The Board was mandated by the parties to the Kyoto Protocol meeting at Copenhagen in December to “consolidate, clarify and revise, as appropriate, its guidance on the treatment of national policies” and was reminded that it is down to host countries to design and implement any policy that favours lower-carbon technologies. This followed the controversial rejection of 10 Chinese wind projects – later cut down to eight – ahead of the December meeting amid questions about the tariffs paid to these projects.

“The rules are so ridiculous, they promote inefficient projects,” said Des Godson from EEA Fund Management in London, which advises carbon fund Trading Emissions. “You can’t have a situation where if I build a wind farm on the windy side of a hill and get an IRR [internal rate of return] above a given benchmark I can’t get CERs [certified emission reductions], but if I build it on the other side and get an IRR below the benchmark, I can get CERs.

“The CDM is promoting the least efficient projects to be built. The current interpretation of additionality wastes capital and undermines the environmental integrity of the CDM. The CDM should support the best projects not the worst.”

At issue is how the EB assesses so-called E+ and E- policies – whether a policy favours emissions-intensive technologies (E+) or less carbon-intensive technologies (E-). Despite its policy not being fleshed out, the Board is pushing for Designated Operational Entities (DOEs), when checking project proposals before submitting them for registration, to determine whether any change in national policy has affected the tariff paid to the project – and last week asked the DOEs to reassess this for 25 Chinese wind and hydro projects before they can be registered.

“In the context of the specific cases referred to in [the previous section of this report], the
Executive Board is not, at this point, satisfied that the validating DOE has adequately conducted this analysis to determine the suitability of the tariff,” it said in its report of last week’s meeting. “The Executive Board has this concern due to the fact that higher tariffs have been observed for similar projects in the same region.”

“There could be very good reasons why earlier projects got higher tariffs,” argued Andrew Prag, co-vice-chairman of the Project Developers’ Forum, for example, to get demonstration projects off the ground. “The backstop position of the EB is that if you can show that even with the highest historical tariff in the province you’d be under the benchmark, then ok,” and your project can be approved. “We hope that it is a temporary position.”

“It is important to understand the difference between a one-off subsidy for a single project and a policy, creating real investment security for any future investor,” added Susanne Häfeli-Hestvik, a vice-president at project developer Tricorona in Stockholm.

However, Mischa Classen, Zurich-based senior project manager at carbon asset managers First Climate, pointed out that none of the projects are making use of E+/E- policies in their proposals, but rather use the tariff paid by the grid company. “It’s not clear what the EB wants,” he told Carbon Finance.

He also highlighted the reversal of the decision to reject two projects in December as a good reason why an appeals mechanism – which the EB has opened consultations on – is urgently needed.

“There was one instance where the EB asked for revisions to a project due to mistakes in the registration process at the secretariat or EB – one should have an appeals process for that,” Classen said. “If a project loses half a [year’s carbon credits] due to erroneous requests for reviews and decisions, there should be compensation.

“It’s not that we don’t trust the EB, but we want to be able to act on obvious mistakes, for the integrity of the CDM.”

Such problems, which have been well-documented over the past three years, are deterring investors, added Godson at EEA. “You can’t have a mechanism to finance projects with uncertainty until the very end, when the CERs are in your account,” he said. “If the purpose of the CDM is to help finance clean energy projects then the rules need to be clear and objective, and delivery of CERs needs to be far more certain so as to secure the additional financial support for the project.”


Source: www.carbon-financeonline.com