Central American Carbon Finance Guide
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Central American Carbon Finance Guide GreenStream Network Ltd. 2010 Edition Energy and Environment Partnership with Central America Central American Carbon Finance Guide (c) copyright 2010, GreenStream Network Plc 3rd edition, November 2010 Contacts: [email protected] [email protected] and [email protected] This Guide may be freely quoted for non-commercial purposes, provided that this Guide is acknowledged as the source and authors’ copyright is recognised . Central American Carbon Finance Guide FOREWORD The United Nations Framework Climate Change Convention (UNFCCC) has encouraged industrialized countries to stabilize GHG emissions and the Kyoto Protocol has committed them to do so. As another initiative to contribute to this effort and launched during the World Summit on Sustainable Development of the United Nations in Johannesburg 2002, the Energy and Environment Partnership with Central America (EEP) has been supporting the Central American countries to promote the renewable energies and energy efficiency with the purpose of not only mitigate the global climate change but also contribute to the sustainable development of the region. After seven years of successful operation the EEP continue striving after reduction of the emissions that are causing climate change and supporting the region to start a new era of global green growth. Started as a pilot initiative, the EEP has proved to be a best practice and concrete example of future climate change action financing after the Copenhagen unsuccessful Climate Summit 2009. EEP has established an outstanding number of 238 projects that are addressing the use of all the available renewable energy resources across the region, involving all kind of project developers and different size of projects. In addition, the Regional Forum on a relevant renewable energy topic that the EEP organizes twice a year is already a regional point of reference where important players of the private sector, governmental and non-governmental organizations gathers to share experiences and knowledge about state-of-the-art renewable energy technologies. The EEP’s third phase (2010 – 2012) is an initiative of the Ministry for Foreign Affairs of Finland, the Austrian Development Cooperation, the European Union, the Central American Commission for Environment and Development (CCAD) and the Secretary- General of the System for Central American Integration (SG-SICA). Also, as a good example of a successful Partnership, the Central American model is being replicated in 8 Eastern and Southern African countries, 4 Mekong river countries, 4 Andean region countries and Indonesia. Considering the renewable energy resources potential and the actual dependency of fossil fuel across the region, the EEP is proud to present the third edition of the Central American Carbon Finance Guide. This has been an important tool that have allowed to potential renewable energy project developers to know more about the Clean Development Mechanism (CDM), the current status and the future of international carbon markets, the impacts of carbon finance to project financing and to get an updated description of the energy sector in each of the Central American countries. For more detailed information about the EEP, I’m cordially inviting you to visit our web site at www.sica.int/energia Dr. Markku Nurmi Director General. Ministry of the Environment, Finland Chairman of Steering Committee of the Energy and Environment Partnership 3 Central American Carbon Finance Guide ACKNOWLEDGEMENTS This Guide is a result of a participatory process involving parties from Central America, Finland and elsewhere. The authors are grateful for all the suggestions and help they have received from many individuals and organisations while writing this guide. We would like to thank especially the Energy and Environment Partnership with Central America (EEP) that made this Guide possible. Many persons within the Partnership have provided valuable comments and support during the process. We would like to express our special gratitude to Chairman of the Steering Committee of the Partnership, Dr Markku Nurmi and Mr. Peter Waldsam from the Austrian Cooperation for Development, Ms. Anu Hassinen from the Finnish Ministry of Foreign Affairs, Mr. Ismael Antonio Sánchez and Ms. María Eugenia Salaverría, as well as all the members of the Steering Committee representing all the Central American countries Carbon Finance and Clean Development Mechanism are still relatively new instruments that are constantly evolving and uncertainty of international climate politics play a key role in their development. Therefore a lot of the information is outdated already when printed. We have tried to incorporate in this guide the most recent developments in the field to the extent possible. Feedback from the users of this Guide is most welcome in this process. Principal authors of this third version of the guide are Mr. Roland Magnusson, Oliver Quireza, Juha Ruokonen and Anna-Maija Sinnemaa from GreenStream Network Ltd with strong support from the Steering Committee members. However all mistakes and errors are those of authors. External financing for this guide was provided by the Ministry for Foreign Affairs of Finland and the Austrian Cooperation for Development through the Energy and Environment Partnership with Central America. Authors appreciate the support. 4 Central American Carbon Finance Guide TABLE OF CONTENTS Foreword to the Third Edition ................................................. 3 Acknowledgements ................................................................. 4 Table of Contents .................................................................... 5 Abbreviations .......................................................................... 8 1 Introduction ..................................................... 10 1.1 Background ....................................................................................... 10 1.2 Purpose of the Central American Carbon Finance Guide ................. 11 1.3 Structure of the Guide ....................................................................... 11 1.4 UNFCCC and the Kyoto Protocol .................................................... 11 2 CDM Projects .................................................... 15 2.1 What is CDM? .................................................................................. 15 2.2 Definition of Small-scale CDM Projects .......................................... 15 2.3 Participation Requirements for CDM Projects ................................. 16 2.4 CDM Project Cycle ........................................................................... 17 2.5 Project Preparation, Validation and Registration .............................. 18 2.5.1 Project Preparation and Host Country Approval .............................. 18 2.5.2 Project Design Document (PDD) ...................................................... 19 2.5.3 Baseline Methodology ...................................................................... 20 2.5.4 Additionality ..................................................................................... 25 2.5.5 Crediting Period and Duration of the Project ................................... 26 2.5.6 Prior Consideration ........................................................................... 27 2.5.7 Monitoring Plan and Methodology ................................................... 27 2.5.8 Environmental Impacts ..................................................................... 28 2.5.9 Stakeholder Comments ..................................................................... 28 2.5.10 Project Validation and Registration .................................................. 29 2.6 Project Implementation Phase ........................................................... 29 2.6.1 Monitoring ........................................................................................ 31 2.6.2 Verification and Certification ........................................................... 31 2.6.3 Issuance of Certified Emission Reductions ...................................... 31 2.6.4 Forwarding ........................................................................................ 32 2.7 Sale of the Emission Reductions ....................................................... 32 2.7.1 Prices and Risks ................................................................................ 32 2.8 Costs Related to the CDM Project Cycle .......................................... 34 3 Financing Small-Scale Renewable Energy Projects ........................................................... 35 3.1 Introduction ....................................................................................... 35 3.2 Impacts of Carbon Finance to Project Financing .............................. 35 3.3 Project Financing .............................................................................. 36 3.4 Types of Capital ................................................................................ 37 3.4.1 Equity Capital ................................................................................... 37 3.4.2 Debt capital ....................................................................................... 37 3.4.3 Mezzanine Capital ............................................................................ 38 3.5 Financial project cycle ...................................................................... 38 3.5.1 Pre-feasibility Studies ......................................................................