Global CDM Project Distribution Factors

Global Distribution of CDM Projects:
An approximation to the determinants of carbon market expansion in
developing countries, 2004-2007

Abstract
The market for Clean Development Mechanism (CDM) projects is continuing to
grow rapidly, with the current portfolio expecting to deliver 2.3 billion tons of Carbon
Dioxide equivalent (CO2e)1 greenhouse gas (GHG) emission reductions by 2012,
equivalent to 18% of developed economies base year Greenhouse gas emissions (see
annex 1 (where it shows the table where it comes from)). The distribution of CDM
projects is geographically concentrated in a limited number of countries: China, India,
Brazil and Mexico. Specific regions in the developing world, namely Sub-Saharan
Africa, Central Europe and Middle East, have been largely bypassed by the CDM market
and are in search of CDM project investors. This study seeks to analyze the global
distribution of CDM projects in the Pipeline2 from 2004 – 2007 as an approximation to
understand the underlying process behind it. It presents a series of variables that affect
the opportunities for market expansion and the risks behind the market, and use a
Regional Gravitational Theory to explain the geographical location of the CDM projects.
It also employs an autoregressive model to foresee the number of projects throughout
2008 for several countries. The data used in this study comes from the United Nations
Environmental Program (UNEP) that consists of observations for 68 countries and 5
regions with a monthly frequency. As a result each country has 49 cases starting from
December of 2003 until December 2007. Put conclusions

Keywords: Clean Development Mechanism, Autoregressive Models, Regional
Gravitational Theory

1
CO2e: Carbon dioxide equivalent from the list of Greenhouse gases that are included in the Kyoto
Protocol, being so: Methane, PFC,
2
Explain pipeline

Global Geographical Distribution of CDM Projects

Introduction
The Kyoto Protocol, signed in 1997, finally entered into force on February 16, 2005.
The Marrakesh Accords in 2001 set out the fundamental rules for the Kyoto mechanisms
—the Clean Development Mechanism (CDM), joint implementation (JI), and emissions
trading –ET-. The CDM was designed to assist developed economies in meeting their
greenhouse gas emissions reduction targets by implementing reduction/sequestration
activities in developing economies and counting the reduced/sequestered amounts as
purchasable “credits.” Before the protocol came into effect, investors and project
developers were hesitant to move into the CDM field. Since it came into force there has
been a steep increase in the number of projects submitted for validation and registration,
and this upward trend is expected to continue in the next few years.

Though a relatively recent phenomenon, the market for Clean Development
Mechanism is rapidly growing. The World Bank estimated the carbon market value at
U$11 billion for 2005, the first year of operation of the European Union Emissions
Trading Scheme (EU ETS). The market value jump at U$30 billion for 2006, and is
estimated to reach U$60 billion for 2007. According to Point Carbon, the world carbon
market could reach U$565 billion by 2020. This considerable sum of money has the risk
of being amassed by a few whereas there continues a strong bias in the geographical
distribution of the projects: China, India, Brazil and Mexico account for the vast majority
of all registered projects as figures 1 and 2 elaborate. The rest of the countries that
participate in the carbon market as part of the Clean Development Mechanism have
lagged behind and stand no comparison against these four giants. The asymmetric
evolution of the market has presented itself as a difficult challenge to policymakers in the
search of universal participation in the struggle against climate change and elimination of
bottle necks.

Figure 1. Geographical location of CDM projects

2

Juan Pablo Dominguez

Note: Red: CDM Large scale project, one location Orange: CDM Large scale project, several locations
Yellow: CDM Small scale project, one location White: CDM Small scale project, several locations
Source: UNFCCC
Change it black and white

Given the youth of carbon markets, especially for CDM, the number of academic
papers written about the topic is very limited. Companies such as Point Carbon and
Natsource to name just a couple, are the leading producers of research regarding the
mechanism. The World Bank, the United Nations Environment Program –UNEP-, the
United National Climate Change Convention –UNFCC- and the Intergovernmental Panel
on Climate Change –IPCC- are among the top multilateral organizations that offer
material for researchers and are more focused on the legal and operational framework of
CDM than in quantifiable data. The works of the World Bank regarding financing are
very complete and offer relevant and reliable data for topics such as internal rates of
returns, market potential and main participants. However, the main source of data of this
paper is CDM pipeline which presents an up to date database of all CDM projects on the
United Nations registry. The data is composed by more than 2548 projects organized by
host country, type, date, methodology, estimated output, credit buyer and other
categories. All the information is available on CD4CDM without any charge.

Figure 2. All CDM Projects in the Pipeline in Brazil, Mexico, India, China as a
percentage of all projects, 2004-2007

3


100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Q2-05

Q3-05

Q4-05
Q1-04

Q2-04

Q3-04

Q4-04

Q1-05

Q1-06

Q2-06

Q3-06

Q4-06

Q1-07

Q2-07

Q3-07

Q4-07
India China Brazil Mexico

Source: UNEP, put the link. Ojo poner también en la bibliografía (poner 2004 en los quarters, es decir poner 20 antes 04)

With these materials we pretend to look the temporal performance in order to analyze
the geographical distribution of the CDM projects. For now China, India and Brazil
account for more than 75% of the market by number of projects and about 80% if
measured by the volume of expected CERs by 2012. The relevance of this study lies in
the opportunities the CDM presents for all developing countries and their commitments
for sustainable development and climate change abatement. The difficulty lies in the
absence of a comprehensive study that would enable developing economies decision
makers as well as CDM developers and investors decide geographical resource allocation
and therefore which countries should reinforce their capacity building.

Given the lack of a theory for explaining CDM geographical allocation we use two
tools: first, the Regional Gravitational Centers theory to broadly explain the behavior
during these past years of the CDM projects. Second we use statistical models to see if
the process has any temporal structure. Here we propose a Time Series Autoregressive
Model for understanding the evolution through time of the series. The objective is not to
predict future behavior of the location of the CDM projects but as to discover which
countries arise in the world markets as alternatives to today’s centers.

4


The main objective of this text is to analyze the geographical distribution of CDM
projects in the pipeline from late 2003 until late 2007. In order to do so, we have divided
the text into six sections. The first one is this short introduction followed by a background
section where the main generalities of the CDM market are presented. The third section
consists of a study of the main barriers that countries have faced when intending to
expand the CDM market in their economies along with the experience of multilateral
agencies interested in fomenting the market. Also, this section briefly presents the main
risks and rationale of the investor when deciding host country selection. The fourth
section is where we introduce a new perspective on the problem through the inclusion of
the Regional Gravitational Centers theory as a way to explain the process of global
geographical distribution of CDM projects. Within this section we also present an
estimation of the performance for selected countries for the year 2008 in terms of the
number of projects. This part of the paper is constructed through the use of econometrical
methods and data provided by the United Nations Environment Program and its Capacity
Building for Clean Development Mechanism program. The following section extends
about the prospects for CDM throughout the region and finally the last section ends with
a set of concluding remarks.

Chapter I Background of (pensar) poner chapter en los
demás menos en conclusion
The CDM was launched in November 2001, the first project was registered about
three years later, and the first CERs were issued in October 2005. CERs can be issued for
verified emission reductions achieved since 1 January 2000. Rules for some categories of
CDM projects were adopted later; afforestation and reforestation projects (December
2003), small-scale afforestation and reforestation projects (December 2004) and
programs of emission reduction activities (December 2005).

CDM projects must use an approved methodology and be validated by an accredited
designated operational entity –DOE-. CERs are issued by the CDM Executive Board only
after the emission reductions achieved have been verified and certified by an accredited
DOE. Thus a CDM project incurs costs (validation of the project) before it can be

5


registered, and further costs (certification of the emission reductions) before CERs are
issued. The National Energy Commission of Chile and the German Technical
Cooperation Agency –GTZ for its initials in german- estimated that these cost can at least
sum up to U$70,000 for a regular scale project (see chapter III, investor’s rationale).
Figure 2. Observed prices for project-based transactions in 2005-2006

Source: Capoor and Ambrosi, 2007

The objective of a CDM project developer is to obtain CERs and, as previously
stated, this process is neither cost nor risk-free. To help defray these issues of
implementing the project, proponents often agree to sell some of the expected CERs
before the project has been implemented. As figure 2 indicates expected CERs from
projects at an early stage command 2006US$ 10.40-12.40, registered project transactions
command close to 2006US$ 14.70 and issued CERs are trading at 2006US$ 17.75
(Capoor and Ambrosi, 2007). The lowest prices reflect risks that the proposed project
might not be registered and might not deliver the expected emission reductions. In each,
the price also depends on how the risks are shared between the buyer and the seller,
through penalty provisions or requirements to replace CERs that could not be delivered.
Once a project is registered the uncertainty is limited to the timing and size of the
emission reductions. Once CERs are
CDM the largest CO2 offset system in the world
issued, delivery to an Annex B Party
• > 948 projects registered by the end of 2007
• 49 countries in active participation
• 192,724,874 certified emission reductions
(CERs) issued 6
• approx. additional 2800 projects in pipeline
Source: 2.7 billion CERs expected to end of 2012
• UNFCCC


registry where they can be used for compliance is the only uncertainty and they therefore
command the highest prices.

At the end of 2007 the 2783 projects in the CDM pipeline were expected to yield
annual emission reductions of 418 Mt CO2e. Experience to-date suggests that CDM
projects achieve about 91.9% of the projected emission reductions (Fenhann, 2007). The
estimated annual emission reduction from the projects registered during 2006 is 88 Mt
CO2e and from projects that entered the pipeline during 2006 is 144 Mt CO2e. The
estimated revenue from the sale of CERs generated by the CDM projects registered
during 2006 is US$ 1-1.5 billion per year and the estimated revenue from the sale of the
CERs generated by the CDM projects that entered the pipeline during 2006 is US$ 1
billion higher. Capoor and Ambrosi report transactions for about 450 Mt CO 2e in this
market during 2006 at an average price of about US$10.70 per t CO2e. Thus the
transactions averaged about three to five years of projected emission reductions for the
new projects.

Figure 1. Projects that entered the clean development mechanism pipeline 2004-2007, by
project type/sector
500

450
2004 2005 2006 2007
400

350
Number of projects

300

250

200

150

100

50

0
Biomass energy

Reforestation
Fossil fuel switch
Afforestation

Coal bed/mine methane

Hydro
EE service

EE supply side
Biogas

Landfill gas
EE households

HFCs
Energy distribution

EE own generation
Cement

Geothermal
CO2 capture

PFCs
EE industry

Wind
Tidal
N2O

Solar
Agriculture

Transport
Fugitive

7


Source: CD4CDM, 2007

Figures 1 and 2 provide the sectoral distribution of projects under the CDM
pipeline and related emission reductions. As figure 1 shows, the growth in 2007 was
especially pronounced in Biomass Energy, Energy Efficiency –EE- Own Generation,
Hydro, Landfill Gas and Wind sectors. By number of CERs still HFCs have the biggest
number. Hydro projects with more than 60 millions tons is the second sector with the
biggest amount followed by N20 and EE own generation. In general, the most important
phenomenon of 2007 in terms of number of projects was a higher participation of EE and
Hydro with a lower participation of HFC and N20.

Figure 2. Estimated CERs from projects that entered the CDM pipeline in 2007, by
project type/sector
90
Millions

80

70

60
Number of CERs

50

40

30

20

10

0
HFCs

PFCs
Hydro

N2O

Solar
Biogas

Transport
Tidal

Wind
Cement

EE industry
Agriculture

CO2 capture

EE supply side
EE households

EE service

Geothermal

Reforestation
Afforestation

Biomass energy

Landfill gas
Fossil fuel switch
EE own generation
Energy distribution
Coal bed/mine methane

Fugitive


Of all the 26 sectors included, only for the agricultural sector does Latin America
maintain a larger amount of projects in comparison to Asia with 157 and 16 respectively.
Regarding energy efficiency Asia has a compelling advantage compared to the rest of the

8


regions. Wind, Hydro and Biomass are concentrated mainly the Asian continent,
whereas the rest of sectors are more evenly spread with Latin America.
Figure 3. Regional distribution of clean development mechanism project activities
registered and in the pipeline 2003-2007
180

160

140

120

100

80

60

40

20

0
Au 6
Au 4

Au 5

Au 7
Fe 3

Ap 4

Fe 4

Ap 5

Fe 5

Ap 6

Fe 6

Ap 7
4

D 5

6

7
04

05

06

07
04

05

06

07
-0

0

-0

0

-0

0

-0

0
0
0

-0

0

-0

-0

0

-0
n-
n-

n-

n-
b-

b-

b-

b-
g-

g-

g-

g-
r-

r-

r-

r-
ec

ec

ec

ec
ct

ct

ct

ct
Ju

Ju

Ju

Ju
O

O

O

O
D

D

D Latin America Asia & Pacific Sub-Sahara Africa North Africa & Middle-East Europe and Central Asia

Note: Central Asia includes Kyrgyzstan, Tajikistan and Uzbekistan which are not considered under Asia - Pacific region.

Figure 3 shows the principal topic of discussion in this paper. This illustration
presents the evolution of the number of projects from the 5 different regions we have
divided the Non-Annex I groups in the CDM program. Two regions inmediately show
clear advantage: Latin America and Asia-Pacific. The first region was the pioneer in
CDM but after 2005 until today Asia pacific has taken a huge advantage in all accounts.
Whereas a number and amount of CERs Latin America lost its momentum and Asia has
consolidated its leadership in the carbon market. The reason behind this process is whate
we want to study here and also to find out how will this distributions of the number of
programs behave during 2008.

In terms of countries, China dominates the CDM market as it is the source of over
55.6% of the estimated annual emission reductions of the projects that entered the
pipeline during 2007. Capoor and Ambrosi note that as the dominant supplier in the
CDM market, China’s informal policy of requiring a minimum acceptable price (around

9


US$10.40 - 11.70 or €8.9 since 2006) before providing approval to projects had a
significant stabilizing impact on the market price.

1.1 Annual Investment in CDM projects
The number of projects a country presents is closely correlated to the capital
invested in the programs. The capital that is, or will be, invested in CDM projects
registered during 2006 was estimated at about US$ 7 billion whereas the capital that is, or
will be, invested in projects that entered the CDM pipeline during 2006 is estimated at
over 2006US$ 26.4 billion as Table 1 shows (UNFCCC, 2007)

Table 1. Capital investments for projects in 2006

Estimated capital Estimated capital Estimated capital
invested in projects Estimated capital invested in invested in unilateral
that entered the invested in projects unilateral projects projects that entered
pipeline during registered during registered during the pipeline during
Country 2006 2006 2006 2006
China 12,130 1,270 93 3,793
India 7,534 1,239 944 5,998
Mexico 1,097 435 138 589
Brazil 981 1,037 601 290
Nigeria 554 206 0 332
Malaysia 455 431 14 0
Indonesia 445 530 27 11
Peru 334 48 47 328
Egypt 328 13 0 0
Equatorial
Guinea 324 0 0 324
Guatemala 302 57 21 160
South Africa 271 49 39 261
Qatar 200 0 0 200
Philippines 160 85 – 0
Republic of
Korea 141 180 46 84
Total 26,465 6,886 2,512 12,894
Source: UNFCCC, 2007

Of the US$ 26.4 billion approximately 50% represents capital invested in
unilateral projects by host country project proponents. Unilateral projects are these for
which the project proponent in the developing country Party bears all costs before selling
the CERs. At the end of 2006, about 60% of the projects, representing about 33% of the
projected annual emission reductions, were unilateral projects. India is home to the most

10


unilateral projects (33% of projected annual emission reductions of projects in the
pipeline at the end of 2006), followed by China (20%), Brazil (11%) and Mexico (6%)
(UNFCCC, 2007).

Over 80 to 90% of the capital, US$ 5.7 billion for registered projects and almost
US$ 24 billion for projects that entered the pipeline went into renewable energy and
energy efficiency projects. Although these projects represent only about 20% of emission
reductions they have high capital costs per unit of emission reductions. The estimated
investment of US$ 5.7 billion for CDM renewable energy and energy efficiency projects
registered during 2006 is roughly triple the Official Development Assistance –ODA-
support for energy policy and renewable energy projects in the same countries
(UNFCCC). It is almost as much as the private investment in renewable energy and
energy efficiency (2006US$ 6.5 billion) in the same countries. China and India receive
most of the CDM investment and private investment.

• CDM projects that entered pipeline in 2006 are expected to result in US$25 billion in
capital investment
(almost double the 14 billion US$ in total investment leveraged through the Global
Environment Facility –GEF- in the climate change area since it started)

• CDM renewable energy & energy efficiency projects registered in 2006 are expected
to result in US$6 billion in capital investment
(about triple the ODA support for energy policy and renewable energy projects in the
same countries. Almost as much as private investment in renewable energy and
energy efficiency (US$ 6.5 billion in 2006) in the same countries)
Source: UNFCCC

The capital invested in afforestation and reforestation has been very low. Only
three afforestation and ten reforestation projects were among the 2783 projects in the
pipeline at the end of 2007. The attractiveness of these projects is reduced by uncertainty
stemming from the temporary nature of temporary CERs (tCERs) and long term CERs
(lCERs) and the fact that installations in the EU ETS can use CERs, but not tCERs or
lCERs, for compliance. This issue is highly relevant to certain countries that have hoped
to increase their participation in the CDM framework through this category and without
its approval their participation will remain low.

11


1.2 The CDM Market outlook
Besides the invested amount in capital, other important variables influence the
expansion of the CDM market in the near future. It comprises a list of relevant issues that
must be taken into account when analyzing the carbon market. In this subsection we
highlight some of the most pertinent:

1.2.1 Financial muscle
The carbon market and associated emerging markets for clean technology and
commodities have attracted a significant response from the capital markets and from
experienced investors, including those in the United States. Analysts estimated that
US$11.8 billion (€9 billion) had been invested in 58 carbon funds as of March 2007
compared to US$4.6 billion (€3.7 billion) in 40 funds as of May 2006 (World Bank).
50% of all capital driven to the carbon value chain is managed from the UK (World
Bank). Most of the newly raised money, of private origin, came to the sell-side (project
development and carbon asset creation) which currently represents 58% of the
capitalization (UNFCCC). A key indicator of interest in aligned and closely related fields
is the record US$70.9 billion in clean technology investments in 2006, with major
investments (and announcements) from well-known investment banks (UNFCCC).

1.2.2 Demand-Supply Balance and CER prices
The Kyoto Protocol established a set of commitments that limits the amount of
carbon dioxide equivalent emissions to the atmosphere by developed economies (or
Annex B countries) for the period 2008 – 2012. With this objective in mind, three
mechanisms were established: the CDM, JI and International Emissions Trading. In this
way, each country has the opportunity to diminish its emissions locally or obtain
certificates from offsets somewhere else in the world. Emission trading systems were
therefore implanted so as to enable the proper interaction between the obligations of the
governments to fulfill their commitments and also the operational requirements of
companies. This complex mechanism allows the companies and governments establish an

12


equilibrium between demand and supply of emission reductions as part of a larger carbon
market.

Table 4. Overview of existing carbon markets (2006)

Sources: Capoor and Ambrosi, 2006; Capoor and Ambrosi, 2007; Ellis and Tirpak, 2006; Fenhann, 2006; Enviros, 2006.
Abbreviations: CDM = Clean Development Mechanism, CER = Certified emission reductions, ERU = Emission reduction unit, ETS =
Emissions trading scheme, JI = Joint Implementation.
a Number of projects in the pipeline at the end of 2006 and the estimated annual emission reductions for those projects.
b Number of projects with issued CERs and the quantity of CERs issued.
c Some national allocation plans for Phase II have not yet been approved, but the number of participants will be higher, and the
emissions limits will be about 8 per cent lower,
than for Phase I. Contracts for Phase II allowances are already trading.
d As discussed in chapter VII.2, this reflects the Direct Entry component of the scheme, which accounted for most of the allowance
allocation and trading activity.
e During the first nine months of 2006.
f Estimated.

The EU ETS is by far the largest market in terms of number of participants and
trading activity. Credits created by CDM projects (certified emissions reductions or
CERs) are the second largest market and there are also emissions trading systems
operating in Australia (the New South Wales.Australian Capital Territory GHG
abatement scheme) and the United States (the Chicago Climate Exchange). The quantities

13


traded in the markets established by these systems and the voluntary markets are much
smaller than those in the EU ETS and the CDM market.

There is a consensus emerging among market analysts that the expected shortfall
in the EU ETS Phase II (i.e. from 2008 to 2012) is likely to be in the range of 0.9 billion
to 1.5 billion tCO2e (Point Carbon). Estimates for not-yet-contracted volumes from
JI/CDM and projected EU shortfalls are very similar to each other in these projections
(unless additional demand before 2012 and the promise of higher prices stimulates
additional JI/CDM supply).

Figure 8. Evolution of the CER Price (secondary market, €)

20

18

16

14

12

10

8

6

4

2

0
May-07
May-07

Nov-07
Mar-07
Mar-07

Nov-07
Nov-07
Apr-07
Apr-07

Jun-07

Jul-07
Jul-07
Aug-07
Aug-07

Jan-08
Jun-07

Jun-07

Jan-08
Sep-07

Oct-07

Dec-07

Feb-08
Sep-07

Oct-07

Dec-07

Source: Reuters – TFS Energy

Future sources of demand for CERs include Canada, the United States and Japan.
The Canadians announced they will tighten its carbon emissions by setting a target of
20% below 2006 levels by 2020 (assumed to be 150 MtCO2e by Canada). They allow
emissions trading, banking and the use of CERs for up to 10% of the projected shortfall.
If these assumptions are true, then some demand from Canada could enter the CER
market relatively soon. The biggest bet at the moment is the United States. Developments
in California, the eastern United States, the promise of US presidential candidates to

14


address more actively in carbon markets hold some promise of market continuity beyond
2012 and therefore stimulate positively the demand. However, there is continued debate,
especially in California, regarding whether emissions trading, including offsets from
overseas will be allowed. Japan has been a strong supporter of the Kyoto Protocol and the
distance from actual emissions to its target has motivated the Japanese to be more
aggressive in the search for offsets.

1.2.3 Regulated vs. Unregulated markets
In the emerging fragmented carbon marketplace, efforts to mitigate carbon are
multiplying in both the regulated and the unregulated sectors. For regulated markets,
emissions trading can help achieve a given level of emission caps efficiently by setting an
appropriate price, but this requires that policymakers set the caps consistent with the
desired – and scientifically credible – level of environmental performance. Regulated
carbon markets can only achieve environmental goals when policymakers set
scientifically-credible emission reduction targets while giving companies maximum
flexibility to achieve those goals. They also require clarity on the assumptions for
economic growth and baseline carbon intensity improvements, orderly and transparent
release of periodic market relevant emissions data and the imposition of strict penalties
for fraud or non-compliance. The key elements for well-functioning carbon markets
include: competitive energy markets; common, fungible units of measure; standardized
reporting protocols of emissions data; and transferability of assets across boundaries
(Point Carbon). Markets can, to a certain extent, accommodate the appetite that
individuals and companies in Europe, Japan, North America, Australia and beyond have
for carbon emission reductions that go well beyond what their law makers require of
them. This high-potential voluntary segment, however, lacks a generally acceptable
standard, which remains a significant reputation risk not only to its own prospects, but
also to the rest of the market, including the segments of regulated emissions trading and
project offsets.
The enormity of the climate challenge, however, will require a profound transformation,
including in those sectors that ‘cap-and-trade’ markets cannot easily reach. These include
making public and private investments in research and development for new technology

15


development and diffusion, economic and fiscal policy changes, programmatic
approaches to decouple economic growth from emissions development as well as the
removal of distortionary subsidies for high-carbon fuels and technologies.

1.2.4 Secondary market
The secondary market has been growing rapidly and this is expected to continue as
more CERs are issued as the quantity of CERs issued rises, exchanges are beginning to
trade them. This will facilitate trades of CERs on an exchange, with the assistance of a
broker, or directly between the buyer and seller. Trades of CERs issued do not involve
project or registration risks. The higher price, US$ 17.75 per t CO q, reflects the absence
of these risks (Capoor and Ambrosi). The first CERs were issued during 2005 and many
of these had already been purchased (through forward contracts). The volume traded is
approximately equal to the quantity of CERs issued.

Chapter 2 Barriers, Multilateral Banks and the
Investor’s Perspective
The former section presented the overview of the CDM market from an outsider
perspective. This section pretends to introduce the view of the people directly involved in
the market. First we analyze how governments from developing economies have intended
to increase its overall market participation in the CDM market. Following we address the
issue of Multilateral Banking and its role in the market and finally we present the private
sector’s perspective.

Given the large amount of possible candidates, we limit our study into three different
categories: core countries, peripheral countries and lagging countries. The first ones have
shown a tremendous capacity to attract investors in number and volume for CDM
projects. China, India and Brazil belong to this category. The second group is composed
by countries close to the core nations and has counted with serious investments but is
behind the statistics of the leaders. Chile, Vietnam, Indonesia are part of this group.
Finally the third group is composed by laggards. Such countries have not been able to

16


attract investment in CDM or at least in very small amounts. African countries are part of
this group.

Two key strategies available to enhance the ability of host countries to utilize the
CDM are information collection/rearrangement/dissemination and capacity building. In
most host countries, some relevant information already exists, but often in disparate
pieces or it is not considered in terms of the CDM—and it has never been put together
before in a comprehensive form. This is the main reason for publishing this series of
guidebooks, which feature information on specific countries in Asia. By making the
guidebooks as user-friendly as possible, they provide essential information that project
developers and investors will need for most effective CDM project preparation and
implementation in each country. (no sé si aqui debe ir esta parte)

(alargar un poquito mas)

Overcoming barriers (esta seccion viene de overcoming barriers)
Geographically, the distribution of CDM projects has so far not been very equitable.
A limited number of countries including China, India, Brazil and Mexico have captured
the largest share of the global CDM project portfolio. Specific regions in the developing
world, namely Sub-Saharan Africa, have been largely bypassed by the CDM market and
are struggling to attract a decent number of CDM projects. In fact, of the total 2,783
projects, only 33 projects are in Sub-Saharan Africa where 21 of these are actually in
South Africa, making the distribution even more skewed.

Understanding the reasons for this is of great importance in order to allow CDM develop
into a stronger instrument for sustainable development as well as creating opportunities
for developing countries to obtain benefits for decreasing its CO2e emissions. Not few
organizations are trying to bring CDM to different countries but the process of creating a
strong knowledge base is slow where as the market is moving at incredible pace.
Capacity-building is different for each member, however, according to the literature two

17


main factors are the ones that need to be addressed by those countries that are up against
access barriers to the CDM market:

Information and expertise
One of the key challenges facing developing countries interested in participating in the
CDM market is the complexity of modalities and procedures of CDM. This has resulted
in some CDM stakeholders in developing countries presenting poorly designed CDM
projects that eventually get rejected. Additionally, some developing countries have not
been able to participate in the CDM primarily due to lack of national-CDM expertise and/
or the appropriate institutional setup necessary for the assessment and approval of CDM
projects.

Finance
Access to finance is an additional barrier facing CDM project developers in many
countries, partially due to lack of CDM knowledge among developing country financial
intermediaries. Consequently, there is a clear need for human and institutional capacity
building within the area of CDM in many developing countries.

For particular cases, institutions such as the World Bank along with the UNEP and
UNDP have created the Nairobi Framework in order to promote the development of
CDM activities in some sub-saharan countries. Among the activities to be implemented
under the new joint proposal are provision of support toward the establishment &
operationalization of several African Designated National Authorities (national CDM
offices), organization of numerous hands-on, CDM capacity development workshops for
national consultants and civil servants, preparation of national portfolios of CDM projects
(feasibility studies), preparation of national CDM investors’ guides for host countries,
and supporting African countries participate in the annual Carbonexpo.

Another case is Capacity Building for Clean Development Mechanism -CD4CDM-
project. Through funding from the Netherlands’ Ministry of Foreign Affairs, the

18


CD4CDM project is a major effort to help develop the institutional and human capacity
necessary to formulate, approve and implement actual CDM projects. The first phase
from 2002 - 2006 supported CDM implementation in Mozambique, Uganda, Cote
d’Ivoire, Ghana, Bolivia, Ecuador, Guatemala, Egypt, Morocco, Philippines, Cambodia
and Veitnam. In the second phase (2007 – 2009), the project is implemented in
Nicaragua, Peru, Suriname, Algeria, Tanzania, Mauritius and Bangladesh following
additional funding from the Government of the Netherlands.

Overcoming barriers to CDM Projects
Responding to a request by the Annex-I Expert Group on Climate Change, the OECD
and URC recently produced a joint study on barriers facing CDM projects and ways to
overcome them. The study focused on barriers that can be potentially removed to
developing CDM projects at the national and international level. Four key groups of
barriers were identified, including:
• National-level barriers, such as electricity regulations not related specifically to the
CDM but constrain projects;
• National-level barriers related to the CDM, such as institutional capability or lack of
awareness about the CDM potential that can dampen interest in CDM projects.
• Project-related issues, including availability of underlying project finance, or other
country or project-related risks that render the performance of the project uncertain; and
• International barriers, such as constraints on project eligibility, such as restricted land
use, and available guidance and decisions, such as the inclusion of carbon capture and
storage projects.
The paper concluded that barriers to CDM development could arise at different stages of
the CDM project cycle. The relative importance of particular barriers varies between
countries as well as over time. A combination of factors is needed to drive growth in a
country’s CDM activity. This includes the presence of attractive CDM opportunities, a
positive investment climate, and an enabling policy and legislative framework.

Risks in CDM and its impact on prices

19


Figure 8. Evolution of risks throughout the phases of CDM projects


As previously states, project-based credits are compliance assets that need to be “created”
through a process that has certain risks inherent with it (regulation, project development
and performance, for instance) and can involve significantly higher transaction costs.
Such risks are addressed through contractual provisions that define how they are
allocated between parties, and, along with other factors, are reflected in the value of the
transaction (IETA). Following we list a number of variables that affect the risk exposure
and divided into two categories:

Figure 12, Impact on CER prices of risk

20


(Todo esto que sigue viene de Financing CDM projects, pp. 82-86)

Generic project risk

Country political risk
It refers to the risk of political and economical instability, of violence or
infrastructural disruptions in a country and how they can reduce the capacity for the
project to deliver CERs. It might affect delivery not only in time but also in magnitude.
This type of risk can be reduced with the purchase of insurance.

Counterparty risk
It states the need for trusting the other party of the contract; therefore credibility is the
main consideration. Credit ratings are instruments for observing such credibility. Several
companies have started to construct and publish these reports where each country
receives a letter in the same fashion as other types of markets. Given that many CDM
project developers will have poor (or non-existent) credit ratings, they may have to
provide credit guarantees in order to satisfy the buyer’s credit requirements.

CDM project specific risk

Methodology risk
To calculate the emission reductions of a CDM project, the project needs to select an
approved baseline and monitoring methodology. If a CDM project is able to use an
existing approved methodology, this considerably reduces the overall risk profile of the
project, since developing a new methodology is costly, time-consuming and risky (with a
50% rejection rate, until 2007).
Historic data show that, in many cases, revision of the methodology was required or
the methodology was rejected. Furthermore, it took, on average, around 303 days for a
methodology to gain final approval. For these reasons, the risk for the project developer
is related to the timing of the CER flow: if a new methodology needs to be developed,

21


time for development and approval will have to be factored in. If a methodology is put on
hold the project developer will have to await the decision made by the Meth Panel and
the EB, which will also delay the potential carbon revenue.

Host Country Approval risk
In order for a project to be registered with the EB it must receive host country
approval from the Designated National Authority (DNA). A risk more frequently
encountered is the delay when applying for host country approval. It is known that some
DNAs regularly take longer to issue an approval than the official timelines suggest (the
average time taken between publication of a PDD for comments and issuance of the
required Letter of Approval by the DNA is 4.5 months, but this varies up to a year or
more in some instances). Host country approval risk therefore mainly impacts the timing
of the CER flow.

Validation & registration risk
Every CDM project has to be validated by a Designated Operational Entity (DOE) in
order to be registered with the EB. Depending on the quality and transparency of
arguments and calculations presented in the project documents, the DOE will issue a list
of corrective action or clarification requests to the project developer.
The validation stage adds further time-delay risk: although validation of most projects
can be done within two months, it typically takes at least three months, due to the high
demand for DOE services, and constraints on DOE capacity.
After validation, the project can be submitted for registration to the CDM EB. The
registration by the CDM EB will be deemed final 8 weeks after the date of receipt by the
CDM EB of the request for registration. Within this 8 week period, the CDM EB has the
right to ask for review of the project.

Performance risk
According to the available information to the end of 2006, issuance of CERs has been
only around 50% of projected CERs in the registered PDDs. Therefore it appears that the
performance of CDM projects has been consistently and significantly over-estimated.

22


Performance risk can affect both the timing and the volume of the CER flow from a
project.

Monitoring/ Verification risk
A monitoring protocol is prescribed for every methodology in order to monitor the
generated emission reductions. The variables that are monitored must be logged
transparently by the project developer. In order for CERs to be issued based on these
monitored variables, they must be independently verified by a DOE. There are numerous
risks related to the monitoring processes and the monitoring equipment installed which
may endanger the quantity of CERs to be issued. For example, the monitoring equipment
for a landfill gas capture and flaring project may be installed as required. However, in
order to produce adequate results, the equipment also has to be calibrated correctly. If the
gas flow is not monitored correctly, the emission reductions generated by the project
cannot be verified and therefore CERs cannot be issued. This illustrates that monitoring
and verification risk factors can impact on the volume of CER flow. Capacity constraints
on DOEs can also introduce a time-delay risk.

Review of issuance risk
Within 15 days after the date of receipt of the request for issuance, the EB can ask for
review of a request for issuance of CERs. Review is limited to issues of fraud,
malfeasance or incompetence of the DOE involved in the project. From 2006, the CDM
Registration and Issuance Team also appraises all requests for issuance of CERs. If any
issues relating to verification and issuance arise, the project may receive less CERs than
originally expected (or even none at all). The review of issuance risk will thus affect the
volume of CERs generated.
If a request for review is triggered, the EB must decide on its course of action at its
next meeting. If it decides to go ahead with a formal review, this must be carried out
within 30 days. In total, the possible delay resulting from a request for review can be up
to 4 months.

Transfer risk

23


In order for CERs to be issued, the project developer can choose to develop a project
unilaterally, thus assigning the legal rights to the CERs to a project participant from the
host country. More commonly, however, the legal rights to the CERs are assigned to a
project participant from an Annex I country. Before the CDM EB will issue the CERs for
such a project, the project participants will need to inform the Board as to which Annex I
party will be involved in the project and seek an investor country approval letter from this
Annex I party. Obtaining an investor country letter of approval is therefore a risk which
can affect the timing of the CER flow.
Upon certification of the emission reductions, the CERs need to be delivered in the
electronic account of the buyer. An international system of registries has been developed
to enable such a transfer. A registry is an electronic administration system used by a
government to register emission allowances, record transfer of ownership of allowances
and reconcile allowance holdings against actual emissions. The International Transaction
Log (ITL) is managed by the CDM EB; it logs international transfers of CERs from
registry to registry. The ITL provides certainty of delivery to the carbon market and
builds up records of holdings and transactions which mirror registries by recording
‘transactions’ of CERs from the CDM Registry to the national registries of Annex I
Parties in accordance with the Kyoto Rules (see Figure 26 below).

The contract to build the ITL was awarded in August 2006 and is expected to be
complete by April 2007. However, as with any complex IT project, there is risk of time
delays.

Market risk
Most market players stated that considerable price risk – and likely volatility –
remained in the market for CERs (Point Carbon). Fijarse donde ponerlo.
The largest market for CERs is the EU ETS. In this market the freely traded
commodity is the European Union Allowance (EUA). Being an openly traded
commodity, market prices of EUAs fluctuate over time. However, the EU ETS is
regulated by the EU and, hence, EU policy is a key factor in determining its development.
Prior to every trading phase, Member States propose allocation levels, which in turn are

24


negotiated with the European Commission. The outcome of these negotiations determines
the shortage of allowances in the market, and therefore the demand for additional carbon
credits such as CERs. If the allocations are not negotiated and assigned appropriately,
more EUAs may be supplied to the market than required, which may cause a drastic fall
in the demand for EUAs. This happened during Phase I of the EU ETS (2005−2007)
when on 15 May 2006 many EU governments announced that allocations for 2005 had
exceeded actual emissions. As a result, the EUA price fell from about €30 to €9 within a
few days (see Figure 22 above).
The behaviour of the EU ETS, as well as other markets for CERs (see section 2.5
above) can affect both the price and volume of CER demand. It is common for CER
prices in ERPAs to be linked to the EU ETS price at the time of selling, thus exposing the
seller to the uncertainty in the EU ETS market.

Post-Kyoto risk
(Aqui hay que hablar de las nuevas conversaciones en Bankgok sobre Copenahgen
2009, que ya está pegado de una noticia de Point Carbon Abajo)
The Kyoto Protocol sets out to reduce emission reductions by 5.2% between
2008−2012. A followup to the Protocol and what role the CDM might play under this
new regime has not yet been decided. Post-Kyoto risk is therefore due to the uncertain
international demand and recognition for CERs beyond 2012. It should be noted,
however, that the EU has stated that the EU ETS, the largest potential market for CERs
(see section 2.5 above) will remain active even after the end of the Kyoto commitment
period in 2012.13 The post-Kyoto risk relates to CDM projects particularly because
project developers can choose CER crediting periods of 10 years (which cannot be
renewed) or 7 years (which can be renewed twice). These crediting periods of up to 21
years therefore put the projects well beyond the end of Kyoto in 2012 and, although there
may be some continued demand for CERs from the EU, international demand remains far
from certain. This risk affects the price and demand for all CERs beyond 2012.

From the project developer’s viewpoint, the lack of any certainty post-2012 implies a
rapidly approaching ‘cliff edge’ beyond which it will be virtually impossible to raise

25


finance for a new CDM project. This is due to the fact that CDM project development
takes at minimum 6 months, and often up to 3 years or longer, and therefore the window
of opportunity for a project to at least recover its costs while there is any degree of
certainty over CER revenue (i.e. to December 2012) is rapidly narrowing. In practice, this
cut-off point will be reached at different times for different project types, depending on
their rate of return. It may already have been reached for some project types in which
little project developer interest has been shown. Very few CER buyers are prepared to
commit to buying CERs beyond 2012, and only then at very low prices. Likewise, any
party willing to take on the risk of financing a project that will not recover its costs before
2012 will require a very high rate of return on their investment. Either way, the post-2012
market will be highly constrained until there is some certainty on the post-2012 regime,
and this will begin to affect development of CDM projects much earlier than this.

07.04.08 UN climate talks in Bangkok conclude with more meetings in sight

UN climate talks in Bangkok concluded last week, with delegates from more than
160 nations agreeing on a more detailed timetable to conclude their talks in
Copenhagen by the end of 2009.

"The train to Copenhagen has left the station," Yvo de Boer, executive secretary of the
UN Framework Convention of Climate Change (UNFCCC), said on Friday.

"Not only do we have the certainty that critical issues will be addressed this year, we now
have the bite-sized chunks which will allow us to negotiate in an effective manner," he
said in a statement.

As expected, there were no major breakthroughs resulting from last week's talks. Yet,
delegates had the chance to exchange their ideas on a wide range of issues – some
controversial, such as avoided deforestation to emissions reductions targets for specific
industrial sectors.

Still, de Boer pointed out that delegates agreed to continue the use of market-based tools
to help combat global warming, including emissions trading and the carbon markets
under the Kyoto protocol.

"This sends an important signal to businesses that the international carbon market
spawned by the Kyoto protocol will continue beyond 2012. Businesses have been asking
for clarity on this issue and now they have it, making it possible for them to plan their
investments accordingly," the UN climate chief added.

26


The Kyoto protocol obliges rich nations to reduce their emissions of six greenhouse gases
by about 5 per cent below the 1990 level from 2008 through 2012.

However, the US has rejected the Kyoto agreement largely because it excludes
developing countries, such as China and India, from capping their emissions.

The parties to the UNFCCC, which includes the US, agreed to include forest and land-use
related activities to help reduce emissions reductions in the second commitment period.

Meanwhile, the group under the Kyoto protocol will continue its work on analysing tools
for developed countries to reach their emissions reductions targets as its next regular
meetings in June and August.

There are 192 parties that make up the UNFCCC, while the Kyoto protocol to date has
178 member parties.

More meetings

According to the so-called Bali roadmap, which was agreed by the international
community in Indonesia in December, there will be at least seven more major UN climate
meetings until the culmination of the Copenhagen meeting in December 2009.

The second major UN climate change meeting this year after Bangkok will be held in
Bonn, Germany, in June. The Bonn meeting will address ways to "generate and mobilise
the necessary financial and investment flows" to help reduce greenhouse gas emissions
and help countries adapt to "the inevitable impacts of climate change", according to the
UNFCCC statement.

The third UN gathering this year will be in Ghana in August, and will focus on several
ways countries can enhance mitigation, such as reducing emission from deforestation in
developing countries – particularly since deforestation accounts for some 20 per cent of
global emissions.

The Ghana meeting will also address ways different business sectors can co-operate on
reducing emissions, the statement said.

In December, the UNFCCC will host the final climate-change discussions for 2008 in
Poznan, Poland, to focus on risk management and risk reduction strategies, as well as
technologies and long-term plans to combat climate change.

In 2009, at least four UN climate-change sessions are expected to be held, with a
combined duration of eight weeks.

27


Investor’s rationale
The revenue earned from the emission reductions credits has very different
impacts on the profitability of different types of projects. Table 1 shows the effect of
different CER prices on the profitability, measured by the internal rate of return, of
HFC-23, methane from landfill, and renewable energy projects. The sale of CERs makes
HFC-23 projects, which have a low capital cost per unit of emissions reduced, much
more profitable. In contrast, the sale of CERs has little effect on the profitability of
renewable energy projects, which have a high capital cost per unit of emissions reduced.

Table 1. Incremental impact of the CER price on the internal rate of return (IRR) of the
project (percentage)
Renewable energy IRR
Five years Impact per
(2008 to Seven Ten Fourteen Twenty- unit (in
Purchase period 2012) years years years one years US$)
CER prices (in US$)
5 0.5 0.6 0.8 1 1.2 3.16/MWh
10 1 1.4 1.7 2.1 2.3 6.33/MWh
15 1.6 2.1 2.7 3.1 3.3 9.49/MWh
20 2.2 2.9 3.6 4.1 4.5 12.65/MWh
Solid waste IRR
tSW (ton solid waste) tSW tSW tSW tSW tSW
CER prices (in US$)
5 17.9 24.1 29.2 31.7 32.8 41/MWh
10 52.3 59.1 62.4 63.5 63.8 82/MWh
15 88.2 93.3 95.4 95.9 96 124/MWh
20 123.7 127.3 128.6 128.8 128.9 165/MWh
HFC/23 IRRa
CER prices (in US$)
5 110.8 112.3 112.7 112.7 112.7
10 176.7 177.3 177.4 177.4 177.4
15 227.3 227.6 227.7 227.7 227.7

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20 270 270.2 270.2 270.2 270.2
Source: World Bank.
a
Sixty-five % tax applied on revenue from sale of CERs.

Table 2. Normal scale project costs
Project phase Costs
Project design U$ 20,000 to US 30,000
National aproval Some countries have, some don't
Validation U$ 15.000 to U$ 50.000
The CDM Executive Board determines the cost of registry according to the number
of emission reductions.
Yearly average emission reductions of CO2e U$
<= 15,000 5,000
> 15,000 to <= 50,000 10,000
> 50,000 to <= 100,000 15,000
> 100,000 to <= 200,000 20,000
Registry > 200,000 30,000
Monitoring: 0.05 - 5% of the value of the project
Verification Verification: U$ 3,000 - U$ 20,000 per verification visit
Certification
and CERs There is a management fee besides a mandatory contribution to the UN Adaptation
emissions Fund for a value of 2% of all the CERs generated in a year.
Source: National Energy Comission of Chile and GTZ, 2006

Table 4: Specific costs associated with CDM stages

29


1 US$0.10/CER for the first 15,000 CERs per year and US$0.20/CER for any CERs above 15,000 CERs per year (max US$350,000).
The minimum shown here has been calculated as 15,000 CERs/year over a single 7-year crediting period.
2 As for large scale, unless total annual average emission reductions over the crediting period are below 15,000 tCO2-e, in which case
no fee is payable. Maximum calculated as 25,000 CERs/year over 7-year crediting period.
Sources: CCPO, 2005; UNEP, 2004 and EcoSecurities market information

Falta análisis de la Tablas.
(Esta parte va en el tema de perspectiva del inversor en la sección 4 junto con las barreras
a la expansión)

Financing the Project
Box 1: Explanation of ‘Gearing’ or ‘Leverage’
The term ‘gearing’ or ‘leverage’ is used to describe the way in which the returns to an
equity investor can be increased by increasing the amount of debt in a project’s capital
structure. This effect arises due to the fact that debt is almost always cheaper than equity.
Consider a project with a capital requirement of US$1,000,000 and a project internal rate
of return of 15%. If 100% of this capital requirement were provided by equity investors,
the equity investors would therefore see a 15% return on their investment. However, if
50% of a project’s capital requirement could be borrowed from a bank at an interest rate
of 8%, the project would provide a return of 22% to the equity investors (their original
return of 15% on US$500,000, plus the 7% return remaining on the other US$500,000,
after debt financing costs). From the equity investors’ point of view, increasing the
amount of debt in the capital structure will always increase the return on their equity
investment, provided the debt interest rate is lower than the project IRR (see section 4.3
for explanation of this term).

30


The above argument ignores any effect of taxation. In fact, in most countries, interest
payments
on debt are a tax-deductible expense. This further enhances the attractiveness of debt in
the
capital structure, since the cost of debt is even lower due to the ‘tax shield’ effect (i.e. the
fact
that interest payments can offset a tax liability).

Market Benefit
CDM and JI projects are considered “offset projects.” Market experiences suggests that
the cost of purchasing an offset from a project tends to be 15-32% lower than trading for
an allowance in the open market.
To illustrate this concept we will take a power generator in Germany as an example. Let
us say that it is a very warm summer in Germany and this has caused the power generator
to burn more coal to sell more electricity to its clients (who use it to cool their homes).
Now, lets assume that the German power generator reaches its limit August 31st (its
Kyoto Cap). The generator has contracts with its clients to sell them electricity for the
rest of the year, but they have used all their pollution rights. The generator will now
consider its options.

1. Do nothing - Pay 100 Euros/tonne tax at the end of the compliance period
2. Emissions Trading - Find an Annex 1 power generator with pollution rights left over
and purchase those rights for market prices (currently 23 Euros/tonne)
3. CDM/JI - Find an environmental project that has proven it has reduced carbon dioxide
in a Non-Annex 1 country and purchase those rights for market prices (currently 10-15
Euros/tonne)

The obvious choice financially would be option 3 - for the generator to buy “carbon
credits” from the environmental project in a Non-Annex 1 country. However, because the

31


ease of transaction is much higher for option 2 – most power generators currently pay the
accompanying higher marginal cost.

Option 3’s project based credits are resultant of the CDM or JI mechanisms and involve
considerably more rigor than buying a pollution right allocated by Kyoto for Emissions
Trading (Option 2). As we will see, the project developer of a CDM/JI project must do
more to earn its credits, but if it does complete the necessary rigors of the UNFCCC
credit creation process it will be a much more competitive option for the German power
generator.

32


Multilateral banking

Hablar sobre como la banca multilateral ha participado en el mercado de CERs.

El rol que han tenido la banca multilateral en proveer recursos e iniciativas para
dirigir la inversión y el flujo de recursos financieros a sectores relacionados con el
cambio climático. Es importante resaltar que el trabajo de las banca regional,
específicamente el caso del ADB ha creado condiciones favorables para el desarrollo de
la oferta de certificados a través de una política clara a favor de este tipo de iniciativas.
Contrasta completamente con el caso de AfDB que no tiene ni siquiera un grupo o
sección dedicada a cambio climático dentro de su estructura. Africa es la región más
rezagada en cuanto a política de cambio climático. Esto redunda en las dificultades de
generar proyectos atractivos para inversionistas. A continuación se presenta la banca
multilateral que ha participado en cambio climático y su estrategia fundamental
relacionada con CDM.

Practices of the multilateral development banks in supporting activities relevant to
climate change
21. MDBs aim at social and economic progress (to eliminate poverty and support sustainable
development) through lending, grant and country-assistance strategies that support different
infrastructure projects and policy reform activities in their developing member countries. MDBs
make loans at commercial rates to governments (and government entities) in medium-income
member countries, and grants to governments and government entities in low-income countries.
The EBRD, EIB and IFC provide only limited grants.
22. The World Bank has the largest investment among the MDBs. In 2006, the IBRD and the
IDA approved loans and grants totalling USD 23.6 billion. Together the other MDBs committed a
similar amount: the ADB, AfDB, EBRD and IDB committed USD 7.4 billion, USD 3.47 billion,
EUR 4.9 billion and USD 6.4 billion, respectively, in 2006. In the same year, the IFC committed
USD 6.7 billion from its own account and the EIB, as a lending bank of the EU, approved in total
EUR 45.7 billion, of which EUR 5.9 billion was invested outside the EU.
23. All the banks recognize the importance of supporting the mitigation of, and adaptation to,
climate change. There has been a growing interest on the part of the MDBs in developing
individual climate change strategies and integrating climate change considerations into their
lending activities, such as those of the EBRD and EIB. In the World Bank and the EBRD, climate
change has been considered part of the environmental appraisal for lending projects.
24. The July 2005 Gleneagles communiqué on climate change of the Group of Eight
industrialized countries (G8) requested the World Bank and the regional development banks to
take a leadership role in developing a framework for clean energy and development, including
investment and financing. The purpose of this framework is to be a vehicle to accelerate
investments to address developing countries’ energy needs, mitigate GHG emissions and support
developing countries in adapting to climate variability and risk. This also provides an opportunity
for all MDBs to consolidate their strategies and actions to address climate change. The joint
efforts by MDBs on the Clean Energy and Development Investment Framework (CEDIF) should
help to develop a more comprehensive strategy to address climate change within each MDB.
25. Reflecting the different priorities in their business strategies, the focal areas to address climate
change vary between the different banks. The focus on climate change seems to have increased in

33


the last two years and is reflected in newly formed dedicated funds for mitigation projects,
adaptation initiatives and capacity-building and information-sharing activities.
26. In most of banks the climate change issue is managed by staff in clean energy, energy
efficiency or other sustainable development units. Specific units in charge of carbon financing
have been established in the World Bank, EIB and EBRD.

I. Regional Gravitational Centers
CDM and the Regional Gravitational Centers theory (esta seccion se van por ahi 15 a 20
paginas)

As we discussed above, the CDM market is geographically heavily, both in number
of projects as well as in number of expected CERs, concentrated in 4 countries: China,
India, and Brazil. These countries have shown impressive growth in the last decades, not
only in terms of the mechanism but in all economic sectors. They are part of the fast
growing economies and are becoming relevant for the international arena in terms of
political and economical reasons. Along with Russia, they form the group known as
BRIC that has caught the attention of institutional investors, governments, private sector
and are expected to be important future players of the global system.

When the data for CDM projects is analyzed through this perspective then it does not
come as a surprise that the leaders of the market are such economies. However, the nature
of the CDM market is not only economically driven but also politically created. The
existence of the market itself responds only to the political will of the governments of the
world because there is actually (at least not in the present) a physical or emotional need
for a carbon restricted world for the general population. There is undeniable support for it
but the market did not come to be as a result of confrontation of needs by agents.

For such reasons the CDM projects do not follow the same patterns as the
international flow of investment (someone, check notes). A different framework for
analysis is needed to explain why such countries account for such a big percentage of the
market. The Regional Gravitational Centers theory is an interesting candidate giving its
broad spectrum of analysis and multi-staged configuration. Since the moment the Kyoto

34


Protocol was ratified the number of CDM projects began to grow. This first stage is still
going on, however the initial signs of a change in the nature of the host country selection
process appears to have sprouted. CDM investors are looking now for new destinations
because they want to diversify their portfolio in order to diminish geographical risk
(buscar en las notas). Which countries are then now the focus of this investors?

Regional Gravitational Centers Theory

Geo-politics and the RGC
Geopolitics, according to Rudolf Kjellén, talks about how the environment
influences the politics of a nation. This first attempt to link local, geographical and
natural conditions of a nation for explaining its political conduct grew in time (fuente). In
turn, geopolitics has become an important instrument for the analysis of international
relations in the modern world (fuente). This construction is the source for the theoretical
approach used here for explaining the process by which some countries have developed
more numbers of projects than others. More specifically, Geopolitics is the meta-
structure, to give it a name, where Regional Gravitational Centers Theory is subscribed
and which is our main analytical tool for understanding the phenomenon.

Within the International Relations area of study geopolitics as an idea has been
surveyed in a robust manner since the discussion of the Heartland Theory by Sir Halford
Mackinder in 1904. Since then it has been further developed and introduced to the
different schools of thought of IR Theory. For this paper, the relevance of geopolitics
stems from the early assertions of Friederich Ratzel in the middle of the XIX century.
Ratzel promulgated the idea that large areas of influence were needed for great powers as
a means for maintaining its leadership and therefore promulgating its own national
interests. These arguments were stated in a world characterized for the existence of a
Colony-Metropolis state of relations between different nations around the world. How
great powers decided to divide the spheres of influence triggered later confrontation
among them, changing the international order of the times.

35


Nowadays, the different regions which compose the global system have been
redefined. With the end of the Cold War the configuration of power was rearranged.
After the fall of the Soviet Union, the United States enlarged its spheres of influence
claiming its title as the only remaining super power. With almost two decades past, the
world has reallocated into new spheres and geopolitics still remain as an important
analytical tool. If we focus our attention on the developing world, 5 main regions are to
be found: Latin America, Asia & the Pacific, Africa, Eastern Europe & Central Asia and
finally North Africa & the Middle East. In this paper, we follow such division and
illustrate how each region has developed into sub-regions and reorganized its structure.

The Regional Gravitational Centers introduction
The Regional Gravitational Centers theory surges as an alternative to geo-politics.
Our modern world has changed in many ways in the last few decades and several facets
are not properly explained with the traditional geopolitical perspective. One of the main
aspects to address is the change the international environment along with the formation of
geo-political/economic plates. These two aspects are pillars for the introduction of the
RGC and are presented in the following pages. Other issues not discussed here that are
also relevant are the Westphalia system in today’s world and beyond and the concert of
Great Powers.

a. The international environment and its
transformation

i. The relationship between globalization and
regional integration:
The RGC begins with the interpretation of two phenomena: globalization and
regional integration. It insists that there is a double causation between the two processes
and that such relationship received a new impulse at the end of the Cold War. There are
two different influences for such process: one being positive with the increased

36


interaction between nations in all spheres (trade, culture, politics and society); the other
one being negative with the unequal growth and development of certain countries while
others lag behind.

ii. The relation between security and stability with
economic growth and development:
The relative newly found stability in developing countries has favored its
development (fuente). Economic growth needs for a secure neighborhood for allowing
investment to mature in a proper way. Society in general needs stability to guarantee the
conditions for a deeper interaction with other countries. The benefits from globalization
can only be perceived within a long-standing and sound environment.

iii. The increasing integration by nation-states of
close geographical proximity:
The late nineties and beginning of the new century saw an increasing amount of
commercial and cultural agreements between countries. To say a few: NAFTA, CAN,
ASEAN and so on. The better parts of those agreements are constricted to countries that
lie within a certain regional sphere. The RGC theorizes the process in five steps: first
from isolation to bilateral and multilateral trade. The next phase will deepen multilateral
trade followed with the formation of regional plates. The last phase is globalization but
within regions, within groups of countries instead of individual countries.

b. Formation of geo-political/economical plates

With the increasing integration among economies, the need for a deeper relation
among countries appears. In this process each region happens to develop a leader, or a
group of more relevant countries, in terms of economic and political influence. Such
states are addressed as Geo-gravitational Center State (or in this paper as core countries).
They are pillars to world and regional economies and established through the internal and
external dynamics of each region.

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Furthermore, such core countries work closer with some countries than others. In our
modern world, the interdependence among countries forces the leaders to have strong
communications with the rest of the countries. This Regional Cooperative Circles can be
imbedded within other international organization structures or simply by geographical
conditions. As an example, the relation of Brazil with Argentina is closer given its
proximity and strong economic exchange than with Ecuador.

Despite having different levels of cooperation, there is a sense of community within
the region. Ecuadorians as well as Brazilians identify themselves as part of the South
American region in the same way as Argentineans, Peruvians or Colombians. In this way,
the globalization process is not just a sum of bilateral or multilateral exchanges, but also a
hierarchical integration process among regional blocs. The creation of those blocs, the
introduction of Geo-gravitational Centric States followed by a Regional Cooperative
Circle with a sense of Regional Community is what we call the Formation of a Geo-
political/economic plate.

1. Geo-gravitational center
A country attracts the rest; there is a centripetal relation among a number of states.
“Gravity” becomes fundamental to maintain the structure of the bloc. A big power,
located in a relatively centric area, has a strong force of gravitation to attract its neighbors
and determines the regional stability and prosperity.

ii. Role of the G-g center
The role of the core country impulses politically other countries by becoming a key
venue for regional political and diplomatic activities; economically by being and engine
for growth, in security by determining the nature of regional stability; and culturally by
influencing day to day people’s life.

iii. Geo-strategic fulcrums to the World Politics and
Economics

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