host country (DNA), however, project developers should seek indication whether their

1 PIN formats are available at different Carbon Buyers Websites. E.g. www.prototypecarbonfund.org (World Bank Format, first internationally available format), http://www.kfw-foerderbank.de/DE_Home/Klimaschutzfonds/Aktuelles.jsp, www.europeancarbonfund.com, http://www.ebrd.com/country/sector/energyef/carbon/nercof.htm etc. In case the project developer already knows to which fund it wishes sell its CERs, it should use the appropriate format of that Carbon Buyer. If the Carbon Buyer is not know at the time of writing the PIN, the World Bank PIN would be a good choice since it historically set a kind of PIN standard. Project developers should also consult host country requirements for using PIN formats (see Part II) as a Letter of Endorsement (LoE) or a Letter of No-Objection may only be issued by the host country government using a certain standard.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-12 project/s will be further supported by the host country government at a very early project development stage through the submission of a PIN.

1.3.4.2 Stage 2: Host country project approval

Most of the developing countries have institutionalised a two-stage process for issuing governmental CDM project approval. In a first phase and following the submission of a PIN, the government will either issue a Letter of Endorsement (LoE) or a Letter of No- Objection provided the host country agrees in principle with the project idea and scope. Such letter usually serves a project developer to decide whether to continue or to stop a CDM project development activity. In a second phase, the project developer will request governmental CDM project approval and authorisation by submitting the complete PDD with other required document to the Designated National Authority (DNA). The DNA will, following a certain procedure usually set out in a Presidential Decree for authorisation of the DNA, issue a Letter of Approval (LoA). Project developers should in particular refer to Part II of the handbook for more country specific information on this matter.

1.3.4.3 Stage 3: Project validation and registration

CDM projects must be validated by DOEs and registered by the CDM-EB in accordance with the CDM rules and procedures. Validation provides assurance that the project complies with all CDM and host country requirements. The DOE conducting the validation will, at a minimum, take account of the following project characteristics and the risks relating to them: Comments invited and received from local stakeholders, and explanation of how comments were received and effected implementation decisions; Analysis of the environmental impacts of the project activity, including transboundary impacts, and whether the project participants or the host country considers those impacts ‘serious or significant’. The project Baseline and monitoring procedures; The quantity of emission reductions expected to be achieved by the project activity during the crediting lifetime of the project, taking account of possible indirect emission effects of the project (in particular, any compensatory GHG increase, commonly known as "leakage" effects); Any relevant UNFCCC and/or Kyoto Protocol criteria as well as host country requirements, such as sustainable development priorities. Provided the Validation is ‘positive’, the DOE will submit all necessary documents to the CDM-EB together with a request for project registration. Once the request for CDM project registration is successful, the project proponent is required to pay the registration fee to the CDM-EB. The fee is dependant from the annual CO2e emission reduction potential. No registration fee has to be paid for CDM project activities with expected average annual emission reduction over the crediting period below 15,000 t CO2 equivalent.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-13 Annual CO2e reduction in t Fee in US$

<= 15,000 t CO2 / crediting period No fee <= 15,000 t CO2 / year 0.10 / per CER > 15,000 / year 0.20 / per CER The maximum registration fee payable based on 350,000 this calculation shall be Table 1-4: CDM project registration fees to be paid to the CDM-EB, see EB23 Meeting, Annex 35 http://cdm.unfccc.int/EB/023/eb23_repan35.pdf

Unless otherwise arranged through a request for review from the participating parties or at least three members of the CDM-EB, the proposed project activity is registered within eight weeks for normal-sized CDM project activities and within four weeks for small-scale CDM project activities (UNFCCC 2001b, 34–36).

1.3.4.4 Stage 4: Project implementation and monitoring

Monitoring describes the systematic surveillance of a CDM project's performance by measuring and recording performance-related indicators relevant to the project. The monitoring plan as described in the PDD must be implemented. The DOE contracted for CER Verification and Certification will use the information and data collected through the monitoring plan to verify a project’s emission reductions at later stage. The monitoring system should be capable of producing records on reported GHG emission reductions, social and environmental impacts and on project management, including monitoring, data collection and management systems.

1.3.4.5 Stage 5: Verification, certification and issuance of CERs

Emission reductions must be verified and certified by a DOE before the CDM-EB can issue Certified Emission Reductions (CERs). Usually, the project has to contract a different DOE as for project Validation and for CER Validation/Certification. Only with the consent of the CDM-EB the same DOE may be contracted. For small scale CDM projects the same DOE can be contracted for both, Validation and Verification/Certification. The verification process involves periodic auditing of monitoring results, the assessment of achieved CERs and checking the project activity’s continued compliance with all relevant criteria. The monitoring and verification process is therefore the basis for the production and delivery of CERs to the project owners/developers and for any related revenue stream that the operator expects to receive. The audit process during verification will be interactive, iterative and participatory. The DOE may use spot checks of data measurement and collection systems and interviews with the key project participants to determine the credibility and accuracy of the reported performance. Certification is the written assurance by the DOE that, during the specified time period, the project activity achieved the reductions in anthropogenic emissions by sources of greenhouse gases that were verified. If the EB is satisfied with the certification report, it will issue CERs to the project owners/developers or other nominated parties. The following graphics illustrates the CDM project cycle.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-14 Project Development

Step 1: CDM project development Develop PDD including • Project description • Additionality assessment • Baseline study with methodology clarification and analysis (if no approved methodology exists, develop new methodology) • Undertake Environmental Impact Assessment (EIA) if required • Obtain stakeholder comments • seek and obtain investor approval Note: In a first stage a Project identification Note (PIN) can be developed to get clarity about CDM eligibility

Step 2: Governmental Approval • Submit PIN with a request for a Letter of Endorsement (LoE) or a Letter of No-Objection • Submit PDD with a request for a Letter of Approval (LoA)

Step 3: Project Validation and Registration • Project developer to enter into a contractual arrangement with a DOE for CDM project Validation • PDD and host country approval will be submitted to the contracted DOE • DOE assess project activity against all eligibility criteria e.g. stakeholder comments, baseline setting, additionality discussion, contribution to sustainable development Note: If a new baseline and monitoring methodology was developed it must be submitted to the CDM-EB for approval prior to submitting the PDD to the DOE.

Project Development

Step 4: Project Monitoring • project operator monitors project performance according to indicators set out in the Monitoring plan • monitored data should be collected as set out in the monitoring plan

Step 5: CER verification / Certification and Issuance • Contract a DOE for Verification and Certification • DOE will assess the quality/quantity of GHG emission reductions and compliance with all CDM criteria through periodic auditing of data in monitoring reports, interviews and spot checks • DOE submits verification report to EB and request issuance • CDM-EB records the CERs, CERs will be issued to Party/ies authorised to receive the CERs. A transfer note is made in the register.

Figure 1-1: Key participants in CDM projects

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-15 1.4 Project categories

The UNFCCC has defined the following project categories for which CDM projects can be developed. When contracting a DOE for project Validation or Verification and Certification of CERs project developers should pay attention on the sectoral scope/s the DOE is accredited for. # UNFCCC Examples DOEs accredited for undertaking Validation 2 Sectoral Scope definition 1 Energy Industries Renewable energy: Japan Quality Assurance Organization (JQA) (renewable / non wind power, hydro JACO CDM.,LTD (JACO) renewable sources) power, Solar PV, Det Norske Veritas Certification Ltd. (DNVcert) geothermal TUV Industrie Service GmbH TUV SUD GRUPPE Non renewable energy: (TUV Industrie Service GmbH TUV) Combined heat and Japan Consulting Institute (JCI) power; fuel switching Bureau Veritas Quality International Holding S.A. from coal or fuel oil to (BVQI Holding S.A.) natural gas SGS United Kingdom Ltd. (SGS) The Korea Energy Management Corporation (KEMCO) TÜV Industrie Service GmbH, TÜV Rheinland Group (TÜV Rheinland) KPMG Sustainability B.V. (KPMG) Spanish Association for Standardisation and Certification (AENOR) TÜV NORD CERT GmbH (RWTUV) Korean Foundation for Quality (KFQ) 2 Energy distribution Electricity: Japan Quality Assurance Organization (JQA) Transmission and JACO CDM.,LTD (JACO) distribution lines Det Norske Veritas Certification Ltd. (DNVcert) TUV Industrie Service GmbH TUV SUD GRUPPE (TUV Industrie Service GmbH TUV) Japan Consulting Institute (JCI) Bureau Veritas Quality International Holding S.A. (BVQI Holding S.A.) SGS United Kingdom Ltd. (SGS) TÜV Industrie Service GmbH, TÜV Rheinland Group (TÜV Rheinland) KPMG Sustainability B.V. (KPMG) Spanish Association for Standardisation and Certification (AENOR) TÜV NORD CERT GmbH (RWTUV) Korean Foundation for Quality (KFQ) 3 Energy demand Energy efficiency High- Japan Quality Assurance Organization (JQA) efficiency equipment JACO CDM.,LTD (JACO) and lighting Det Norske Veritas Certification Ltd. (DNVcert) TUV Industrie Service GmbH TUV SUD GRUPPE (TUV Industrie Service GmbH TUV) Bureau Veritas Quality International Holding S.A. (BVQI Holding S.A.) SGS United Kingdom Ltd. (SGS) TÜV Industrie Service GmbH, TÜV Rheinland Group (TÜV Rheinland) KPMG Sustainability B.V. (KPMG)

2 For DOEs accredited to undertake Verification & Certification please consult the website: http://cdm.unfccc.int/DOE/list

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-16 # UNFCCC Examples DOEs accredited for undertaking Validation 2 Sectoral Scope definition Spanish Association for Standardisation and Certification (AENOR) TÜV NORD CERT GmbH (RWTUV) Korean Foundation for Quality (KFQ) 4 Manufacturing Energy efficiency: Japan Quality Assurance Organization (JQA) industries High-efficiency Det Norske Veritas Certification Ltd. (DNVcert) equipment TUV Industrie Service GmbH TUV SUD GRUPPE Fuel switching: From (TUV Industrie Service GmbH TUV) coal to natural gas, clean SGS United Kingdom Ltd. (SGS) coal technology TÜV NORD CERT GmbH (RWTUV) 5Chemical Process change: Nitrous Japan Quality Assurance Organization (JQA) industries oxide abatement Det Norske Veritas Certification Ltd. (DNVcert) TUV Industrie Service GmbH TUV SUD GRUPPE (TUV Industrie Service GmbH TUV) SGS United Kingdom Ltd. (SGS) TÜV NORD CERT GmbH (RWTUV) 6 Construction Material substitution: Japan Quality Assurance Organization (JQA) Energy-saving Det Norske Veritas Certification Ltd. (DNVcert) measures; shorter TUV Industrie Service GmbH TUV SUD GRUPPE transport distance for (TUV Industrie Service GmbH TUV) trucks SGS United Kingdom Ltd. (SGS) TÜV NORD CERT GmbH (RWTUV) 7 Transport Energy efficiency: Japan Quality Assurance Organization (JQA) Improved vehicle Det Norske Veritas Certification Ltd. (DNVcert) efficiency, transit TUV Industrie Service GmbH TUV SUD GRUPPE expansion (TUV Industrie Service GmbH TUV) Fuel substitution: SGS United Kingdom Ltd. (SGS) Biofuels, natural gas TÜV NORD CERT GmbH (RWTUV) fuels 8 Mining / Mineral Fuel substitution: Coal Det Norske Veritas Certification Ltd. (DNVcert) production mine methane recovery 9 Metal production Energy efficiency: Det Norske Veritas Certification Ltd. (DNVcert) Improved process efficiency Process change: Dry coke quenching 10 Fugitive emissions Fuel substitution: Japan Quality Assurance Organization (JQA) from fuels (solid, Recovery and utilisation Det Norske Veritas Certification Ltd. (DNVcert) oil and gas) of gas from oil wells TUV Industrie Service GmbH TUV SUD GRUPPE (TUV Industrie Service GmbH TUV) SGS United Kingdom Ltd. (SGS) TÜV NORD CERT GmbH (RWTUV) 11 Fugitive emissions HFCs: Incineration of Japan Quality Assurance Organization (JQA) from production HFC-23 waste streams Det Norske Veritas Certification Ltd. (DNVcert) and consumption TUV Industrie Service GmbH TUV SUD GRUPPE of halocarbons and (TUV Industrie Service GmbH TUV) sulphur SGS United Kingdom Ltd. (SGS) hexafluoride TÜV NORD CERT GmbH (RWTUV) 12 Solvent use Material substitution: Japan Quality Assurance Organization (JQA) Replacement with less Det Norske Veritas Certification Ltd. (DNVcert) GHG-emitting materials TUV Industrie Service GmbH TUV SUD GRUPPE (TUV Industrie Service GmbH TUV) SGS United Kingdom Ltd. (SGS) TÜV NORD CERT GmbH (RWTUV) 13 Waste handling Fuel substitution: Japan Quality Assurance Organization (JQA) and disposal Landfill gas recovery, Det Norske Veritas Certification Ltd. (DNVcert)

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-17 # UNFCCC Examples DOEs accredited for undertaking Validation 2 Sectoral Scope definition wastewater treatment, TUV Industrie Service GmbH TUV SUD GRUPPE animal waste treatment (TUV Industrie Service GmbH TUV) Japan Consulting Institute (JCI) SGS United Kingdom Ltd. (SGS) TÜV Industrie Service GmbH, TÜV Rheinland Group (TÜV Rheinland) TÜV NORD CERT GmbH (RWTUV) 14 Afforestation and Reforestation TUV Industrie Service GmbH TUV SUD reforestation Afforestation 15 Agriculture Methane production Det Norske Veritas Certification Ltd. (DNVcert) avoidance from biomass TUV Industrie Service GmbH TUV SUD GRUPPE decay (TUV Industrie Service GmbH TUV) SGS United Kingdom Ltd. (SGS) Table 1-5: Sectoral Scopes, examples and DOEs accredited for undertaking Validation.

1.5 Contribution to sustainable development

In addition to achieving GHG emission reductions, a CDM project must be in line with national sustainable development criteria. Compliance with those criteria will be checked by the host country government once the project is under the review of the DNA for issuance of the Letter of Approval (LoA). Validators will in course of validating the PDD also pay attention on the environmental and social impacts of the project.

1.5.1 Sustainable development criteria

The following example provides a set of sustainable development criteria that can be defined by a CDM host country. For country specific sustainable development criteria and how compliance of a CDM project with the criteria is evaluated please refer to further information in Part II.

Sustainable Sectoral / Project level Measurement standard of indicator development criteria indicator Economic Growth (impact on GDP GDP national/regional budget) FDI Total financial costs Employment Employment Change in the rate of unemployment Investments Net costs, financial flows, Foreign exchange requirements activity in energy sector, industry, agriculture Sectoral development Technology access, market E.g. energy demand and supply, economic creation measures, energy efficiency and affordability, energy security Environmental Climate Change GHG emissions GHG emissions

Air Pollution Local air pollution, particulate Emissions of SO2, NOX particulate Water Rivers, lakes, irrigation, Emissions in physical units damages in drinking water physical and monetary units Soil Exposure to pollutants Emissions in physical units damages in physical and monetary units

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-18 Social Legal framework Regulation, property rights Quantitative: physical regulation standard, land area distribution; Qualitative: outline of major rules and property rights Information sharing Institutions, markets, formal Quantitative: new institutions created; and informal networks Qualitative: mapping local stakeholders and their participation

Education Literacy rates, primary and Quantitative: literacy rates, enrolment rates, secondary education, training energy, education , changes in years of training Health Life expectancy , infant Quantitative: epidemics, nutrition, energy for mortality, major diseases, clinics. nutrition Table 1-6: Overview of possible sustainable development criteria set by a host country, Source: Adapted from CDM Information and Guidebook. June 2004. The UNEP project CD4CDM

1.5.2 Applying sustainable development criteria to projects

To illustrate how the sustainable development impacts of a CDM project may be assessed in practice, the following hypothetical CDM project is referred to. The CDM project will be a rural biogas plant for household cooking, lighting, and electricity production. The project is assumed to replace the baseline activity, where cooking and heating is based on wood fuel and kerosene is used for lighting. The table below gives an overview of the impacts of the example CDM project. Compared to the baseline situation. The assessment of the sustainability is qualitative in nature. The specific indicators of sustainable development impacts of the CDM project activity should merely be seen as an example of aspects that countries may consider to decide. Energy access and Project costs Employment affordability Replacement costs of Baseline case: wood wood fuel cooking High costs of wood Employment related to wood fuel for cooking, devices and kerosene fuel and kerosene fuel and kerosene provision kerosene for lighting lamps CDM project: biogas Capital costs of biogas Employment related to Low costs of gas and plant for electricity plant and cooking and construction phase and electricity production lightning appliances maintenance Higher employment in project Probably higher project Lower energy supply Net impact: start-up but lower permanent costs costs employment Environmental Education Income generation impacts Energy provision takes No power supply for local High local air pollution time from educational industries, households spent Baseline case: as with associated health activities, lighting time on energy provision that above damages quality poor for substitutes income generation studying activities Energy supply supports Low local air pollution development of local CDM project: as Better lighting for with associated health industries, households get more above studying benefits time for income generation activities Table 1-7: Qualitative assessment of sustainable development

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-19 As shown, there may be examples of projects with a negative employment impact in cases where labor-intensive fuel consumption is substituted, but most other sustainable development impacts are likely to be either insignificant or positive. For example, there are only a few examples of trade-off between GHG emission reduction and local air pollution improvements. Such a trade-off can occur in the transportation sector if diesel is substituting gasoline, because diesel consumption can have lower GHG emissions per km than gasoline, but have higher local air emissions.

1.5.3 Steps to evaluate projects towards sustainable development

The following sustainable development assessment steps for CDM projects are suggested (Quote from CDM Information and Guidebook. June 2004. The UNEP project CD4CDM) Step 1: Selection of policy priorities that characterises the broader development context, for example as reflected in national plans and sectoral strategies. The policy priorities may be suggested or evaluated in stakeholder sessions and/or related to political decisions or official plans that have been developed in other policy contexts. Step 2: Selection of major sustainable development policy areas that are to be addressed in the CDM project evaluation taking the starting point in a broad range of national development policy themes. This will include economic, social, human and environmental policy dimensions. Step 3: Initial screening of CDM project areas that are considered to be relevant and that should be included in the assessment of linkages to development policies. Step 4: General outline of a procedure for sustainable development impacts of CDM projects including: Selection of sustainable development indicators. Design of an approach for assessing the indicators. Definition of a reporting format for sustainable development impacts of the CDM project with standards for representing economic, social, human, and environmental information in quantitative and/or qualitative terms. Step 5: Detailed assessment of CDM project impacts on sustainable development policies as part of project development. This may involve redesign of projects in order to incorporate sustainable development policy priorities. Step 6: Broader decision making on CDM project selection in the context of national sustainable development contribution as part of more general activities to develop CDM project portfolios. This includes the initial establishment of a dialogue between government, national stakeholders and project developers. Step 7: Broader evaluation of how the implemented CDM project has performed in relation to predetermined sustainable development criteria as a supplement to monitoring, verification and certification procedures.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-20 1.6 Project Additionality

CDM project activities must reasonably demonstrate that the emission reductions from the project are additional to what would have happened in the absence of the project. As such, to satisfy the additionality test, project developers may need to demonstrate that, without the CDM, the project would not be implemented, due to economic, technological or other barriers.

1.6.1 The “Tool for the assessment of additionality” (for mitigation projects)

To facilitate demonstration of mitigation project additionality, the CDM-EB has issued first guidance at the CDM-EB 16 Meeting (Annex 1) on how such assessment could be done. The latest version of the “Additionality Tool Test” (EB 22, Annex 8, http://cdm.unfccc.int/EB/Meetings/022/eb22_repan8.pdf) is available at the Website: http://cdm.unfccc.int/EB/Meetings.

The steps of the test for assessing additionality are as follows: Step 0: Preliminary screening based on the starting date of the project activity. Step 1: Identification of alternatives to the project activity consistent with current laws and regulations. In accordance with guidance by the Executive Board, consistency is to be ensured between “baseline scenario” and “baseline emissions”. Sub-step 1a: Identify realistic and credible alternative(s) available to the project participants or similar project developers that provide outputs or services comparable with the proposed CDM project activity. Sub-step 1b: Enforcement of applicable laws and regulations. Step 2: Investment analysis. Determine whether the proposed project activity is the economically or financially less attractive than other alternatives without the revenue from the sale of certified emission reductions (CERs). Sub-step 2a: Determine appropriate analysis method. Sub-step 2b: If it is concluded that the proposed CDM project activity is not financially attractive then proceed to Step 4 (Common practice analysis). Option I. Apply simple cost analysis Option II. Apply investment comparison analysis Option III. Apply benchmark analysis Sub-step 2c: Calculation and comparison of financial indicators (only applicable to options II and III). Sub-step 2d: Sensitivity analysis (only applicable to options II and III). Step 3: Barrier analysis. If this step is used, determine whether the proposed project activity faces barriers that: (a) Prevent the implementation of this type of proposed project activity; and

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-21 (b) Do not prevent the implementation of at least one of the alternatives. Sub-step 3a: Identify barriers that would prevent the implementation of type of the proposed project activity. Sub-step 3b: Show that the identified barriers would not prevent the implementation of at least one of the alternatives (except the proposed project activity). Step 4: Common practice analysis. The above generic additionality tests shall be complemented with an analysis of the extent to which the proposed project type (e.g. technology or practice) has already diffused in the relevant sector and region. This test is a credibility check to complement the investment analysis (Step 2) or barrier analysis (Step 3). Sub-step 4a: Analyse other activities similar to the proposed project activity. Sub-step 4b: Discuss any similar options that are occurring. Step 5: Impact of CDM registration. Explain how the approval and registration of the project activity as a CDM activity, and the attendant benefits and incentives derived from the project activity, will alleviate the economic and financial hurdles (Step 2) or other identified barriers (Step 3) and thus enable the project activity to be undertaken. → If Step 5 is satisfied, the proposed CDM project activity is not the baseline scenario. → If Step 5 is not satisfied, the proposed CDM project activity is not additional. Project developers should note that when proposing a new baseline and monitoring methodology suggestions should be made on the applicability of the above ‘Tool’. The methodology proponent should indicate under which assumptions the available ‘Tool’ could be used. It may also propose other tools for the demonstration of additionality to the Executive Board for its consideration. The practicality of the available ‘Tool’ has been criticised by the public that would call for some major revisions to it. The CDM-EB took note of the fact that the Meth Panel would require time to prepare its recommendations on additionality tool and baseline scenario selection tool, as requested by the EB at its twenty third meeting (EB23). The EB also took note that most of the public inputs submitted were suggesting improvements of the existing additionality tool and few ideas for alternative tools. In response to a request for guidance by the Meth Panel the EB asked the Meth Panel to prioritize its work taking into account the improvement and merging of the draft baseline scenario selection tool with the additionality tool, with a view to make a recommendation to the Board for its consideration at its twenty sixth meeting. (EB-Meeting 24, § 43, available on the UNFCCC website under http://cdm.unfccc.int/EB/Meetings/024/eb24rep.pdf) Project developers should consult the latest version of a Test to prove project additionality as provided by the CDM-EB or should make proposals of such test or amendments the existing tests when proposing a new baseline and monitoring methodology.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-22 1.6.2 The Tool for the assessment of additionality (for afforestation/reforestation projects)

For afforestation/reforestation CDM project activities a separate tool for demonstrating the additionality was published as result of EB 21 meeting, see Annex 16 at http://cdm.unfccc.int/EB. The tool can also be downloaded from http://cdm.unfccc.int/methodologies/ARmethodologies/AdditionalityTools/Additionality_t ool.pdf. An afforestation or reforestation project activity under the CDM is additional if the actual net greenhouse gas removals by sinks are increased above the sum of the changes in carbon stocks in the carbon pools within the project boundary that would have occurred in the absence of the registered CDM afforestation or reforestation project activity. The tool for demonstrating the additionality provides a step-wise approach to demonstrate additionality. These steps include: Identification of alternatives to the A/R project activity (the possible baselines); Investment analysis to determine that the proposed project activity is not the most economically or financially attractive; or Barriers analysis; and Impact of registration of the proposed afforestation or reforestation (A/R) project activity as an A/R CDM project activity.

The use of this tool to assess and determine additionality does not replace the need for the baseline methodology to provide for a stepwise approach justifying the selection and determination of the most plausible baseline scenario alternatives. Project participants proposing new baseline methodologies shall ensure consistency between the determination of additionality of a project activity and the determination of a baseline scenario. Project participants proposing new baseline methodologies may incorporate this consolidated tool in their proposal. Project participants may also propose other tools for the demonstration of additionality to the Executive Board for its consideration. Note: The tool is not applicable for small- scale A/R project activities. The following illustration shows the main steps of the additionality tool test.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-23 Figure 1-2: Flow diagram of how to assess additionality for A/R projects

Each step is explained in more detail below. Step 0: Preliminary screening based on the starting date of the A/R project activity: 1. Project participants shall provide evidence that the starting date of the A/R CDM project activity was after 31 December 1999 and that the incentive from the planned sale of GHG emission allowances was seriously considered in the decision to proceed with the project activity. Step 0a: Preliminary screening based on the specific features of A/R activity: 2. Project participants shall provide evidence that the land within the planned project boundary is eligible as the A/R CDM project activity.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-24 3. Project participants shall provide evidence that the project activity is directly human-induced (e.g. through planting, seeding and/or the human- induced promotion of natural seed sources or root stocks) and not a mere continuation of the pre-project spontaneous processes. Step 1: Identification of alternatives to the A/R project activity consistent with the current laws and regulations: 1. Define realistic and credible alternatives3 to the project activity(ies) that can be (part of) the baseline scenario through the following sub-steps Sub-step 1a Define alternatives to the project activity 2. Identify realistic and credible land-use alternative(s) available to the project participants or similar project developers Sub-step 1b Enforcement of applicable laws and regulations 3. The alternative(s) shall be in compliance with all applicable legal and regulatory requirements, even if these laws and regulations have objectives other than land-use and related regulations, e.g. conservation of biodiversity, soil and water resources protection / conservation, tax and investment regulations, mitigation of air pollution. 4. If an alternative does not comply with all applicable legislation and regulations, then show that, based on an examination of current practice in the country or region in which the law or regulation applies, those applicable legal or regulatory requirements are systematically not enforced 5. If the proposed project activity is the only alternative amongst the ones considered by the project participants that is in compliance with all regulations with which there is general compliance, then the proposed A/R CDM project activity is not additional Sub-step 1c Selection of the baseline scenario: 6. The baseline methodology that would use this tool shall provide for a stepwise approach justifying the selection and determination of the most plausible baseline scenario alternatives.

→ Proceed to Step 2 (Investment analysis) or Step 3 (Barrier analysis), as it is necessary to undertake at least one of them.

Step 2: Investment analysis 1. Determine whether the proposed project activity, without the revenue from the sale of temporary CERs (tCERs) or long-term CERs (lCERs), is economically or financially less attractive than other alternatives. Investment analysis may be performed as a stand-alone additionality analysis or in connection to the Barrier analysis (Step 3). To conduct the investment analysis, use the following sub-steps:

3 Reference to “alternatives” throughout this document (the additionality tool test in full) denotes “alternative scenarios”. Please follow guidance offered by Decision 19/CP.9

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-25 Sub-step 2a Determine appropriate analysis method 2. Determine whether to apply simple cost analysis, investment comparison analysis or benchmark analysis (sub-step 2b). If the A/R CDM project activity generates no financial or economic benefits other than CDM related income, then apply the simple cost analysis (Option I). Otherwise, use the investment comparison analysis (Option II) or the benchmark analysis (Option III)4. Sub-step 2b. – Option I. Apply simple cost analysis → If it is concluded that the proposed A/R CDM project activity produces no financial benefits other than CDM related income then proceed to Step 4 (Impact of CDM Registration). Sub-step 2b. – Option II. Apply investment comparison analysis Sub-step 2b. – Option III. Apply benchmark analysis Sub-step 2c. – Calculation and comparison of financial indicators (only applicable to options II and III): Option II (investment comparison analysis): If one of the other alternatives has the better indicator (e.g. higher IRR), then the A/R CDM project activity can not be considered as the financially attractive; or Option III (benchmark analysis): If the A/R CDM project activity has a less favourable indicator (e.g. lower IRR) than the benchmark, then the A/R CDM project activity cannot be considered as financially attractive. → If it is concluded that the proposed A/R CDM project activity without the financial benefits from the CDM is not financially attractive then proceed to Sub-step 2d (Sensitivity analysis). Sub-step 2d. Sensitivity analysis Include a sensitivity analysis that shows whether the conclusion regarding the financial attractiveness is robust to reasonable variations in the critical assumptions.

Step 3: Barrier analysis 1. If this step is used, determine whether the proposed project activity faces barriers 2. Use the following sub-steps: Sub-step 3a Identify barriers that would prevent the implementation of type of the proposed project activity: Sub-step 3bShow that the identified barriers would not prevent the implementation of at least one of the alternatives (except the proposed project activity)

4 Option I, Option II and Option III are mutually exclusive, i.e. only one can be applied by the project proponent.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-26 → If both Sub-steps 3a – 3b are satisfied, proceed to Step 4 (Impact of CDM registration) → If one of the Sub-steps 3a – 3b is not satisfied then the project activity cannot be considered additional by means of barrier analysis. Optionally proceed to Step 2 (Investment analysis) to prove that the proposed A/R CDM project activity without the financial benefits from the CDM is unlikely to produce economic benefit (Option I) or to be financially attractive (Option II and Option III). Step 4: Impact of CDM registration → If Step 4 is satisfied, the proposed A/R CDM project activity is not the baseline scenario and, hence, it is additional. → If Step 4 is not satisfied, the proposed A/R CDM project activity is not additional.

1.6.3 Tips for successful argumentation of additionality

Project proponents should, once the project idea has been created, start to take notes of important meetings discussing the project and why to undertake it as a CDM project with plant managers, CEOs, institutions contacted for data collection etc. Such written notes can provide later evidence for DOEs to demonstrate that the CDM was taken into account at early project development stage and long before project financing has been cleared with banks or other financiers thus showing the project would not have happened in a business as usual scenario.

1.7 Official Development Assistance (ODA)

CDM project activities are to be hosted in developing countries, and can be financed through a variety of sources, excluding official development assistance (ODA). An issue for developing countries is how the CDM will impact Official Development Assistance (ODA) or funding by the GEF. For many developing countries today, ODA is a basic requirement for their development priorities: therefore a diversion of ODA towards climate change activities would have a contrary effect. In the light of these concerns, negotiators included within Decision 17/CP.7 of the 2001 Marrakech Accords the following principle: “…public funding for clean development mechanism projects from Parties in Annex is not to result in the diversion of official development assistance and is to be separate from and not counted towards the financial obligations of Parties included in Annex I.” If a project activity is financed using public funds from Annex I Parties, project developers must list information on these sources of funding. According to Decision 17/CP.7, this list will be considered an affirmation that the funding does not result in a diversion of ODA and is not counted towards the financial obligations of those Annex I Parties providing the funding.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-27 1.8 Project and CDM Risks

1.8.1 Overview of risks

Currently paid prices for CERs greatly depend from various risks associated with a CDM project and the time of negotiation a carbon deal with an interested buyer. If a buyer wants to secure CERs at very early project development stage, e.g. after successful project validation or registration, prices vary between 4 to 7 €/CER. The further the project makes progress towards financial close and operation many of the project risks are addressed and removed. Thus, carbon investors are willing to pay more per CER. In some cases 10 to 15 €/CER are observed in the carbon market today, however, the upper bound are rather exceptions. CER prices for private sector deals are not publicly accessible as the case for prices paid for EU Allowances on the spot and future market. The only source of information for prices is through the annual carbon market reports of the International Emissions Trading Association (IETA). An individual carbon purchase deal would have to be negotiated. To secure the best price for CERs it is important for project developers to understand the risks that carbon investors are likely to associate with a CDM project and how such risks differ to conventional project risks. Once risks have been identified, it is then possible to develop a competent risk management strategy. When dealing with any type of project there are a number of inherent conventional risks. Typical risks can be categorized as either country related or commercial project risks.

Country Risks Commercial Project Risks • Political (e.g. unstable regime) • Development risks (e.g. not getting • Country Commercial (e.g. currency approval for projects) exchange rate fluctuations) • Construction (e.g. delays in construction • Legal (e.g. change to national legislation) completion) • Operating (e.g. insecure fuel supply)

Figure 1-3: Overview of normal risks In addition to normal project development risks, CDM projects face additional risks. Specific risks associated with CDM projects can be categorised as: Market risks, in other words uncertainty regarding the price for a CER, and, when CERs are eligible for the EU-ETS, the price development of the EUAs; Policy risks – where CERs would not be compatible with e.g. the EU-ETS CDM Project development risks – where a project does not meet UNFCCC requirements CER delivery risk – where emission reductions less than the value predicted in the PDD will be achieved and thus the project fails to supply the carbon investor with the agreed number of credits.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-28 CDM Project Development Risks - Project does not meet UNFCCC requirements - Project requires the development of a new Baseline and Monitoring methodology that is complex and time consuming - Generated emissions different to PDD predictions and CER delivery is less than expected - Search for identifying investors is difficult in particular because CDM project should show that without Carbon Financing it would not represent the Baseline situation.

Policy Risks Market Risks - Current insecurities on a future climate - The immaturity and lack of volume and change policy framework after 2012 liquidity in the carbon market - Limitations to transfer CERs into EU - The market price for EUAs (European Emissions Trading Scheme or other trading Union Allowances) schemes - The project development stage at which - Uncertainty about requirements regarding a CER Purchase Agreement with a excess allowances, sink projects Carbon Buyer is made - Capacity within host countries - Transaction costs - Emissions growth rates - Banking

CER Price

Figure 1-4: Risk factors and their impact on the CER price

1.8.2 Risk mitigation measures

Although the above mentioned risks referred to CDM are new, traditional risk management methods can still play a role in reducing these risks. The following risk management methods can be applied: Portfolio diversification – reduces market risks; Insurance – reduces market risks; Contracts (fixed price turnkey contracts for construction, long term supply agreements, long term power purchasing agreements and firm emission reduction sales contracts) – can reduce both policy and market risks; Completing project development before negotiating ERPAs – can reduce the market risks and lead to higher CER prices; Improving the perception of risk by investors – reduces market risks. Risk management principles apply to both categories of project risks, namely: allocation of risks to contracting parties who best understand the risks, and transfer of risks to a third party who uses financial tools.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-29 There are several financial tools for risk management; these include hedging, guarantees and insurance products. In financial hedging, the derivative markets are used to fix future prices of commodities, currencies and interest rates. Financial derivatives market can also be used for emission commodities. These include: call and put options, collars, swaps and forward contracts. With insurance, a third party is paid to bear a particular risk. Insurance is often used to mitigate political risks and natural hazards. A number of international agencies provide political risk insurance and guarantees. The European Investment Fund, for example, offers guarantees on debt financing to infrastructure projects including those in the energy sector. The International Bank for Reconstruction and Development (IBRD) likewise provides guarantees against interest rate conversions or swaps; interest rate caps and collars, currency conversions or swaps and commodity swaps. Several other risk mitigation organisations provide or broker mitigation products in the SO2, NOX emission reduction markets. As an example for risk mitigation, the PCF acting as one of the leading Carbon Buyers world-wide assumes CDM-specific risks and assigns project equity sponsors and creditors to bear project risks. Before the Kyoto Protocol was legally enforced, the PCF in managing the Kyoto risk: - sought a commitment from host countries for Kyoto Protocol ratification and compliance, and for the transfer of CERs; - shared this risk with project sponsors (in the case of Chile for example, PCF committed to a higher CER price once the Government ratified the Kyoto Protocol and provided a letter of approval to PCF); and - in some cases, required the Kyoto ratification as a requirement in the carbon purchase agreements. As the Kyoto risk now not further exists, these mitigation measures are not any further important. Other risks may be more important to address. A few more examples are the following : The exposure to baseline risks is managed by PFC by commissioning a rigorous baseline study, monitoring plan and third party validation. For market risks, the PCF assumes market risks and agrees to pay the contract price regardless of the actual market price at the time of delivery. However, many other Carbon Buyers build in more flexibility into their Emission Reduction Purchase Agreements (ERPAs) nowadays, regarding prices. Project risks are assessed by PCF by commissioning rigorous and independent assessment of baseline and project risks, and structuring emission reduction purchase transaction to either mitigate risks or transfer them to parties that are best able to manage them. Tools in structuring transactions used by the PCF include over-collateralization (limiting the amount of emissions reductions that PCF commits to purchasing in a transaction), payment upon delivery, restrictions on upfront purchases, structural seniority (purchasing emissions reductions generated in earlier years of the project), seniority in the purchase (establishing structurally that PCF has a senior interest in emissions reductions generated by the project), and credit enhancement through insurance, guarantees and other risk management tools.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 1-30 2. Calculation of greenhouse gas emission reductions and project monitoring

2.1 GHG mitigation projects to reduce sources of GHG

2.1.1 Small-scale CDM mitigation projects

According to the “Modalities and procedures for clean development mechanisms projects”, Decision /CP.7 (Article 12) § 6c, thresholds for small-scale are defined as follows: (i) Renewable energy project activities with a maximum output capacity equivalent of up to 15 megawatts (or an appropriate equivalent) (ii) Energy efficiency improvement project activities which reduce energy consumption, on the supply and/or demand side, by up to the equivalent of 15 gigawatthours per year; (iii) Other project activities that both reduce anthropogenic emissions by sources and that directly emit less than 15 kilotonnes of carbon dioxide equivalent annually. A project which is eligible to be considered as a small scale CDM project activity can benefit from the simplified modalities and procedures, which were adopted by the Conference of the Parties at its eighth session (Simplified modalities and procedures for small-scale CDM project activities: Annex II to Decision 21/CP.8, and http://cdm.unfccc.int/Reference/Documents/AnnexII/English/annexII.pdf.

Approved Baseline and Monitoring Methodologies According to the modalities and procedures for the CDM, the following types of small- scale CDM projects are possible for which simplified baseline and monitoring methodologies exist:

Project type Small-scale CDM project categories Latest version Type I: A. Electricity generation by the user Version 08, 3 March 2006 Renewable B. Mechanical energy for the user Version 08, 3 March 2006 energy projects C. Thermal energy for the user Version 08, 3 March 2006 D. Renewable electricity generation for a grid Version 09, 28 July 2006 Type II: A. Supply side energy efficiency improvements Version 07, 28 November 2005 Energy efficiency - transmission and distribution improvement B. Supply side energy efficiency improvements Version 07, 28 November 2005 projects – generation Version 07, 28 November 2005 C. Demand-side energy efficiency programmes for Version 07, 28 November 2005 specific technologies Version 07, 28 November 2005 D. Energy efficiency and fuel switching Version 07, 28 November 2005 measures for industrial facilities E. Energy efficiency and fuel switching measures for buildings F. Energy efficiency and fuel switching measures for agricultural facilities and activities Type III: A. Agriculture Version 08, 12 May 2006

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-1 Project type Small-scale CDM project categories Latest version Other project B. Switching fossil fuels Version 09, 12 May 2006 activities C. Emission reductions by low-greenhouse gas Version 09, 28 July 2006 emission vehicles D. Methane recovery Version 10, 28 July 2006 E. Avoidance of methane production from Version 09, 12 May 2006 biomass decay through controlled combustion F: Avoidance of methane production from biomass decay through composting Version 02, 12 may 2006 G: Landfill methane recovery H: Methane recovery in wastewater treatment Version 03, 28 July 2006 I: Avoidance of methane production in wastewater treatment through replacement of anaerobic lagoons by aerobic systems Version 03, 28 July 2006 J: Avoidance of fossil fuel combustion to produce carbon dioxide, to be used as a raw Version 01, 29 September 2006 material for industrial processes Table 2-1: Project types in Small-scale CDM project categories

A Small-Scale Working Group (SSC-WG) has been established to prepare recommendations to the CDM-EB on submitted proposals for new baseline and monitoring methodologies for small-scale project activities. Terms of reference of the SSC-WG were agreed in EB15 and can be viewed in Annex 11 of the meeting report (see also: http://cdm.unfccc.int/Panels/ssc_wg).

2.1.2 Large scale CDM mitigation projects

Approved & Approved Consolidated Baseline & Monitoring Methodologies (AM & ACM) The following baseline and monitoring methodologies have been developed and approved during the last years by the CDM-EB. Some of them were later on compiled to an approved consolidated methodology. Some approved methodologies and approved consolidated methodologies were revised several times. As revisions may continue in the future, project developers should check the latest version of a suitable methodology before staring to write the PDD. For reference to individual AM or ACM please use the following Website link: http://cdm.unfccc.int/methodologies/PAmethodologies/ approved.html

Code Name of methodology Applicable for project scope / last version/ Date AM001 Incineration of HFC 23 Waste Streams Scope 11 Version 4 19 May 2006 AM002 Greenhouse gas emission reductions through landfill gas Scope 13 capture and flaring where the baseline is established by a Version 2 public concession contract 28 November 2005 AM003 Simplified financial analysis for landfill gas capture Scope 13 projects Version 3 30 September 2005 AM007 Analysis of the least-cost fuel option for seasonally- Scope 1 & 4 operating biomass co-generation plants Version 01

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-2 Code Name of methodology Applicable for project scope / last version/ Date 14 June 2004 AM009 Recovery and utilisation of gas from oil wells that would Scope 10 otherwise be flared Version 02 13 May 2005 AM0010 Landfill gas capture and electricity generation projects Scope 1 & 13 Version 01 where landfill gas capture is not mandated by law 13 July 2004 AM0011 Landfill gas recovery with electricity generation and no Scope 13 capture or destruction of methane in the baseline scenario Version 02 30 September 2005 AM0013 Forced methane extraction from organic waste-water Scope 13 treatment plants for grid-connected electricity supply Version 03 19 May 2006 AM0014 Natural gas-based package co-generation Scope 1 & 4 Version 01 3 September 2004 AM0017 Steam system efficiency improvements by replacing steam Scope 3 traps and returning condensate Version 02 22 June 2005 AM0018 Steam optimisation systems Scope 3 Version 01 6 December 2004 AM0019 Renewable energy project activities replacing part of the Scope 1 electricity production of one single fossil-fuel-fired power Version 02 plant that stands alone or supplies electricity to a grid, 19 May 2006 excluding biomass projects AM0020 Baseline methodology for water pumping efficiency Scope 3 improvements Version 01 25 February 2005 AM0021 Baseline Methodology for decomposition of N2O from Scope 5 existing adipic acid production plants Version 01 25 February 2005 AM0022 Avoided Wastewater and On-site Energy Use Emissions in Scope 13 the Industrial Sector Version 02 08 July 2005 AM0023 Leak reduction from natural gas pipeline compressor or Scope 10 gate stations Version 01 08 July 2005 AM0024 Methodology for greenhouse gas reductions through waste Scope 1 & 4 heat recovery and utilisation for power generation at cement Version 01 plants 30 September 2005 AM0025 Avoided emissions from organic waste through alternative Scope 13 waste treatment processes Version 03 03 March 2006 AM0026 Methodology for zero-emissions grid-connected electricity Scope 01 generation from renewable sources in Chile or in countries Version 02 with merit order based dispatch grid 19 May 2006 AM0027 Substitution of CO2 from fossil or mineral origin by CO2 Scope 5 from renewable sources in the production of inorganic Version 01 compounds 28 November 2005 AM0028 Catalytic N2O destruction in the tail gas of Nitric Acid Scope 5 Plants Version 01 03 March 2006 AM0029 Methodology for Grid Connected Electricity Generation Scope 1 Plants using Natural Gas Version 01 19 May 2006

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-3 Code Name of methodology Applicable for project scope / last version/ Date AM0030 PFC emission reductions from anode effect mitigation at Scope 9 primary aluminium smelting facilities Version 01 19 May 2006 AM0031 Bus Rapid Transit System Scope 7 Version 01 28 July 2006 AM0032 Waste gas or waste heat based co-generation systems Scope 1 & 4 Version 1 28 July 2006 AM0033 Use of non-carbonated calcium sources in the raw mix for Scope 04 cement processing Version 01 28 July 2006

AM0034 Catalytic reduction of N2O inside the ammonia burner of Scope 5 nitric acid plants Version 01 28 July 2006 AM0035 SF6 Emission Reductions in Electrical Grids Scope 11 and 01 Version 01 29 September 2006 AM0036 Fuel switch from fossil fuels to biomass residues in boilers Scope 01 and 04 for heat generation Version 01 29 September 2006 AM0037 Flare reduction and gas utilisation at oil and gas processing Scope 10 and 05 facilities Version 01 29 September 2006 AM0038 Methodology for improved electrical energy efficiency of Scope 09 an existing submerged electric arc furnace used for the Version 01 production of SiMn 29 September AM0039 Methane emissions reduction from organic waste water and Scope 13 bioorganic solid waste using composing Version 01 29 September AM0040 Baseline and monitoring methodology for project activities Scope 04 using alternative raw materials that contain carbonates in Version 01 clinker manufacturing in cement kilns 29 September 2006 Table 2-2: Approved baseline and monitoring methodologies (AM) for large scale mitigation projects

As mentioned, some approved methodologies of the same sectoral scope have undergone consolidation. For choosing a methodology, the first choice should be looking for an approved consolidated methodology (ACM). If such ACM is not available for the project type then an AM should be applied if an appropriate one is available. If a new ACM becomes officially valid, the AM/AMs it is based on may be replaced by that ACM or remain valid in itself. http://cdm.unfccc.int/methodologies/PAmethodologies/approved.html should be consulted for latest information on AM and ACM. The following table provides an overview of existing approved consolidated methodologies (ACM) for mitigation projects.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-4 Code Name of methodology Applicable for project scope / last version/ ACM0001 Consolidated methodology for landfill gas projects Sector 13 Version 03 ACM0002 Consolidated methodology for grid-connected electricity Sector 1 generation from renewable sources Version 06 ACM0003 Emissions reduction through partial substitution of fossil fuels Scope 4 with alternative fuels in cement manufacture Version 03 ACM0004 Consolidated methodology for waste gas and/or heat for power Scope 1 generation Version 02 ACM0005 Consolidated Methodology for increasing the Blend in Cement Scope 4 Production Version 03 ACM0006 Consolidated methodology electricity generation from biomass Scope 1 residues Version 03 ACM0007 Methodology for conversion from single cycle to combined Scope 1 cycle power generation Version 01 ACM0008 Consolidated methodology for coal bed methane and coal mine Sector 8 & 10 methane capture and use for power (electrical or motive) and Version 01 heat and/or destruction by flaring ACM0009 Consolidated methodology for industrial fuel switching from Scope 4 coal or petroleum fuels to natural gas Version 02 ACM0010 Consolidated methodology for GHG emission reductions from Scope 13, 15 manure management systems Version 01 Table 2-3: Approved consolidated baseline and monitoring methodologies (ACM) for large scale mitigation projects

2.2 GHG sequestration projects

§7 of the Decision 17/CP.7 in Article 12 of the Marrakech Accord: “Modalities and procedures for a clean development mechanism”, decided: That the eligibility of land use, land-use change and forestry project activities under Article 12 is limited to afforestation5 and reforestation6; That for the first commitment period (that is between 2008 and 2012), the total of additions to a Party’s assigned amount resulting from eligible land use, land use change and forestry project activities under Article 12 shall not exceed one per cent of base year emissions of that Party, times five; That the treatment of land use, land use change and forestry project activities under Article 12 in future commitment periods shall be decided as part of the negotiations on the second commitment period. A Working Group on Afforstation and Reforestation for CDM project activities (A/R WG) was established to prepare recommendations on submitted proposals for new baseline and monitoring methodologies for CDM A&R; project activities. The working group is expected to work in co-operation with the Meth Panel.

5 “Afforestation” is the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources. 6 “Reforestation” is the direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non-forested land. For the first commitment period, reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December 1989.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-5 When developing an afforestation or reforestation project for instance, project participants shall provide evidence that the land within the planned project boundary is eligible as an afforestation/reforestation CDM project activity following the steps outlined below. (c) Demonstrate that the land at the moment the project starts is not a forest by providing information that: (c) The land is below the forest national thresholds (crown cover, tree height and minimum land area) for forest definition under Decisions 11/CP.7 and 19/CP.9, as communicated by the respective Designated National Author-ity; and ii. The land is not temporarily unstocked as a result of human intervention such as harvesting or natural causes or is not covered by young natural stands or plantations which have yet to reach a crown density or tree height in accordance with national thresholds and which have the potential to revert to forest without human intervention. (b) Demonstrate that the activity is a reforestation or afforestation project activ-ity: (c) For reforestation project activities, demonstrate that on 31 December 1989, the land was below the forest national thresholds (crown cover, tree height and minimum land area) for forest definition under Decision 11/CP.7, as communicated by the respective Designated National Author-ity. ii. For afforestation project activities, demonstrate that the land is below the forest national thresholds (crown cover, tree height and minimum land area) for forest definition under Decision 11/CP.7, as communicated by the respective Designated National Authority, for a period of at least 50 years. In order to demonstrate steps 1(a) and 1(b), project participants shall provide one of the following verifiable items of information: (c) Aerial photographs or satellite imagery, complemented by ground reference data; or (b) Ground-based surveys (land-use permits, land-use plans or information from local registers such as cadastre, owners register, land use or land management register); or © If options (a) and (b) are not available/applicable, project participants shall submit a written testimony which was produced by following a participatory rural appraisal methodology. Participatory rural appraisal is an approach to the analysis of local problems and the formulation of tentative solutions with local stakeholders. It makes use of a wide range of visualisation methods for group-based analysis to deal with spatial and temporal aspects of social and environmental problems (see: Executive Board 22nd Meeting, Annex 16).

2.2.1 Small scale afforestation and mitigation projects

A small-scale A/R CDM project activity is defined as resulting in net anthropogenic greenhouse gas removals by sinks of less than 8 kilotonnes of carbon dioxide per year if the average projected net anthropogenic greenhouse gas removals by sinks for each verification period do not exceed 8 kilotonnes of carbon dioxide equivalent per year.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-6 If a small-scale afforestation and reforestation project activity results in net anthropogenic greenhouse gas removals by sinks greater than 8 kilotonnes of carbon dioxide equivalent per year, the excess removals will not be eligible for the issuance of temporary certified emission reductions and long-term certified emission reductions Simplified methodologies for small-scale A/R CDM project activities have been under development since CoP7, 2001. Project developers should refer to the following document: “Simplified baseline and monitoring methodologies for selected small-scale afforestation and reforestation project activities under the CDM” (also referred to as Annex II). http://cdm.unfccc.int/methodologies/Armethodologies/AR_SSC_Annex_II.pdf This Annex covers: A simplified baseline methodology and default factors for small-scale A/R project activities implemented on grasslands or croplands; A simplified monitoring methodology, based on appropriate statistical methods, to estimate, measure and monitor the actual net greenhouse gas (GHG) removals by sinks and leakage. Project activities implemented on settlements or wetlands are not included in this methodology7. The application of the small scale simplified baseline and monitoring methodology is currently limited for the following project activities: Grassland to forested land; Cropland to forested land.

2.2.2 Large scale afforestation and reforestation projects

The following table provides an overview of approved baseline and monitoring methodologies for large scale A/R projects. All methodologies can be found under the following link: http://cdm.unfccc.int/methodologies/ARmethodologies/approved_ar.html

Code Name of methodology Applicable for project scope / last version AR-AM0001 Reforestation of degraded land Scope 14 Version 02 AR-AM0002 Restoration of degraded lands through Scope 14 afforestation/reforestation Version 01 AR-AM0003 Afforestation and reforestation of degraded land Scope 14 through tree planting, assisted natural regeneration and Version 02 control of animal grazing AR-AM0004 Reforestation and afforestation of land currently under Scope 14 agricultural use Version 01 Table 2-4: Approved large scale baseline and monitoring methodologies for A/R project activities.

7 Wetlands and settlements are not covered by the present methodologies. Methodologies for wetlands are still under development and, given the state of knowledge, simplification is not yet possible. Further, conversions from settlements or wetlands to forests are unlikely for several reasons, including the social and environmental impacts that such conversions can cause.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-7 2.3 Proposing a new baseline and monitoring methodology

If a project developer wants to develop a CDM project but an approved baseline and monitoring methodology cannot be found and used, the project developer could develop a new baseline and monitoring methodology that is applicable for the type of new CDM project.

2.3.1 New methodologies for mitigation projects

For proposing a new methodology for a mitigation CDM project a specific UNFCCC format must be completed. (see: http://cdm.unfccc.int/Projects/pac/howto/CDMProjectActivity/NewMethodology or http://cdm.unfccc.int/Projects/Reference/Documents). The new baseline methodology shall be submitted to the secretariat by the designated operational entity for review, prior to a validation and submission for registration of this project activity, with the draft project design document (CDM-PDD), including a description of the project and identification of the project participants. This means, that a project developer should line up with a DOE for such submission, preferably the same DOE which is going to validate the PDD. The new baseline and monitoring methodology shall be proposed and approved together. The Form “Proposed New Baseline and Monitoring Methodologies” (CDM-NM) is to be used. The form should be accompanied by a draft PDD (CDM-PDD) with section A-C completed. If a project has several components for which several new baseline and monitoring methodologies would be needed, a separate CDM-NM form should be completed for each component but only one draft PDD is required that should cover the application of all the new methodologies. Guidance on how to complete the form are provided in Part III A. Technical guidelines for the development of proposed new baseline and monitoring methodologies: (CDM-NM) http://cdm.unfccc.int/Reference/Documents/copy_of_Guidel_Pdd/English/Guidelines_CD MPDD_NM.pdf . The secretariat shall forward the documentation to the CDM-EB and the Meth Panel after having checked that the CDM: Proposed new methodology form (F-CDM-PNM) ”has been duly filled by the DOE and documentation provided by the DOE is complete”. The date of transmission to the CDM-EB is to be considered as the date of receipt of a proposed new methodology by the Board. The secretariat will make any proposed new methodology publicly available on the UNFCCC CDM web site (www.unfccc.int) and invite public inputs for a period of 15 working days. Project developers should note that approval of a new baseline and monitoring methodology through the CDM-EB is a time consuming process and may take at least 3 up to 9 months, depending from the level of complexity, timing of the next meeting if the Methodology Panel (that Panel is responsible for reviewing new methodologies together with support of external desk reviewers and provides a recommendation to the CDM-EB); and number of revisions to the methodology that may be required. Once a new baseline and monitoring methodology is submitted, the CD-EB may take the following decision:

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-8 It may approve the methodology (so-called “A” cases). The identification number e.g. NM0240 (NM stands for New Methodology) will change into AM40 (AM stands for approved methodology) It may reconsider the methodology at the next meeting (so-called “B” cases”). Reconsideration is subject to (a) required changes are being made by the project participants, taking into account issues raised by the CDM-EB, recommendations made by the Meth Panel, and re-submissions of duly revised proposal (the secretariat will make a revised proposal publicly available); (b) reconsideration of the revised proposal directly by the Meth Panel, without further desk review by desk reviewers; and (c) a recommendation by the Meth panel being made to the CDM-EB. It may not approve the methodology. The CDM-EB will for such cases invite project participants to consider the views and suggestions made, in particular with regard to CDM- NMB and CDM-NMM, and encourages them, using the form (CDM-NM), to make new submissions.

2.3.2 New methodologies for A/R projects

If the project developer wants to submit a new A/R methodology a similar procedure as explained for mitigation applies. However, a different format for submission of the new methodology is to be used and should be sent to the secretariat (see: http://cdm.unfccc.int/Projects/pac/ar_howto/New_AR_Methodology/index.html). The secretariat shall forward the documentation to the CDM-EB and the working group on afforestation and reforestation after having checked that the methodology format ”has been duly filled by the DOE and documentation provided by the DOE is complete”. The date of transmission to the CDM-EB is to be considered as the date of receipt of a proposed new A/R methodology by the Board. The secretariat will make any proposed new A/R methodology publicly available on the UNFCCC CDM web site and invite public inputs for a period of 15 working days.

2.4 Quantifying GHG emissions by sources

2.4.1 Project boundary

The project boundary shall encompass all anthropogenic emissions by sources of greenhouse gases (GHG) under the control of the project participants that are significant and reasonably attributable to the CDM project activity. In the PDD, the project developer has to describe the sources and gases that are included in the project boundary. This serves the purpose of calculating project and baseline emissions. In cases, where a methodology allows project participants to choose whether a source or gas is to be included in the project boundary, the choice made should be explained and justified. The following provides and example illustration of a project boundary with indication of direct and indirect sources of emissions. The GHGs covered in the project boundary would be methane and carbon dioxide.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-9 Figure 2-1: Illustration of a project boundary with direct and indirect sources of emissions from landfill gas power plant project, Source: UNEP, 2004

2.4.2 GHG emission factors

Unless better emission factors are available, the “Revised 1996 IPCC Guidelines for National GHG Inventories” should be used to calculate GHG emissions.8 It should be noted that IPCC 2006 Guidelines are upcoming that may result in changes to the below discussed GHG emission factors. A CDM project is only than able to generate CERs, when it either reduce the emissions of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), perfluorocarbons (PFCs), hydrofluorocarbons (HFCs) or sulphur hexafluoride (SF6). The default 1996 IPCC CO2 emission factors for the most common fuel types are shown below. Should emission factors expressed as Carbon emitted per TJ fuel (t C/TJ) the factor has to be converted into 44 t CO2/TJ by multiplying it by /12 (the molecular weight of CO2 divided by the atomic weight of Carbon).

Fuel TCO2/TJ Natural gas 56.1 LPG 63.1 Gasoline 69.3 Jet Petroleum 71.5 Kerosene 71.9 Crude oil 73.3 Diesel 74.1 Fuel Oil 77.4 Orimulsion 80.7 Coal 94.6 Petroleum Coke 100.8 Lignite 101.2 Peat 106.0 Coke 108.2 Table 2-5: 1996 IPCC CO2 emission factors

8 http://www.ipcc-nggip.iges.or.jp/public/gl/invs6.htm

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-10 2.4.3 Global Warming Potential

In the emission calculation all results must be converted into CO2–equivalents (CO2–eq.). This is done by multiplying the emissions of GHG with the respective Global Warming Potential (GWP). If, for example, the emissions were 10 tones of CH4, the CO2-eq. is 210 tones CO2-eq., which is 10 multiplied by the GWP 21. The GWPs have been estimated by complex modelling of the chemical interaction in the atmosphere and will change over time as the knowledge about atmospheric chemistry improves. New values must first be published in a new IPCC edition and can be used once a following meeting of the Conference of the Parties (COP) under the UNFCCC has decided to use them. The following GWP can be used currently.

GHG Chemical Formula 100 years GWP

Carbon dioxide CO2 1 Methane CH4 21 Nitrous oxide N2O310 Sulphur hexafluoride SF6 23900 Perfluoromethane CF4 6500 Perfluoroethane C2F6 9200 Perfluorobutane C4F10 7000 HFC-23 CHF3 11700 HFC-32 CH2F2 650 HFC-43-10 C5H2F10 1300 HFC-125 C2HF5 2800 HFC-134a CH2FCF3 1300 HFC-143a C2H3F3 3800 HFC-152a C2H4F2 140 HFC-227ea C3HF7 2900 HFC-236fa C3H2F6 6300 HFC-245ca C3H3F5 560 Table 2-6: Global Warming Potential (GWP)of GHGs, Source: Table 2e in the IPCC Second Assessment Report “Climate Change 1995, the science of Climate Change”. (The later published GWP data from the Third Assessment Report must not be used, since they are not accepted by the COP.)

CDM Handbook Armenia_FINAL Oct 2006_English.doc 2-11 3. Project financing, costs and value of CERs

A number of new investment funds and finance facilities have been established to encourage environmentally beneficial investments. Traditional finance institutions are also adapting to the growing demand for initiatives targeted at environmental protection. Some instruments may actively seek certified emission reductions (CERs) from CDM projects specifically. Others have a broader scope but may still be important to consider for CDM projects, in terms of the geographical and financial scope of their operations and their application to the energy sector. Since CERs are based on reductions in carbon dioxide equivalent, financial exchanges for CERs are often referred to as carbon finance.

The following section examines how carbon finance can be incorporated into the financing structure of CDM mitigation or A/R project activities. It discusses the ways in which the carbon component can complement traditional sources of project finance. It provides an overview of carbon finance (finance that is directed towards or someway involved in developing greenhouse gas reduction projects or in the purchase of emission reductions from such projects) that is specifically directed to CDM projects. Strategies to attract local and international investors are then discussed, with a perspective on assessment and mitigation of CDM related risks.

3.1 Transaction costs

In order to make an assessment on whether it is financially attractive to develop a CDM project, a project developer must have an indication of the additional costs arising from the CDM project cycle. These costs are also referred to as ‘transaction costs’. Some transaction costs may occur up-front, but others can be deferred until the project is operational and generates revenues, such as the verification costs. The World Bank Prototype Fund (PCF) has for instance estimated some time ago the ‘front end’ costs of the PCF project cycle, which mirrors the CDM project cycle, within the range of US$ 150,000 to US$ 200,000. Front-end activities include (i) Project identification and preparation; baseline study and possibly the development of a new baseline and monitoring methodology; (ii) preparation of the monitoring reports; (iii) CDM project validation through a DOE, consultation with CDM authorities, stakeholders; CDM project registration fees; (iv) CDM analysis, dialogue, negotiation of Carbon purchase agreement, obtaining project approval. Under several Carbon purchase programmes, some of the up-front costs of CDM projects were funded by the purchasing facility, including costs of preparing the PDD and validating the project. However, there are caps and conditions placed on the maximum amounts that will be paid for under these programs. Often, these costs have to be repaid by the project developer as soon as the first instalment of CERs is received on the account of the authorised CER owner. As purchase programs change over time project developers should consult open calls for CER purchase on specific up-front payment conditions. If the transaction costs exceed 10 – 12% of the present value of the revenue of a project it will most likely fail to attract investment. Therefore the project developer should assess whether through project bundling or technology modifications the project would be more viable for CDM and funding.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-1 The following table describes the major CDM transaction cost components. Table 3-2 provides an indicative range of costs that - to some extent – are based on estimates and discussions with several CDM stakeholders, e.g. project developers, DOEs, Carbon Buyers.

Cost Item Description Implementation costs Search costs with PIN Costs incurred by project developer to identify a potential development project for CDM and to prepare a PIN that will serve the purpose to identify project financing and to get a first indication by the host country government on whether the project is considered eligible and has chances to receive a Letter of Approval PDD development costs Costs incurred in the preparation of the project design document, including the baseline study and monitoring plan. It also includes costs for public consultation with key stakeholders and identification of project sustainable development contribution. Costs also incur for developing a new baseline and monitoring methodology if an approved methodology through the CDM-EB cannot be used. Additional expenditures/fees possible such as for getting new baseline and monitoring methodologies approved. Validation costs Costs to pay a DOE for validation services. Costs may differ for small and large scale CDM projects. Costs for revising the PDD as required by the DOE Approval costs Costs for authorisation and receiving formal governmental approval from the DNA in the host country. Registration costs Cost for registering the CDM project activity at the CDM-EB. Negotiation costs Costs to negotiate a deal with a Carbon purchaser for CER delivery. Implementation costs Monitoring costs Costs incurred in the process of measuring data and preparing frequent monitoring reports that document monitored parameters according to the suggestions made in the PDD. Verification and Certification Cost to pay a DOE for CER verification and certification costs Government Taxation Host country governments may impose a tax on CER value for e.g. covering costs for issuing governmental approval. If taxation is an issue, then it is likely to happen when CERs are issued to the account of the CER owner. Enforcement costs Includes costs of administrative and legal measures incurred by the carbon purchaser in the event of departure from the agreed transaction Table 3-1: CDM transaction costs components from the perspective of project developers

CDM projects must also account for administrative costs, which are regulated under the Kyoto Protocol. Currently, the CDM-EB is entitled to charge a fee (the registration fee), to be taken from project proceeds, for payment of administrative costs (see rules for fee payments above).

CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-2 In addition, Article 12 requires that two per cent of the CERs issued for a CDM project activity shall be used to assist developing country Parties to meet the costs of adaptation (known as the ‘adaptation levy’). CDM project activities in least developed countries shall be exempt from payment of the levy.

Transaction Cost Item Transaction Costs (€) Search with PIN 10,000 – 20,000 PDD / methodology 20,000 – 40, 000 development Validation 5,000 – 15,000 Governmental approval 0 – 10,000 Project Registration Depends from number of CERs generated: if ≤ 15,000 t CO2 / crediting period, no fee if ≤ 15,000 t CO2 / a then 0.10 US$ / per CER if > 15,000 / a then 0.20 US$/ per CER The maximum registration fee payable based on this calculation shall be 350,000 US$ ERPA negotiation In kind contribution by project developer Monitoring 3,000 – 10,000 (per monitoring period) Verification/Certification 5,000 – 10,000 (per verification/certification period) or as % of CERs generated in period Taxation x% of CERs generated in period (please consult host country requirements) Enforcement According to ERPA agreements, volume may differ considerably across different ERPAs Table 3-2: CDM transaction cost estimates (provided as ranges)

3.2 Securing project & carbon finance

3.2.1 Project financing

With the validation and registration of the project, project developers will take actions to implement the project, which will generate GHG emission reductions as well as other conventional benefits to create financial income. Project financing is a common and crucial part of project implementation in every project. There are multilateral and bilateral sources of funding to develop CDM projects. This project financing also involves risks from different sources and requires project developers to properly manage any potential risks, including project risks, political risks, and market risks. Project risks include whether the project meets all the requirements of the CDM and whether the project will generate the CERs estimated in the PDD. Political risks include currently agreement on and a ratification of a new protocol or treaty for a period after 2012. Market risks include the price of CERs and transaction costs. Public funding for CDM projects from Parties in Annex I countries is, however, not to result in the diversion of official development assistance (ODA) and is to be separate from

CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-3 and not counted towards the financial obligations of Parties included in Annex I (Decision 17/CP.7, the Marrakech Accords).

3.2.2 International Carbon financiers

A number of international, national or multilateral Carbon funds operate currently exists. Through the funds, CERs are purchased. These funds provide an important source of revenue for project developers whose project generate carbon credits. The following Table 3-3 outlines some of the best established Carbon funds that operate today and are open for purchase of CERs from different types of projects. Carbon Funds usually open Calls for Proposals. Within a set time frame CDM project developers can submit their proposals according to the terms of reference. Some of the Carbon Funds may close for a while before opening new tranches. Project developers should contact the funds of interest to get further information. As new funds are going to open in the future the below list must be considered non-exhaustive.

3.2.3 Private Carbon buyers

Besides those rather institutional funds, private entities may also buy CER through a facility or represent brokers. There are some tendencies that CER owners step into ERPAs with these private entities there is more flexibility to negotiate the terms of contract, delivery and prices. Private buyers may be industries, Emission Trading Facilities (Brokers), technology producers, banks, other private entities or in very rare cases individuals

In many cases the CER buyer negotiates directly with the CER seller, assuming the buyer disposes of a CER-account. As special advantages enjoys individual CER buyer better contracts with individual conditions. If the buyer of CERs is also the investor at the same time who finances the CDM project, then it can also better control the project cycle and arrange monitoring when required. Furthermore, CDM risks can be better spread.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-4 CER Purchaser Sector restrictions CDM Regions Minimum Contact details CO2e /a reductions INSTITUTIONAL CARBON FUNDS OR GOVERNMENTAL CARBON PURCHASE PROGRAMMES Prototype Carbon All sectors except forestry and agriculture South Asia, India, East Asia, China, 30 000 t www.carbonfinance.org Fund (PCF) Eastern Europe, Africa, Latin and E-mail: [email protected] South America, Carbon Finance Business The World Bank, MC4-414 1818 H Street, NW Washington, DC 20433 USA ++1.202.473.9189 Benoit Bosquet E-mail: [email protected] BioCarbon Fund Environmental restoration, avoided Africa, Latin America & Caribbean, 30 000 t Managed by the World Bank (Bio-CF) deforestation, commercial plantations, East Asian & Pacific, Europe & Same contact details as for PCF sustainable agriculture, agroforestry, Central Asia fuelwood plantations, Silvopastural, community reforestation Community Mainly renewable energy and waste South Asia, Africa, Latin America & Not specified Managed by the World Bank Development management projects Caribbean, East Asian & Pacific, Same contact details as for PCF Carbon Fund Europe & Central Asia (CDCF) Austrian Carbon Energy production (renewable/non Bhutan, Bolivia, Brazil, China, Not specified Web: http://www.ji-cdm-austria.at Fund renewable), (e.g. hydro, wind, biogas, Colombia, Ecuador, Egypt, Ethiopia, E-mail: [email protected] biomass); Avoidance or recovery of Georgia, India, Indonesia, Israel, Management of the Austrian JI/CDM landfill gases; Combined heat and power Malaysia, Paraguay, Serbia, Programme: Kommunalkredit Public installations; Fuel switch to renewables or Montenegro Consulting GmbH, Austria less carbon intensive fuels; Energy Phone: +43/1/31631-0, demand; Manufacturing industries; Fax +43/1/31631-104 Chemical industries; Fugitive emissions Austrian Federal Ministry of Agriculture, from production and consumption of Forestry, Environment and Water halocarbons and sulphur hexafluoride; Management, Austria Waste handling and disposal; Agriculture Phone: +43/1/51522-0 KfW Carbon Fund All sectors exept forestry South Asia, India, East Asia, China, 50 000 t KfW Klimaschutzfonds Eastern Europe, Africa, Latin and Palmengartenstr. 5 South America, 60325 Frankfurt Germany Tel: 0049 (0)69 7431-4218 E-mail: [email protected] WWW: http://www.kfw-

5761P15/500/CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-5 CER Purchaser Sector restrictions CDM Regions Minimum Contact details CO2e /a reductions foerderbank.de/DE_Home/Klimaschutzfonds/ Aktuelles.jsp Belgian Carbon All project activities eligible, except: land Not specified Web: http://www.klimaat.be/jicdmtender/ Fund use, land use change and Forestry JI/CDM team of the Climate Change Section projects; nuclear energy projects of the Belgian Federal Administration, Belgium Tel: +32 2 524 95 31 +32 2 524 95 34 Fax: +32 2 524 96 01 E-mail: [email protected] Italian Carbon No sector restrictions China, India, Central and South Not specified Managed by the World Bank Fund America, the Balkans, East Asia, the Same contact details as for PCF Mediterranean, Middle East Danish Carbon Renewable energy (wind, biomass, solar, Central Asia and Caucasus , Central Not specified Web: www.DanishCarbon.dk Fund geothermal and small hydro power 20 and Eastern Europe http://www.mst.dk/transportuk/01070000.htm MW); Fuel switch from CO2-intensive Ministry of the Environment fuels to cleaner fuels; Introduction of Danish Environmental Protection Agency waste to energy; Energy efficiency Climate Change & Environmental (combined heat and power, process Assistance, optimisation, lighting and insulation); Denmark Methane capture (landfill gas Direct telephone: +45 32 66 01 00 extraction and biogas extraction); Direct fax: +45 32 66 04 79 Reductions in industry (reduction of E-mail: [email protected] emissions from energy efficiency, adipic acid production, nitric acid production and HCFC production) Spanish Carbon Renewable energy, biomass and Latin America, North Africa, East Not specified Managed by the World Bank Fund agricultural waste products, urban waste Asia, South Asia, Eastern Europe and Same contact details as for PCF management, industrial processes the Russian Federation. Multilateral All sectors including forestry Eastern Europe CDM countries, Not specified Egbert Liese Carbon Credit however, only those included in Manager Netherlands EBRD Carbon Fund Fund (MCCF) EBRD region. Tel: 0044 20 7338 7177 E-mail: [email protected] Web: http://www.ebrd.com/country/sector/energyef /carbon/nercof.htm or www.ebrd.com/carbonfinance

5761P15/500/CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-6 CER Purchaser Sector restrictions CDM Regions Minimum Contact details CO2e /a reductions PRIVATE CARBON FUNDS Merzbach All sectors expect forestry South Asia, India, East Asia, China, 80 000 t – 100 Claude Devillers Mezzanine Fund 1 Eastern Europe, Africa, Latin and 000 t Managing Director and Founding Partner South America, Merzbach Group, LLC NJ 07670 30 North Brae Court, USA Tel: 12015672562 E-mail: [email protected] Web: www.merzbach.tk Natsource GG-Gap All sectors except forestry South Asia, India, East Asia, China, not specified E-mail: Eastern Europe, Africa, Latin and [email protected] South America, Web: http://www.natsource.com/news/index.asp?n =453 EcoSecurities Paul Soffe Standard Bank Deputy Facility Manager Carbon Facility Tel: +(44) 1865 297489 E-mail: [email protected] Web: http://www.ecosecurities.net/general/index.ht m or http://www.essbcarbonfacility.com/ Table 3-3: Overview of Multilateral and Private Carbon Funds and CER Purchase Facilities (not exhaustive list)

5761P15/500/CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-7

3.3 Impact of CER sales on project financing

Access to Carbon finance and revenue from the sales of CERs can assist the overall financial performance of sustainable energy projects in many different ways, such as: Being sold forward to reduce borrowing requirements; Creating an additional revenue stream; Creating a hard currency revenue stream to offset hard currency equipment and financing costs (thus reducing risk); Enabling lower cost hard currency borrowing without interest rate exposure; Mitigating against project risks; and Increasing investors confidence in the viability of the project. In summary Carbon finance provides additional income and reduces the cost of project debt, by mitigating financial risks. The level of financial contribution offered by the CDM is dependent on a number of variables. These include the value of emission reductions, the type of project and the circumstances in which the project is developed. The following Table 9f from the PCF provides an indicative range of financial contribution by carbon finance in a range of sustainable energy projects.

3.4 The Value of CERs and price evolution

The commercial viability of a CDM project will depend on the revenues that can be expected from the sale of emission reductions (CERs) earned from project activities as well as other revenue. The additional cash flow generated from the sale of CERs is expected to convert marginally negative CDM projects (that might have a positive impact on the host countries development) into commercially attractive investment opportunities. Currently paid prices for CERs greatly depend from various risks associated with a CDM project and the time of negotiating a carbon deal with an interested buyer. If a buyer wants to secure CERs at very early project development stage, prices vary between 4 to 7 €/CER. However, these prices usually are before CDM transaction cost occur (e.g. before costs for PIN development are paid) that would have to be beard by the buyer. The further the project makes progress towards financial close and operation many of the project risks are addressed and removed. Thus, carbon investors are willing to pay more per CER. In some cases 10 to 15 €/CER are observed in the carbon market today, however, the upper bound are rather exceptions. The value of credits delivered by CDM project activities will ultimately depend on supply and demand and the growth of the global carbon market. CER prices for private sector deals are not publicly accessible as the case for prices paid for EU Allowances on the spot and future market. The only source of information for prices is through the annual carbon market reports of the International Emissions Trading Association (IETA). An individual carbon purchase deal would have to be negotiated.

5761P15/500/CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-9 To secure the best price for CERs it is important for project developers to understand the risks that carbon investors are likely to associate with a CDM project and how such risks differ to conventional project risks. Once risks have been identified, it is then possible to develop a competent risk management strategy. Project participants will have complete discretion to determine how project revenue shall be used and distributed among investors, financiers and other interested parties. The interested parties must contractually agree on the ownership structure of any emission reduction credits that would result from the project and the sale price of CERs, prior to commencement of the project. As an example, the PCF considers several parameters in determining its price in the PCF’s carbon purchase agreement. Moreover, certain project parameters command price premiums under the PCF program. These include: - the existence of government guarantees, - project generation of social benefits, and - the exclusion of preparation costs in the total project cost.

In the C-ERUPT program, prices are also differentiated according to technology type. CERs from renewable energy project form the reference price (maximum price of EUR 5.5 per CER). CERs from sustainable grown biomass projects as well as from energy efficiency projects are priced 20% lower (maximum price of EUR 4.5) while those from fuel switching and methane recovery projects are 65 40% cheaper (maximum price of EUR 3.3). At present there is no single CER price but differentiated according to risks, technology type and social development components In a GHG market analysis, Natsource (2002) forecasts prices for project-based carbon emission reductions (both JI and CDM markets) to vary from US$3 to 5 for the period 2002-2005, US$2.5 to 9.0 during 2005-2007, and US$5 to11 from 2008-2012. There are several potential occurrences that are likely to influence the prices of emissions asset: Details of the degree to which CERs will be accepted for compliance between 2008 and 2012. Certainty that there is a regime that will value reductions of greenhouse gas emissions after 2012. Increasing political commitment both inside and outside the EU will contribute to longer time lines and confidence hence spurring increased activity in projects. The increase of scope of the EU scheme to include other industries is likely to increase the demand for CERs and the stronger emergence of CERs buyers such as Japan and Canada whose emission reduction schemes will be different is likely to increase demand. Dependencies of carbon price from carbon purchase contract types For “World Bank” contracts (Quote: IETA GHG Market 2005) seller do its utmost to deliver a flexible volume and the buyer in some cases guarantees to buy verified emissions reductions, even if project not accepted by the EB. Such contracts have few preconditions but can achieve only low average prices of €3 early 2004 to €4 recently. For standard off-take contracts, the seller does its utmost to deliver a flexible volume, buyer guarantees to buy. Contracts are only valid on a set of preconditions and can achieve average carbon prices in the range of €4 early 2004 to €6.5 recently.

5761P15/500/CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-10 For guaranteed delivery contract, the seller guarantees delivery of a firm volume and buyer guarantees to buy. These contract are only valid on a set of preconditions (including some warranties) and can achieve average carbon prices between €4 early 2004 to €9.5 recently. For exchange contracts, the seller guarantees to deliver a firm volume at a specified time and buyer guarantees to buy. In case of non-delivery the seller pays EUA mark-to- market/liquidated damages CERs or cash. Average carbon prices between €6.5 early 2005 to €11.5 recently can be achieved.

5761P15/500/CDM Handbook Armenia_FINAL Oct 2006_English.doc 3-11 4. Legal Issues in the CDM

The international legal framework for the Clean Development Mechanism consists of the United Nations Framework Convention on Climate Change (“UNFCCC”), the Kyoto Protocol and the Marrakech Accords. These international legal instruments, along with any rules developed by the Executive Board and any domestic host country requirements, will provide the legal regime within which CDM projects will be developed and operated. In undertaking CDM projects, there are a range of legal issues that need to be addressed in order to ensure that the project qualifies as a CDM Project and is capable of producing fully tradable CERs with clear legal title. This requires: (a) understanding the legal requirements for undertaking a CDM project and bringing CERs into existence; (b) developing a project in a manner consistent with the CDM rules and developing legal arrangements that clearly allocate project rights, responsibilities and financial (including tax) obligations and which manage relationships with third parties; and (c) assessing and managing the various legal risks that may potentially affect the project or use of the CERs, such as project failure and deficient validation, verification or certification.

4.1 The international legal framework

4.1.1 Legal Status of the Kyoto Protocol

The UNFCCC is an international framework agreement (or treaty) governed by the principles of public international law. It provides for Parties to the UNFCCC to negotiate subsidiary international instruments under the UNFCCC to develop further the nature of the obligations it creates. The Kyoto Protocol, itself an international agreement, is a subsidiary instrument to the UNFCCC. The Marrakech Accords were agreed to at the seventh Conference of Parties of the UNFCCC (COP 7) serving as the Meeting of the Parties to the Kyoto Protocol. The Marrakech Accords provide detailed rules for the operation of the CDM and also create a CDM Executive Board to develop further guidelines. As instruments of international law 9, the UNFCCC and Kyoto Protocol are only binding upon those states which are a party to them. Becoming a party to a treaty occurs when a state takes affirmative steps to demonstrate its consent to be bound. This is usually referred to as ratification, acceptance or accession. In some countries, the act of ratification alone automatically means that the treaty is binding on that country. However, for many states, ratification of a treaty cannot take place until the treaty is first approved

9 An international law treaty is an "an international agreement concluded between states in written form and governed by international law, whether embodied in a single instrument or two or more related instruments". Vienna Convention on the Law of Treaties, Article 2.1(a).

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-1 through the domestic political process. This may require the international instrument to be tabled before the national parliament and enacted into domestic legislation. The Kyoto Protocol is an international treaty which creates obligations on nation states, not private entities. Certified Emission Reductions (CERs) are units produced by a Clean Development Mechanism (CDM) in a non-Annex 1 country which can be used by Annex 1 countries to meet their Kyoto Protocol obligations. Nation states which have not signed and ratified the Kyoto Protocol are not Parties to the Protocol, and are therefore not eligible to participate in the Kyoto Protocol mechanisms (e.g. CDMs). However the Kyoto Protocol permits private entities and non-governmental organisations in the Party nation states to participate in the CDM Projects. The CDM Registry is established and maintained by the Executive Board (EB) on behalf of the non-Annex 1 Parties. It is a standardised electronic database to ensure the accurate accounting of CERs. Under the Marrakech Accords the CDM Registry is where CERs are issued and forwarded to Project Participants; CERs are held by non-Annex 1 Parties; the share of proceeds is managed; CERs may be cancelled, for example to make up for an over issuance of CERs based on erroneous DOE verifications; only CERs may be held in CER registry accounts; and information is made publicly available. In addition the Registry has to perform business, administrative and infrastructure functions, e.g. working in a network with National Registries (NR) and the International Transaction Log (ITL). The CDM Executive Board which approves the CDM Project from the non-Annex 1 host country has the responsibility for allocating the CERs once they have been produced, verified and certified. This is done when an accredited (by the Executive Board) Designated Operational Entity (DOE) provides a Verification Report to the Project Participants, the Parties involved and the Executive Board. The report shall be publicly available. The Certification Report shall constitute a request to the Executive Board for the issuance of CERs equal to the verified amount of reductions of anthropogenic emissions by sources of greenhouse gases (GHGs). The issuance of Certified Emission Reductions (CERs) is considered final 15 days after the date of receipt of the request for issuance unless, one party involved or three board members request a review of the proposed issuance of CERs. The Executive Board will then instruct the CDM Registry to issue the specified quantity of CERs into the pending account of the CDM Registry and deduct 2% of the total CERs as a CDM levy, unless the CDM Project activity is in a least developed country/Party. Then it will forward the remaining CERs to the Registry Accounts of Parties and Project Participants involved, in accordance with their request and confirmation of final payment of the Share of Proceeds (SOP) Administration charges. CERs will only be issued for a crediting period starting after the date of registration of a CDM Project activity.

4.1.2 Compliance with the Kyoto Protocol (Marrakech Accords)

The Marrakech Accords (MA) state that to participate in a CDM Project, a country must be a Party (signed and ratified) to the Kyoto Protocol. CDM Host Countries (non-Annex 1 countries) have to specify a domestic institutional body, to be called a Designated National Authority (DNA). The host country through its Designated National Authority (DNA) must approve each CDM Project by signing a Letter of Approval (LoA). Decision 17CP.7 sets out minimum standards for the participation of a host country planning CDM projects. The host country must have ratified the Kyoto Protocol and

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-2 designated a National Authority, a DNA within the Government structure, which will be responsible for CDM activities. The structure, size of a DNA and whether or not is has a Secretariat is a decision for each country. There are no rules set out for the type of structure of the DNA except that it must be within a government structure of the country/Party. In practice there are five models for a DNA structure. The non-Annex 1 country/host country must have in a mechanism to evaluate and approve CDM projects before they are submitted to the CDM Executive Board for registration. National approval by the DNA has three purposes; to formally indicate that the host country/ Party would like to participate in the specific project activity; if it is an entity other than the host country Party itself, which will participate in the project activity, then to approve the voluntary participation10 of this entity; and, to confirm that the activity is consistent with the national sustainable development aims of the host country/Party. The Letter of Approval (LoA) signed by the DNA is a written of the non-Annex 1 country approving a specific entity(ies) participation in the specific CDM project activity. The DNA of a host country/Party involved in a proposed CDM project activity in the non- Annex1 country shall include the following in the LoA; the Party has ratified the Kyoto Protocol; the approval of the voluntary participation in the proposed CDM project activity; that the proposed CDM project activity contributes to sustainable development. The written approval, the LoA shall be unconditional with respect to these matters 11. The CDM Project is registered by the CDM Executive Board with the Executive Board Registry and once CERs are produced by the registered CDM Project and verified and certified following procedures established by the CDM EB, then only the CDM EB has the authority to issue the CERs. The CDM Executive Board supervises the CDM and reports directly to the Conference of Parties (COP) to the UNFCCC/the Meeting of the Parties (MOP) to the Kyoto Protocol (COP/MOP). Under the International Rules: (i) the COP/MOP has power and authority over the Executive Board; (ii) the Executive Board is provided with a mandate to supervise the CDM, while remaining fully accountable to the COP/MOP; and (iii) the Secretariat is assigned the responsibility, amongst other matters, of servicing the EB and allocating staff and a budget towards implementation of Article 12 of the Kyoto Protocol. Article 12.4 of the Kyoto Protocol confirms that the CDM will be subject to the authority and guidance of the COP/MOP and be supervised by the CDM Executive Board. The modalities and procedures for the CDM (CDM Modalities) reiterates that the COP/MOP

10 See: Para 33 of the Annex (Modalities and procedures for a clean development mechanism) to decisions 17CP.7 states that “ a Party that authorises private and/or public entities to participate in Article 12 project activities shall remain responsible for the fulfilment of it obligations under the Kyoto Protocol and shall ensure that such participation is consistent with the present Annex….”; “Voluntary participation” means that non-State entities can only participate in CDM projects activities with the express authorisation of the DNA.

11 See: Annex 14 to the Report of the Executive Board at its 20th meeting - 8 July 2004

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-3 will have authority over and provide guidance to the CDM as a whole (see Annexe to Decision 17/CP.7, para.2). In terms of guidance to the EB, the CMD Modalities specify that “the COP/MOP shall provide guidance… by taking decisions amongst other things on: (a) The recommendations made by the EB on the rules of procedure; (b) The recommendations made by the EB, in accordance with provisions of decision 17/CP.7, the present Annex and relevant decision of the COP/MOP…”(see Annex to Decision17/CP.7, para. 3). (c) And the COP/MOP will review the annual reports of the EB. The guidance provided so far by the COP (acting as COP/MOP) do not request the EB to undertake specific administrative tasks in relation to the implementation of the CMD Modalities but rather encourages it to “intensify its work on methodologies”(see Decision 18/CP.9, para. 1(i)); keep its rules of procedure under review (see Decision 21/CP.8, para 1(b) and Decision 18/CP.9 para.1(e) and Decision 12/CP.10,para.8) and to “continue to assess existing and new ways to ensure transparency” (see Decision12/CP.10, para.4).

While the COP/MOP has delegated as wide range of executive functions to the Executive Board to implement the CDM Modalities as agreed by the COP/MOP, the COP/MOP still retains the legal power under Article 12,4 of the Kyoto Protocol and paragraph 2 of the CDM Modalities to remove, limit, expand or otherwise amend the Executives Board’s delegated authority to implement the agreed CDM Modalities and any new rules or procedures which might be agreed by the COP/MOP.

4.2 Domestic law Issues

In addition to compliance with the Kyoto Protocol and the Marrakech Accords, a CDM project approved by the non-Annex 1 host country DNA to be implemented in that non- Annex 1 country must comply with all its national laws. This may include, for example, foreign investment laws; environmental assessment and planning laws, licensing laws, tax laws, contractual laws and employment laws.

The DNA should guide the Project Participants not only through the CDM Project Cycle requirements, but also direct the CDM Project Participants to the relevant licenses and approvals required under national laws before the CDM Project can be approved. In many countries the DNA Secretariat has produced a Guidebook to the CDM process. Where CDM projects involve foreign entities, there will also be international laws that apply relating to corporate governance and corporate responsibility.

4.3 Legal Issues in the development of a CDM Project

Participation in a Clean Development Mechanism is regulated in ss28-34 of the CDM M&P. Decision 17/CP.7 “Modalities and procedures for the clean development mechanism”. The Marrakech Accords states: Participation in a CDM Project activity is voluntary; Parties participating in the CDM shall designate a national authority DNA;

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-4 a Party not included in Annex 1 to the UNFCCC may participate in a CDM Project activity if it is a Party to the Kyoto Protocol; a Party is eligible to transfer and /or acquire CERs issued in accordance with the relevant provisions if it is in compliance with the following eligibility requirements. For acquiring CERs it is a Party to the Kyoto Protocol and has established its assigned amounts (Annex B countries only). It further has in place a national system for the estimation of anthropogenic emissions by sources; it has submitted annually the most recent required inventory (Annex B Parties only); and, it has submitted the supplementary information on the assigned amount. It has established a national registry. Project identification. A potential CDM project can be identified (and developed) by the Host Country Project Developers. These may also be private companies, NGOs, governments (usually departments of governments), municipalities, foundations international organisations or international investors

PIN development / getting in touch with the DNA Once the possible CDM Project is identified then the Project Developers should look at the sustainable development criteria of the non-Annex 1/Host Country, and it is advisable at this stage, to meet the DNA Secretariat with a Project Idea Note (PIN). This avoids unnecessary costs, as the DNA could give an initial endorsement based on the PIN and also advise what other national laws apply and what licences or permissions have to be obtained. This saves time and money before the Project Participants incur further costs developing the Project Design Document (PDD).

PDD development Once the PDD is developed, the CDM modalities and procedures as well as relevant guidance issued by the CDM-EB has to be respected. Further information on such guidance is provided in Chapter 1 and 2. Attention must be given to perform the stakeholder consultation period according to the legal requirements (see 37(b) and (c) of decision 17/CP.7). “An invitation for comments by local stakeholders shall be made in an open and transparent manner, in a way that facilitates comment to be received from local stakeholders and allows for a reasonable time for comment to be submitted. In this regard, project participants shall describe a project activity in a manner which allows the local stakeholders to understand the project activity taking into account confidentiality provisions of the CDM modalities and procedures.”

Requesting and receiving governmental project approval

The DNA signs and issues the Letter of Approval (LoA) upon a formal request is made by the project developer and provided all necessary requirements are met. The written approval from the DNA constitutes the authorisation by the DNA of the specific entities participation as a Project Developer/Participant in the specific CDM Project activity. The approval covers the requirements of para. 33 & para. 40 (a) and (f) of the CDM Modalities and procedures. A written approval (LoA) from a non-Annex 1/host country may cover more than one CDM Project, provided that ALL of the proposed CDM Projects are clearly listed in the letter (See Annex 4 of the 17th CDM Executive Board meeting).

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-5 Project Validation The project developer will enter into a contractual arrangement with a DOE for Validation. The general terms of conditions may differ between accredited DOEs. It is advised to project developers to get offers from several DOEs and compare and study the clauses covering such contract. The Validator has – when undertaking a Validation – also respect the CDM modalities and procedures. Three important issues must be addressed: Local stakeholders and how their comments were addressed by the Project Participants; An analysis of the environmental impacts of the Project activity Assessment of the Additionality of the proposed CDM Project

Project registration If the DOE determines the proposed Project activity is valid then it will submit it to the CDM Executive Board with: a request for registration in the form of a Validation Report; the Project Design Document; the written approval of the Host Country/Party; an explanation of how it has taken into account the comments received during the stakeholder period; a Statement of the likelihood of the Project activity to achieve the anticipated emission reductions stated in the CDM-PDD. This statement will constitute the basis of the calculation of the registration fee; and make this Validation Report publicly available upon transmission to the Executive Board. This is the formal acceptance by the Executive Board of a validated project as a CDM Project activity and the prerequisite for the Verification Certificate and Issuance of CERs related to that particular CDM Project activity. The registration by the Executive Board is an automatic procedure unless, there is a call for a review of the proposed CDM project activity within eight weeks by one party involved or three of the members of the CDM EB. Is a proposed CDM Project activity not accepted, the project developer may resubmit it for Validation and subsequent registration, provided appropriate revisions were made as requested by the Validator.

Negotiating a CER sales deal CER purchase deals are normally negotiated between the project participants and an investor, that is an entity interested to purchase CERs from a CDM project. The investor is usually from an Annex I country, but does not have to be, and can be a government body or a non-governmental organisation, too. CER purchase deals may be negotiated at any time during the CDM project cycle, however, some potential buyers may wish to negotiate deals at a specific CDM project development stage.

Monitoring The Project Participants must implement the Monitoring Plan contained in the registered PDD. This forms the basis for the DOE, that is contracted to perform the verification of emission reductions. If the project participant is not sticking to the monitoring plan as approved this may cause problems to claim CERs. Further it can put the project participant

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-6 at the risk to not meet its agreements made under a Carbon Purchase Agreements, which may cause penalty payments for each CER not delivered.

Verification / Certification Verification is the periodic independent review and ex post determination by the DOE of the monitoring reductions in the GHG emissions that have occurred as a result of the registered CDM Project activity during the verified period.

Certification is the written assurance by the DOE that during a specified period, a CDM project activity achieved the reductions in anthropogenic emissions by sources of greenhouse gases GHGs as verified. The Verification & Certification report is then submitted to the EB for consideration and CER issuance.

The legal basis for Verification and Certification are set out in the Marrakech Accords (Decision 17/CP.7 Article 12, §27 b) and §61-§63.

Issuance The Issuance of CERs is considered final 15 days after the date of receipt of the request for issuance unless one party involved or three board members request a review of the proposed issuance.

The EB will the instruct the CDM Registry to issue the specified quantity of CERs into the pending account of the CDM Registry and deduct 2% of the total CERs as a CDM levy, unless the CDM Project activity is in a least developed country/Party.

The EB will then forward the remaining CERs to the Registry Accounts of Parties and Project Participants involved, in accordance with their request and confirmation of final payment of the Share of Proceeds SOP Administration charges. CERs will only be issued for a crediting period starting after the date of registration of a CDM Project activity.

4.4 Legal Arrangements

4.4.1 The entitlements to create legal ownership of CERs

The Marrakech Accords do not legally define a CER or identify who has the legal entitlement to generate CERs from a CDM project activity. Nonetheless, as a general principle it is understood that entitlement to create CERs is with the Project activity responsible for the displacement, reduction, offset or removal of greenhouse gas emissions (GHGs). For example a wind farm displacing coal generated electricity or a landfill site capturing methane emissions will have the right to generate CERs.

While the legal entitlement to generate CERs in such a situation is clear, it is more complex when project activities involve a number of parties. It is essential that the contracts between the CDM Project Participants and/or the Emissions Reductions Purchase Agreement (ERPA) between the seller and the buyer clearly specify who has the legal entitlement to generate and transfer the CERs.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-7 Even where legal entitlements to create CERs are identified or have been clarified by a contract between CDM Project Participants, it is still possible to contractually allocate legal ownership to the CERs. For example a Project Participant developing a wind power CDM Project may enter into financial or power purchase agreements under which some or all of the CERs are allocated to the financier or power off-taker.

Many non-Annex 1/ Host Countries have already defined CERs under their national laws. The possibility remains that there might be further refinement of the Marrakech Accords on CERs; and /or domestic legislation implementing the Kyoto Protocol may specifically detail who has the legal entitlement to generate CERs. Nonetheless, even in these circumstances it is still possible to contractually allocate the ownership of the CERs.

Finally, it has been suggested that some national governments may take a percentage of the CERs generated by a project thereby effectively "taxing" the project. For host countries, this would assist in raising revenue and placing CERs on reserve for potential future commitments while for Annex 1 countries this could assist in ensuring CERs created by its national entities go towards their Kyoto obligations.

4.4.2 Legal Nature of CERs

The CER is defined as a “unit issued pursuant to Article 12 of the Kyoto Protocol and the requirements there-under, as well as the relevant provisions in these modalities and procedures, and is equal to one metric tonne of carbon dioxide equivalent, calculated using global warming potentials defined by decisions 2/CP.3 or as subsequently revised in accordance with Article 5 Kyoto Protocol.” Para.1(b) Annex (Modalities and procedures for a clean development mechanism), to decision 17CP.7.

The CER represents a unit that can be credited towards an Annex 1 Party’s fulfilment of its quantified emission limitation and reduction commitments. CERs are issued by the Executive Board, and then allocated to the respective accounts in accordance with the request of the Parties and Project Participants. See Decision 17/CP.7.

A CER represents not only the physical presence of carbon, but a unit of verified carbon removals computed after the application of accounting rules that exclude removals resulting from certain enumerated factors. A CER, once issued by the EB, can be freely sold or exchanged. As CERs arise from activities within a CDM Project Site, the assumption is that, in the absence of any agreement to the contrary, or a national law of the non-Annex 1 country which states otherwise, they belong either to the owner of the Project site, or the government of the non-Annex 1 country.

The owner of the CDM Project may, however, elect to dispose of, or transfer the CERs or the rights to the CERs to another party. Rights to CERs here means,” the right to benefit from an potential gain arising out of the conversion of the CER in a Project activity to a freely-tradable CERs under the Kyoto Protocol.”

This issue of the legal character of a CER is a complex issue. Some host countries have considered a CER in relation to the proposed CDM Projects within their country, for example, Afforestartion and power stations and then considered the existing country

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-8 legislation to see if a CER is already defined. For example, does the law defining power emissions from power stations, possibly cover a CER from methane landfill site?

The Kyoto Protocol and CDM EB refer only to transfers of CERs, not to a legal title. As long as the Project Participants has the Letter of Approval from the non-Annex 1/host country DNA, can transfer the verified CERs from one Registry to another, then it is argued it has official approval from the host country to the future CERs, and the buyer is able purchase the CERs. The issue then is only of the transfer of the CERs from the seller to the buyer.

It seems for some countries the most current laws on property and contract and existing classifications of property may be able to accommodate the concept of CERs and the rights to CERs.

Country Country’s view on CERs Ghana: The right to CERs is recognisable as a right/interest in or over land and is capable of being registered in the register of the Land Title Registry Argentina Its Civil Code states, that the right might be characterised as a civil or industrial “fruit”. As a fruit, the CER would belong to the owner of the source of the fruit, unless there was an agreement to the contrary. India The right to the CER is a separate alienable right which the owner of the land can convey to others without conveying the whole property ownership. In A/R projects the farmers have legal title to their land and it is registered. Rights to use the forest land is given by the social forestry officer and entered into the forest department land registry with details of the time period for which the land use is granted and the lease amount if any. The rights to the sequestered carbon are therefore either with the private farmer, in the case of planting on private lands or with a farmer group in the case of revenue land or forest department land. The carbon is a usufruct and the forest department transfers the right to the usufruct to the farmers in a deed of transfer stating the period of time and all other contractual details. The Peoples has stated that all land belongs to the State and that all CERs are natural resources Republic of which also belong to the State. China (PRC) Chile The right to a CER may be recognisable as a private property right. The legal system for land ownership in Chile is established by the Political Constitution, article 19 no. 24 which includes “the right to property” as a fundamental right of every person. The owner of the land is also the owner of the forests on the land. Therefore, forests belong to the category of “immovable goods”, or real property as they cannot be moved form place to place. The forests become “movable goods” to trade, in the sense that the owner of the land can separate it from its forests and therefore sell the right to the forest independently. Therefore the owner of the land is also the owner through accession of CERs that might be established as a consequence of the emissions reductions produced on the land. They were considered “civil fruits” not “natural fruits” which are those given by nature under the Civil Code. If the landowner transfers the right of usufruct over something which might generate the emissions reduction, in the case of forests then the CER will be owned by the usufruct holder. The right to a CER is not defined in Chilean law and there are no plans to define this special right through national legislation. However there are two important precedents in Chilean legislation regarding this kind of right. 1 The offset program based on the 1992 emission standard for particulate matter. 2. The pending bill of

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-9 Country Country’s view on CERs Law on tradable emission permits which established a system of tradable emission permits very similar to the concept of CERs. In theory, GHGs could be covered by this system if regulations to that effect are adopted. However, currently, the right to a CER can be defined sufficiently between parties to a project, even in the absence of a clear legal definition, as is already shown with some projects. The right to a CER can be characterized as a private property right which is enforceable by its holder against all parties and which is exercised over an intangible and movable good (the CER). Therefore the right to a CER is a “real right,” which can be exercised against all parties over an incorporate and movable good (the credit) which gives its holder rights to use it, receive its and benefits and sell it. The contract concerning a right to CER would be classified as a contract over a movable right as it is exercised over a movable thing, the credit over the emission reduction. Philippines The country claims ownership over CERs because of their potential nature as a national natural resource. This follows the doctrine that all land originally belongs to the State. Thus all land, ownership of forests or timber and other natural resources belongs to the State/Provinces. Therefore all CERs generated would be vested in the State and not belong to the landowner. In forestry projects (CDM AR) it may be possible to characterise a CER as a forest resource and the right to a CER as immovable property. As a forest resource, CERs could be transferred not only to Philippine nationals, but foreigners as well, and as an immovable property the interest in the right could be more securely protect under Philippine law then if the CERs were treated as movable property. The Philippine Clean Air Act has made it possible for Philippine companies to trade emissions, without defining the nature of emission quotas or credits. There is also no definition of an emission. This new Act could however lead to a law defining CERs in the Philippines Table 4-1: Overview of Multilateral and Private Carbon Funds and CER Purchase Facilities (not exhaustive list)

The question of what is the legal definition of a CER is therefore a complex one for a non- Annex 1 country/host country to consider. It might depend on many factors; the national sustainable development criteria; the likely number of CDM projects possible in the country; potential types of CDM projects most suitable for the non-Annex 1 country and whether there are existing laws which might already legally define the particular type of CERs. If it is likely that there will only b a small number of CDM projects within the non-Annex I country then it might be preferable to define the legal nature of a CER for each CDM project. Then the non-Annex I country/host country need only guarantee to the Project Developers/Participants and that the legal ownership of the particular CER produced by the CDM Project is with the CDM Project is with the Project Developer/Participants/Seller and will be transferred, if all the contractual conditions between the parties are fulfilled, to the buyer of the CERs. However for many non Annex 1 countries with potential for many CDM projects they have seen the likely benefit to be accrued from CERs in the future and are concerned to make sure their country participates in and shares these benefits. This then means defining CERs from the beginning as national natural resources.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-10 Given the lack of specific legislation relating to CERs in many of the non-Annex I countries/ host countries, if the country is considering legislation it is important to consider carefully: - the sharing of CERs among the Project Participants; - the transferability of CERs, who is presumed to own them, who can sell or transfer CERs; - or rights to CERs and who can acquire CERs and the rights to CERs.

4.4.3 Taxation

It has been suggested by some non-Annex I countries, that as a CER is a national natural resource, they should take a percentage of the CERs generated by a project thereby effectively "taxing" the project. This would be done on a sliding scale basis with the amount or fee calculated on the number of CERs anticipated and their contract price; or a fee calculated as a percentage of the total number of CERs to be produced by the CDM project. If this is implemented there are two options: Option 1: national legislation in the non-Annex I country stating that there is a tax or fee for CERs produced by CDM Projects implemented within the country. Option 2: if there is no national legislation on this, then the non-Annex 1 should make sure it, and the CERs it requires from the CDM Project are included in the contracts and/or ERPA between the CDM Project Developers/Participants, and/or Sellers and Buyers of the CERs produced. Then when the CERs are verified and certified by the DOE and allocated by the CDM EB Registry based on the documents registered with the approved CDM Project, the non-Annex 1 country will receive its allocation of CERs.

4.5 CER Transactions

The Kyoto Protocol and Marrakech Accords establish the framework for Parties to transfer and trade the CERs, a mechanism called Kyoto rights which is to help Annex I Parties to meet their national obligations. However, neither the Kyoto Protocol nor the Marrakech Accords outline the way in which private legal entities are to participate in this international trading framework, although there is clear recognition that this will occur. It is now clear that in addition to Annex I and non-Annex I countries, Project Developers and/or Project Participants developing and operating CDM Projects may come from the following types of organisations in both the Annex I and non-Annex I countries:- - Governmental bodies (usually departments of government) - Municipalities - Foundations - Financial institutions - Private sector companies - Non governmental organisations

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-11 The participation in whatever combination of the various organisations or legal entities from the Annex I and non-Annex I countries in the CDM Project in non-Annex I countries will be regulated by the laws of the non-Annex I country; the laws of contract; and the ERPAs for the transfer of the CERs. Like the CDM Executive Board Registry, National GHG Registries (NR) are also electronic databases for recording and tracking units. They are not responsible for how ownership in an allowance is traded but how the allowances are transferred between accounts. NRs are developed and maintained under the control of national governments. As there can only be one registry for each jurisdiction, registries are a government monopoly. According to the Marrakech Accords (MA) see decision 19CP.7 the functions to be performed by a registry are to ensure that the accurate accounting of the issuance, holding, transfer, acquisition, cancellation and retirement of CERs as well as the carry over of CERs. In addition these registries may perform these or similar functions for units in a domestic e.g. UK or EU scheme. Allocation of CERs into different accounts in the CDM registry after they have been issued by the EB assumes that there is a pre-agreed basis for the allocation of CERs among the Parties, Project Participants, and in some cases other stakeholders as well. The basis for this allocation will be set out in the project contract and/or ERPA (Emissions Receipt Purchase Agreement) between the Project Participants and/or Investors and/or arrived at through the direct application of the relevant national and international laws. The contract and/or ERPA and/or national law must address issues of responsibility for any shortfall in expected CERs; exact consequences of shortfalls (penalty payments or the purchase of equivalent credits) and the rights to receive surplus credits. Establishing the legal relationships with regard to CERs has so far been within the scope of the contracts. Other host countries have decided to approve the transfer of the CERs from a seller to a buyer, but not define legally what a CER is and what exactly is being transferred. This facilitates the CDM process but could cause problems later, if it is decided at a future date by a non-Annex I country, that a CER is a national natural resource of the non-Annex I. Some countries because they consider it a national natural resource have decided that a CER cannot therefore be transferred without a fee or approval from the government for the transfer and sale of a national natural resource.

4.5.1 Contractual Arrangements

A CDM project can be structured, and the CERs arising from a CDM project sold, in a variety of ways. There is no universal approach to the way in which the creation and sale of CERs is documented although the nature of the contracts will to some extent depend on whether the deals are spot or forward transactions. Contracts for the sale and purchase of CERs from CDM Projects are usually individually negotiated for each project, taking into account the specific circumstances of the individual project, the governing law of the contract and the legal and business constraints binding on each of the parties.

4.5.1.1 Emission Reduction Purchase Agreements (ERPAs)

In some instances, the CERs may be part payment on an equity investment or financial loan to a CDM Project. Or a Project Developer and Annex I private entity joint venture partner may share CERs in accordance with the agreed pro rata distributions. In the case

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-12 of the first CDM Projects CERs have been sold as a separate project asset under stand alone contracts or Emission Reduction Purchase Agreements (ERPAs). Rarely have the CERs been incorporated directly into the project investments or the technology transfer agreements. The sale of CERs from a CDM Project is similar to the sale of any commodity from a project e.g. electricity under a power purchase agreement). However CDM projects present particular unique risks due to the developing nature of the international framework upon which they are based. While most of the risks are not insurmountable they must be identified and managed in the ERPA. There have been a number of approaches to match buyers and sellers in the CDM market. These include: Major buyers implementing a competitive tender process or potential CDM Projects from which they will purchase CERs; Buyers issuing a request for CERs from the market; Sellers approaching potential buyers with a term sheet or project description to propose an investment in a CMD Project Sellers arranging with independent brokers to transact their CER on the market. A large number of the first CDM Projects registered with the CDM EB have been involved in the first process, where Project Participants tender to buyers for example, the Netherlands Government CERUPT funds, the World Bank Carbon funds or the European Bank for Reconstruction and Development.

In the case of the Dutch CERUPT funds, the tender process involves using standard contractual terms and conditions, which may be negotiated once a CDM Project has been selected. The ways in which CERs can be sold into the market include:- (i) a direct and immediate sale of CERs which have already been generated by a CDM Project over a certain period (i.e. a spot transaction); (ii) a direct sale of CERs from a future activity of a CDM Project (either all of the CERs from the project or a certain amount from each Verification period) (i.e. like a forward sale); and (iii) a sale of Options to purchase agreed volumes of CERs at a later date (i.e. an option agreement). The sale of CERs can also occur through a combination of the above, for example a sale of CERs already generated by the Project, and a fixed amount of those which will be generated for five years in the future and options to purchase additional CERs at the market price. CER clauses can also be incorporated into power purchase arrangements or investment contracts. For the first CDM Projects the contracts or EPRAs are in the form of forward contracts which will purchase future streams of CERs produced by a CDM Project. The agreed price for each CER varies depending on whether the ERPA provides for initial financing, which means a higher risk for the buyer, so a lower price for the CERs or whether the payment only becomes due when the CERs are verified and allocated by the CDM EB Registry. Price certainty for CERs at the outset would assist the Project Developer in finding finance or an investor; and if the market price of CERs is likely to increase then the purchaser wants this benefit to accrue to him by fixing the lower price for the CER in the initial contract. Figure 4-1: Contractual Arrangements CERUPT Program, The Netherlands

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-13 Projects at an early stage of development, for example PIN the Parties usually enter into a simple binding legal agreement. This Agreement secures an arrangement between the buyer and the seller to deal exclusively with each other for a defined period or which fixes the CERs at a certain price and gives the Parties time to negotiate the final agreement or ERPA. This first Agreement could include the following: An Exclusivity Agreement whereby the Parties agree to only negotiate with each other for a fixed period; or A binding Letter of Intent setting out the basis agreement between buyer and seller for the transaction of CERs and/or A List providing a summary of the major terms contained in the ERPA. The Exclusivity Agreement can be incorporated into the Letter of Intent. The World Bank’s Prototype Carbon Fund (PCF) and the Netherlands Government’s ERUPT and CERUPT funds have been the primary purchasers of emission reductions in the early carbon trading market. These initial ERPAs have protected the investor/ buyer of the CERs because of the degree of uncertainty and no registered CDM Projects. There are now many registered CDM Projects, a CDM EB Registry and a system of trading CERs. Also, now the Annex I and non-Annex I countries are more knowledgeable about CDMs, as are the banks and financial institutions and insurers. There is now more certainty regarding the future stream of CERs from a CDM Projects and banks and financial institutions are more likely to finance to Annex I country investors whether government agencies or private entities, and now also non-Annex 1 government and private entities in for example, a non-Annex I country unilateral CDM Project. A GHG transaction / trade consists a combination of Immediate Settlements, Forwards, and Options. Contracts to execute the trade are becoming standardised and contain at least the following elements: Description of the source of reductions including the methodology, technology or process improvement implemented to create GHG reductions Methodology and responsibility for verification of actual GHG reductions Statement of additionality qualification Description and warranties of the seller’s claim to ownership of the reductions Description of the structure of the transaction including the type of purchase , the schedule of delivery and payment reductions etc. Discussion of warranties and risks including protections for non-delivery and non- payment , provisions for the type of reduction not being recognised by appropriate international and domestic regulatory bodies etc.

4.5.1.2 Comparison of ERPAs – Lessons learnt

The development of an ERPA was in the past buyer orientated, with a concern to protect the rights of the buyers and to ensure CERs and VRs were successfully transferred to the buyer.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-14 The buying and selling of emission reductions generated under the Kyoto Protocol was initiated by forward thinking buyers — namely the participants in the World Bank's Prototype Carbon Fund, and the ERUPT and CERUPT tenders run by the government of the Netherlands. These early entities developed the first template for the Emission Reduction Purchase Contracts (ERPAs). The World Bank's original template ERPA formed the basis of the first International Emission Trading Association's (IETA) template ERPA. Since then both the World Bank and IETA have revised their template documents various times. As the carbon market has grown, these existing templates have served as the starting point for determining standard industry practice. While the first work and subsequent revisions by these organizations were intended to produce legal documents that would reflect the interests of both the buyer and seller, this is not always the case and therefore sellers should also take advice before agreeing to the terms and conditions of an EPRA especially if produced by the buyer. The EPRA developed by IETA is now more balanced and reflects the interests of both the buyer and the seller. As the carbon market continues to develop, and moves from a buyers market to a sellers market, then the seller must have the same degree of certainty in any ERPA as the buyer. It is important that entities selling CERs under forward contracts receive proper legal advice.

There are key issues which must be mentioned in any ERPA. An ERPA can be a simple agreement between a buyer and a seller for CERs to produced from a CDM Project or it can be more detailed and contain additional Clauses which address not only the buying and selling of the CERs but the CDM Project producing the stream of CERs; whether it is better to transfer verified emission reductions (VRs) or CERs; and what happens if there is a shortfall or over production of CERs; and the usual conditions in any agreement of the applicable law; arbitration; and amendments to the agreement. The more recent EPRAs also have Schedules attached which contain copies of the important documents; the PDD for the CDM Project; the Monitoring plan; and the letter of Approval for example. Any ERPA must contain the following clauses. 1 Nature of the Rights being sold. CERs or Verified Emissions Reductions (VRs). The Seller may prefer that the delivery obligations are completed upon the transfer of Verified Emissions Reductions through the submissions of a Verification Report. Then the CERs or VRs would be allocated by the CDM EB Registry to the various accounts of the Project Participants on the basis of the agreement between them. 2 Legal title to CERs (Appropriate Parties to the Contract). The question is who is entitled to the GHG Reductions which underlie the CERs. Entitlement to these GHG Reductions will determine the appropriate Seller under the EPRA. Seller should examine all relevant documents to ensure that the legal rights flowing from the GHG Reductions have not already been assigned to another party. The seller must also ascertain whether the Host Country is likely to consider that the GHG Reductions are a country resource, a natural resource and therefore cannot be sold by private entities.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-15 3 Purchase and Sale of the CERs. The Contract should clearly state that the legal title to CERs or VRs, is to be transferred to the Purchaser/Buyer and identify at which point such a title transfers. The Seller must ensure that the Buyer is obligated to pay for the CERs, VRs before it receives legal title to them. Then, if the Buyer fails to pay for the CERs, then the Seller can sell them to another market Purchaser without having to retrieve legal title from the Buyer. Contractual warranties should be provided in the ERPA that the Seller has full right and title to the GHG Reductions and has not sold, leased or otherwise dealt with the GHG Reductions in any way other than as contemplated in the ERPA. There is no existing encumbrance on the CERs. The ERPA should clearly state the point at which legal title passes from Seller to Buyer. It is usually with the transfer of the CERs or VRs and therefore under the final control of the CDM EB Registry and its issuance procedures. 4 Obligations to ensure CERs are issued to the Buyer. This should be detailed in any ERPAs to ensure that there is no confusion regarding the number of CERs; the transaction date; any special requirements of the issue; and whether there are options to be considered and if so the calculation of the price for the CERs. 5 Quantity of CERs being acquired. How many CERs are to be produced by the CDM Project and how are they being allocated between the Project Developers/Participants/Investors. In many of the EPRAs there is a Minimum Clause whereby each year the CDM Project generates the minimum amount of CERs as agreed in the contract and these are verified and issued to the buyer. If the Project generates more CERs than the minimum amount then more CERs can be verified and certified and upon issuance by the CDM EB registry be transferred to the buyer. In this way the agreed numbers of CERs sold may be transferred earlier. 6 Options. This is an Option to acquire additional or excess CERs produced by the CDM Project. For example in consideration of the buyer purchasing the CERs, the buyer is given an option exercisable at the buyers sole discretion to purchase all or part of any additional or excess CER on the same terms and conditions as the buyer purchase the contract CERs under the EPRA on condition that the purchase price for any additional or excess CERs shall be at the then prevailing market price, or a price to be agreed upon between the seller and the buyer. 7 Shortfall provisions. Managing a shortfall in the delivery of CERs and whether there will be penalty clauses for a failure to deliver. Whether the buyers requests the seller to take out insurance to cover this contingency. 8 Purchase Price. How will this be calculated by the parties. The current market price for a CER or the price at the date when the CERs will be produced. This is for negotiation between the parties and and the final price will reflect the likelihood of the CMD Project successfully producing the CERs in the PDD.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-16 9 Payment of Costs. It is usual for the seller to request the buyer pay for all the costs. However this again is for negotiation between the parties. In some instances costs could be shared between the parties. Also non-Annex 1 countries could assist seller if it is a non-Annex 1 government entity by making the CDM Project process as inexpensive as possible. It would also encourage sharing of costs between the parties and encourage CDM Project development in the non-Annex 1 country. 10 Provision of Documents and other information. The EPRA should have as an Annex to it all the relevant documents of the CDM Project. A copy of the PDD, the Monitoring report; the Letter of Approval; and the financing agreement for the CDM Project. 11 Liability and Indemnities and Warranties. 12 Force Majeure. 13 Dispute Resolution and Choice of Law. Managing the major risks discussed above in relation to the Project and the international and domestic legal systems within in which it is based. Two example ERPAs, one issued by the International Emissions Trading Organisation and one by the Danish Ministry of Environment, are attached in Annex 2 respectively 3 for further information on how Clauses could be formulated. In 2002 the IETA Contracts Working Group identified the need for an Emissions Trading Master Agreement (ETMA) to be applied in the coming EU Emissions Trading Scheme. Version 1.0 of the IETA ETMA was launched in June 2003, and was the first contract used for transactions of the EU Allowances. The objective of this work has been to facilitate trades, and, by streamlining the contractual process, helping to reduce transaction costs in the market. During spring 2004, the Working Group carried out an extensive revision process of the ETMA. Version 2.0 was published in July 2004 and is based on companies’ experience from early trading in the EU emissions trading scheme. A new version of the ERPA will be available from September 2006 on the IETA website (http://www.ieta.org/). There is a requirement that the ERPAs are balanced and reflect also the interests of developers of CDM projects especially if the non-Annex I entity participating is in a weaker position both financially and legally than the prospective buyer of the CERs. One purpose of an ERPA for a non-Annex I country or a participant from a non-Annex I country is to provide publicly available legal documentation that will assist sellers to participate in the international carbon market on an equal footing with more experienced buyers. The EPRA should identify key issues for sellers, and provide a language that can be used as the starting point or as a counter proposal in negotiations with buyers. Such a document may form the basis of subsequent agreements with medium and smaller buyers, however it is difficult to see that many larger institutions will abandon their preferred ERPA precedents. Transactions range from simple purchases and sales to structured options transactions. Basic structures include: Immediate Settlement (Spot) trades are trades where the terms of a bid and offer are set on the trade date with delivery and payment occurring in a standard timeframe shortly thereafter.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-17 Forward Settlements trades resemble immediate settlement trades, with the difference being that terms are again set on the trade date, but delivery of reductions and payment are deferred to a future date also specified at the time of trade. Options are derivative products in which the parties buy or sell the option, or right decided, whether or not to enter into a specified cash transaction at (or before) a future date, referred to as the strike date. The most common types of options are call options and put options, though there are many other forms. Call options allow a buyer to lock in the right to purchase reductions at a specified date at a specified price. Put options allow a seller to lock in the right to sell reductions at a set price.

4.5.1.3 Risk sharing and CER price determination

The sharing of risk in case the actual CERs generated do not match the projected amount is important to all parties to the CDM Project. ERPAs stipulates only that the rights to CERs is transferred from Project Participants to the Purchase at a particular moment in time, for example payment, without attaching any significance to the characterisation of a CER under the national law of a non-Annex 1/host country. These types of ERPAs assume: That, while there is no distinct property right over the CER, the owner of the land can contractually promise to manage the property in a way to increase the carbon potential; That the right to CER is a separate alienable right which the owner of the land can convey to other without conveying the whole ownership of the property. This has been reflected in the development of ERPAs to reflect the concerns of all the parties to the production and sale of CERs. Undertaking any CDM Project also involves different risks. Risks the CDM Project will not be implemented; risk the implementing agency will become insolvent; risk that the CDM Project will not produce the number of CERs in the PDD. Each Project Participant will identify risks specific to its interests and once negotiated and agreed commercially will be reflected in the contracts. The general rule is that a risk should be contractually assigned to the Party which is better able to manage that risk. Risks which are beyond the control of either Party (e.g. force majeure or governmental interference) and if these risks are assigned to a Party by the contract, the assignment of risk should be reflected in the contract price. The greater the risk involved in purchasing the CERs, the lower the price that a buyer will be willing to pay and the more stringent conditions it will endeavour to place on the seller who is often the Project Developer. For example, if a CER purchaser is required to provide upfront payments for CERs to provide a CDM Project with the finance to become operational, the purchaser’s risk exposure is much greater than if payment is made only after CERs are delivered. A purchaser of CERs will aim to place various obligations onto the seller of the CERs to mitigate the level of risk. Obligations could include: The requirement the seller maintain a certain level of credit rating; That the Seller must have the project operational by a certain date; Penalties are imposed for breach of the agreement.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-18 Generally the parties will allocate the risks discussed above on the basis of which Party has control over the occurrence of that particular risk. Risk allocation will be dealt with through contracts between the various participants, financiers and purchasers of CERs by the following measures:- Guarantees from parent companies or Host Country governments as to the financial stability of the Project Developer; Force Majeure clauses covering risk contingencies such as a change in law or policy in the Host Country making the project unfeasible or natural events leading to lower than expected emissions reductions; Placing particular risks to other Parties, for example, contractors or the DOE for the project; Adequate warranties and indemnities in contracts; Procuring insurance for various project and credit risks; and Providing rights of termination in certain events.

4.5.2 The CDM Registry

The CDM Registry is maintained by the Executive Board on behalf of the non-Annex I Parties. It is a standardised electronic database to ensure accurate accounting of CERs. According to the Marrakech Accords the CDM Registry is where:- CERs are issued and forwarded to Project Participants; CERs are held in accounts; the share of the proceeds is managed; CERs may be cancelled to make up for an over issuance of CERs based in erroneous Verification by the DOE; only CERs may be held in CER Registry accounts; and, where information subject to any confidentiality requirements is made publicly available. In additional the Registry performs the business and administration and other functions e.g. working with the network of national registers and the International Transaction Log (ITL). The CDM registry is established in a similar way to the National Registries. It has the following accounts: 1. Pending Account: The general account in which the CERs are issued following the issuing decision by the EB. There is only one Pending Account which holds all the CERs which have not yet been forwarded to the respective receiving accounts. From the Pending Account CERs are then formally forwarded to the accounts defined by the forwarding instructions of the CDM Project. 2. Forward Account: During the Executive Board meeting 21, the EB agreed that Project Proponents/Participants could request a partial forwarding of the CERs issued to the Project Proponent/Participants. It also allows for the remaining CERs to be collected for an unlimited time period in the Pending Account of the CDM Registry, providing more flexibility to the Project Proponents/Participants. They are now able to

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-19 delay the forwarding of CERs that are not under contract to later at a time when they have found a suitable buyer at a good or higher price. 3. Temporary Accounts for Annex 1 Countries: In the absence of ITL and or a National Registry not being in place, Annex 1 Parties and their entities will have accounts in the CDM Registry. These accounts have a temporary nature and will be closed once the ITL is operational and the respective National Registry of the Party is connected to the ITL. At this stage ALL CERs in the temporary account will be removed to the respective accounts in the National Registry. Entities that have an authorisation from more than one Party will have an equal number of temporary accounts in the CDM Registry. For example entity Z may have an authorisation from the UK and the Netherlands for different periods. Consequently it will have two temporary accounts, one under the UK and one under the Netherlands. 4. Share of Proceeds. This is the account into which 2% of the Share of Proceeds is transferred. This account is managed by the UNFCCC Administrator. The EB deducts 2% of the CERs to be used for the benefit of developing countries that are particularly vulnerable to the effects of climate change (unless the CDM project occurred in a “least developing country” in which case no deduction will occur) and may also deduct a share of the credits to cover the administration expenses of the CDM. 5. National Registry Account: The remainder of the credits are transferred from the CDM EB “Pending Account” into the National Registry Accounts of the Party or Parties, in accordance with the instructions of the Project Participants. The Parties may then transfer the CER’s into public or private party Sub –Accounts

In the CDM EB Registry National Registry Accounts there are two limitations. First, while it is clear that Annex I Parties (i.e. Kyoto Protocol signatories with emission reduction obligations) can establish private party sub-accounts into which CER’s can be transferred, it is not clear whether CDM non-Annex I countries/Host Countries can establish such Sub- Accounts, although they can have National Registry Accounts. Second, a Party can transfer or acquire CER’s ONLY if: it is a Party to the Kyoto Protocol; for Annex I countries only, if it has established its “assigned amount” (i.e. it requires emission reductions under the Kyoto Protocol); (a) it has a national system to estimate anthropogenic GHG emissions; (b) it has a National Registry for GHG credits; (c) it has submitted the required GHG emissions inventories under the Protocol; and (d) it submits any required supplementary information related to its assigned amount All CERs are electronic rights which must be traded within an international Registry system comprising of: (i) the CDM Executive Board Registry which is responsible for initially issuing the CERs; and (ii) Annex I national registry accounts (the Kyoto Protocol rules do not provide that non- Annex 1 developing countries can establish national accounts).

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-20 The CDM Executive Board is responsible for developing a CDM registry system. Various Annex I countries have developed their own registry systems for their own trading regimes (for e.g. the European Union) and which will be compatible with the CDM Executive Board Registry. The CDM Registry Administrator operates the Registry under the authority of the CDM Executive Board (EB). The CDM Registry unlike the National Registries will not allow transfers between two accounts within the CDM Registry, as this is considered trading which under Article 17 of the Kyoto Protocol and is only possible between Annex 1 countries which have ratified the Kyoto Protocol. The Executive Board has on a number of occasions considered the possibility of having non-Annex I countries move CERs around within the CDM Registry but the issue is whether this would be trading within the CDM EB Registry. This is however a decision for COP/MOP to make. It is however accepted that those CERs which have been issued to a non-Annex I account can be forwarded to an Annex I account once a Letter of Authorisation has been submitted for the respective receiving entity or Party.

4.5.2.1 Trading/transfer arrangements

A trade is the closure of a contract between two parties to transfer allowances; a transfer refers to the transfer of allowances between the registry accounts. In the existing trading schemes legal entities are free to trade however they like: internally, through pools, bilaterally, through brokers or through an exchange. Under the Kyoto Protocol and also the European Union Emissions Trading context private entities will be authorised by an eligible Kyoto Party/European Union Member State to open an account with a National Registry and participate in trades that involve transfers of units to or from their registry accounts. These trades might be spot trades which result in immediate transfers; forward trades which result in a future transfer; or option trades which may or may not be exercised and therefore might not result in a transfer. These transfers of units will be to or from their Registry account. (See: Decision 18CP.7 Annex para.2.) This means that the Parties are ultimately responsible for transaction integrity and ensuring that the participation of their legal entities is consistent with the rules applying to the Parties to the KP and MA. The legal consequences arising from this are: 1. the relationship between an authorised legal entity that holds an account in a National Registry (NR) and that NR must be regulated domestically in such a way that transactions between accounts in different national registries are fully compliant with and respect the treaty-based legal relationship between National Registries; 2. a Party State must secure the integrity of its Register and the ability to perform its treaty obligations as a Party State, as between other Party States. 3. an authorised legal entity must be given legal means to commission the NR in which it holds an account to transact with another NR in order to be able to perform a transaction with an authorised legal entity holding an account in that other NR.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-21 4.5.2.2 The International Transaction Log

At the COP/MOP1 Parties agreed that the International Transaction Log (ITL) should be fully operational by April 2007 and comments on testing by the 31st October 2006. In the absence of the ITL not being operational any CER that is being issued by the CDM Registry will not be able to be transferred to the Annex I Registries. The CDM Registry will hold temporary accounts in the CDM Registry for those Annex I Parties that require an account in order to receive their CERs. As soon as the ITL is operational those CERs issued to the temporary account will be formally checked by the ITL and then transferred to the respective account in the National Registry of the Annex I Country.

4.5.2.3 The case of unilateral CDM projects

During the Executive Board EB 19 the Board confirmed that it would consider unilateral projects to be eligible for CDM allowing non Annex I countries to register CDM projects without the participation of an Annex I country. The EB however, also suggested that when a non Annex I Party wants to forward CERs to an Annex I Party it would require it to submit to the board a Letter of Authorisation from the Annex I Party receiving the CERs before the CDM EB would approve the forwarding of the CERs.

4.5.2.4 The European Union Emissions Trading Scheme (EU-ETS)

For the purpose of allowing participating entities in the EU-ETS trading EUAs, a EU-ETS Registry has been created and the Registry Administrator records:

CO2 allowance and units that are allocated to and held in installation account; Annual verified emissions for installations; The movement of allowances to and from accounts; Annual compliance status of installations. Electronically linked National Registries are central to both the European Union Trading Scheme and wider international emissions trading under the Kyoto Protocol from 2008. As entities participting under the EU-ETS are allowed to partly use CERs for meeting their individual CO2 emission caps, it is important that linking with the CDM registry created. Once the ITL is operational then these National Registries will be linked and able to trade with the CERs held in the CDM Executive Board Registry.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-22 Part II Armenia - Country information for CDM Project Development -

CDM Handbook Armenia_FINAL Oct 2006_English.doc 4-23 5. General Country Information

5.1 Country Overview

Armenia is a landlocked country with a total area of 29.74 km2 and a population of approximately 3.2 mln. Armenia is located between Europe and Asia in a region known as the South Caucasus. It is bounded in the north by Georgia, in the east by Azerbaijan, and by Turkey and Iran in the south. The greatest extend from North–West to South–East comprises 360 km, from West to East about 200 km. It is a mountainous country, with the lowest point being 375m above the sea level (near the Debed River in the north of the country) and the highest recorded point being at 4095m (the northern peak of Mount Aragats). Overall, the average altitude across the country is 1850 m, but the variations in altitude (up to 3700 m, but more generally 1500-2000 m) have important effects on the climatic and landscape zones within the country. The mountainous nature of Armenia results in a series of highly diverse landscapes, with variations in geological substrate, terrain, climate, soils and water resources. These landscapes support a great variety of habitats, which in their turn support distinctive flora and fauna. The climate varies from subtropical to continental; temperatures can range from –41OC to +42OC. In the southern plain regions the climate is arid and extremely continental. The climate of northern mountainous regions is milder and damper. Annual rainfall is about 570 mm, ranging from 114 mm in the semi-desert zone to about 900 mm in the high mountains. One of the largest alpine and freshwater lakes of the world, Lake Sevan, is located at 1916 m above the sea level and occupies the one-sixth of the whole territory of the country. Out of Armenia’s territory settlement areas constitute 4.6 %, industrial facilities – 5.5 %, forests – 11.2 %, specially protected areas – 10 %. Per inhabitant of Armenia it makes 0,9 ha of land. The Republic of Armenia is an independent, democratic, social and legal state. The Declaration of State Independence of the Republic of Armenia was adopted on 23 August 1990, and the referendum on the Declaration of Independence was held on 21 September 1991. On 21 December of the same year Armenia became a member of the CIS, on 2 March 1992 – a member of the United Nations, on 25 January 2001 – a member of the Council of Europe and on 5 February 2003 – a member of the World Trade Organisation. The Government of the country has executive, legislative, and judicial branches. According to the Constitution and the Law on Administrative Territorial Division, an administrative territorial unit of Armenia is a marz (region) and a hamaink (community). The capital of Armenia - the city of Yerevan has the status of a marz. Marzes are composed of rural and urban communities and Yerevan - district communities. Though Yerevan has the status of a marz, the implementation of state government and local self-government has its specificities. In Yerevan there are two tiers of city governance: central government and local self-government. Local self-government is exercised in Yerevan in 12 district communities.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-1 Almost immediately after gaining independence, Armenia plunged into a period of deep economic and social crises resulting in mass impoverishment of the country’s population. In an effort to reverse the country’s decline and establish a liberal market regime, the Government of Armenia (GoA) introduced comprehensive reforms in the mid-1990s. These reforms, which included the adoption of a macro-economic stability model based on strict fiscal discipline, low inflation and minimum deficits, led to a turn-around in the economy. Between 1996 and 2003, Armenia’s Gross Domestic Product annual growth rate averaged 7.8 %, accelerating in 2001-2003 up to more than ten percent and in 2002-2003 to an estimated 13-14 %12.

Armenia ratified the Kyoto Protocol on December 26, 2002 and as a result participates in the CDM. Since ratification several CDM project developments have been initiated. To date some projects have been progressed already to the stage of registration with the CDM Executive Board. The following illustration provides an overview of CDM project developments underway in Armenia as of October 2006. More detailed information on individual projects are provided in Chapter 10.

12 Enabling Activities for the Preparation of Armenia’s Second National Communication to the UNFCCC, UNDP Project Document

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-2 Landfill Gas Capture and Landfill Gas Capture and Power Generation Project in Power Generation Project in Gyumry (Shirak) Vanadzor (Lori)

Construction of Jradzor Afforestation/Reforestation Small HPP (Shirak) CDM Project (Lori)

Optimization of technological r. Tashir Noyemberyan Tashir Alaverdy ed eb D cement production processes r. r r. Akhuryan r. Dzoraget pa ke LEGEND Ashotsk os V and introduction of power and r r. Stepanavan . M Amasya a rt resource savingRepublic Border technologies at si TAUSH ge ur k t py LORY REGION r agh REGION a . ch SH I RA K ha Mica-Cement CJSC (Kotayk) b Ch r. K m d REGION m u er Region Border a h r. a Ijevan B Pam P Berd . t bak n v k r u . e a r r a t ush o k s H a z

Gyumry h h . T d g r n Spi t ak c r. h City Vanadzor h A . K y r r. Dilijan Lusakert Biogas Plant r . or Reservoir r. Geghadzor K dz as ra r. G ak h etik Project (Kotayk) r h eg . M Artik M r. r. an M a r. Razd t rm an Maralik as Aparan ari h k r. G Sevan e gh Hrazdan L r a . r a o A t k

m e h b S k t Construction of Argichi e a e r s E g Talin d a KOTAYK Gavar ARAGATS ra V K a Small HPP (Gegharkunik) . v REGION r REGION A Ashtarak a G N Eghvard Kotayk . r tar r. Ge r. Masrik

Bagramyan Armavir YEREVAN Vardenis Construction of Echmiadzin et r. ng Martuny ARMAVIR Se ila Gegharot Small vg r. G REGION eu Masis r. r Az at GEGHARKUNIK HPP (Aragatsotn) REGION r. Araks ARARAT REGION y Artashat h c i Vedy g r. Ve r dy A

. r r. Elegis Jermuk VAYOTS DZOR REGION r

Ararat .

Eghegnadzor V Nubarashen Landfill Gas a o rp r A o t r. Arpa r. a Capture and Power Generation n Project (Yerevan) Vayk

Si si an Goris

r. V or ota Substitution of natural gas with Yeghegis Small Scale Hydro n butadiene during production of Project (Vayots Dzor) SYU N I K REGI O N synthetic rubber at “Nairit Kapan

y Factory” CJSC (Yerevan) ch kh Vo r.

Meghry s ak Ar Status of the projects r.

- registered by the CDM Executive Board - approved by the DNA of Host country - endorsed by the DNA of Host country - PIN/PDD is under development

Figure 5-1: Overview of CDM project location under development in Armenia.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-3 5.2 Overview of GHG emission inventory according to the First National Communication

The first GHG emissions inventory by sources and sinks was developed with in the scope of the First National Communication preparation according to the 1995 IPCC Guidelines. The lead agency13 responsible for the GHG inventory preparation is the Ministry of Nature Protection of the Republic of Armenia under the overall guidance and co-ordination of the GHG Inventory Team functions. The National GHG Inventory of Armenia considers five of the six main modules of the IPCC Guidelines. These are Energy, Industrial Processes, Agriculture, Land Use Change and Forestry and Waste. The estimations have not been done for the Solvent Use module because of the absence of relevant methodology both in IPCC Guidelines and at national level. The GHG emissions were estimated based on the volume of the activities. In the calculations IPCC default emission factors were combined with verified emission factors with regard to the specific conditions of Armenia, particularly in the Land Use Change and Forestry sector. The volume of activities was determined according to the activity data provided by the state and institutional statistics, such as appropriate line ministries, National Statistical Service, etc. According to the Resolution of the Second Session of the COP, Armenia has selected 1990 as base year for the first National Inventory. Inventory data of GHG emissions for 1990 were given in more details according to requirements. However, to reveal the dynamics of greenhouse gas emissions the levels of GHG emissions other than the base year have also been estimated for 1985 and 1994-1996. Both, the Reference Approach and Detailed Technology Based Calculations (DTBC) were applied to 1990 base year, while for 1985 and 1994-1996 only Reference Approach was used.

Greenhouse Gas Emissions in 1990 year

Total emissions of gases with direct greenhouse effect - CO2, CH4 and N2O and their values in CO2 equivalent (CO2 equivalent) are given in Table 5-1 and the emission distribution according to source categories is given in Table 5-2 and Figure 5-2 provides data by categories of sources.

Greenhouse Absolute Emissions in CO2 Share in total Gas Emissions equivalent/1 emissions, % CO2 21396.08 21396.08 86.64 CH4 152.76 3207.96 12.99 N2O 0.2941 91.17 0.37 Total 24,695.21 100.00

Table 5-1: The anthropogenic greenhouse gas emissions in Armenia, Gg, 1990

13 The designation “lead agency” implies that the agency has overall responsibility for the inventory and that the agency carries out most, or all, of the following duties: co-ordination/compilation of national inventory; archiving of relevant national data; periodic updating of the inventory; documentation of selection process for national activity data, emission factor, and other conversion factors; documentation of methods and assumptions used; validation of conversion units and other data; verification of inventory estimates; compilation of the inventory report; and reporting to international bodies.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-4 The presented data illustrate that in 1990 CO2 was the main greenhouse gas in Armenia, with the share of 86.64 % of the anthropogenic emissions. The share of CH4 was 12.99 %, N2O - 0.37 %. Anthropogenic greenhouse gas emissions are presented according to source categories and sectors in Table 5-2.

Source Category CO2 CH4 N2O CO2 eqv. Energy 21382.78 80.25 0.1281 23107.74 Industrial Processes 630.30 630.30 Agriculture 47.01 0.1660 1038.67 Land Use Change and Forestry 1/ -617.00 -617.00 Waste 25.50 535.50 Total: 21396.08 152.76 0.2941 24695.21

Table 5-2: Anthropogenic greenhouse gas emissions by source categories, Gg, 1990 1/the balance of this category is negative, i.e. the CO2 removal (697 Gg) exceeds the emissions (80 Gg).

Figure 5-2: Greenhouse gas emission distribution by source categories, 1990 Energy The main part of greenhouse gas emissions are caused by the Energy Sector. The Energy Sector causes 97 % of CO2 emissions, 53 % of CH4 emissions (as a result of fuel leakage) and 43 % of N2O emissions. 93% of the overall national greenhouse gas emissions expressed in CO2 equivalent are caused by the Energy sector. The main part of CO2 emissions is caused by fuel combustion. The distribution of CO2 emissions by fuel types is illustrated in Table 5-4 and in Figure 5-3, and the emission distribution by sectors is presented in Figure 5-4. The large part of CO2 emissions from the fuel combustion is caused by the Energy and Transformation Industry (53 %) and Transport (17 %). Industrial Processes

In Armenia the basic technology of this category, connected to CO2 emissions, is cement production. In 1990, CO2 emissions from cement production made for 630.3 Gg or about 3 % of total CO2 emissions. Agriculture

In this category CH4 emissions was 47.01 Gg, N2O - 0.17 Gg or, 30 % and 57% of total greenhouse gas emissions, accordingly. Sources of CH4 emissions are mainly agricultural

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-5 animals and manure management, N2O emissions are mainly produced from the application of nitric fertilisers. The emissions of CH4 and N2O as a result of burning of agricultural residues are insignificant (0.24 Gg and 0.01 Gg, accordingly). In Figure 5-5, the distribution of methane emissions by animal types is illustrated.

Greenhouse Gas Source and Sink Categories CO2 CH4 N2O Energy 21382.78 80.25 0.1281 A. Fuel Combustion 21382.78 0.28 0.1262 Energy and Transformation Industries 11332.87 0.0670 Industry 2138.28 0.0126 Transport 3635.07 0.0215 Residential and Commercial/Institutional sector 3848.90 0.0227 Other 427.66 0.0024 Biomass Burned for Energy 0.28 0.0019 B. Fugitive Emissions 79.97 Oil and Natural Gas System 79.97 Industrial Processes 630.30 Agriculture 47.01 0.1660 Enteric Fermentation 44.07 Manure Management 2.70 Field Burning of Agricultural Residues 0.24 0.0060 Use of Nitric Fertilizers 0.1600 Land Use Change and Forestry -617.00 Changes in Forestry and other Woody Biomass Stock -617.00 Forests and Grassland Convention1/ Abandonment of Managed Lands1/ Waste 25.50 Landfills 23.70 Wastewater Treatment 1.80 Waste Incineration1/ Other 1/ Total Net Greenhouse Gas Emissions2/ 21396.08 152.76 0.2941 Emissions from International Bunkers 404.80 0.0030

Table 5-3: Greenhouse gas emissions in Armenia by source categories, Gg, 1990. 1/the activity types do not exist in Armenia 2/with consideration of the emission-removal balance in the Forestry sector

Fuel Types Emission Share, % Solid 757.89 4 Liquid 12162.62 57 Gaseous 8462.27 39 Total: 21,382.78 100

Table 5-4: Anthropogenic CO2 emissions from fuel combustion in Armenia, Gg, 1990

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-6 Figure 5-3 Figure 5-4 Distribution of CO2 emissions by fuel types, Distribution of CO2 emissions by Energy 1990 sub-sectors, 1990

Land Use Change and Forestry

In the given category the CO2 emission and absorption is estimated to be caused only by forestry sector. Emission and absorption levels connected to land use change in Armenia are not taken into consideration, as the activity on forest and grassland conversion is not realised, and the abandoned managed lands are located on steep slopes, thus are exposed to constant degrading and do not accumulate carbon. In the forestry sector all amount of accumulated carbon as a result of change in forest and other woody biomass stocks from the sphere of economic activity is estimated. The tree species and forestry peculiarities in Armenia are considered in the calculation of carbon emissions and absorption in the forestry sector, thus local factors were applied, in particular, the values of carbon fraction of dry matter and annual biomass growth. The sectoral experience for national GHG inventory under the First National Communication was consistent with the IPCC Guidelines, 1995. The LUCF sector main emission/sink balance for the baseline 1990 year looks as follows: CO2 emissions form forestry sector were 80 Gg, absorption – 697 Gg, thus the net absorption – 617 Gg.

Waste

The methane emissions in this category were 25.5 Gg or 17 % of total CH4 emissions. More than 90 % of these emissions in the given category is caused by waste sites. Distribution of CH4 emissions by waste categories is illustrated in Figure 5-5. The generated methane is not utilised but completely emitted into the atmosphere. According to corresponding statistics, the amount of waste and wastewater removed from the populated areas is registered. The estimation of emissions was carried out both on the basis of the above-mentioned registration and the local values of appropriate coefficients, and applying methodology and coefficients recommended by IPCC. A discrepancy in the results, received by these two methods, is about 13 %. The aforementioned value of methane emissions is calculated by application of data of national statistics and coefficients.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-7 Figure 5-5 Figure 5-6 Distribution of CH4 emissions by types Distribution CH4 emissions from of agricultural animals, 1990 the "Waste" module, 1990

International Bunkers

In 1990, CO2 emissions from bunker fuel, used for international transportation was 405.8 Gg. The calculations have included the use of bunker fuel only for realisation of international air transportation, since Armenia does not have access to sea and marine. According to IPCC Guidelines emissions from bunker fuel are not included in the balance of the Inventory.

5.3 Enabling activities for the preparation of the Second National Communication

Activities for the preparation of the Second National Communication have started in 2006 under GEF funded enabling activity project implemented by UNDP. In the framework of the project assistance will be provided for the elaboration of Armenia’s second national GHG inventory for the base year 2000. Armenia‘s second national GHG inventory will cover all sources and sinks as well as all gases as mandated by 17/CP8. Therefore, it will consider three direct GHGs: CO2, CH4 and N2O and other indirect GHGs, such as: CO, NOx, SOx and NMVOC. In addition, estimates of HFCs, PFCs and SF6 will be provided, that were not reported under the Armenia’s First National Communication. Emissions released from bunker fuels will be estimated and reported separately as instructed by the guidelines. Estimates of the key sources, sensitivity analysis and uncertainty level will be provided. The second GHG inventory will report on estimates of aggregated GHG emissions and removals expressed in CO2 equivalent. In addition, indicators such as CO2/GDP and CO2/Capita will be estimated mainly for the purpose of comparison. Work on improvement of emission factors will be continued and studies will be conducted on identification of new GHG emission sources. Recalculations for the years covered by First National Communication will be made as well. Other years may be covered to provide for trend analysis, as permitted by data availability. Special attention will be given to the key source categories, and a sensitivity analysis will be conducted.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-8 With respect to emission factors and methodologies, in most of the cases default factors provided by IPCC 1996 Revised Guidelines and Good Practice Guidance (GPG) 2000 (as well as subsequent ones, if/when released) will be used. However attempts to improve the quality of GHG inventory have started in June 2003 through the GEF regional project. The progress made so far under this project has addressed the national arrangements for compiling, archiving, updating and managing GHG inventories. Armenia’s system of GHG inventory is under the process of documentation. Archiving of activity data and estimates is underway; the methodology choices are documented for the key sources. The national strategy aiming at improvement of quality of GHG inventories is drafted.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 5-9 6. CDM Policy Framework in Armenia

6.1 Background

The Republic of Armenia signed the United Nations Framework Convention on Climate Change (UNFCCC) on June 13, 1992 and ratified it as a non-Annex I country on May 14, 1993. In 1996, the UNDP/GEF funded project ”Armenia - Country Study on Climate Change” was launched in order to support Armenia in capacity building and developing its First National Communication The ultimate objective of this project was building capacity in Armenia to fulfil the country’s commitments to the UNFCCC and respond to the objectives of the Convention on a sustained basis. Within the framework of the implementation of Phase I of the mentioned project, Armenia’s First National Communication was developed and presented in Buenos Aires in 1998, at the fourth Conference of the Parties to UNFCCC. The First National Communication incorporates: the inventory of greenhouse gases (GHG) for 1990, projection of GHG emissions till 2010, climate change forecast scenarios for Armenia, and possible impacts of these changes on the country’s economy, water resources, ecosystems and health of population. The Communication also incorporates materials on information provision, systematic observations in Armenia as well as a number of studies pertaining to the latter. In 1997, the Climate Change Informational Center along with its web site (www.nature- ic.am) was established aiming at provision of the information on ongoing and envisaged environmental projects targeted to climate change mitigation, as well as development and dissemination of publications and awareness rising materials. After completion of the First National Communication, Armenia received additional funding from UNDP/GEF for incorporating a technology needs assessment in priority areas. The elaborated report also provides the outcomes of a self-assessment of national needs for GHG abatement and adaptation technologies and prioritised them under a set of evaluation criteria agreed by experts and stakeholders consulted. After selection of key technologies, a package of project proposals, addressing each selected technology option was developed. GEF has supported also the regional project aimed at national capacity building for development of GHG inventories. This project targets 12 countries from Eastern Europe and Newly Independent States (NIS), including Armenia. By strengthening the institutional capacity to prepare inventories and establishing a trained, sustainable inventory team, the project will help countries to reduce uncertainties and improve the quality of inventories for subsequent NC. This, in turn, will allow countries to improve national strategies for reducing greenhouse gas emissions. In 2003 the UNDP/GEF funded project - “Armenia – National Capacity Self-Assessment for Global Environmental Management (NCSA)” started. The objective of the project was to determine the priority needs, and plan of the activities and measures for developing Armenia’s capacity to meet its commitments to the global environmental management. The project was focused on capacity related issues that are

CDM Handbook Armenia_FINAL Oct 2006_English.doc 6-1 common across the UN environmental conventions, including needs associated with strengthening institutional mechanisms, environmental assessment, monitoring and research, improving the dialogue, information exchange and co-operation amongst all stakeholders. As an outcome of the project, the national NCSA Action Plan for 2004-2008 has been developed and approved by the Governmental Decree. On December 26, 2002, the National Assembly of Armenia ratified the Kyoto Protocol, which made the Armenia the 108th Party to join the Protocol. Thus, Armenia has met one of the main requirements for participation in Clean Development Mechanism. It is important to mention that Armenia, as a non-Annex I country, does not have any quantitative obligations regarding greenhouse gases emissions reduction or limitation.

6.2 Implementation

On September 16, 2003, the Ministry of Foreign Affairs of the Republic of Armenia submitted a notification to the UNFCCC Secretariat on the assignment of the Ministry of Nature Protection (MoNP) of the Republic of Armenia as Designated National Authority (DNA) for CDM in Armenia. The Head of Environmental Protection Department of the MoNP acting as UNFCCC National Focal Point has been nominated the DNA Contact Person. Contact details are provided in Annex 4. On November 9, 2004, the Memorandum of Understanding between the Government of the Republic of Armenia (MoNP) and the Government of the Kingdom of Denmark on Co- operation for the Implementation of the Kyoto Protocol was signed. The main objective of the Memorandum is to facilitate the development and implementation of GHG emissions reduction project activities in the Republic of Armenia and the transfer to Denmark of the agreed part of the Certified Emission Reductions (CERs) resulting from those project activities in accordance with Article 12 of the Kyoto Protocol. The Memorandum was ratified by Decree of the President of the Republic of Armenia on March 9, 2005 and entered into force on March 17, 2005. Starting from 1998, four year Action Plans were developed for the implementation of commitments of Armenia under UNFCCC. The Action Plans adopted by the Government Decisions set measures, responsible and co-operating national agencies for the implementation of certain activities and measures. The current Action Plan adopted in 2004 for the period of 2004-2008 has envisaged several measures for the implementation of the Kyoto Protocol in Armenia. Particularly is planned to elaborate and adopt the procedures for national approval and implementation of CDM projects. On July 19, 2006, the Government of the Republic of Armenia adopted Decision N-974N on “Implementation of Projects within the framework of the Clean Development Mechanism of the Kyoto Protocol under the United Nations Framework Convention on Climate Change”. In order to ensure the implementation of Article 12 of the Kyoto Protocol under UNFCCC, the Government of the Republic of Armenia has decided to: 1. Recognise that the Ministry of Nature Protection of the Republic of Armenia is the Designated National Authority for the Clean Development Mechanism, which is defined

CDM Handbook Armenia_FINAL Oct 2006_English.doc 6-2 by Article 12 of the Kyoto Protocol under the United Nations Framework Convention on Climate Change. 2. Define that the Ministry of Nature Protection of the Republic of Armenia: a) Approves the compliance of project activities implemented under the Clean Development Mechanism with the requirements of Article 12 of the Kyoto Protocol; b) Certifies the voluntary participation of project participants in projects implemented under the Clean Development Mechanism; c) Ensures availability of information on projects implemented under the Clean Development Mechanism; d) Conducts negotiations with potential investors and develops strategic directions for implementation of projects under the Clean Development Mechanism; e) Ensures the efficient participation of the Republic of Armenia in international processes of the Clean Development Mechanism under the Kyoto Protocol; f) Ensures the co-ordination of Clean Development Mechanism projects and project documents with relevant stakeholders and organisations, according to the procedures defined by the legislation of the Republic of Armenia.

The decision has also authorised the Minister of Nature Protection of the Republic of Armenia, within a three-month period, to develop and approve the ‘Procedure for submission of project documents under CDM’ as well as negotiate (jointly with the Ministry of Foreign Affairs of the Republic of Armenia) with international organisations and/or donors for provision of technical and financial assistance to the DNA. With this regard, the DNA has already initiated drafting of the Procedure for CDM projects submission, evaluation and approval. The document will be introduced for approval after broad consultation with relevant state organisations and the national legislation. At the same time, simultaneously with the approval, the DNA will have to address the issues of not lesser importance such as finalisation and approval of the DNA’s structure and detailed functions of the DNA and its Secretariat as well as mechanisms for their sustainable financing.

6.3 Institutional set up of the Armenian DNA

The draft procedures aim at 1) utilising the existing institutional structure of the DNA; 2) being less bureaucratic and 3) relying on existing institutions, as well as using the experience gained so far from the approval process of 3 CDM projects in Armenia. The final decision on a CDM project endorsement / approval is proposed being done by the DNA (MoNP) based on positive evaluation of two other key ministries. The DNA while using the already established practice of consultations between different ministries will acquire the official opinion of the Ministry of Trade and Economic Development of Republic of Armenia and the Ministry of Social Security of Republic of Armenia. The choice of these key-ministries is justified by the fact that these bodies are responsible in the country for preparation and implementation of strategy in the field of economic and social development, i.e., for the social and economic components of the country’s sustainable development. As to the environmental component, the DNA itself will assess it, as the responsible Ministry for environmental policy.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 6-3 To provide more transparency and efficiency of decision-making on CDM projects, the Armenian DNA has defined a set of basic criteria for project evaluation, which reflects the objectives of the country’s sustainable development. These criteria will serve as a constituent part of the official procedure for CDM project approval. In addition, the conformity of the project objectives to the policy in the particular sector has to be confirmed by the corresponding ministry. The DNA will request also an official letter from the project national participant(s) stating their willingness to participate in the CDM project. Besides that, the project participants have to submit the official protocol on the results of public hearings and/or comments received from stakeholders and public during the consultation period.

6.4 DNA Secretariat

The DNA organises and implements its activities with assistance of the DNA Secretariat. The Secretariat functions in the initial phase will be entrusted to the Environmental Protection Department of the MNP and the Climate Change Co-ordinating Group. Whereas, the final operational and financing structure of the Secretariat is still a subject of discussion, the main administrative functions of the Secretariat proposed by the draft Procedure are as follow: Organise and regulate the process of submission, evaluation and approval of the CDM project documents; Carry out consulting for development of project documents, including development and provision of Project Idea Note (PIN) forms, guides and other relevant materials; Register the Project Design Documents (PDD) of the project activities in the national CDM database and make the documents public in electronic format; Assist the DNA in development of sustainable development criteria for CDM projects; Review officially submitted project documents (PIN/PDD) and prepare evaluation reports for decision making by the DNA; and Develop and maintain a publicly accessible database containing information from all approved project design documents and their evaluation reports on which the Designated National Authority based its approval decision as well as subsequent validation and verification reports on emission reductions from approved projects.

6.5 Expert Group

At the stage of projects evaluation, the DNA may request the services of experts. The objective of this Expert Group is to review the project documents in terms of their conformity with national strategies and policies, examine technical aspects of the project, assess the projects in terms of the CDM requirements; and develop and submit to the DNA (Secretariat) relevant evaluation report. The Expert Group will include independent experts, representatives of sectoral ministries as well as their separate divisions, etc. It will also include the trainees of the CDM capacity building workshops organised within the EC TACIS project.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 6-4 The issue of financing of the experts to be included in the Expert Group is still under discussion. At the beginning, the experts may volunteer, however, later on a transparent mechanism of their sustainable financing should be developed in order to ensure the Group’s effective work.

6.6 Procedure proposed for CDM project approval in Armenia

National approval of CDM projects has a twofold purpose: 1) to formally indicate that the country is voluntarily participating in a specific project activity; and 2) to acknowledge that the project is assisting in achieving national sustainable development goals. It must be stated that the national approval process reviews the conformity to the CDM requirements and does not free the project owner of complying with national legislation and regulations. The detailed description of the Procedure proposed for CDM project approval in Armenia is given in Section 7 of the present handbook.

6.7 Conclusions

As of today, the DNA is legally established and operational. It provides efficient procedures for CDM project approval. However, further development of the CDM potential in the country requires time and additional financial resources and is directly connected with relevant capacity building. A number of measures aimed at reinforcement of CDM processes in the country have been already developed, since it is viewed as a promising mechanism for attracting financial means in the sectors of economy and social development where regular investments are often hampered. Due to the support provided by the DNA and its active participation in all stages of project development, Armenia holds a leading position in the Commonwealth of Independent States on the number of CDM projects registered by the CDM Executive Board. At the same time, the country recognises that there are barriers preventing CDM projects from development. These obstacles can be listed in the following order: sophisticated and costly procedures of project documentation development and approval; low awareness of national decision-makers, private sector actors and general public on the benefits of the CDM process; lack of awareness on legislative and financial aspects of CDM; lack of local professional expertise necessary for CDM projects development and evaluation, etc. The national capacity has to be enhanced to ensure the smooth implementation of the CDM projects and monitoring of the expected mitigation objectives. The DNA being responsible for implementation of the Kyoto Protocol commitments of the non-Annex I / Host Country will support and monitor the CDM project needs in their early inception phase.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 6-5 7. CDM Project Approval Process

7.1 Background

Project approval by the Host Country is one of the most important prerequisites established by the international regulations for potential CDM project registration by the CDM Executive Board. The assessment of projects for the Host Country approval is the primary role of the Designated National Authority, which has the responsibility to decide whether a proposed CDM project activity makes contribution to achieving the country’s sustainable development goals and whether the country participates in a project voluntarily. With this regard, it is necessary that a country which is willing to host CDM projects establish a logical, clear and transparent procedure for projects submission, evaluation and approval. Availability of such a procedure is not only a necessary formality but also an important factor which provides protection of the rights and interests of the host country, lowers risks for local and international project participants and raises attractiveness of the country from the point of view of CDM project realisation. The last factor is especially imperative for Armenia, since the country has a relatively small CDM potential. A well- developed and clear procedure would improve Armenia’s competitiveness in the field of CDM and encourage local and international investors to participate in development of CDM projects in the country. Currently, the procedures for CDM approval are being finalised for official adoption by the DNA. One of the reasons the procedures have not been approved yet is the lack of capacity on legal and financial aspects of CDM. In particular, the financing mechanism and the status of the DNA Secretariat have not been determined yet, and neither the DNA's supervisory functions at the project post-approval stage and the legal status of CERs, etc are defined. Nevertheless, Armenia became the first country in the post-Soviet space hosting a CDM project which has been registered by the CDM Executive Board. This circumstance resulted from the “learning by-doing” policy implemented by the Armenian DNA in a hope to promote CDM development in the country and build confidence in CDM among national stakeholders at both governmental and private levels, as well as among foreign investors. At present, there are a number of CDM projects in the country at various stages of development. More than a dozen projects in the field of small-scale energy have potential for realisation in the framework of CDM.

To facilitate the project approval process and secure their sustainability the Ministry of Nature Protection of Republic of Armenia (DNA) has developed and submitted to the government of Armenia a draft governmental decision on “Implementation of Projects within the framework of the Clean Development Mechanism of the Kyoto Protocol under the United Nations Framework Convention on Climate Change”, which was approved by the government and then ratified by the Armenia's President on July 19, 2006. This document determines formal functions of the Ministry as the DNA and entrusts the

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-6 Minister of Nature Protection to develop and approve the ‘Procedure for submission of project documents under the CDM’ within a three-month period.

7.2 Procedure proposed for CDM project approval in Armenia

The submission procedure of CDM project documentation will include two stages: the voluntary stage and the mandatory stage.

7.2.1 The voluntary stage

The voluntary stage includes development and submission of a Project Idea Note for the DNA's consideration and endorsement. Project participants may develop a Project Idea Note for initial review of the proposed project activity and obtaining the Letter of Endorsement from the DNA based on evaluation results. There are several purposes of the project initial screening process and the issuance of the Letter of Endorsement such as evaluation of project eligibility under CDM and the national legislation at the earlier stage, improvement of project quality based on the received comments and recommendations, facilitation of contact between potential partners, investors and carbon funds, lowering risks and financial losses for project participants in case of major unacceptability of the proposed project activity, etc. A Project Idea Note is to be prepared in accordance with the format developed by the Armenian DNA 14and filled in to the best of the participants’ knowledge. Three copies of the document should be submitted in both the Armenian and English languages in electronic and printed formats. Given that many carbon funds have their own mandatory formats for PINs, the Armenian DNA may consider PINs in those formats as well. However, in that case the project participants are to submit also all the specific information requested by the DNA but missing in those formats as a separate file (e.g. availability of water and land use permissions, pre-feasibility, etc.) Availability of the mentioned supplementary information on the project is preferable but not mandatory for PIN consideration and approval. A PIN shall be officially introduced to the DNA together with an application letter in which the project participant informs the DNA on its willingness to realise the project under the CDM and requests the DNA to issue the Letter of Endorsement. If the project participant had already identified a potential CER recipient/buyer at the moment the PIN has been submitted to the DNA, this fact should be reflected in the application letter. However, this latter circumstance does not mean that the availability of a CERs recipient or buyer is a necessary prerequisite for endorsement of a proposed project activity, since the Armenian DNA also supports unilateral CDM projects. Nevertheless, once the project participant has made a decision on CER transfer, its decision should be submitted to the DNA in writing.

14 For the latest version of the PIN accepted by the Armenia DNA please consult the website www.cdm.nature-ic.am

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-7 Together with the PIN, a project participant may also submit other supporting documents to justify the project and prove the proposal’s conformity with the country's sustainable development goals. In particular, these may be supported by recommendation letters obtained from various state and private organisations. During the official evaluation of a PIN, the DNA considers such supporting documentation. Nevertheless, the DNA reserves the right to address to the referee once again in order to obtain a more thorough estimation of the project activity and ensure unbiased references. Upon the reception of the documents, the DNA Secretariat will check the accuracy of both the PIN and the application letter along with the presence of additional documentation on the proposed project. After that, a relevant summary report will be submitted to the DNA. Having received the report, the DNA directs the copies of the PIN along with supporting documentation to the two key-ministries, namely, the Ministry of Labour and Social Security and the Ministry of Trade and Economic Development. Both Ministries will check compatibility of the PIN with the respective social and economic contribution to sustainable development and get back to the DNA with a written assessment of whether they would support the endorsement of the project. Depending on a project scale and complexity, the DNA may assign experts from the Expert group to perform an additional review of the project. The DNA may also send the document to various sectoral ministries, and agencies, responsible of the specific sector of the project activity, and request their opinion of the project’s compliance with the national sectoral strategy. All comments received from respondents should be collected and analysed by the Secretariat and relevant summary reports should be submitted to the DNA. The final decision on a PIN endorsement is taken by the DNA with consideration of all received feedback. The PIN evaluation and issuance of a response as either the endorsement letter or a letter describing why the project cannot be endorsed will require up to 25 working days. In case of a positive decision on a PIN, the DNA will issue the Letter of Endorsement to the project participant. The project participant can then continue with further project development and start developing the Project Design Document (PDD). The letter itself is an official document from the DNA stating that, on the basis of the information contained in the PIN and comments received, the further development of the proposed project is supported by the DNA. At the same time, the DNA endorses the possible CER transfer to the mentioned CER recipient (if the given circumstance has been mentioned in the application letter) as well as further participation of the Host Party’s representatives in the mentioned project. If the submitted project idea receives a negative opinion, the DNA returns the document to the project participant indicating the rationale for rejection and/or necessary improvements required according to the received comments. PIN endorsement does not guarantee, secure or imply the automatic approval of the proposed project in the future. During the approval stage the PDD will be checked by the DNA regardless of any positive comments or conclusions received during the endorsement stage. This means a project may be rejected in case of not-meeting approval requirements despite having received endorsement. The template of the Letter of Endorsement issued by the Armenian DNA is presented in Figure 7-2.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-8 7.2.2 The mandatory stage

The mandatory stage requires the submission of a PDD for the DNA’s consideration and approval. For the purpose of obtaining approval for a project activity under the Clean Development Mechanism project participants shall develop and officially submit to the DNA the following documents both in electronic and printed formats:

- Application letter addressed to the Armenian DNA;

- A Project Design Document developed in accordance with the requirements and guidelines of the CDM Executive Board under the UNFCCC;

- Project executive summary in the Armenian language, which demonstrates project’s contribution to the country sustainable development;

- A declaration signed by all project participants identifying the responsible person and the form of communication with the DNA;

- An Initial Environmental Evaluation (IEE) or Environmental Impact Assessment report (if available) required under the DNA procedures (the necessity of such depends on the project type);

- A protocol of stakeholders meeting (Public hearings on the project) and relevant supporting letters from stakeholders;

- Other available supporting documentation, such as: water use permit, license for construction and operation, power purchase agreement, feasibility study, information on temporary and permanent land acquisition, validation report from DOE, etc.;

- The Letter of Commitment stating the distribution of any ultimately acquired CERs (if such a decision were taken at the moment of PDD submission) It must be noted that the Armenian DNA does not require that PDD be validated by the DOE at the moment of the PDD submission to the DNA. The process of project validation may also be initiated after the DNA’s approval or carried out simultaneously with the approval process. However, once a project is validated, the copy of a relevant report should be submitted to the DNA for information. Upon the reception of the PDD, the DNA Secretariat will check the accuracy of both the PDD and the application letter along with the presence of additional documentation on the proposed project. After that, a relevant summary report will be submitted to the DNA. Having received the report, the DNA directs the electronic and draft copies of the PDD along with the executive summary and other supporting documentation to the Ministry of Labor and Social Security and the Ministry of Trade and Economic Development. Both Ministries will check compatibility of the received project documents with the respective social and economic contribution to sustainable development and get back to the DNA with a written assessment of whether they would support the approval of the project.

At the same time, the DNA will forward the PDD and other supporting documentation for the consideration of sector-specific ministries as well as, -agencies, companies and NGOs in order to obtain feedback on the PDD. The mentioned group of relevant parties may include the following organisations depending on project type: Ministry of Energy of Republic of Armenia

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-9 Ministry of Urban Development of Republic of Armenia Ministry of Agriculture of Republic of Armenia Public Services Regulatory Commission “Environmental Expertise” State Non-commercial Organisation Agency on Water Resource Management Agency on Biological Resources Environmental NGOs Others Sector-specific ministries review the project’s compliance with the national and regional, policies and strategies. If needed the ministries and agencies may address to the DNA with a request to organise a working panel with the project participants and the DNA representatives to clarify any doubts or questions. The Expert Group, may be asked by the DNA to review the PDD on its technical and environmental aspects. Starting with the initiation of project evaluation, the DNA will post a summary of the submitted PDD (due to its proprietary character) on its web site in order to invite public comments. Depending on the project type as well as its social and ecological significance, the DNA may require project participants to organise and hold a Public Hearing on the reviewed project. At that, the DNA is to take part in the development of the list of the invited stakeholders, experts, interested organisations and NGOs as well as representatives of local communities and self-government bodies. Minutes of the meeting may be later be used as an annex to the PDD or, alternatively, as a separate file presenting the hearings outcomes, drawn conclusions and developed recommendations. All comments received from respondents should be collected and analysed by the Secretariat and a relevant summary evaluation report should be submitted to the DNA. The report will incorporate conclusions developed by the Expert Group as well. The DNA will evaluate the PDD against its contribution to the country’s sustainable development and make the final decision on the project approval taking into consideration the following information: The information received and included in the PDD Evaluation report developed by the Secretariat Public comments received during the consultation period In case of a positive decision on the PDD, the DNA will issue the Letter of Approval to project participants. If the submitted PDD receives a negative opinion, the DNA returns the documents to the project participant indicating the rationale for rejection and/or necessary improvements according to the received comments. The procedure of a PDD evaluation and approval lasts up to 30 working days. In case the DNA requires additional information from the project participant, the mentioned period will be halted until the required information has been received. A chart below demonstrates a CDM project submission, evaluation and approval processes as currently in place.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-10 Ministry of Trade and Ministry of Nature Ministry of Labour Economic development Protection (DNA) and Social Security

recommendations on project decision on project

Expert Group consultations with DNA Secretariat consultations with Other relevant organisations: * technical aspects * ministires * environmental aspects * agencies and institutions * local self governing bodies * ngo's and snco's * private companies submission PIN/PDD decision on project

Investor/CER Buyer Project owner/developer * Carbon Funds * Private company * Banks and other IFIs * State company * Private/State organisation *NGO etc. and companies etc.

Figure 7-1: Project submission, evaluation and approval processes.

7.3 CDM projects approval criteria

The Armenian DNA has not officially approved a detailed list of sustainable development criteria yet. This explains the accepted practice of project approval when each relevant ministry deals with individual assessment of the project’s sustainability aspects and informs the DNA on its decision to support/reject project approval. Even though the given approach guarantees efficient and prompt addressing the issue of project approval, it does not provide enough transparency and objectivity. Considering both, this fact and the international practices, the Armenian DNA has defined a set of basic criteria for project evaluation, which may later lay grounds for development of an official procedure for CDM project approval. These basic criteria take into account technical, environmental, economic and policy aspects of the country’s sustainable development and fall into the four following categories: Environmental criteria (depending on the type of CDM project) Improvement of air and water quality Efficient utilisation of natural resource Biodiversity protection Economic criteria Attraction of foreign investments Renewable energy development, energy-saving Sustainable technology transfer Employment generation Development of regional and local economy Social criteria Full participation of stakeholders

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-11 Creation of new jobs Services quality improvement Capacity development Political criteria Effects on national and/or regional priority objectives Effect on sector priority objectives For each of the sub-criteria, it is imperative that the project describes possible effects, including mitigation measures in case of negative impacts.

7.4 General national requirements to CDM projects

General national requirements to CDM projects may be grouped as follows: Voluntary participation of the project participants and Project Host: a project must be developed on a voluntary basis and agreed with all the parties involved; CDM project's contribution to sustainable development: the overall contribution of the project to sustainable development must be positive; Prevention of any negative impact on the environment: projects should not result in negative impacts on the environment; and Compliance with all national, and international requirements for CDM projects.

7.5 Sectors prioritized by the Armenian DNA for CDM project implementation

Taking into consideration the structure of the Armenia’s economy, its development potential, the lack of energy resources as well as some ecological aspects, the following sectors may be prioritised as the most promising in terms of CDM project realisation: Energy, Industry, Waste Management, Agriculture, Forestry, Transport The most preferable would be projects involving technology transfer, since this guarantees most sustainable support to the country. Table 7-1 provides more detailed information on CDM project categories with higher priority for Armenia.

Sector Category Options Renewable Solar, wind, large and small hydro, biomass, biogas, geothermal energy Co-generation, combined cycle technologies, centralized and Energy Energy decentralized heat supply, high-performance boilers, control and efficiency metering, insulation, reduction of the energy intensity of the production Optimization of technology for cement production, substitution Technological Industry of natural gas with butadiene during production of synthetic improvements rubber Waste-to- Municipal solid waste management, municipal wastewater Waste energy treatment Agriculture Biogas capture Mitigation of animal effluent related to GHG emissions, by

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-12 improving the plant's Animal Waste Management System practices. Afforestation and reforestation projects, enlargement of greenery Carbon Forestry areas, establishment of recreational areas, establishment of sequestration protection forest belts and other agro-forestry systems Improvement of the level of motor transport gasification, Fuel economy diversification of urban public transport, increase in the number Transport improvement of buses of great capacity as well as electrified transport means, introduction of alternative fuel

Table 7-1: Sectors prioritised for CDM project implementation

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-13 7.6 Letter of Endorsement

Letter to Endorsement to: Project Participants/CER Recipients

Referring to the request of [company/organization] as a CDM Project Host from the [date and reference number of the letter] with respect to the submitted Clean Development Mechanism (CDM) Project Idea Note on [CDM project title], I inform you of the following. As Minister of Nature Protection of the Republic of Armenia and appointed Designated National Authority for the CDM under the Kyoto Protocol of the United Nations Framework Convention on Climate Change I declare that:

1 The Republic of Armenia ratified the Kyoto Protocol on 26 December, 2002.

2 Designated National Authority has taken notice of the submitted CDM Project and is aware that the [company/organization] as a Project Host intends to transfer ensuing Certified Emission Reductions (CERs) to [CER recipient company/organization] for the account of [Annex I country].

3 Designated National Authority will assess the CDM Project according to the criteria implying sustainable development and attraction of investments for the Clean Development Mechanism project realization in Armenia.

4 Designated National Authority endorses further development of the CDM Project and is committing itself to render such assistance as may be necessary in the future validation, verification and transfer of the CERs.

5 In case the results from the assessment mentioned above are positive, Designated National Authority will start discussions with the Project Host on distribution of ensuing CERs and will consider to grant a formal approval of the CDM Project that brings about transfer of CERs to the account of [Annex I country], according to the conditions stipulated by the Agreement or Protocol between Project Participants.

Yours Sincerely, Minister of Nature Protection of the Republic of Armenia and Designated National Authority for the Clean Development Mechanism under the Kyoto Protocol

Figure 7-2: Letter of Endorsement to be issued for CDM project developments in Armenia

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-14 7.7 Letter of Approval

Letter of Approval to: Project Participants

1. As Minister of Nature Protection of the Republic of Armenia and appointed Designated National Authority for the Clean Development Mechanism (CDM) under the Kyoto Protocol of the United Nations Framework Convention on Climate Change, I hereby confirm: (i) The Republic of Armenia ratified the United Nations Framework Convention on Climate Change on May 14, 1993 and the Kyoto Protocol on December 26, 2002; (ii) The Republic of Armenia participates voluntarily in the Clean Development Mechanism and in the “Project” identified in paragraph 1(iii) of the present letter; (iii) The “Project” as defined in the Project Design Document [CDM project title], submitted on [date of submission] to the Designated National Authority of Armenia for the CDM, will assist the Republic of Armenia in achieving sustainable development objectives. The Project Design Document is available on the following web site at: www.cdm.nature-ic.am

2. I further inform that the “Project” can be submitted to the Clean Development Mechanism Executive Board in order to request registration of the “Project” as a Clean Development project activity.

3. I henceforth declare that the Designated National Authority of Armenia for CDM reserves the right to submit to the CDM Executive Board a request for review of the “Project” in case the Project Design Document submitted to the CDM Executive Board for registration does not correspond to the document identified in paragraph 1(iii) above.

4. I look forward to the project smooth start up according to the procedures.

Yours Sincerely,

Minster of Nature Protection of the Republic of Armenia and Designated National Authority for the Clean Development Mechanism under the Kyoto Protocol

Figure 7-3: Letter of Approval to be issued to CDM project developers in Armenia

CDM Handbook Armenia_FINAL Oct 2006_English.doc 7-15 8. Sector and Policy Information

8.1 Energy Sector

8.1.1 Current situation in the energy sector of Armenia

Background: Armenia does not have proven reserves of indigenous fossil fuels and is fully dependent on imports for its thermal power plants operation. The only local energy resource is hydro-power, most potential of which is already in use. Nuclear power could also be considered as local source, although Armenia does not have a full nuclear fuel cycle. Furthermore, Armenia has high estimated potential of alternative energy sources like small hydro, solar, wind and geothermal energy, the use of which is currently insignificant. Today, the Armenian power sector operates with hydro, thermal and nuclear generation capacities supplemented with a relatively small new renewable energy capacities. Armenia’s energy security is a major issue, particularly due the recently experienced energy crisis between 1992 and 1994 due to fuel blockade and the closure of the nuclear power plant.15 In the following years, the fuel supply schemes were diversified and the second unit of nuclear power plant was re-commissioned in 1995. System structure: At present, the power generation, transmission and distribution in Armenia is provided by the following facilities and entities: I. Power Generation: - Armenian Nuclear Power Plant, - Thermal Power Plants (TPPs), - Hydro Power Plants (HPPs); II. Power Transmission: - High voltage power transmission network company, - Settlements center, - Power system operator; III. Power Distribution: - Electricity Distribution Company.

The power generation, transmission and distribution are regulated by Public Services Regulatory Commission (PSRC) founded in December 2003 on the basis of the Energy Regulatory Commission (established in 1997). The PSRC regulates the service quality,

15 The crisis occurred because of the following: - After the collapse of the Soviet Union it was difficult to operate and maintain the country’s energy sector as outside the larger South Caucasus system. - The earthquake of 1988 constrained to shut down the Armenian Nuclear Power Plant (ANPP), which was providing more than 30% of annual energy demand of the country. - Due to the military friction in Nagorno Karabakh the only source of gas and oil for thermal power plants was cut off: transportation links and gas supply via pipelines through Azerbaijan were suspended since mid 1991 and mazout (black oil) shipment from Iran was also blocked from passing through the territory of Nakhichevan which belongs to Azerbaijan. - Gas supply through Georgia with the pipeline built in 1993 was regularly interrupted by acts of sabotage. During the crisis period the homes and offices were deprived of heating, and the entire population suffered below-zero temperature winters with electricity supply of 2-3 hours per day.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-1 tariff and licensing policy for several utility sectors: power, gas, water, communication under one umbrella. Power Generation: The main capacities of power generation in Armenia are nuclear, thermal and hydro power plants, which provide about 43%, 29% and 28% of total electricity generation accordingly in 2005 (total electricity generation in 2005 was about 6.3 mln MWh).

Hydro 1772.6 mln kWh 28%

Thermal Nuclear 1827.2 mln kWh 2716.3 mln kWh 29% 43%

Figure 8-1: Structure of electricity generation in 2005

The installed capacities by generation types and plants along with the dates of their launch are summarized in Table 8-1.

Years of separate Plant Type and Name Capacity [MW] aggregates start-up Nuclear Power Plant 815 (408) 1976 - 1980 (1995) ANPP (Medzamor) Unit 2 408 1980 (1995) Thermal Power Plants 1.756 1963 - 1976 Hrazdan TPP 1.110 1966, 1967, 1969, 1972,1974 Yerevan TPP 550 1963, 1964, 1965 Vanadzor TPP 96 1964, 1966, 1976 Hydro Power Plants 1.044 1913 - 2006 Sevan-Hrazdan cascade of HPPs 556 1936 - 1944, 1949 - 1962 Vorotan cascade of HPPs 404 1970, 1977, 1989 Small HPPs 84 1913-2006 TOTAL 3.208

Table 8-1: Installed capacities by generation types and plants Source: “100 Years of Armenian Energetics”, Musaler Tpagagratun printing house, Yerevan, 2003;

The current status, ownership and operational conditions of the above generation capacities are briefly described in the following. Nuclear Power Plant: The ANPP (Medzamor) is the only nuclear power plant in the country. It provides about 40% of the current total electricity generation. The ANPP units were commissioned in 1976-1980 with two VVER - 440/V270 reactors and an installed capacity of 815 MW. The earthquake of 1988 generated safety concerns and resulted in the power plant shut-down. The second unit of ANPP was re-commissioned in 1995 after

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-2 extensive renovation and seismic safety improvements. The government of Armenia is the owner of the plant under the management of Russian “Inter RAO EES” company. In recent years, there has been extensive pressure from the European Union to shut down the plant for security reasons. However, according to the assessment provided by Armenian and Russian experts, the plant can safely operate until 2016. The discussions on the plant future operation between the European Commission and the Government of Armenia continue. It is noteworthy, that the latest Least Cost Generation Plan (LCGP) for the Armenian energy sector in 2006-2025, which was released in 2006, considers scenario of development of Armenian energy sector with a new nuclear power plant. Thermal Power Plants: Thermal power plants provide about 30-40% of the total electricity generation. Currently, the plants operate on natural gas. The Hrazdan TPP with an installed capacity of 1 100 MW was commissioned in 1966-1973, the Yerevan TPP with an installed capacity of 550 MW – in 1963-1968 and the Vanadzor TPP with an installed capacity of 96 MW – in 1964-1976. Many of these plants underutilize their installed capacities due to their poor technical conditions and insufficient power load. The owner of the Hrazdan TPP is the Government of the Russian Federation (ownership transferred through debt-for-asset swap), the Yerevan TPP – the Ministry of Energy of Armenia, and the Vanadzor TPP – Zakneftgasstroy – Promethey, a Russian company (currently the Vanadzor TPP is out of operation). Hydro Power Plants: The hydro power system of the country includes the Sevan-Hrazdan cascade with six plants, the Vorotan cascade with three plants as well as a number of small HPPs. The total installed capacity of the HPPs is 1 044 MW about 54% of which is filled by the Sevan-Hrazdan cascade, 39% - by the Vorotan cascade and 7% - by small HPPs. The owner of the Sevan-Hrazdan cascade is “International Energy Corporation”, a Russian company and a subsidiary of Inter RAO UES, the Vorotan cascade – the Government of Armenia and the small HPPs - private owners. Power transmission and distribution networks: The transmission network of the Armenian power sector consists of 164 km of 330 kV lines and 1 substation; 1 323 km of 220 kV lines and 14 substations; and 3 169 km of 110 kV lines and 119 substations. A part of the network is operated by High Voltage Grids CJSC and the other part – by Electric Networks of Armenia (ENA). The current high voltage network capacity is adequate for both current and predicted electricity loads. The Armenian transmission network has interconnections with the neighboring countries such as Georgia, Iran, Azerbaijan and Turkey, with the following capacities: Armenia- Iran, two 220 kV transmission lines that were built in 1997 and 2003 with 300-450 MW capacity. Plans are to increase the capacity to 600 MW. In 2004 Armenia exported 446 GWh of electricity to and imported 215 GWh from Iran. Armenia-Georgia, one 220 kV transmission line with 250 MW capacity, and two 110 kV transmission lines with a total capacity of 100 MW. In 2004 Armenia exported 475 GWh of electricity to Georgia. Armenia-Azerbaijan, one 330 kV line with 420 MW capacity, which is currently disconnected.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-3 Armenia-Turkey, one 220 kV line with 300 MW capacity, which is currently disconnected. The distribution network of the country’s power sector includes 278 substations of 35 kV with 2 675 km of 35 kV lines; 10(6) kV 9 740 km overhead and 4 955 km cable lines; 0.4 kV 13 570 km overhead and 2 160 km cable lines. As already mentioned, the ENA is the exclusive electricity distribution company in the country, in accordance with the 1997 Energy Law, and has contracts with High Voltage Grids CJSC and dispatching company (Power System Operator CJSC) and an account settlement center (Settlement Center CJSC). As a result of poor technical conditions of power grid facilities, significant losses of energy take place during transmission and distribution, reducing the overall energy efficiency of the power grids. The current energy losses in the grid amount to 18 percent, including losses in high voltage transmission system – 1.6 percent and losses in distribution system (technological) - 16.3 percent. Import/Export: Armenia maintains electricity export and exchange activities with Georgia and Iran. Armenia operates on zero-saldo swap exchange with Iran: it exports electricity during the summer months (April-September), when it has surplus electricity and imports from Iran during the winter months (October-March). Armenia also exports some of its surplus electricity to Georgia. Currently, Iran-Armenia gas pipeline is under construction and is planned to be completed by the end of 2006. According to the agreement signed between Armenia and Iran, Armenia will pay for natural gas received from Iran with export of electricity. Power demand forecast: According to the “Energy Sector Development Strategies in the Context of Economic Development in Armenia” adopted by the government of Armenia in 2005, two scenarios for energy demand were developed based on the GDP increase forecasts within the period of 2000-2020: 1. Low scenario with GDP increase of 4.8 % annually; 2. Reference scenario with GDP increase is 6 % annually. Electricity Demand Forecast: according to the 2006 LCGP, the domestic energy consumption growth has been identified in Armenia since 2002. The annual growth for peak load and energy is forecasted to be about 2.6 % per year starting from the initial values of 5 529 GWh (energy) and 1 293 MW (peak load) in 2005, which is in line with the benchmarks set by the “Energy Sector Development Strategies in Context of Economic Development in Armenia”. The energy demand growth forecasts by sectors are summarized in the table below:

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-4 Increase Capacity [GW] Share [%] Sector [%/year] 1999 2020 1999 2020 Low Scenario 7.7 1.3 6.3 100.0 100.0 Industry 8.3 0.44 2.34 32.8 37.0 Agriculture/Construction/Mining 9.5 0.15 0.98 33.7 41.9 Factories 7.7 0.29 1.36 66.3 58.1 Transport 5.8 0.42 1.38 31.9 21.8 Residential/Services 8.5 0.47 2.62 35.3 41.3 Reference Scenario 8.7 1.33 7.67 100.0 100.0 Industry 9.6 0.44 3.02 32.8 39.4 Agriculture/Construction/Mining 10.4 0.15 1.18 33.7 39.2 Factories 9.2 0.29 1.84 66.3 60.8 Transport 6.9 0.42 1.72 31.9 22.4 Residential/Service 9.1 0.47 2.92 35.3 38.1

Table 8-2: The energy demand growth forecasts by sectors Source: Energy Sector Development Strategies in the Context of Economic Development in Armenia Electricity Demand Forecast

Fuel Consumption Forecast Since coal, wind and solar were not found as viable generation options to meet base load requirements for Armenia, only gas fired, hydro, and nuclear generation options are in the focus of forecast exercise. Currently, the bulk of fuel consumed in Armenia is natural gas (See Figure 8-2 below). Natural gas consumption is significant and is currently growing in the power sector (roughly 73%), as well as industrial (~15%) and residential (~12%) sectors.

Mazout (0.078%) Aviation petrol ( 2.7%) Liquid gas (1.73%) Diesel (7.3%)

Petrol (15,1%)

Natural gas (72%) Coal (0.97)

Figure 8-2: Fuel Consumption Structure in 2004 (1000 t.c.f.) Source: Alliance to Save Energy. Armenia - MUNEE Program. Development of National Program on Energy Saving and Renewable Energy Nuclear: This trend is envisaged under the assumption that the existing Metzamor NPP will retire in the fourth quarter of 2015 and be replaced by a new nuclear generation

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-5 facility. According to LCGP 2006, the nuclear fuel utilization is assumed to increase by 3% per year for the next 20 years. Natural Gas: The natural gas-fired options included changing Hrazdan Unit#5 into a combined cycle, new combined cycle units, and new small gas turbines. Based on the projections made for the expected growth in the electricity demand (partially relying on natural gas) as well as the intensive expansion of the natural gas for residential and industrial consumers, the rate of expected growth in natural gas consumption is impressive. Figure 8-3 presents the gas consumption trend as well as the projections for the following 25 years in Armenia. However, it is important to note that the natural gas consumption heavily depends on the world fuel prices and the tariffs charged by the Russian supplier; consequently, the electricity prices are significantly affected by these tariffs.

On April 1, 2006 the prices for natural gas increased drastically. To ease the negative impact of this gas price hike on Armenian consumers, the government of Armenia decided to allocate $180 million to subsidize the increased gas price. As of April 10, 2006, the state subsidizes 25 AMD of the current 90 AMD charged for one cubic meter of gas whereas before the price increase it was 59 AMD. Meanwhile, enterprises consuming more than 10 thousand cubic meters of gas per month will be compensated $52.01 of the $146.51 charge for 1000 m³, whereas prior to the price increase it had been $79.1 for 1000 m³. The subsidy will be in place till 2009. This governmental decision was inspired by the desire to mitigate the impact of drastic gas price increases on the population as well as on industry. While the Iran-Armenia gas pipeline may provide some level of competition for gas supply to Armenia, it is unlikely that the price of gas from Iran would be significantly lower than the price of gas from Russia. Nevertheless, even a higher price for gas will still be below the world market price. Moreover, in the absence of other alternatives, natural gas will still be the first fuel choice for Armenia’s thermal power plants, industrial consumers as well as residential heating, hot water and food preparation needs, hence the demand will not be very price sensitive. However, depending on the capacity of the envisaged new nuclear generation facility, the gas demand may vary. Should the installed capacity of the new plant be significantly higher than the current MNPP operation mode, the reliance on thermal power plants operating on gas will significantly reduce, thus substantially reducing the natural gas consumption in the country, which is currently not built into the projection analysis reflected in Figure 8-3. Hydro: There is substantial improvement in the small and micro hydro power development process. New hydro generation facilities are already in the pipeline for entering construction and operation phase in the next decade include Shnogh (75 MW), Megri (140 MW), and Lori-Berd (60 MW). The development of hydro power is addressed in the renewable energy section further.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-6 Actual and Projected Gas Consumption in Armenia (Billion cubic meters) 3 2.73 2.66 2.60 2.70 2.53 2.63 2.47 2.57 2.40 2.50 2.33 2.43 2.5 2.27 2.37 2.14 2.20 2.30 2.24 2.07 2.17 2.10 2.01 2.04 2 1. 7 4 1. 8 3 1. 5 5 1. 6 5 1. 4 6 1. 5 0 1. 3 0 1. 3 8 1. 5 1. 4 2 1. 2 2 1. 3 4 1. 14 1. 2 6 1. 18 1. 10

0.5

0 years

99 14 25 29 19931994199519961997199819 2000200120022003200420052006200720082009201020112012201320 201520162017201820192020202120222023202420 20262027202820 2030

Figure 8-3: Past and Expected Gas Consumption Trend in Armenia (b.c.m) Source: Alliance to Save Energy. Armenia - MUNEE Program. Development of National Program on Energy Saving and Renewable Energy

8.1.2 CO2 emissions from the sector

The main outputs of the GHG Inventory are given in Table 8-3 below by sub-categories of energy sector emission sources. Energy Sector Emission Source sub-categories 1990 (NGHG Inventory)16 200017 (estimate)

CO2 CH4 N2O Gg CO2 eq.* Total Energy 21382.78 1685.25 39.711 5719.98 A. Fuel Combustion 21382.78 5.88 39.122 4699.36 Energy and Transformation Industries 11332.87 0 20.77 3904.86 Industry 2138.28 0 3.906 1672.50 Transport 3635.07 0 6.665 332.19 Residential and Commercial/Institutional sector 3848.9 0 7.037 1071.50 Other 427.66 0 0.744 757.07 Biomass Burned for Energy 0 5.88 0.589 71.60 B. Fugitive Emissions 0 1679.37 0 794.50 Oil and Natural Gas System 0 1679.37 0 794.50 Table 8-3: Greenhouse gas emissions in the Armenian Energy Sector according to source sub-categories, Gg CO2 equivalent*, (1990 - National GHG Inventory and 2002 - estimates)

* For calculation of CO2 equiv. emissions the following values of potential global warming are used: СО2 – 1, СН4 – 21, N2О – 310 (IPCC, 1995).

16 National GHG Inventory: “First National Communication of the Republic of Armenia under UNFCCC”. Prepared within the frames of UNDP/GEF/ARM/95/G31/A/1G/99 “Armenia - Country Study on Climate Change” Project. 17 “Capacity Building in the Republic of Armenia for Technology Needs Assessment and Technology Transfer for Addressing Climate Change”, 2000. Document prepared within the frames of the UNDP/GEF/ARM/95/G31/A/1G/99 “Armenia-country study on climate change. Phase II” Project

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-7 After sharp recession in economy of 1991-1994 (about 70% of the Armenian economy was not functioning as compared with 1989), the country’s GDP indicated stable growth of average 5.4% during 1994-2000. In 2002, the structure of Armenia’s GDP was: industry – 20.4%, construction – 12.8%, agriculture – 23.7%, services – 33.5%. GDP per capita was 623 USD, GDP per capita by purchasing power parity – 3 312 USD. Regardless of the economic growth starting from 1994, the GHG emissions stabilised on an apparently low level, after which positive economic growth was registered, while energy generation remained on a relatively stable level (See Figure 8-4). The trends of the GDP growth for 1997-2004 and greenhouse gas (GHG) emissions for 1990-2000 are presented in following Figures18.

8000 180001800 1600 1476 7000 160001600 1261 140001400 6000 1145 1044 120001200 5000 987 954 888 100001000 4000 268 587 619 628 491 536 8000800 3000 6000600 Effective (GWh) Demand 3962 2000 3629 3575 3513 3400 3654 1998) Dram (bln. GDP Annual 4000400

1000 2000200

0 00 1997 1998 1999 2000 2001 2002 2003 2004

Delivery to DISCO Commercial Losses GDP (bln. Dram of 1998)

Figure 8-4: Economic Development and Energy Consumption (Source: LCGP 2006)

% 100 GDPÂÂÏ CO2 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Figure 8-5: Trends for the GDP growth and CO2 emissions in Armenia, 1990-2000

18 Source: Armenia – Recent Developments in the Climate Mitigation Policy and Practice. A.H.Gabrielyan, D.Harutyunyan, A.V.Pasoyan, S.Shatvoryan, M.K.Vermishev. CTI Capacity Building Seminar Proceedings 2003.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-8

PJ 0 50 100 150 200 250 300 350

1990 21.4 340 1991 20.4 326 1992 8.8 163 Energy 1993 6.2 138 Emissions 1994 3.3 80 1995 3.8 84 1996 4 92 1997 3.9 88 1998 4 89 1999 3.8 86 2000 3.9 93

0 5 10 15 20 25 mln t СО2

Figure 8-6: Dynamics of energy production and CO2 emissions from energy sector

The same pattern is observed in the dynamics of energy production and CO2 emissions from the energy sector (see Figure 8-6). The current rate of emissions from fossil fuel combustion processes comprise 82% of all emissions from the “Energy” sector19 and 68% of total GHG emissions. The emissions by main GHGs in Armenia are: carbon dioxide – 68.2%, methane – 29.8%, and nitrous oxide – 2%. Armenia has a high potential for energy savings, which should be regarded as an internal source of energy. Sectors of economy included in the “Energy” category have the highest potential for energy saving and reduction of GHG emissions (electricity and heat production, heating of housing and municipal sectors, transportation). The technical potential of GHG reduction (excluding the potential of renewable sources) from a wide range of energy saving measures in the energy sector in general, and in the utility/housing sector in particular is considerable. The findings of the Phase II research under the “Armenia – Country Study on Climate Change” project indicated that during 2000-2020 energy saving measures could mitigate emissions up to 22 million ton CO2 equivalent. For example, rehabilitation of efficient district heating systems in Armenia will reduce the consumption of primary energy by 60 percent and annual CO2 emissions by 38-40 percent, which in a 20-year period will make up to 9.6 Mt. At the same time, the reconstruction and phase by phase improvement of the energy efficiency of the Yerevan heating system, which accounts for more than 50 percent of the heat consumption in the entire housing- municipal sector of the country, allows for the reduction of CO2 emissions in a 20-year period by 6.5 Mt. Capital investments in the reconstruction of the Yerevan heating system are evaluated at US$ 45 million (excluding the costs of restoration of gas supply to boiler 20 houses), which is equal to US$ 6.9/t СО2 expenditure for emission reduction.

19 “Energy” sector, by definitions of the Intergovernmental Panel on Climate Change for GHG Inventories also includes fugitive emissions. 20 Capacity Building in the Republic of Armenia for Technology Needs Assessment and Technology Transfer for Addressing Climate Change Problems. “Armenia - Country Study on Climate Change” Project , II Phase Report. Yerevan – 2003

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-9 8.1.3 Renewable Energy Potential in Armenia

Armenia has a significant renewable energy potential and its utilization is very important for a country with absence of domestic fossil fuels. The renewable energy potential in Armenia is as follows:21 Hydropower potential According to the Sustainable Energy Sector Development strategy of Armenia of 2005, the total theoretical potential of hydropower in Armenia is 21.8*109 kWh/year, of which 9 Technologically available potential equals to 7-8*109 kWh/year, 9 Economically beneficial potential equals to 3.6 *109 kWh/year, of which 1.5*109 kWh/year is utilized already The rest of the economically feasible hydropower potential is expected to be utilized during the next 15 years. According to “Small HPP development scheme of Armenia”, it is planned to construct 325 small HPPs with a total capacity of 270 MW and production of 833 GWh electricity, which is equivalent to annual saving of around 286 000 t equivalent of fuel and result in a respective reduction of carbon dioxide emissions of 470 000 t by substituting TPP, which operate on natural gas. Through the planned priority projects for the next 15-20 years large, medium sized and small HPPs with a total capacity of 300 MW and electricity production of 1 234 GWh will be built. Implementation of these projects will result in annual fossil fuel savings of 422 thousand t equivalent fuel and a respective reduction of carbon dioxide emissions by 692 000 t. The utilisation of hydro-electric resources becomes an important factor in light of compensation for the capacity of the nuclear power plant in case of its shut-down, as well as in terms of reduction of carbon dioxide emissions. The barriers for further development of hydropower in Armenia include: 9 Regulatory and administrative barriers 9 Absence of affordable long-term funding Micro-hydro power potential The micro-hydro power potential is being widely explored throughout Armenia. The plants are being constructed on water pipelines – both in irrigation system and drinking water system. There were 43 applications received by the PSRC for constructing micro-hydro power plants with the total capacity of 1 473 MW22. Wind power Wind energy is a renewable source of energy with real possibilities of application in Armenia.

21 Sources used: The Energy Sector Development Strategies in the Context of Economic Development in Armenia (2005) and “Capacity Building In the Republic of Armenia for Technology Needs Assessment and Technology Transfer for Addressing Climate Change Problems”, prepared within the frames of the UNDP/GEF/ARM/95/G31/A/1G/99 “Armenia-country study on climate change. Phase II” Project, 2000

22 Source: PA Consulting

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-10 A comprehensive study on wind energy resources in Armenia was conducted by the National Renewable Energy Laboratory (NREL) in 2003. The work was sponsored by the US government and aimed at identification of wind characteristics and distribution of the wind recourses in Armenia as well as development of detailed wind resource maps for the country.

The study concludes that the potential for more than 4,000 MW of economic wind power exists in Armenia. About 1 000 km2 of land areas of Armenia have been assessed by NREL as areas with good-to-excellent wind resource potential. The proportion of windy land and potential wind capacity represents less than 4% of the total land area (28,400 km²) of Armenia. Using a conservative assumption of 5 MW per km2, this windy land could support almost 5,000 MW of the potential installed capacity. Additional studies are required to accurately assess the wind electric potential, considering such factors as the existing transmission grid and accessibility. If additional areas with moderate wind resource potential (or good for rural power applications) are considered, the total estimated windy land area increases to more than 2,200 km2, or almost 8% of the total land area of Armenia. This amount of windy land could support more than 11,000 MW of installed capacity23. The proportion of windy land and the potential wind capacity in each wind power category is listed in Table 8-4:

Wind Resources Wind Wind Power Wind Speed at Total Capacity Utility Scale Class at 50 m, 50 m, Installed MW W/m2 m/s Good 4 400-500 7.5-8.1 2,500 Excellent 5 500-600 8.1-8.6 1,050 Excellent 6 600-800 8.6-9.5 850 Excellent 7 >800 >9.5 500 Total 4,900 Table 8-4: Good-to-Excellent Wind Resources at 50 m Source: “Wind Energy Resource Atlas of Armenia”, National Renewable Energy Laboratory, July 2003 The first megawatts of wind electricity in Armenia were transmitted to the national grid in the fourth quarter on the year 2006 from Lori-1 wind farm constructed at Pushkin Pass in 2005 with the support of the Iranian Government. Currently, there are some activities under way for organizing the construction of one more wind-electric power plant (WPS) at the same site with 40 MW capacity and the design electricity production capacity of around 120 GWh. Another wind power plant with a total capacity of 20 MW is also proposed to be installed in the Zod region of Armenia. To promote wind power development, the tariff established by the Public Services Regulatory Commission of Armenia for wind power projects is US$0.07 per kWh (VAT excluded) through 2016. Solar power There is a significant solar power potential in Armenia. The average total (diffuse and direct) intensity of solar power on 1 m2 of horizontal surface is equal to 1 720 kWh/m2 (the average for the most of the Europe is 1 000 kWh/m2). The quarter of the country area has 1

23 “Wind Energy Resource Atlas of Armenia”, National Renewable Energy Laboratory, July 2003

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-11 850 kWh/m2 potential. The main barrier for the widespread use of this technology is the high cost of technology. Biogas One of the first biogas installations to produce biogas of cattle manure in combination with solar water heating system in Armenia was created at a small cattle breeding farm in Aparan in 1998 with the support of “VISTA” expert center. Similar installations, but without solar collectors, were also assembled in the cities of Eghvard and Aparan. In 2003, a biogas installation with the reactor volume capacity of 25 m3 (Advanced Engineering Associates International (AEAI) and SolarEn) was put into operation for biological processing of cattle manure with production of biogas (50 m3 daily) in the territory of “Agroservice” OJSC in Yerevan. For the coming 15 years the methane production potential from biogas plants is estimated to be around 100,000 m3. Installation of a biogas plant with the electric capacity of 1.3 MW and methane production capacity of 8,500 m3 has been envisaged at Lusakert Poultry Farm. The project will be implemented under the Clean Development Mechanism. The barriers for this renewable energy source include: 9 Low awareness on this technology in Armenia 9 Lack of big facilities with appropriate capacities 9 Absence of affordable long-term funding Geothermal power According to preliminary research, Armenia has significant geothermal potential, but it is necessary to explore it more in order to estimate the technically available and economically beneficial potential.

8.1.4 Laws regulating the energy sector of Armenia

Currently, the energy sector of Armenia is being regulated by the following laws and regulations: 9 Law on Energy (1997, revised in 2001)

9 Law on Energy Saving and Renewable Energy (2004)

9 The Energy Sector Development Strategies in the Context of Economic Development in Armenia (Adopted by GoA on June 23, 2005)

9 Order of PSRC on Licensing the Activities in Energy Sector (2002)

9 Water Code (2002) and Orders on Acquiring a Permit for Water Use for Newly Constructed Hydro Power Plants

9 Land Code (1991) and Orders on Acquiring a Permit for Land Use

9 Law on Environmental Impact Assessment (1995)

9 Law on State Technical Audit in Energy Sector (2005)

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-12 Work is being conducted for facilitating the enforcement and development of secondary legislation under the Law on Energy Saving and Renewable Energy. The Ordinance on Conducting Energy Examination was developed and is currently being circulated among the governmental stakeholder organizations. The Energy Research Institute of Armenia is currently developing the National Program on Energy Saving and Renewable Energy.

8.1.5 Governmental incentives in the energy sector

The main government incentive related to the renewable energy is the following: – The government of Armenia guarantees the purchase of energy from renewable energy generating facilities with the capacity of less than 10 MW at fixed prices during the 16 years starting from the date of commissioning the power plant. – The current price set for small hydro-power plants constructed on run-off-rivers is 4.5 cents/kWh, and for hydro-power plants on irrigation and drinking-water supply canals 3.0 and 2.0 cents/kWh respectively. – The price for wind energy and biomass (“municipal solid waste – biogas - electricity” technology) is set at 7.0 cents/kWh24. On April 13, 2006 the Government Decree N509 directed the PSRC to provide licenses for the implementation of combined heat and power (CHP) generation projects for the purpose of restoration of the district heating system of Avan and Davidashen districts of Yerevan city. According to the aforementioned Decree the government provides guarantees for purchasing the generated electric energy for 5 years, by the tariff for the generated electric energy not exceeding the electric energy one part tariff for the Hrazdan TPP in the given year.

8.1.6 Current research activities in the energy sector of Armenia

There are a number of ongoing and completed studies related to the energy sector of Armenia. During the preparation stage for the launch of the Renewable Resources Revolving Fund the following studies were conducted: 9 Development of a computer database of renewable resources in Armenia. Collection of information on renewable energy and field investigation in Lori Marz, Armenia 9 Creation of a geographical information database for Lori Marz, Armenia 9 Investigation of barriers for development of renewable energy in Armenia 9 Assessment of technology transfer potential in the renewable energy sector 9 Development of «One window» mechanism for implementation of renewable energy projects in Armenia An ongoing research is being conducted by the State Engineering University of Armenia, the Yerevan State University, the Energy Research Institute of the Ministry of Energy of RA, American University of Armenia and other research institutes and organizations on the following issues:

24 PSRC’s decisions No 21 from 09.02.2004, No 207 from 13.12.2005, No 52 02.09.2003

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-13 9 Hydrogen technology 9 Solar power technology 9 Wind power technology 9 Biomass technology H2Economy Ltd. (www.H2Economy.com) designs and manufacture small (<100W) polymer exchange membrane fuel cells for the educational and hobbyist market, while working to discover manufacturable, reliable and cost effective fuel cells. In the area SW of Armavir, at least four gas prospects have been identified, with reserve sizes ranging from 10 to 40 bcf (billions of cubic feet) of gas. Statistically, these are ‘most likely' estimates - i.e. probabilities of at least 50 % that these reserves exist; actual reserves could be much greater. There are at least another eight similar size (or larger) prospects known, but they require more technical work. A reasonable estimate of gas potential so far is therefore 500 bcf or greater, which represents a ten year supply for Armenia, as the amount of gas currently imported is currently about 50 bcf/year. Northern and eastern parts of the Oktemberyan Basin remain virtually unexplored and would be expected to yield further deposits25. U.S. Geological Survey (USGS) has conducted research in Armenia on potential coal resources: Conducted coal exploration and resource assessment in Armenia Established a coal characterisation laboratory in Armenia Many other scientific research efforts attempted to quantify oil and gas resources in Armenia. In the following, a few ongoing research activities and projects in the energy sector are described in greater detail. The Residential Heating Project (RHP) funded by the USAID The RHP conducts the following main research activities: Review and assessment of the existing heat supply situation and heat energy market; Development of sustainable, reliable, affordable and efficient options of rehabilitation of heating systems in the residential sector of the Republic of Armenia; Conducting a feasibility study and estimate expenditure of the projects with least rehabilitation costs and implement those projects in Yerevan and other regions of the Republic through the grant awarded by USAID; Review, assessment and recommendations for improvement of the legal and regulatory framework related to property rights in common land and the improvements (facilities) used for residential heat supply systems in Armenia. “Armenia – Improving the Energy Efficiency of Municipal Heating and Hot Water Supply”, UNDP/GEF/0003579926 The goal of this full size GEF funded project is provision of the technical assistance for the promotion of the measures aimed at reduction of greenhouse gas (GHG) emissions

25 http://groong.usc.edu/ro/ro-20020624.html 26 http://www.nature-ic.am/ClimateChange/Undp_Gef_Projects/Project_Document_eng.pdf

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-14 resulting from the current heat and hot water supply practices in Armenian cities by laying the foundation for the sustainable development of services while taking into account global environmental impacts. “Municipal Network for Energy Efficiency” Program funded by USAID The Alliance to Save Energy and the Energy Research Institute of Armenia, with financial assistance from the United States Agency for International Development, is currently developing the National Program on Energy Saving, which includes: - Energy examinations for energy consumers in industrial, agricultural and - residential sectors - Preparation of energy passports for large energy consumers - Estimation of energy saving potential in the aforementioned sectors - Preparation of recommendations for energy efficiency improvement in Armenia.

8.1.7 National short, medium and long-term development goals in the energy sector

The Energy Sector Development Strategy of Armenia is aimed towards the following goals: - Achieving sustainable economic development in Armenia; - Ensuring safety in the energy sector; - Enhancing the energy independence of the country, including diversification of imported and domestic energy resources and ensuring maximum utilization of generating capacity; - Ensuring efficient use of domestic energy resources and alternative sources of energy and implementation of economic and legal mechanisms for that purpose. The Strategy is aimed at the resolution of the following primary problems: - Providing reliable energy supply at low rates to satisfy the fundamental needs of all customers, while enhancing energy conservation; - Avoiding methods of energy import that might expose the security and economy of Armenia to events with political impact beyond the control of the Republic of Armenia; - Ensuring the safe operation of the ANPP till 2016 or such time when its energy can be replaced and when decommissioning can proceed without unacceptable economic, ecological and energy security impacts; - Ensuring ecologically sustainable energy supply, based on the principles of sustainable development and in compliance with the international environmental commitments of the Republic of Armenia; - Construction of a financially sustainable energy system, encouraging efficient operation of all energy suppliers, which would bring forth interest among investors and private capital;

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-15 - Creation of an electric energy system that is export oriented and generates high added value; - Development of research programs targeted at the implementation of the goals and primary objectives specified in the Strategies, with the employment of the newest energy sector technologies known in the world, as well as the latest developments in the global energy system. Considering the current reform and commercialization processes in the energy sector, the Armenian government is becoming more focused on financial support and attraction of direct foreign investments for projects that have nation-wide significance, are capable of ensuring an adequate level of energy security and independence and can secure social and economic development. The projected generation capacity additions as presented in Table 8-5.

Period: 2005-2010 Name Installed capacity (MW) Construction of the first Combined Cycle Unit at Yerevan TPP 208 Construction of a Gas Turbine Unit 5 at Hrazdan TPP 440 Construction of Meghri HPP 140 Construction of Small HPPs 70 Construction of Wind Power Plants 100 Period: 2011-2016 Name Installed capacity (MW) Construction of Loriberd HPP 60 Construction of Small HPPs 65 Construction of Wind Power Plants 200 Construction of the second Combined Cycle Unit at Yerevan TPP 208 Construction of the 6th Combined Cycle Unit at Hrazdan TPP 400 Period: 2017-2025 Name Installed capacity (MW) Construction of Shnogh HPP 75 Commissioning of the new ANPP 640 Construction of Small HPPs 130 Construction of Wind Power Plants 200

Table 8-5: Projected generation capacity additions in the energy sector of Armenia Source: The Energy Sector Development Strategies in the Context of Economic Development in Armenia, 2005

8.1.8 Grid emission factors for the Armenian energy system

The energy sector of Armenia has a large potential for implementation of emission reduction projects, both in the fields of generation as well as consumption. A high energy intensity is a common feature of almost all branches of the national economy. The most

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-16 promising CDM project types within the Armenian energy sector in terms of GHG emission reduction potential are heat supply, energy efficiency, renewable energy, gas transportation and distribution. As one important activity, within the framework of the EC project «Technical Assistance to Armenia, Azerbaijan, Georgia and Moldova with respect to their Global Climate Change Commitments» a baseline study for grid-connected electricity generation from renewable sources was carried out. The study aimed at provision of a country-wide valid multi project baseline for CDM projects in Armenia, that provide renewable electricity for the national grid in order to significantly reduce transaction cost of such projects under the CDM. The Baseline Study considers two approved CDM baseline and monitoring methodologies: «Indicative Simplified Baseline and Monitoring Methodology for Selected Small-scale CDM Projects Activity Categories», Type I – Renewable Energy Projects, I.D. – Renewable Electricity Generation for a Grid (eligible for small scale CDM projects below 15 MW installed capacity) and «Consolidated baseline methodology for grid connected electricity generation from renewable sources» ACM0002 According to the mentioned methodologies, the baseline emission factor is calculated as the weighted average of the so-called Operating Margin (OM) emission factor, which describes the average emission intensity of the existing power plants, and the so-called Build Margin (BM) emission factor which represents the emission intensity of those power plants recently built or to be built in the near future.

For the derivation of the OM emission factor EFOM, the baseline methodology ACM0002 provides four different procedures. Due to the fact that with nuclear and hydro power so- called low-cost/must run resources comprise more than 50% of the Armenian power generation (71% in 2005), the Simple adjusted OM has been used for further calculations. The OM was calculated ex-ante for the 3-year vintage 2003 to 2005 at

0.62 t CO2/MWhel. This simple adjusted OM is based on the preliminary assumption that λ, the time when low-cost/must-run power resources are operating on the margin, has been 0 hours in 2003 to 2005. This issue at the time of issuing this handbook still was analysed, so that the final OM might evolve slightly below the value as indicated above.

The BM emission Factor EFBM was calculated ex-ante based on the most recent information available on plants already built, as well as an estimation of a likely ex-post BM based on the planned developments within the Armenian power sector was made. Around the years 2009/10 the commissioning of combined cycle units at Yerevan TPP (208 MW) and at Hrazdan TPP (440 MW) is scheduled. The medium-term BM after commissioning of Yerevan and Hrazdan combined cycle units would be largely determined by these and some new small hydropower power plants. With an approximate weighting of 90% new combined cycle units, the Build Margin will develop as follows:

~ 0.35 tCO2/MWhel This ex-post Build Margin also more adequately covers the intention of the BM to represent the average emissions of recently commissioned power plants, rather than the ex-

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-17 ante BM that would include plants commissioned already starting in 1967, and therefore a whole lifetime of 40 years for thermal power plants ago. Accordingly, the medium-term Combined Margin at 50/50 ex-ante OM / ex-post BM weighting is expected to develop after commissioning of Yerevan and Hrazdan combined cycle units a follows:

~ 0.48 tCO2/MWh (in case that the old Units at Yerevan and Hrazdan TPPs are completely retired).

8.2 Forestry and Land Use sector

8.2.1 Forest Definition

Designated National Authorities (DNA) have the role of deciding for their country where to lay the forest thresholds from a range determined at COP927:

Minimum tree crown cover value between 10 and 30 per cent; Minimum land area value between 0.05 and 1 hectare; Minimum tree height value between 2 and 5 meters. The national definition under the Forest Code of Armenia elaborated in 2005 is the following: “Forest - interconnected and interacting integrity of biological diversity dominated by tree- bush vegetation and of components of the environment with the minimal area of 0.1 ha, minimal width of 10 m and with the tree crowns covering at least 30% of the area, as well as non-forest cover areas which have been previously forested”. It is obvious that the code is lacking the required tree height threshold. As a tentative definition for the A/R project development it has been chosen the following expert recommendation, avoiding further changes in the new Forest Code definition thresholds: Minimum tree crown cover value 30 per cent; Minimum land area value 0.1 hectare; Minimum tree height value 3 meters. The chosen tree height threshold would allow the inclusion of shrub lands or other woody forest vegetation areas below 3 m at maturity in situ, thus extending the country potential for CDM A/R activities.

27 “Forest” is a minimum area of land of 0.05-1.0 hectares with tree crown cover (or equivalent stocking level) of more than 10-30 per cent with trees with the potential to reach a minimum height of 2-5 meters at maturity in situ. A forest may consist either of closed forest formations where trees of various storeys and undergrowth cover a high proportion of the ground or open forest. Young natural stands and all plantations which have yet to reach a crown density of 10-30 per cent or tree height of 2-5 meters are included under forest, as are areas normally forming part of the forest area which are temporarily unstocked as a result of human intervention such as harvesting or natural causes but which are expected to revert to forest.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-18 However, the Designated National Authority would consider the ecosystems in the country and which forest definitions would best serve national development goals and report to the UNFCCC about the approved definition.

8.2.2 Legal issues

The former Forest Code of Armenia (1994), was based on the Soviet time Forest Code, in fact is a "State Forest Fund Lands Management Code". Issues such as social-economic relations, transition to a market economy, different forms of ownership and others were not reflected in the Forest Code of the Republic of Armenia. Meanwhile the new Forest Code endorsed by the National Assembly of Armenia on October 24, 2005 envisages in addition community and private ownership and a number of other provisions aiming to improve the available legal framework in the country. The main legal documents regulating the land use and forestry are the following legal documents: Land Code of RA, 2001; Forest Code of RA, 2005; Law on Environmental Impact Assessment of RA, 1995; Law on Flora of the Republic of Armenia, 1999; Law on local self-governance of RA, 2002 etc; Forest Regulations based on new Forest Code are under development, covering the fields of forest management, utilisation, protection and regeneration. Generally all the Forest Regulations are expected to be ready by the end of 2008 according to the timetable set by the government. However, thanks to obtained financial support form the FAO National Forest Program Facility the process of development of forest regulations will be accelerated, ensuring wider participation of the stakeholders.

8.2.3 Forest Policy

The forest has indispensable environmental and social significance. However, significant forest territories have been subjected to degradation due to negative anthropogenic, biotic and abiotic impacts. The main goal of the National Forest Policy and Strategy of the Republic of Armenia is to ensure sustainable management of forests and forest areas. According to Resolution N1 adopted in June 1993 by the European Ministerial Conference in Helsinki sustainable management is defined as “The stewardship and use of forests and forest lands in a way and at a rate, that maintains their biological diversity, productivity, regeneration capacity, vitality, and potential to fulfill, now and in the future, relevant ecological, economic and social functions, at a community, national and global levels, and that does not cause damage to other ecosystems.” The Government of the Republic of Armenia will have to balance the environmental and society’s interests, establish conditions for the economic prosperity of the country protecting ecological and social values of forests. The forest policy is an important tool to facilitate the governance of the Armenian forests, being a national asset, and to make the

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-19 interests of the forest sector consistent with other national policies, especially those concerning the environment, rural development, agriculture and forest industries. After Armenia gained its independence in 1991, the first efforts to develop a forest policy were made (1994 -1995). With the support of the Food and Agriculture Organization “Forestry Sector Development” project “A Strategy for the Development of the Armenian Forest Sector” was presented in 1996, which mainly was of declarative nature. On May 27, 1996 the Ministry of Nature Protection and Underground Resources approved the strategy document. The National Forest Policy and Strategy document has been developed in a cross-sectoral participatory process in Armenia since February 2003. It was funded and governed by the Forest Institutional Support Project. The Forest Institutional Support Project is a grant project from Sida (Sweden) and constitutes a part of the Forest Management Component of the World Bank Natural Resources Management and Poverty Reduction Project to Armenia. The Natural Resources Management and Poverty Reduction Project and Forest Institutional Support Project envisages that this National Forest Policy and Strategy should be implemented by the process of National Forest Program development, which started in the beginning of 2004. It will serve as a basis for an immediate revision of the Forest Code of the Republic of Armenia of 1994. The strategy document provides directions of the national forest policy of the Republic of Armenia. When developing a National Forest Policy for Armenia, the principle saying is that the forests are a national property. The present and future should benefit from it. The National Forest Policy is aimed at the restoration of deteriorated forest ecosystems, emphasizing the conservation and development of environmental, social and economic properties of forests, for the benefit of the people and the prosperity of the country. The National Forest Policy and Strategy is consistent with the Constitution of the Republic of Armenia, international conventions ratified by the Republic of Armenia, covenants and is based on modern forestry achievements and positive experience.

Later on the National Forest Program of the Republic of Armenia has been approved by the Governmental decree N 1232-N on July 21, 2005, which states the action plan for the short-term (2006-2008), mid-term (2008-2010) and long-term (2010-2015) prospective, covering forest management, social, economic, environmental and other spheres.

Generally the current forest issues can be summarized as following:

8.2.4 Other issues

Economic issues/Illegal logging According to expert’s assessments about 80% of the annually used forest resources (wood) is used illegally, namely without paying taxes. The main legal forest user in the Republic of Armenia is “Hayantar” (ArmForest), a State Non-Commercial Organization (SNCO). The Republic of Armenia so far was the only and exclusive owner of forests in Armenia, facing financial difficulties to fulfill appropriately its ownership right. However the new Forest Code endorsed by the National Parliament of RA in 2005 has already envisaged other forest ownership, such as community and private. The state budget funding is

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-20 limited, in particular for forest management and at present the forests of Armenian are in great need of the state support. Furthermore, the limited state budget support forces the state forest manager to utilize the forests to as high degree as it possible and to reduce the expenses for forest rehabilitation. This leads to over-utilization of forests in accessible areas, reduction of the forest rehabilitation process and non-observance of good forest management principles. At present, there are no state budget allocations for the improvement of forest infrastructure, maintenance of forest cadastre, and the implementation of a forest inventory. A recently established forest monitoring center currently is focusing on monitoring the illegal logging only. As a result, the forestry sector and the state looses financial resources which are difficult to calculate. Illegal forest logging has a number of objectives and subjective reasons, which have their roots both inside and outside of the forest sector. Measures undertaken by competent state institutions to mitigate illegal activities, particularly in regions rich in forests, are currently insufficient and do not address the wide range of problems. Positive dynamics in the forest sector can be expected in case of sustainable forest use based on modern forest management plans, which simultaneously will support the mitigation of main causes of illegal loggings. Social issues Present short-term social consequences of current unsustainable forest use seem to be positive, as they ensure the survival of the population in the difficult social-economic conditions of the transition period, but the long-term consequences are extremely negative. The main reasons and mechanisms for the anthropogenic impact on the forests caused by local communities are as follows: Very high unemployment; Inaccessible prices of electricity and energy carriers for the majority of population; and Overgrazing in the forests due to the lack of fodder and inaccessibility of pastures and hay-lands.

8.2.5 International Cooperation

Particularly the establishment and strengthening of international cooperation in the forest sector can be successfully implemented through CDM Afforestation and Reforestation activities to promote the forest sector further development, which is already envisaged by the National Forest Program of Armenia endorsed by the Governmental Decree in 2005. Carbon sequestration projects through land use, land use change and forestry (LULUCF) activities could demonstrate a win-win situation from the point of view of climate change and sustainable development. For the period 2008-2012, forestry activities under the Clean Development Mechanisms (CDM) of the Kyoto Protocol have been restricted to afforestation and reforestation (A/R) on areas that were not forested since December 1989. Properly designed A/R projects increase carbon stock and at the same time improve the rural livelihoods. Initiating carbon forestry projects it is crucial from the technical point of view to identify appropriate target forest species, planting schemes, management techniques for achieving good results during the operational lifetime of the projects.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-21 Afforestation/Reforestation projects are significant and will have considerable positive environmental and socio-economic impacts in Armenia helping to achieve sustainable development. Creating local employment prospects for communities, A/R projects can make important contribution in alleviating poverty and improving rural livelihood. Development of carbon forestry projects would allow to support forest sector sustainable development and balance the consumption of wood products in a long run, avoiding forest degradation and deforestation. On the other hand they will help to generate additional incomes from the environmental services performed by newly planted forest plantations. According to the available forest inventory data of Armenia the forest cover is far away from the optimal rate for the country. Expanding the forest cover areas up to 20.1%, as mentioned in the FNC, it might be possible to make essential contribution to mitigate anthropogenic climate change, absorbing heat trapping carbon dioxide from the atmosphere and store carbon as a key constituent of forest biomass and soil organic matter. Finally, sustaining the forest land use can be feasible to reach the target for optimal forestation of Armenia up to 2050, thus making modest - compared to global estimates - but essential contributions by Armenia to mitigate climate change.

8.3 Industry Sector

8.3.1 Sector overview

The complexities of an initial stage of transition to market economy, the breach of economic relations and disintegration of the uniformed economic space of the former USSR became the principal causes of economic and industrial recession in Armenia in 1992-94. The volume of Armenia’s industrial production in 1994 and 2004 made 32 % and 72 % respectively from the 1990’s levels28,3. By the year 1995, the situation had been stabilised and economic recession slowed down; a slight growth of industrial production was secured. As a result of the adaptation to new conditions, significant changes were seen in the sectoral structure of the Armenian industry 29,30.

Electric power (2.9) Other types of industry (8.0) Non-ferrous metallurgy (2.8) Food industry (16.3) Chemical and petrochemical industry (3.9)

Machinery and metalworking (34)

Logging, wood-working and paper industry (2.1) Light industry (24.9) Construction materials industry (5.1) 1990

28 Social-economic Situation of the Republic of Armenia for 1995. Ministry of Statistics of RA 29 Statistical yearbook of Armenia, year 1991. State Department of Statistics of RA, 1991. 30 Statistical yearbook of Armenia, year 2004. National Statistical Service of RA, 2005.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-22 Other industries (9.4) Electric power (16.1) Food industry (31.3)

Non-ferrous metallurgy (31.0)

Light industry (1.1) Chemical and petrochemical Construction materials industry (3,4) industry (2.4) Logging, wood-working Machinery and metalworking (4.4) and paper industry (0.9) 2004

Figure 8-7: Sectoral structure of the Armenian industry in 1990 and 2004 Within the total amount of the country’s industrial output volumes, a sharp decrease was found in such formerly leading sectors as mechanical engineering and light industry, whereas the ratio of non-ferrous metallurgy, food-processing industry and electric power industry increased. The emissions of greenhouse gases in the industry are composed of: (1) emissions attributable to industrial energy consumption and accounted in the “Power” category and (2) emissions caused by technological processes during which chemical or physical transformation of materials occurs. Figure 8-8 presents the dynamics of CO2 emissions in the industrial sector due to energy consumption (electric power, thermal energy, natural gas)31,32. The share of these emissions in the total emissions of GH gases made 8.5 per cent in 1990 and 5.8 per cent in 2000; this made 10 per cent and 8.5 per cent accordingly of the total CO2 emissions. Year

2005** 541.4

2000** 333.2

Emissions, 1990* 2138.3 1000 t CO2

0 500 1000 1500 2000 2500 *- according to GHG inventory, **- evaluation

Figure 8-8: CO2 emissions from the Armenian industry (due to energy consumption)

31 First National Communication of the Republic of Armenia under UNFCCC, UNDP/GEF, 1998 32 «Capacity Building in RA for Technology Transfer Need Assessment and Technology Transfer for Addressing Climate Change Problems», «Armenia - Country Study on Climate Change» Project, II Phase, UNDP/GEF, 2003

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-23 The following Armenian industries cause GHG emissions at technological processes: The construction materials industry: cement production, building plaster (alabasters), perlite, dolomite and glass containers manufacturing; The chemical industry: manufacture of caustic soda at the “Nairit” synthetic rubber factory in Yerevan (the synthesis-gas received from pyrolysis of acetylene is forwarded to the Yerevan thermal power plant as fuel), manufacture of ammonia and calcium carbide at a chemical factory in Vanadzor (currently not operational); The food-processing industry: manufacture of alcoholic beverages and bakeries (emissions of non-methane hydrocarbons). In the national inventory of greenhouse gases developed on the data of the basic year 1990, the CO2 emissions from the industrial sector have been estimated considering only the manufacture of cement. Emissions from other mentioned manufactures had not been taken into account due to absence of reliable information, methodologies and specific emission factors. In the following years, the estimation of GHG emissions from the mentioned manufactures was not carried out due to halts in or irregularity of their operation.

The dynamics of cement production and CO2 emissions is presented in Figure 8-9. The data for the year 1990 are cadastral and the data for the years 1995, 2000 and 2004 have been estimated on the basis of the statistical data on cement production. Year

228 2004 501 - CO2 emissions

109 - cement production 2000 219

114 1995 228 Emissions, 630 1000 t CO2 1990 1264

0 500 1000 1500

Figure 8-9: Cement production and CO2 emissions in Armenia (1000 t)

The Ministry of Trade and Economic Development of the Republic of Armenia is a national authority responsible for implementation of the industrial policy in the country.

8.3.2 Legislation and research activities

The following laws and governmental decrees that legislatively promote realisation of measures on reduction of GHG emissions particularly in the industrial sector have been adopted in Armenia: The Law of the Republic of Armenia on Energy Saving and Renewable Energy (adopted on November 9, 2004). The Law establishes the principles of a state policy in the field of realisation of energy saving as well as the development of renewable energy. It also determines mechanisms of realisation of such principles and stimulates

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-24 the development of energy efficient and environmentally friendly technologies and manufactures. Governmental Decision N-1840 on “Measures to Perform Obligations of the Republic of Armenia under a Number of Environmental Conventions” (adopted on December 2, 2004) The Decision sets forth the state agencies responsible to perform different tasks under the Conventions, including UN Framework Convention on Climate Change and Convention on Long-Range Transboundary Air Pollution. It also envisages the development of the second cadastre of GHG emissions and defines the responsible ministries as well as terms of execution. Governmental Decision N-974N on “Implementation of Projects within the framework of the Clean Development Mechanism of the Kyoto Protocol under the United Nations Framework Convention on Climate Change ” (adopted on July 19, 2006). The Decree appoints the Ministry of Nature Protection of RA as Designated National Authority for the Clean Development Mechanism in Armenia. In the Degree, the Ministry’s functions are determined and it is entrusted to develop the procedure of submission of project documentation under the CDM.

The research of CO2 emissions and the potential of their reduction in the industrial sector (from energy consumption and cement production) was carried out within the framework of the “Armenia Energy Conservation Plan” project (USAID, 2002) and the “Capacity building in the Republic of Armenia for Technology Needs Assessment and Technology Transfer for Addressing Climate Change Problems” Armenia - country study on climate change” project (UNDP/GEF, 2003, II Phase). The outcomes of the studies were reflected in corresponding project reports. Currently, a national program on Replacement of Ozone Depleting Substances (CFCs) in the Manufacture of Commercial Refrigeration Equipment and Production of Aerosols is being carried out by UNDP/GEF. The program has an objective to eliminate emissions of CFC gases in the commercial sector of the country via provision of new technologies and information. The GHG emissions from technological processes not related to fuel combustion, which have not been estimated yet, as well as potential of their reduction, are subject to study within the framework of the Second National Communication of Armenia under UNFCCC. The Communication preparation will commence at the end of 2006.

8.4 Waste Management Sector

8.4.1 Municipal Solid Waste (MSW)

Currently, about 2262 thousand m³ of solid municipal waste are annually generated in Armenia, including municipal, industrial, construction and other wastes. The average proportional volume weight of municipal solid wastes is 0.2-0.3 t/m³. Municipal solid wastes are mainly collected and stored in managed landfills of settlements, while 13-15 %, mainly in rural areas, is disposed irregularly in any available area. At present, there are 58 landfills in Armenia, of which 57 are under the management of local self-governing bodies and one is managed by the Yerevan municipality. General information on landfill sites in marzes and total volumes of waste disposed annually are introduced in Table 8-6.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-25 Total annual volumes of waste disposed in Total area of NMarz landfills, 1000 m3 landfills, ha 2000 2001 2002 1 Yerevan 60 1298 1492 786 2 Aragatsotn 6.2 28 30.2 29.7 3 Ararat 10.3 78 80 86.6 4 Armavir 18.3 109 104.4 104.1 5 Gegharkunik 16.1 58 57.5 57.7 6 Lori 35.3 119 146.1 146.2 7 Kotayk 22.3 177 180.3 176.4 8 Sirak 21.5 130 130.4 128.7 9 Sjunik 13.5 151 159.3 159.5 10 Vajots Dzor 8.0 37 38.3 38.1 11 Tavush 12.3 55 56.3 56.7 Total 223.8 2262 2474.5 1769.7

Table 8-6: General information on landfill sites in Armenia The average distance of landfills from settlements is between 2 and 18 km. The total area covered by landfills is 250 ha including landfills located in rural areas. The largest landfills are: Yerevan (57 ha), Vanadzor (18 ha), Gyumri (10 ha), Armavir (8 ha). Municipal solid wastes are accumulated in all landfills without prior classification and sorting and decontaminated partially by being covered by earth. Technical provisions are at a low level; vehicles and other machinery are not adequate. The accumulation of large amounts of waste in landfills results in anaerobic decomposition of their organic parts and emission of CH4. Sometimes fires occur in landfills, which causes pollution of air basin of settlements and results in CO2 emissions as well. Due to decrease in population of the country as a result of emigration in the 1990s, the volumes of solid municipal waste and methane emissions have decreased. According to the GHG inventory, emissions of methane from landfills in 1990 amounted to 23.7 Gg or 2 % of the total amount of GHG emissions, in 2000 (estimation)- 18.0 Gg and 6.6 % correspondingly. For effective processing of waste, it would be necessary to introduce the principle of sorting (glass, mental, paper, plastic bottles) by residents. A preliminary analysis of the content/quantity of waste in Ararat and Yeghegnadzor cities was conducted within the TACIS project. The results of the mentioned study are summarised in Table 8-7.

Components Artashat Yeghegnadzor subject to Single-family Apartment Single-family Apartment processing houses (%) buildings (%) houses (%) buildings (%) Glass 4.8 2.3 4.4 2.4 Metal 4.3 3.6 5.9 2.4 Paper 3.0 3.3 0.8 2.4 Plastic 5.5 7.5 2.2 4.8 Other waste 82.4 83.3 86.7 88.0 Total 100 100 100 100

Table 8-7: Proportion of waste components

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-26 8.4.2 Institutional and legislative aspects for MSW

The solid waste management system of Armenia is currently in a process of reformation. The former centralised system has been replaced by a new one where solid waste management functions are performed by state and local self-governing bodies. The main framework document regulating waste collection and transportation processes is, in effect, the country’s Law on Local Self-Governance adopted in 2002. According to the Constitution of the Republic of Armenia, local self-governing bodies are authorised to manage community property and resolve various issues at a community level. In particular, organisation of waste disposal is defined as a mandatory responsibility of local self-governing bodies. According to the Presidential Decree “On state governance in marzes of Armenia”, waste processing shall be organised by marz authorities. However, municipal waste decontamination is, in effect, organised by local self-governing bodies. The Law on Sanitary-Epidemiological Safety defines general requirements which refer to ensuring proper sanitary conditions in settlements. The Waste Act, adopted on 24 November 2004, defines the legal and economic framework for waste collection, transportation, storage, processing, recycling, disposal, reduction of its volumes and other relationships relevant to the sector, as well as prevention of negative health and environmental impacts. The Act defines the powers of state governance (Government of Armenia, Ministry of Nature Protection of RA and Ministry of Health of RA) and local self-governing bodies (communities) in the field of waste management. The Ministry of Nature Protection is empowered to manage, classify, and maintain registers of industrial chemical waste (defined as “waste outputs of industrial processes”). However the current national legislation is not stipulating mandatory norms for waste sorting and recycling. In 2004-2005, the Ministry of Urban Development implemented the “Integrated Management of Municipal Solid Waste in Ararat and -Vayots Dzor Marzes” project, in order to support the drafting of conceptual policy framework for this sector and currently has drafted the “Instructions for designing and operation of municipal solid waste landfills”. The “Armenia - Country Study on Climate Change” Phase I and Phase II projects, implemented by the Ministry of Nature Protection, identified and assessed the volumes of greenhouse gas emissions from the wastes sector and made practical steps towards the implementation of projects for technology transfer and mitigation of greenhouse gas emissions, as well as within the framework of the Kyoto Protocol and Clean Development Mechanism. As of beginning of 2005, the Japanese “Shimizu" corporation has initiated the project for landfill gas extraction and utilisation from the municipal solid wastes landfill in Yerevan within the framework of Clean Development Mechanism. Total estimated GHG emission reductions expected within 16 years of the project crediting period is about 2 million t CO2 equiv. Landfills in Gyumri and Vanadzor have also been studied for the same purpose. It goes without saying, that funding is a decisive factor in organising the municipal solid wastes management on a sustainable basis.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-27 According to the current legislation, communities have the power to define the tariffs for collection and disposal of waste (per 1 cub m). Costs of collection, transportation and processing of municipal solid wastes are compensated by residents and organisations, whereas costs of collecting litter from streets and areas for public use are compensated from the community budget. Private organisations collect the fees for collection and transportation of municipal solid wastes from home owners and organisations on a contractual basis, and the costs of transportation of the litter collected from the streets are compensated from community budgets on a contractual basis. But in a number of settlements (Spitak, Masis), fees for services provided to private home owners are collected by the community, in accordance with the contracts signed with waste collection companies. This approach produces positive results, considering that the current legislation does not provide private companies with leverages for collecting fees.

8.4.3 Wastewater

Domestic and industrial wastewater from all Armenian cities are disposed through wastewater networks and collectors. The existing networks collect waste water from 60- 80% of urban areas, while rural areas do not basically have sewage systems, so that waste water is entirely discharged into the river basin. The total length of the primary and secondary network pipelines in the main cites of Armenia makes around 4200 km and they remove approximately 60-80% of the waste water in urban areas. According to the National Statistical Service of RA, the total volume of waste water generated in Armenia in 1990 makes 760 mln. m³, from which 279 mln. m³ are considered clean according to the normative standards, and from the remaining 481 mln. m³ 269 mln. m³ have to be treated at the plants and 212 mln. m³ are directly discharged into the surface water basins. Twenty big and small waste water treatment plants were constructed in the Republic of Armenia before 1990. Their total installed capacity makes about 974.33 thousand m³/day, considering mechanical and biological treatment facilities. Main structures at all waste water plants are no longer operating for various reasons; the normal procedure of sewage water treatment that they have to provide is disrupted and only the mechanical cleaning facilities are partially operational. The treatment of wastewater with a high content of organic substances, including domestic, commercial and some industrial waters streams, cause emissions of a large amount of methane. The total emissions of methane from the waste water sector or Armenia, according to the GHG Inventory for 1990 (First National Communication of Armenia under UNFCCC), is 14.07 Gg/a (in CO2 equivalents 295.47 Gg/a). The largest wastewater treatment plant of Armenia is the Yerevan aeration plant, which started operation in 1981. The plant has a capacity of 530 thousand m³/day and serves around 1.3 mln. population of the cities of Yerevan, Abovian and Charentsavan . The plant’s major sections are: mechanical, biological, sludge dehydration and treatment section. The installed equipment include: 8 methane tanks with the capacity of 3500 m³, 2 gas holders, a mechanical dehydration facility with 5 (6) vacuum filters, a thermal drying facility, 2 sludge concentrators, and emergency sludge squares.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-28 As of 1990, the waste water is not undergoing biological treatment. Methane tanks have never been operated from the day of construction. Although the initial design included digesters and gas-holders for accumulation of methane, these did not operate from the beginning of plant exploitation. The main portion of waste waters is discharged into the Razdan river, which belongs to the Araks-Kura river basin, creating the risk of transboundary pollution. Further problems can arise from industrial waste water which enters the river basin without special treatment, considering the recent progress in the industrial sector rehabilitation. Considering that wastewater treatment plants need radical reconstruction, it is appropriate to install modern technologies for high-temperature treatment of sediments, with extraction of flammable gases (mainly methane). The collected methane can be used for generation of electricity and heat for internal use at the treatment plant, and the residual product in the form of compost can be used as a quality fertiliser. Since the greatest amount of sludge is generated at the Yerevan aeration plant, it is appropriate to use the mentioned technology first of all at the treatment plant of Yerevan. The rehabilitation of waste water treatment facilities is an urgent need for all main urban areas. The emerging problems are of hygienic, epidemiological and environmental nature. From the UNFCCC point of view, the water treatment sector has considerable input in GHG emissions. Methane utilization from waste water can be considered under CDM.

8.4.4 Governmental incentives and initiatives

The new Water Code enacted by the National Assembly in 2002 endeavours to capture all the steps necessary to achieve an integrated and forward-looking management plan for Armenia’s water resources in one visionary legal document. As a result of the enactment of the Water Code and preparation of the National Water Program, Armenia’s water resource policies and standards are undergoing major changes. In 2005, a conference was organised on “Issues of the Municipal Solid Waste Management in Armenia” by the Ministry of Urban Development and OSCE and GTZ offices in Yerevan. Experiences of European countries in waste management, the current situation in the country and the aims and objectives of the conceptual framework for municipal solid wastes management were discussed. The Ministry of Urban Development has currently started the drafting of the conceptual framework. The “Strengthening Integrated Waste Management in Armenia” UNDP project envisages to strengthen waste registration and control system through studying the registration of wastes in Armenian settlements and establishment of corresponding databases. The program for industrial and municipal solid waste management in Yerevan for 2005- 2008 has been drafted. The Ministry of Nature Protection has further drafted the “Regulations for Conducting а Register of Wastes”.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-29 8.5 Transport Sector

The transport sector of Armenia includes automobile, railway, air, and pipeline (gas- transport system) transport. Since the railway transportation of the republic is completely electrified and the internal air lines are currently not operational, CO2 emissions due to railway and air transportation are absent. The motor transport and the gas-main pipelines represent the two major sources of GHG emissions in the transport sector of Armenia (due to leakages of methane). Starting from 1990, the transport sector of Armenia has undergone substantial changes resulted from the transition of the country’s economy and blockade of the communication systems, which, in their turn, have influenced the amount of GHG emissions 33,34 (see Figure 8-10)

Air transport (0.2%) Air transport (0.1%) Railway transport Railway transport (5.6%) (45.5%)

Motor transport (94.3%) Motor transport (54.4%)

1990 2004

Figure 8-10: Cargo transportation by transport type (percentage of the total amount)

Trolleybus (10.5%) Tram (3.8%) Trolleybus (2.7%) Subway (8.7%) Subway (10.5%)

Motor transport (76.9%) Motor transport (88.6%)

1990 2004

Figure 8-11: Passenger transportation by transport type (excluding air and railway transport) In 2004, the total volumes of motor-traction (mln. tons) by motor transport decreased by 80 times as compared with 1990, whereas volumes of passengers commuting by motor transport dropped by 2.3 times, by trolley bus - 8.4 times, by the underground - 3.2 times, and by tram – were completely excluded.

33 Statistical yearbook of Armenia, year 1990. State Department of Statistics of RA, 1991. 34 Statistical yearbook of Armenia, year 2004. National Statistical Service of RA, 2005.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-30 Changes have also taken place in the country’s motor pool structure as a result of a decrease in the number of tracks of great carrying capacity as well as buses of great capacity. The structure of the motor pool of Armenia as of 2004 is presented in Figure 8-12

Bus (5.3%) Trucks (17.5%)

Passenger cars (77.2%)

Figure 8-12: The structure of the motor car pool of Armenia (percentage of the total amount) Notes: 1. The “Trucks” category also includes low-duty cargo vehicles. 2. The “Buses” category also includes large buses and vans.

Table 8-8 shows the parameters of the motor fuels used, a share of automobiles by a 35,36 used type of fuel as well as CO2 emissions as of 2004 .

Amount of Distribution Distribution of Types of motor fuel, CO emissions, by fuel type, vehicles by the 2 motor fuel 1000 t of 1000 t CO % fuel used, % 2 equivalent fuel Gasoline 284.7 52.9 71.8 615.5 Diesel fuel 151.1 27.7 10.9 327.1 Compressed 100.4 18.5 16.1 182.7* natural gas Liquid gas 4.7 0.9 1.2 Total 564.5 100 100 1125.3

Table 8-8: General information on fuel consumption *Incl. liquid gas

The majority of motor vehicles currently used in Armenia were manufactured in the former USSR in the 1980s. In recent years, the number of foreign made used cars imported into the country has increased. In general, motor vehicles in the country have grown old and have poor technical conditions and ecological characteristics. Old motor vehicles do not have exhaust gas cleaning systems, such as catalytic neutralizers widely used in developed countries. This results in atmospheric air pollution with gases such as SO2 and NOx, which, although not considered greenhouse gases, nevertheless, have an impact on climate change as precursors of GHG 6.

37,38 Figure 8-13 presents the dynamics of CO2 emissions due to motor vehicles :

35 “Natural gas as a motor fuel in Armenia” Study, UNDP, 2004 36 State Motor Vehicle Inspectorate Department of RA 37 First National Communication of the Republic of Armenia under UNFCCC, UNDP/GEF, 1998

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-31 Year 2004** 1125.3

2000** 757

1990* 3685 Emissions, 1000 t CO2

0 1000 2000 3000 4000

*- according to GHG inventory, **- estimates

Figure 8-13. CO2 emissions due to motor transport in Armenia

A sharp decrease in CO2 emissions due to motor transport is caused by structural transition in the country’s economy, changes in the composition of motor transport, reduction in cargo and passengers transportation. The increase in emissions in 2004 was caused by fast pace of automobilization of the republic, basically due to personal cars.

In 1990, the share of CO2 emissions from motor transport was estimated at 14.4 % and in 2004 - 13.3 % of the total GHG emissions, which made 17 % and 19.4 % of the total CO2 emissions amounts accordingly. Recently, the shift to the use of natural gas as a more economical and environmentally friendly motor fuel has been accelerating in the sphere of motor transport. Gas fuel has a number of advantages compared to the traditional types of motor fuel: low price and 25-35 percent lower emissions of carbon dioxide and polluting substances. The use of gas fuel increases the life of engine by 1.4 to 1.8 times and the period between engine repairs by 1.5-2.0 times. Compared to 2000, it is planned to increase the use of compressed natural gas 1.8 times by 2010, 2.3 times by 2015 and 3 times by 2020. According to the projections for the development of gas-compressor refueling stations network, the share of compressed natural gas as motor vehicles fuel will increase up to 20 % by 2020. Considering the fast growth of the motor-vehicle pool, this must expedite significant reduction of harmful substances and GHG gases emissions 6. Over the last decade, the energy efficiency of urban public transportation has reduced significantly. According to expert evaluations, per unit consumption of fuel in passenger transportation has increased by 4 times. This is a result of large busses and transport means operating on electricity (trams, trolley buses, underground) being gradually substituted by microbuses, which currently account for 90 % of passenger transportation. This structure of passenger transportation has resulted in overuse of motor fuel, and, correspondingly, an increase in CO2 emissions and the level of air pollution. The second source of GHG emissions from the transport sector of Armenia is the gas- transport system due to the emissions of methane resulting from leakages. Those leakages are attributable to technological losses within the gas-transport systems (gas mains), and

38 «Capacity Building in RA for Technology Transfer Need Assessment and Technology Transfer for Addressing Climate Change Problems», «Armenia - Country Study on Climate Change» Project, II Phase, UNDP/GEF, 2003

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-32 gas distribution systems, losses due to pipelines and equipment purging as well as loses due to emergencies. Figure 8-14 shows methane emissions within the gas-transport system.

Year

2000** 794.5

1990* 1679.4 Emissions, 1000 t CO2

0 500 1000 1500 2000 *- according to GHG inventory, **- estimates

Figure 8-14: Methane emissions within the gas-transport system of Armenia Reduction of the total volumes of methane emissions in 2000 was caused by a triple decrease in gas supply to the republic on the one hand and the modernization of the system during its restoration on the other hand. At the same time, the share of methane emissions in the total GHG emissions amounts increased from 6.65 % in 1990 up to 13.89 % in 2000. Taking into account the double increase in gas supply to the republic which is expected in 2007, the potential of methane emissions reduction in gas-transport system may improve considerably. The Ministry of Transport and Communication of RA is a designated national authority which manages the transport system of Armenia and realizes its technical policy. The management of the gas supply system of Armenia is carried out by "ArmRosgasprom", a Russian-Armenian Joint-Stock Company, which executes transportation, storage and distribution of gas, as well as works on restoration and exploitation of gas networks. The following laws and governmental decrees that legislatively promote realization of measures on reduction of GHG emissions in the transport sector have been adopted in Armenia: The Law of the Republic of Armenia on Energy (adopted on February 3, 1998) The Law of the Republic of Armenia on Energy (adopted on March 21, 2001) The Law of the Republic of Armenia on Energy Saving and Renewable Energy (adopted on November 9, 2004) Governmental Decision N-1840 on “Measures to Perform Obligations of the Republic of Armenia under a Number of Environmental Conventions” (adopted on December 2, 2004) Governmental Decision N-1033N on “Approval of the program of measures on reduction of emissions of hazardous substances from vehicles (adopted on June 14, 2006)

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-33 Governmental Decision N-974N on “Implementation of Projects within the framework of the Clean Development Mechanism of the Kyoto Protocol under the United Nations Framework Convention on Climate Change ” (adopted on July 19, 2006)

The research of CO2 emissions and the potential of their reduction was carried out within the framework of the following programs and projects: “Capacity building in the Republic of Armenia for Technology Needs Assessment and Technology Transfer for Addressing Climate Change Problems” Armenia - country study on climate change” Project (II Phase) UNDP/GEF, 2003. The concept of reduction of harmful substances emissions from motor vehicles developed by the Ministry of Nature Protection in 2003 “Natural Gas as Motor Fuel in Armenia” UNDP Study, 2004 The general plan for development of the city of Yerevan (up to 2020) authorized by the Government of Armenia on 15.12.2005. The general plan stipulates the new urban transportation system aimed at ordering and optimisation of transport streams, as well as increase in passengers commuting by trolley buses from 1.1 % to 24.1 %, by the underground from 4 % to 12 %, and by buses with great capacity from 1.9 % to 45 %. The outcomes of the research were reflected in corresponding project reports. Currently, a project aimed at “Studying and estimation of the potential of increase in energy efficiency and GHG emissions reductions in the transport sector of Armenia” is being developed for submission of the PDF-B project funding request to GEF. The research activity on the transport sector of Armenia as a source of GHG emissions and the estimation of their reduction potential will be carried out also within the framework of the Second National Communication of Armenia on UNFCCC. The Communication preparation will commence at the end of 2006.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 8-34 9. The CDM Potential in Armenia / Technology transfer

9.1 CDM project opportunities in the various country regions

Regions Sector CDM Project Opportunities 12 3 Installation of a new 208 MW combined cycle unit at Yerevan TPP. The project will be jointly financed by the soft loan provided by Japan with co-financing from the Armenian government. The new unit will provide steam to the neighboring industries and heat to residential area located next to the plant. Estimated annual fuel saving - 276.000 t eq. fuel Expected annual GHG emissions reduction - 352.000 t CO2e. Rehabilitation of centralized and decentralized heating systems of Yerevan city Energy based on introduction of co-generation heating systems, modernization of existing boiler houses, installation of up-to-date metering and control equipment, etc. The energy sector in Armenia accounts for 97% of the total CO2 emissions. The main potential for reducing CO2 emissions and improving energy saving lies in electricity production and heat supply systems. Thus, enhancing the energy efficiency of municipal heat supply system and promoting energy conservation measures can result in substantial GHG emissions reduction. Introduction of energy efficiency measures and implementation of new technologies in the process of calcination at “Gajegorts” alabaster factory. CO2 emissions reduction potential will be estimated within the framework of the Second National Communication of RA under the UNFCCC. Substitution of natural gas with butadiene during production of synthetic rubber at “Nairit Industrial Factory” CJSC. Currently, the plant uses a technology for production of processes synthetic rubber from natural gas. This technology is characterized by high energy consumption and low productivity. Introduction of butadiene technology as well as elimination of energy losses from the steam pipelines will increase efficiency of production and lead to GHG emissions reduction. Expected annual GHG emissions reduction – 225.000 t CO2e. Yerevan city Landfill gas capture and power generation project. The ongoing project is carried out by the Japanese companies and the Municipality of Yerevan. Estimated emissions reduction is 2,16 mln t CO2e for 16 years of crediting period. Rehabilitation of Yerevan Waste Water Treatment Plant. The plant, which is the largest one in the country, with 550 cubic meters a day Waste capacity and 4,200 km of system network and collectors, is operating with only management mechanical treatment. The biological treatment system of the plant is completely out of service due to equipment failures and lack of funds for repairs and refurbishment. After the rehabilitation of the plant it will be possible to introduce biogas technologies to organize methane capture and its further destruction through utilization in gas engine generator or by flaring. Implementation of energy efficiency measures at pumping stations, introduction of a gravitational system of water supply at delivery mains, revision of principles of water supply zoning, installation of modern individual Water water metering and control systems on the consumer level. supply Due to the implementation of the above-mentioned measures it will be possible to noticeably decrease the energy intensity of the municipal water supply and reduce GHGs emissions from energy consumption. Afforestation/Reforestation projects aiming at carbon sequestration through enlargement of greenery area, such as urban forestry area for performing LULUCF recreational, sanitary-hygienic, sporting and other social-environmental purposes.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-1 Regions Sector CDM Project Opportunities 12 3 Construction of small HPPs with the total installed capacity of 21 MW and annual power generation of 54,5 GWh. Energy Estimated annual fuel saving – 18.000 t eq. fuel Expected annual GHG emissions reduction – 29.500 t CO2e. Implementation of Afforestation/Reforestation CDM projects to expand forest plantation area, which in addition could prevent land erosion, improve water Aragatsotn LULUCF catchments areas and support agro-forestry plantations in rather extensive areas of community, state and private ownership. Construction of small HPPs with the total installed capacity of 18,2 MW and annual power generation of 56,1 GWh. Energy Estimated annual fuel saving – 18.500 t eq. fuel Expected annual GHG emissions reduction – 30.300 t CO2e. Introduction of energy efficiency measures and implementation of new technologies in the process of calcination of limestone at “Ararats” cement Industrial factory.

Ararat processes CO2 emissions reduction potential will be estimated within the framework of the Second National Communication of RA under the UNFCCC. Establishment of protection forest belts and other agro-forestry systems aiming LULUCF carbon sequestration and the improvement of the management of croplands and grasslands, requiring regular irrigation. Construction of small HPPs with the total installed capacity of 23 MW and annual power generation of 66 GWh. Estimated annual fuel saving – 21.800 t eq. fuel Expected annual GHG emissions reduction – 35.700 t CO2e. Energy Construction of WPPs with the total installed capacity of 60 MW and annual power generation of 58,5 GWh. Estimated annual fuel saving – 19.400 t eq. fuel

Gegharkunik Expected annual GHG emissions reduction – 31.800 t CO2e. Afforestation/Reforestation CDM projects aiming improvement of watershed LULUCF management of lake Sevan, prevention of land erosion and supporting the recreational functions of newly established forests.

Construction of a new 440 MW gas turbine (Unit N5) at Hrazdan TPP. CO2 emission reduction potential will be estimated within the framework of the Second National Communication of RA under the UNFCCC Energy Construction of small HPPs with the total installed capacity of 9,1 MW and annual power generation of 21,4 GWh. Estimated annual fuel saving – 9.000 t eq. fuel Expected annual GHG emissions reduction – 14.700 t CO2e. Optimization of technological cement production processes and introduction of Industrial power and resource saving technologies at Mika-Cement CJSC. Expected processes annual GHG emissions reduction – 115.000 t CO2e. Mitigation of Lusakert Pedigree Poultry Plant's animal effluent related to GHG

Kotayk emissions, by improving the plant's Animal Waste Management System practices. The technology implementation is based on the use of anaerobic digester treatment as the first step before a lagoon system. Produced effluent Agriculture from the biogas plant will be routed to the existing lagoons and the captured gas will be used in a gas engine generator to produce heat and electricity. Any excess gas will be flared. Expected annual GHG emissions reduction – 63.000 t CO2e. Implementation of Afforestation/Reforestation CDM projects aiming carbon LULUCF sequestration, as well as improvement of social, economic and environmental functions of the forests in community, state and private ownership lands.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-2 Regions Sector CDM Project Opportunities 12 3 Construction of Loriberd HPP with the total installed capacity of 66 MW and annual power generation of 216 GWh. HPP will be constructed in northern part of Armenia on Dzoraget River as a complex consisting of three derivation type HPPs. Construction of Shnogh HPP with the total installed capacity of 75 MW and annual power generation of 270 GWh. The HPP will be constructed in the north of Armenia on Debed River. Estimated annual fuel saving – 89.100 t eq. fuel Energy Expected annual GHG emissions reduction – 146.000 t CO2e. Construction of small HPPs with the total installed capacity of 335 MW and annual power generation of 123,5 GWh. Estimated annual fuel saving – 40.700 t eq. fuel Expected annual GHG emissions reduction – 66.700 t CO2e. Lori Construction of WPPs with the total installed capacity of 25,2 MW and annual power generation of 54,1 GWh. Estimated annual fuel saving – 17.800 t eq. fuel Expected annual GHG emissions reduction – 29.800 t CO2e. Waste Landfill gas capture and power generation project. Estimated annual emission management reduction - 19700 t CO2e. Afforestation/Reforestation CDM projects aiming at establishment of forest plantations on community, state and private ownership lands, which could in addition play significant role supporting sustainable land management, LULUCF preventing of land erosion, improving the water catchments areas, agro-forestry plantings, as well as alleviating of rural poverty through generated local employment opportunities etc. Construction of Meghri HPP with the total installed capacity of 140 MW and annual power generation of 800 GWh.The HPP will be constructed in the south of Armenia on Arax River. CO2 emissions reduction potential will be estimated within the framework of the Second National Communication of RA under the UNFCCC. Construction of small HPPs with the total installed capacity of 486 MW and Energy annual power generation of 177,4 GWh. Estimated annual fuel saving – 58.500 t eq. fuel Expected annual GHG emissions reduction – 96.400 t CO2e.

Syunik Construction of WPPs with the total installed capacity of 84 MW and annual power generation of 107,6 GWh. Estimated annual fuel saving – 35.500 t eq. fuel Expected annual GHG emissions reduction – 58.200 t CO2e. Afforestation/Reforestation CDM projects aiming at establishment of forest plantations on different ownership lands, which could support sustainable land LULUCF management, prevent land erosion, improving the water catchments areas, agro- forestry plantings, as well as alleviating of rural poverty through generated local employment opportunities etc.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-3 Regions Sector CDM Project Opportunities 12 3 Construction of Meghri HPP with the total installed capacity of 140 MW and annual power generation of 800 GWh.The HPP will be constructed in the south of Armenia on Arax River. CO2 emissions reduction potential will be estimated within the framework of the Second National Communication of RA under the UNFCCC. Construction of small HPPs with the total installed capacity of 486 MW and Energy annual power generation of 177,4 GWh. Estimated annual fuel saving – 58.500 t eq. fuel Expected annual GHG emissions reduction – 96.400 t CO2e.

Tavush Construction of WPPs with the total installed capacity of 84 MW and annual power generation of 107,6 GWh. Estimated annual fuel saving – 35.500 t eq. fuel Expected annual GHG emissions reduction – 58.200 t CO2e. Afforestation/Reforestation CDM projects aiming at establishment of forest plantations on different ownership lands, which could support sustainable land LULUCF management, prevent land erosion, improving the water catchments areas, agro- forestry plantings, as well as alleviating of rural poverty through generated local employment opportunities etc. Construction of small HPPs with the total installed capacity of 25 MW and annual power generation of 78,9 GWh. Estimated annual fuel saving – 26.000 t eq. fuel Expected annual GHG emissions reduction – 42.700 t CO2e. Energy Construction of WPPs with the total installed capacity of 10 MW and annual power generation of 21,5 GWh. Estimated annual fuel saving – 7.100 t eq. fuel Shirak Expected annual GHG emissions reduction – 11.600 t CO2e. Waste Landfill gas capture and power generation project. Estimated annual emission management reduction - 50000 t CO2e. Establishment of protection forest belts and other agro-forestry systems aiming LULUCF the improvement of croplands and grassland management, which will usually require regular irrigation. Construction of small HPPs with the total installed capacity of 35 MW and annual power generation of 88,7 GWh. Estimated annual fuel saving – 29.300 t eq. fuel Expected annual GHG emissions reduction – 48.700 t CO2e. Energy Construction of WPPs with the total installed capacity of 14 MW and annual power generation of 42 GWh. Estimated annual fuel saving – 13.900 t eq. fuel Expected annual GHG emissions reduction – 22.800 t CO2e.

Vayots Dzor Afforestation/Reforestation CDM projects aiming at establishment of forest plantations on different ownership lands, which could support sustainable land LULUCF management, prevent land erosion, improving the water catchments areas, agro- forestry plantings, as well as alleviating of rural poverty through generated local employment opportunities etc. Improvement of the level of motor transport gasification and diversification of urban public transport due to an increase in the number of buses of great Transportati capacity as well as electrified transport means. Expected annual GHG on emissions reduction – 66.000 t CO2e. (motor A more precise estimation of GHG emission reduction will be conducted within transport) the framework of UNDP/GEF “Studying and estimation of the potential of All regions increase in energy efficiency and GHG emissions reductions in the transport sector of Armenia” project.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-4 Regions Sector CDM Project Opportunities 12 3 Use of new technologies for the reconstruction of linear parts of gas pipelines, Fuel leakage gas leakage prevention from gas-distribution and compressor substations, (gas- introduction of computer-based data-processing system with remote supervision transport equipment and gas flow calculators system) Expected annual GHG emissions reduction – 320.000 t CO2e. According to the First National Communication of RA, one of the measures outlined to mitigate adverse climate change was development of Optimal Forestation Concept, which has an overall target to expend forest cover areas of LULUCF Armenia up to 20.1% by 2050 year, generating large potential for A/R projects in the country. However a comprehensive feasibility study would be required to assess the real potential of A/R projects consistent to CDM modalities and procedures.

Table 9-1: CDM project opportunities in Armenia

9.2 Demand for Technology Transfer

A comprehensive study on identification and assessment of technological needs for reducing GHG emissions as well as mitigation the consequences of the climate change, named “Capacity Building in the Republic of Armenia for Technology Needs Assessment and Technology Transfer for Addressing Climate Change Problems” was conducted in 2003 within the frame of the second phase of UNDP/”GEF “Armenia - Country Study on Climate Change” project. Armenia, as a non-Annex I party to the Convention does not have quantitative commitments for reducing GHG emissions. Nevertheless, the transfer of modern technologies for reducing emissions and their introduction in the relevant sectors of the national economy is considered as a strong and efficient tool facilitating the sustainable development of the country. This is particularly true with regard to projects being implemented under the Kyoto Protocol’s Clean Development Mechanism. Considering the multi-sectoral nature of the issue, particular attention was paid to inter-agency cooperation and establishment of an information database on technological needs and technologies. One of the most important goals of the study was the determination of the priority technological needs of the country suitable for the reduction of greenhouse gas emissions, development of proposals for key technologies, assessment of possibilities for practical application of the identified technologies and development and assessment of specific technological projects. According to the study, the country’s technological needs in terms of GHG emissions reduction are as follows.

9.2.1 Power industry

Modernisation of generation capacities, introduction of new highly effective technologies for power generation at TPPs (combined cycle technology, small and medium scale cogeneration) Introduction of highly effective micro-turbines (1-100 kW)

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-5 Utilisation of new hydro-energy resources and widespread use of small HPPs Utilisation of economically sound potential of wind energy (wind turbines and generators) Reconstruction and update of transmission and distribution grids, reduction of energy losses and introduction of the system of optimal distribution of energy Introduction of new modern biogas technologies for heat and electricity production (methane tanks, gas filters and purifiers, etc.) The energy sector of Armenia has significant CDM potential. In particular, four CDM projects on small scale hydro energy have already been developed and are now passing various stages of implementation. The estimation of CDM potential in wind-, solar- and bio-energy sectors is being carried out. The Armenian DNA, together with the Ministry of Energy, is considering opportunities of realization of CDM projects on construction of large scale HPPs and installation of new CHP generation units at already operational thermal power plants under CDM. Implementation of energy efficiency measures in transmission and distribution grids may also lead to significant reduction of GHG emissions through reduction of technological losses.

9.2.2 Heat supply

Introduction of devices for heat consumption metering and regulation; Reconstruction of existing DH systems with application of cogeneration technologies, automatic regulation systems, pre-insulated pipes, individual heating substations, etc.; Introduction of local (individual) heating systems with highly efficient boilers of small capacities using natural gas as fuel, installation of small capacity combined heat and electricity production, solar heaters in combination with water heating boilers; and Introduction of heat-pumping systems utilising low-potential heat of the ground, sewerage and other heat sources. Currently, a comprehensive feasibility study on restoration of the district heating system of Avan and Davidashen districts of Yerevan is being developed within the framework of the UNDP/GEF “ Armenia - Improving the Energy Efficiency of Municipal Heating and Hot Water Supply ” project. The objective of the project is to reduce greenhouse gas (GHG) emissions resulting from current heat and hot water supply practices in Armenian cities by laying the foundation for the sustainable development of heat and hot water supply services in these cities while taking into account global environmental impacts. Within this framework the project aims: Supporting the restructuring of the centralised heat and hot water supply services in selected locations; Supporting the new decentralised service providers to commercially run, market and diversify their businesses, in order to promote the use of alternative environmentally clean and energy efficient technologies; and

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-6 Utilising the results, experiences and lessons learned for advancing the sustainable development of the heat and hot water services in Armenia with a specific emphasis on the GHG emission reduction aspects. In connection with the emphasized ecological orientation the project experts, in addition to calculating the basic technical and economic parameters of the project evaluate the potential of GHG emissions reduction potential resulting from the application of energy efficient technologies and introducing demand side management possibility. The mentioned calculations are carried out taking into consideration an opportunity of the project realization under CDM. Thus, if the provided calculations confirm the expediency of applying CDM to the given project, it will considerably expand the CDM potential in this sector due to realization of projects on restoration/construction of centralized and decentralized heating systems in various regions of Armenia.

9.2.3 Gas Supply

Use of modern technologies and equipment for reconstruction of the linear part of gas pipelines; Introduction of automatic information-computer systems with remote-control and calculators of gas consumption for timely identification of sources of leaks and their prompt repair; Use of quality sealing grease in gas distribution and compressor stations in order to stop gas leaks; Regular implementation of the entire set of prophylactic and organisational measures for reduction of accidents and emissions from gas treatment of cleaning equipment, gas pipelines and during elimination of accident consequences and formation of hydrates; and Reconstruction of gas compressor station at Abovyan underground gas storage in order to reduce fugitive leakages. The gas-transport system of Armenia holds significant potential from the point of view of CDM realization, especially taking into account the Global Warming potential of methane. However, till now, "ArmRosgasprom", a Russian-Armenian Joint-Stock Company, which is carrying out the Armenian gas supply system management, had not shown much interest in realization of projects on eliminating gas leakages in the system. The basic cause of it, according to the company management, was relative underutilization of the system in comparison with its estimated parameters. For instance, in 1989, when Armenian economy was at the peak of its development, the annual level of gas consumption in the Republic was estimated at 5,9 billion m³, while in 2005, this parameter made only 1,65 billion m3. At such a level of annual consumption, the volume of gas saved as a result of realization of losses reduction activities could not provide cost-effectiveness of the project. At the same time, in view of steady growth in gas consumption in the country, which in its turn is due to the increase in the number of consumers as well as further development of the gas distribution system, realization of activities aimed at reduction of fugitive gas losses in the system can prove to be attractive. With this regard, the Armenian DNA has already carried out a series of advisory meetings with the company management. The

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-7 meetings were aimed at discussing technical and economic potential of realization of such projects under CDM.

9.2.4 Production processes

Increase in energy efficiency of production by application of modern energy and resource saving technologies and equipment (transition from direct to indirect burning, improvement of preliminary heating up of furnaces, use of highly efficient mills and separators, introduction of automated regulation systems and control of the burning regime, improvement of heat-insulation of furnaces, etc.); Cement production with small proportionality of clinker-cement; and Implementation of use of dry technology in cement production at the Hrazdan cement factory. Currently, there are two projects in the industry sector which are being implemented under the CMD in Armenia. One of them, the most advanced, is “Optimization of technological cement production processes and introduction of power and resource saving technologies at Mika-Cement CJSC” project developed jointly by Mika-Cement CJSC and Danish Environmental Protection Agency. The project proposes realization of a set of activities directed at increasing cement production efficiency, reduction of per-unit costs and reduction of volumes of harmful substances and GHGs emissions into the atmosphere. The project PIN was endorsed by the Armenian DNA on June 17, 2005. The PDD is under development with the assistance of DEPA and is supposed to be submitted the DNA for approval in the autumn of 2006. The second project, “Substitution of natural gas with butadiene during production of synthetic rubber at “Nairit Factory” CJSC “, also developed jointly with DEPA, proposes restoration of the formerly used butadiene technology at the enterprise, which will allow achieving significant reduction of GHG emissions into the atmosphere. The project PIN was endorsed by the Armenian DNA on June 15, 2005. However, development of the PDD has been temporarily suspended due to the necessity of clarifying certain project financing aspects.

9.2.5 Transportation

Increase in number of motor vehicles using natural gas and diesel fuel; Improvement in the quality of motor fuel; Optimisation of passenger transportation and diversification of the urban public transportation means; Use of large buses and electrified transportation means; Improvement in streets-roads network and optimisation of transportation flows; Provision of modern devices to points conducting technical and ecological examination; and

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-8 Introduction of financial incentive mechanisms for limiting and reducing emissions of polluting and greenhouse gases.

9.2.6 Agriculture

Optimisation of livestock feed through technologies of silage and ammoniation of hay; Use of natural adsorbents available in Armenia as feed supplement for livestock; Use of crops cultivation and livestock production wastes for energy production based on biogas; and Biogas production on the base of agricultural residues, husbandry and poultry waste utilisation. The Armenian DNA has already approved "Lusakert Biogas Plant (LBP), methane capture and combustion from poultry manure treatment" PDD. The project proposes mitigation of the plant's animal effluent related to GHG emissions, by improving the plant's Animal Waste Management System practices. On July 15, 2006, the PDD was submitted to the CDM Executive Board for registration. In case of registration and following successful realization of the project under CDM, this project type will have potential to be replicated in other regions of Armenia where large poultry farms also exist. More detailed information on the project in presented in Chapter 10.3.

9.2.7 Forestry

Technological development of seed and seedling production Forest restoration, forest generation and cultivation of dry-resistant species Technology for sustainable forest use Technology for protection of forests from pests and diseases Water saving technologies for watering Management and staff training technologies Within the scope of the European Commission "Technical Assistance to Armenia, Azerbaijan, Georgia and Moldova with respect to their Global Climate Change Commitments" Project, development of a PIN for the first Caucasian CDM Afforestation / Reforestation project activity has been initiated. The project aims to reforest approximately 1000 ha of degraded grasslands in co-operation with low-income communities in Lori Marz. In case of successful implementation of the mentioned activity, CDM may become an effective tool which will facilitate the realization of optimal afforestation program in the Republic and ensure more active participation of local communities in such activities.

9.2.8 Waste management

Modern technologies for processing solid domestic waste with obtaining alternative energy;

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-9 Modern technologies of collection and utilisation of methane from sedimentary waste formed in treatment plants of wastewater for obtaining energy and organic compost Construct waste processing plants for producing electricity and heat The very first Armenian CDM project registered by the CDM Executive Board on 28 November, 2005, namely, "Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan" gave the green light to realization of such projects in two regions of the country: Shirak and Lori. Currently, Japanese Shimizu Corporation is already conducting development of PDDs for these two new projects with the purpose of submitting them to the DNA's consideration. More detailed information on the Nubarashen Landfill project in presented in Chapter 10.2

9.2.9 Agriculture

Restoration and sustainable use of degraded grasslands and pastures; Restoration and sustainable development of fruit and grape production; Adaptation of farming to climate change, including cultivation of new climate change resistant crop varieties; Restoration of collector-drainage network on agricultural and saline lands in the Ararat valley; and Application of water saving technologies in crop production.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 9-10 10. Existing CDM Projects in Armenia

The following figure illustrates CDM project developments in Armenia that are currently underway. Further below individual projects are explained in greater details.

10.1 CDM project opportunities in various regions of Armenia

ENERGY: contstruction of large ENERGY: construction of large and ENERGY: construction of small and small HPPs and WPPs small HPPs and WPPs HPPs and WPPs WASTE: landfill gas capture and WASTE: landfill gas capture and LULUCF: afforestation and power generation project power generation project reforestation activities activities LULUCF: afforestation and LULUCF: afforestation and reforestation activities reforestation activities

ENERGY: construction of ENERGY: installation of a new small HPPs gas turbine at Hrazdan TPP, LULUCF: afforestation construction of small HPPs and reforestation INDUSTRY: introduction of EE measures at cement factory AGRICULTURE: mitigation of ENERGY: installation of a GHG emissions from poultry CC unit at Yerevan TPP, farm by improving AWMS rehabilitation of DH LULUCF: afforestation and system of the city reforestation activities INDUSTRY: introduction of EE measures at alabaster factory, shift to ENERGY: construction of butadiene technology at small HPPs and WPPs Nairit Factory LULUCF: afforestation and WASTE: landfill gas reforestation activities capture and power generation, rehabilitation of Yerevan WWTP ENERGY: construction of large and small HPPs and WATER SUPPLY: WPPs introduction of EE ENERGY: construction of smal measures at pumping HPPs LULUCF: afforestation and stations INDUSTRY: introduction of EE reforestation LULUCF: establishment measures at cement factory of protection forest belts LULUCF: establishment of (A/R) protection forest belts (A/R)

ALL REGIONS TRANSPORT: Improvement of the level of motor transport ENERGY: construction of gasification and diversification of urban public transport small HPPs and WPPs FUGITIVE EMISSIONS FROM FUELS: reconstruction of linear LULUCF: afforestation and parts of gas pipelines, gas leakage prevention from gas-distribution reforestation activities and compressor substations, etc.

Figure 10-1: CDM project opportunities in various region of Armenia

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-1 10.2 Project Summary for Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan

Project background Since 2001 Shimizu Corporation, a Japanese construction and engineering firm, has conducted a series of studies oriented to implementing CDM projects in several sectors of the Armenian economy. Among the three chosen projects on prefeasibility assessment stage was: “Introduction of co-generation system into district heating system in Yerevan”, “Small scale hydropower plant” and the one which proposes collection of landfill gas (LFG) from Nubarashen landfill site in Yerevan and its further combustion in a gas engine generator. The later appeared to be the most promising and to that end the draft of a feasibility study for utilization of methane gas at landfill disposal sites in Yerevan was developed by the request of NEDO in 2002. The study presented overview materials on the Republic of Armenia, the solid waste management utility in Yerevan, environmental legislation, an outline of the implementation site, etc. Later on, after a series of consultations with the key ministries and officials, this research served as a basis for the development of the project design document (PDD). Description of the project The Nubarashen landfill site has been handling the solid waste of Yerevan City ever since its establishment on the outskirts of the city in 1960. The landfill site is divided into three sections, A, B and C, each covering an area of 20 ha. Site A started service in 1960 and became full in 1985; Site B has been in service since 1986 until the present day, and Site C has been set aside for future use. Having said that, since use of the site in reality has been rather unregulated, the partitions between the three sections are fairly ambiguous and it is not clear when each section was filled either. The Nubarashen landfill site receives almost all the solid waste of Yerevan City, which has a population of approximately 1,280,000. Almost all the waste going to Nubarashen is composed of domestic waste discharged by citizens, whereas currently the industrial waste accounts for only a small proportion. The amount of waste carried into the Nubarashen landfill site is roughly estimated as 420-450 tons/day and, even taking the most conservative estimate, 149,100 tons/year (assuming daily operation except for year end and New Year, 420 x 355 days, as of 2004). However, since incoming waste is only managed according to the number of trucks entering the landfill site, there are no accurate data concerning the quality and quantity of the waste. Due to a lack of funds, site operation and heavy machinery maintenance cannot be carried out according to the prescribed manuals (landfill standards), and many machines are in a state of disrepair following breakdowns. Landfill gas (LFG) from the site is released into the atmosphere unchecked and current conditions on the site are detrimental to the local environment. This is because LFG is a source of odor when emitted in low concentrations and a potential cause of explosion or ignition when emitted in high concentrations. Moreover, since the main constituent of LFG is methane, which has global warming potential (GWP) of 21, it also has a negative impact on the global environment. Yerevan city tried to collect LFG in the past, however, this attempt failed due to the lack of funds and also insufficient technical capacity.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-2 It is assumed that the capacity of gas engine generator (GEG) is 1.7 MW, but the capacity will be reconsidered according to the real amount of generated LFG after installing LFG collection system and confirming the amount of LFG. When the real amount of generated LFG is found to be too small or too unstable, it is possible that the project participant will give up installing GEG and will use only flaring. In addition, after studying feasibility of introducing co-generation to supply heat for local customers, the decision will be made to install co-generation at the landfill or not. LFG collection system is composed of vertical collection holes, horizontal gas drains, gas collection pipes, airtight sheet, gasholders, measuring instruments, and blowers. This applies technology adopted in cases where ground containing high water content is improved by the vacuum consolidation method. It is a high-efficiency system in which an LFG collection efficiency of 60% or more can be anticipated. Biogas small-scale GEG technology is composed of a gas engine capable of realizing stable operation using even a rarefied LFG like methane, generators, control panels, grid connection lines, and measuring instruments. The gas engine has generating efficiency of 30~40%. In addition, high-level technology is required for a gas engine that can stably operate on a rare gas fuel such as LFG. The main characteristics of the project are presented in Table 10-1. Expected project outcomes Along with the positive environmental outcome of the Project, the following benefits are expected: Odor prevention; Wastes explosion and ignition prevention; Replacement of exhausted energy generating sources; Energy utilisation; Human development at innovative technology introduction; and Employment within the project implementation.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-3 Project number: 0069 Project Title: Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan Host Party: Republic of Armenia Authorized Municipality of Yerevan City Participant: Other Project ¾ Shimizu Corporation, a Japanese construction and engineering firm; Participants: ¾ Hokkaido Electric Power Company, Incorporated, a power company; ¾ Mitsui & Co., Ltd., a Japanese general trading company. CER recipient: Shimizu Corporation (Japan) PDD Developer: Shimizu Corporation Activity Sector: Fugitive gas capture and alternative / renewable energy Activity Scale: Large Methodologies ACM0001: Consolidated methodology for landfill gas activities Used: AMS-I.D.: Renewable electricity generation for a grid Amount of 135 000 metric tons CO2 equivalent per annum 6 Reduction: (2.16*10 ton of CO2e during crediting period of 16 years) Proposed Crediting 16 years Period: Total Initial Costs: 3 463 500 000 AMD (construction costs) Project Stages: 1st stage: Construction of landfill gas collection system 2nd stage: Construction of gas engine generation system Project Timing 01/04/2007: Construction works on LFG collection system (rough schedule) 01/04/2008: Starting date of the first crediting period 01/10/2009: Starting date of construction works on GEG 01/04/2010: Starting date of operation of GEG Project Economic CER = 5 USD/t-CO2 the IRR (before tax) = 7.96% Indicator: CER = 10 USD/t-CO2 the IRR (before tax) = 18.59% Table 10-1: General characteristics of the project according to the PDD

Project status A series of meetings in the Ministry on Nature Protection of RA as the Designated National Authority (DNA) for CDM under the Kyoto Protocol as well as on-site visits preceded the development of the final version of the PDD which was submitted for approval to the DNA on January 21, 2005. Shimizu Corporation, Hokkaido Electric Power Company, Mitsui & Co., Ltd. and Municipality of Yerevan stood as project participants. The project document has been reviewed by the DNA in terms of its contribution to Armenia’s sustainable development and was approved on February 16, 2005. A week later, the project was approved by the Japanese Government. Later, the project was validated by Japan Quality Assurance Organization as the Designated Operational Entity and submitted to the CDM Executive Board for registration. On November 28, 2005, the registration of the “Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan” CDM project took place. The positive decision on registration was taken by the CDM Executive Board earlier that month, during its 22nd meeting. The significance of the event must not be underestimated as it made Armenia the 17th country in the world and the very first country in the post Soviet space, hosting a CDM project.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-4 On May 11, 2006 the Protocol of Understanding was signed among the project participants. The Protocol is a framework document setting mutual liabilities of the participants and stipulating conditions of further project implementation. It envisages signing of a separate agreement which will endorse the project construction works. Table 10-2 introduces the main steps related to the Nubarashen Landfill project development, approval and registration processes. Mar 2002 Study for Utilization of Methane Gas at landfill Disposal Sites in Yerevan, Armenia. NEDO-IC-OOER. Entrusted to Shimizu Corporation Jan 21,2005 Official submission of the PDD to the Ministry of Nature Protection of RA as the DNA for CDM under KP Jan 24, 2005 Site-visit Report for Validation (prepared by Japan Quality Assurance Organization) Feb 16, 2005 CDM project approval by the Armenian DNA Feb 23, 2005 CDM project approval by the Government of Japan Mar 31, 2005 The project validation (conducted by JQA) Apr 21, 2005 Statement on CERs allocation at issuance (signed by four project participants) May 23, 2005 Submission of the PDD to the CDM Executive Board for registration Jul 17, 2005 Expected date of project registration Jul 19, 2005 Requests for review received from three members of the EB Sep 28, 2005 The second revision of the project by the EB on its 21st session Nov 28, 2005 Project registration by the CDM EB on its 22nd meeting May 11, 2006 Signing of the Protocol of Understanding among project participants

Table 10-2: Nubarashen Landfill project benchmarks

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-5 10.3 Project Summary for Lusakert Biogas Plant (LBP), methane capture and combustion from poultry manure treatment

Project background Lusakert Pedigree Poultry Plant (LPPP) was established in 1964 and gave its first production in 1966. In 1988 the farm reached its highest efficiency producing about 650 000 eggs per day. Nevertheless, the farm had been stopped since 1992, and was started up only in 1998. In the same year LPPP formed a part of Max Concern LLC, an Armenian company involved in various spheres of business activities such as crop cultivation, woodworking, meat production, etc. Currently LPPP is one of the leading companies on the Armenian market of chicken meat and hen's eggs production. Description of the baseline situation The manure treatment system which is currently used at the plant consists of traditional open stabilization lagoons serving for treatment of liquid waste from poultry production. This approach is considered to be the most economical, efficient and reliable animal waste management system. Nevertheless, anaerobic lagoons lead to the direct release of methane (CH4) and nitrous oxide (N2O) into the atmosphere as a result of the anaerobic digestion process that takes place inside of the lagoons. Thus, anthropogenic GHGs are released into the atmosphere via decomposition of animal manure and a nitrification/denitrification process associated with volatilization of nitrogen. There are no existing, pending, or planned national, state, or local regulatory requirements in Armenia that govern GHG emissions from agricultural operations, specifically, poultry production activities. That is why, currently, farm produced biogas (mainly methane) is not collected or destroyed. Taking into account above mentioned as well as the fact that present lagoon system used at the farm complies with national requirements it could be concluded that no improvements would take place unless more economically attractive solution is found. Description of the project The decision on implementation of a more expensive technology which will allow improving waste management system at the farm and reducing GHG emissions into the atmosphere was influenced by the entrance into the force of the Kyoto Protocol. In 2005 Max Concern LLC, an Armenian company which owns LPPP, Vekst Foundation, an independent and private Norwegian foundation which focuses on research and development of projects related for the most part to energy efficiency and The Danish Environmental Protection Agency under the Danish Ministry of the Environment jointly initiated development of Lusakert Biogas Plant project under the CDM. The purpose of the project is to mitigate Lusakert Pedigree Poultry Plant's animal effluent related GHG emissions, by improving the farm's Animal Waste Management System practices. The project consists of an advanced improvement to the common practice of poultry waste treatment, reducing a significant volume of greenhouse gases compared to those emissions that would otherwise occur in a scenario with traditional poultry manure treatment systems. The project will also result in improving of the rejected water quality.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-6 The technology implementation is based on the use of anaerobic digester treatment as the first step before a lagoon system. The volume of each digester is 2200 m3. An existing steel tank will be used as gas storage for the produced biogas. Produced effluent from the biogas plant will be routed to the existing lagoons and the captured gas will be used in a gas engine generator to produce heat and electricity. Any excess gas will be flared. The heat from the cogeneration plant is used for heating the digester, in order to optimize operation and increase the speed of decomposition of the organic matter of effluents, thus replacing the use of fossil fuel that would otherwise contribute to emissions leakage. Most of the mechanical equipment such as engines, pumping equipment and software will be imported from Denmark as standard units. The project developer in conjunction with its in-country suppliers will be responsible for the civil works and the on-site construction of digesters. It is necessary to mention that the improved management of the poultry manure as a result of the implementation of digesters does not require changes to the barns or their physical structure, i.e.; there will be no changes in the physical housing capacity or in the management of the barns. Therefore, the volume of effluents to be treated does not increase and only treatment parameters are improved. LBP Project will be materialized under Clean Development Mechanism (CDM) of the Kyoto Protocol and envisages investment in digester tanks, pumps, switchboard, machinery, gas flare and gas engine. The operational income will derive from sale of electrical energy to the distribution grid as well as realization of a fertilizer from the biogas production. It is expected that the revenues from Certified Emission Reductions (CER's) will make the project economically viable. LBP agrees to transfer a specific amount of CERs generated during the first crediting period to the Danish Party. The main characteristics of the project are presented in Table 10-3.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-7 Project ref. number: 0452 Project Title: Lusakert Biogas Plant (LBP), methane capture and combustion from poultry manure treatment Host Party: Republic of Armenia Authorized Participant: Max Concern LLC (Armenia) Other Parties Involved: Denmark Authorized Participants: Danish Environmental Protection Agency (DEPA) CER recipient: Danish Party PDD Developer: GasCon ApS, Ramboll Danmark A/S (Danmark) Activity Categories: Sectoral scope 13: Waste management and handling; Sectoral scope 15: Agriculture Activity Scale: Large Methodologies Used: AM0016 ver. 3 - Greenhouse gas mitigation from improved animal waste management systems in confined animal feeding operations Amount of Reduction: 62,832 metric tons CO2 equivalent per annum (439,824 tons of CO2e during the first crediting period) Proposed Crediting Period: 21 years Total Initial Costs: ~ 2.5 mln. Euro (construction costs) Project Timing Spring 2006: Construction on LBP (rough schedule) Autumn 2006: Start up operations January 2007: Starting date of the first crediting period

Table 10-3: General characteristics of the project according to the PDD Expected project outcomes By distracting the methane coming from the biogas production in a gas engine and by flaring, the LBP project will significantly reduce emissions of greenhouse gases from the poultry plant. The environmental impacts due to the development of this project can be summarized as ancillary benefits: Reducing atmospheric emissions of Volatile Organics Compounds that cause odor The use of the biogas collected as an energetic resource for power generation Reducing the risk of releasing disease-transmitting vectors and airborne pathogens At the same time, the proposed project will have the following negative impacts: Discharge of exhaust gases from the gas engine generator Generation of noise and vibration by gas engine generator However, the mentioned problems can be addressed by installation of chimneys of appropriate height and application of advanced noise-suppressing technologies. The introduction of digester technology introduced in the project will bring improvements in the AWMS practice, and may pave the way for the upgrading of the manure into commercial production of fertilizer in Armenia. The project developers are implementing a multi-faceted approach to ensure that the project, including technology transfer, proceeds smoothly. This approach includes careful specification and design of a complete technology solutions, identification and

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-8 qualification of appropriate technology/service providers, supervision of the complete project installation, farm stuff training, ongoing monitoring and developing/implementing a complete Operation and Maintenance plan. Project status The Project Idea Note (PIN) describing the project concept was submitted to the Ministry of Nature Protection of RA (Designated National Authority for CDM) for consideration on April 7, 2005. The project PIN was endorsed by the DNA on May 16, 2005, which served as a formal incentive for initiating the Project Design Document development. In April 2006, the latest PDD (Version 6) was submitted to the DNA for approval. The project document had been reviewed by the DNA in terms of its contribution to Armenia’s sustainable development and was approved on May 5, 2006. Simultaneously, the project participants had initiated and finalized the project validation process by the Designated Operational Entity (Det Norske Veritas). The project validation report was issued on December 8, 2005 and reviewed on April 10, 2006. On July 15, 2006, the project was submitted to the CDM Executive Board for registration. On September 11, 2006 Lusakert Biogas Plant project was registered by the CDM Executive Board and became the second CDM project hosted by the Republic of Armenia. Table 10-4 summarises the main steps related to the Lusakert Biogas Plant project development and approval processes

April 7, 2005 Official submission of the project PIN to the Ministry of Nature Protection of RA as the Designated National Authority for CDM May 16, 2005 PIN endorsement by the Armenian DNA (Letter of Endorsement) Sept 23, 2005 The first meeting with the project stakeholders Nov 7, 2005 Public hearings on the LBP project organized by project participants Dec 8, 2005 Issuance of the first version of the Validation Report Dec 22, 2005 CDM project approval by the Danish DNA (Letter of Approval) April 28, 2006 Official submission of the project latest PDD (Version 6) to the DNA May 5, 2006 CDM project approval by the Armenian DNA (Letter of Approval) June 1, 2006 Second revision of the Validation Report July 15, 2006 Submission of the PDD to the CDM Executive Board for registration Sept 11, 2006 Registration of the project by the CDM EB

Table 10-4: Lusakert Biogas Plant project benchmarks

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-9 10.4 Project Summary for Community SSC Afforestation / Reforestation CDM project

Within the scope of the European Commission "Technical Assistance to Armenia, Azerbaijan, Georgia and Moldova with respect to their Global Climate Change Commitments" Project it has been undertaken the development of the Afforestation/Reforestation project under the CDM, which is a prevailing practice not only for Armenia, but also for the whole Caucasian region. After review of the approved list of baseline and monitoring CDM A/R project activity methodologies, it has been decided to apply the “Simplified baseline and monitoring methodologies for selected small-scale afforestation and reforestation project activities under the Clean Development Mechanism”. Proposed project has a clear community based orientation focused on one of the largest but poorest administrative region of the country called Lori. Another important aspect related to the nature -climatic conditions were also taken into account when choosing the appropriate region for the A/R project activity. Ensuring the voluntary project participation, the country TACIS office has prepared the official letter on behalf of the Ministry of Nature Protection addressed to the local government of Lori, presenting the goal and the objectives of the current initiative. Particularly the Questionnaire have been developed by the country office to facilitate the data requesting from the communities, covering the potential by main land use within each community, the socio-economic impact of the proposed activity, as well as the expected environmental benefits. It has to serve as a good basis for identification of eligible sites, which is time and resource consuming process, requiring continuous cooperation with the communities. In parallel a series of community meetings and field visits were undertaken to accelerate the site identification process and to promote the community participation. Most of the surveyed communities are strongly interested to join the A/R project, highlighting the expected positive socio-economic impacts, such as creating local employment opportunities, poverty reduction, and development of community forest. The environmental aspects were also highlighted by the communities in relation to prevention of land erosion, regulation of water sources and superficial flows, improvement of the microclimate, avoidance of torrents, biodiversity enrichment etc. Certain communities could not joint the initiative, in spite they find it very attractive due to lack of eligible lands for the proposed A/R activity. The proposed project is going to be a bundle of relatively small areas located in low income communities or individuals of Lori region embracing around 1000 ha of area. The project area limitation is based on applied methodology for the small scale project type, since the project is expected to result in net anthropogenic GHG removals by sinks less than 8 kilotons of CO2 per year. Other aspects influencing the A/R project area are derived on selection of target forest species, stand density, management technique, site index etc. In order to address the non-permanence issue, project developers have chosen the issuance of lCERs for the net anthropogenic GHG removals by sinks achieved by the proposed SSC A/R CDM project activity. In a case of unexpected releases of the sequestered carbon, an equivalent quantity of lCERs shall be replaced based on modalities and procedures of A/R CDM project activities.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-10 The crediting period chosen for the project is 20-years, with the renewals of two further 20-year periods for a total crediting period of 60 years. Further site identification activities are planned as follows: 1. Technical inspection of proposed A/R sites in the selected communities. If they meets the land eligibility requirements under Ssc-AR-CDM project activities; 2. Preparation of maps with geographic coordinates of the A/R sites in selected communities; 3. Obtaining the legal documents proving the land ownership and tenure rights from the landholder (community/private owner); 4. Signing of Memorandum of Co-operation (MoC) with proposed project participants. The estimation of the forest carbon sequestration due to proposed project activity is currently underway, more specific information on net anthropogenic GHG removal by sinks etc might be obtained later on.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 10-11 11. Fiscal and Financial Issues

11.1 Aspects affecting the development of CDM pojects

The legal frameworks for implementation of CDM projects in Armenia are based on the legal acts which regulate foreign investments, export/import operations as well as general tax policy.

11.1.1 Taxation system

According to Article 12 of the law “On Taxes” of the Republic of Armenia (RA), which was adopted on 14 April, 1997, the following types of taxes exist in the Republic of Armenia: Profit Tax; Income Tax; Excise Tax; Value Added Tax; Property Tax; and Land Tax, As the same Article states, the law may specify presumptive payments and simplified taxes as a replacement for taxes mentioned above. According to Article 13 of the same law, the Armenian tax legislation determines the following types of tax privileges: reduction of the object of taxation; reduction of a tax rate; reduction of a tax; deferment of tax calculation; deferment of tax payment; exemption, reduction, deferred payment of fines and penalties established by the tax legislation, accrued for the violation of the tax legislation and other legal acts regulating tax relations in the Republic of Armenia; and deferment of penalties and other financial sanctions imposed by a bank or a lending organisation for failure to perform or inadequate performance of tax liabilities during the period, when the Central Bank of RA freezes the claims of a bank's or a lending organisation’s creditors. In cases and according to the procedure established by the tax legislation, the amount of the tax paid (exacted) shall be compensated to the taxpayers. Tax privileges shall be determined by the law listing enterprises, companies or organizations of RA which are given privileges on taxes, customs, and presumptive payments as it is done for: the Yerevan Gold Factory, the Yerevan Brandy Company, the

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-1 Gafesjian Foundation, the Armenian Nuclear Station, “Hajantar”/”Armenian Forest”/ JSCC, Agarak’s Cu/opper and Zangezur Copper-Molybdenum factories, Vanadzor Microfiber Chemical and “Prometevs” factories, etc., unless otherwise provided by the laws on certain types of taxes. Taxpayers and their authorized representatives (for enterprises, institutions and organizations) specified by the legislation of the Republic of Armenia shall take on responsibility for the accurate calculation, due payment of taxes and observance of other requirements of the tax legislation, unless otherwise provided by the tax legislation. RA Tax Inspectorate through its regional subdivisions in accordance with the procedure established by the government of the Republic of Armenia is an authorized state body for control and supervision of the tax liability implementation. The bodies authorized to conduct audit within their competence on the territory of the Republic of Armenia are the following: RA Ministries: of Finance and Economy; of Justice; of Transport and Communications; of Nature Protection; of Agriculture; of Energy; and Territorial Administration, Departments: Standardization, Metrology and Certification; of State Atomic Control; of Technical Safety Control; RA State Bodies of Fire Control, RA State Tax Service, RA Service of State Hygienic and Anti-Epidemic Control, RA State Fund of Social Insurance, RA State Inspection Board of Language, RA National Statistical Service, as well as all state bodies authorized to grant licenses.

In case of changes in state bodies or their competence, authorization shall be conducted by successor bodies or bodies possessing relevant competence. According to Article 12 of the mentioned law, refund to a business entity for damages, including missed profits, accrued as a result of illegal actions taken by the officials carrying out the inspection shall be subject to payment from the State Budget in due course as established by the legislation of the Republic of Armenia and in terms stipulated in the RA law "On RA Budgetary System". It is also important to refer to Article 205 of the RA Criminal Code, which relates to initiating a criminal proceedings for major size tax avoidance through an obvious accounting and tax related documents fraud. Corporate/Profit Tax The issues connected with the profits obtained by both resident or non-resident companies and organizations from their activities on the territory of Armenia, either resident companies and organizations - in another country, are regulated by the RA Law “On Profit”, N-AL-155, adopted by the National Assembly of RA on 27 November 1997. For residents, the amount of the profit tax in respect to the taxable profit shall be calculated by rate of 20 %. Also, the law may establish fixed payments substituting for the profit tax for certain payers and types of activity. Taxation of the income derived by a non-resident of the Republic of Armenia from Armenian sources shall be performed by a tax agent at the source of paying income, at the following rates:

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-2 Amount of Type of income the Profit Tax Insurance compensation, reinsurance payments and income received from the 5 percent freight Dividends, interests, royalty, income from the lease of property, increase in the value of property and other passive income (with the exception of the income 10 percent received from the freight) as well as other income received from Armenian sources

Table 11-1: Profit taxation of the income derived by a non-resident of the Republic of Armenia from Armenian sources Dividends received by non-residents from Armenian sources shall be taxed at zero rate, in case the conditions provided by the law will be fulfilled concurrently. Taxpayers shall determine the amount of the profit tax on an annual basis, in accordance with the stated rates. When determining taxable profit, deductions (expenses, losses and other deductions) from gross income are allowed as provided by Chapter 4 of the law. The amount of the same deductions may be deducted from gross income only once. The profit before tax shall be reduced, for example, in the total amount of expenses from scientific research, experimental and designing activities within the year of incurring such expenses, in the amount of expenses incurred on preparatory, drafting and research activities, geological research for the extraction of natural resources. When determining taxable profit, gross income shall be reduced in the amount of documentary supported expenses. Chapter 6 /Articles 36-41/ of the law lists all profit tax privileges. In case of impossibility to make exact accounting of the income derived from agricultural production realization, the income shall be calculated on the basis of the net cadastral income data approved in accordance with the procedure established by the legislation of the Republic of Armenia. Article 39 states the privileges of a resident with foreign investment. When the total amount of investment in the equity capital of a resident with foreign investment (except for banks and loan organizations) actually performed after 1 January 1998 constitutes at least 500 million Armenian drams, the amount of the profit tax shall be reduced by:

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-3 Date of supplement of the established norm of The amount of deductions from the profit tax of foreign investment in the equity capital of a resident with foreign investment per year resident by 100% by 50% 1998 1999 and 2000 2001-2008 inclusive 1999 2000 and 2001 2002-2009 inclusive 2000 2001 and 2002 2003-2008 inclusive 2001 2002 and 2003 2004-2007 inclusive 2002 2003 and 2004 2005-2006 inclusive 2003 2004 and 2005 2004 2005 and 2006 2005 2006 and 2007 2006 2007 and 2008 2007 2008 and 2009 Table 11-2: Schedule (by years) of privileges for business activities with foreign investments in the Republic of Armenia However, in case taxpayer is liquidated within the effective period of the privilege, established by this paragraph, the amount of the profit tax for the period of this privilege shall be calculated at full rate - for the whole period of activity. For the purposes of this article: a) investment is considered to be an inflow of assets and (or) reduction of liabilities directed to the establishment and replenishment of statutory capital, as well as the privatization of state property, b) investments in the form of property are subject to state registration and (or) notary authorization and (or) independent expertise in accordance with procedures specified by the legislation. We should remember that the privilege specified in this article does not apply to investments of non-material assets. According to Article 41 (”Profit Tax Privileges Defined by Other Laws”) - “the law may establish other privileges on the exemption from the profit tax and those provided by the tax legislation of the Republic of Armenia”. Under this Law the residents are taxed on profit derived both in Armenia and abroad, while non-residents are only taxed on profit from Armenian sources. Non-residents operating through their subdivisions or location of business in Armenia are taxed on profits earned from the activities of the subdivision or location. Income received by non-residents from other than Armenian resources, e.g. dividends (for enterprises only), royalties, rental income, etc., is subject to a withholding tax. The latter may be reduced or eliminated by implementing double taxation treaties. Currently the Republic of Armenia has more than 20 ratified Double Taxation international bilateral treaties, signed between the government of Armenia and governments of other countries.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-4 11.1.2 Guaranties

Relationships arising from foreign investments in the Republic of Armenia are regulated by the RA Law “On Foreign Investments”, N-HN-1093-I, adopted on 04 July, 1994, as well as by other legislative acts and international treaties of the Republic of Armenia. Should international treaties of the Republic of Armenia establish rules that differ from the one in this law, the rules of the international treaties shall apply to the respective cases. Foreign investments shall be appraised according to the foreign investor’s choice, in freely convertible foreign currency or the national currency of the Republic of Armenia. The legal regime governing foreign investments and the methods of their implementation in the Republic of Armenia cannot be less favorable than the regime governing the property, property rights and investment activities of citizens, legal entities and unincorporated enterprises of the Republic of Armenia. To encourage foreign investments in the most significant fields of social and economic development, additional privileges for such investments may be established by the legislation of the Republic of Armenia. In the event of changes or amendments to the foreign investment legislation of RA, the legislation that was effective at the moment of implementation of foreign investments shall be applied, upon the request of a foreign investor, within a five-year period starting from that moment (the “grandfather clause”) /Article 7/. Also, the foreign investments in the Republic of Armenia shall not be subject to nationalization. Neither can government bodies confiscate foreign investments. Confiscation may be allowed only as an extreme means in case of emergency declared in accordance with the legislation of the Republic of Armenia, and it may be applied only upon a court ruling and with full compensation /Article 8/. Consequently, foreign investors shall be entitled to compensation, through a court order, for those material and moral damages, including lost profits, as a result of illegal actions taken by government bodies of the Republic of Armenia or their officials, as well as improper performance, by those bodies or their officials, of their obligations established by the legislation of the Republic of Armenia. All the damages caused to foreign investors as a result of actions identified in Article 8 and Article 9, Par. 1 of this Law shall be subject to prompt compensation at current market prices or prices determined by independent auditors. This compensation shall be paid either in the currency invested, or in any other currency mutually agreed upon by the parties. For the period from the moment of origination of the right to compensation through the moment of its execution, an interest in the due amount of compensation shall be calculated at current rates for deposit accounts established on the loan market of the Republic of Armenia /Article 9. “Compensation for Damages Caused to Foreign Investors”./ Foreign investors and employees are guaranteed the right to freely export their property and income. The investment protection agreements have been signed between the government of Armenia and governments of more than 20 other countries. Property imported by a foreign investor as a contribution to statutory capital is exempted from custom duties.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-5 11.1.3 Customs duties

In general, a uniform rate of 10% applies to majority imports, whereas a special rate of custom duties has been established for only 13 types/Codes/ of goods according to Point 4 of Article 102 of the RA Custom Code. Some essential goods such as raw materials and fuels are exempted from custom duties. There are no custom duties on exports. With some countries free-trade agreements were signed, by which no custom duties are levied between the RA and those countries.

11.1.4 Value Added Tax

Individuals and organizations carrying out independent economic (business) activity in accordance with the procedure defined by the law and implementing transactions listed in Article 6 of the RA Law “On Value Added Tax” /N-AL-118, adopted on 14 May,1997/ shall be considered as VAT payers. VAT is an indirect tax which, in compliance with this law, shall be paid (levied) to the state budget for imported goods at all stages of their production and turnover, as well as for the rendering services in the territory of RA. According to Article 6 of this law, the following transactions (operations) shall be subject to VAT taxation: 1. Delivery (supply) of goods - a transaction that is implemented by transferring the ownership right of goods (including production output and real estate) to other person for compensation. Disposal of personal property of individuals, with the exception of cases defined by this law, shall not be considered as the delivery of goods. 2. Rendering of services - a transaction (operation) other than the delivery of goods, conducted for any form of compensation, including the sales (transfer) of intangible assets. The lease of goods and real estate shall be also considered the rendering of services. 3. Free or partially free consumption - free delivery of goods or the provision of services performed by VAT payers pursuant to the procedure defined by this law to specified or other persons, or delivery of goods and provision of services at significantly lower prices than charged for such transactions (operations), with the exception of cases provided by the law or in cases specified by law or other decrees. 4. Importing goods by "Importing for Free Turnover" customs regime, with the exception of cases specified by the law. For goods imported into the territory of the RA the VAT is calculated and collected on the border by customs officials, with the exception of goods included in the list defined by law for which the customs duty for import is defined as 0 percent and which are not subject to excise tax. The rate of VAT shall be determined in the amount of 20 percent of taxable turnover of goods and services. The amount of VAT within the amount of the total indemnity for the goods and services (including the 20 percent rate) shall be determined at the rate of 16.67 percent. VAT may be replaced by fixed payments (presumptive tax) defined by the law for certain VAT payers, groups of taxpayers, or certain types of transactions and operations. The zero

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-6 rate of VAT shall be applied to the taxable turnover of goods and services defined in Article 16 of this law, as follows: 1.Taxable turnover of goods exported by "Export for free turnover" Customs regime outside the customs border of the RA, as well as to fuel for airplanes of international flights and supply of the goods for consumption during the flight for the staff and passengers of airplanes. When exporting goods purchased in the RA by foreign persons the amounts of VAT paid for the goods in question on the territory of the RA shall be refunded to them (deleted expression) according to the procedure established by the RA Government; 2. Retail sale of goods for passengers of international routes in airports, in places specially allocated for that purpose beyond customs and passport control territories, provided that the goods have passed customs registration prior to being on sale pursuant to the procedure established by the customs legislation for the export of goods from the territory of the RA; 3. Taxable turnover of services (deleted words), maintenance (including navigation, take- off and landing services), repair and re-equipment (deleted words) of the means of transport for international transportation, as well as services rendered for passengers, baggage, cargo and post on international flights and services rendered to passengers during the flight; 4. Taxable turnover of services (including those provided by agencies and intermediary services) directly related to the provision of services defined in clause 5 of this article; 5. Taxable turnover of services on processing and assembly of products from raw materials, semi-manufactured goods, and materials of foreign legal entities, enterprises without the status of a legal entity, or individuals according to their orders, services on the repair and modernization of movable property on the territory of the RA and other similar services exported outside the customs border of the RA in conformity and within the terms established by the customs legislation of the RA; 6. Taxable turnover of services whose place of provision is outside the territory of the RA in accordance with this law; 7. Goods imported or purchased on the territory of the RA for the official use of diplomatic representations and consular institutions, as well as international intergovernmental (interstate) organizations deemed equal thereto, and services rendered to them; 8. Transit of foreign loads through the territory of the RA. When implementing transactions (operations) taxable at zero rate the amounts of VAT for the purchased goods and rendered services indicated in the tax accounts submitted by the suppliers shall be subject to refund (set-off) according to the general procedure established by this law. Other laws may establish VAT exemption privileges and other types of privileges as provided by RA tax legislation. Legal entities and individual entrepreneurs shall be considered VAT taxpayers:

- if they provide, that they are not considered simplified taxpayers (including cases where the persons may not or have ceased to be regarded as such);

- for transactions (activities) that are not subject to tax by the simplified or presumptive tax.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-7 Individuals, other than individual entrepreneurs who carry out economic activities, are considered VAT taxpayers in the current year provided the revenues from the transactions stated in Article 6, Clauses 1 and 2 exceeds 3 million Armenian drams. These individuals calculate and pay VAT on revenues exceeding 3 million drams. In the event the activity carried out by individuals, other than individual entrepreneurs, is considered an illegal business activity as described by law, the individual's tax liabilities are calculated in accordance with the procedures stipulated in by law. Within the meaning of this Law, revenue is the overall outcome of economic (business) activities of the persons carrying out economic (business) activities without deducting incurred expenses (including expenses incurred for the purchase of goods). In trade it corresponds to the turnover. Tax invoices must be filed by those suppliers of goods and services who pay VAT. For violations of the procedure on filling in tax accounts a penalty amounting to 10 percent of VAT calculated in the documents in question shall be imposed on the taxpayers. If VAT amounts for supplies and purchases that are provided and goods and services that are received are not included (reported) in the information submitted to tax entities according to the procedure stated in article 20 of this law, the person who submitted information shall be charged penalty at 5,000 drams per piece of false information (tax invoice). In cases where tax invoices are issued without transactions for the provision of goods and services, the persons are charged the VAT amounts included in the tax invoices as well as penalty equal to 100 percent of the VAT amount, but not less than 1 million drams. This penalty does not apply if the person remains responsible for completing the transaction based on the goods or service agreement. Failure to record (failure to deduct) the VAT amounts by the procedure stated in this law is regarded as an offset (deduction) of the VAT amounts paid for goods and services by a violation of the procedure prescribed in the Law. According to the provisions of Article 46 of this law, the instructions related to the provisions of this law along with the explanations to them shall be approved by the Tax Inspectorate of RA in coordination with the Ministry of Finance of RA, as well as the explanations to the provisions of:

- Clauses 3 and 4 of Article 15 of this law - with the Ministry of Education and Science of RA;

- Clauses 5-7 of Article 15 of this law - with the Ministry of Agriculture of RA, and with the Department for Standardization, Metrology and Certification of the Trade and Economic Development Ministry of RA;

- Clause 8 of Article 15 of this law - with the Labor and Social Issues Ministry of RA;

- Clause 13 of Article 15 of this law - with the Ministry of Communication of RA;

- Clause 18 of Article 15, and Clause 10 of Article 16 (on construction and related works) of this law - with the Ministry of Urban Development of RA, and with the National Statistical Service;

- Clause 19 of Article 15 of this law - with the Ministry of Health of RA. The respective instruction on VAT imposed by the customs bodies of RA while importing goods into the territory of RA, in the part of the provisions concerning the calculation and

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-8 payment of the tax, as well as explanations to them, shall be approved by the Customs Department of RA in coordination with the Ministry of Finance and Economy of RA, and the Tax Inspectorate of RA. However, in cases when norms different from those provided by this law are established by agreements concluded on behalf of RA, or by ratified international agreements, the norms of international agreements shall be applied.

11.1.5 Excise Tax

The Law of the Republic of Armenia "On Excise Tax" N AL-79, dated July 27, 2000, coming into force on August 1, 2000, states that excise tax shall be paid by individuals, legal persons (including branches and representatives of foreign legal entities registered in the RA) importing or exporting the following goods: beer, grape and other wines, wine ingredients, spirits, cigars, cigarillos and cigarettes with tobacco or its substitutes, petrol and diesel fuel. In terms of this law the taxable base shall be considered the actual amount of the quantity (volume) of the goods subject to excise tax to which the legally established rates are applied to calculate the excise tax amount. Hence, the following excise tax rates are established:

Code of the production according to the trade Name of the group of Taxable nomenclature of the Rate of Excise Tax (Dram) products base External Economic Activity 2203 beer 1 liter 70 10 percent of factory price (not grape and other wines, wine including VAT and excise tax) or 2204 ingredients customs value - in case of import, but not less than 100 AMD per liter Vermouth and other types of 2205 wine that contain vegetarian 1 liter 500 and other aromatic extracts Other brewed drinks 2206 (apple cider, Pearru (pear 1 liter 180 cider), honey-drinks) 1 liter (by re- 2207 Ethyl spirit calculation of 600 100% spirit) 30 percent of factory price (not including VAT and excise tax) or 2208 Alcoholic drinks 1 liter customs value - in case of import, but not less than 380 AMD per liter 2403 Tobacco substitutes 1 kilogram 1,500 2709 Raw oil and oil materials 1 ton 27,000 Gases produced from oil and 2711 (excluding 2711 11 other hydro-carbons (except for 1 ton 1,000 and 2711 21) natural gas) Table 11-3: List of excise tax rates in the Republic of Armenia

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-9 Also, it should be mentioned, that: a) The excise tax rates of tobacco products and imported diesel fuel and petrol are determined by separate laws, b) The law may establish a fixed payment instead of excise tax, c) Imported goods are exempted from excise tax if they are imported under special customs regimes, are imported by individuals, who are not entrepreneurs (goods for personal cosumption), and do not exceed the value or quantity established by customs legislation. In any case the following shall not be subject to excise tax: a) Alienation (sale) of products exported from Armenia and subject to excise tax, if the copy of customs declaration with the note "The pass is allowed", completed in accordance with the procedure established by customs legislation, is available, b) Goods subject to the excise tax imported into and exported from the customs territory of the Republic of Armenia under customs regimes established by the customs legislation that differ from "Import for free turnover" regime, c) Import and realization of goods subject to excise tax that are confiscated in accordance with procedures established by legislation, goods recognized as having no owner and transferred to the state, as well as good transferred to the state by the right of inheritance, d) Goods subject to excise tax imported into the Republic of Armenia by individuals. The law may define other excise tax privileges too. The violation of this law entails responsibilities according to the procedure established by the legislation. In case of concealing or understating the actual taxable base and/or the object taxable by excise tax, the taxpayer shall be subject to a penalty equal to 100 percent of the concealed or understated amount of excise tax. Taxpayers shall pay fine of 200 thousand drams for the submission of more than one of each corrected excise tax payment document for every reporting period according to the procedure stated in this law. Custom Tax on Imported Equipment and Raw Materials Customs duties are mandatory payments pursuant to the procedures and in amounts stipulated by the RA Custom Code /AL-83/, adopted by the RA National Assembly on 06 July 2000 and entered into force from 1st January, 2000. In general, no duties are levied on goods in the following categories: 1. Transit shipments; 2. Importation into a customs warehouse; 3. Importation into a customs free warehouse; 4. Importation into a duty free shop; 5. Temporary importation for inward processing; 6. Temporary importation. The exact tariff rates for all goods imported from Armenia are stated in Article 102 of the Custom Code which contains all detailed descriptions of goods and their own HS Codes. According to this article, raw materials are completely exempt from custom duties. Also, the major types of equipment have 0 rates, except for the following types of equipment:

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-10 1. kitchen sanitary-technical equipment and their aluminum parts /with Code 7615/, 2. other equipment from aluminum /with Code 7616/, 3. refrigerating or freezing equipment, electric or other /with Code 8418/, but other than for civil aviation; 4. electrical machinery and equipment; sound recorders; television image and sound recorders and reproducers (players) /with Code 85/; 5. sports articles and equipment /with Code 9506/. For these types of equipment a 10% custom duty has been established.

11.2 Accessing funds/loans

In Armenia, so-called ‘institutional financing’ supported by the government is very limited. Financing medium to large size energy related or industrial projects through national banks is theoretically possible but due to high interest rates often no alternative compared to multilateral funding: the usual commercial financing available requires 18- 22% interest rate, 3 years repayment period, etc. Foreign countries raise the required funds to arrange on-shore loans. Continued development of renewable energy projects, particularly hydro power, should be encouraged due to their low cost and utilization of domestic energy resources. Planned low-cost financing supported by international agencies, revolving fund, should be established to continue the development of small hydro power plants and eventually other renewable resources. The ongoing financing mechanisms are available under the following programs (note 1 through 3 are unified under a single lending institution):

11.2.1 Renewable Energy Project (IDA Credit and GEF Grant) – administered under R2E2 Fund

Administered under R2E2 Fund REP will be implemented over the period of about 5 years. The proposed project budget is around US$24.40 million, of which $US5.0 million would be provided by the International Development Agency (IDA) as a credit, and US$ 3.0 million - by the Global Environmental Facility, as grant. The rest will be contributed by the Recipient and European Bank for Reconstruction and Development. Project Technical assistance components: to remove barriers and support project implementation (indicative amount US $3 million from the GEF):39 Improvement of legal and regulatory framework and capacity building for state agencies (US$ 400,000); Capacity building and other support to the private sector (US$ 1,600,000); Mechanisms to leverage additional financing (US$ 340,000;

39 Source: http://www.nature- ic.am/ClimateChange/Undp_Gef_Projects/Armenia%20REP%20EMP.pdf#search=%22renewable%20energ y%20loan%20credit%20armenia%22

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-11 Project implementation and monitoring (US$ 660,000). The financial institution which is planned to provide loans for implementation of this kind of projects is Cascade Credit Universal Credit Organization (Cascade Credit UCO). The funds of the Cascade Credit UCO come from the Renewable Resources and Energy Efficiency Fund (R2E2 Fund). Investment component: project implementation (credit of US $5 million from IDA) see below:

11.2.2 EBRD Armenian Renewable Energy Programme

The program is designed to: 40 I. finance alternative generation capacity in support of the timely closure of Medzamor NPP II. reduce Armenian dependence on imported fuel used for power generation and increase energy security. The client Cascade Credit CJSC (or “Cascade Credit”) - as a universal credit organization registered and licensed with the Central Bank of Armenia. This project is aimed at encouraging private sector investment and demonstrate the viability of renewable energy generation projects in Armenia given the government’s new regulatory framework for renewable energy investments. The presence of Cascade Credit as a strategic investor will give a strong signal to private investors who are still hesitating to enter the Armenian energy market.

11.3 The Cafesjian Family Foundation

The Cafesjian Family Foundation, among its five major areas of activity in Armenia, also has energy. The Cafesjian Family Foundation owns a series of companies engaged in developing and promoting use of alternative energy in Armenia including Solar, Biomass, Wind and fuel cell technology. Through its financial services group (particularly through Cascade Credit41), the Cafesjian Family Foundation is active in lending to the renewable energy sector, particularly small hydro and wind.42 This lending activities also include financial resources received through the EBRD – Armenian Renewable Energy program (see below). But, according to the Central Bank regulations, the Cascade Credit UCO cannot provide loans over $1,000,000 USD limit, since the authorized capital of the Cascade Credit UCO is equal to $4,000,000, and the loan limit for any credit organization in Armenia should be

40 Source http://www.ebrd.com/new/pressrel/2006/63may23.htm 41 Cascade Credit is a finance company subsidiary of Cascade Capital Holdings (“CCH”). CCH is a 99.9% owned Armenian registered company set up by the Cafesjian Family Foundation (“CFF” or the “Sponsor”) to hold investments in the Armenian financial services sector. The CFF is a US non-profit tax-exempt organisation (501(c)3 designation) set up to promote the well-being of Armenians and to foster economic development and western orientated values in Armenia. 42 Source: http://www.cascadecapitalholdings.com/

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-12 less than 25%. Thus, in order to implement the CDM projects in hydro power sector, the Project Developers would have to apply to a third party lending institution, which would create additional barriers for investments, such as shared collateral contracts, etc. Hence, for some larger scale REN projects currently this fund cannot be accessed. Private investors will be able to access financing for the development of renewable energy projects. Based on comparative analyses of economic and financial feasibility of different types of renewable projects, it is expected that the financing will be mainly targeted at SHPPs on natural (run-off the river) and artificial (irrigation and drinking water pipes and canals) water flows, and wind farms. The sub-loans are expected to be in the range of US $100,000 to US $2 million with an average project size of US $500,000. Sub-borrowers will be required to contribute at least 30% of total project costs as equity financing.

EBRD provided USD 7 million to the program. The World Bank is in the process of transferring USD 5 million and Cascade Credit provided USD 3 million of equity. Total project cost for 1-3 above is USD 15 million. Considering the minimum 30% own contribution requirement in the lending conditions, the Fund will also generate over USD 6.4 million in equity financing, thus bringing up the financing resource to about USD 21,4 million.

11.4 German-Armenian Fund (GAF) Renewable Energy Program

The overall objective of the GAF RE Program is to contribute to an improved energy supply and to a further economic development of the private sector in Armenia by the cost- effective utilisation of renewable energy sources for electricity production. To this end, approximately 10 to 15 privately owned hydro power plants shall be rehabilitated, upgraded or newly constructed, partly financed through own contributions of the owners, and partly by loans to be extended by the participating partner financial institutions. It is envisaged to set up a fund for the promotion of investments in small hydropower stations (volume of FC funds: EUR 6 million). The financing conditions of the loans to be extended by the partner banks will be based on the reigning capital market conditions, taking into consideration however the favourable refinancing conditions offered under the present programme.43 As the private power plant operators are hardly in the position to provide the necessary documents requested by banks (feasibility studies, loan applications) and banks themselves hardly have any experience in the provision of long-term loans, additional advisory and consulting services are needed both for banks and for enterprises. In consequence, the amount of EUR 1.5 million has been earmarked for such advisory services.44 The adequacy of the refinancing conditions will be determined by the Supervisory Council (SC) consisting of representatives of the Armenian Ministry of Energy, Central Bank, Ministry of Finance and Economy, and the KfW Development Bank.

43 Source: http://www.gaf.am/ 44 Source : KfW Brief Project Description at http://www.kfw- entwicklungsbank.de/EN_Home/Laender_und_Projekte/Europe42/Armenia30/EPKD_20160_DE_Programm _zur_Foerderung_erneuerbarer_Energie.pdf

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-13 11.5 Support to the Energy Policy of Armenia (EuropeAid/120653/C/SV/AM)

This project is yet in its initiation phase and shall work under EU grant financing on two main components. The first one will deal with the decommissioning of the Medzamor Nuclear Power Plant (MNPP) and will focus on (a) assistance to the GoA in identifying the most suitable decommissioning strategy and (b) assistance to the GoA in preparing and adopting, when possible, the relevant legal documents and normative acts. All the results will be summed up in a Decommissioning Action Plan (DAP) to be prepared by the contractor. The second component will deal with the development of alternatives to nuclear energy and will focus on (a) the assessment of the potential of development of renewable energies around the Sevan Lake, in anticipation of feasibility studies to be prepared by the contractor for the most promising projects (b) which will then be presented by the GoA with the assistance of the contractor (c) to the EU member states in view of financing in the frame of the Kyoto Protocol. Total Project budget is: 909,200.00 EUR Other non-CDM, grant and private sector investment is currently underway in the wind power development (e.g. ZodWind), solar energy applications (SolarEn), fuel cells research (H2Economy), micro-hydro projects (USAID/PA consulting), etc. Extensive capital investment by various entities in the energy sector demonstrates the change in commercial conditions and positive future prospects for investment in Armenia. The accomplishments in the Armenia’s energy sector should make it easier for investors and developers to obtain financing for their proposed projects.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 11-14 12. Legal issues regarding CDM in Armenia

12.1 Definition of the legal nature of CERs in Armenia

The legal nature of CERs has not been defined under the national legislation yet. However, it is important for Armenia as Host Country to consider the issue of CERs status and whether they are sovereign or private rights, since the uncertainty of this issue increases the risks for both local and foreign investors and may impede further development of CDM projects. Today, the only official document that outlines the country’s policy on CDM is Governmental Decision on “Implementation of Projects within the framework of the CDM of the Kyoto Protocol under the UNFCCC” which was ratified by Armenia's President on July 19, 2006. The document entrusts the MoNP (as the DNA) to develop and approve the Procedure for submission of project documents under the CDM. Most likely that the answer to the question who will be legally entitled to any benefits from GHG emissions reduction or sequestration (and, therefore, entitled to CERs) will be received in the process of development of the above-mentioned Procedure, taking into consideration all relevant aspects of the national legislation. During determination of the legal nature of CERs, the following two general approaches will be considered. One approach is that in the absence of any legal, normative document or regulation to the contrary, the project owner who undertakes a specific CDM project activity is considered the legal owner of any CERs produced and entitled to deal with them exclusively. However, it must be recognized that the Kyoto Protocol is an international agreement providing rights and obligations for states. Thus, the second approach has been accepted that the reduction of GHG emissions is in effect the management of a natural resource. Therefore, some host countries may consider that CERs are sovereign rights that can only be owned and traded for profit by the government, since natural resources (such as the air and water) are seen to be the responsibility and the property of the government . At the same time, the Armenian DNA considers CDM as an effective tool for attracting foreign investment that may lead to development of projects in various sectors of the country’s economy. In this case, CERs become more important for Host Country as a factor increasing the appeal of CDM projects and attracting relevant investment and, consequently, fostering the country’s sustainable development. Taking into account this factor and the relatively small CDM potential of Armenia, the DNA will develop a liberal position regarding CERs. If that is the case, the DNA has to consider authorization of the project participants from the Republic of Armenia to be involved in proposed CDM project activity, and thereby, allow them to enter into arrangements to manage CERs and create revenue from their sale. At the same time, the Host Country DNA may charge a certain fee for this or take a proportion of project CERs depending on project size, type and strategic importance in the context of Host Country’s sustainable development priorities. It is necessary to note that such a practice has already been applied to "Nubarashen Landfill Gas Capture and Power Generation Project in Yerevan" when the DNA has

CDM Handbook Armenia_FINAL Oct 2006_English.doc 12-1 requested that 1% of CERs be forwarded to the Armenia’s national CDM account under Executive Board CDM Registry. Authorisation of a local project participant will substantially decrease risks for CER purchasers, since the latter’s primary concern when entering into a contract to buy CERs from a project will be to ensure that the seller under the agreement (ERPA) can prove either that he has legal title to the CERs or is entitled by Host Country to conduct CERs transfer or sale. This certainty will also enable the seller to obtain a higher price for CERs. The Host Country participant’s authorisation can be stated either in the Letter of Approval issued by the DNA or in a separate document. Once the state policy on this matter has been defined and approved in compliance with the acting national legislation of Armenia, it will be delivered to potential CDM project participants and investors by the DNA via its web site and publications in newspapers.

12.2 Regulatory framework for foreign direct investments

Although, general principals of CDM regulation introduced in the Kyoto Protocol are provided for all countries participating in the CDM, finally these rules will be implemented in the particular context of Host Country national legal system. Thus, complex and bureaucratic legal system of the Host Country could hamper CDM projects development; prolong their approval and further materialisation processes; and increase transaction costs. In particular, a CDM project might be affected by the state policy with respect to foreign direct investments. This is especially important if foreign company involvement in CDM project is not limited to CERs purchase, but rather extended to provision of finance for the project with a purpose of taking some ownership in it. In this regard, the Armenian legal system can be considered liberal, since it provides quite favourable conditions for foreign direct investments. For example: The Armenia legislation does not require governmental approval for foreign investment, unless the latter is related with activities which require licensing; The Armenia legislation does not impose any restriction on foreign ownership of assets except for land (according to article 31 of the RA Constitution foreigners as well as non-citizens can not enjoy a right to possess land property, unless it is stipulated by law); The Armenian legislation does not impose higher tax rates for foreign investments; The Armenian legislation provides corresponding taxation policy which prevents double taxation of profits (Governmental Decision N1398 from December 18, 2004); The Armenian legislation does not envisage foreign currency control which restricts the ability to repatriate project profit. (According to the current legislation the Armenian dram is the only currency which can circulate within Armenia. Nevertheless, tax legislation gives non-residents the right to repatriate profits in any currency and to any country) Thus, the legal framework for foreign direct investments in Armenia is likely to promote foreign investments in CDM, which, in its turn, should have a positive impact on the feasibility of CDM projects and their implementations. It is quite possible that in the future

CDM Handbook Armenia_FINAL Oct 2006_English.doc 12-2 national regulations will target such foreign investments to concrete sectors of the national economy depending on Armenia’s sustainable development goals and objectives.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 12-3 Annex 1 Glossary

CDM Handbook Armenia_FINAL Oct 2006_English.doc Annex 1: Glossary of terms used in the Handbook

The CDM glossary assists project developers in hindsight of clarifying terms that became common during the past years of the evolving modalities and procedures for implementation of CDM projects. Correct utilisation of terminology facilitates the necessary interaction of CDM project developers with other stakeholders, such as project validators, CER buyers and others. Terms are explained in alphabetical order.

Additionality: The term refers to the reduction in Greenhouse Gas emissions by sources or removals by sinks that is additional to any that would occur in absence of the CDM Project activity. The term is stated in the Marrakech Accords clarifying that a project activity is additional if anthropogenic emissions of Greenhouse Gases are reduced below those that would have occurred in the absence of the CDM project. Rom this perspective, additionality is often referred to as Environmental Additionality.

Afforestation: refers to the direct human-induced conversion of land that has not been forested for a period of at least 50 years to forested land through planting, seeding and/or the human-induced promotion of natural seed sources.

Allocation Statement: is the statement which may be provided by Project Participants to the CDM Executive Board.

Annex B Country: are those countries and economies in transition, listed in Annex B to the Kyoto Protocol, which have agreed to achieve emission reduction targets by the Commitment Period, 2008-1012. The targets became legally binding with the Kyoto Protocol that entered into force on 16 February 2005.

Annex I Country: refers to those developed countries and economies in transition listed in Annex I of the UNFCCC, which have agreed to non-binding commitments to reduce their GHG emissions to 1990 levels by the year 2000.

Approved Baseline methodology: A baseline methodology approved by the Executive Board is publicly available along with relevant guidance on the UNFCCC CDM Website (http://unfccc.int./cdm) or through a written request sent to cdm- [email protected].

Approved Monitoring methodology. A monitoring methodology approved by the Executive Board and made publicly available along with relevant guidance, see above for references).

Assigned Amount Unit (AAU): are tradable units, equal to one metric ton of CO2 equivalent and calculated according to an Annex B country’s Assigned Amount.

Attributable: In an operational context, the term attributable in paragraph 51 (project boundary) of the CDM modalities and procedures should be read as “directly attributable”, respectively.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Baseline: refers to the scenario that reasonably represents the anthropogenic emissions by sources of Greenhouse Gases that would occur in the absence of the proposed project activity.

Baseline approach: Baseline approach is the basis for a baseline methodology. The Executive Board agreed that the three approaches identified in sub-paragraphs 48 (a) to (c) of the CDM modalities and procedures be the only ones applicable to CDM project activities. They are: (i) Existing actual or historical emissions, as applicable; (ii) Emissions from a technology that represents an economically attractive course of action, taking into account barriers to investment; or (iii) The average emissions of similar project activities undertaken in the previous five years, in similar social, economic, environmental and technological circumstances, and whose performance is among the top 20 per cent of their category.

Baseline methodology: A methodology is an application of an approach as defined in paragraph 48 of the CDM modalities and procedures, to an individual project activity, reflecting aspects such as sector and region. No methodology is excluded a priory so that participants have the opportunity to propose a methodology. In considering paragraph 48, the Executive Board agreed that, in the two cases below, the following applies: (i) in case of a new methodology: In developing a baseline methodology, the first step is to identify the most appropriate approach for the project activity and then an applicable methodology; (ii) in case of an approved methodology: In opting for an approved methodology, project participants have implicitly chosen an approach.

Bilateral CDM project: A bilateral CDM project is the standard form of the CDM project, involving an investor, a developed country and a host developing country.

CDM Registry: Standard electronic database to be established and maintained by the CDM Executive Board which will contain common data elements relevant to the issuance, holding, transfer and acquisition of CERs.

Certification (of CERs): The written assurance by the DOE (Designated Operational Entity) to confirm that, during a specified time period, a CDM Project activity achieved the reductions in Greenhouse Gas emissions as verified.

Certified Emission Reduction (CER): Units issued for emission reduction generated by CDM project activities. One unit is equal to one metric ton of CO2 equivalent.

Clean Development Mechanism (CDM): Flexible mechanism under Article 12 of the Kyoto Protocol with the purpose to (1) assist non-Annex I Parties in achieving sustainable development; (2) contribute to the ultimate objective of the UNFCCC; and (3) assist Parties included in Annex I achieve compliance with their quantified emission limitation and reduction commitments.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Conservative: see Transparent and conservative

Conference of the Parties (CoP): The CoP is comprised of countries that have ratified or acceded to the UNFCCC. The CoP is the supreme governing body of the UNFCCC.

Crediting Period: The period for which the CDM project can generate CERs for eligible emission reductions.

Designated National Authority (DNA): is the national authority for CDM designated by the relevant Party to the Kyoto Protocol.

Designated Operational Entity (DOE): is an independent legal entity accredited by CDM Executive Board that can validate proposed CDM Projects and verify and certify Greenhouse Gas emission reductions. Using the same DOE for non-small- scale CDM projects requires the prior acceptance through the CDM Executive Board. For small-scale CDM projects the same DOE may be contracted without prior approval.

Emission Reduction Purchase Agreement (ERPA): governs any contractual arrangements between the entity having received entitlement of selling CERs and another entity in need to purchase CERs. Most importantly, the ERPA includes provisions for CER delivery, payments, and several obligations of both Parties. In many case, intermediaries such as brokers or Carbon Funds purchase CERs and will make purchase agreements with the seller directly.

Executive Board (EB) (also referred to as CDM Executive Board): The CDM Executive Board supervises the CDM, under the authority and guidance of the COP/MOP, and is fully accountable to the COP/MOP.

First Commitment Period: The period between 2008-2012 during which Annex I countries to the Climate Change Convention are required to reduce their emissions of Greenhouse Gases to the levels established in the Kyoto Protocol.

Gold Standard (CDM project) : is an independently audited, globally applicable best practice methodology for CDM project development that delivers high quality carbon credits of premium value. It serves internationally as a kind of benchmark for developing high quality CDM project. CERs from Gold Standard CDM projects are usually traded at higher prices than for non-Gold Standard CDM project CERs.

Greenhouse Gas (GHG): One or more of the six gases listed in Annex A to the Kyoto Protocol that trap heat when released into the atmosphere, being carbon dioxide (CO2), methane, nitrous oxide, ozone, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6). They occur through natural and human-induced activities.

Host County: The non-Annex I country in which a CDM Project is based.

Issuance (of CERs): Issuance of CERs refers to the instruction by the Executive Board to the CDM registry administrator to issue a specified quantity of CERs for a

CDM Handbook Armenia_FINAL Oct 2006_English.doc project activity into the pending account of the Executive Board in the CDM registry, in accordance with paragraph 66 and Appendix D of the CDM modalities and procedures.

Kyoto Protocol: The Protocol to the UNFCCC signed at the third COP meeting, establishing binding Annex I Greenhouse Gas emission reduction targets of 5.2% below 1990 levels by 2008-2012. The Koto Protocol entered into force on 16 February 2005 once at least 55 Parties representing 55% of industrial nations’ Greenhouse Gas emissions have ratified it.

Leakage: refers to the net change of anthropogenic emissions by sources of Greenhouse Gases that occurs outside the project boundary as result of CDM project implementation and is measurable and attributable to the CDM Project activity.

Letter of Approval (LoA): A letter issued by the Designated National Authority of the Host Country to a CDM Project confirming that the project, as proposed, will assist in resulting in GHG emission reductions that are additional to what would occur without the project and will assist the Host Country to achieve its sustainable development goals.

Letter of Endorsement (LoE): An LoE confirms that in principle the host government is has no objections against a proposed project idea and would further support its development as a complete CDM project.

LULUCF: Land Use, Land-Use Change and Forestry as defined under the Kyoto Protocol and Marrakech Accords particularly decision 11/CP.7.

Marrakech Accords: Decisions 2/CP.7 through to Decision 24/CP.7 (inclusive) of the seventh session of the COP/MOP.

Measurable: In an operational context, a term measurable in paragraph 51 (projct boundary) of the CDM modalities and procedures should be read as “which can be measured”, respectively.

Methodology Panel (short: Meth Panel): Shall develop specific proposals for consideration by the Executive Board on e.g. appropriateness of new proposed baseline and Monitoring methodologies.

Mitigation: An anthropogenic intervention to reduce the sources or enhance the sinks for greenhouse gases.

Monitoring of a CDM project activity: Monitoring refers to the collection and archiving of all relevant data necessary for determining the baseline, measuring anthropogenic emissions by sources of greenhouse gases (GHG) within the project boundary of a CDM project activity and leakage, as applicable.

Monitoring methodology: A monitoring methodology refers to the method used by project participants for the collection and archiving of all relevant data necessary for the implementation of the monitoring plan.

CDM Handbook Armenia_FINAL Oct 2006_English.doc MOP: Meeting of the Parties. This refers to the meetings of all Parties having ratified the Kyoto Protocol. The first MoP was held in December 2005 in conjunction with CoP11 at Montreal, Canada.

New baseline methodology: Project participants may propose a new baseline methodology established in a transparent and conservative manner. In developing a new baseline methodology, the first step is to identify the most appropriate approach for the project activity and then an applicable methodology. Project participants shall submit a proposal for a new methodology to a designated operational entity by forwarding the proposed methodology in a draft project design document (CDM- PDD), including the description of the project activity and the identification of the project participants.

New monitoring methodology: Project participants may propose a new monitoring methodology. In developing a monitoring methodology, the first step is to identify the most appropriate methodology bearing in mind good monitoring practice in relevant sectors. Project participants shall submit a proposal for a new methodology to a designated operational entity by forwarding the proposed methodology described in a draft project design document (CDM-PDD), including a description of the project activity and identification of the project participants.

Non Annex I Country: Countries which are not listed in Annex I of the UNFCCC (generally, developing and least developed countries).

Official Development Assistance (ODA): Annually disbursed official bilateral government assistance from Annex I to non-Annex I countries.

Operational lifetime: It is defined as the period during which the CDM project activity is in operation. No crediting period shall end after the end of the operational lifetime (calculated as from starting date)

Project activity: A project activity is a measure, operation or an action that aims at reducing greenhouse gases (GHG) emissions. The Kyoto Protocol and the CDM modalities and procedures use the term “project activity” as opposed to “project”. A project activity could, therefore, be identical with or a component or aspect of a project undertaken or planned.

Project boundary: The national boundaries surrounding an actual or proposed CDM Project within which Greenhouse Gas emission impacts and effects are considered and quantified.

Project Design Document (PDD): The document to be prepared and submitted by Project Participants to an accredited DOE for validation of a proposed project activity.

Project Identification Note (PIN) also referred to as Project Idea Note: A PIN is often used to describe the a new CDM project idea and provide a first rough estimation of CO2e emission reductions. The PIN often serves to request the DNA for a Letter of Endorsement. It also serves to justify in a later CDM project validation stage that CDM was taken into account seriously at early project planning stage.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Project participants: The legal entity (both public and private entities) that develop and implement CDM Project activities.

Public consultation period: sometimes also referred to as stakeholder consultation process is the process where the project developer invites stakeholders that may be affected by the project to explain the project, to answer questions and to clarify issues of public concern. The project developer must as part of the PDD development summarise how the public consultation period was organised and how due account was taken on public comments.

Reforestation: The direct human-induced conversion of non-forested land to forested land through planting, seeding and/or the human-induced promotion of natural seed sources, on land that was forested but that has been converted to non- forested land. For the First Commitment Period, reforestation activities will be limited to reforestation occurring on those lands that did not contain forest on 31 December 1989.

Stakeholder/s: The public, including individuals, groups or communities affected, or likely to be affected, by the proposed CDM project activity.

Starting date: The starting date of a CDM project activity is the date at which the implementation or construction or real action of a project activity begins.

Transaction log: Under the Marrakech Accords, a transaction log will be established by the secretariat to the UNFCCC to verify the validity of all transactions involving Kyoto Protocol rights including CERs within or between registries (including between a national registry and the CDM registry). The log will cover the issuance, transfer, acquisition, cancellation, retirement or carryover into the next commitment period of any Kyoto Protocol rights.

Transparent and conservative: Establishing a baseline in a transparent and conservative manner means that assumption are made explicitly and choices are substantiated. In case of uncertainty regarding values of variables and parameters, the establishment of a baseline is considered conservative if the resulting projection of the baseline does not lead to an overestimation of emission reductions attributable to a CDM project activity (that is, in the case of doubt, values that generate a lower baseline projection shall be used)

Registration: The formal acceptance by the CDM Executive Board of a validated project as a CDM Project. Registration is the prerequisite for verification, certification and issuance of CERs related to that project.

UNFCCC: United Nations Framework Convention on Climate Change, signed at the ‘Earth Summit’ in Rio de Janeiro in May 1992.

Unilateral CDM project: A Clean Development Mechanism project developed and implemented by a developing country (non-Annex I) party and/or entity.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Validation: is the process of independent evaluation of a project activity by a designated DOE against the requirements of the CDM as set out in the Marrakech Accords on Article 12 and on the basis of the Project Design Document.

Verification: The periodic independent review and ex post determination by the designated DOE of the monitored reductions in anthropogenic emissions by sources of Greenhouse Gases that have occurred as a result of a registered CDM Project activity during the verification period.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Annex 2 CDM Emission Reductions Purchase Agreement© v. 2.0 2004 (IETA) CDM Emission Reductions Purchase Agreement - v 2.0 2004 (Name of the Project) by and between [PROJECT ENTITY] and [**] Dated, [Date] © International Emission Trading Association (IETA). This document may be freely used, copied and distributed on the condition that each copy shall contain this copyright notice.

TABLE OF CONTENTS

ARTICLE I DEFINITIONS; INTERPRETATION; HEADINGS; SCHEDULES Section 1.01 Definitions Section 1.02 Interpretation; Headings; Schedules ARTICLE II CONDITIONS PRECEDENT[; KYOTO PROTOCOL] Section 2.01 Conditions Precedent Section 2.02 Waiver Section 2.03 Date for fulfilling conditions Section 2.04 Progress report [Section 2.05 Kyoto Protocol] ARTICLE III PURCHASE AND SALE OF CERTIFIED EMISSION REDUCTIONS Section 3.01 Purchase and Sale Section 3.02 Minimum Amount ARTICLE IV OPTION TO [ACQUIRE][SELL] [ADDITIONAL][EXCESS] ERs Section 4.01 Option Section 4.02 Exclusivity ARTICLE V PRICE AND PAYMENT Section 5.01 Unit Price Section 5.02 Annual Payment Section 5.03 Form of Payment Section 5.04 Costs Section 5.05 Taxes ARTICLE VI INITIAL VERIFICATION; VALIDATION AND REGISTRATION; BASELINE Section 6.01 Initial Verification Section 6.02 Operational Entity Section 6.03 Validation and Registration Section 6.04 Baseline

ARTICLE VII MONITORING PLAN Section 7.01 Monitoring Plan Section 7.02 Annual ER Report Section 7.03 Amendments to Monitoring Plan ARTICLE VIII VERIFICATION AND CERTIFICATION Section 8.01 General Requirements Section 8.02 Operational Entity Section 8.03 Verification and Certification

CDM Handbook Armenia_FINAL Oct 2006_English.doc ARTICLE IX PROJECT OPERATION AND MANAGEMENT Section 9.01 Project Operation ARTICLE X CERTIFIED EMISSION REDUCTIONS Section 10.01 Authorization Section 10.02 General Communication Section 10.03 Establishment of Accounts Section 10.04 Delivery of CERs Section 10.05 Provisional Issuance of CERs ARTICLE XI REPRESENTATIONS AND WARRANTIES Section 11.01 The Project Entity Representations Section 11.02 Buyer Representations ARTICLE XII FAILURE TO GENERATE OR TRANSFER MINIMUM AMOUNT Section 12.01 Production Failure or Transfer Failure Section 12.02 Buyer’s Rights in Event of Production Failure or Transfer Failure Section 12.03 Rights in the Event of Gross Negligence, Fraud or Willful Misconduct ARTICLE XIII EVENTS OF DEFAULT Section 13.01 Events of Default ARTICLE XIV TERMINATION Section 14.01 Suspension on Default Section 14.02 Termination on Default Section 14.03 Non-Default Termination Section 14.04 Automatic Termination ARTICLE XV MISCELLANEOUS PROVISIONS Section 15.01 Amendments to the Agreement Section 15.02 Confidentiality Section 15.03 Notices Section 15.04 Evidence of Authority Section 15.05 Assignment Section 15.06 Survival of Provisions Section 15.07 Execution in counterparts; Language Section 15.08 Entire Agreement Section 15.09 Severability Section 15.10 Applicable Law Section 15.11 Arbitration Section 15.12 Waiver of Sovereign immunity SCHEDULES Schedule 1 Description of the Project Schedule 2 Minimum Amount and Contract CERs Schedule 3 Monitoring Plan Schedule 4 Option Notice Schedule 5 Letter of Approval Schedule 6 Letter of Credit

CDM Handbook Armenia_FINAL Oct 2006_English.doc EMISSION REDUCTIONS PURCHASE AGREEMENT [**], a [private][public] company [with limited liability] incorporated under the laws of [**], having its seat at [**] ("Project Entity") and [**],a [private][public] company [with limited liability] incorporated under the laws of [**], having its seat at [**] (the "Buyer") WHEREAS: A. [Name of the Host Country] ("Host Country") has ratified the United Nations Framework Convention on Climate Change (the "UNFCCC") on [date] and has [ratified/acceded] on [date] to the Protocol that was adopted at the Third Conference of the Parties to the UNFCCC in Kyoto, Japan on December 11, 1997 (the "Kyoto Protocol"). B. [Host Country has authorized the Project Entity to participate in the Project and [**] has authorized the Buyer to participate in the Project.] C. The Project Entity intends to carry out the Project, as described in Schedule 1, which is expected to result in reduction in greenhouse gas emissions that are additional to any that would occur in the absence of the Project. D. The Project Entity wishes to sell, and the Buyer wishes to purchase, upon the terms and conditions of this Emission Reductions Purchase Agreement (this "Agreement"), Certified Emission Reductions generated by the Project.

The Parties hereby agree as follows:

ARTICLE I Definitions; Interpretation; Headings; Schedules Section 1.01 Definitions Unless the context otherwise requires, the following capitalized terms shall have the following meanings wherever used in this Agreement and its preamble: "Additional ERs" means in a Year any ERs generated by the Project which are likely to qualify as CERs in excess of the Minimum Amount for such Year as reported in the Annual ER Reports to the extent such ERs are not meant to make up for any Transfer Failure in a previous Year. "Annual Payment" means the amount set out in Section 5.02. "Annual ER Report" means a report provided by the Project Entity setting out the amount of GHG Reductions generated by the Project during the previous Year as monitored in accordance with the Monitoring Plan and which includes all other data as may be required to be collected and recorded by the Monitoring Plan and which shall serve as the monitoring report required to be provided to the Operational Entity under the International UNFCCC/Kyoto Protocol Rules. "Assigned Amount Unit" or "AAU" means a unit issued pursuant to the International UNFCCC/Kyoto Protocol Rules and is equal to one metric tonne of carbon dioxide equivalent, calculated in accordance with the International UNFCCC/Kyoto Protocol Rules. "Bankruptcy Proceedings" means, in relation to any person: (a) the making of an assignment or arrangement for the benefit of creditors; (b) the filing of a petition or commencement of proceedings under any bankruptcy or similar law, or having such a petition filed against such person, which petition is not dismissed for a period of 30 days; (c) the levy of an attachment for execution against the whole or any material part of its assets; (d) such person becoming (or is, or could be, deemed by law or a court to be) insolvent or unable to pay its debts; or (e) such person stops, suspends or threatens to stop or suspend payment of all or a material part of its indebtedness or begins negotiations or takes any other step with a view to the deferral, rescheduling or other readjustment of all or a material part of its indebtedness. "Baseline" means the scenario that reasonably represents the anthropogenic emissions by sources of GHGs that would occur in the absence of the Project as described in the International UNFCCC/Kyoto Protocol Rules. "Baseline Study" means a written report of the Baseline prepared as part of the Project Design Document. "Buyer’s Account" means the account of Buyer [to be] established in the national CDM registry of [**].

CDM Handbook Armenia_FINAL Oct 2006_English.doc "Carbon Dioxide Equivalent" or "CO2e" means the base reference for the determination of global warming potential of Greenhouse Gases in units of carbon dioxide. "Certification" and "Certified" each means the written assurance by the Operational Entity that, during a specified time period, the Project has achieved the GHG Reductions as reported in the Verification Report. "Certification Report" means the document setting out the Certification. "Certified Emission Reduction" or "CER" means a unit issued pursuant to Article 12 of the Kyoto Protocol as well as all other relevant International UNFCCC/Kyoto Protocol Rules and is equal to one metric tonne of carbon dioxide equivalent, calculated in accordance with the International UNFCCC/Kyoto Protocol Rules. "Clean Development Mechanism" or "CDM" means the mechanism referred to in Article 12 of the Kyoto Protocol. "Commissioning" or "Commissioned" means the satisfactory completion of the Project by the Project Entity in accordance with such procedures and tests as from time to time constitute usual and prudent industry standards and practices to demonstrate to the reasonable satisfaction of the Buyer that the Project is capable of commercial operation and of generating GHG Reductions for the purpose of, inter alia, this Agreement. "Consents" means any consent, authorization, registration, filing, license, permit, approval, agreement, authority or exemption from, by or with a competent authority, required for the construction, maintenance and operation of the Project. "Contract CERs" means the CERs sold under, and to be forwarded pursuant to, Section 3.01 arising from the first [**] tonnes of GHG Reductions from the Project regardless of the Year in which they are created. "COP/MOP" means the Conference of the Parties to the UNFCCC serving as the Meeting of the Parties to the Kyoto Protocol. "Credit Facility" means the credit facility entered into between [**] and the Project Entity dated [**]. "Crediting Period" means the period in which GHG Reductions from the Baseline are Verified and Certified by an Operational Entity for the purpose of Issuance of CERs and which shall commence after the first Emission Reductions are generated by the Project. "Designated Operational Entity" or "DOE" means an entity designated by the COP/MOP, based on the recommendation by the Executive Board as qualified to Validate proposed CDM project activities or to Verify and Certify GHG Reductions. "Emission Reductions" or "ERs" means any right, interest, credit, entitlement, benefit or allowance to emit (present or future) arising from or in connection with any GHG Reduction by the Project and includes any right that may be created under any regulatory or legal regime as a result of the GHG Reductions whatsoever. ["Euro" or "¼" means the lawful currency of the participating member states of the European Union that have adopted the single currency in accordance with the Treaty establishing the European Community, as amended by the Treaty on the European Union.] "Event of Default" has the meaning ascribed thereto in Section 13.01. "Excess ERs" means any ERs generated by the Project which are likely to qualify as CERs in excess of the Contract CERs as reported in Annual ER Reports. "Executive Board" means the executive board of the Clean Development Mechanism that is established pursuant to the International UNFCCC/Kyoto Protocol Rules. "Expiry Date" means [**] "Financial Close" means the first date on which drawdown is permissible under the Credit Facility for the financing of the Project. “Force Majeure” means, in respect of either Party, any occurrence of Physical Force Majeure or one or more of the following event(s) or circumstance(s) (only) which are beyond the reasonable control of the affected Party acting (and having acted) in accordance with prudent operating practice and which results in or causes the failure of the affected Party to perform any of its obligations under this Agreement: (a) [strike, lockout or other industrial disturbance affecting [power generators] in [**] generally; or] (b) act of the public enemy, war declared or undeclared, threat of war, terrorist act, blockade, revolution, riot, insurrection, civil commotion or public demonstration, provided that a lack of funds shall not be treated as an event of Force Majeure. "Global Warming Potentials" means the global warming potentials used to calculate the carbon dioxide equivalence of Greenhouse Gases as accepted or subsequently revised in accordance with Article 5 of the Kyoto Protocol. "Greenhouse Gases" or "GHGs" means the six gases listed in Annex A to the Kyoto Protocol.

CDM Handbook Armenia_FINAL Oct 2006_English.doc "GHG Reduction" means the removal, limitation, reduction, avoidance, sequestration or mitigation of GHGs emissions. “Gross Negligence” means any act or omission, whether deliberate or not, which in the circumstances (including both the probability and seriousness of the consequences likely to result) would be regarded by those familiar with both the Project activity and surrounding circumstances (including without limitation the Project Entity’s obligations under this Agreement) as amounting to the reckless disregarding of the consequences, being more fundamental than a failure to exercise proper skill and care. "Host Country" means[**]. "Initial Verification Report" means a report commissioned by the Buyer during the construction of the Project to ensure all Monitoring Plan-mandated data collection and management systems are in place to allow subsequent successful Verification and Certification of the GHG Reductions. "International UNFCCC/Kyoto Protocol Rules" means the UNFCCC, the Kyoto Protocol, the Marrakesh Accords, any relevant decisions, guidelines, modalities and procedures made pursuant to them, as amended from time to time. "Issuance of CERs" means the issuance of CERs by the CDM registry administrator of the specified quantity of CERs into the pending account of the Executive Board in the CDM registry, upon being instructed to do so by the Executive Board. "Issued CERs" has the meaning ascribed thereto in Section 5.01. "Kyoto Protocol" means the protocol to the UNFCCC adopted at the Third Conference of the Parties to the UNFCCC in Kyoto, Japan on December 11, 1997 as may be amended. "Letter of Approval" means the letter through which the Host Country inter alia approves the Project for the purposes of Article 12 of the Kyoto Protocol [substantially in the form of] [a copy of which is attached as] Schedule 5. "Letter of Credit" means an irrevocable, standby letter of credit issued or confirmed by a bank or financial institution with a credit rating of at least [**] assigned by Standard & Poor´s or [**] assigned by Moody´s substantially in the form of Schedule 6. "Marrakech Accords" means Decision 2/CP.7 through Decision 24/CP.7 inclusive of the COP in its seventh session, held at Marrakech, Morocco from October 29 to November 10, 2001. "Minimum Amount" means the minimum number of GHG Reductions to be generated by the Project in any given Year and to be forwarded to the Buyer as Contract CERs as set out in Schedule 2. "Monitoring" means activities of collecting and recording data in accordance with any relevant standards or conditions provided for under the International UNFCCC/Kyoto Protocol Rules that allow the assessment of the GHG Reductions resulting from the Project pursuant to the terms of the Monitoring Plan. "Monitoring Plan" means the set of requirements for Monitoring incorporated in Schedule 3 of this Agreement, as such schedule may be amended from time to time in accordance with Section 7.03. "Operational Entity" means (i) a Designated Operational Entity, or, in the absence thereof, (ii) an entity, independent from the Buyer, the Host Country and the Project Entity, which has: (A) applied for accreditation as a designated operational entity under the International UNFCCC/Kyoto Protocol Rules; and (B) not been previously employed on Project related activities, and which unless otherwise authorized by the Buyer and the Executive Board performs either the Validation of the Project or the Verification and Certification of the GHG Reductions generated by the Project. "Option" has the meaning ascribed thereto in Section 4.01(a). "Option CERs" has the meaning ascribed thereto in Section 4.01(d). "Parties" means the Project Entity and the Buyer, and each of them shall be individually referred to as a "Party". “Physical Force Majeure” means (except to the extent that any of the same arise from an electrical or mechanical breakdown at the Project) the occurrence of lightning, fire, storm, flood, earthquake, accumulation of snow or ice or explosion which are beyond the reasonable control of the affected Party acting (and having acted) in accordance with prudent operating practice and which results in or causes the failure of the affected Party to perform any of its obligations under this Agreement. "Production Failure" means the failure to generate the Minimum Amount of GHG Reductions in a given Year. "Project" means the project activity described in Schedule 1 of this Agreement to be implemented in accordance with the International UNFCCC/Kyoto Protocol Rules. "Project Commissioning Date" means the date on which the Project is fully Commissioned.

CDM Handbook Armenia_FINAL Oct 2006_English.doc "Project Design Document" or "PDD" means a description of the Project [to be] submitted for Validation in accordance with the International UNFCCC/Kyoto Protocol Rules. "Project Documents" means together or individually the Baseline Study, the Project Design Document, the Monitoring Plan, the Validation Report, the Verification Report, the Certification Report and the Letter of Approval. "Registration" or "Registered" means the formal acceptance by the Executive Board of a Project as a CDM project activity. "Replacement CERs" means CERs from the Project or from a project approved by the Buyer, supplied to the Buyer to replace any shortfall of GHG Reductions or Contract CERs as a result of a Production Failure or a Transfer Failure by the Project Entity, so as to enable full delivery of the Contract CERs and which may, if the Buyer requests, be substituted with AAUs. "Share of Proceeds" means any share of the Emission Reductions deducted by the CDM registry administrator in accordance with the Kyoto Protocol to cover administrative expenses and to assist in meeting costs of adaptation. "Taxes" means all national, state, regional, provincial, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, fuel, gas import, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever imposed by any governmental entity, whether in effect at the time of this Agreement or thereafter imposed, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. "tCO2e" means metric tonnes of Carbon Dioxide Equivalent. "Third Party" means a party other than the Buyer or the Project Entity. "Transfer Failure" means the failure, for any reason whatsoever, of the Project Entity to have forwarded to the Buyer a number of Contract CERs equivalent to the Minimum Amount for a particular Year. "United Nations Framework Convention on Climate Change" or "UNFCCC" means the United Nations Framework Convention on Climate Change adopted in New York on May 9, 1992. "Unit Price" means [US$] ["United States Dollars" and "US$" each means the lawful currency of the United States of America]. "Validation" and "Validated" each means the process of independent evaluation of the Project by an Operational Entity against the requirements of the CDM in accordance with the International UNFCCC/Kyoto Protocol Rules. "Validation Report" means a written report prepared by the Operational Entity of the Validation. "Verification" and "Verified" each means the periodic independent review and ex post determination by an Operational Entity of GHG Reductions monitored in accordance with the Monitoring Plan that have occurred during the relevant period as a result of the Project being carried out in accordance with the International UNFCCC/Kyoto Protocol Rules. "Verification Report" means a written report prepared by the Operational Entity of the Verification which independently assesses the Annual ER Report and the amount of GHG Reductions generated by the Project for the preceding Year. "Year" means the twelve month period commencing on the Project Commissioning Date and each subsequent 12 month period commencing on the anniversary of the Project Commissioning Date thereafter. Section 1.02 Interpretation; Headings; Schedules (a) In this Agreement unless the context requires another meaning, a reference: (i) to any document (including this Agreement) is to that document as varied, amended, novated, ratified or replaced from time to time; (ii) to any Party includes that Party’s executors, administrators, successors and permitted assigns, including any person taking by way of novation and, in the case of a trustee, includes any substituted or additional trustee; (iii) to the singular includes the plural and vice versa, and to a gender includes all genders; (iv) to a Party means a Party to this Agreement, and to an Article, Section or Schedule is to an Article, Section or Schedule of this Agreement (unless specified otherwise); and (v) to any International UNFCCC/Kyoto Protocol Rules, statute or to any treaty or statutory provision includes any statutory modification or re-enactment of it or any treaty or statutory provision substituted for it, and all protocols, rules, modalities, guidelines, procedures, ordinances, by-laws, regulations, rules and statutory instruments (however described) issued under it. (b) The terms of this Agreement shall be interpreted in a manner that is consistent with the

CDM Handbook Armenia_FINAL Oct 2006_English.doc International UNFCCC/Kyoto Protocol Rules. (c) The Schedules to this Agreement are an integral part hereof. (d) The headings of the Articles and Sections are inserted for convenience of reference only and do not affect the interpretation of this Agreement.

ARTICLE II Conditions Precedent [; Kyoto Protocol]

Section 2.01 Conditions Precedent The provision of this Agreement (other than Articles I, II, VI, VII, IX, XI, XIII, XIV and XV) are conditional upon each of the following occurring: (a) the grant of all necessary Consents and such Consents being in full force and effect; (b) the Project having been Validated and Registered; (c) [the Host Country having authorized the Project Entity to participate in the Project]; (d) [[**] having authorized the Buyer to participate in the Project]; (e) [the Host Country having issued the Letter of Approval]; (f) the Project having reached Financial Close by [**]; (g) the furnishing of a Letter of Credit in the amount of [**] by the [Buyer]/[Project Entity] to the [Project Entity]/[Buyer] by no later than the date at which the Project achieves Financial Close; and (h) the Project having been Commissioned by [**]; (i) [the Kyoto Protocol having entered into force]1

Section 2.02 Waiver The conditions set forth in Section 2.01 sub [a, b, c, d, e, f, and h] are for the benefit of, and may only be waived or deferred by, the Buyer. The condition set forth in Section 2.01 sub g is for the benefit of, and may be waived or deferred by, the [Project Entity]/[Buyer].

Section 2.03 Date for fulfilling conditions If not all conditions set forth in Section 2.01 have been satisfied (or waived) by [**], unless otherwise provided in Section 2.01, this Agreement (other than Articles I, II, VI, VII, IX, XI, XIII, XIV and XV) shall not become binding and enforceable.

Section 2.04 Progress report The Project Entity shall provide a report to the Buyer every [30/60/90] days following the date of this Agreement or at such other time as the Buyer may reasonably request, setting out the Project Entity’s progress toward fulfilling the conditions precedent set forth in Section 2.01 [other than sub g] and relevant actions taken or events occurring since the latest such report and a statement of the Project 1 This Agreement provides for an acceptance by the Buyer of ERs in Section 10.01. This conditions precedent should only be inserted if the Buyer is not willing to take the risk of the Kyoto Protocol not entering into force. Entity’s reasonable expectation as to whether and when each such condition precedent that has not yet been fulfilled will be fulfilled.

[Section 2.05 Kyoto Protocol2 This Agreement shall be valid and binding also in the event the Kyoto Protocol does not enter into force. In such event the CERs to be delivered hereunder shall be ERs which shall be verified, certified and delivered as provided in this Agreement.]

ARTICLE III Purchase and Sale of Certified Emission Reductions

Section 3.01 Purchase and Sale The Project Entity agrees to sell to the Buyer and the Buyer agrees to purchase from the Project Entity the Contract CERs together with any Option CERs requested by the Buyer. [If Share of Proceeds is for the account of the Project Entity: All CERs to be delivered under this Agreement shall be net of the Share of Proceeds][ If Share of Proceeds is for the account of the Buyer: The Share of Proceeds shall deemed to be part of the CERs delivered under thiS Agreement.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Section 3.02 Minimum Amount (a) Each Year the Project Entity shall have the Project generate the Minimum Amount set out in Schedule 2 and have CERs corresponding to these GHG Reductions issued and forwarded to the Buyer.3 (b) Where the Project generates more than the Minimum Amount in a particular Year, any Additional ERs generated in that Year shall be [Verified and Certified and upon Issuance of CERs be forwarded to the Buyer as part of the Contract CERs until the total amount of Contract CERs sold under this Agreement has been forwarded to the Buyer.][at the disposal of the Project Entity] (c) Where the Project Entity fails (i) to generate the Minimum Amount and (ii) to have an amount of CERs corresponding to the Minimum Amount forwarded to the Buyer, in a given Year then Article XII shall apply. 2 Insert only if condition precedent sub (i) is not used. 3 The sum of all Minimum Amounts should add up to the Contract CERs.

ARTICLE IV [Option to Acquire [Additional]4 [Excess]5 ERs

Section 4.01 Call Option (a) In consideration of the Buyer’s purchase of the Contract CERs, the Project Entity grants the Buyer an option exercisable at the Buyer’s sole discretion to purchase all or part of any [Additional][Excess] ERs on the same terms and conditions as the Buyer purchases the Contract CERs under this Agreement (the "Option")[, provided that the purchase price for any [Additional][Excess] ERs shall be the then prevailing market price to be agreed upon by the Project Entity and the Buyer in good faith]. (b) The Project Entity shall, within [**] days of the provision of the first Annual ER Report in accordance with Section 7.02 finding that [Additional][Excess] ERs have been generated notify the Buyer of the total quantity of such [Additional][Excess] ERs [together with an indication of the then prevailing market price]. (c) Within [**] days of receipt of the Project Entity’s notification meant sub (b) above, the Buyer shall provide written notice in the form of the notice attached hereto as Schedule 4 to the Project Entity of its intention whether or not to exercise the Option for the Year immediately passed [together with an acceptance of the prevailing market price as indicated by the Project Entity or an alternative for the prevailing marketprice indicated by the Project Entity]. (d) Following notification by the Buyer to the Project Entity of its intention to exercise the Option (whether in whole or part), the Project Entity shall arrange for Verification and Certification of the [Additional][Excess] ERs or part of the [Additional][Excess] ERs (as the case may be) ("Option CERs") in accordance with the procedures set out in this Agreement.] [Option to Sell [Additional]4[Excess]5 ERs

Section 4.01 Put Option a) In consideration of the Project Entity´s sale of the Contract CERs, the Buyer grants the Project Entity an option exercisable at the Project Entity's sole discretion to sell all or part of any [Additional][Excess] ERs [up to a maximum of [**]] generated by the Project on the same terms and conditions as the Buyer purchases the Contract CERs under this Agreement (the "Option")[, provided that the purchase price for any [Additional][Excess] ERs shall be the then prevailing market price to be agreed upon by the Project Entity and the Buyer in good faith]. b) The Project Entity shall, within [**] days of the provision of the first Annual ER Report in accordance with Section 7.02 finding that [Additional][Excess] ERs have been generated notify the Buyer of the total quantity of [Additional][Excess] ERs [together with an indication of the then prevailing market price]. c) Within [**] weeks of the first Annual ER Report finding that [Additional][Excess] ERs have been generated, the Project Entity shall provide written notice in the form of the notice attached hereto as Schedule 4 to the Buyer of its intention whether or not to exercise the Option for the Year 4 Use when Additional ERs are at the disposal of the Project Entity, see Section 3.02(b) 5 Use when Additional ERs will be forwarded to the Buyer as part of the Contract CERs, see Section 3.02(b) immediately passed [together with an acceptance of the prevailing market price as indicated by the Project Entity or an alternative for the prevailing market price indicated by the Project Entity].

CDM Handbook Armenia_FINAL Oct 2006_English.doc d) Following notification by the Project Entity to the Buyer of its intention to exercise the Option (whether in whole or part), the Project Entity shall arrange for Verification and Certification of the [Additional][Excess] ERs or part of the [Additional][Excess] ERs (as the case may be) ("Option CERs") in accordance with the procedures set out in this Agreement.]

Section 4.02 Exclusivity The Project Entity may solicit bids from, and enter into negotiations with, any Third Party to sell the [Additional][Excess] ERs in any given Year [Add when Call Option alternative is used: , provided that prior to the expiration of the period in Section 4.01(b) such soliciting and negotiations are made subject to the Call Option right of the Buyer].

ARTICLE V Price and Payment

Section 5.01 Unit Price The Buyer shall pay the Project Entity the Unit Price for each Contract CER and [the prevailing market price agreed upon for] each Option CER forwarded to the Buyer in accordance with this Agreement (the "Issued CERs").

Section 5.02 Annual Payment The Buyer agrees to pay the Project Entity the Annual Payment within [**] days of the date the Issued CERs are credited to the Buyer´s Account or are otherwise forwarded with the approval of the Buyer. The Annual Payment shall be equal to (i) the product of the Unit Price and each Contract CER [and each Option CER] [and (ii) the product of the prevailing market price agreed upon and each Option CER] forwarded to the Buyer in accordance with this Agreement.

Section 5.03 Form of Payment Payments will be made by the Buyer: (a) in [US$/CER] (b) to an account which has been nominated in writing by the Project Entity at least [**] days prior to the date the Annual Payment is due and payable.

Section 5.04 Costs (a) Any costs and expenses regarding the preparation of the Project Documents, Validation, Registration, Verification, Certification and Issuance of CERs, including fees and expenses payable to the Operational Entity and the Executive Board are for the account of the [Project Entity][Buyer]. (b) Any costs and expenses regarding the Initial Verification Report, if any, the creation and maintenance of the Buyer´s Account and the authorization of the Buyer by [**] are for the account of the Buyer. (c) Each Party will bear its own costs and expenses in connection with the preparation, negotiation and execution of this Agreement.

Section 5.05 Taxes Any Taxes that may be payable with regard to the Project and the sale, purchase and transfer pursuant to this Agreement shall be borne by the [Project Entity][Buyer] [, except for Taxes imposed by [**], which shall be for the [Buyer’s][Project Entity’s] account.]

ARTICLE VI Initial Verification; Validation and Registration; Baseline

Section 6.01 Initial Verification (a) At least [**] days prior to the Commissioning of the Project, the Project Entity shall notify the Buyer in writing of the expected Project Commissioning Date. (b) Upon receipt of notification pursuant to Section 6.01(a), the Buyer has the right to arrange for an Initial Verification Report to be prepared for the Project by an Operational Entity. (c) The Buyer shall instruct the Operational Entity to provide a copy of the Initial Verification Report to both the Buyer and the Project Entity. (d) In the event that the Initial Verification Report indicates that the Project is not in compliance with the International UNFCCC/Kyoto Protocol Rules on monitoring requirements and, in the

CDM Handbook Armenia_FINAL Oct 2006_English.doc opinion of the Operational Entity, there is no reasonable prospect of such compliance being obtained within a further [**] months then the Buyer may terminate this Agreement by giving notice to the Project Entity.

Section 6.02 Operational Entity (a) The Project Entity shall select and contract with the Operational Entity to undertake Validation of the Project from a shortlist of Operational Entities mutually agreed with the Buyer. (b) The Project Entity shall inform the Buyer of the name of the Operational Entity it has contracted with to perform the Validation.

Section 6.03 Validation and Registration (a) The Project Entity [shall prepare the Project Design Document, including the Baseline Study, and submit the Project Design Document and any supporting documents as meant in paragraph 37 of Decission 17/CP.7 of the Marrakesh Accords to the Operational Entity for Validation.][has prepared the Project Design Document, including the Baseline Study, and has submitted the Project Design Document and any supporting documents as meant in paragraph 37 of Decision 17/CP.7 of the Marrakesh Accords to the Operational Entity on [date].] (b) [The Parties agree to seek a [seven (7) year Crediting Period to be renewed twice, adding up to a total Crediting Period of twenty-one (21) years][10 year Crediting Period]]. [The Crediting Period shall be [seven (7)][ten (10)] years.] (c) [The Project Entity shall instruct the Operational Entity to submit a request for Registration to the Executive Board in the form of a Validation Report. In the event that (i) the Operational Entity determines that the Project does not meet Validation requirements, or (ii) the Executive Board does not accept Registration of such Project, then the Project Entity shall make appropriate revisions and resubmit such Project for Validation and subsequent Registration.][The Project has been Registered on [date].] (d) Until the earlier of (i) the Kyoto Protocol entering into force, and (ii) the Executive Board accepting request for Registration in anticipation thereof, Registration shall be deemed to occur upon the issue by the Operational Entity of the Validation Report. Upon the occurrence of an event meant sub (i) or (ii) of this paragraph, the Project Entity shall instruct the Operational Entity in accordance with paragraph (c).

Section 6.04 Baseline In the event that a renewal of the Baseline is required by the International UNFCCC/Kyoto Protocol Rules at any time, the Project Entity shall arrange for such renewal of the Baseline.

ARTICLE VII Monitoring Plan

Section 7.01 Monitoring Plan (a) The Project Entity shall: (i) fully implement the Monitoring Plan set out in Schedule 3 no later than the Commissioning; (ii) install, operate and maintain the facilities and equipment, and employ and train staff, necessary for gathering all such data as may be required by the Monitoring Plan; (iii) establish and maintain data measurement and collection systems for all indicators listed in the Monitoring Plan; (iv) observe, implement and meet all other requirements contained in the Monitoring Plan, in particular those pertaining to environmental and social performance and operational management systems; and (v) ensure the Project is maintained and prepared to allow for Verification and Certification as required by the Monitoring Plan.

Section 7.02 Annual ER Report Each Year the Project Entity shall, within [**] days of the end of that Year, provide the Buyer with an Annual ER Report.

Section 7.03 Amendments to Monitoring Plan Each of the Buyer and the Project Entity may introduce amendments to the Monitoring Plan: (a) when such amendments are necessary to reflect any guidelines for Monitoring, Verification and reporting under International UNFCCC/Kyoto Protocol Rules;

CDM Handbook Armenia_FINAL Oct 2006_English.doc (b) when such amendments appear warranted by concerns identified by the Operational Entity; or (c) in the event that a renewal of the Project Baseline in accordance with the provisions of Section 6.04 leads to an outcome which is substantially different from that in the Verification Report, provided that such amendments shall only have effect upon the approval thereof by both Parties.

ARTICLE VIII Verification and Certification

Section 8.01 General Requirements All GHG Reductions generated by the Project, until the end of the term of this Agreement, shall be subject to Verification and Certification by an Operational Entity in accordance with and subject to the provisions of this Article.

Section 8.02 Operational Entity (a) The Project Entity shall select the Operational Entity to undertake Verification and Certification of the GHG Reductions from a shortlist of Operational Entities mutually agreed with the Buyer. (b) The Project Entity shall inform the Buyer of the name of the Operational Entity it has selected to perform the Verification and Certification.

Section 8.03 Verification and Certification (a) The Project Entity shall instruct the Operational Entity to undertake the Verification and Certification of the GHG Reductions each Year within [**] days after receipt by the Buyer of the Annual ER Report. (b) In the event that there is a discrepancy between the Annual ER Report and the Verification Report, the Verification Report shall prevail.

ARTICLE IX Project Operation and Management

Section 9.01 Project Operation The Project Entity shall: (a) carry out the Project with due diligence and efficiency and in conformity with appropriate administrative, financial, engineering and environmental practices and all other relevant requirements of this Agreement including without limitation the requirements of Section 7.01; (b) carry out the Project in accordance with the applicable International UNFCCC/Kyoto Protocol Rules; (c) at all times operate and maintain its plant, machinery, equipment and other property, and from time to time, promptly as needed, make all necessary repairs and renewals thereof, all in accordance with sound engineering, financial and environmental practices and the requirements of Section 7.01; (d) satisfy any obligations in respect of applications for all Consents and authorizations required by applicable law to implement, operate and maintain the Project; and (e) keep the Project insured in accordance with applicable law and prudent industry practice, which may be in the form of self-insurance.

ARTICLE X Certified Emission Reductions

Section 10.01 Authorization The Project Entity shall direct the Executive Board as to the forwarding of CERs up to an amount equal to the Contract CERs and, if applicable, Option CERs.

Section 10.02 General Communication The Parties agree that the Buyer shall serve as the focal point for all communications with regard to the Project with the Executive Board and the UNFCCC secretariat, in particular with regard to instructions regarding allocations of CERs upon Issuance of CERs. Nevertheless, all communications to the Executive Board shall be copied to the Project Entity. All communications received from the Executive Board shall be immediately forwarded to the Project Entity. Any

CDM Handbook Armenia_FINAL Oct 2006_English.doc Executive Board communications sent or received by the Project Entity concerning the Project shall be immediately forwarded to the Buyer.

Section 10.03 Establishment of Accounts (a) The Project Entity shall, if directed by the Buyer, establish an account to hold CERs under the national CDM registry of [**]. (b) The Buyer shall establish the Buyer´s Account prior to the date of the first Verification Report.

Section 10.04 Delivery of CERs Delivery of CERs under this Agreement takes place upon the CDM registry administrator forwarding such CERs to the Buyer's Account.

Section 10.05 Provisional Issuance of CERs Until the earlier of (i) the Kyoto Protocol entering into force, and (ii) the Executive Board, through the CDM registry administrator, issuing CERs in anticipation thereof, Issuance of CERs and delivery of such CERs hereunder shall be deemed to occur upon the issue by the Operational Entity of the Certification Report and the receipt by the Buyer of an irrevocable written statement by the Project Entity that it has assigned all its right, title and interest in the ERs certified in such Certification Report to the Buyer. Upon the occurrence of an event meant sub (i) or (ii) of this paragraph, the Buyer may instruct the Operational Entity to submit the Certification Reports issued prior thereto to the Executive Board and direct the Executive Board to have the CDM registry administrator forward CERs to the Buyer's Account up to an amount equal to the Contract CERs and, if applicable, Option CERs deemed to be issued and delivered under this Agreement. So long as neither the event meant sub (i), nor the event meant sub (ii) has occurred, the Buyer shall accept the assignment of ERs described in this Section as due compliance by the Project Entity with its obligation to deliver CERs under this Agreement up to the quantity of the ERs so assigned. Therefore the risk of the Kyoto Protocol not entering into force shall be for the account of the Buyer.

ARTICLE XI Representations and Warranties

Section 11.01 The Project Entity Representations The Project Entity represents and warrants to the Buyer in each of the following terms as at the date of this Agreement and at the Project Commissioning: (a) The Project Entity is duly organized and validly existing under the laws of [**] and is qualified to conduct its business in [**]. (b) The execution, delivery and performance of this Agreement are within its powers, have been duly authorized by all necessary action and do not violate or conflict with or require any consent or waiver under any of the terms or conditions in its governing documents or any material contract to which it is a party or by which any of its assets are bound or affected, or any law, rule, regulation, order, statement of claim, judgment, decree or other legal or regulatory determination applicable to it. (c) All Consents necessary for: (i) the Project Entity to perform its obligations under this Agreement; and (ii) the conduct of the business of the Project Entity and the construction, maintenance and operation of the Project, have been obtained and are in full force and effect. As of the Project Commissioning Date, the Project Entity has not received any notice of violation of any material Consents relating to the Project. (d) This Agreement constitutes legal, valid and binding obligations of the Project Entity enforceable in accordance with its terms. (e) There are no Bankruptcy Proceedings pending or being contemplated by the Project Entity or [, to its knowledge,] threatened against the Project Entity. (f) There are no claims, actions, proceedings or investigations pending or[, to the Project Entity’s knowledge,] threatened against or relating to the Project Entity before any competent authority that may materially adversely affect its ability to perform this Agreement. (g) The Project Entity is not subject to any judgment, rule, order, statement of claim, injunction or decree of competent authority that materially adversely affects its ability to perform this Agreement. (h) This Agreement, the execution and delivery of this Agreement and the fulfillment and compliance with the terms of this Agreement by the Project Entity will not materially conflict with

CDM Handbook Armenia_FINAL Oct 2006_English.doc any of, or require the consent of any person under, any loan or security agreement, or other material agreement to which the Project Entity is a party.

Section 11.02 Buyer Representations The Buyer represents and warrants to the Project Entity in each of the following terms as at the date of this Agreement and at the Project Commissioning Date: (a) It is duly organized and validly existing under the laws of [**] and is qualified to conduct its business in [**]. (b) The execution, delivery and performance of this Agreement are within its powers, have been duly authorized by all necessary action and do not violate or conflict with or require any consent or waiver under any of the terms or conditions in its governing documents or any material contract to which it is a party or by which any of its assets are bound or affected, or any law, rule, regulation, order, statement of claim, judgment, decree or other legal or regulatory determination applicable to it. (c) This Agreement constitutes the legal, valid and binding obligations of the Buyer enforceable in accordance with its terms. (d) There are no Bankruptcy Proceedings pending or being contemplated by it or[, to its knowledge,] threatened against the Buyer. (e) There are no claims, actions, proceedings or investigations pending or[, to the Buyer’s knowledge,] threatened against or relating to the Buyer before any competent authority that may materially adversely affect its ability to perform this Agreement. (f) The Buyer is not subject to any outstanding judgment, rule, order, statement of claim, injunction or decree of competent authority that materially adversely affects its ability to perform this Agreement. (g) This Agreement, the execution and delivery of this Agreement and the fulfillment and compliance with the terms of this Agreement by the Buyer will not materially conflict with any of, or require the consent of any person under, any loan or security agreement, or other material agreement, to which the Buyer is a party.

ARTICLE XII Failure to Generate or Transfer Minimum Amount

Section 12.01 Production Failure or Transfer Failure (a) Should the Project Entity know, or reasonably anticipate, at any point in time that there will be or has been a Production Failure or a Transfer Failure in respect of any given Year, then the Project Entity shall immediately give a notice to the Buyer advising the Buyer of this existing or anticipated failure. The notice must include the following information: (i) details as to the Project Entity's failure (or anticipated failure, as the case may be) to generate the Minimum Amount or to have the requisite number of Contract CERs forwarded to the Buyer; (ii) the total shortfall of GHG Reductions and/or Contract CERs; (iii) the likely delay before the shortfall can be recovered and the extent to which the Minimum Amount for the subsequent Year is to be affected; and (iv) any other details requested by the Buyer. (b) For the purposes of this Article, where the number of Contract CERs, excluding for the avoidance of doubt any Option CERs, forwarded to the Buyer exceeded the Minimum Amount in a preceding Year or Years such that the cumulative aggregate Minimum Amount has been met in the Year the shortfall has occurred or will occur, this shortfall shall not constitute a Production Failure or a Transfer Failure.

Section 12.02 Buyer’s Rights in Event of Production Failure or Transfer Failure On receipt of a notice from the Project Entity under Section 12.01 above, or upon an Annual ER Report or Verification Report finding that the Minimum Amount has not been generated for the Year to which that report relates, such that the Project Entity cannot have the requisite number of Contract CERs issued and forwarded to the Buyer, the Buyer may in its sole discretion: (i) accept the shortfall where it believes it can be recovered in the subsequent Year and that the Minimum Amount and the equivalent number of Contract CERs to be forwarded for the subsequent Year will not be affected; (ii) require the Project Entity to propose a plan of action to remedy the shortfall and which includes appropriate adjustments to the Minimum Amounts or number of Contract CERs to be forwarded in Schedule 2;

CDM Handbook Armenia_FINAL Oct 2006_English.doc (iii) require the Project Entity to, at its cost, provide Replacement CERs in the same quantity as the shortfall amount which will enable full delivery of the Contract CERs; or (iv) where such Production Failure or Transfer Failure is the result of an event of default under Section 13.01, terminate this Agreement in accordance with Article XIV.

Section 12.03 Rights in the Event of Gross Negligence, Fraud or Willful Misconduct (a) Where a Production Failure or Transfer Failure is a result of Gross Negligence, fraud or willful misconduct (including the provision of false or misleading representations or warranties) on the part of the Project Entity, then the Buyer shall, in addition to its rights under Section 12.02 be entitled to exercise the right to: (i) terminate this Agreement and seek to recover all costs and damages from the Project Entity; and (ii) recover liquidated damages from the Project Entity in an amount that represents a genuine estimate of the losses, damages and costs suffered by the Buyer as a result of the Production Failure or Transfer Failure. (b) In addition to Section 12.03(a) the Project Entity shall indemnify the Buyer for any additional liabilities incurred as a result of a Production Failure or Transfer Failure.

ARTICLE XIII Events of Default

Section 13.01 Events of Default (a) The occurrence at any time with respect to a Party of any of the following events constitutes an Event of Default with respect to such Party: (i) the Party fails to pay when due any amount payable by it under this Agreement and such failure is not remedied within [**] days after written notice of such failure is given to such Party; (ii) the Party fails to comply in any material respect with or perform in any material respect any of its other obligations under this Agreement other than the events that are specifically and expressly covered elsewhere in this Section 13.01 and (if it is apable of remedy) such failure is not remedied to the reasonably satisfaction of the other Party within [**] days after written notice of such failure is given to the Party by such other Party; (iii) any representation or warranty made or repeated or deemed to have been made or repeated by the Party in this Agreement proves to have been incorrect of misleading (in any material respect when made or repeated or deemed to have been made or repeated); (iv) the commencement of Bankruptcy Proceedings in respect of the [Party][Buyer][or][the Project Entity]; (v) the Project Entity fails to maintain all necessary Consents in respect of the Project or the performance of its obligations under this Agreement or fails to comply with all applicable laws; (vi) in respect of the Project Entity: (i) the failure to achieve Financial Close by [**]; (ii) the failure to notify the Project Commissioning Date in accordance with Section 6.01(a). (vii) The dissolution or liquidation of the [Project Entity][Buyer] or changes in the ownership structure of the [Project Entity][Buyer] in a manner that detrimentally affects its ability to [carry out the Project in the reasonable opinion of the Buyer][pay any amounts due hereunder in the reasonable opinion of the Project Entity]; (viii) Material delay in the construction of the Project or other materially adverse change in the status of the Project construction or delay in the commencement of initial operations which will prevent the Project from achieving the Commissioning on or prior to [**].

ARTICLE XIV Termination

Section 14.01 Suspension on Default Upon the occurrence of any Event of Default or at any time thereafter while such Event of Default subsists, the non-defaulting Party may by notice to the defaulting Party suspend performance of its obligations under this Agreement. If, prior to the exercise of rights under Section 14.02, such Event of Default is remedied, the notice served under this Section 14.01 shall be deemed to be withdrawn automatically.

CDM Handbook Armenia_FINAL Oct 2006_English.doc Section 14.02 Termination on Default Upon the occurrence of an Event of Default or at any time thereafter while such Event of Default subsists (subject to any applicable grace period), the non-defaulting Party may terminate this Agreement [**] days after the giving of written notice to de defaulting Party of its intention so to terminate.

Section 14.03 Non-Default Termination Either Party may terminate this Agreement on or at any time after the occurrence of any of the following events: (a) either Party’s obligations under this Agreement being suspended by reason of (i) an event of Force Majeure (other than Physical Force Majeure) continuing for more than [**] consecutive days or for more than [**] days in any Year or (ii) an event of Physical Force Majeure continuing for a period in excess of [**] days in any Year; or (b) a change in law that renders the Agreement illegal or unenforceable or results in a Party becoming unable to perform its obligations under this Agreement (except to the extent that the Parties agree to amend this Agreement pursuant to Section 15.09).

Section 14.04 Automatic Termination This Agreement shall terminate automatically on the Expiry Date.

ARTICLE XV Miscellaneous Provisions

Section 15.01 Amendments to the Agreement Except as otherwise provided herein, this Agreement may not be amended except by a written agreement executed by Buyer and the Project Entity.

Section 15.02 Confidentiality The Parties shall treat the terms of this Agreement and all information provided under or in connection with it (collectively, “Confidential Information”) as confidential and may not either disclose Confidential Information or use it other than for bona fide purposes connected with the Agreement without the prior written consent of the other Party, except that consent is not required for disclosure to: (a) directors or employees of a Party, as long as they in turn are required by that Party to treat the Confidential Information as confidential in favour of the other Party on terms substantially the same as those set out in this Section 15.02; (b) persons professionally engaged by a Party, as long as they (i) are subject to statutory professional secrecy rules or similar legal concepts under applicable law, or (ii) in turn are required by that Party to treat the Confidential Information as confidential in favour of the other Party on terms substantially the same as those set out in this Section 15.02; (c) the extent legally required by any government, agency or regulatory authority having jurisdiction over that Party; (d) any bank, other financial institution or rating agency to the extent required in relation to the financing of a Party’s business activities, as long as the bank or other financial institution or rating agency, as the case may be, is required by that Party to treat the Confidential Information as confidential in favour of the other Party on terms substantially the same as those set out in this Section 15.02 [and then only subject to prior [consultation with][notification to] the other Party]; (e) the extent required by any applicable laws, judicial process or the rules and regulations of any regulated market or recognised stock exchange [and then only subject to prior [consultation with][notification to] the other Party]; (f) any intended assignee of the rights and interests of a Party under this Agreement or to a person intending to acquire an interest in a Party or that Party’s holding company as long as the intended assignee or acquirer in turn is required by that Party to treat the Confidential Information as confidential in favour of the other Party on terms substantially the same as those set out in this Section 15.02; (g) the extent that the Confidential Information is in or lawfully comes into the public domain other than by breach of this Section 15.02; or (h) price reporting agencies for the calculation of an index as long as the identity of the other

CDM Handbook Armenia_FINAL Oct 2006_English.doc party is not revealed. It must also be a precondition of the disclosure agreement between a Party and the price reporting agency that only the price is released by the price reporting agency and not the identity of either Party.

Section 15.03 Notices (a) Any notice, communication, statement, request or correspondence required or permitted under the terms of this Agreement shall be in writing, in the English language (it being understood that any such communication in a language other than English shall be of no force and effect), and shall be delivered personally, or via courier, mail, or facsimile to the address and telecopier numbers provided below.

For the Project Entity: [**]

For the Buyer: [**]

(b) Any notice, communication, statement, request or correspondence made or delivered by a Party to the other Party hereunder will only be effective:

(i) if by way of fax, when received in legible form; or (ii) If by way of letter, when it has been delivered at the relevant address or [**] days after being deposited in the post postage prepaid in an envelope addressed to such other Party at that address.

Section 15.04 Evidence of Authority The Parties shall furnish to each other sufficient evidence of the authority of the person or persons who will, on their behalf, take any action of execute any documents required or permitted to be taken or executed by the respective Parties under this Agreement, and the authenticated specimen signature of each such person.

Section 15.05 Assignment (a) The Project Entity may not assign or transfer its rights or obligations under this Agreement to any party without the prior written consent of the Buyer, such consent not to be unreasonably withheld, except that the Project Entity may assign its right to receive payments from the Buyer for Contract CERs and Option CERs to a Third Party. Any other such purported assignment or transfer without such consent shall be deemed ineffective and void. (b) The Buyer may assign all or a part of its rights (including, but not limited to, the right to receive CERs, the option to purchase [Additional][Excess] ERs) under this Agreement at any time to any one or more parties.

Section 15.06 Survival of Provisions The respective rights and obligations of the Parties contained within Sections 12.03, 15.02, 15.03, 15.06, 15.10, 15.11 and 15.12 will survive any termination under this Agreement.

Section 15.07 Execution in counterparts; Language This Agreement shall be executed in two counterparts in the English language, each of which shall be an original.

Section 15.08 Entire Agreement This Agreement constitutes the entire agreement and understanding of the Parties with respect to its subject matter and supersedes and extinguishes any representations previously given or made with respect to its subject matter other than those given or made in the Agreement, but nothing in this section 15.08 limits or excludes any liability for fraud in relation to those representations.

Section 15.09 Severability If any provision or part of a provision of this Agreement is found by a court, arbitrator or other authority of competent jurisdiction to be void or unenforceable, that provision or part of a provision is to be deemed deleted from this Agreement and the remaining provisions to continue in full force and effect.

CDM Handbook Armenia_FINAL Oct 2006_English.doc The Parties shall in this event seek to agree upon a valid and enforceable provision or part of a provision to replace the provision or part of a provision found to be void and unenforceable.

Section 15.10 Applicable Law This Agreement is governed by and to be construed in accordance with [**] law.

Section 15.11 Arbitration The Parties agree that any difference or dispute arising under, out of or in connection with this Agreement that the Parties are unable to settle between themselves is to be resolved by arbitration in accordance with the rules for arbitration of disputes relating to natural resources and/or the environment of the Permanent Court of Arbitration, the number of arbitrators shall be three (3) and the place of arbitration shall be [**] . The language of arbitration is English. The appointing authority is the Secretary-General of the Permanent Court of Arbitration.

Section 15.12 Waiver of Sovereign Immunity Each Party hereby irrevocably agrees that, to the extent it or any of its assets or property has or hereafter may acquire any right of immunity as against the other Party or any other Person from any legal proceedings to enforce or collect upon this Agreement or related to any of its other liabilities or obligations in connection with this Agreement or the Project, it hereby expressly and irrevocably waives and agrees not to assert any such immunity.

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the date first above written. ______[**] By: Title: ______[**] By: Title:

SCHEDULE 1 DESCRIPTION OF THE PROJECT

SCHEDULE 2 MINIMUM AMOUNT AND CONTRACT CERs Year Period Minimum Amount of GHG Reductions to be generated by Project and forwarded to the Buyer as Contract CERs 1 Commissioning Date – [*] 2 3 4 5 6 7 8

SCHEDULE 3 MONITORING PLAN

SCHEDULE 4 OPTION NOTICE

CDM Handbook Armenia_FINAL Oct 2006_English.doc To: [Project Entity] [Address Details] [Additional][Excess] Emission Reductions Option In accordance with the Option to acquire [Additional][Excess] ERs under the Emission Reductions Purchase Agreement dated [**] (the "Agreement") between: [Project Entity] ("Project Entity") and (the "Buyer") The Buyer hereby exercises its Option to acquire [Additional][Excess] ERs from the Project Entity on the same terms and conditions as set out in the Agreement. The Buyer proposes the prevailing market price to be [EUR][US$] [**] per CER. Place: Dated: ______[**] By: Title:

SCHEDULE 5 Example Letter of Approval Host Country Letter head of Designated National Authority To: the Operational Entity Undersigned, as a legal and authorized representative of the Designated National Authority ("National Authority") of the [**] ("Host Country"), [Preambles, references, political statements.] referring to: proposal number. , named , hereafter to be referred to as ‘the CDM project’, located location> by [**], hereafter to be referred to as ‘Project Entity’, dated , declares that: 1. Host Country is a Party to the Kyoto Protocol. 2. National Authority recognises the CDM project to be a Clean Development Mechanism project in accordance with article 12 of the Kyoto Protocol. 3. National Authority confirms that the CDM project contributes towards realization of the country’s sustainable development goals. 4. National Authority confirms that it is participating in the CDM project voluntarily. 5. National Authority authorizes the Project Entity to participate in the CDM project. 6. National Authority irrevocably accepts the issue of all CERs generated through the CDM project to the Project Entity or its designee during the [**] year crediting period of the CDM project, subject to the deduction corresponding to the share of proceeds to cover administrative expenses and to assist in meeting cost of adaptation as meant in article 12 paragraph 8 of the Kyoto Protocol. For the avoidance of doubt, this acceptance is deemed to be the request to the CDM registry administrator meant in paragraph 6 sub (c) of Appendix D to Decision 17/CP.7 of the Marrakesh Accords. 7. National Authority authorizes the Project Entity to communicate with the CDM executive board on its behalf on the allocation of CERs as provided for in this Letter of Approval. 8. In case the Kyoto Protocol will not enter into force or for as long as the Kyoto Protocol has not entered into force, Host Country agrees that the Project Entity is entitled to, and authorized to sell and transfer, any rights, title and interest in respect of greenhouse gas emission reductions generated by the CDM project. Drafted , Signed For the Host Country: Full Name Country: Name:

CDM Handbook Armenia_FINAL Oct 2006_English.doc Annex 3 Example CDM Emission Reductions Purchase Agreement issued by

Danish Environmental Protection Agency of the Ministry of the Environment

CDM Handbook Armenia_FINAL Oct 2006_English.doc PARTIES: This Emission Reductions Purchase Agreement is entered into the […] day of […]200[… ]

BETWEEN:

1 [Insert name of Project Proponent] a company incorporated in [Country] (Registered No. […]) whose [registered office]/[principal place of business] is at [address] (“Project Proponent”); and 2 THE GOVERNMENT OF THE KINGDOM OF DENMARK (“Denmark”) represented by and acting through the DANISH ENVIRONMENTAL PROTECTION AGENCY (“DEPA”)

Whereas:

RECITALS

A The Government of the Kingdom of Denmark has ratified the United Nations Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol to the UNFCCC, and the Government of [Host Country] has ratified the UNFCCC and [ratified]/[intends to ratify] the Kyoto Protocol.

B. [Only where applicable: The Government of the [Host Country] and the Government of the Kingdom of Denmark have signed a Memorandum of Understanding (MoU) in …….. on ………[or: intend to sign a MoU]

C. The Project Proponent intends to carry out the Project for which the Project Design Document and baseline study (Annex I) have been validated as set forth in the Validation Report (Annex III) and ac-cording to which the Project is expected to generate Certified Emission Reductions that are additional to any that would occur in the absence of the Project.

D. The Host Country and DEPA on behalf of the Kingdom of Denmark [have approved]/[intend to ap-prove] the Project as CDM project under Article 12 of the Kyoto Protocol.

E. The Project Proponent wishes to sell and DEPA wishes to purchase for the account of Denmark upon the terms and conditions of this Agreement Certified Emission Reductions generated by the Project.

5. Definitions "Additional CERs" means reductions in GHG emissions that the Project achieves during the Crediting Period above and beyond the total number of Contract CERs as stated in Article 3.5, and that qualify as CERs;

"Annual CERs" means the number of Contract CERs to be delivered by the Project each Year as stated in Article 3.5;

"Baseline" means the scenario described in the baseline study, included in the Project Design Document, that reasonably represents the anthropogenic emission by sources of GHGs that would occur in the absence of the Project;

"Certification" means the written assurance by the Operational Entity that the Project has achieved the GHG Reductions as reported in the Verification Report.

CDM Handbook Armenia_FINAL Oct 2006_English.doc "Certification Report" means the document setting out the Certification.

"Certified Emission Reductions" or "CERs" means a unit issued pursuant to Article 12 of the Kyoto Protocol and the Kyoto Protocol Rules and is equal to one metric tonne of CO2 equivalent;

"Clean Development Mechanism" of "CDM" means the mechanism as defined by the Kyoto Protocol Rules;

"Contract CERs" means the CERs to be delivered by the Project in accordance with the terms of this Agreement as stated in Article 3.5;

"COP/MOP" means the Conference of the Parties to the UNFCCC serving as the Meeting of the Parties to the Kyoto Protocol.

"Crediting Period" means the period in which GHG Reductions from the Baseline are verified and certified by a Designated Operational Entity for the purpose of issuance of CERs and which shall commence after the first Emission Reductions are generated by the Project Proponent;

"Cumulative CERs" means the added Annual CERs to be delivered by the Project each Year during the Crediting Period as stated in Article 3.5;

“Denmark’s National Registry” means the account or the accounts in the national registry of the Denmark to be established under the Kyoto Protocol Rules;

"Designated Operational Entity" or "DOE" means an entity designated by the COP/MOP based on the recommendation by the Executive Board as qualified to validate proposed CDM project activities and/or to verify and certify GHG Reductions.

"Emission Reductions" means any right, interest, benefit or allowance to emit arising from or in connection with any reduction of GHGs by the Project below the Baseline and measured in metric tonnes of CO2 equivalents as monitored in accordance with the Monitoring and Verification Plan;

"Executive Board" means the executive board of the Clean Development Mechanism that is established pursuant to the Kyoto Protocol Rules;

"Generation Failure" means the failure for whatever reason of the Project Proponent to generate in accordance with Article 3.5. at least the number of Annual CERs for a particular Year;

"Greenhouse Gases" or “GHGs” means the six Greenhouse Gases listed in Annex A to the Kyoto Protocol;

"Host Country" means [the Host Country];

"Kyoto Protocol" or "Protocol" means the Protocol to the UNFCCC adopted at the Third Conference of the Parties to the UNFCCC in Kyoto, Japan on December 11, 1997 as may be amended;

"Kyoto Protocol Rules" means Article 12 of the Kyoto Protocol and the relevant rules, decisions, modalities and guidelines adopted thereunder;

"Letter of Credit" means the letter of credit issued or to be issued in favour of DEPA by …. Bank in accordance with Article 5.3;

" Letter of Approval" means the letter through which the Host Country and the Kingdom of Denmark approve the Project for the purposes of Article 12 of the Kyoto Protocol [and a copy of which is attached as Annex IV to this Agreement];

CDM Handbook Armenia_FINAL Oct 2006_English.doc "Lien" includes mortgages, pledges, charges, privileges and priorities of any kind;

"Monitoring" means activities on the basis of measurements established by the Project Proponent or an entity contracted by the Project Proponent, through which data assessing the reductions in GHG emissions resulting from the Project are collected and recorded pursuant to the terms of the Monitoring and Verification Plan;

"Monitoring and Verification Plan" means the set of requirements to be applied in the monitoring of GHG emissions and the verification process in accordance with the Kyoto Protocol Rules; a copy of the Monitoring and Verification Plan is included as Annex II to this Agreement;

"Monitoring Report" means a document indicating the annual results of the monitoring process conducted by the Project Proponent or an entity contracted by the Project Proponent in accordance with the Monitoring and Verification Plan and calculating the amount of reductions in GHG that the Project has generated during the relevant Monitoring Period;

"Monitoring Period" means each of the periods for which the amount of reductions in GHG that the Project has generated is calculated, each of such periods corresponding to a Year;

"Project" means the project activity at the installation, described in the PDD relating to the [Project Name];

“Project Commissioning Date” means the date from which the Project is considered to be technically able to generate Emission Reductions;

" Project Design Document" or "PDD" means a description of the project included in Annex I of this Agreement covering, inter alia the description of the Project, baseline study and Monitoring and Verification Plan;

"Registration" means the formal acceptance by the Executive Board of a Project as a CDM project activity;

"Share of Proceeds" means any share of the Certified Emission Reductions deducted by the CDM registry administrator in accordance with the Kyoto Protocol Rules to cover administrative expenses and to assist in meeting the costs of adaptation;

"Taxes" means all national, state, regional, provincial, local, foreign and other net income, gross income, gross receipts, sales, use, advalorem, transfer, franchise, profits, licence, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, fuel, gas import, customs, duty or other taxes, fees, assessments or charges of any kind whatsoever imposed by any governmental entity whether in effect at the time of this Agreement or thereafter imposed together with any interest and any penalties additions to tax or additional amounts with respect thereto;

"Transfer Failure" means the failure for whatever reason of the Project Proponent to transfer to DEPA in accordance with Article 3.5. at least the number of Annual CERs for a particular Year;

"UNCITRAL" means the United Nations Commission on International Trade Law;

"United Nations Framework Convention on Climate Change" or "UNFCCC" means the United Nations Framework Convention on Climate Change adopted in New York on May 9, 1992;

"Validation" means the assessment by a Designated Operational Entity of the project design, including its Baseline, to determine the compliance of the Project with the Kyoto Protocol Rules;

CDM Handbook Armenia_FINAL Oct 2006_English.doc "Validation Report" means a report prepared by the Designated Operational Entity of the Validation;

"Verification" means the periodic independent review and ex post assessment by a Designated Operational Entity of the monitored GHG reductions that have occurred as a result of the Project during a specified Year, being carried out in conformity with the Monitoring and Verification Plan and in a manner fully consistent with the Kyoto Protocol Rules;

"Verification Report" means a report prepared by a Designated Operational Entity pursuant to a Verification, which reports the findings of the verification process and indicates the Certified Emission Reductions that the Project has generated during the relevant Year;

"Year" corresponds to a calendar year.

6. Sale and acquisition of Certified Emission Reductions Subject to the terms and conditions set forth in this Agreement the Project Proponent agrees to sell, free and clear of any Lien and DEPA agrees to buy the total number of Contract CERs as set forth in Article 3.5 together with any Additional CERs in respect of which Denmark exercises its option pursuant to Article 6.4.

7. Generation and Delivery of Certified Emission Reductions, Transfer of Legal Title

7.1 The Project Proponent shall deliver all Certified Emission Reductions generated by the Project until the total number of Contract CERs as set forth in Article 3.5 has been delivered. Each Year, the delivery shall at least amount to the number of Annual and Cumulative CERs as set out for that Year in Article 3.5.

7.2 CERs are considered to be delivered upon receipt of these units in the account of DEPA in Denmark’s National Registry.

7.3 Within 15 (fifteen) days of the submission of a Certification Report relating to the Contract CERs to the Executive Board, the Project Proponent shall direct the Executive Board as to the forwarding of CERs to the account of DEPA in Denmark's National Registry.

7.4 Transfer of Legal Title

7.4.1 Legal title to any CERs purchased under this Agreement shall pass from the Project Proponent to the Government of the Denmark upon receipt of the CERs in the account of DEPA in Denmark’s National Registry.

7.4.2 The Project Proponent further agrees that if, for whatever reason, any CERs cannot be forwarded to the account of DEPA in Denmark’s National Registry then the Project Proponent shall forward them to a registry account as DEPA shall direct.

7.5 The Project Proponent shall deliver as a minimum the Annual CERs and Cumulative CERs generated by the Project in accordance with the timetable specified in the following schedule:

CDM Handbook Armenia_FINAL Oct 2006_English.doc Year Year Cumulative Year generated Annual CERs verified Transferred CERs

Total no. of Contract --- CERs

8. Purchase Price and Payments The purchase price for CERs shall be EUR [- in letters -] ([number]) per CER delivered.

8.1 All Contract CERs purchased under this Agreement shall be delivered to DEPA free of any charges, levies or taxes.

8.2 DEPA shall pay the purchase price in annual payments. Each payment shall be in an amount equal to the purchase price multiplied by the number of CERs delivered minus the amount which serves as reimbursement of the advance payment in accordance with Article 5.6.

8.3 Each payment shall be made in EUR via wire transfer into such account as the Project Proponent shall designate in each invoice in accordance with Article 4.5.

8.4 All payments shall be subject to an invoice. The invoice shall state as a minimum the following:  name of the Project,  designation of the account into which payments shall be made,  number of Contract CERs delivered for which payment is requested in accordance with Article 4.3.,  price per unit of Contract CERs in accordance with Article 4.1.,  amount of the payment to be made in accordance with Article 4.3.

8.5 Subject to presentation of an invoice in accordance with Article 4.5, payments for CERs shall be made within forty-five (45) days from their receipt in the account of DEPA in Denmark’s National Registry.

9. Advance Payment

9.1 DEPA will make an advance payment calculated as xx % of the purchase price times the total number of Contract CERs, cf. Art 3.5.and 4.1 of this Agreement. The advance payment is totalling EUR [- in letters -] ([number]). Subject to reporting by the Project Proponent in accordance with Article 9.2, and to the milestones laid down in the schedule attached as Annex [XX] being fulfilled, the advance is due on the Project Commissioning Date. [Optional: insert instead of last sentence: "Subject to reporting by the Project Proponent in accordance with Article 9.2, and to the milestones laid down in the schedule attached as Annex [XX] being fulfilled,, the advance will be paid in xx [insert number of instalments] instalments, each instalment totalling EUR [- in letters -] ([number]), the instalments being due on [insert dates]"].

9.2 The advance payment [or: "The instalments", if that option is chosen], will only be made against an invoice ["invoices", in the case of instalments], stating as a minimum the following  name of the Project,  designation of the account into which payments shall be made,

CDM Handbook Armenia_FINAL Oct 2006_English.doc  amount of the payment to be made in accordance with Article 5.1.

9.3 Together with the invoice [add in the case of instalments: "for the first instalment"], the Project Proponent shall provide DEPA with a guarantee in the form of a Letter of Credit, issued by a financial institution satisfactory to DEPA, for an amount equal to the amount of the [add in the case of instalments: "total"] advance payment plus interest at a rate of …%.

9.4 DEPA may exercise its rights under the Letter of Credit in the event that the Project Proponent failed to reimburse to DEPA all or part of the advance payment plus interest accrued in accordance with Articles 5.7. and 5.8.

9.5 The advance [replace in the case of instalments by: "The first instalment …"] will be paid within thirty (30) days of receiving the invoice and Letter of Credit. [add in the case of instalments: The other instalments will be paid within thirty (30) days of receiving an invoice."]

9.6 DEPA shall subtract the advance payment from the annual payments pursuant to Article 4.3. The annual deductions shall be made in sums equal to the total amount of the advance payment divided by [insert number] number of Years.

9.7 DEPA shall have the right to reclaim the advance payment in case this Agreement is terminated before all or part of the advance payment has been reimbursed to DEPA in accordance with Article 5.6. In such event, the Project Proponent shall reimburse to DEPA any outstanding amount of the advance payment within a period of thirty (30) days from the date of termination of the Agreement. In the event the Project Proponent fails to reimburse DEPA in accordance with this provision, Article 5.4 shall apply.

9.8 In the event that any of the events of default specified under Article 16 occurs before all or part of the advance payment has been reimbursed to DEPA in accordance with Article 5.6 and that event of default has not been cured ten (10) days before expiry of the time period agreed to under Article 17.3, the Project Proponent shall, upon written notice by DEPA, reimburse any outstanding amount of the advance payment plus interest to DEPA. In the event the Project Proponent fails to reimburse DEPA in accordance with this provision, Article 5.4. shall apply. The same shall apply in the event of a Generation or Transfer Failure giving rise for DEPA to terminate this Agreement pursuant to Article 13.3 (a) (iv).

9.9 In the event of a Generation or Transfer Failure giving rise for DEPA to terminate this Agreement pursuant to Article 13.4 (a) before all or part of the advance payment has been reimbursed to DEPA in accordance with Article 5.6, the Project Proponent shall, upon written notice by DEPA, reimburse the outstanding amount of the advance payment plus interest to DEPA. In the event the Project Proponent fails to reimburse DEPA in accordance with this provision, Article 5.4. shall apply.

10. Additional CERs (subject to negotiation on a case-by-case basis)

10.1 The Project Proponent hereby grants DEPA an option exercisable at DEPAs sole discretion to purchase [an amount of up to [insert number]] Additional CERs.

10.2 The price for Additional CERs shall be EUR ……(- in letters -) per Additional CER delivered.

10.3 The Project Proponent shall offer such Additional CERs to DEPA in writing within thirty (30) days from the receipt of the Verification Report by DEPA indicating that Additional CERs have been generated.

10.4 DEPA may exercise its option to purchase Additional CERs, in whole or in part, by giving written notice to the Project Proponent within ninety (90) days from the date that the Additional

CDM Handbook Armenia_FINAL Oct 2006_English.doc CERs have been offered in accordance with Article 6.3. If DEPA does not exercise its option within that time limit, or declines it at the price offered and stated in Article 6.2, the Project Proponent shall thereafter be allowed to offer the Additional CERs to a third party, but granting a right of first refusal for DEPA, at the price offered by or proposed to the third party, before entering into an agreement with such third party. DEPA shall exercise its right of first refusal within (30) days after written confirmation by the Project Proponent, that a third party has made a firm offer. Such written confirmation shall include documentation that a third party has made a firm offer and of the price offered by it.

10.5 Without prejudice to Article 6.2 and to Article 6.4 insofar as the price for Additional CERs is concerned, all other provisions of this Agreement with regard to the Registration, Monitoring, Verification, Certification, purchase, payment for, delivery and transfer of Contract CERs shall apply accordingly to Additional CERs.

11. Registration

11.1 [The Parties agree to seek a [seven (7) year Crediting Period to be renewed twice, adding up to a total Crediting Period of twenty-one (21) years] OR: [10 year Crediting Period]]. OR: [The Crediting Period shall be [seven (7)][ten (10)] years.]

11.2 The Project Proponent shall instruct the Operational Entity to submit a request for Registration to the Executive Board in the form of the Validation Report. In the event that (i) the Operational Entity determines that the Project does not meet Validation requirements, or (ii) the Executive Board does not accept Registration of such Project, then the Project Proponent shall make appropriate revisions and resubmit such Project for Validation and subsequent Registration.

12. Communication with the CDM Executive Board and the Convention Secretariat

12.1 The Project Proponent and the DEPA agree that the Project Proponent shall serve as the focal point for all communications with regard to the Project with the Executive Board and the UNFCCC Secretariat, in particular with regard to instructions regarding allocations of CERs upon issuance of CERs.

12.2 The Project Proponent shall communicate with the CDM Executive Board and the UNFCCC secretariat with respect to the Contract CERs and the Additional CERs in a manner consistent with this Agreement.

12.3 The Project Proponent shall keep DEPA fully informed at all times as to any communications with the CDM Executive Board and the UNFCCC secretariat by providing a written copy of such communication in case it has been submitted in writing, or by email or telephone in case the communication has taken place verbally over the telephone or in person, within five (15) days of such communication occurring.

13. Supervision of Project Implementation Prior to the Project Commissioning Date 13.1 The Parties have agreed on a schedule for Project implementation prior to the Project Commissioning Date. This schedule is annexed to this Agreement as Annex [XX] and includes appropriate milestones regarding the planning, design and construction of the facilities prior to the Project Commissioning Date. This schedule takes appropriate account of the delivery schedule for Annual CERs and Cumulative CERs as included in Article 3.5.

13.2 The Project Proponent shall report in quarterly intervals on progress made in relation to the schedule for Project implementation prior to the Project Commissioning Date starting at the date this Agreement is executed by both Parties and has entered into full force and effect.

13.3 Article 15.1 lit. j applies.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 13.4 DEPA’s rights under this Article shall also include the right to have an initial Project assessment carried out prior to the commencement of operations. This initial Project assessment shall ensure that the Project has been constructed in accordance with the Project Design Document and its Monitoring and Verification Plan. In case DEPA so wishes, it may appoint, contract and pay an entity for carrying out this initial assessment. DEPA shall inform the Project Proponent of its intention to make use of this right in a timely manner.

14. Monitoring of GHG emission reductions The Parties agree that the careful and continuous monitoring of the reduction in GHG emissions achieved by the Project is essential for the successful implementation of this Agreement.

14.1 The Project Proponent shall ensure that the monitoring activities are carefully and continuously performed in conformity with the Monitoring and Verification Plan and the Kyoto Protocol Rules.

14.2 The Project Proponent shall submit the Monitoring Reports concerning each Year to DEPA annually prior to 1st of February the Year following the respective Monitoring Period.

14.3 All costs in connection with the Monitoring of reductions in GHG emissions and preparation of the Monitoring Reports shall be borne by the Project Proponent.

15. Verification and Certification of Emission Reductions

15.1 All Emission Reductions generated by the Project shall be subject to periodic Verification and Certification

15.2 The Verification and Certification of Emission Reductions generated by the Project shall be conducted as promptly as possible and not later than 31st March of each Year.

15.3 The Project Proponent will arrange for Verification and Certification by a Designated Operational Entity. All costs incurred by the Designated Operational Entity in connection with the Verification and Certification shall be borne by the Project Proponent.

15.4 In the event that there is a discrepancy between the annual Monitoring Report and the Verification Report, the Verification Report shall prevail.

16. Regulatory Costs

16.1 The Share of Proceeds shall be borne by the Project Proponent.

16.2 For the avoidance of doubt, all costs, fees and charges associated with the Project and which are imposed as a consequence of the regulatory framework of the UNFCCC and/or the Kyoto Protocol Rules, by the Executive Board, a Designated Operational Entity, or any other similar organisation or entity (the "Regulatory Costs") shall be borne by the Project Proponent, unless otherwise foreseen in this agreement. This includes, inter alia, the costs associated with the Validation, Registration, Monitoring and Verification of Emission Reductions, the Certification, issuance and transfer of Certified Emission Reductions and, the case being, the renewal of the Baseline and/or the Crediting Period of the Project.

16.3 Unless agreed otherwise by the Parties, where DEPA has agreed with the Project Proponent to pay such costs on behalf of the Project Proponent (but without implying any obligation on the part of DEPA to do so), the Project Proponent shall reimburse DEPA for any and all such payments made on its behalf. Reimbursement is subject to the submission by DEPA to the Project Proponent of proof for such payment. DEPA shall have the right to subtract any such payments from

CDM Handbook Armenia_FINAL Oct 2006_English.doc the annual payment pursuant to Article 4.3 in the Year following the payment of such costs on behalf of the Project Proponent.

16.4 All costs other than the Regulatory Costs, accrued to each of the Parties in preparation of this Agreement, shall be borne by each of the Parties themselves.

17. Generation and/or Transfer Failure Generation Failure: a. Should the Project Proponent know, or reasonably anticipate, at any point in time that there will be or has been a Generation Failure in any given Year, then the Project Proponent shall immediately give a notice to DEPA advising DEPA that the Annual CERs as set out in Article 3.5 may or will not be produced or have not been produced for that Year. The notice must include the fol-lowing information: (i) details as to the Project Proponent’s failure (or anticipated failure, as the case may be) to generate the Annual CERs; (ii) the total (anticipated) shortfall of Contract CERs; (iii) the likely delay before the shortfall can be re-covered and the extent to which the amount of Cumulative CERs as set out in Article 3.5 for the subsequent Year is to be affected; and (iv) any other details related to the shortfall as may be reasonably requested by DEPA. b. For the purposes of this Article, where the amount of Annual CERs as set out in Article 3.5 was exceeded in the preceding Year or Years such that the amount of Cumulative CERs has been met in the Year the shortfall has occurred or will occur, this shall not constitute a Generation Failure.

17.1 Transfer Failure: a. Should the Project Proponent know, or reasonably anticipate, at any point in time that there may be a Transfer Failure in any given Year for any reason whatsoever, then the Project Proponent shall immediately give a notice to DEPA advising DEPA that the Project Proponent has been or may or will be unable to transfer to DEPA an amount of Contract CERs equivalent to the Annual CERs as set out in Article 3.5 for that Year. The notice must include the following information: (i) details as to the Project Proponent’s failure (or anticipated failure, as the case may be) to transfer the Annual CERs; (ii) the total (anticipated) shortfall of Contract CERs to be transferred; (iii) the likely delay before the shortfall can be re-covered and the extent to which the amount of Cumulative CERs as set out in Article 3.5 for the subsequent Year is to be affected; and (iv) any other details related to the shortfall as may be reasonably requested by DEPA. b. For the purposes of this Article, where the amount of Annual CERs as set out in Article 3.5 was exceeded in the preceding Year or Years such that the amount of Cumulative CERs has been met in the Year the shortfall has occurred or will occur, this shall not constitute a Transfer Failure.

17.2 Rights in Event of Generation or Transfer Failure a. On receipt of a notice from the Project Proponent under Article 13.1 or Article 13.2 above, or upon a Verification Report finding the amount of Annual CERs as set out in Article 3.5 has not been generated for the Year to which that report relates, such that the Project Proponent cannot transfer the requisite number of Contract CERs, DEPA may in its sole discretion: (i) accept the shortfall where it believes it can be recovered in the subsequent Year and the Annual and Cumulative CERs for the subsequent year will not be affected; (ii) require the Project Proponent to propose a plan of action to remedy the shortfall and which includes appropriate adjustments to the number of Annual and Cumulative CERs as stated in Article 3.5, which will only be adopted under this Article if it is accepted by DEPA; (iii) require the Project Proponent to, at its cost, provide replacement CERs in the same quantity as the shortfall amount which will enable full delivery on time of the Contract CERs; (iv) where such Generation or Transfer Failure is the result of an uncured event of default under Article 16, terminate the Agreement in accordance with Article 17. b. In accordance with Article 4.3., in the event of a Generation or Transfer Failure the annual payment pursuant to Article 4.3 shall be adjusted accordingly.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 17.3 Rights in the event of gross negligence, fraud or wilful misconduct Where a Generation or Transfer Failure is a result of gross negligence, fraud or wilful misconduct (including the provision of false or misleading representations or warranties) on the part of the Project Proponent, then the Project Proponent shall be required to, at its cost, provide replacement CERs in the same quantity as the shortfall amount which will enable full delivery on time of the Contract CERs, or, to cover all costs for the procurement of such replacement CERs by DEPA. In addition, the Project Proponent shall be required to pay a penalty of twenty-five percent (25%) of the price DEPA would have paid of the Contract CERs not generated and/or transferred. Alternatively, DEPA may also choose to terminate the Agreement and seek to recover all costs and damages from the Project Proponent.

17.4 In case the CDM Executive Board or any other committee established under the Kyoto Protocol declares any of the delivered Contract CERs to be ineligible, non-compliant, invalid or restricted in their use due to the Project Proponent's failure to comply with the prevailing requirements under the Kyoto Protocol Rules, the Project Proponent shall provide replacement CERs to DEPA within sixty (60) days from the day the Contract CERs have been declared ineligible.

18. Representations and Warranties Each Party warrants and represents to the other Party that it has the power and authority to execute and deliver this Agreement and to perform its obligations under it.

18.1 The Project Proponent warrants, as of the date of this Agreement, that: a. All of the information provided to DEPA regarding the Project and in particular in the Project Design Document is true and correct and may be relied upon by DEPA; b. There are no actions, suits or proceedings pending or, to the Project Proponent's knowledge, threatened against or affecting the Project Proponent or the Contract CERs before any court or administrative body or arbitral tribunal which might materially and adversely affect the ability of the Project Proponent to meet and carry out its obligations under this Agreement; c. It has no outstanding agreements or liabilities, contingent or otherwise (including taxes), that might materially and adversely affect its financial condition; d. It has full title to all of the Emission Reductions to be generated by the Project free of any encumbrance; e. It is authorized to enter into agreements regulating the sale of CERs; and f. It has not sold, transferred, assigned, licensed, disposed of, granted or otherwise created any interest in the Emission Reductions or Certified Emission Reductions to be generated by the Project to any third party.

19. Obligations of the Parties The Project Proponent hereby covenants and agrees that it shall: a. Take the steps required under the Kyoto Protocol Rules concerning the generation, Monitoring, and Verification of reductions in GHG emissions from the Project; b. Fully co-operate with DEPA and any Host Country authorities and take such action as reasonable and appropriate to ensure the generation, Verification, and Certification of Emission Reductions and transfer of Certified Emission Reductions to DEPA in accordance with the terms of this Agreement, and the Kyoto Protocol Rules; c. Satisfy all obligations in respect of licenses, permits, consents, concessions and authorizations required to implement and operate the Project; d. Implement and operate the Project with due diligence and efficiency and in accordance with sound and ethical administrative, financial, environmental, social and technical practices and in compliance with Host Country legislation, and so as to achieve the Certified Emission Reductions sold and assigned as part of this Agreement; e. Maintain the legal rights of use of all lands and infrastructure necessary to implement and operate the Project and provide promptly funds, facilities, utilities, materials, equipment and other resources required for the implementation and operation of the Project;

CDM Handbook Armenia_FINAL Oct 2006_English.doc f. Insure and keep insured with financially sound and reputable insurers acceptable to DEPA all of its assets and business related to the Project against those risks that would be insured by a prudent company engaged in a business of the nature and scope of the Project, including any further insurance required by applicable law; g. Coordinate with DEPA for the contracting of Designated Operational Entity to conduct the periodic Verification and Certification in accordance with Article 11 of this Agreement; h. Grant any authorized representative of DEPA at no extra cost, access to the Project site and any relevant information for the purposes of implementing this Agreement. This right of DEPA shall also be applicable before the Project Commissioning Date; i. Immediately inform DEPA if the Project is hindered or in danger of being hindered and thereby causing risk for the generation and/or transfer of the Certified Emission Reductions; j. Report on progress on the implementation of the Project and generation of Emission Reductions on an yearly basis, no later than the 30th January of each Year, and whenever an unexpected event occurs that changes the expected implementation plan originally submitted to DEPA; k. Not sell, transfer, assign, license, dispose of, grant or otherwise create any interest in the Emission Reductions or Certified Emission Reductions generated by the Project to any third party other than in accordance with this Agreement; and l. Be responsible for and indemnify DEPA against all and any third party out-of-pocket costs incurred in association with the Project, including without limitation the Registration, Monitoring and Verification of the Emission Reductions, and Certification and delivery of the Certified Emission Reductions resulting from the Project, following the execution and entry into force of this Agreement.

19.1 DEPA hereby covenants and agrees that it shall Fully co-operate with the Project Proponent, the [Representative of the Host Country] and any Designated Operational Entity and take such action as reasonable and appropriate to ensure the proper preparation of all the documentation required for the development of the Project as a CDM Project, as well as for the Verification, Certification, transfer and acquisition of Emission Reductions in accordance with this Agreement, and the Kyoto Protocol Rules.

20. Events of Default Each of the following events shall constitute an event of default on part of the Project Proponent: a. The implementation of the Project, in the reason-able opinion of DEPA, is significantly behind the schedule referred to in Article 9 annexed to this Agreement as Annex [XX] which makes it im- probable that the Project will generate the Con-tract CERs committed by the Project Proponent to DEPA by [insert date ]; b. The Project Commissioning Date occurs more than [xx] months later than [insert date], if no later date has been agreed with DEPA in writing, c. The Project Proponent fails to report to DEPA on the progress of the Project according to Article 9.2. and fails to provide the due report within two weeks after having been requested to do so, d. The Project Proponent does not start generating any Contract CERs by [insert date]; e. The Project Proponent fails to generate and de-liver to DEPA in three consecutive Years at least seventy five (75) per cent of the Annual CERs due under this Agreement; f. Breach of any covenant or agreement under this Agreement, other than the failure to generate and deliver Certified Emission Reductions a in accordance with Article 3.5; g. Breach of any representation and warranty under this Agreement; h. Violation of any terms and conditions imposed by the Host Country in accordance with its domestic legislation that would, in the reasonable opinion of DEPA, adversely affect the generation of Certified Emission Reductions by the Project or the delivery of Certified Emission Reductions generated by the Project to DEPA or cause reputational risk for the Kingdom of Denmark; i. The Designated Operational Entity determines during Verification that the Project does not comply with requirements imposed by the Government of the Host Country affecting the generation of Certified Emission Reductions and such situation is not remedied within ninety (90) days; j. Gross violation or wilful misconduct or criminal conduct established by a court; or

CDM Handbook Armenia_FINAL Oct 2006_English.doc k. The dissolution, de-establishment, liquidation, in-solvency or bankruptcy of the Project Proponent, or such changes in its ownership structure that in the reasonable opinion of DEPA detrimentally affect its ability to carry out its obligations under this Agreement.

20.1 Each of the following events shall constitute an event of default on part of DEPA: a. It fails to make a payment within thirty (30) days of the agreed date as set forth in Article 4.7.; or b. It defaults on its obligations to co-operate with the Project Proponent, the Host Country and/or the Designated Operational Entity involved in the Project.

21. Notice and Cure Upon the occurrence of any event of default specified in Article 16 above, either Party may exercise one or more rights provided in this Agreement or under the applicable law defined in Article 22. The selection of any one or more rights or remedies shall not operate as a waiver of any other rights or remedies provided.

21.1 The Party invoking an event of default shall deliver to the other Party a written notice of default specifying in reasonable detail the condition upon which the notice is based.

21.2 Each Party shall have sixty (60) days following the delivery of a notice of default to cure the identified default to the reasonable satisfaction of the other Party. A failure to do so shall give rise to a right to pursue any one or more of the remedies mentioned in Articles 17.4. and 17.5. The Parties may mutually agree to extend the time for curing the default.

21.3 If any event of default by the Project Proponent occurs which has not been cured in accordance with Article 17.3, DEPA may: a. suspend any pending payments under this Agreement until the event or events which gave rise to suspension of payments have ceased to exist, or it otherwise decides to resume the payments, b. terminate this Agreement upon written notice to the Project Proponent.

21.4 In the event of default by DEPA which has not been cured in accordance with Article 17.3, the Project Proponent may: a. suspend the transfer of any Contract CERs until DEPA has fulfilled its obligations, b. terminate this Agreement upon written notice to DEPA.

22. Force Majeure

22.1 In the event of Force Majeure, fulfilment of the obligations of both Parties arising from the Agreement shall be suspended in whole or in part without the Parties having to pay compensation to each other provided that they take all reasonable steps to limit the effects of Force Majeure.

22.2 The Party invoking Force Majeure shall promptly inform the other Party of an instance of Force Majeure in writing and submit reasonable evidence.

22.3 Both Parties shall be entitled to terminate this Agreement in case it is evident that its implementation would be postponed by more than twelve months as a result of Force Majeure. 22.4 For the purposes of the Agreement, Force Majeure shall be a situation beyond the reasonable control of the Parties and include events such as wars, war-like actions, riots, revolutions, fires, floods and natural disasters. Lack of funds shall not be treated as an event of Force Majeure.

22.5 Unexceptional weather conditions that do not cause serious physical damage to the Project or interruptions in the logistical chain that affect the facilities shall not be considered events beyond the reasonable control of the Parties for the purposes of this Agreement.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 22.6 The withdrawal by the Host Country from the United Nations Framework Convention on Climate Change and/or the Kyoto Protocol shall be considered as Force Majeure situations for the purposes of this Agreement.

22.7 The suspension of the rights and obligations under this Agreement shall not affect the obligation of the Project Proponent to monitor, if possible, the reductions in GHGs in accordance with Article 10.

23. Taxes Any Taxes under the law of the Host Country that may be payable with regard to the sale and purchase of the Contract CERs pursuant to this Agreement shall be borne by the Project Proponent.

24. Revision of the Baseline

24.1 In the event that revision of the Baseline is required by the Kyoto Protocol Rules, including in order to obtain the renewal of the Crediting Period, the Project Proponent shall arrange for such renewal of the Baseline at its own costs.

24.2 The Project Proponent will promptly inform DEPA of the outcome of the revision of the Baseline.

24.3 The Parties shall jointly agree on the basis of the outcome of the revision of the Baseline how it affects the implementation of this Agreement.

25. Information The Parties shall, from time to time and at the request of any one of them, exchange information with regard to the progress of the Project, the purpose of this Agreement, and their respective obligations. They shall promptly inform each other of any event or situation, which may affect the Project.

25.1 Each Party shall be allowed to disclose such information regarding the Project and this Agreement as required by law, the United Nation Framework Convention on Climate Change and the Kyoto Protocol Rules.

25.2 Each Party may also disclose or divulge non-proprietary information regarding the project to third parties. Information related to the Determination of whether the reduction in GHGs by the Project are additional, Baseline methodology and its application and the assessment of environmental and social impacts of the Project, cannot be considered as proprietary or confidential. The Parties shall keep each other informed of any such disclosure. 25.3 The Parties shall own and have copyright jointly to all documents related to the Project, except in the event of default, in which case the defaulting party will lose its ownership of these documents. This also applies with respect to the PDD unless the project development costs were borne by the Project Proponent alone, or until the Project Proponent has reimbursed DEPA for any project development costs that may have been borne by DEPA. In those cases the Project Proponent shall own and have copyright to the PDD.

25.4 The Parties shall not disclose or divulge any information regarding the commercial aspects of this Agreement to third parties. Information related to the terms of this Agreement, including prices, obligations and liabilities are considered confidential. Except as otherwise agreed between the Parties in writing, this confidentiality undertaking will remain in force until [insert date - depending on crediting period plus …].

26. Liability DEPA shall not in any way be liable for actions carried out by the Project Proponent or any possible subcontractor, damages caused by the implementation of the Project and/or costs arising from

CDM Handbook Armenia_FINAL Oct 2006_English.doc actions and negligence contravening legal and/or social obligations in the Host Country or any other consequential damages.

27. Applicable Law and Settlement of Disputes The rights and obligations of DEPA and the Project Proponent under this Agreement shall be governed by the laws and regulations of the Kingdom of Denmark.

27.1 All disputes or differences arising in connection with this Agreement shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force.

27.2 The appointing authority shall be designated by the Permanent Court of Arbitration in The Hague, Netherlands.

27.3 The number of arbitrators shall be three.

27.4 The arbitration shall take place in Copenhagen/Denmark.

27.5 The language of the arbitration shall be English.

27.6 The award of the arbitrators shall be final and binding upon the Parties.

27.7 Any disagreement between the parties as to the meaning, operation or effect of this Article 22 shall be heard by the tribunal that would (if the application to consolidate were successful) decide the dispute.

28. Notices Any notice or communication under the terms of this Agreement shall be in writing, in English and shall be delivered personally, or via mail or facsimile to the addresses, fax numbers or e-mail addresses provided below. For [the Project Proponent]:

Address: Phone: Fax: e-mail:

For DEPA: Address: Strandgade 29, DK - 1401 Copenhagen K Fax: e-mail:

29. Variation This Agreement may be varied or modified only by a written Agreement between the Parties. The variation shall enter into force upon signature by DEPA and the Project Proponent.

30. Assignment The Project Proponent may not assign, delegate or transfer its rights or obligations under this Agreement to any third party without the prior written consent of DEPA. DEPA shall not withhold its consent without reasonable cause.

30.1 Without prejudice to the obligations under this Agreement, DEPA may assign, transfer or novate this Agreement to other state entities of the Government of Denmark.

31. Entry into Force and Termination The entry into force of this agreement is subject to availability of an unconditional Letter of Approval (LoA) signed by the National Focal Point of the Host Country, and ratification of the Kyoto Protocol by the Host Country.

CDM Handbook Armenia_FINAL Oct 2006_English.doc 31.1 Subject to para. 1., this Agreement shall enter into force on the date of the signature by both Parties. Where the conditions pursuant to para.1 are not fulfilled at the time of the signature of this Agreement, and subject to para. 3, the Agreement shall enter into force on the day of the signature of an unconditional Letter of Approval, or on the day of ratification of the Kyoto Protocol by the Host Country, whichever event comes later.

31.2 Where the conditions pursuant to para. 1 are not fulfilled within three (3) months from the signature of this Agreement, DEPA shall have the right to terminate the Agreement.

31.3 Once the Agreement has entered into force, it remains valid, unless cancelled or terminated as provided herein, until all the obligations have been duly fulfilled by both parties.

Done at on the in four originals in the English language and duly signed by the authorized representatives of DEPA and [the Project Proponent],

………………………….. ………………………………….

[Project Proponent] Danish Environmental Protection Agency

ANNEXES I Project Design Document incl. baseline study II Monitoring and Verification Plan III Validation Report IV Letter of Approval, if available [XX ] Schedule for Project implementation prior to the Commissioning Date

CDM Handbook Armenia_FINAL Oct 2006_English.doc Annex 4 Contact Details DNA Armenia

CDM Handbook Armenia_FINAL Oct 2006_English.doc Head of Designate National Authority for CDM in Armenia:

Vardan Ayvazyan Minister of Nature Protection of RA Government Building #3, Republic Square Yerevan 375010, Republic of Armenia Tel.: (37410) 521099, 585469 Fax: (37410) 583933 E-mail: [email protected] www.mnp.am

DNA Contact Person:

Aram Gabrielyan Head of Environmental Protection Department Ministry of Nature Protection of RA UNFCCC Focal Point Government Building #3, Republic Square Yerevan 375010, Republic of Armenia Tel.: (37410) 583934, 583920 Fax: (37410) 583933 E-mail: [email protected] www.mnp.am, www.cdm.nature-ic.am

CDM Handbook Armenia_FINAL Oct 2006_English.doc Annex 5 References

CDM Handbook Armenia_FINAL Oct 2006_English.doc CDM Information and Guidebook. Prepared as part of the UNEP project CD4 CDM, 2nd edition, June 2004

Legal Issues Guidebook to the Clean Development Mechanism. Prepared as part of the UNEP project CD4CDM, 2nd edition June 2004

CDM CAPSSA Guidelines, prepared by F. Thomas, S. Ullrich (Germany) in collaboration with: Baker & McKenzie (UK), ECON (France), ESD (UK), CEEEZ (Zambia), EECG (Botswana), ERI (S. Africa), MNRE (Swaziland), SCEE (Zimbabwe), SAD-Elec (Mozambique), prepared as part of the project “CDM Capacity Building Amongst the Private Sector in Southern Africa, EC Contract No. 4.1041/D/01-006-S12.327940, 2003

List of Documents relating to the United Nations Framework Convention On Climate Change (UNFCCC), the Kyoto Protocol, Country Reports and all COP meetings reports. See: http://www.unfccc.int. Access documents by clicking on the “Resources” button.

Information on Clean Development Mechanisms (CDMs); Meetings of the Executive Board and Project Activity Cycle see: http://unfccc.int/cdm/

The Project Design Document (PDD) must contain certain elements. To see the latest version of a PDD look at the following website: http://cdm.unfccc.int/Reference/Documents

See list of approved Methodologies for PDDs at:- http://cdm.unfccc.int/methodologies/appro/ed

Decision 17/CP/7 available at http://cdm.unfccc.int/Reference/Documents/cdmmp/English/mpeng.pdf The Marrakech Accords were adopted by the first Meeting of the Parties (MOP) and are available to download at http://www.unfccc.int in Document FCCC/CP/2001/13.

The Montreal Meeting Decisions 3/CMP1, 4/CMP1, 5CMP1, 6/CMP1 and Decision 7CMP1 are available at http://unfccc.int/resource/docs/2005/cmp1/eng/08a01.pfd.

The CDM Executive Board (EB) was established at the seventh session of the Conference of Parties (COP) in 2001. See: http://cdm.unfccc.int/

International Transaction Log (ITL) Decision of 12CMP1 available at http://unfccc.int/resource/docs/2005/cmp1/eng/08a02pdf.

COP Meetings see: http://unfccc.int/meetings/COP

ERPAs IETA Master Agreement – ERPA latest version. Their website gives the original version of the EPRA Master Agreement and the subsequent changes. See: www.ieta.org/ieta/www/pages/index.php?ldSitePages58

CDM Handbook Armenia_FINAL Oct 2006_English.doc IETA International Emissions Trading Association see: www.ieta.org/ieta; www.ieta.org/ieat/www/pages/getfile

Delhi GHG Forum 31/1/ -1/2/2006 on Emission Reduction Purchase Agreements, see: http://www.wbcsd.org/web/projects/climate/ghg-forum2006/cormierl.pdf

Countries Japan has signed ERPAs with for CDM Project are listed here www.jcarbon.co.jp/JCF_HP/04.new/04new.html EU-ETS European Union Emissions Trades

CDM Registry Issuance of CERs, see: http://cdm.unfccc.int/Issuance/IssuanceCERs.html

CERs Issued, http://cdm.unfccc.int/Issuance/cers_iss.html

CDM Handbook Armenia_FINAL Oct 2006_English.doc