ADDITIONALITY OF THE CLEAN DEVELOPMENT MECHANISM: INSIGHTS FROM CENTRAL AMERICAN CASE STUDIES A thesis submitted by Abby Lindsay In partial fulfillment of the requirements For the degrees of Master of Arts in Law and Diplomacy in The Fletcher School of Law and Diplomacy and Master of Arts in Urban and Environmental Policy and Planning TUFTS UNIVERSITY May 2009 © 2009, ABBY LINDSAY ADVISORS: William Moomaw, The Fletcher School Justin Hollander, Urban and Environmental Policy and Planning ! ABSTRACT As part of the global response to climate change, the Clean Development Mechanism (CDM) was developed to involve developing countries in emission reductions by allowing them to sell developed countries carbon credits generated from emission-reducing projects. The CDM theoretically should help developing countries implement renewable energy, thus contributing to sustainable development, so this study focuses on the interaction between renewable energy, the CDM, and small developing countries. It analyzes the barriers to projects and the decision-making factors that determine whether or not projects are pursued in Honduras and Costa Rica. A host of barriers were found throughout the study, ranging from low electricity production revenues to investment barriers. The major decision-making factors were government policies, financial viability with and without revenue from the credits, and other barriers. Furthermore, since the carbon credits can be traded into cap and trade systems, the emission reductions must be additional. This study uses the barriers and decision-making factors to analyze the additionality of the CDM projects in comparison to the theory. The results found that while the additionality claims of the CDM projects were not false, in most cases the reasons cited would not likely have prevented the projects from being implemented. Implementation is more complex than the theory, and the next round of climate negotiations must take the difficulty ensuring strict environmental additionality into account. ii ACKNOWLEDGMENTS Thank you to my two advisors, Bill Moomaw and Justin Hollander, for all of your support and guidance throughout this study. Thank you to Tufts Institute of the Environment for supporting the costs of this research through the Graduate Research Fellowship. Additionally I would like to thank all the people who allowed me to interview them or discuss this project with. iii TABLE OF CONTENTS Abstract ii Acknowledgments iii Table of Contents iv List of Tables vi List of Figures vii Acronyms viii 1. Introduction 1 2. Clean Development Mechanism Background 3 2.1. Introduction 3 2.2. International Negotiations and Mechanisms to Address Climate Change 4 2.3. The Clean Development Mechanism 7 2.3.1. CDM Overview and Negotiation 7 2.3.2. Current CDM Projects 10 2.3.3. Key Actors 13 2.3.4. Project Cycle 14 2.3.5. CDM Markets 16 2.4. Additionality 17 2.4.1. Additionality Basics 17 2.4.2. Additionality Determination 18 2.4.3. Debate over Additionality 21 3. Methodology 24 3.1. Project Development 24 3.2. Research Overview and Boundaries 25 3.3. Case Study Methodology 28 3.4. Database and Literature Review 30 3.5. Research Trips for Stakeholder Interviews 31 3.6. Analysis 33 iv 4. Honduras 34 4.1. Honduras Energy Sector Overview 34 4.2. Energy and Renewable Energy Legislation 38 4.3. Energy Institutions 40 4.4. The CDM in Honduras 42 4.4.1. Overview 42 4.4.2. Current situation 43 4.4.3. Actors 44 4.5. Barriers to Renewable Energy 46 4.6. Barriers to the CDM 53 5. Costa Rica 54 5.1. Costa Rican Energy Sector Overview 54 5.2. Energy and Renewable Energy Legislation 57 5.3. Energy Institutions 59 5.4. The CDM in Costa Rica 60 5.4.1. Overview 60 5.4.2. Current situation 62 5.4.3. Actors 62 5.5. Barriers to Renewable Energy 64 5.6. Barriers to the CDM 68 6. Additionality 69 6.1. Introduction 69 6.2. Additionality Analysis 70 6.3. Main Decision-Making Factors 77 6.3.1. Introduction 77 6.3.2. Government Policies 78 6.3.3. Financial Viability 79 6.3.4. Financial Viability with CERs 81 6.3.5. Other Barriers 83 7. Conclusions 84 Appendix I. Sample Interview Questions 91 Reference List 92 v LIST OF TABLES Table 1. Regional distribution of CDM projects 12 Table 2. Country statistics for Honduras and Costa Rica 27 Table 3. Sources used to meet each objective 29 Table 4. Honduran electric capacity 2006-2007 38 Table 5. Registered CDM projects in Honduras 43 Table 6. Registered CDM projects in Costa Rica 62 Table 7. Additionality analysis of large-scale projects 72-74 Table 8. Additionality analysis of small-scale projects 76 vi LIST OF FIGURES Figure 1. Growth of total expected accumulated 2012 CERs 10 Figure 2. Growth of expected accumulated 2012 CERs by country 11 Figure 3. CDM project cycle 14 Figure 4. Additionality determination 19 Figure 5. Historical electricity generation in Honduras by fuel, 1971 to 2005 36 Figure 6. Historical electricity generation in Costa Rica by fuel 57 vii ACRONYMS AAU Assigned Amount Units CDM Clean Development Mechanism CER Certified Emission Reduction CO2e Equivalent carbon dioxide COP Conference of the Parties DNA Designated National Authority DSE Energy Sector Direction, Costa Rica (Dirección Sectorial de Energía) EB Executive Board (of the CDM) ENEE National Electric Company, Honduras (Empresa Nacional de Energía Electrica) ERPA Emissions Reduction Purchase Agreement ERU Emission Reduction Unit GEF Global Environment Facility GHG Greenhouse gas ICE Costa Rican Institute of Electricity, Costa Rica (Instituto Costarricense de Electricidad) IMN National Meteorological Institute, Costa Rica (Instituto Meteorológico Nacional) IPCC Intergovernmental Panel on Climate Change IRB Internal Review Board LoA Letter of Approval MINAET Ministry of the Environment, Energy and Telecommunications, Costa Rica (Ministerio de ambiente, energía y telecomunicaciones) MoP Meeting of the Parties NGO Non-governmental organization OCIC Costa Rican Office of Joint Implementation (Oficina Costarricense de Implementación Conjunta) PDD Project Design Document UN United Nations UNFCCC United Nations Framework Convention on Climate Change viii ! 1. Introduction The links between the environment and development are increasingly exposed: climate change is causing visible changes and threatening people’s livelihoods; biomass used for energy is contributing to deforestation and emissions; and poverty is closely tied with economic growth and resource use. When Honduras was hit by Hurricane Mitch many regions of the country were devastated. Poverty increased drastically, and health and water outbreaks ravaged the region. Energy use has historically been correlated with quality of life (Najam and Cleveland 2003; WRI 2002),1 but we are now calling into question the development progression that is generally based on increasing fossil fuel use for industrialization. There is widespread agreement that the “warming of the climate system is unequivocal” and “most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic [greenhouse gas] concentrations” (IPCC 2007). Energy presents an interesting paradox when viewed in the light of sustainable development: increased energy access can reduce vulnerability and increase social and economic welfare, but at the same time, the majority of the energy supply has significant negative environmental effects from the emission of greenhouse gases (GHG). To abate climate change, actions will need to be taken to reduce GHG emissions from energy sources in all countries around the world, even though developed countries are responsible for the majority of historical emissions. 1 As measured by the relationship between energy use in 1000 million tonnes of oil equivalent and GDP in million US dollars in 1998. 1 The international community agreed to reduce global greenhouse gas emissions by signing the Kyoto Protocol in 1997, where developed countries committed to target emission reductions. With the Kyoto Protocol, the Clean Development Mechanism (CDM) was developed as a market mechanism to reduce emissions and encourage sustainable development by helping finance emission-reducing projects in developing countries through carbon credits that could be put towards developed country commitments. Since its formal start in 2005, the CDM has grown rapidly; there are currently 4,252 projects either registered or in the process, which will amount to 7,125,124 Mt CO2e reduced by 2020 (UNEP Risoe Centre 2008). CDM projects have been touted as having great potential to aid in the economic development of countries on a national scale and help reduce poverty when coupled with energy access (Olsen 2007; Schneider 2007; Borges da Cunha, et al. 2007), but the implementation is often more difficult than the theory. One of the core principles is additionality, which states that in order for the credits to be used towards developed country commitments, the projects must not have occurred in the absence of the CDM. While additionality helps the Mechanism function on the global scale, the decision- making factors that determine whether or not a project is pursued do not always follow the theory. Much of the attention of the CDM has been on the large developing countries that provide the largest potential for emissions reductions, such as India, China, and Brazil, but it is often argued that less developed countries have a greater need for CDM projects because they are less affluent, lack universal 2 energy access, and will be hit hard by climate change impacts (Roberts 2007). This study focuses on the interaction between renewable energy, the CDM, and small developing countries in Central America—specifically Honduras and Costa Rica. Why were CDM projects pursued there? What were the barriers? Did the CDM provide sufficient incentive to tip the balance to decide to implement renewable energy over a fossil fuel source? The decision-making factors and challenges to implementing renewable energy CDM projects are analyzed through a series of stakeholder interviews in Honduras and Costa Rica.