LV Thạc sỹ_Improve CDM projects development consulting activities efficiency at PVFC

…, Deputy Manager of CDM Department, for enthusiastically providing me with valuable instruction and explanations about the CDM Projects Development Consulting Activities at PVFC During

BACHELOR THESIS

SOLUTIONS TO IMPROVE CDM PROJECTS DEVELOPMENT CONSULTING ACTIVITIES’

EFFICIENCY AT PVFC

ACKNOWLEDGEMENT

First of all, I would like to give a warm thanking to all the lecturers of Advance program of National Economics University in accordance with all the staff of PetroVietnam Financial Corporation - PVFC - for providing me with favorable conditions and enthusiastic supports to complete my thesis

Especially, I would also want to express a sincere gratitude to my supervisor Dr

…, who directly guided me in the process of writing my thesis Moreover, I also want to give special thanks to Mr …, Deputy Manager of CDM Department, for enthusiastically providing me with valuable instruction and explanations about the CDM Projects Development Consulting Activities at PVFC

During 1 month of internship at PetroVietnam Financial Corporation - PVFC, Ihave tried my best to collect necessary information and proposed somerecommendations to improve the efficiency of CDM Project Development ConsultingActivities at PVFC However, there are certain limitations and possible misconceptions due

to the lack of time and information Therefore, I am willing to receive anycomments and suggestions on my thesis

LIST OF TABLES 2

LIST OF FIGURES 2

ABBREVIATION 3

INTRODUCTION 4

CHAPTER 1: PROJECTS DEVELOPMENT CONSULTING SERVICE 7

1.1 Overview of Projects Development Consulting Service 7

1.1.1 Consulting Service 7

1.1.2 Projects Development Consulting Service 8

1.2 Consulting Activities’ Efficiency 10

1.2.1 Evaluation Criteria 11

1.2.2 Influencing factors 1 3 CHAPTER 2: CDM PROJECTS DEVELOPMENT CONSULTING SERVICE OF PVFC 16

2.1 General Introduction of PVFC 16

2.1.1 Foundation & Development History 1 6 2.1.2 Vision & Mission 1 8 2.1.3 Organizational Structure 19

2.1.4 Business Activities 2 0 2.1.5 Business Results from 2008 to 2011 2 3 2.2 Current Situation of CDM Projects Development Consulting Service at PVFC 26

2.2.1 Introduction of Clean Development Mechanism (CDM) 26 2.2.2 CDM Projects Development Consulting Activities at PVFC 33 2.3 Evaluation of Consulting Activities’ Efficiency 40 2.3.1 Current Situation & Limitations of CDM Projects Development

Consulting Activities at PVFC… 4 0 2.3.2 Reasons for Consulting Activities’ Inefficiency 4 5 CHAPTER 3: SOLUTIONS FOR IMPROVING CDM PROJECTS

DEVELOPMENT CONSULTING ACTIVITIES’ EFFICIENCY 5 1 3.1 Review of current situation 51 3.2 Solutions to improve efficiency of CDM Projects Development

Consulting Activities 53 3.2.1 Short-term Recommendations 5 3 3.2.2 Long-term Recommendations 58 REFERENCES 61 COMMENTS 6 2

LIST OF TABLESTable 1: Qualitative Criteria

Table 2: PVFC's Mobilization Results

Table 3: PVFC's Loan Structure

Table 4: PVFC's Business Results (2008-2011) Table 5:

CDM Projects Development Consulting Process Table 6:

List of CDM Projects

Table 7: Priority Order

LIST OF FIGURES

Figure 1: Project Development Consulting Process

Figure 2: Organizational Structure

Figure 3: The Kyoto Flexibility Mechanisms

Figure 4: CDM Project's Life Cycle

ABBREVIATION

UNFCCC : United Nation Framework Convention on Climate Change

PVFC : PetroVietnam Financial Corporation

UNCED : United Nations Conference on Environment and Development

IET : International Emissions Trading

CERs : Certified Emission Reductions

INTRODUCTION

1 The essential of the research

In recent years, the phrase “climate change” has received special concerns from allhuman beings as a hot issue We have been gradually aware of the severe impacts of climatechange on our daily life as well as the serious threats on our future The weather phenomenasuch as droughts, floods, especially the global warming are the most visible evidences of climate change In a near future, poor people in developing countries aresubjected to the most severe impacts of climate change It can be said that climatechange has been ruining the international efforts on fighting against poverty indeveloping countries

In 1992, the leaders of 154 countries signed the “United Nations Framework Convention on Climate Change”, in which these countries commit to reduce their emission of greenhouse gases To enforce the implementation of these commitments, the United Nations created the Kyoto Protocol in 1997regulating on flexible

mechanisms One of such flexible mechanisms is the “Clean Development Mechanism”(CDM) This mechanism allows developing countries receive financial aids andtechnologies from developed countries for implementing national policies on theenvironment while still ensuring sustainable development Realizing the benefits from thismechanism, Vietnam has actively participated in the Kyoto Protocol and facilitated thedevelopment of CDM projects

Currently, there are many domestic and foreign organizations providing CDM projects development consulting service in Vietnam The PetroVietnam Finance Corporation is among organizations providing this type of service In addition to the main task of arranging capital for PetroVietnam’s projects, PVFC has been supporting the CDM projects development of companies within the petroleum industry with

consulting service However, due to various objective and subjective reasons, PVFC’sconsulting activities have not met the efficiency as expected

Having recognized PVFC’s role in popularizing CDM in Vietnam as well asissues existing in PVFC’s consulting activities, I have decided to conduct a research on

“Solutions for improving the efficiency of CDM projects development consultingactivities at PVFC”

 Quantitative analysis: Given the limitations in term of time and the availability

of information needed, this research is just able to conduct brief analysis on some key indicators of consulting activities’ performance

3 Research Scope

My research focuses on evaluating the efficiency of CDM projects developmentconsulting activities at PVFC based on specific evaluation criteria As issues areidentified, some feasible solutions and recommendations are proposed

4 Research Structure

The research consists of three chapters:

 Chapter 1: Project Development Consulting Service

The aim of this chapter is giving brief introduction of the Project DevelopmentConsulting Service as well as general knowledge of Consulting Activities’ Efficiencyincluding evaluation criteria and influencing factors

 Chapter 2: CDM Projects Development Consulting Activities of PVFC

This chapter provides general information about the PetroVietnam FinancialCorporation and further details about CDM Projects Development Consulting Activities atPVFC In this chapter, the Consulting Activities’ current performance will bedescribed and analyzed in order to identify shortcomings or issues existed and possiblereasons behind

 Chapter 3: Solutions for improving CDM Projects Development Consulting Activities’ Efficiency

In this chapter, some feasible solutions and recommendations are proposed in the effort of improving CDM Projects Development Consulting Activities’ Efficiency at PVFC

CHAPTER 1: PROJECTS DEVELOPMENT

CONSULTING SERVICE

1.1 Overview of Projects Development Consulting Service

1.1.1 Consulting Service

Consulting service is the practice of providing advice to clients for a fee in order

to help them solve a particular problem or range of problems within a certain area of business For financial companies, consulting service includes the following forms:

 Capital Arrangement Consultancy

Financial companies provide the most suitable and effective capital solutions forclients based on their capacity, available resources and their business plans’ feasibility Also,financial companies offer clients the most updated information on capital market’scondition as well as financial tools appropriate to their capital needs

 Business Transformation Consultancy

Financial companies conduct roadmap for clients’ business transformation(including construction of transformation scheme, new business model, transformationplan, regulations, etc.); assist clients in preparing and completing profiles anddocuments Besides, financial companies provide consultancy on business valuation in case

of equitization

 Stock Issuance Consultancy

Financial companies provide consultancy on the decision of issuing stocks based

on analysis of clients’ business performance as well as capital needs Financial companies can advise or represent clients to deal with relevant organizations and

complete required procedures; provides consultancy on time, location, price, issuingmethod and post-management

 Mergers & Acquisitions Consultancy

Financial companies assist clients in finding target companies, looking for strategic partners or arranging additional capital for clients’ projects Also, financial companies help clients build M&A plans, prepare profile, provide business assessment, etc

 Project Development Consultancy 

Other consulting services

In addition to the major forms of consulting service above, financial companies alsoprovide a variety of services such as financial strategy consultancy, financialmanagement system consultancy, cashflow management consultancy, etc depending onclients’ specific requests

1.1.2 Projects Development Consulting Service

Projects Development Consulting Service is the practice of colleting relevant documents related to the project (clients’ financial condition, project’s expected outcome, regulations on project’s activities, etc.), analyzing project’s benefits andfeasibility in order to provide consultancy on project development Besides, financialcompanies give advices on loans’ structural adjustment and suitable payment plan for theproject, or provide financial support in case of low risk expected

A project development consulting process includes 5 basic steps as following:

Analyzing project's feasibility

Constructing project's profile

Applying for approval

Financing project Post-project Consulting

Figure 1: Project Development Consulting Process Step 1: Analyzing project’ feasibility

In this step, financial company collects and conducts research on information related to the project in order to give evaluation on the project’s feasibility During this step, the financial company may provide consultancy on law (such as the government’s policies, regulations or potential adjustments affecting the project development), possible business risks or necessary preparations, etc when running the project At the end of this step, clients will be advised on whether they should or should not pursuit the projects

 Step 2: Constructing project’s profile

After the project is determined as feasible, financial company will assist clients

on drafting and preparing relevant documents (such as rules, regulation, labor

agreements, technology transfer, etc.) as well as completing administrative procedures

prescribed by law Financial company will act as an intermediary to gather and connectinformation between clients and related stakeholders

 Step 3: Applying for approval

The project’s profile is sent to competent authorities for researching, reviewing and approving These authorities will conduct various activities such as investigating project’s condition, requiring involved parties to present about the project or answering related questions, etc in order to decide whether they should approve the project Financial companies will assist clients on complying with procedures of submitting profile, presenting about projects or editing required documents during the approval process

 Step 4: Financing project

During this period, domestic and foreign investors contribute capital in form ofcash, technology or legal assets to launch the project For some certain cases, financialcompany can participate in financing the project if it is feasible to do so

 Step 5: Post-project consulting

After the project was implemented and put into operation, financial companymay provide consultancy on selecting buyers for the project’s outputs or inspecting andsupervising project’s activities throughout the project’s life cycle, etc

1.2 Consulting Activities’ Efficiency

According to the definition in the website www.en.wikipedia.org, “Efficiency” ingeneral describes as “the extent to which time or effort is well used for the intended task orpurpose” It is often used with the specific purpose of relaying the capability of a specificapplication of effort to produce a specific outcome effectively with a minimumamount or quantity of waste, expense, or unnecessary effort

For consulting activities, “efficiency” is the compatibility between consulting outcomes and expenses, efforts spent by financial companies when performing consulting services The consulting activities’ efficiency is a relative concept, which requires both qualitative and quantitative evaluations in order to have the most precise conclusions

1.2.1 Evaluation Criteria

1.2.1.1 Qualitative Criteria

Consulting activities’ Efficiency can be assessed through:

 The level of customer satisfaction when using the company’s consulting

service

 The consultancy’s accuracy based on the results of each step in the

consulting process

Table 1: Qualitative Criteria

1.Analyzing - The accuracy of the - The report is highly accurate and fully

project’s feasibility report identifies all possible difficulties that may

2 Constructing - The quality of project’s - Project documents are clear, complete andprojects’ profile documents sufficient to persuade the competent

authorities for approval

3 Applying for - The sensitivity of - Closely following the project’s approvalapproval consulting activities process; proactively assisting clients on

editing project’s documents (if necessary)

4 Financing - The sensitivity of - Providing accurate consultancy, which is

project consulting activities consistent with clients’ financial situation

- Financing the project (if needed)adequately and timely

5 Post-project - The sensitivity of - Closely monitoring the project’s progress,consulting consulting activities providing clients with timely and accurate

 Completion rate of projecting objectives: It evaluates the compatibility between the projecting objectives and clients’ real capacity to achieve those objectives Also, the completion rate assesses the consulting activities’ efficiency on helping clients fulfill their objectives (considering the impacts of subjective and

 The ability of registering CDM projects within favorable period

 The quality of consulting contract: contract’s size, contract’s field

 Technical factors

Financial companies design their own processes, techniques and methods to help consultant team finish the works assigned Those technical processes will ensure the consulting service to be performed scientifically Besides, they will help financial companies reduce costs, save time and efforts for both clients and consultants as well as minimize possible risks Therefore, the performance of consulting activities will greatly

be affected by techniques, methods, models applied in consulting process On the other hand, consulting activities deal with a large amount of data and requires complicated estimations, calculations The accuracy of figures inferred is very important to determine what action should be made As a result, the quality of technology, calculating system implemented also have significant impacts on the consulting efficiency

 Management system

The management system play an important role on ensuring consulting activities to

be carried out in accordance with technical processes as well as consultants tocomply with professional standards and ethics Besides, a good management system canconnect different departments toward achieving the same objective Also, how tasksare organized and information is communicated will remarkably affect the company’sability of quickly reacting to unexpected problems

1.2.2.2 Objective factors

 Economic Environment:

Economic environment is a collection of all the economic conditions at home andabroad affecting the operation of financial companies When the economy is in stablegrowth, enterprises will have more favorable conditions to expand their businesses.Besides, the disbursement of funds for projects will be much quicker and easier.Therefore, the projects development consulting activities of financial companies should besmoother and less risky Also, financial companies may have more options of customers toprovide service as well as more works available

 Legal Environment

Consulting Activities are regulated and affected by Vietnam’s legal framework Even some projects have to comply with complex international law If the legislation is not clear, synchronous or instable, there will be more barriers and risks for enterprises’ business as well as consulting activities of financial companies The negative impacts could be longer time and higher cost to complete the validation procedure, or difficulties on getting approval for projects Therefore, financial companies’ consulting activities should significantly benefit from a transparent and stable legal environment

 Quality of Information Sources

Thanks to advances in technology, accessing to various information resourceshas become a lot easier However, for consulting activities, the requirement for thequality as well as the updating level of information is very high Despite a huge amount ofinformation available on the internet and other storage channels, the specific data forconsulting activities are normally not disclosed resulting in the shortage of necessaryinformation Not only that, even in the case of accessing to the information needed,there is still the risk that the information is already modified due to certain reasons.Therefore, the quality of information sources is really a big concern for consultingactivities of financial companies

 Foreign factors

In the context of global economic integration, consulting activities of financialcompanies has been expanding throughout the world Nowadays, there are more andmore projects involving foreign elements have been consulted by financial companies.However, it also means that financial companies have to face challenges and fiercecompetitions from international consulting organization with rich experience in projectdevelopment consulting as well as international law Therefore, domestic financialcompanies need to prepare adequate knowledge of international law to performconsulting service effectively in international environment

CHAPTER 2: CDM PROJECTS DEVELOPMENT

CONSULTING SERVICE OF PVFC

2.1 General Introduction of PVFC

2.1.1 Foundation & Development History

PetroVietnam Financial Corporation (PVFC) was founded on 30/3/2000 functioning as a non-bank financial institution completely funded by PetroVietnam(PVN).The corporation officially went into operation on 19/6/200 After

11 years of development, PVFC has successfully formed a strong position in Vietnam’s financial market as well as gradually expanded to the global market PVFC’s pathway

of development can be divided into two important periods with 2008 as a turning point

 From 6/2000 to 12/2007:

During this period, PVFC is a company completely funded by the government.PVFC initiated its business with charter capital of VND 100 billion with nearly noreputation while the market already had many strong and well-known commercialbanks and financial institutions competing Despite great challenges, the supports fromPetroVietnam and the government helped PVFC strengthen its organizational structure,building fundamental facilities and gradually expand the operating network As a result,PVFC was able to quickly form its network of 9 branches and 4 subsidiaries ateconomic and oil centers and started to build relationship with domestic andinternational partners And two years later, PVFC was confident to strongly expand itsbusiness thanks to Decree No.79/2002/ND-CP of the government on the operation andoperation of financial institutions

At the end of 2007, PVFC achieved remarkable successes such as raising its charter capital to be VND 3,000 billion and arranging capital for projects in oi l and gas

industry up to VND 6,700 billion Also, the corporation built a strong reputation andfinancial capability to lead or co-operate with other financial institution to arrange fund forPVN’s projects Besides, PVFC improved the quantity as well as the quality of itsfinancial services step by step During the 7 years of this start-up period, PVFC alwaysfulfill all the key objectives such as revenue, profit or tax contribution

 From 2008 until now:

This is the period of model’s transformation and integration into the worldwideeconomy With good preparation of internal factors and supports from PVN, PVFCsuccessfully switch to be a Joint-Stock Financial Corporation Only after a short period, thecorporation completed the important changes and activities such as bidding59,639,000 shares to contribute to the government’s budget more than VND 7,000billion of capital surplus, quickly completing the procedure of model transformation toofficially operate on 18/3/2008 Since then, PVFC created another milestone to increase itscharter capital to VND 5,000 billion and attract the investment bank -Morgan Stanley

- to become its strategic partner of 10% ownership

On 3/11/2008, PVFC’s stocks were officially listed at Ho Chi Minh StockExchange with transaction code of PVF and greatly attracted many investors as one ofjoint-stock companies with largest capitalization value in Vietnam stock market.Currently, PVFC rank of 11 out of 23 largest credit institutions in VN in term ofinvestment scale and is the financial company with biggest charter capital Not onlythat, PVFC also joined with the global trend in implementing the Clean DevelopmentMechanism(CDM) into PVN’s projects as well as applying the advanced bankingtechnology of Core Banking and Flexcube

Despite great impacts of the economic crisis, PVFC has still achieved good growth and completed important objectives Particularly, in 2009, total revenue reached

VND 5,660 billion, which was 45% higher than expectation Profit before tax was VND

611 billion and total assets valued more than VND 64,652 billion

2.1.2 Vision & Mission

Vision: To become a strong financial institution, specialized in providing the best and diversified services to clients, typically PetroVietnam (PVN) and otherclients operating in the key industries including power, natural resources andinfrastructure

Mission: Focus on obtaining stable growth in banking and financial sectors and strong competence on the local and international monetary markets; Emphasize meeting clients’ demands for financial and banking services, especially PetroVietnam; Commit all business lines to the development of oil and gas industry, the interest of the shareholders and all members of PVFC

2.1.3 Core Values

PVFC’s business activities are conducted in respect of 4 core values The firstvalue is the Professionalism achieved through employing young and talented team ofprofessional, dynamic and forward-thinking individuals in order to provide the bestservices to customers Secondly, it is the Efficiency in term of risk minimization andprofit maximization applying in all business activities Transparency is PVFC’s thirdvalue implying the corporation’s efforts for information disclosure and operationcompliance Finally, it is the principle of Client-focus in which satisfaction remains thehighest priority in business’ objectives

2.1.3 Organizational Structure

General Shareholders Council

Board of Managers

Board of Internal Controllers Board of

General Directors

Internal Audit

Accounting &

Business Finance Dept.

Development Dept.

Risk Management Dept.

Technology Center

Legislation Dept.

Core-Banking PMU

Administration Dept.

Figure 2: Organizational Structure

Branches

Ho Chi Minh Vung Tau

Da Nang Hai Phong Nam Dinh Can Tho Thanh Hoa Quang Ngai Saigon Thang Long

2.1.4 Business Activities

2.1.5.1 Corporate Financial Services

For corporate customers, PVFC provides a wide range of financial services fromcredit/deposit services, financial services to investment, foreign exchange services Thevariety of financial services has closely approached the standard of financial companies inthe world Detail information about corporate financial services provided by PVFC isdescribed as following:

 Credit:

- Guarantee: issuing letter of guarantee to beneficiary (guarantee’s beneficiary) on executing financial responsibilities for customer (guaranteed person) in case he/she does not execute or incorrectly execute the responsibilities committed to guarantee’s beneficiary

- Factoring: granting credit to seller through rebuying accounts receivable arising from goods purchasing and selling, which are negotiated by seller and buyer in the contract

- Project Credit: providing credit solution satisfying demand for capital in middle term and long term for investment projects of enterprises

- Working Capital Financing: providing Working Capital Financing solution, helping firms flexibly utilize their capital cycles

- Syndication: syndicating with other Financial Institutions or Banks to lend anamount of money to customers

 Deposit: Only providing Term Deposit Products

 Financial Services:

- Capital Arrangement: providing feasible capital solutions in order to timelyresponse to firms’ capital demands for investment

- Trust Fund Management Service: managing customers’ inactive capital forcertain period

- Trust Fund Lending: providing various services of trust fund receiving from business entities or financial institutions to finance directly to customers through the nominated trust fund

- Payment Account Management Service: providing service of managing cash flow

on customers’ payment account at partner banks of PVFC with favorable conditions

in order to save cost; maximize profit for customers based on their account’s balance

- Corporate Bonds Issuance Advisory: helping corporations to have a new finance resource beside from popular forms such as equity, bank loans

- Corporate Financial Consulting: consulting corporations to assess comprehensively financial activities and establish optimum solutions to strengthen financial position of corporations such as following contents

- CDM Projects Development Consulting: CDM projects (Clean Development Mechanism) develop based on the mechanism regulated in United Nation Framework Convention on Climate Change (UNFCCC) in order to benefit project owners with added income from implementing greenhouse effect reduction activities

 Investment Services

- Cooperate Investment: With the advantage of expertises in evaluating, sponsor capital mobilizing and market seeking for products of investment projects, PVFC searches and contributes capital to corporations in form of: Business cooperation contracts; joint stock company, limited liability company, joint venture company, etc

- Valuable Papers Trading: Trading various valuable papers on the market betweenPVFC and customers, who demand for short term funding (from 3 to 6 months)

- Trust Investment: receiving customers’ capital through entrusted contracts to invest and trade appointed products by customers and regulated portfolio of PVFC

- Option Transaction: allowing customers to have options of selling or buying one type of currencies during a certain period or at a certain time with pre-agreed rate

- Swap Transaction: Customers who demand for spot delivery of buying, selling

foreign exchange or need for foreign exchange service in appropriate time for riskprevention are provided foreign exchange products following current regulations offoreign currency management

2.1.5.2 Individual Financial Services

For individual customers, PVFC only provides a limited number of financial services, specifically credit services, since this is not the corporation’s major target customers The individual financial services currently provided by PVFC include:

 Loans against valuable papers: Providing credit for customers owning valuable papers while demanding for capital

 Installment Loans for House Purchasing: Providing credit for customers to purchase house with flexible amortization

 Installment Loans for Car Purchasing: Providing credit for customers to purchase car with flexible amortization

 Installment Loans by Salary: Providing credit without collateral for customers, who have their salaries as monthly payment and work for companies accepted by PVFC

 Loans against pledged assets: Providing credit for customers using pledged assets as collateral

 Foreign Exchange: Buying Foreign Currencies from Individual Customers at PVFC’s Transaction Offices

2.1.5.3 Other Financial Services

In addition to corporate and individual financial services, PVFC also coordinates withprestigious insurance companies to provide insurance package to customers asking PVFC forloans

 Home Loan Repayment Insurance

 Term insurance for credit balance, Personal Credit Insurance

 Car insurance: Civil liability insurance of car owner, Car frame insurance, etc

2.1.5 Business Results from 2008 to 2011

 Fund Mobilization

Table 2: PVFC's Mobilization Results

Balances due to other credit institutions 5,409 20,140 10,429 23,067

In 2008, due to the whole economy’s poor performance, PVFC’s fund mobilization only had a slight increase of 8% However, there was great improvement

in 2009 with mobilization’s growth of 55% compared to 2008 as the economy started to recover after crisis In 2010, PVFC applied a contraction in funds mobilized from Balances due to other credit institution with total reduction of nearly 50% As a result, total funds mobilized in 2010 were 5% lower than in 2009 However, an impressive recovery of mobilizing activities was observed in 2011 due to expansion of

mobilization from credit institutions as well as the first-time implementation ofderivatives tools

in expanding credit activities because of high, unattractive interest rate as well as regulation of the Resolution 11 NQ/CP on controlling credit growth rate under 20%, achieving a credit growth rate of 36.57% showed a remarkable business result for PVFC However, this high level of credit growth also exposed PVFC to certain credit risks, which can be clearly observed in the increasing trend of bad debt Particularly,

the troubles from Vinashin’s debt of more than 2,000 billion VND really had significantimpacts on PVFC’s overall performance in 2011

(Source: PVFC’s Financial Statements 2008-2011) PVFC has done a good job in achieving quick recovery from impacts of economy crisis It was PVFC’s great efforts to improve its profit after taxes from below

50 billion VND in 2008 to more than 500 billion VND in 2009 and 2010 However, there was a slight decrease in PVFC’s profit due to fluctuations in Vietnam economy such as high inflation, poor performance of stock market The investments in stock market have continuously been the major source of PVFC’s losses because of the market’s instability Besides, the low quality of loans requiring a significant proportion

of revenue reserved as provision for loan loss resulted in a decline in PVFC’s profitability

2.2 Current Situation of CDM Projects Development Consulting Service at PVFC

2.2.1 Introduction of Clean Development Mechanism (CDM)

2.2.1.1 United Nations Framework Convention on Climate Change - UNFCCC

The United Nations Framework Convention on Climate Change (UNFCCC) is

an international environmental treaty produced at the United Nations Conference on Environment and Development (UNCED), informally known as the Earth Summit, held

in Rio de Janeiro from June 3 to 14, 1992 On June 12, 1992, 154 nations signed the UNFCCC that upon ratification committed signatories’ governments to a voluntary

“non-binding aim” to reduce atmospheric concentrations of greenhouse gases (GHG) with the goal of “preventing dangerous anthropogenic interference with Earth’s climate system” These actions were aimed primarily at industrialized countries, with the intention of stabilizing their emissions of greenhouse gases at 1990 levels by the year 2000; and other responsibilities would be incumbent upon all UNFCCC parties

Parties to UNFCCC are classified as:

 Annex I countries: industrialized countries and economies in transition

 Annex II countries: developed countries which pay for costs of developing countries

 Non Annex I countries: Developing countries

Annex I countries have committed to reduce their emission levels of greenhouse gases to targets that are mainly set below their 1990 levels They may do this by allocating reduced annual allowances to the major operators within their borders Theses operators can only exceed their allocations if they buy emission allowances, or

offset their excesses through a mechanism that is agreed by all the parties to UNFCCC.Annex II countries are a sub-group of the Annex I countries

Developing countries are not required to reduce emission levels unlessdeveloped countries supply enough funding and technology Setting no immediaterestrictions serves three purposes:

 It avoids restrictions on their development, because emission are strongly linked to industrial capacity

 They can sell emissions credits to nations whose operators have difficulty meeting their emissions targets

 They get money and technologies for low-carbon investments from Annex II countries

The UNFCCC itself set no mandatory limits on greenhouse gas emissions for individual countries and contains no enforcement mechanisms In that sense, the treaty is considered legally non-binding Instead, the treaty provides for updates (called

“protocols”) that would set mandatory emission limits The principal update is theKyoto Protocol, which has become much better known than the UNFCCC itself

2.2.1.2 Kyoto Protocol

The Kyoto Protocol is an update to the UNFCC aimed at fighting global warming The protocol was initially adopted on 11 December 1997 in Kyoto, Japan, and entered into force on 16 February 2005 The Kyoto Protocol’s first round commitments are the first detailed step of the UNFCCC The Protocol establishes a structure of rolling emission reduction commitment periods, with negotiations on second period commitments that were scheduled to start in 2005 The first period emission reduction commitments start from 2008 and will expire at the end of 2012

Under the Protocol, 37 countries (Annex I countries) commit themselves to a reduction of four greenhouse gases (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride) and two groups of gases (hydrofluorocarbons and perfluorocarbons) produced by them, and all member countries give general commitments At negotiations, Annex I countries collectively agreed to reduce their greenhouse gas emissions by 5.2% on average for the period 2008-2012 This reduction is relative to their annual emissions in a base year, usually 1990 Since the US has not ratified the treaty, the collective emissions reduction of Annex I Kyoto countries falls from 5.2% to4.2% below base year

The Protocol defines three “flexibility mechanisms” that can be used by Annex I Parties in meeting their emission limitation commitments The flexibility mechanisms are International Emissions Trading (IET), the Clean Development Mechanism (CDM) and Joint Implementation (JI) IET allows Annex I Parties to directly “trade” their emissions in the units in which each country’s target is denominated, known as Assigned Amount Units (AAUs) The economic basis for providing this flexibility is that the marginal cost of reducing (or abating) emissions differs among countries

“Marginal cost” is the cost of abating the last ton of CO2-eq for an Annex I/non Annex

I Party

Figure 3: The Kyoto Flexibility Mechanisms The CDM and JI are called “project-based mechanisms” in that they generate emission reductions from projects The difference between IET and the project-based mechanisms is that IET is based on the setting of a quantitative restriction of emissions, while the CDM and JI are based on the idea of “production” of emission reductions The CDM is designed to encourage production of emission reductions in non-Annex I Parties, while JI encourages production of emission reductions in Annex I Parties

The production of emission reductions generated by the CDM and JI can be used

by Annex I Parties in meeting their emission limitation commitments The emission reductions produced by the CDM are called Certified Emission Reductions (CERs); reductions produced by JI are called Emission Reduction Units (ERUs) The main advantages for countries hosting CDM or JI emission reduction projects are the

attraction of foreign investment, the transfer of technology, and the contribution to thecountry’s sustainable development

2.2.1.3 Clean Development Mechanism (CDM)

The Clean Development Mechanism (CDM) is one of the “flexibility”mechanisms defined in the Kyoto Protocol It is defined in Article 12 of the Protocol,and is intended to meet two objectives:

 To assist parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the UNFCCC, which is to prevent dangerous climate change

 To assist parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments

The second objective is achieved by allowing the Annex I countries to meet part

of their caps using “Certified Emission Reductions” from CDM emission reduction projects in developing countries This is subject to oversight to ensure that these emission reductions are real and “additional” The CDM is supervised by the CDM Executive Board (CDM EB) and is under the guidance of the Conference of the Parties (COP) of the United Nations Framework Convention on Climate Change (UNFCCC)

The nature of CDM projects can vary widely The UNFCC distinguishes theCDM categories detailed below:

 Energy industries (Renewable and Non-renewable sources): 

Energy distribution

 Energy demand

 Manufacturing industries

 Chemical industries