70806 TECHNICAL GUIDE TO ACTIONS ON GLOBAL WARMING Public Disclosure Authorized AND CLEAN DEVELOPMENT MECHANISM (CDM) IN SRI LANKA Public Disclosure Authorized B.M.S. BATAGODA S.P. Nissanka Suren WIJEKOON Avanthie JAYTILAKE Ministry of Environment and Natural Resources 82, Rajamalwatta Road Public Disclosure Authorized Battaramulla Sri Lanka And Sri Lanka Carbon Finance Assist Programme World Bank The CF Assist Program Carbon Finance Unit The World Bank Public Disclosure Authorized TECHNICAL GUIDE TO CLEAN DEVELOPMENT MECHANISM IN SRI LANKA TABLE OF CONTENTS CHAPTER 1 - INTRODUCTION TO CLIMATE CHANGE UNFCC, KYOTO PROTOCOL AND CDM RULES IN RELATION TO SRI LANKA .............................................................................................................. 3 1.1. INTRODUCTION.......................................................................................................................................... 3 1.1.1 Greenhouse effect ................................................................................................................................ 3 1.2 GLOBAL CLIMATE IN THE 20TH CENTURY ..................................................................................................... 4 1.3 TEMPERATURE CHANGES ............................................................................................................................... 5 1.4 CHANGES DURING THE 20TH CENTURY DUE TO GLOBAL WARMING ............................................................ 8 1.5 PROJECTED CLIMATE CHANGE IN THE 21ST CENTURY...................................................................................... 9 1.6 PROJECTIONS FOR FUTURE CHANGES IN PRECIPITATION AND SEA LEVEL ....................................................... 9 1.7 PROJECTIONS OF EXTREME CLIMATE AND WEATHER EVENTS ......................................................................... 9 1.8 POTENTIAL IMPACTS OF CLIMATE CHANGE ON DEVELOPING COUNTRIES ....................................................... 9 1.9 CONVENTION ON CLIMATE CHANGE ............................................................................................................ 11 1.10 KYOTO PROTOCOL .................................................................................................................................. 12 1.11 FLEXIBILITY MECHANISM ........................................................................................................................ 14 1.12 MODALITIES, RULES AND GUIDELINES FOR CLEAN DEVELOPMENT MECHANISMS ................................. 15 1.13 PROJECT DESIGN ..................................................................................................................................... 16 1.13.1CDM eligibility requirements for Sri Lanka .......................................................................................... 16 1.13.2 Project Identification ............................................................................................................................ 18 1.13.3 Project Idea Note (PIN) ........................................................................................................................ 18 1.13.4 Project Design Document (PDD) ......................................................................................................... 18 1.14 ADDITIONALLY ....................................................................................................................................... 20 1.15 SUSTAINABLE DEVELOPMENT CRITERIA .................................................................................................. 22 1.16 BASELINE SCENARIO ............................................................................................................................... 22 1.17 BASELINE APPROACH .............................................................................................................................. 22 1.18 BASELINE METHODOLOGY ...................................................................................................................... 23 1.19 BASELINE FOR SMALL-SCALE CDM PROJECT ACTIVITIES ........................................................................ 23 1.20 CREDITING PERIOD .................................................................................................................................. 25 1.21 LEAKAGE ................................................................................................................................................ 25 1.22 VALIDATION ........................................................................................................................................... 25 1.23 REGISTRATION ........................................................................................................................................ 25 1.24 VERIFICATION ......................................................................................................................................... 26 1.25 CERTIFICATION ....................................................................................................................................... 26 1.26 MONITORING AND VERIFICATION PLAN .................................................................................................. 26 1.27 DESIGNATED OPERATIONAL ENTITY ........................................................................................................ 26 1.28 CDM IN FORESTRY SECTOR ..................................................................................................................... 28 1.28.1 Afforestation.................................................................................................................................. 28 1.28.2 Reforestation ................................................................................................................................. 28 1.28.3 Non-permanence ........................................................................................................................... 28 1.28.4 Eligible forest CDM Projects under Bonn Agreement .................................................................. 28 1.28.5 Major decisions in the Marrakech Accords related to CDM ........................................................ 29 CHAPTER 2 - REVIEW THE INTERNATIONAL CARBON MARKET AND PROGRESS OF VARIOUS FLEXIBLE MECHANISMS UNDER KYOTO PROTOCOL TO IDENTIFY SPECIFIC NICHES FOR SRI LANKA .................................................................................................................................................................... 30 2.1 ECONOMIC THEORIES OF FLEXIBILITY MECHANISMS ................................................................................... 30 2.1.1 Marginal abatement costs (MAC) ........................................................................................................... 31 2.1.2 CDM transaction costs............................................................................................................................ 32 2.1.3 Prices of CERs ........................................................................................................................................ 33 2.1.4 Impacts of CDM on project IRR.............................................................................................................. 34 2.2 GLOBAL CARBON MARKET POTENTIAL UNDER THE KYOTO PROTOCOL ....................................................... 35 2.2.2 CERs buyers ......................................................................................................................................... 36 2.2.2 CERs sellers .......................................................................................................................................... 37 2.2.3 CDM projects registered up to September 2006 ..................................................................................... 38 2.2.4 Sector distribution of CDM projects ....................................................................................................... 40 2.3 IMPACTS OF EMISSIONS TRADING ON CDM ...................................................................................................... 42 ii TECHNICAL GUIDE TO CLEAN DEVELOPMENT MECHANISM IN SRI LANKA CHAPTER 3 - OVER ALL SRI LANKAN CDM OPPORTUNITIES AND POTENTIAL ............................ 43 3.1 NATIONAL POTENTIAL OF CDM ...................................................................................................................... 43 3.2 HYDRO POWER (MINI AND MICRO-HYDRO)..................................................................................................... 44 3.3 WIND AND SOLAR POWER ............................................................................................................................... 45 3.4 BIOMASS .......................................................................................................................................................... 46 3.4.2 Absorption Refrigeration ........................................................................................................................ 46 3.4 4. Household Sector ................................................................................................................................... 47 3.5 ENERGY EFFICIENCY ....................................................................................................................................... 47 3.6 INDUSTRY .......................................................................................................................................................